-----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, I9PzuRjDh5rrnEgpr99iZSJSum2ok1wXFp8iMRanFHRf7PRGsh0PtH48NuZcibb6 N3dpCOJ4OytAit4DWZIkJw== 0000944209-98-000794.txt : 19980416 0000944209-98-000794.hdr.sgml : 19980416 ACCESSION NUMBER: 0000944209-98-000794 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980415 SROS: NASD 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-K405 SEC ACT: SEC FILE NUMBER: 000-19861 FILM NUMBER: 98594907 BUSINESS ADDRESS: STREET 1: 23550 HAWTHORNE BLVD STREET 2: STE 110 CITY: TORRANCE STATE: CA ZIP: 90505 BUSINESS PHONE: 7145560122 10-K405 1 FORM 10-K405 FOR PERIOD ENDED 12/31/1997 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, 1997 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)-791-8020 (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 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 31, 1998 on the Nasdaq National Market was approximately $921,724,234. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [X] The number of shares of Common Stock outstanding as of March 31, 1998: 38,748,331. DOCUMENTS INCORPORATED BY REFERENCE (NOT APPLICABLE) IMPERIAL CREDIT INDUSTRIES, INC. 1997 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I
PAGE ---- ITEM 1. BUSINESS..................................................... 3 ITEM 2. PROPERTIES................................................... 40 ITEM 3. LEGAL PROCEEDINGS............................................ 40 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 41 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS......................................... 42 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA......................... 43 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 46 ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK... 70 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 71 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... 143 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 143 ITEM 11. EXECUTIVE COMPENSATION....................................... 145 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................. 150 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 151 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......................................................... 168
FORWARD LOOKING STATEMENTS When used in this Form 10-K or future filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "would be", "will allow", "intends to", "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", or similar expressions are intended to identify "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. 2 ITEM 1. BUSINESS GENERAL Imperial Credit Industries, Inc. (the "Company" or "ICII"), with consolidated assets of $2.1 billion as of December 31, 1997, is a diversified commercial and consumer lending, financial services and investment holding company, organized in 1986 with its headquarters located in Torrance, California. Its principal business activities consist of the operation of six significant wholly owned operating subsidiaries: Southern Pacific Bank ("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit Advisors, Inc. ("ICAI"), Auto Marketing Network Inc. ("AMN"), Imperial Credit Commercial Asset Management Corporation ("ICCAMC") and Imperial Credit Worldwide, Ltd. ("ICW"), one significant majority owned consolidated operating subsidiary, Imperial Capital Group, LLC ("ICG") and significant equity investments in two publicly traded companies, Southern Pacific Funding Corporation ("SPFC") NYSE Symbol: SFC and Franchise Mortgage Acceptance Company ("FMC") NASDAQ Symbol: FMAX. The Company and its subsidiaries and affiliates offer a wide variety of financial services and investment products nationwide. Equity investments in publicly traded companies are defined as investments accounted for by the Company pursuant to the equity method of accounting which requires a minimum of 20% ownership in the voting common stock of the investee company. The Company's major business activities consist of the following subsidiaries, investments and equity investments in publicly traded companies: SIGNIFICANT WHOLLY-OWNED OPERATING SUBSIDIARIES Southern Pacific Bank........ An industrial loan company specializing in asset-based lending, loan participations, lending to small businesses and consumers, and income property lending. In October 1997, Southern Pacific Thrift and Loan changed its name to Southern Pacific Bank. Imperial Business Credit, Inc.......................... A commercial leasing company specializing in equipment leasing to small businesses. Auto Marketing Network, Inc.......................... A company providing sub-prime auto financing. Imperial Credit Advisors, Inc.......................... A company providing management advisory services. Imperial Credit Worldwide, Majority owner of Credito Imperial Argentina, a Ltd.......................... mortgage banking company conducting business in Argentina. Imperial Credit Commercial Asset Management Corporation.................. A company that manages the day to day operations of Imperial Credit Commercial Mortgage Investment Corporation ("ICCMIC") NASDAQ Symbol: ICMI, a publicly traded real estate investment trust with investments in multifamily and commercial properties, loans, and securities. As of December 31, 1997, the Company owned 8.9% of ICCMIC's common stock. SIGNIFICANT MAJORITY-OWNED OPERATING SUBSIDIARY Imperial Capital Group, LLC.. The holding company for a registered investment broker/dealer providing investment opportunities and research to individuals and institutional investors. The Company owns 60% of ICG's equity. 3 SIGNIFICANT EQUITY INVESTMENTS IN PUBLICLY TRADED COMPANIES Franchise Mortgage Acceptance Company........... A franchise lending company specializing in lending to the restaurant and retail energy industries. As of December 31, 1997, the Company owned 38.4% of FMC's common stock. Southern Pacific Funding Corporation.................. A sub-prime mortgage banking company. As of December 31, 1997, the Company owned 47.0% of SPFC's common stock. BUSINESS STRATEGY In 1995, the Company began to reposition, transform and diversify its core business activities from the traditional mortgage banking operations of originating and selling conforming residential mortgage loans to offering higher margin loan, lease, investment and financial services products. The Company's core business has remained consistent in that it originates loans and leases funded primarily by warehouse lines of credit, repurchase facilities, securitizations and whole loan sales in the secondary market. The Company accomplished its diversification through a business strategy that emphasizes: . Investing in and managing businesses in niche segments of the financial services industry. The Company intends to retain a significant equity investment in the companies to provide a source of future earnings and cash flow for the Company. . Conservative, disciplined underwriting and credit risk management. . Loan and lease originations, where possible, on a wholesale basis. . Securitization or sale in the secondary market of substantially all of the Company's loans and leases, other than those held by SPB for investment. . Maintaining business and financial flexibility to take advantage of changing market conditions with respect to specific financial services businesses. Strategic Focus and Acquisitions The Company diversified its loan and lease products by focusing on the creation and acquisition of additional finance businesses in order to reduce its dependency on residential mortgage lending. When acquiring new businesses or targeting expansion opportunities, the Company seeks to retain existing management and recruit additional experienced management to increase growth and profitability and to reduce the risks associated with operating the newly acquired entity. The Company, through its repositioning and diversification process from the traditional mortgage banking operations of originating and selling conforming residential loans to a more diversified financial services company has accomplished that goal by its acquisitions of businesses in niche segments of the financial services industry. For the years ended December 31, 1997, 1996 and 1995, the Company originated or acquired $1.2 billion, $2.2 billion and $3.0 billion of loans and leases, respectively. Such amounts include loan and lease originations through the third quarter ended September 30, 1997 for Franchise Mortgage Acceptance Company, LLC ("FMAC"). In August 1997, FMAC incorporated FMC, for the purpose of succeeding to the business of FMAC. Immediately prior to FMC's initial public offering of its common stock, FMAC merged into FMC (the "Reorganization"). As of the fourth quarter ended December 31, 1997, FMAC is no longer a majority owned subsidiary of the Company. In addition, during the years ended December 31, 1997, 1996 and 1995, the Company completed securitization transactions totaling $919.1 million, $1.3 billion and $1.0 billion, respectively. 4 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 sub-prime residential mortgage banking, commercial mortgage banking, business finance lending and consumer lending. The Company provides loan and lease products primarily in the following sectors: sub-prime residential mortgage banking; commercial mortgage banking income producing property loans; business lending--equipment leasing, loan participations and asset-based lending; consumer lending--sub-prime auto loans and Title I home improvement lending. The Company solicits loans and leases from brokers on a wholesale and portfolio basis and originates loans directly from borrowers. The majority of the Company's loans and leases, other than those held by SPB for investment, are sold in secondary markets through securitizations and whole loan sales. During 1995, the Company sold its mortgage conduit operations and SPB's warehouse lending operations to Impac Mortage Holdings, Inc. ("IMH") AMEX Symbol IMH, formerly Imperial Credit Mortgage Holdings, Inc. In exchange for these assets, the Company received approximately 11.8% of the common stock of IMH. Additionally, ICAI entered into a management agreement with IMH pursuant to which ICAI advised upon the day-to-day operations of IMH and for which it was paid a management fee. During 1997, the Company sold its common stock interest in IMH, receiving proceeds of $12.0 million and recording a gain of approximately $11.5 million. In December 1997, IMH and the Company negotiated a termination of the management agreement (the "Termination Agreement"). The consideration received by the Company pursuant to the Termination Agreement was comprised of 2,009,310 shares of IMH common stock and certain securitization-related assets. Additionally, the Company agreed to cancel its note receivable from ICI Funding Corporation ("ICIFC"), a former subsidiary of ICII which is now known as Impac Funding Corporation and is the origination unit of IMH, in the amount of $29.1 million. The IMH common stock and the securitization-related assets were recorded by the Company at their fair values of approximately $35.0 million and $13.1 million, respectively, for a total of $48.1 million. This amount, when netted with the $29.1 million cancellation of the ICIFC note receivable resulted in the gain on termination of the management agreement of approximately $19.0 million. During the first quarter of 1997, the Company disposed of its common stock interest in ICIFC, resulting in a loss of $100,000. At December 31, 1996, the Company owned 100% of the common stock of ICIFC which represented only a 1% economic interest as IMH owned all of the non-voting preferred stock of ICIFC which gave IMH a 99% economic interest in ICIFC. The Company's disposal of its remaining economic interest in ICIFC concluded its exit from the former mortgage banking operations. Franchise Mortgage Acceptance Company On June 30, 1995, the Company completed the acquisition of certain net assets from Greenwich Capital Financial Products, Inc. and formed FMAC, a limited liability company, in which the Company had a 66.7% ownership interest. The acquisition was accounted for as a purchase and the purchase price of $7.6 million, which included $3.8 million in contingent consideration for loans in the pipeline, was allocated to the net assets acquired based on their fair value resulting in goodwill of approximately $4.0 million. The Company's franchise lending business was conducted through FMAC until November 1997, at which time FMAC merged into FMC, a Delaware corporation formed for the purpose of succeeding to the business of FMAC, and FMC completed an initial public offering of its common stock. The Company sold into FMC's initial public offering 3,568,175 shares at $18.00 per share generating net proceeds of $59.7 million and a gain of $48.9 million. Additionally, the Company recognized a gain of $43.2 million resulting from the adjustment in the basis of its investment in FMC due to the offering and its reduced ownership percentage. At the time of FMC's initial public offering and at December 31, 1997, the Company's percentage ownership of FMC common stock was 38.4%. Accordingly, FMC's operating results are no longer consolidated with those of the Company and the Company's investment in FMC is accounted for under the equity method. 5 Southern Pacific Funding Corporation For the year ended December 31, 1996, a substantial portion of the Company's operations were conducted through its sub-prime residential lending subsidiary, SPFC. In June 1996, SPFC completed an initial public offering of its common stock pursuant to which ICII was a selling shareholder. SPFC and the Company sold 5.2 million shares and 3.5 million shares, respectively, at $11.33 per share. In a secondary offering during 1996, the Company sold 1.5 million SPFC shares at $19.83 per share. The Company recognized a gain on sale of the SPFC shares it owned of $51.2 million, which is net of offering expenses and the Company's cost basis in the shares. The Company also recognized a gain of $31.4 million related to the stock sold by SPFC. The gain related to the stock sold by SPFC is based on the difference between the Company's equity ownership in SPFC after the sale and such equity ownership prior to the sale, using the Company's respective SPFC ownership percentages. During the first quarter of 1997, the Company sold 370,000 shares of SPFC common stock at $16.63 per share generating net proceeds of $6.2 million and a gain of $4.3 million. Such transaction reduced the Company's ownership percentage in SPFC from 51.2% at December 31, 1996, to 49.4% at March 31, 1997. Accordingly, SPFC's operating results are no longer consolidated with those of the Company and the Company's investment in SPFC is accounted for under the equity method. During the third quarter of 1997, the Company sold an additional 500,000 shares of SPFC common stock generating net proceeds of $7.6 million and a gain of $5.2 million. At December 31, 1997, the Company's ownership interest in SPFC was 47%. Imperial Business Credit IBC leases business equipment, including copying, data processing, communication, printing and manufacturing equipment, exclusively to business users. The Company expanded its commercial equipment leasing business conducted by IBC through the acquisitions of substantially all of the assets of First Concord Acceptance Corporation ("FCAC") for a purchase price of $21.4 million in May 1995 and all of the assets of Avco Leasing Services, Inc. and Avco Financial Services of Southern California, Inc. (together "Avco") for approximately $94.8 million in October 1996. These acquisitions were accounted for as purchases and the purchase prices were allocated to the net assets acquired based on their fair value resulting in goodwill of $1.2 million and $12.5 million for the FCAC and Avco transactions, respectively. For the years ended December 31, 1997 and December 31, 1996, IBC originated $151.3 million and $87.2 million of leases and securitized $213.6 million and $87.0 million of leases, respectively. Coast Business Credit Coast Business Credit ("CBC") is an asset-based lender specializing in lending to middle market manufacturing, distributing and high-technology businesses. In September 1995, the Company began making asset-based loans to middle market companies located mainly in California by acquiring CoastFed Business Credit ("CBCC"), from Coast Federal Bank, a financial services company engaged primarily in the asset-based commercial lending business. This entity, now a division of SPB, was renamed CBC. The acquisition was accounted for as a purchase and the purchase price of $150 million was allocated to the net assets acquired based on their fair value resulting in goodwill of approximately $16 million. At December 31, 1997 and 1996, CBC had total commitments of $803.3 million and $547.7 million, of which $484.8 million and $288.5 million of loans were outstanding, respectively. Imperial Capital Group During the fourth quarter of 1996, the Company continued to diversify and strategically deploy its capital by announcing the closing of its investment in Dabney/Resnick/Imperial LLC ("DRI") (formerly Dabney/Resnick, Inc.), an investment banking firm. DRI was headquartered in Beverly Hills, California with offices in Chicago, Illinois, Dallas, Texas, and Sun Valley, Idaho, and offered full service investment banking, brokerage, and asset management services. DRI managed and underwrote public offerings of securities, arranged private placements and provided advisory and 6 other services in connection with mergers, acquisitions, restructurings, and other financial transactions. The Company acquired a 1% interest in DRI and purchased a warrant to acquire an additional 48% interest. During the fourth quarter of 1997, the Company formed a new subsidiary, ICG, which includes a registered broker/dealer and an asset management company offering individual and corporate investors a wide range of financial products and services. In connection with the formation of ICG, the Company recognized a pre-tax charge of $3.7 million relating to the restructuring of its loan to DRI. As part of the DRI restructuring, substantially all of the assets and personnel of DRI were acquired or hired by ICG. During the fourth quarter of 1997, ICG raised $323 million for corporate clients through private placement debt and equity offerings generating investment banking fees of $7.7 million. At December 31, 1997, the Company's ownership interest in ICG is 60%. Auto Marketing Network In March 1997, the Company acquired all the outstanding common stock of AMN, a sub-prime auto lender engaged in the financing of new and used motor vehicles on a national basis, for $750,000. As part of the acquisition, the Company advanced $11.6 million to repay amounts owed pursuant to operating lines of credit and for working capital purposes. The acquisition was recorded using the purchase method of accounting. The purchase price was allocated to the net assets acquired based on their fair value and goodwill of approximately $20.8 million was recorded. Since the March 1997 acquisition date, AMN posted operating losses and experienced significant increases in non-performing assets, loan charge-offs and loan loss provisions. In December 1997, the Company developed revised operating projections which indicated that the goodwill resulting from the AMN acquisition was not recoverable. Accordingly, the remaining goodwill balance of $20.1 million was written off during the fourth quarter of 1997. PrinCap Mortgage Warehouse In October 1997, the Company's wholly-owned subsidiary, SPB, acquired substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and PrinCap Mortgage Backed, L.P. (collectively, "PrinCap") and contributed such assets to a subsidiary. The acquisition was accounted for as a purchase, and the purchase price of $123.7 million was allocated to the net assets acquired based on their fair value resulting in goodwill of $6.8 million. PrinCap's primary business is residential mortgage warehouse lending to medium-sized brokers and mortgage bankers on a national basis. At December 31, 1997, PrinCap had commitments outstanding and loans of $124.6 million and $122.5 million, respectively. Imperial Credit Commercial Asset Management Corporation The Company formed ICCAMC, a wholly-owned subsidiary, to oversee the day to day operations of ICCMIC, a real estate investment trust intending to invest primarily in performing multi-family and commercial real estate loans and mortgage-backed securities. In October 1997, ICCMIC completed its initial public offering and sold approximately 34.5 million shares of common stock at $15.00 per share resulting in net proceeds of approximately $481.2 million. The Company purchased 2,970,000 shares of ICCMIC common stock in the offering and an additional 100,000 shares in December 1997. As of December 31, 1997, the Company owned 8.9% of the common stock of ICCMIC. 7 LOAN AND LEASE PRODUCTS The Company offers loan and lease products and provides other services in the following sectors: . BUSINESS FINANCE LENDING. Business finance lending is conducted through IBC and three divisions of SPB: Coast Business Credit ("CBC"), the Loan Participation and Investment Group ("LPIG") and the Auto Lend Group ("Auto Lend"). . COMMERCIAL MORTGAGE LENDING. The Company conducts its commercial mortgage lending operations through the Income Property Lending Division ("IPLD") of SPB. . CONSUMER LENDING. The Company conducts consumer lending operations through the Auto Lending Division ("ALD") and Consumer Credit Division ("CCD") of SPB and through AMN. . ADVISORY, INVESTMENT AND OTHER ACTIVITIES. The Company conducts advisory services through its ICAI, ICCAMC, and ICG subsidiaries and has substantial equity investments in SPFC, a publicly traded sub-prime residential mortgage lender, and FMC, a publicly traded specialty commercial finance company. BUSINESS FINANCE LENDING The Company, through IBC, and SPB's CBC, LPIG and Auto Lend divisions, engages in business finance lending, which consists of commercial equipment leasing, asset based lending, loan participations and automobile inventory financing for auto dealers. IMPERIAL BUSINESS CREDIT, INC. General In May 1995, the Company expanded its existing commercial equipment leasing business conducted by its wholly-owned subsidiary, IBC, through the acquisition of the assets and the assumption of certain liabilities of FCAC, a Colorado corporation engaged in the origination, acquisition and servicing of business equipment leases. The sale was effectuated pursuant to an asset purchase agreement among the Company, FCAC and Oren L. Benton, FCAC's majority shareholder ("Benton"). In connection with the purchase of FCAC's assets, the Company or its affiliates also purchased 100% of the partnership interests of three partnerships controlled by Benton that were formed for the purpose of securitizing certain of FCAC's lease receivables. The acquisition was accounted for as a purchase and the purchase price of $21.4 million was allocated to the net assets acquired based on their fair value resulting in goodwill of approximately $1.2 million. In October 1996 pursuant to the Avco Acquisition, IBC acquired substantially all of the assets of Avco Leasing Services, Inc. and all of the assets of Avco Financial Services of Southern California, Inc. related to its business of originating and servicing business equipment leases and agreed to assume certain related liabilities in connection therewith from Avco Financial Services, Inc. The Avco Acquisition was accounted for as a purchase, and the purchase price of $94.8 million was allocated to the net assets acquired based on their fair value, resulting in goodwill of approximately $12.5 million. IBC's corporate headquarters are located in Rancho Bernardo, California. IBC carries out its business equipment leasing operations from both its headquarters and its sales offices in Irvine, California, Denver, Colorado and Atlanta, Georgia. IBC's lease originations totaled $151.3 million and $87.2 million for the years ended December 31, 1997 and December 31, 1996, respectively. During the years ended December 31, 1997 and December 31, 1996, IBC securitized $213.6 million and $87.0 million of leases, respectively. Lease Finance Operations IBC is in the business of leasing equipment, including copying, data processing, communication, printing and manufacturing equipment, exclusively to business users. Initial lease terms typically range from 24 months 8 to 60 months. IBC will commit to purchase this equipment only when it has a signed lease with a lessee who satisfies its credit and funding requirements. Substantially all the leases written by IBC are full-payout ("direct financing") leases that allow IBC to sell or re-lease the equipment upon termination of the lease. IBC also purchases small portfolios of existing equipment leases from brokers with whom it has established relationships. These portfolios are evaluated on an individual basis according to IBC's established credit policy. The Company believes that these acquisitions allow IBC to grow with greater efficiency than usual at a level of decreased risk due to the portfolio aging that has occurred on the books of the originating broker. IBC uses an established computer system and related software systems to process lease applications, book leases, post lease payments, and closely monitor credit processing and collections. These systems have in part been developed by IBC management. Upon expiration of the initial lease terms of its direct-financing leases, IBC expects, on average, to realize slightly more than the "residual value" at which the leased equipment is carried on IBC's books. IBC's ability to recover the recorded estimated residual value depends on the accuracy of initial estimates of the equipment's useful life, the market conditions for used equipment when leases expire, and the effectiveness of IBC's program for re- leasing or otherwise disposing of leased equipment. Residual recovery, however, is not required for IBC to achieve a profitable return on its investment. The residual is usually worth 1% to 2% of the gross yield depending upon the original lease term, further mitigating against the residual risk inherent in the portfolio. The following table sets forth IBC's lease originations by equipment type for the period presented.
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996 ---------------------------------- ---------------------------------- NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL LEASES AMOUNT % OF TOTAL LEASES AMOUNT % OF TOTAL ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS ---------- ---------- ------------ ---------- ---------- ------------ (DOLLARS IN THOUSANDS) Computers............... 1,981 $ 39,270 26.0% 857 $21,331 24.5% Manufacturing/Machine work................... 441 12,001 7.9 380 11,289 13.0 Restaurant.............. 1,047 13,072 8.6 395 6,238 7.2 Furniture and fixtures.. 984 18,407 12.2 242 5,963 6.8 Automotive.............. 1,843 15,879 10.5 475 4,279 4.9 Heavy equipment......... 430 9,449 6.2 163 3,938 4.5 Radio television production equipment... 374 7,869 5.2 202 3,838 4.4 Print/Typeset equipment. 136 3,423 2.3 141 3,251 3.7 Health/Sports equipment. 152 4,005 2.6 125 3,069 3.5 Dry cleaning/Washing.... 102 2,385 1.6 102 2,387 2.7 Clothing manufacture.... 38 1,451 1.0 59 2,373 2.7 Other................... 1,251 24,057 15.9 1,204 19,251 22.1 ----- -------- ----- ----- ------- ----- Total................. 8,779 $151,268 100.0% 4,345 $87,207 100.0% ===== ======== ===== ===== ======= =====
IBC uses a non-cancelable lease, the terms and conditions of which vary only slightly from transaction to transaction. In substantially all of the leases, lessees are obligated to: (i) remit all rents due, regardless of the performance of the equipment, (ii) operate the equipment in a careful and proper manner compliance with governmental rules and regulations, (iii) maintain and service the equipment, (iv) insure the equipment against casualty losses and public liability, bodily injury and property damage and (v) pay directly, or reimburse IBC for, any taxes associated with the equipment, its use, possession or lease, except those relating to net income derived by IBC therefrom. The lease provides that IBC, in the event of a default by a lessee, may declare the entire unpaid balance of rentals due and payable immediately, and may seize and remove the equipment for subsequent sale, re-lease or other disposition. 9 Underwriting IBC maintains written credit policies that IBC believes are prudent and customary within the lease finance industry. Such policies form the basis for IBC's standardized lease forms and approval processes. On occasion, IBC will make exceptions to its written credit policy for lease brokers with whom IBC has had past positive experience. In general, IBC's credit policies encourage leasing of income-generating equipment. Within these guidelines, there are few specific equipment or industry prohibitions. IBC's credit policies allow it to accept credit investigations provided by select brokers and has generated a database of brokers with whom it does business. IBC also maintains a written collection policy to provide standard collection guidelines. In those instances when a portfolio of leases is acquired, documentation provided by the originating lessor is checked for compliance with IBC's documentation standards before accepting the portfolio for purchase. Marketing IBC markets its equipment lease products through its own in-house sales force and through its network of professional equipment lease brokers. IBC's 20 person in-house sales force solicit end user customers and vendors to market their equipment lease transactions. In the future, IBC intends to expand its marketing efforts to include more vendors. The sales force also calls on IBC's network of professional equipment lease brokers to solicit these professionals to send their lease transactions to IBC. IBC's broker advisory panel consists of a group of its most productive brokers who are brought together on an annual basis, so that they may have an open interchange of ideas and information regarding IBC and the leasing marketplace. IBC believes the advisory panel serves a multi-purpose function by allowing IBC to reward those brokers that provide a profitable base of business to IBC, and also providing IBC the opportunity to market new ideas and concepts to those brokers before a general release to the leasing community. IBC believes that it benefits by obtaining information on how the brokers work with IBC's competitors (such as special programs and market trends), and this information can then be used to drive future marketing plans. COAST BUSINESS CREDIT General CBC is a senior secured asset-based lender located in Los Angeles, California, which has historically conducted its lending business activities in the Western United States. During 1996 CBC executed an expansion plan which increased its customer base outside of California. CBC now operates four loan production centers in California and additional loan production centers in Atlanta, Baltimore, Boston, Chicago, Cleveland, Minneapolis, Phoenix, Portland, Providence and Seattle. At December 31, 1997 and December 31, 1996, CBC had outstanding loans totaling $484.8 million and $288.5 million, respectively. CBC had unused loan commitments of $318.4 million and $259.2 million at December 31, 1997 and 1996, respectively. CBC's principal business is asset-based lending to small-to medium-sized businesses with annual revenues ranging from approximately $10 million to $100 million. At December 31, 1997 and 1996, CBC had outstanding loans to technology companies totaling $201.8 million and $115.6 million, respectively. At December 31, 1997 and December 31, 1996, CBC's loan portfolio represented lending relationships with 142 and 105 customers, with an average outstanding loan balance per customer of $3.4 million and $2.8 million, respectively. The Company believes that CBC's relationships with venture capital investors and its industry expertise contribute to CBC's ability to distinguish itself from its competitors and grow its lending relationships. 10 The Company believes that CBC's loan pricing is competitive with pricing charged by other commercial finance companies. In addition, CBC attempts to be flexible in the structuring of its revolving credit lines and to provide prompt service in order to gain an advantage over its competitors. When CBC competes against more traditional lenders, it competes less on price and more on flexibility, speed of funding and the relative simplicity of its documentation. CBC strives to fund its initial loan advance under a loan to an approved client within three weeks of CBC's receipt of required information with respect to the client, and strives to fund future advances generally by the next business day after CBC's receipt of required documentation. Loan Products and Originations CBC's loans are categorized based on the type of collateral securing the loan. CBC makes revolving loans primarily secured by accounts receivable and secondarily by inventory. It also makes term loans secured by real property, equipment or other fixed assets. CBC also periodically enters into participations with other commercial finance companies. CBC's loans typically have maturities of two to five years, providing borrowers with greater flexibility to manage their borrowing needs. These loans have an automatic renewal for a one year period at the end of such contract term unless terminated by either party (usually requiring 60 days written notice prior to the end of such term). Equipment loans are term loans typically with three- to five-year amortization periods, but are due and payable upon termination of the master loan and security agreement. Accounts receivable loans are revolving lines of credit that are collateralized principally by accounts receivable. Each borrower's customers normally remit their accounts receivable payments directly to CBC, usually on a daily basis. CBC deposits the payments daily and applies the funds to the borrowers' loan balances. CBC typically lends up to 80% of the principal balance of accounts receivable that meet CBC's eligibility requirements. CBC's auditors conduct quarterly audits of the collateral and financial condition of each borrower. Inventory loans are revolving lines of credit collateralized by eligible inventory that is restricted to raw materials and finished goods. Inventory loans are generally made in conjunction with accounts receivable loans to qualifying borrowers. Borrowers are required to provide CBC with monthly inventory designations that are supported by a physical listing or a copy of a perpetual computer listing. These reports are compared to the borrower's financial statements for accuracy, and CBC advances the loan proceeds as a percentage of the eligible inventory value. Inventory loans are primarily structured as revolving lines of credit, but under certain circumstances may be structured to incorporate monthly amortization. Participation loans consist of term loans or revolving lines of credit in which CBC and other lenders (banks or other asset-based lenders) jointly lend to borrowers when the loan amount exceeds the lending limits of an individual lender. Set forth below is a table showing the principal amount of CBC's outstanding loans as of December 31, 1997 and December 31, 1996, and the percentage of CBC's portfolio comprised of each loan type as of such date.
AT DECEMBER 31, AT DECEMBER 31, 1997 1996 ----------------- ----------------- OUTSTANDING % OF OUTSTANDING % OF BALANCE TOTAL BALANCE TOTAL ----------- ----- ----------- ----- (DOLLARS IN THOUSANDS) Accounts receivable loans................. $344.2 71.0% $208.1 72.1% Inventory loans........................... 55.1 11.4 34.9 12.1 Participation loans(1).................... 85.5 17.6 45.5 15.8 ------ ----- ------ ----- Total................................... $484.8 100.0% $288.5 100.0% ====== ===== ====== =====
- -------- (1) Participation loans include $85.5 million purchased at December 31, 1997 and $48.4 million purchased and $2.9 million sold at December 31, 1996. 11 The weighted average yield on CBC's loans outstanding was 12.79% and 12.41% at December 31, 1997 and December 31, 1996, respectively. CBC had commitments to make additional fundings on lines of credit with existing borrowers totaling approximately $318.4 million and $259.2 million at December 31, 1997 and December 31, 1996, respectively; however, each additional funding is contingent upon the borrowers maintaining both sufficient collateral and compliance with the terms and conditions of the loan documents. Underwriting Before a credit line proposal letter is issued and a line of credit is established, CBC policy requires a review of the prospective client, its principals, business and customer base, including a review of financial statements and other financial records, legal documentation, samples of invoices and related documentation, operational matters, accounts receivable and payable. In addition, CBC confirms certain matters with respect to the prospective client's business and the collectibility of the client's commercial receivables and other potential collateral by conducting public record searches for liens, conducting credit reviews of the prospective client and its principals, contacting major customers and suppliers to identify potential problems, and conducting an on-site audit of the prospective client's invoice, bookkeeping and collection procedures to verify that they are properly conducted and operationally compatible with CBC's operations. For high technology borrowers, particular emphasis is placed on comprehending the underlying value of the technology itself, including the value of the borrowers intangible assets. After the preliminary review and due diligence, CBC requires the prospective borrower to provide a deposit for fees and orders appraisals if lending against inventory, equipment or real estate and schedules an audit. CBC's auditing staff conducts an audit generally consisting of a due diligence review of the prospective borrower's accounting and financial records, including a statistical review of accounts receivable and charge-off history. CBC auditors then submit their audit reports and work papers to CBC's credit committee for review prior to the extension of credit. In making a decision to approve a credit line, CBC establishes credit limits under the revolving credit line and analyzes the prospective client's customer base to assure compliance with CBC's policies generally limiting CBC's overall exposure to account debtors, especially with respect to privately held or non- investment grade borrowers. When deemed necessary for credit approval, CBC may obtain guarantees or other types of security from a client or its affiliates and may also obtain subordination and intercreditor agreements from the borrower's other lenders. Although CBC's underwriting guidelines specify a review of the factors described above, CBC does not apply a rigid scoring system to prospective borrowers. Decisions to enter into a relationship with a prospective client are made on a case-by-case basis. CBC's underwriting guidelines and policies provide that, prior to each loan funding, the account executive assigned to the borrower (i) obtains the original or a copy of the invoice to be sent to the borrower and the purchase order (if one is required by CBC) related to such invoice, (ii) confirms the validity and accuracy of a representative sampling of invoices and (iii) mails a letter, on the borrower's letterhead, to the new borrower's customer which introduces CBC and requests that payment be made directly to CBC. Credit Monitoring and Controls An assigned CBC account executive monitors each borrower's credit, collateral and advances. All account executives are required to meet with each of their assigned borrowers at least quarterly to monitor the borrower's business, physically inspect the borrower's facilities and equipment, and discuss any potential problems the borrower may be experiencing. 12 CBC monitors borrowers' accounts receivable using three forms. The first form is an accounts receivable aging analysis report prepared monthly by the loan processor and reviewed by the account executive, and which includes, among other things, details pertaining to account concentrations and aging trends. The second is an accounts receivable activity summary prepared weekly by the loan processor and reviewed by the account executive, summarizing borrowings, repayments and pledged collateral. The third is a daily report prepared by the borrower and reviewed by the account executive to determine credit availability for a particular day. In addition to the foregoing monitoring procedures, interim audits of all borrowers are scheduled as deemed appropriate. Also, each account is reviewed on its anniversary date and revolving lines are reviewed and reconciled on a monthly basis. Where liquidation is required for repayment of an outstanding loan, CBC attempts to effect a consensual possession of the subject collateral property and joint collection of accounts receivable. In certain instances, court action may be required to ensure collection of receivables and possession of pledged assets. CBC has not experienced any loan losses since its acquisition by the Company. Marketing CBC obtains business through referrals from banks, venture capitalists, accounting firms, management consultants, existing borrowers, other finance companies and independent brokers. CBC's marketing officers call on CBC's referral sources to identify and receive introductions to potential clients and to identify potential clients from database searches. CBC currently compensates its marketing personnel with what it believes are competitive base salaries and commissions based on funded transactions in order to motivate and reward the creation of new business and the renewal of existing business. Such commissions can be a significant portion of the total compensation paid to CBC's marketing personnel. CBC's marketing personnel have no credit decision authority. The Company believes that CBC's marketing strengths are its rapid response time and high level of service. The Company believes that, based on CBC's experience with technology credits and valuation of their associated tangible and intangible assets, CBC is able to quickly evaluate potential borrowers, thus providing it with a competitive advantage over other lenders with less experience providing loans to high technology companies. The Company also believes that CBC's ability to quickly evaluate credit requests and provide loans to borrowers who, for various reasons, have not established relationships with traditional lenders, has resulted in a loyal customer base. LOAN PARTICIPATION AND INVESTMENT GROUP LPIG was formed by SPB in September 1995 to invest in and purchase syndicated commercial loan participations in the secondary market originated by commercial banks. As of December 31, 1997 and December 31, 1996, LPIG had total loan commitments of $483.7 million and $267.1 million, of which $196.4 million and $160.7 million of loans were outstanding, respectively. At December 31, 1997 and December 31, 1996, none of LPIG's loan participations were 30 days or more delinquent. The principal types of loans acquired by LPIG are senior secured bank loans consisting of: (i) revolving lines of credit which allow the borrower to borrow and repay proceeds as needed for working capital purposes, (ii) long- term loans with a specific amortization schedule which requires the borrower to repay the borrowed loans over time, usually on a quarterly basis or (iii) letters of credit which are normally funded as a sublimit under the revolving line of credit commitment. The loans are generally secured by a first priority lien on all of the borrower's property including accounts receivable, inventory and furniture, fixtures and equipment, as well as liens on owned real estate. At December 31, 1997 and December 31, 1996, loan participations held by LPIG ranged in size from approximately $575,000 to $24.0 million and $900,000 to approximately $15.0 million, respectively. 13 LPIG believes that its purchase of senior secured loan participations allows it to build and maintain a loan portfolio without costly direct customer loan servicing and loan origination costs. In addition, such purchases facilitate the maintenance of a portfolio which is diversified both geographically and by industry. LPIG's loan underwriting policy requires an analysis of the borrower's ability to repay its debts, as well as an evaluation of the effects of general economic and industry trends and various competitive factors affecting the borrower. LPIG's commitments/outstandings by industry type at December 31, 1997 are as follows:
% OF TOTAL % OF TOTAL COMMITMENT COMMITMENT OUTSTANDING OUTSTANDING AMOUNT AMOUNT AMOUNT AMOUNT ---------- ---------- ----------- ----------- (DOLLARS IN THOUSANDS) Manufacturing.................. $ 93,384 19.3% $ 34,470 17.5% Hotels......................... 50,338 10.4 12,359 6.3 Waste disposal services........ 36,712 7.6 13,588 6.9 Outdoor advertising............ 31,600 6.5 20,568 10.5 Automobile rentals............. 25,000 5.2 -- -- Radio broadcasting............. 24,000 5.0 18,780 9.6 Air carrier.................... 23,000 4.8 7,820 4.0 Defense........................ 22,530 4.7 6,541 3.3 Automobile parts............... 21,646 4.5 1,646 0.8 Food processing................ 20,000 4.1 9,948 5.1 Food distribution.............. 16,441 3.4 -- -- Party goods distribution....... 15,000 3.1 3,000 1.5 Rail transportation............ 14,520 3.0 14,520 7.4 Telecommunications............. 14,440 3.0 5,036 2.6 Equipment rentals.............. 12,600 2.6 5,216 2.7 Healthcare..................... 10,750 2.2 6,615 3.4 Chemicals...................... 10,522 2.2 7,379 3.7 Collection services............ 10,275 2.1 8,067 4.1 Park management................ 10,000 2.1 7,000 3.6 Television broadcasting........ 5,000 1.0 3,575 1.8 Garment........................ 5,000 1.0 1,400 0.7 Supermarkets................... 4,900 1.0 4,900 2.5 Paper.......................... 3,030 0.6 1,010 0.5 Restaurants.................... 2,982 0.6 2,982 1.5 -------- ----- -------- ----- Total........................ $483,670 100.0% $196,420 100.0% ======== ===== ======== =====
Auto Lend Group Auto Lend was established in September 1996 as a division of SPB, to provide automobile inventory financing for automobile dealers. The principal types of loans originated are fixed-rate lines of credit. Auto Lend had $62.4 million and $28.8 million of commitments and $14.1 million and $4.6 million of loans outstanding at December 31, 1997 and December 31, 1996 respectively. SPB believes that Auto Lend's products offer synergistic opportunities, when offered in connection with SPB's sub-prime auto lending ability, to provide car dealers a complete financing package. See "--Consumer Lending--Auto Lending Division." 14 COMMERCIAL MORTGAGE LENDING Income Property Lending Division The Company conducts its commercial mortgage lending operations through the Income Property Lending Division ("IPLD") of SPB. IPLD was formed in February 1994 to expand the Company's apartment and commercial property lending business. The focus of IPLD's lending activities is the small loan market (consisting of loans typically less than $2.5 million) for multi-family apartments and commercial buildings. For the years ended December 31, 1997 and 1996, IPLD funded approximately $295.9 million and $260.9 million in loans, respectively. During the year ended December 31, 1997 and the year ended December 31, 1996, SPB completed securitizations of approximately $203.1 million and $277.0 million of multi-family and commercial mortgage loans originated or purchased by IPLD, respectively. At December 31, 1997 and December 31, 1996, $497,000 and $1.9 million or 0.8% and 1.1%, respectively, of IPLD's outstanding loans were 30 days or more delinquent. At December 31, 1997 and December 31, 1996, $500,000 and $4.4 million, respectively, of IPLD originated loans were held for investment by SPB. IPLD generally seeks to make 70% of its loans secured by apartment buildings and 30% of its loans secured by other commercial properties. Most of IPLD's business is generated through in-house loan representatives who market the loans directly to mortgage brokers and borrowers. Most of IPLD's loans have been secured by properties in California. SPB believes that IPLD employs conservative underwriting criteria, which include a maximum loan-to-value ratio of 70% and minimum debt coverage ratio of 1.2x on all loans. Loans secured by income properties entail additional risk as compared to single family residential lending. The payment experience on such loans is generally dependent on the successful operation of the related commercial or multi-family property and can be greatly impacted by adverse conditions in local real estate markets or in the economy. All of IPLD's loan programs include 30-year adjustable rate loans tied to the 6-month LIBOR, 1-year Treasury, or Bank of America prime indexes. Margins vary depending on product type, property location and credit history of the borrower. With respect to apartment loans, IPLD uses standard government agency documentation and approved independent appraisers. CONSUMER LENDING Through ALD and CCD, which are divisions of SPB, and AMN, the Company also makes consumer loans consisting of sub-prime automobile finance loans, home improvement loans and other consumer credit. Auto Lending Division ALD was formed in October 1994 to finance new and used automobile purchase contracts. ALD's borrowers are generally credit-impaired and therefore are unable to access traditional sources of financing from banks and captive automobile finance companies. ALD seeks to offset the increased risk of default in its portfolio with higher yields and aggressive servicing and collection activities. During the year ended December 31, 1997 and December 31, 1996, ALD originated approximately $74.2 million and $35.0 million, respectively, in automobile loans. SPB currently generates automobile loans through three Northern California retail offices. Consumer Credit Division CCD was formed in early 1994 to offer loans primarily to finance home improvements and consumer goods. CCD's business is developed through a network of retailers and contractors throughout California and out of state. All loans are centrally processed, approved and funded at CCD's headquarters in Irvine, California. 15 Home improvement loans offered by CCD range from $5,000 to $350,000 and include major remodeling projects that are sometimes coupled with refinancings. CCD's typical loan is secured by a junior lien. In addition, CCD purchases unsecured installment sales contracts to finance certain home improvements such as air conditioning, roofing, kitchen or bathroom remodeling. During the years ended December 31, 1997 and December 31, 1996, CCD originated $19.8 million and $22.0 million in loans, respectively, all of which are held for investment. At December 31, 1997 and December 31, 1996, $900,000 or 1.9% and 2.4%, respectively, of CCD's outstanding loans were 30 days or more delinquent. Auto Marketing Network, Inc. AMN was acquired on March 14, 1997 to finance on a nationwide basis the purchase of new and used automobiles primarily to sub-prime borrowers. At December 31, 1997, AMN was headquartered in Tulsa, Oklahoma and had certain business development and administrative activities located in its Florida office. For the period from its acquisition through December 31, 1997, AMN originated $170.6 million and securitized $158.6 million in sub-prime auto loans. Since the March 1997 acquisition date, AMN has posted operating losses and experienced significant increases in non-performing assets, loan charge- offs and loan loss provisions. In December 1997, the Company developed revised operating projections which indicated that the goodwill resulting from the AMN acquisition was not recoverable. Accordingly, the remaining goodwill of $20.1 million was written off through accelerated amortization during the fourth quarter of 1997. General AMN is engaged primarily in the indirect origination of sub-prime motor vehicle receivables. As of December 31, 1997, AMN's receivables are originated through a network of approximately 819 participating dealers. Approximately 87% of all originating dealers are new car franchised dealers or their affiliates and the others are independent dealers. AMN's direct dealer relationships generally begin with AMN's area dealer representative contacting a dealer to explain AMN's financing program. AMN's representative presents the dealer with a sales package, including promotional material containing current rates being offered by AMN to dealerships, copies of AMN's dealer agreement, information regarding AMN's special finance training schools and samples of AMN's documentation requirements. A dealer that decides to participate in AMN's financing program must enter into a non- exclusive dealer agreement with AMN. As a condition to entering into an agreement, a dealer must provide certain business information to AMN. A dealer must also make representations and warranties to AMN with respect to the receivables to be assigned. Upon execution of the dealer agreement, AMN's area dealer representative provides the dealership with necessary documentation for origination of receivables and conducts a two-day in-house training session at the dealership for personnel responsible for the use of such documentation. In addition, dealers are encouraged to send staff members to AMN's Alternative Finance Training School within the first four months after their enrollment in AMN's program. Since its formation, AMN has purchased receivables from dealers generally at a 10% discount from the financed amount. AMN is in the process of developing a risk-based tiered pricing program which AMN anticipates will be implemented during 1998. The program includes a wholesale advance rate (rather than a retail advance rate currently used by AMN), and includes acquisition fees, annual percentage rates and other criteria that differ depending upon the creditworthiness of the borrowers. In addition, AMN has retained certain consultants to assist in the development of a credit scoring model and a bankruptcy scorecard predictor and in the development of portfolio risk management procedures associated with its risk-based tiered pricing program. 16 In addition, in June 1997, AMN entered into an agreement with Auction Finance Group, Inc. pursuant to which AMN may obtain referral business from certain independent used car dealers from whom AMN currently purchases receivables from time to time at a 12% discount from the financed amount. All dealers are obligated to repurchase any receivable identified by AMN if that dealer's representations and warranties prove to have been false at the time AMN purchased the receivable. The sales by the dealers of installment sale contracts to AMN do not generally provide for recourse to the dealer for unpaid amounts in the event of a default by a borrower thereunder, other than in connection with the breach of the foregoing representations and warranties. The dealers also indemnify and hold harmless AMN for any liabilities and costs (including attorney fees) arising from any act or omission by the dealer required to be performed under the dealer agreement for any receivable. Underwriting The credit guidelines applied by AMN in acquiring receivables are considerably less stringent with respect to the credit of the obligor than those generally applied by other lenders, such as banks and savings and loans associations. The obligors on the acquired receivables are individuals who are not typically able to obtain financing from such other lenders due to prior credit problems, which may include bankruptcies, repossessions, foreclosures, charge-offs, judgements or collection problems (or to a lessor extent, qualifying first time borrowers). However, the prospective obligor is required to be currently performing on all outstanding obligations reported to AMN which AMN deems significant. Due to the lower credit quality of the obligors and the resulting higher risks of loss, receivables have been originated with Annual Percentage Rates ("APR's") which are higher than would be available to prime borrowers. The following procedures describe AMN in underwriting retail installment contracts secured by motor vehicles. . AMN purchases retail installment sale contracts secured by new and used automobiles, vans and light duty trucks from dealers who participate in its motor vehicle financing program. The receivables purchased by AMN were originated by dealers in accordance with AMN's requirements under existing agreements with such dealers. . Applications submitted to AMN are required to list sufficient information to process the application, including the applicants' income, employment status, residential status, monthly mortgage or rent payment and other personal information. Upon receipt of an application, AMN obtains at least one credit report from an independent credit bureau. If no report is available due to insufficient credit or other factors, the application is automatically denied. Each credit report is reviewed by AMN to determine the applicant's current credit status and past credit performance. Factors considered negative generally include past due credit, repossessions, foreclosures, loans charged off by other lenders, judgements and previous bankruptcy. Positive factors such as amount of credit and favorable payment history are also considered. Other considerations include income requirements and the ratio of total debt to income and of monthly auto payment to income. . Although AMN will consider various criteria in evaluating a loan application. including but not limited to borrower's employment and residence, ability to make loan payments and credit history, the amount of the down payment , the value of the financed vehicle, the mileage of the financed vehicle and the amount of the loan in relation to the value of the vehicle, AMN may approve a loan application even if it has made an evaluation that one or more of such criteria has not been met or exceeded if in its judgement there are countervailing factors. . Thus AMN may, in some cases, approve a loan even though its evaluation of a borrowers' record of employment or ability to make loan payments, or a borrowers' credit history, are different from its standard underwriting guidelines In June 1997, internal exception tolerances were tightened, which affected most guideline limits in the program. AMN also implemented an internal audit system whereby its internal auditor reviews a sample of each week's originations for compliance with its underwriting guidelines. Furthermore, in September 1997, several key guideline limits were changed. 17 These included an increase in minimum income requirements for qualified credit applicants, an increase in the minimum required credit score, and decreases in allowable debt-to-income and payment-to-income ratios. Other minor changes at that time included a limit on fees charged by dealers and a reduction in allowable additions to vehicle value for options. The changes AMN made to its underwriting guidelines were the result of its Credit Committee's review of an analysis of all defaulted loans originated by AMN since April 1995. In addition, AMN is in the process of developing a risk-based tiered pricing program designed to improve further the credit quality of the receivables it originates. There can be no assurance, however, that the tightening of AMN's credit standards and implementation of the risk-based tiered pricing program will result in improved credit quality in AMN's receivables portfolio. Insurance on Financed Vehicles' AMN's retail installment sale contract requires that borrowers maintain specific levels and types of insurance coverage, including physical damage insurance, to protect the related financed vehicle against loss. At the time of purchase, the borrower signs a statement which indicates the customer has or will have the necessary insurance, and which shows the name and address of the insurance company along with a description of the type of coverage. Although each receivable requires the related obligor to maintain insurance covering physical damage to the financed vehicle, since the obligors may select their own insurers to provide the requisite coverage, specific terms and conditions of their policies may vary. A failure by an obligor to maintain such physical damage insurance will constitute a default under the related receivable, but will not cause such receivable to become a delinquent receivable. Guidelines and Procedures for Credit Evaluation AMN's underwriting guidelines are designed to provide financing to people with impaired credit, which may include bankruptcies, repossessions, foreclosures, charge-offs, judgements and collection accounts. To a lesser extent, AMN will purchase receivables from qualifying first-time borrowers. AMN's underwriters will evaluate suitability based on their assessment of all elements of the proposed credit (e.g. the borrower's credit, the deal structure and the collateral). An underwriter may reject a contract in which all of the elements of the proposed credit meet only the minimum requirements, or the underwriter may grant conditional approval on the prospective borrowers ability to meet additional conditions, such as a higher down payment, a lower advance or purchase of a different vehicle. The underwriter may waive certain requirements or grant exceptions, generally with the approval of the regional credit manager. All credit decisions are made at the discretion of AMN. Approval Process When AMN approves the purchase of a finance contract, AMN notifies the dealer by facsimile or telephone. Such notice specifies certain pertinent information relating to the terms of the approval, including the maximum monthly payment and the stipulations required for funding. Generally, a borrower is required to make a down payment (which includes cash and/or vehicle trade-in value) of at least 10% of the sales price. Subject to limited exceptions, AMN's guidelines and procedures currently require that the total amount financed cannot exceed 115% of the retail value of the financed vehicle. Under the risk-based tiered pricing program, the advance rate will vary depending upon the creditworthiness of the individual borrower. Receivable Purchase Upon final confirmation of the terms by the borrower, the dealer completes the sale of the automobile and the loan to the borrower. AMN receives all funding packages from courier services or local delivery and sorts them for pick up by appropriate departments. Data entry clerks in the contract processing department then log each new or returned funding package into AMN's database for tracking. The clerks then print the credit bureau reports reviewed by AMN's underwriters for approval. 18 The credit bureau reports are placed in the loan files and such files are distributed to the appropriate territorial processor. The territory to which a dealer's contracts are assigned is determined based upon the state in which the dealer's business is located. Contract processors sort the documentation received from the dealers and check the items for authenticity and acceptability according to company standards. Although pre-funding verifications of employment and insurance are currently performed and obligors are contacted for completion of a collateral audit, a substantial percentage of the receivables are verified using a book- out sheet procedure requiring signature of the dealer and the obligor. After the dealer delivers all required loan documentation to AMN, AMN purchases the finance contract and remits the funds to the dealer, generally within 72 hours. Upon purchase of the finance contract, AMN acquires a perfected security interest in the financed vehicle. Each finance contract requires that the automobile be properly insured and AMN named as a loss payee. Compliance with these requirements is verified prior to the remittance of funds to the dealer. After the purchase of the finance contract, AMN contacts the borrower to explain payment procedures. Management Information Systems AMN relies heavily upon its loan processing system to purchase contracts. AMN's loan processing system enables AMN to handle a significant volume of applications while maintaining integrity in the area of data entry, contract processing, and underwriting procedures. The system is serviced on a monthly basis, and daily data backup procedures are in place. ADVISORY, INVESTMENT AND OTHER ACTIVITIES The Company conducts advisory services through its ICAI, ICCAMC and ICG subsidiaries and has substantial equity investments in SPFC, a publicly traded sub-prime residential mortgage lender, FMC, a publicly traded specialty commercial finance company, ICCMIC, a publicly traded REIT engaged in commercial finance activities, IMH, a publicly traded REIT engaged in non conforming residential mortgage lending and ICW, a holding company for international finance activities. Imperial Credit Advisors, Inc. ICAI provides capital markets, portfolio management and research services to the Company's subsidiaries and affiliates. Prior to December 1997, ICAI oversaw the day-to-day operations of IMH pursuant to a management agreement, recently terminated as more fully described in Item 13--"Certain Relationships and Certain Transactions--Relationships with IMH--Other Arrangements and Transactions with IMH." For the years ended December 31, 1997, 1996 and 1995, ICAI earned $4.9 million, $3.3 million and $38,000, respectively, in management fees and incentive payments pursuant to the management agreement. Imperial Credit Commercial Asset Management Corporation ICCAMC was formed in the third quarter of 1997 and oversees the day-to-day operations of ICCMIC pursuant to a management agreement more fully described in Item 13--"Certain Relationships and Certain Transactions--Relationships with ICCMIC--ICCMIC Management Agreement." For the year ended December 31, 1997, ICCAMC earned $940,000 in management fees pursuant to the management agreement. Imperial Capital Group, LLC ICG is a majority owned subsidiary formed in July 1997. ICG, together with its subsidiaries Imperial Capital, LLC and Imperial Asset Management, LLC, offer individual and institutional investors financial products and services. Imperial Capital, LLC, is a registered broker/dealer with the United States Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc. Imperial Capital, LLC, provides investment opportunities and research to individual and institutional investors, raises private and 19 public capital for middle market companies, and trades debt, equity and asset backed securities. Imperial Asset Management, LLC, is an investment advisor registered with the United States Securities and Exchange Commission, and provides investment management services to high net worth individuals and institutional clients. When ICG was initially capitalized in September 1997, the Company's ownership percentage was 80%. Subsequently, on December 5, 1997, the Company's ownership percentage was reduced to 60% in a restructuring of its loan to DRI and the purchase of substantially all of the assets of DRI. Southern Pacific Funding Corporation SPFC is a publicly traded sub-prime mortgage banking company which originates, purchases and sells high yielding, single family sub-prime mortgage loans. Substantially all of SPFC's loans are secured by first or second mortgages on owner occupied single family residences. The majority of the originated and purchased loans are made to borrowers who do not qualify for or are unwilling to obtain financing from conventional mortgage sources. As of December 31, 1997, ICII owned 9,742,500 shares of SPFC common stock, representing 47.0% of the outstanding common stock of SPFC, which, commencing with the three months ended March 31, 1997, is reflected on the Company's consolidated balance sheet as "Investment in Southern Pacific Funding Corporation" and is accounted for pursuant to the equity method of accounting. ICII's investment in SPFC constituted 3.1% of the Company's total assets and contributed 8.4% of the Company's total revenue for the year ended December 31, 1997. Franchise Mortgage Acceptance Company FMC is a publicly traded specialty commercial finance company engaged in the business of originating and servicing loans and equipment leases to small businesses, with a primary focus on established national and regional franchise concepts. More recently, FMC has expanded its focus to include retail energy licensees (service stations, convenience stores, truck stops, car washes and quick lube businesses), funeral homes, cemeteries and golf operating businesses (golf courses and golf practice facilities). FMC originates long-term fixed and variable rate loan and lease products and sells such loans and leases either through securitizations or whole loan sales to institutional purchasers on a servicing retained basis. FMC also periodically makes equity investments or receives contingent equity compensation as part of its core lending and leasing business. For the nine months ended September 30, 1997 and year ended December 31, 1996, FMAC originated or acquired $510.8 million and $449.3 million of franchise loans and securitized, $343.8 million and $325.1 million of loans, respectively. During the fourth quarter of 1997, FMC completed an initial public offering of its common stock pursuant to which ICII was a selling stockholder. As a result of the Company's participation in the public offering, the Company's percentage ownership of FMC was reduced to 38.4%. Consequently, commencing with the quarter ended December 31, 1997, the financial statements of FMC are no longer consolidated with those of ICII. ICII's investment in FMC is reflected on the Company's consolidated balance sheet as "Investment in Franchise Mortgage Acceptance Company" and is accounted for pursuant to the equity method of accounting. ICII's investment in FMAC constituted 2.5% of the Company's total assets as of December 31, 1997. Imperial Credit Commercial Mortgage Investment Corporation In October 1997, the Company completed a public offering of the common stock of ICCMIC. ICCMIC invests primarily in performing multifamily and commercial loans and mortgage-backed securities. The Company purchased 2,970,000 shares of ICCMIC common stock for $41.4 million in October 1997. In December 1997, the Company purchased an additional 100,000 shares of ICCMIC common stock for $1.5 million. The Company owned 8.9% of the outstanding common stock of ICCMIC as of December 31, 1997. 20 Impac Mortgage Holdings, Inc. Simultaneously with IMH's initial public offering in November 1995, the Company contributed certain operating assets of ICII's mortgage conduit operations and SPB's warehouse lending operations for 500,000 shares of IMH's common stock. IMH is a publicly traded specialty finance company which operates three businesses: (i) long-term investment operations which invests primarily in nonconforming residential mortgage loans and securities backed by such loans, (ii) warehouse lending operations which provides short-term lines of credit to originators of mortgage loans and (iii) conduit operations, through its affiliate ICIFC, which primarily purchases and sells or securitizes non-conforming mortgage loans. As of September 30, 1997, the Company sold its common stock interests in IMH. However, pursuant to a termination agreement (the "Termination Agreement") entered into in December of 1997, related to the management agreement between ICAI and IMH, the Company received shares of IMH common stock and other consideration as more fully described in "Item 13--Certain Relationships and Certain Transactions-- Relationships with IMH--Other Arrangements and Transactions with IMH." Imperial Credit Worldwide, Ltd. ICW is a holding company for the Company's international finance activities and is a majority owner of Credito Imperial Argentina, a mortgage banking company conducting residential mortgage business in Argentina. LOANS HELD FOR INVESTMENT The following table sets forth certain information regarding the Company's loans held for investment. Substantially all of the Company's loans held for investment are held by SPB:
AT DECEMBER 31 ------------------------------------------------------ 1997 1996 1995 1994 1993 ---------- ---------- -------- ---------- -------- (IN THOUSANDS) Loans secured by real estate: One to four family...... $ 244,588 $ 375,476 $228,721 $ 897,494 $ 73,636 Multi-family............ 17,261 2,527 7,028 82,004 61,908 Commercial.............. 1,085 11,011 133,189 30,287 21,663 ---------- ---------- -------- ---------- -------- 262,934 389,014 368,938 1,009,785 157,207 Leases.................. 7,745 99,717 7,297 23,667 2,969 Installment loans....... 154,919 34,248 1,900 4,290 12 Franchise loans......... 62,219 115,910 46,766 -- -- Asset based loans....... 484,832 288,528 154,252 -- -- Commercial loans........ 344,882 173,932 110,104 5,882 247 ---------- ---------- -------- ---------- -------- 1,317,531 1,101,349 689,257 1,043,624 160,435 Unearned income......... (7,850) (6,336) (5,217) (5,900) (1,406) Deferred loan fees...... (4,916) (6,415) (1,540) (1,114) (1,180) ---------- ---------- -------- ---------- -------- 1,304,765 1,088,598 682,500 1,036,610 157,849 Allowance for loan losses................. (38,047) (19,999) (13,729) (7,054) (3,254) ---------- ---------- -------- ---------- -------- Total................. $1,266,718 $1,068,599 $668,771 $1,029,556 $154,595 ========== ========== ======== ========== ========
The Company's loans held for investment are primarily comprised of first and second lien mortgages secured by residential and income producing real property in California, leases secured by equipment, installment loans to consumers, loans to experienced franchisees of national and regional restaurant franchises, asset-based loans to middle market companies mainly in California and syndicated commercial loan participations. As a result, the loan portfolio has a high concentration in the same geographic region. Although the Company has a diversified portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economy of California. With respect to loans held for investment at SPB, a decline in California real estate values 21 may adversely affect the underlying loan collateral. In order to reduce the Company's risk of loss on any one credit, the Company has historically sought to maintain a fairly low average loan size within the portfolio of loans held for investment. The average loan size and single largest loan, excluding loans originated by CBC, of the loans originated by and held for investment at SPB at December 31, 1997 and December 31, 1996 were $122,000 and $18.8 million, and $100,000 and $11.0 million, respectively. The largest loan held for investment at December 31, 1997 and December 31, 1996 was a performing real estate loan secured by a first deed of trust. Non-performing assets ("NPA's") consist of nonaccrual loans, loans with modified terms, other real estate owned ("OREO") and other repossessed assets. The Company's policy is to place all loans 90 days or more past due on nonaccrual. Any mortgage loans held for sale, originated or acquired as part of the Company's former mortgage banking operations which are held more than 90 days after origination are classified as mortgage loans held for investment and are transferred at the lower of carrying value or market value. Such loans may be unsalable for a variety of reasons, including documentation deficiencies, payment defaults or borrower misrepresentations. The former mortgage banking operations' OREO arises primarily through foreclosure on mortgage loans repurchased from investors, typically due to a breach of representations or warranties. The Company incurred losses of approximately $4.5 million and $5.0 million related to activities of its former mortgage banking operations during the years ended December 31, 1997 and December 31, 1996, respectively. During the years ended December 31, 1997 and 1996, the impact of loans repurchased as the result of borrower misrepresentations was not material. In the fourth quarter of 1997, the Company recorded a provision of $5.4 million for future losses on repurchases of former mortgage banking loans. 22 The following table sets forth the amount of NPA's attributable to the Company's former mortgage banking operations and to all of its other lending activities:
AT DECEMBER 31, ------------------------------------------------------------------------------------------- 1997 1996 1995 1994 ---------------------- ---------------------- ---------------------- --------------------- FORMER FORMER FORMER FORMER ALL OTHER MORTGAGE ALL OTHER MORTGAGE ALL OTHER MORTGAGE ALL OTHER MORTGAGE LENDING BANKING LENDING BANKING LENDING BANKING LENDING BANKING ACTIVITIES OPERATIONS ACTIVITIES OPERATIONS ACTIVITIES OPERATIONS ACTIVITIES OPERATIONS ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Nonaccrual loans: One to four family.......... $ 27,573 $ 6,874 $ 24,711 $19,928 $ 2,652 $ 20,990 $ 4,012 $ 5,697 Commercial property........ 5,058 -- 3,052 -- 1,824 -- 2,201 -- Multi-family property........ 1,837 -- 1,421 -- 5,522 -- 1,195 -- Leases and installment..... 29,289 -- 997 -- -- -- -- -- ---------- ------- ---------- ------- ---------- -------- -------- ---------- Total nonaccrual loans............ 63,757 6,874 30,181 19,928 9,998 20,990 7,408 5,697 ---------- ------- ---------- ------- ---------- -------- -------- ---------- OREO: One to four family.......... 2,552 5,774 6,639 3,508 1,937 4,173 1,217 1,277 Commercial property........ 2,526 -- 1,200 -- 211 -- 445 -- Multi-family property........ 53 -- 867 -- 858 -- 329 -- ---------- ------- ---------- ------- ---------- -------- -------- ---------- Total OREO....... 5,131 5,774 8,706 3,508 3,006 4,173 1,991 1,277 ---------- ------- ---------- ------- ---------- -------- -------- ---------- Loans with modified terms: One to four family.......... -- -- 800 -- 870 -- 76 -- Commercial property........ -- -- 456 -- -- -- -- -- Multi-family property........ -- -- -- -- -- -- -- -- ---------- ------- ---------- ------- ---------- -------- -------- ---------- Total loans with modified terms... -- -- 1,256 -- 870 -- 76 -- ---------- ------- ---------- ------- ---------- -------- -------- ---------- Repossessed property: Equipment held for sale........ 4,437 -- -- -- -- -- -- -- Repossessed vehicles........ 4,563 -- -- -- -- -- -- -- ---------- ------- ---------- ------- ---------- -------- -------- ---------- Total repossessed property......... 9,000 -- -- -- -- -- -- -- ---------- ------- ---------- ------- ---------- -------- -------- ---------- Total NPAs....... $ 77,888 $12,648 $ 40,143 $23,436 $ 13,874 $ 25,163 $ 9,475 $ 6,974 ========== ======= ========== ======= ========== ======== ======== ========== Total loans and OREO............. $1,475,920 $24,087 $2,012,704 $40,955 $1,168,783 $869,463 $216,555 $1,094,144 Total NPA's as a percentage of loans and OREO... 5.27% 52.51% 1.99% 57.22% 1.19% 2.89% 4.38% 0.64% 1993 ---------------------- FORMER ALL OTHER MORTGAGE LENDING BANKING ACTIVITIES OPERATIONS ---------- ----------- Nonaccrual loans: One to four family.......... $ 1,124 $ 1,198 Commercial property........ 1,481 -- Multi-family property........ 1,136 -- Leases and installment..... -- -- ---------- ----------- Total nonaccrual loans............ 3,741 1,198 ---------- ----------- OREO: One to four family.......... 189 2,148 Commercial property........ 358 -- Multi-family property........ 781 -- ---------- ----------- Total OREO....... 1,328 2,148 ---------- ----------- Loans with modified terms: One to four family.......... 47 -- Commercial property........ 702 -- Multi-family property........ 871 -- ---------- ----------- Total loans with modified terms... 1,620 -- ---------- ----------- Repossessed property: Equipment held for sale........ -- -- Repossessed vehicles........ -- -- ---------- ----------- Total repossessed property......... -- -- ---------- ----------- Total NPAs....... $ 6,689 $ 3,346 ========== =========== Total loans and OREO............. $120,606 $1,281,313 Total NPA's as a percentage of loans and OREO... 5.55% 0.26%
23 The following table summarizes certain information regarding the Company's allowance for loan losses and losses on OREO:
YEARS ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------ ------ (IN THOUSANDS) Allowance at beginning of period.... $19,999 $13,729 $ 7,054 $3,255 $1,995 Provision for loan and lease losses. 38,951 9,773 5,450 5,150 2,350 Business acquisitions and bulk loan purchases.......................... 11,161 4,500 4,320 -- -- Sale of leases...................... (900) -- -- -- -- Deconsolidation of ICIFC............ (687) -- -- -- -- Loans charged off................... (31,053) (8,326) (3,106) (1,436) (1,124) Recoveries on loans previously charged off........................ 576 323 11 85 34 ------- ------- ------- ------ ------ Net charge-offs..................... (30,477) (8,003) (3,095) (1,351) (1,090) Allowance at end of period.......... $38,047 $19,999 $13,729 $7,054 $3,255 ======= ======= ======= ====== ====== OREO losses: OREO writedowns................... 2,074 3,252 $ 2,085 $ 369 $ 406 Loss (gain) on sale of OREO....... 4,453 2,842 (957) (119) (62) ------- ------- ------- ------ ------ Total OREO losses............... $ 6,527 $ 6,094 $ 1,128 $ 250 $ 344 ======= ======= ======= ====== ======
The percentage of the allowance for loan losses to nonaccrual loans will not remain constant due to the nature of the Company's portfolio of mortgage loans. The collateral for each non-performing mortgage loan is analyzed by the Company to determine potential loss exposure, and in conjunction with other factors, this loss exposure contributes to the overall assessment of the adequacy of the allowance for loan losses. On an ongoing basis, management monitors the loan portfolio and evaluates the adequacy of the allowance for loan losses. In determining the adequacy of the allowance for loan losses, management considers such factors as historical loan loss experience, underlying collateral values, evaluations made by bank regulatory authorities, assessment of economic conditions and other appropriate data to identify the risks in the loan portfolio. Loans deemed by management to be uncollectible are charged to the allowance for loan losses. Recoveries on loans previously charged off are credited to the allowance. Provisions for loan losses are charged to expense and credited to the allowance in amounts deemed appropriate by management based upon its evaluation of the known and inherent risks in the loan portfolio. While management believes that the current allowance for loan losses is sufficient, future additions to the allowance may be necessary. FUNDING AND SECURITIZATIONS The Company's liquidity requirements are met primarily by warehouse lines of credit and repurchase facilities from financial institutions, securitizations, whole loan sales, SPB customer deposits and FHLB borrowings. The Company has also accessed the capital markets through equity and debt offerings. As of December 31, 1997, the Company had warehouse lines of credit and commitments and repurchase facilities of $434.6 million. Business operations conducted through divisions of SPB are primarily financed through deposits, capital contributions from ICII to SPB, a warehouse line of credit and FHLB borrowings. At December 31, 1997 and December 31, 1996, SPB had total deposits of approximately $1.2 billion and $1.1 billion, respectively, (excluding deposits of the Company maintained with SPB). 24 Repurchase and Warehouse Facilities The Company is dependent upon its ability to access repurchase facilities and warehouse lines of credit in order to fund new originations and purchases. The Company had various warehouse lines and reverse repurchase facilities available as follows at December 31, 1997:
INTEREST INDEX RATE COMMITMENT OUTSTANDING (BASIS POINTS) EXPIRATION DATE -------- ---------- ----------- -------------- --------------- (DOLLARS IN THOUSANDS) Greenwich Capital Financial (AMN)........ 7.25% $125,000 $ 20,058 Libor plus 125 March 10, 1998 Donaldson, Lufkin and Jenrette (Corona Film Finance Fund).......... 5.85 79,591 79,591 Fixed rate January 7, 1998 CoreStates Bank, N.A. (IBC).................. 8.17 30,000 10,192 Libor plus 220 October 6, 1998 Morgan Stanley (SPB).... 6.51 200,000 35,000 Libor plus 50 October 1, 1998 -------- -------- 6.37 $434,591 $144,841 ======== ========
Securitizations of Assets As a fundamental part of its business and financing strategy, the Company has sold substantially all of its loans and leases through securitization, except for loans held for investment by SPB. The Company believes that securitizations provide it with greater operating leverage and a reduced cost of funds. In a securitization, the Company sells loans or leases that it has originated or purchased to a trust or special purpose entity for a cash purchase price and an interest in the loans or leases securitized. The cash price is raised through an offering of pass-through certificates by the trust or special purpose entity. Following the securitization, the purchasers of the pass-through certificates receive the principal collected and the investor pass-through interest rate on the principal balance of the loans or leases, while the Company receives the balance of the cash flows generated by the securitized assets in the form of principal and interest on any subordinate bonds or residual interests retained. These cash flows represent the excess cash flow collected after credit losses on loans or leases sold over the sum of the pass-through interest rate plus a normal servicing fee, a trustee fee and, where applicable, an insurance fee related to such loans or leases over the life of the loans or leases. Each loan or lease securitization may have specific credit enhancement requirements in the form of overcollateralization which must be met before the Company receives cash flows due. As the securitized assets generate cash flows, they may be used to pay down the balance of the pass-through certificates until such time as the ratio of securitized assets to pass- through certificates reaches the overcollateralization requirement specified in each securitization. This overcollateralization amount is carried on the balance sheet as retained interest in loan and lease securitizations. After the overcollateralization requirement and the other requirements specified in the pooling and servicing agreement have been met, the Company begins to receive principal and interest on any subordinate bonds or residual interests retained. A substantial portion of the Company's gross income is recognized as gain on sales of loans or leases, which represent the present value of the estimated cash flows on the subordinate bonds or residual interests retained, less origination and underwriting costs. The Company may retain interests in loan and lease securitizations in the form of subordinate bonds or residual interests, which represent interests in the trust or special purpose entity to which such loans or leases have been sold. The Company recognizes such gain on sale of loans or leases in the year in which such loans or leases are sold, although cash (representing the principal and interest on any retained subordinate bonds or residual interests in loan and lease securitizations) is received by the Company over the life of the loans or leases. Concurrent with recognizing such a gain on sale, the Company records any subordinate bonds or residual interests as an asset on its consolidated balance sheet. 25 The capitalized balance of any subordinate bonds or residual interest is determined by computing the present value of the excess of the weighted average coupon on the loans or leases sold over the sum of: (i) the coupon in the pass-through certificates, (ii) a base servicing fee paid to the loan or lease servicer and (iii) expected losses to be incurred on the portfolio of loans or leases sold, and considering prepayment assumptions. Prepayment assumptions are based on recent evaluations of the actual prepayments of the Company's servicing portfolio or on market prepayment rates on new portfolios and consideration of the current interest rate environment and its potential impact on prepayment rates. The cash flows expected to be received by the Company, net of expected losses, are then discounted at an interest rate that the Company believes an unaffiliated third-party purchaser would require as a rate of return on a financial instrument with similar characteristics. Expected losses are discounted using a rate equivalent to the risk-free rate for securities with a duration similar to that estimated for the underlying loans or leases sold. The excess cash flows may only be available to the Company to the extent that there is no impairment of the credit enhancements established at the time the loans or leases are sold. Interest-only and residual certificates in securitizations of mortgage loans retained by the Company are held as trading securities and are adjusted to their respective market value quarterly with corresponding charges and credits made to income in the adjustment period. Subordinate bonds retained by the Company are held as either trading or available for sale securities in accordance with the Company's investment objectives. To the extent that actual results are different from the cash flows the Company estimated, the Company's subordinate bonds, interest-only certificates or residual interest will be adjusted quarterly with corresponding charges made against income in that period. Upon completion and analysis of the carrying values of the Company's subordinate bonds, interest-only certificates or residual interest during 1996, the Company wrote down the balance of such assets by $4.7 million. Any similar future charge against income may have a material adverse effect on the Company's results of operations. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." On the Company's consolidated balance sheet, securitization-related assets such as capitalized excess servicing fees receivable, subordinate bonds, interest-only certificates and residual interests are reduced as cash is received by the trust or special purpose entity holding the loans or leases pooled and sold. Although the Company believes that it has made reasonable assumptions, on a pool-by-pool basis, of its securitization-related assets likely to be realized, it should be recognized that the rates of prepayment and default or other assumptions utilized by the Company represent estimates. Actual experience may vary from these estimates. At December 31, 1997 and December 31, 1996, the Company's consolidated balance sheet reflected retained interest in loan and lease securitizations of $43.1 million and $49.5 million, respectively. At December 31, 1997 and December 31, 1996, the Company's consolidated balance sheet reflected capitalized excess servicing fees receivable of $0 and $23.1 million, respectively. Retained interest in loan and lease securitizations and capitalized excess servicing fees receivable are computed using prepayment, default, discount rate and interest rate assumptions that the Company believes market participants would use for similar instruments at the time of sale. There is no liquid market for these assets; therefore, no assurance can be given that all or any portion of these assets could be sold at their stated value on the consolidated balance sheet. During the year ended December 31, 1997, the Company completed five loan and lease securitizations totaling $919.1 million. Multi-family and commercial mortgage loans totaled $203.1 million, franchise loans totaled $343.8 million, equipment leases totaled $213.6 million and auto loans totaled $158.6 million. 26 The following table sets forth the securitizations effected by the Company since inception:
PRINCIPAL AMOUNT ISSUE DATE ISSUANCE NAME SECURITIZED ---------- ------------- ------------- (IN MILLIONS) December 1994 Prudential Securities 1994-6................... $ 45.5 March 1995 Prudential Securities 1995-1................... 95.5 June 1995 Southern Pacific Secured Assets Corp. ("SPSAC") 1995-1........................................ 55.3 August 1995 Second delivery of SPSAC 1995-1................ 20.0 August 1995 Donaldson, Lufkin & Jenrette ("DLJ") 1995-4........................................ 290.9 September 1995 SPSAC 1995-2................................... 261.7 November 1995 DLJ 1995-5..................................... 98.3 November 1995 Second delivery of SPSAC 1995-2................ 28.0 December 1995 Third delivery of SPSAC 1995-2................. 2.3 December 1995 Franchise Loan Receivables Trust ("FLRT") 1995-B........................................ 105.2 March 1996 SPSAC 1996-1................................... 102.4 June 1996 SPSAC 1996-2................................... 130.0 June 1996 FLRT 1996-A.................................... 167.4 July 1996 Second delivery of SPSAC 1996-2................ 40.0 August 1996 SPSAC 1996-3................................... 150.0 September 1996 Southern Pacific Thrift and Loan 1996 C-1...... 277.0 October 1996 Second delivery of SPSAC 1996-3................ 50.0 December 1996 SPSAC 1996-4................................... 185.0 December 1996 FLRT 1996-B.................................... 157.7 March 1997 IBCI 1997-1.................................... 84.6 June 1997 Southern Pacific Thrift and Loan 1997 C-1...... 203.1 June 1997 FMAC 1997-A.................................... 158.6 September 1997 FMAC 1997-B.................................... 185.2 December 1997 AMN 1997....................................... 158.6 -------- Total(1)....................................... $3,052.3 ========
- -------- (1) Excludes IBC's monthly deliveries to CAPMAC and CNAI securitization vehicles totaling $129.0 million and $87.0 million for the years ended December 31, 1997 and 1996, respectively. SPB Deposits SPB obtains its funds from depositors by issuing FDIC insured passbook accounts and term certificates of deposit. SPB solicits both individual and institutional depositors for new accounts through print advertisements and computerized referral networks. SPB currently maintains two deposit gathering facilities in Southern California. At such facilities, tellers provide banking services to customers such as accepting deposits and permitting withdrawals. However, customers are not offered check writing services or offered demand deposit accounts. Generally, certificates of deposit are offered for terms of one to 12 months. See "--Regulation--Thrift and Loan Operations--Limitations on Types of Deposits" for a description of limitations on types of deposits that SPB, as a thrift and loan, can accept. 27 The following table sets forth the distribution of SPB's deposit accounts (prior to intercompany elimination), and the weighted average nominal interest rates on each category of deposits:
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996 ---------------------------- ---------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE % OF INTEREST % OF INTEREST AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE ---------- -------- -------- ---------- -------- -------- (DOLLARS IN THOUSANDS) Passbook accounts....... $ 62,274 5.2% 4.81% $ 47,890 4.5% 4.73% Time deposits of less than $100,000.......... 891,102 74.9 6.00 803,556 74.9 5.84 Time deposits of $100,000 and over...... 236,465 19.9 5.81 220,820 20.6 5.74 ---------- ----- ---- ---------- ----- ---- Total................. $1,189,841 100.0% 5.80% $1,072,266 100.0% 5.77% ========== ===== ==== ========== ===== ====
The following table sets forth the dollar amount of deposits by time remaining to maturity:
AT DECEMBER 31, AT DECEMBER 31, 1997 1996 ------------------- ------------------- % OF % OF AMOUNT DEPOSITS AMOUNT DEPOSITS ---------- -------- ---------- -------- (DOLLARS IN THOUSANDS) Three months or less.................... $ 449,414 37.8% $ 404,565 37.7% Over three months through six months.... 296,512 24.9 279,397 26.1 Over six months through twelve months... 357,326 30.0 311,862 29.1 Over twelve months...................... 86,589 7.3 76,442 7.1 ---------- ----- ---------- ----- Total................................. $1,189,841 100.0% $1,072,266 100.0% ========== ===== ========== =====
Interest expense associated with certificates of deposit of $100,000 and over was approximately $15.6 million, $13.6 million and $15.4 million for the years ended December 31, 1997, 1996 and 1995, respectively. Since December 31, 1991, SPB has increased its deposits as necessary so that deposits together with cash, liquid assets, FHLB borrowings and warehouse borrowings, have been sufficient to provide SPB funding for its lending activities. The weighted average interest rate of the deposit accounts was 5.80% at December 31, 1997 as compared to 5.77% at December 31, 1996 and 5.54% at December 31, 1995. The Company believes that SPB's local marketing strategies, as well as its utilization of domestic money markets, have been the basis by which SPB has been able to acquire new deposits at levels consistent with management's financial targets. Certain levels of growth of SPB's assets and deposits require notice to the FDIC. As an additional source of funds, SPB was approved in 1991 to become a member of the FHLB. Currently, SPB is approved for borrowings from the FHLB pursuant to a secured line of credit that is automatically adjusted subject to applicable FHLB regulations and available pledged collateral. At December 31, 1997, $45.0 million was outstanding bearing an average interest rate of 6.71%. As a second additional source of funds, SPB had available a $200 million secured line of credit from Morgan Stanley, that is automatically adjusted subject to applicable available collateral. At December 31, 1997, $35.0 million was outstanding bearing an average interest rate of 6.51%. COMPETITION The businesses in which the Company operates are highly competitive. The Company faces significant competition from other commercial and consumer finance lenders, commercial banks, credit unions, thrift institutions and securities firms, among others. Many of these competitors are substantially larger and have more capital and other resources than the Company. 28 Competition can take many forms, including convenience in obtaining a loan or lease, customer service, marketing and distribution channels and interest rates charged to borrowers. In addition, the current level of gains realized by the Company and its competitors on the sale of their loans and leases could attract additional competitors into these markets, with the possible effect of lowering gains that may be realized on the Company's future loan and lease sales. Wholesale originations are expected to remain a significant part of the Company's loan and lease production programs. As a wholesale purchaser of loans and leases, the Company is exposed to fluctuations in the volume and cost of wholesale loans and leases resulting from competition with other purchasers of such loans and leases, market conditions and other factors. Management believes that SPB's most direct competition for deposits comes from savings and loan associations, other thrift and loan companies, commercial banks and credit unions. The Company's cost of funds fluctuates with general market interest rates. During certain interest rate environments, additional significant competition for deposits may be expected from corporate and governmental debt securities as well as money market mutual funds. REGULATION The Company's businesses are subject to extensive regulation in the United States at both the federal and state level. In the Company's home equity loan and financing businesses, regulated matters include loan origination, credit activities, maximum interest rates, finance and other charges, disclosure to customers, the terms of secured transactions, the collection, repossession and claims handling procedures utilized by the Company, multiple qualification and licensing requirements for doing business in various jurisdictions, and other trade practices. As a part of the financing and asset securitization business, the Company is required to register as a broker-dealer with certain Federal and state securities regulatory agencies and is a member of the NASD. Truth in Lending The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder contain disclosure requirements designed to provide consumers with uniform, understandable information with respect to the terms and conditions of loans and credit transactions in order to give them the ability to compare credit terms. TILA also guarantees consumers a three day right to cancel certain credit transactions, including loans of the type originated by the Company. The Company believes that it is in compliance with TILA in all material respects. The enforcement provisions applicable to TILA grant broad powers to the appropriate federal regulatory agencies or the Federal Trade Commission to enforce TILA with respect to those entities not otherwise subject to federal regulations, such as the Company. TILA also contains criminal penalties for wilful violations and grants a private right of action with specified statutory damage awards for certain violations. If the Company were found not to be in compliance with TILA with respect to certain loans, aggrieved borrowers could have the right to rescind their mortgage loan transactions and to demand the return of finance charges paid to the Company, and other damages provided under TILA. The Board of Governors of the Federal Reserve System recently amended Regulation Z to add rescission "tolerances" to the rule to limit the rule's rescission remedy to disclosure inaccuracies of the finance charge which amount to over one percent of the face amount of the note. The new rule also implements amendments to TILA which provide for rescission after the initiation of foreclosure proceedings under certain circumstances. TILA applies to all individuals and businesses that regularly extend consumer credit which is subject to a finance charge or is payable by a written agreement in more than four installments and is primarily for personal, family or household purposes. As such, TILA is applicable to the Company and its subsidiaries. Generally, TILA requires a creditor to make certain disclosures to the consumer concerning, among other things, finance charges and annual percentage rates. In addition to these general requirements, TILA also requires additional disclosures in connection with certain types of mortgage loans. 29 These additional disclosure requirements apply to loans (other than mortgage loans to finance the acquisition or initial construction of a dwelling) with (i) total points and fees upon origination in excess of eight percent of the loan amount or $400, whichever is greater or (ii) an annual percentage rate of more than ten percentage points higher than comparably maturing United States Treasury securities ("Covered Loans"). Effective January 1, 1998, the $400 figure was adjusted by the Board of Governors of the Federal Reserve System to $435 until December 31, 1998, in accordance with Regulation Z. These TILA provisions prohibit lenders from originating Covered Loans that are underwritten solely on the basis of the borrower's home equity without regard to the borrower's ability to repay the loan. The Company believes that only a small portion of loans originated after October 1995 (the effective date of the requirements) are of the type that, unless modified, are prohibited by TILA. It is the Company's policy to apply to all Covered Loans underwriting criteria that take into consideration the borrower's ability to repay. TILA also prohibits lenders from including prepayment fee clauses in Covered Loans to borrowers except in cases in which the penalty can be exercised only during the first five years following consummation of the loan, the consumer's total monthly debt-to-income ratio does not exceed 50% and the Covered Loans are not used to refinance existing loans originated by the same lender. The Company will continue to collect prepayment fees on loans originated prior to October 1995 (the effective date of the prepayment provision of TILA) and on non-Covered Loans, as well as on Covered Loans in permitted circumstances, but the level of prepayment fee revenue may decline in future years. TILA imposes other restrictions on Covered Loans, including restrictions on balloon payments and negative amortization features, which the Company does not believe will have a material impact on its operations. Other Lending Laws The Company and its subsidiaries are also required to comply with the Equal Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors from discriminating against applicants on the basis of race, color, religion, sex, age or marital status. The ECOA also prohibits discrimination in the extension of credit based on the fact that all or part of the applicant's income derives from a public assistance program or the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. Regulation B promulgated under ECOA restricts creditors from obtaining certain types of information from loan applicants. It also requires certain disclosures by the lender regarding consumer rights and requires lenders to advise applicants of the reasons for any credit denial. In instances where the applicant is denied credit or the rate or charge for loans increases as a result of information obtained from a consumer credit agency, another statute, the Fair Credit Reporting Act of 1970 ("FERA"), as amended, requires lenders to supply the applicant with the name and address of the reporting agency; the FERA also imposes other reporting and disclosure requirements on creditors. The Company is also subject to the Real Estate Settlement Procedures Act of 1974, as amended, and is required to file an annual report with the Department of Housing and Urban Development pursuant to the Home Mortgage Disclosure Act. In addition, the Company is subject to various other Federal and state laws, rules and regulations governing, among other things, the licensing of, and procedures which must be followed by, mortgage lenders and servicers, and disclosures which must be made to consumer borrowers. Failure to comply with such laws may result in civil and criminal liability and may, in some cases, give consumer borrowers the right to rescind their mortgage loans and to demand the return of finance charges paid to the Company. In addition, certain of the loans originated or purchased by the Company, such as Title I home improvement loans, are insured by an agency of the Federal government. Such loans are subject to extensive government regulation. Environmental Liability In the course of its business, the Company may foreclose on properties securing loans that are in default. There is a risk that hazardous or toxic substances or petroleum constituents could be on such properties. 30 In such event, it is possible that the Company could be held responsible for the cost of cleaning up or removing such waste depending upon the lender's activities, and such cost could exceed the value of the underlying properties. Under the laws of certain states, contaminated property may be subject to a lien on the property to assure payment for cleanup costs. In several states, such a lien has priority over the lien of an existing mortgage or owner's interest. In addition, under the laws of some states and under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), a lender may become liable for cleanup of a property and adjacent properties that are contaminated by releases from the mortgaged property if the lender engages in certain activities. In 1996 CERCLA was amended to eliminate federal lender liability under CERCLA in certain circumstances, including foreclosure if the lender resells the property at the earliest practicable, commercially reasonable time on commercially reasonable terms. In addition, the amendments defined the term participation in management, which provided some guidance to lenders about the nature of activities that would and would not give rise to liability under CERCLA. These amendments do not apply to state Superfund laws. Also, foreclosure and other activities on contaminated property may subject a lender to state tort liability. Future Laws Because each of the Company's businesses is highly regulated, the laws, rules and regulations applicable to the Company are subject to modification and change. There are currently proposed various laws, rules and regulations which, if adopted, could impact the Company. There can be no assurance that these proposed laws, rules and regulations, or other such laws, rules or regulations will not be adopted in the future which could make compliance more difficult or expensive, restrict the Company's ability to originate, broker, purchase or sell loans, further limit or restrict the amount of commissions, interest and other charges earned on loans originated, brokered, purchased or sold by the Company, or otherwise adversely affect the business or prospects of the Company. THRIFT AND LOAN OPERATIONS SPB is subject to regulation, supervision and examination under both Federal and California law. SPB is subject to supervision and regulation by the California Department of Financial Institutions (the "DFI") and by the FDIC. In states other than California where SPB operates loan production offices, SPB may be subject to certain state and local laws, including those governing qualifications to do business. Neither the Company's mortgage banking operations nor SPB's thrift business is regulated or supervised by the Office of Thrift Supervision, which regulates savings and loan institutions. ICII is not directly regulated or supervised by the DFI, the FDIC, the Federal Reserve Board or any other bank regulatory authority, except with respect to the general regulatory and enforcement authority of the DFI and the FDIC over transactions and dealings between ICII or any of its other subsidiaries and SPB, and except with respect to both the specific limitations regarding ownership of the capital stock of a parent company of any thrift and loan association and the specific limitations regarding the payment of dividends from SPB discussed below. General SPB is governed by the California Industrial Loan Law and the rules and regulations of the DFI that, among other things, regulate in certain limited circumstances the maximum interest rates payable on, and the terms of, certain thrift deposits as well as the collateral requirements, maximum maturities and repayment terms of the various types of loans that are permitted to be made by California chartered industrial loan companies, also known as thrift and loan companies or thrifts. As SPB's primary regulator, the DFI has broad supervisory and enforcement authority with respect to SPB and its subsidiaries. The enforcement authority of the DFI over thrift 31 and loan companies includes the ability to impose penalties for and to seek correction of violations of laws or regulations or unsafe or unsound practices by assessing monetary penalties, issuing cease and desist or removal and prohibition orders against a company, its directors, officers or employees and other persons, initiating injunctive actions or even taking possession of the business and property of a thrift and loan company. In general, such enforcement actions may be initiated for violations of laws, regulations, cease and desist orders or the thrift and loan company's articles of incorporation or for unsafe or unsound conditions or practices. Certain provisions of the California Industrial Loan Law also provide for the institution of civil or criminal actions against thrift and loan companies and their officers, directors, employees and affiliates with respect to violations of the law and related regulations. SPB's investment certificates (hereinafter referred to as "deposits") are insured by the Bank Insurance Fund of the FDIC to the full extent permissible by law. As an insurer of deposits, the FDIC issues regulations, conducts examinations, requires the filing of reports and generally regulates the operations of institutions to which it provides deposit insurance. SPB is subject to the rules and regulations of the FDIC to the same extent as other state financial institutions that are insured by that entity. This regulation is intended primarily for the protection of depositors, and to ensure services for the public's convenience and advantage and to ensure the safety and soundness of the regulated institution. Either notice to or approval by the FDIC and the DFI is required before any merger, consolidation or change in control, or the establishment, relocation or closure of a branch office of SPB. However, only the DFI's approval is required to establish a loan production office limited to the solicitation of loans. After January 1, 1998, notice of intent to establish a branch office is required rather than application for approval, subject to order or regulation of the DFI. The FDIC, as insurer of SPB's deposits, also has broad enforcement authority over and other insured state-chartered thrift and loan companies, including the power in appropriate circumstances to issue cease-and-desist orders and removal and prohibition orders and to terminate the insurance of their insured accounts. The FDIC is required to notify the DFI of its intent to take certain types of enforcement actions with respect to a California chartered, FDIC- insured thrift and loan company and of the grounds therefor. If satisfactory corrective action is not effectuated within an appropriate time, the FDIC may proceed with its enforcement action. The FDIC may also terminate the deposit insurance of any insured depository institution if it determines that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed by in writing by the FDIC. The DFI also has the authority, independent of the FDIC, to issue cease and desist orders, impose operating restrictions, and take other actions to assure the safety and soundness of the institution. In September 1996, President Clinton signed into law, as part of a 1997 omnibus spending bill, the Economic Growth and Regulatory Paperwork Reduction Act of 1996, which simplifies and streamlines across a broad spectrum the regulation of federally-insured depository institutions in diverse areas including consumer credit, truth-in-lending, real estate residential lending, regulatory applications, branching, disclosures and advertising, regulatory examinations, insider lending and lender and fiduciary exposure for environmental contamination under the Comprehensive Environmental Response, Compensation and Liability Act (i.e., "Superfund" liability) and the Solid Waste Disposal Act, and the elimination (after five years) of civil liability under the Truth in Savings Act. The FDIC and DFI completed a joint examination of SPB for the period ended April 14, 1997. As a result of the examination, the FDIC terminated a memorandum of understanding, dated September 16, 1996 ("MOU"), acknowledging that SPB had sufficiently satisfied most of the provisions of the MOU. As part of the agreement for terminating the MOU, SPB's board of directors adopted a resolution to address the issues remaining in the MOU, which include (i) corrective actions to remedy the violations of law and regulations in the FDIC's and DFI's most recent reports of examination and as were reflected in the MOU, (ii) review by management of all existing written policies and procedures, and enhancement and augmentation of them, so as to assure continued compliance with all applicable federal and state laws and regulations, (iii) development of additional staff training to assure continued compliance with federal and state laws and 32 regulations by all appropriate personnel, and (iv) senior management periodic updates to the board of directors on all progress made with respect to these matters. The FDIC examination report also noted certain violations of applicable law and regulations for which SPB is required to take remedial action. The FDIC has the authority to take a variety of informal and formal remedial and other enforcement actions with regard to violations of law, and unsafe and unsound banking practices, including, among other things, the institution of proceedings or actions imposing or seeking memoranda of understanding, cease and desist orders, injunctions, criminal or civil penalties, removal from office or the revocation of SPB's charter. Although the Company does not believe that an enforcement action is warranted under the circumstances, any such enforcement could have a material adverse effect on the Company. Limitations on Investments Subject to restrictions imposed by California law, SPB is permitted to make secured and unsecured consumer and non-consumer loans. The maximum term for repayment of loans made by thrift and loan companies may be as long as 40 years and 30 days depending upon collateral and priority of the lender's lien on the collateral, except that loans with repayment terms in excess of 30 years and 30 days may not in the aggregate exceed five percent of total outstanding loans and obligations of the thrift. Although secured loans may generally be repayable in unequal periodic payments during their respective terms, consumer loans secured by real property with terms in excess of three years must be repayable in substantially equal periodic payments unless such loans were made or purchased by the thrift and loan under the Garn-St. Germain Depository Institutions Act of 1982 (which applies primarily to one to four unit residential loans). California law limits lending activities outside of California by thrift and loan companies to no more than 20% of total assets or 40% with the approval of the DFI. California law contains requirements for the diversification of the loan portfolios of thrift and loan companies. A thrift and loan with outstanding deposits may not, among other things: (i) place more than 25% of its loans or other obligations in loans or obligations that are secured only partially, but not primarily, by real property (which restriction is repealed effective January 1, 1998); (ii) make any loan secured primarily by improved real property that exceeds 20% of its paid-up and unimpaired capital stock and surplus not available for dividends; (iii) make any loan secured primarily by unimproved real property in an amount in excess of 10% of its paid up and unimpaired capital stock and surplus not available for dividends; (iv) lend an amount in excess of five percent of its paid-up and unimpaired capital stock and surplus not available for dividends upon the security of the stock of any one corporation; (v) make loans to, or hold the obligations of, any one person as primary obligor in an aggregate principal amount exceeding 20% of its paid- up and unimpaired capital stock and surplus not available for dividends; (vi) have more than 70% of its total assets in loans that have remaining terms to maturity in excess of seven years (as defined) and are secured solely or primarily by real property; and (vii) have more than 40% of its loans to borrowers who do not reside in or have a place of business in the state of California; provided, however, that certain loans that are sold within 90 days are excluded from the portfolio limitations described in (vi) and (vii). SPB had paid-up and unimpaired capital stock and surplus not available for dividends of $125.0 million and $80.5 million at December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, SPB was in compliance with its California investment law restrictions. SPB originates and holds a portion of the Company's loans held for sale, of which a majority have a maturity of greater than seven years. SPB believes that it will be able to continue to meet its requirements by managing the types of loans originated and where the loans are domiciled. Under California law, thrift and loan companies are generally limited to investments that are legal investments for commercial banks. A thrift and loan company may acquire real property only in satisfaction of debts previously contracted, pursuant to certain foreclosure transactions, or as may be necessary as premises for the transaction of its business, in which case such investment is limited to one-third of a thrift and loan's paid-in capital stock and surplus not available for dividends. 33 Effective January 1, 1997, as a result of changes in the California Industrial Loan Law passed in 1996, SPB may invest in the capital stock, obligations, or other securities of one or more corporations, subject to rules or orders prescribed by the DFI, if such investment would be lawful for commercial banks. California chartered commercial banks may invest in equity securities of one or more subsidiary corporations upon receiving authorization from the DFI. Under federal law, SPB is considered an insured state bank, and as such, it may make any equity investment, including an investment in the equity securities of an operating subsidiary, that is permissible for a national bank. Operating subsidiaries include corporations, limited liability companies or similar entities. In turn, operating subsidiaries of national banks may engage in activities that are part of, or incidental to the business of banking, as determined by the Office of the Comptroller of the Currency (the "OCC"). Transactions With Affiliates Under California law, a thrift and loan generally may not make any loan to, or hold an obligation of, any of its directors or officers or any director or officer of its holding company or affiliates, except in specified cases and subject to regulation by the DFI. In addition, a thrift and loan may not make any loan to, or hold an obligation of, any of its shareholders or any shareholder of its holding company or affiliates, except that this prohibition does not apply to persons who own less than 10% of the stock of a holding company or an affiliate that is listed on a national securities exchange. As a result of these requirements, SPB may not make loans to ICII or other affiliates or purchase a contract, loan or chose in action of ICII or other affiliates other than subsidiaries of SPB. Exemptions from these restrictions are available for: (i) purchase of loans from affiliates which are licensed mortgage brokers (such as ICII) or other certain types of licensed lenders, subject to prior approval of the DFI; (ii) purchase of loans pursuant to a sale and repurchase agreement. However, these purchases would be subject to strict limitations under federal law. Federal law also limits transactions between SPB and its affiliates. Generally, such transactions must be on terms and under conditions, including credit standards, that are substantially the same, or at least as favorable to SPB, as those prevailing at the time for comparable transactions with or involving other nonaffiliated companies. In addition, SPB is prohibited from engaging in "covered transactions" with an affiliate if the aggregate amount of such transactions with any one affiliate would exceed 10% of SPB's capital stock and surplus, or in the case of all affiliates, if the aggregate amount of such transactions exceeds 20% of SPB's capital stock and surplus. "Covered transactions" include loans or extensions of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate (subject to certain exemptions), the acceptance of securities issued by an affiliate as collateral security for a loan or extension of credit to any person or company, or the issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate. For certain "covered transactions," collateral requirements in specified amounts will be applicable. SPB also is prohibited from purchasing low-quality assets from its affiliates, except under limited circumstances. SPB engages in many transactions which involve its affiliates, including ICII and its other subsidiaries. As such, many of the transactions between the Company and SPB are subject to federal and state affiliate transaction regulations. Further, under federal law, a transaction by SPB with any person shall be deemed to be a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred to that affiliate. The term "affiliate" excludes any company other than a bank, that is a subsidiary of SPB, unless the FDIC has determined by regulation or order not to exclude such subsidiary. Absent such determination, transactions conducted between SPB and its non-bank subsidiaries would not be subject to the amount limitations and collateral requirements under federal law. This exemption, however, is unavailable for transactions between a bank and a subsidiary that engages in activities not permissible for the parent depository institution. 34 Under the California Industrial Loan Law, unless the DFI has issued a permit authorizing such sale, it is unlawful for SPB to offer or sell any security in an issuer transaction which offer or sale is subject to applicable provisions of the California Corporate Securities Act of 1968, as amended. Effective July 1, 1997, any offer to an affiliate or institutional or registered investor under the California Corporate Securities Act of 1968, as amended, is exempt from the permit requirement, subject to certain conditions. (See "--Recent Legislation") The DFI, however, has authority to exempt any such transaction which the DFI determines is not comprehended within the purposes of the qualification requirements and which the DFI finds not necessary or appropriate in the public interest or for the protection of investors. The DFI also has authority to impose conditions in any permit, including legends restricting transferability, impounding proceeds, or other conditions deemed reasonable and necessary in the public interest. Capital; Limitations on Borrowings Under California law, a thrift and loan is subject to certain leverage limitations that are not generally applicable to commercial banks or savings and loan associations. In particular, a thrift and loan institution that has been in operation in excess of 60 months may have outstanding at any time deposits not to exceed 20 times paid-up and unimpaired capital and surplus as restricted in its by-laws as not available for dividends, with the exact limitation subject to order by the DFI. The DFI has issued an order to SPB authorizing the maximum 20 times leverage standard. Thrift and loan companies are not permitted to borrow, except by the issuance of investment certificates, in an amount exceeding 300% of outstanding capital stock, surplus and undivided profits, without the DFI's prior consent. All sums borrowed in excess of 150% of outstanding capital stock, surplus and undivided profits must be unsecured borrowings or, if secured, approved in advance by the DFI, and be included as certificates of deposit for purposes of computing the above ratios; however, collateralized FHLB advances are excluded for this test of secured borrowings and are not specifically limited by California law. In 1989, the FDIC and the other federal regulatory agencies adopted final risk-based capital adequacy standards applicable to financial institutions like SPB whose deposits are insured by the FDIC. These guidelines provide a measure of capital adequacy and are intended to reflect the degree of risk associated with both on and off balance sheet items, including residential loans sold with recourse, legally binding loan commitments and standby letters of credit. Under these regulations, financial institutions such as SPB are required to maintain capital to support activities that in the past did not require capital. Because ICII, unlike SPB, is not directly regulated by any bank regulatory agency, it is not subject to any minimum capital requirements. See "--Holding Company Regulations." A financial institution's risk-based capital ratio is calculated by dividing its qualifying capital by its risk-weighted assets. Financial institutions generally are expected to meet a minimum ratio of qualifying total capital to risk-weighted assets of 8%, of which at least 50% of qualifying total capital must be in the form of core capital (Tier 1), which includes common stock, noncumulative perpetual preferred stock, minority interests in equity capital accounts of combined subsidiaries and allowed mortgage servicing rights less all intangible assets other than allowed mortgage servicing rights and purchased credit card relationships, subject to certain amount limitations. Supplementary capital (Tier 2) consists of the allowance for loan losses up to 1.25% of risk-weighted assets, cumulative preferred stock, intermediate-term preferred stock, hybrid capital instruments and term subordinated debt. The maximum amount of Tier 2 capital that may be recognized for risk-based capital purposes is limited to 100% of Tier 1 capital (after any deductions for disallowed intangibles). The aggregate amount of term subordinated debt and intermediate term preferred stock that may be treated as Tier 2 capital is limited to 50% of Tier 1 capital. Certain other limitations and restrictions apply as well. At December 31, 1997, the Tier 2 capital of SPB consisted of its allowance for loan losses and $35.0 million in term subordinated indebtedness. 35 The FDIC has adopted a 3% minimum leverage ratio that is intended to supplement risk-based capital requirements and to ensure that all financial institutions, even those that invest predominantly in low risk assets, continue to maintain a minimum level of core capital. A financial institution's minimum leverage ratio is determined by dividing its Tier 1 capital by its quarterly average total assets, less intangibles not includable in Tier 1 capital. The FDIC rules provide that a minimum leverage ratio of 3% is required for institutions that have been determined to be in the highest category used by regulators to rate financial institutions. All other organizations are required to maintain leverage ratios of at least 100 to 200 basis points above the 3% minimum. At December 31, 1997, SPB was in compliance with all of its capital requirements. Prompt Corrective Action The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires the federal banking regulators to take "prompt corrective action" with respect to banks that do not meet minimum capital requirements. In response to this requirement, the FDIC adopted final rules based upon FDICIA's five capital tiers. The FDIC's rules provide that an institution is "well capitalized" if its risk-based capital ratio is 10% or greater; its Tier 1 risk-based capital ratio is 6% or greater; its leverage ratio is 5% or greater; and the institution is not subject to a capital directive of a federal bank regulatory agency. A bank is "adequately capitalized" if its risk-based capital ratio is 8% or greater; its Tier 1 risk-based capital ratio is 4% or greater; and its leverage ratio is 4% or greater (3% or greater for the highest rated institutions). An institution is considered "undercapitalized" if its risk-based capital ratio is less than 8%; its Tier 1 risk-based capital ratio is less than 4%, or its leverage ratio is 4% or less (less than 3% for the highest rated institutions). An institution is "significantly undercapitalized" if its risk- based capital ratio is less than 6%; its Tier 1 risk-based capital ratio is less than 3%; or its leverage ratio is less than 3%. A bank is deemed to be "critically undercapitalized" if its ratio of tangible equity (Tier 1 capital) to total assets is equal to or less than 2%. An institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it engages in unsafe or unsound banking practices. Under this standard, SPB is currently "well capitalized"; this classification, however, is a regulatory capital classification used for internal regulatory purposes, and is not necessarily indicative of SPB's financial condition and operations. Undercapitalized institutions are required to submit a capital restoration plan for improving capital. In order to be accepted, such plan must include a financial guaranty from the institution's holding company that the institution will return to capital compliance. If such a guarantee were deemed to be a commitment to maintain capital under the Federal Bankruptcy Code, a claim for a subsequent breach of the obligations under such guarantee in a bankruptcy proceeding involving the holding company would be entitled to a priority over third party general unsecured creditors of the holding company. Undercapitalized institutions: are prohibited from making capital distributions or paying management fees to controlling persons; may be subject to growth limitations; are restricted from ongoing acquisitions, branching and entering into new lines of business, and transactions with affiliates; and are limited to the appointment of additional directors or senior executive officers. Finally, the institution's regulatory agency has discretion to impose certain of the restrictions generally applicable to significantly undercapitalized institutions. In the event an institution is deemed to be significantly undercapitalized, it may be required to: sell stock; merge or be acquired; restrict transactions with affiliates; restrict interest rates paid; divest a subsidiary; or dismiss specified directors or officers. If the institution is a bank holding company, it may be prohibited from making any capital distributions without prior approval of the Federal Reserve Board and may be required to divest a subsidiary. A critically undercapitalized institution is generally prohibited from making payments on subordinated debt and may not, without the approval of its principal bank supervisory agency, enter into a material transaction other than in the ordinary course of business; engage in any covered transaction; or pay excessive compensation or 36 bonuses. Critically undercapitalized institutions are subject to appointment of a receiver or conservator. Effectively, the FDIC would have general enforcement powers over SPB and the Company in the event that SPB is deemed undercapitalized. SPB's Capital Ratios. The following tables indicate SPB's capital ratios under (i) the California leverage limitation, (ii) the FDIC risk-based capital requirements, using rules effective December 31, 1997, and (iii) a 3% FDIC minimum leverage ratio at each of December 31, 1997.
WELL MINIMUM CAPITALIZED ACTUAL REQUIREMENT REQUIREMENT -------------- -------------- -------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- -------- ----- (IN THOUSANDS EXCEPT FOR RATIO DATA) California Leverage Limitation... $157,082 13.20% $ 59,476 5.00% $ -- -- % Risk-based Capital............... 190,673 12.25% 124,583 8.00% 155,729 10.00% Risk-based Tier 1 Capital........ 136,206 8.75% 62,292 4.00% 93,437 6.00% FDIC Leverage Ratio.............. 136,206 8.30% 65,644 4.00% 82,055 5.00%
Limitations on Types of Deposits Because of limitations contained in the Industrial Loan Law, and to maintain the exemption from the BHCA (see "Holding Company Regulations," below), SPB currently offers investment certificates in the form of passbook accounts and certificates of deposit. SPB does not offer demand deposit accounts. Insurance Premiums The FDIC administers two separate deposit insurance funds, the Bank Insurance Fund ("BIF"), which insures the deposits of institutions which were insured by the FDIC prior to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), and the Savings Association Insurance Fund ("SAIF"), which insures the deposits of institutions which were insured by the Federal Savings and Loan Insurance Corporation prior to the enactment of FIRREA. SPB's insurance premium for the year ended December 31, 1997 was approximately $250,000. As required by FDICIA, the FDIC has established a risk-based system for setting deposit insurance assessments. Under the risk-based assessment system, an institution's insurance assessments vary depending on the level of capital the institution holds and the degree to which it is of supervisory concern to the FDIC. Once an insurance fund has reached its designated reserve ratio of 1.25%, and as long as there are no outstanding borrowings by the FDIC from the United States Treasury, the FDIC is not permitted to charge assessment premiums that would increase the reserve ratio of the insurance fund above its designated reserve ratio. The BIF reached its designated reserve ratio in 1995. Recent Legislation A new California state regulatory agency was created in 1996 to be known as the Department of Financial Institutions ("DFI"). The DFI became effective July 1, 1997. All California state chartered depository institutions will be licensed and regulated after July 1, 1997 by the DFI, which includes banks, savings associations, credit unions, and industrial loan companies. SPB, an industrial loan company, is subject to the jurisdiction of the DFI as its state regulator. Certain administrative and most examination staff personnel have transferred to the DFI from the California State Banking Department. Former California Department of Banking senior staff personnel, including persons in the office of general counsel and senior examination staff of the DFI, who are unfamiliar with the Industrial Loan Law will be interpreting the Industrial Loan Law. It is uncertain whether this will have any material effect on SPB. The 1996 California legislation that created the DFI also authorized the use of the word "bank" by thrift and loan companies, such as SPB, in their names. Effective October 8, 1997, Southern Pacific Thrift and Loan 37 changed its name to "Southern Pacific Bank." That legislation also granted the DFI jurisdiction over the issuance of securities by a thrift and loan company requiring application and permit unless otherwise exempt. On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act") was enacted which, among other things, imposes on BIF-insured deposits a special premium assessment on domestic deposits at one-fifth the premium rate imposed on SAIF-insured deposits, which will be used to pay the interest on Financial Corporation ("FICO") bonds issued by the federal government as part of the savings association bailout provisions of the 1989 FIRREA legislation. In the year 2000, however, the Funds Act requires BIF-insured institutions to share in the payment of the FICO obligations on a pro-rata basis with all savings institutions, with annual assessments expected to equal approximately 2.4 basis points until the year 2017, and to be completely phased out by 2019. The Funds Act also prohibits the merger of the BIF and SAIF insurance funds unless the savings institution charter has been eliminated on January 1, 1999. In addition, on December 6, 1996, the FDIC determined to continue the current downward adjustment to the assessment rate schedule applicable to deposits of BIF institutions for the semi-annual assessment period beginning January 1, 1997. For such period, and for succeeding semi-annual periods, the BIF assessment rates will range from 0 to 27 basis points. In addition, in accordance with the Funds Act, the FDIC eliminated the minimum assessment amount for BIF-insured institutions. SPB's combined FDIC and FICO assessment rate for 1998 was approximately 4.3 cents per $100 of deposits. Safety and Soundness Guidelines In July 1995, certain federal bank regulatory agencies, including the FDIC, adopted Interagency Guidelines establishing standards for safety and soundness as required by the FDICIA. In accordance with these Guidelines, institutions are required to establish policies and procedures regarding: (i) internal controls and information; (ii) internal audit systems; (iii) loan documentation; (iv) credit underwriting; (v) interest rate exposure; and (vi) asset growth. In addition, under these Guidelines institutions must maintain safeguards to prevent the payment of compensation and fees which are excessive or could lead to a material loss for the institution. The federal bank regulatory agencies recently amended the Interagency Guidelines to include asset quality and earnings standards. The new guidelines require an institution to identify problem assets and estimate inherent losses. The earnings standards under the revised guidelines require an institution to establish monitoring and reporting systems. Holding Company Regulations The Competitive Equality Banking Act of 1987 ("CEBA") subjected certain previously unregulated companies to regulation as bank holding companies by expanding the definition of the term "bank" in the BHCA. SPB remained exempt from the definition of "bank" under the BHCA, and therefore ICII was exempt from regulation as a bank holding company. SPB may cease to fall within those exceptions if it engages in certain operational practices, including accepting demand deposit accounts. SPB currently has no plans to engage in any operational practice that would cause it to fall outside of one or more of the exceptions to the term "bank" as defined by CEBA. Pursuant to CEBA, ICII and its affiliates are treated as if ICII were a bank holding company for the limited purposes of applying certain restrictions on loans to insiders, transactions with affiliates and anti-tying provisions. Limitations on Dividends Under the California Industrial Loan Law, a thrift and loan may declare dividends on its capital stock only if it has at least $750,000 of unimpaired capital stock plus additional capital stock of $50,000 for each branch office. In addition, no distribution of dividends is permitted unless: (i) such distribution would not exceed a thrift and loan's retained earnings; (ii) any payment would not result in a violation of the approved minimum capital to thrift and loan certificate of deposit ratio; and/or (iii) after giving effect to the distribution, either (y) the sum of a thrift and loan's assets (net of goodwill, capitalized research and development expenses and deferred 38 charges) would be not less than 125% of its liabilities (net of deferred taxes, deferred income and other deferred credits), and (z) current assets would be not less than current liabilities (except that if a thrift and loan's average earnings before taxes for the last two fiscal years had been less than average interest expense, current assets must be not less than 125% of current liabilities). Under California law, in order for capital (including surplus) of an institution to be included in calculating the leverage limitation described above, thrift institutions must amend their by-laws to restrict such capital from the payment of dividends. The amount of restricted capital maintained by a thrift also provides the basis for establishing the maximum amount that a thrift may lend to one borrower. As of December 31, 1997 and 1996, $125.0 million and $80.5 million, respectively, of SPB's capital was so restricted. The FDIC has advised insured institutions that the payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. As a result of this policy, thrift and loans may find it difficult to pay dividends out of retained earnings from historical periods prior to the most recent fiscal year or to take advantage of earnings generated by extraordinary items. Under the Financial Institutions Supervisory Act and FIRREA, federal regulators also have authority to prohibit financial institutions from engaging in business practices which are considered to be unsafe or unsound. It is possible, depending upon the financial condition of a thrift and other factors, that such regulators could assert that the payment of dividends in some circumstances might constitute unsafe or unsound practices and prohibit payment of dividends even though technically permissible. Pursuant to FDICIA, SPB is prohibited from paying dividends if the payment of such dividends would cause the institution to become "undercapitalized." These limitations on the payment of dividends may restrict the Company's ability to utilize cash from SPB which may have been otherwise available to the Company for working capital. Limitations on Acquisitions of Voting Stock of the Company Any person who wishes to acquire 10% or more of the capital stock or capital of a California thrift and loan company or 10% or more of the voting capital stock or other securities giving control over management of its parent company must obtain the prior written approval of the DFI. Similarly, the federal Change in Bank Control Act of 1978 requires any person or company that obtains "control" of an insured depository institution to notify the appropriate Federal banking agency, which would be the FDIC in the case of SPB, 60 days prior to the proposed acquisition. If the FDIC has not issued a notice disapproving the proposed acquisition within that time period (including a possible 120 day extension), the person may retain its interest in such institution. For purposes of the statute, "control" is defined as the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of an insured depository institution. However, there is a rebuttable presumption that any person acquiring 10% or more of any class of voting securities of said institution is presumed to have "control." In such cases, such person must file an application for approval with the FDIC or rebut the presumption. Restrictions on Investments by Imperial Bank At December 31, 1997, Imperial Bank owned 8,938,553 shares of Common Stock, or 23.0% of the Company. Imperial Bancorp ("Bancorp") is the owner of all of the outstanding capital stock of Imperial Bank. FDICIA restricts the ability of state chartered banks, such as Imperial Bank, to hold equity securities and requires impermissible investments to be disposed of before December 19, 1996. Imperial Bank acquired its interest in the Company at its formation, which interest has been reduced by the Company's sale of Common Stock to third parties, as well as through a sale of stock by Imperial Bank subsequent to the initial public offering of the Company. 39 Because Imperial Bank owns less than 50% of the outstanding shares of the Company and the Company is operated as a company independent of Imperial Bank and Bancorp, the Company believes that, in the event of an insolvency, bankruptcy or receivership proceeding involving Imperial Bank or Bancorp, a court, exercising reasonable judgment after full consideration of all relevant factors, would not order the substantive consolidation of the assets and liabilities of the Company with either Imperial Bank or Bancorp. One director of the Company also serves on the board of directors of Bancorp. See item 10, "Directors and executive officers of the registrant." Imperial Financial Group In February 1997, the board of directors of Bancorp approved a plan to spin off a portion of its specialty lending and finance businesses, including Imperial Bank's common stock interest in ICII, to Imperial Financial Group, Inc. ("IFG"), a recently created subsidiary of Imperial Bank formed to hold various business assets of Bancorp and its subsidiaries. Three directors of the Company also serve on the board of directors of IFG. EMPLOYEES As of December 31, 1997, the Company had 784 employees, (55 at ICII, 317 at SPB, 88 at IBC, 224 at AMN, 9 at ICCAMC, 80 at ICG, 10 at ICW and one at ICAI). Management believes that its relations with these employees are satisfactory. Neither ICII nor any of its subsidiaries is a party to any collective bargaining agreement. ITEM 2. PROPERTIES The Company's executive offices occupy approximately 22,000 square feet of space in Torrance, California at a current monthly rental of approximately $31,400. The Company's former administrative facilities occupy approximately 37,638 square feet of space in Santa Ana Heights, California. The Company leases these facilities pursuant to a ten-year lease, commencing September 1, 1992 and subleases a portion of these premises to IMH resulting in a current net monthly rental of approximately $39,200. See "Item 13--Certain Relationships and Certain Transactions--Relationships with IMH." The Company currently leases offices in San Diego, Walnut Creek, Newport Beach, Woodland Hills, Sacramento, San Jose and Irvine, California, as well as in Parsippany, New Jersey; Greenville, Delaware; Bellevue, Washington; Denver, Colorado; Boca Raton, Florida; Allentown, Pennsylvania; and Lake Oswego and Grants Pass, Oregon. SPB operates in California through branches and loan production offices and in other states through loan production offices and representatives. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in Fortune Mortgage Corporation et al. vs. ICII et al., originally filed in Orange County Superior Court on March 5, 1997 and recently ordered removed to arbitration under the auspices of the American Arbitration Association. The complaint alleges breach of contract, breach of implied covenant of good faith and fair dealing, negligent misrepresentation, fraud, conspiracy to commit fraud, aiding and abetting fraud, contractual indemnity and reimbursement, money had and received, and unjust enrichment arising from the Company's sale of a group of loan production offices to plaintiffs. The plaintiffs seek rescission, restitution and general, special and/or consequential damages, and also exemplary and punitive damages as relate to the claims regarding fraud. The plaintiffs are seeking approximately $3.5 million in general damages and approximately $10.0 million in punitive damages. 40 In Steadfast Insurance Co., Inc. vs. AMN and ICII, filed on August 12, 1997 in the U.S. District Court, Northern District of Illinois, the plaintiff seeks a declaratory judgment, compensatory damages in the amount of $9 million and punitive damages arising from an alleged breach of contract and allegedly fraudulent conduct by AMN. The claim relates to an insurance policy issued to AMN in 1993 covering certain losses resulting from auto loan defaults. The Company and a Director are defendants in Judy L. Resnick v. Imperial Credit Industries, Inc., et al originally filed on January 14, 1998, in Los Angeles Superior Court, which was recently ordered removed to arbitration. The complaint alleges conspiracies by the defendants to defraud, interfere with advantageous business relationships, defame, and breach of fiduciary duty as well as actual fraud, defamation, and breach of the implied covenant of good faith and fair dealing arising out of ICG's acquisition of substantially all of the assets of Dabney/Resnick/Imperial. The plaintiff is seeking actual, consequential, incidental, general and punitive damages in a sum of not less than $25 million. The Company is involved in additional litigation arising in the normal course of business. All of the above referenced actions are being actively defended. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 41 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Since May 18, 1992, the Company's Common Stock has been quoted in the over- the-counter market on the Nasdaq National Market under the symbol "ICII". The following table sets forth the high and low closing sales prices for the Common Stock as reported by the Nasdaq National Market.
HIGH LOW ------ ------ 1997 First Quarter............................................. $27.38 $20.13 Second Quarter............................................ $21.00 $13.44 Third Quarter............................................. $26.88 $18.06 Fourth Quarter............................................ $28.50 $17.63 1996 First Quarter............................................. $13.09 $ 8.52 Second Quarter............................................ $16.69 $11.69 Third Quarter............................................. $18.44 $13.06 Fourth Quarter............................................ $21.25 $15.38
At March 31, 1998, the closing sales price of the Common Stock as reported by the Nasdaq National Market was $23.69. At March 31, 1998, there were approximately 1,000 shareholders of record. The Company has not paid cash dividends on its Common Stock and does not anticipate that it will do so in the foreseeable future. The present policy of the Company is to retain earnings for use in its operations and the expansion of its business. On October 22, 1996, the Company effected a two for one stock split to shareholders of record as of October 15, 1996. On February 26, 1996, the Company paid a stock dividend to shareholders of record as of February 12, 1996. One new share of Common Stock was issued for each ten shares currently held by shareholders. On October 24, 1995, the Company effected a three for two stock split to shareholders of record as of October 10, 1995. On December 30, 1993, the Company paid a stock dividend to shareholders of record as of December 20, 1993. One new share of Common Stock was issued for each ten shares currently held by shareholders. 42 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, 1997. 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, -------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Revenues: Gain on sale of loans and leases.......................... $ 67,723 $ 88,156 $ 39,557 $ 8,628 $18,149 -------- -------- -------- ------- ------- Interest on loans and leases..... 201,728 188,242 120,244 79,173 51,612 Interest on investments.......... 23,531 10,807 6,630 3,610 1,972 Interest on other finance activities...................... 2,678 8,422 2,608 -- -- -------- -------- -------- ------- ------- Total interest income.......... 227,937 207,471 129,482 82,783 53,584 Interest expense................. 126,594 135,036 95,728 61,674 29,811 -------- -------- -------- ------- ------- Net interest income............ 101,343 72,435 33,754 21,109 23,773 Provision for loan and lease losses.......................... 38,951 9,773 5,450 5,150 2,350 -------- -------- -------- ------- ------- Net interest income after provision for loan and lease losses........................ 62,392 62,662 28,304 15,959 21,423 Loan servicing income............ 10,743 1,680 12,718 16,332 6,785 Equity in net income of SPFC..... 25,869 -- -- -- -- Equity in net loss of FMC........ (3,050) -- -- -- -- Gain on sale of servicing rights.......................... -- 7,591 3,578 30,837 23,655 Gains on sale of SPFC stock...... 9,488 82,690 -- -- -- Gains on sale of FMC stock....... 92,137 -- -- -- -- Gain on termination of REIT advisory agreement.............. 19,046 -- -- -- -- Investment banking fees.......... 7,702 -- -- -- -- Gain on sale of IMH stock........ 11,496 -- -- -- -- Other income..................... 6,014 14,154 1,152 1,048 1,414 -------- -------- -------- ------- ------- Total other income............. 179,445 106,115 17,448 48,217 31,854 -------- -------- -------- ------- ------- Total revenues................. 309,560 256,933 85,309 72,804 71,426 Expenses: Personnel expense................ 60,830 48,355 34,053 33,477 24,520 Other expenses................... 89,554 50,694 27,127 28,037 15,433 -------- -------- -------- ------- ------- Total expenses................. 150,384 99,049 61,180 61,514 39,953 -------- -------- -------- ------- ------- Income before income taxes, minority interest and extraordinary item............ 159,176 157,884 24,129 11,290 31,473 Income taxes...................... 58,747 69,874 10,144 4,685 13,055 Minority interest in income (loss) of consolidated subsidiaries..... 10,513 12,026 (208) -- -- -------- -------- -------- ------- ------- Income before extraordinary item............................ 89,916 75,984 14,193 6,605 18,418 Extraordinary item-Loss on early extinguishment of debt, net of income taxes..................... (3,995) -- -- -- -- Extraordinary item-Repurchase of Senior Notes, net of income taxes............................ -- -- -- 919 -- -------- -------- -------- ------- ------- Net income....................... $ 85,921 $ 75,984 $ 14,193 $ 7,524 $18,418 ======== ======== ======== ======= ======= BASIC INCOME PER SHARE(1): Income before extraordinary item............................ $ 2.33 $ 2.11 $ 0.45 $ 0.21 $ 0.58 Extraordinary item-Loss on early extinguishment of debt, net of income taxes.................... (0.10) -- -- -- -- Extraordinary item-Repurchase of Senior Notes, net of income taxes........................... -- -- -- 0.03 -- -------- -------- -------- ------- ------- Net income per common share.... $ 2.23 $ 2.11 $ 0.45 $ 0.24 $ 0.58 ======== ======== ======== ======= ======= DILUTED INCOME PER SHARE(1): Income before extraordinary item............................ $ 2.20 $ 1.95 $ 0.40 $ 0.19 $ 0.54 Extraordinary item-Loss on early extinguishment of debt, net of income taxes.................... (0.10) -- -- -- -- Extraordinary item-Repurchase of Senior Notes, net of income taxes........................... -- -- -- 0.03 -- -------- -------- -------- ------- ------- Net income per common share.... $ 2.10 $ 1.95 $ 0.40 $ 0.22 $ 0.54 ======== ======== ======== ======= ======= Weighted average diluted shares outstanding..................... 40,855 38,975 35,122 33,582 33,880
43
AT OR FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- ----------- --------- ---------- (DOLLARS IN THOUSANDS) CASH FLOW DATA: Net cash provided by (used in) operating activities............ $ 57,727 $ (31,262) $(1,173,703) $ 961,579 $ (903,050) Net cash (used in) provided by investing activities............ (355,124) 244,177 140,961 (796,638) (145,701) Net cash provided by (used in) financing activities............ 273,747 (177,834) 1,047,004 (177,314) 1,066,584 --------- --------- ----------- --------- ---------- Net (decrease) increase in cash.... $ (23,650) $ 35,081 $ 14,262 $ (12,373) $ 17,833 ========= ========= =========== ========= ========== OPERATING AND FINANCIAL DATA(2): (DOLLARS IN MILLIONS) Loans originated: ICII................. $ -- $ 310 $ 1,816 $ 4,260 $ 6,019 ICW.................. 1 -- -- -- -- SPB.................. 398 531 724 NA(3) NA(3) SPFC................. -- 790 288 190 -- FMAC................. 511 450 164 -- -- AMN.................. 171 -- -- -- -- IBC.................. 151 87 36 -- -- --------- --------- ----------- --------- ---------- Total.............. $ 1,232 $ 2,168 $ 3,028 $ 4,450 $ 6,019 ========= ========= =========== ========= ========== Loans securitized: ICII................. $ -- $ -- $ 177 $ -- $ -- SPB.................. 203 277 511 46 -- SPFC................. -- 657 165 -- -- FMAC................. 343 325 105 -- -- AMN.................. 159 -- -- -- -- IBC.................. 214 87 85 -- -- --------- --------- ----------- --------- ---------- Total.............. $ 919 $ 1,346 $ 1,043 $ 46 $ -- ========= ========= =========== ========= ========== Outstanding balance of loans and leases securitized (at end of period)(4)............ $ 1,277 $ 2,118 $ 1,047 $ 45 $ -- SELECTED RATIOS: Ratio of indebtedness to total capitalization (at end of period)(5)............ 47.2% 40.5% 46.1% 51.4% -- % Average equity to average assets........ 11.30 7.27 4.72 4.86 6.71 Return on average common equity......... 34.95 45.55 17.59 10.57 31.76 Return on average assets................ 3.95 3.31 0.82 0.51 2.13 SPB REGULATORY CAPITAL RATIOS (AT END OF PERIOD): California leverage limitation(6)......... 13.20% 13.50% 11.58% 11.50% 7.29% Risk-based--Tier 1..... 8.75 9.71 11.72 14.21 10.27 Risk-based--Total...... 12.25 10.87 13.18 15.13 10.73 FDIC Leverage Ratio.... 8.30 9.35 8.04 8.08 9.47 ASSET QUALITY RATIOS (AT END OF PERIOD): Non-performing assets as a percentage of total assets.......... 4.31% 2.64% 1.55% 1.16% 0.64% Allowance for loan and lease losses as a percentage of non- performing loans...... 53.87 38.94 44.30 53.83 65.91 Net charge-offs as a percentage of average total loans held for investment(7)......... 2.72 0.94 0.36 0.23 0.89
44
AT DECEMBER 31, ------------------------------------------------------ 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) BALANCE SHEET DATA: Cash................... $ 50,597 $ 74,247 $ 39,166 $ 24,904 $ 37,277 Interest bearing deposits.............. 103,738 3,369 267,776 10,600 90,000 Investment securities.. 228,631 84,296 5,963 18,817 18,000 Loans held for sale.... 162,571 940,096 1,341,810 263,807 1,238,006 Loans held for investment, net....... 1,266,718 1,068,599 668,771 1,029,556 154,595 Securitization related assets................ 43,105 159,707 58,272 4,558 529 Total assets........... 2,102,094 2,470,639 2,510,635 1,420,409 1,572,663 Deposits............... 1,156,022 1,069,184 1,092,989 934,621 1,001,468 Borrowings from FHLB... 45,000 140,500 190,000 295,000 320,000 Remarketed par securities............ 70,000 -- -- -- -- Other borrowings....... 144,841 694,352 992,810 -- 147,611 Senior and convertible subordinated notes.... 219,813 163,209 80,472 80,344 -- Total liabilities...... 1,778,161 2,231,131 2,416,533 1,344,536 1,504,411 Shareholders' equity... $ 323,933 $ 239,508 $ 94,102 $ 75,873 $ 68,253
- -------- (1) Income per share and weighted average shares outstanding reflect 1-for-10, 1-for-10 and 1-for-19 stock dividends paid in 1996, 1993 and 1992, respectively, a 3-for-2 stock split effected in 1995 and a 2-for-1 stock split effected in 1996. All per share amounts reflect the adoption of SFAS No. 128. (2) Does not include loans originated or securitized by ICIFC. Excludes SPFC and FMAC loan origination and securitization activity for periods subsequent to their respective deconsolidations. (3) Information not available. (4) Represents the outstanding balance of loans and leases securitized, excluding loans held for sale and investment. (5) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness plus total shareholders' equity. (6) Ratio of (i) SPB's total shareholders' equity to (ii) total deposits. (7) Excluding charge-offs at AMN, the ratio of charge-offs to average loans held for investment in 1997 was 1.16%. 45 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Organization Imperial Credit Industries, Inc. ("ICII"), incorporated in 1986 in the State of California, is 23.0% owned by Imperial Bank as of December 31, 1997. In 1991, Imperial Bank recapitalized the Company to conduct a full service mortgage banking operation. The consolidated financial statements include ICII, its significant wholly- owned operating subsidiaries, significant majority-owned operating subsidiaries and equity investments in two publicly traded companies (collectively the "Company"). The significant wholly-owned subsidiaries include: Southern Pacific Bank ("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit Advisors, Inc. ("ICAI"), Auto Marketing Network ("AMN"), Imperial Credit Commercial Asset Management Corporation ("ICCAMC") and Imperial Credit Worldwide ("ICW"). The majority-owned significant operating consolidated subsidiary is Imperial Capital Group ("ICG"), which is 60% owned by the Company and 40% owned by ICG's management. The significant equity investments in publicly traded companies are Southern Pacific Funding Corporation ("SPFC") NYSE Symbol: SFC and Franchise Mortgage Acceptance Company ("FMC") NASDAQ Symbol: FMAX. Both SPFC and FMC were former consolidated subsidiaries of the Company. All material intercompany balances and transactions with consolidated subsidiaries have been eliminated. Strategic Focus and Acquisitions Historically, the Company's primary business was the origination and sale of conforming residential mortgage loans. This business experienced substantial growth due to high levels of mortgage loan refinancing activity in 1992 and 1993, as interest rates dropped to historically low levels. However, as interest rates increased and refinancing activity declined in 1994, conforming residential mortgage loan originations on an industry-wide basis decreased dramatically and pricing became increasingly competitive. The Company recognized that the sub-prime residential mortgage loan market provided greater opportunities for mortgage loan origination growth. As a result, during 1995 and 1996, the Company directed additional capital and resources to its sub-prime residential mortgage lending subsidiary, SPFC, and divested substantially all of its conforming mortgage lending and servicing businesses. At the same time, the Company entered or expanded its presence in higher margin commercial and consumer lending markets. 1995 marked the first year for the Company that included operations from both its historical operations and newly acquired or recently started business lines. The Company now operates as a commercial and consumer finance company providing loan and lease products in the following sectors: business finance lending, commercial mortgage lending, consumer lending. The Company also is a provider of other financial services and investment products. In 1995, the Company began to reposition, transform and diversify its core business activities from the traditional mortgage banking operations of originating and selling conforming residential mortgage loans to offering higher margin loan, lease, investment and financial services products. The Company's core business has remained consistent in that it originates loans and leases funded primarily by warehouse lines of credit, repurchase facilities, securitizations and whole loan sales in the secondary market. The Company accomplished its diversification through a business strategy that emphasizes: . Investing in and managing businesses in niche segments of the financial services industry. The Company intends to retain a significant equity investment in the companies to provide a source of future earnings and cash flow for the Company. . Conservative, disciplined underwriting and credit risk management. . Loan and lease originations, where possible, on a wholesale basis. . Securitization or sale in the secondary market of substantially all of the Company's loans and leases, other than those held by SPB for investment. 46 . Maintaining business and financial flexibility to take advantage of changing market conditions with respect to specific financial services businesses. The Company diversified its loan and lease products by focusing on the creation and acquisition of additional finance businesses in order to reduce its dependency on residential mortgage lending. When acquiring new businesses or targeting expansion opportunities, the Company seeks to retain existing management and recruit additional experienced management to increase growth and profitability and to reduce the risks associated with operating the newly acquired entity. The Company, through its repositioning and diversification process from the traditional mortgage banking operations of originating and selling conforming residential loans to a more diversified financial services company has accomplished that goal by its acquisitions of businesses in niche segments of the financial services industry. For the years ended December 31, 1997, 1996 and 1995, the Company originated or acquired $1.2 billion, $2.2 billion and $3.0 billion of loans and leases, respectively. In addition, during the years ended December 31, 1997, 1996 and 1995, the Company completed securitization transactions totaling $919.1 million, $1.3 billion and $1.0 billion, respectively. Impac Mortgage Holdings, Inc. and Impac Funding Corporation During 1995, the Company sold its mortgage conduit operations and SPB's warehouse lending operations to Impac Mortgage Holdings, Inc. ("IMH") AMEX Symbol: IMH, formerly Imperial Credit Mortgage Holdings. In exchange for these assets, the Company received approximately 11.8% of the common stock of IMH. Additionally, ICAI entered into a management agreement with IMH pursuant to which ICAI advised upon the day-to-day operations of IMH and for which it was paid a management fee. During 1997, the Company sold its common stock interest in IMH, receiving proceeds of $12.0 million and recording a gain of approximately $11.5 million. In December 1997, IMH and the Company negotiated a termination of the management agreement (the "Termination Agreement"). The consideration received by the Company pursuant to the Termination Agreement was comprised of 2,009,310 shares of IMH common stock and certain securitization-related assets. Additionally, the Company agreed to cancel its note receivable from ICI Funding Corporation ("ICIFC"), a former subsidiary of ICII which is now known as Impac Funding Corporation and is the origination unit of IMH., in the amount of $29.1 million. The IMH common stock and the residual interests were recorded by the Company at their estimated fair values of approximately $35.0 million and $13.1 million, respectively, for a total of $48.1 million. This amount, when netted with the $29.1 million cancellation of the ICIFC note receivable resulted in the gain on termination of the management agreement of approximately $19.0 million. During the first quarter of 1997, the Company disposed of its common stock interest in ICIFC, a wholly-owned subsidiary engaged in mortgage conduit operations for IMH, resulting in a loss of $100,000. At December 31, 1996, the Company owned 100% of the common stock of ICIFC which represented only a 1% economic interest as IMH owned all of the non-voting preferred stock of ICIFC which gave IMH a 99% economic interest in ICIFC. The Company's disposal of its remaining economic interest in ICIFC concluded its exit from the former mortgage banking operations. Franchise Mortgage Acceptance Company On June 30, 1995, the Company completed the acquisition of certain net assets from Greenwich Capital Financial Products, Inc. and formed FMAC, a limited liability company, in which the Company had a 66.7% ownership interest. The acquisition was accounted for as a purchase and the purchase price of $7.6 million, which 47 included $3.8 million in contingent consideration for loans in the pipeline, was allocated to the net assets acquired based on their fair value resulting in goodwill of approximately $4.0 million. The Company's franchise lending business was conducted through FMAC until November 1997, at which time FMAC merged into FMC and FMC completed an initial public offering of its common stock. The Company sold at FMC's initial public offering 3,568,175 shares at $18.00 per share generating net proceeds of $59.7 million and a gain of $48.9 million. Additionally, the Company recognized a gain of $43.2 million resulting from the adjustment in the basis of its investment in FMC due to the offering and its reduced ownership percentage. Immediately after FMC's initial public offering and at December 31, 1997, the Company's percentage ownership of FMC common stock was 38.4%. Accordingly, FMC is no longer consolidated in the Company's consolidated financial statements and the Company's investment in FMC is accounted for under the equity method. Southern Pacific Funding Corporation During the first quarter of 1997, the Company sold 370,000 shares of SPFC common stock at $16.63 per share generating net proceeds of $6.2 million and a gain of $4.3 million. Such transaction reduced the Company's ownership percentage in SPFC to 49.4% at March 31, 1997 from 51.2% at December 31, 1996. Accordingly, SPFC's operating results are no longer consolidated with those of the Company and the Company's investment in SPFC is accounted for under the equity method. During the third quarter of 1997, the Company sold an additional 500,000 shares of SPFC common stock generating net proceeds of $7.6 million and a gain of $5.2 million. At December 31, 1997, the Company's ownership interest in SPFC was 47%. For the year ended December 31, 1996, a substantial portion of the Company's operations were conducted through its sub-prime residential lending subsidiary, SPFC. In June 1996, SPFC completed an initial public offering of its common stock pursuant to which ICII was a selling shareholder. SPFC and the Company sold 5.2 million shares and 3.5 million shares, respectively, at $11.33 per share. In a secondary offering during 1996, the Company sold 1.5 million SPFC shares at $19.83 per share. The Company recognized a gain on sale of the SPFC shares it owned of $51.2 million, which is net of offering expenses and the Company's cost basis in the shares. The Company also recognized a gain of $31.4 million related to the stock sold by SPFC. The gain related to the stock sold by SPFC is based on the difference between the Company's equity ownership in SPFC after the sale and such equity ownership prior to the sale, using the Company's respective SPFC ownership percentages. Imperial Business Credit The Company expanded its commercial equipment leasing business conducted by IBC through the acquisitions of substantially all of the assets of First Concord Acceptance Corporation ("FCAC") for a purchase price of $21.4 million in May 1995 and Avco Leasing Services, Inc. and Avco Financial Services of Southern California, Inc. related to its business of originating and servicing business equipment leases and agreed to assume certain liabilities in connection therewith from Avco Financial Services, Inc. (the "Avco Acquisition) for approximately $94.8 million in October 1996. These acquisitions were accounted for as purchases and the purchase prices were allocated to the net assets acquired based on their fair value resulting in goodwill of $1.2 million and $12.5 million for the FCAC and Avco transactions, respectively. IBC's lease originations were $151.3 million and $87.2 million, and it securitized and sold $213.6 million and $87.0 million during the years ended December 31, 1997, and 1996, respectively. Coast Business Credit In September 1995, the Company began making asset-based loans to middle market companies located primarily in California by acquiring CoastFed Business Credit. This business, now a division of SPB, was renamed Coast Business Credit ("CBC"). The acquisition was accounted for as a purchase and the purchase price of $150 million was allocated to the net assets acquired based on their fair value resulting in goodwill of approximately $16 million. At December 31, 1997 and 1996, CBC had total commitments of $803.3 million and $547.7 million, of which $484.8 million and $288.5 million of loans were outstanding, respectively. 48 Imperial Capital Group During the fourth quarter of 1996, the Company continued to diversify and strategically deploy its capital by announcing the closing of its investment in Dabney/Resnick/Imperial LLC ("DRI") (formerly Dabney/Resnick, Inc.), an investment banking firm. DRI was headquartered in Beverly Hills, California with offices in Chicago, Illinois, Dallas, Texas, and Sun Valley, Idaho, and offered full service investment banking, brokerage, and asset management services. DRI managed and underwrote public offerings of securities, arranged private placements and provided advisory and other services in connection with mergers, acquisitions, restructurings, and other financial transactions. The Company acquired a 1% interest in DRI and purchased a warrant to acquire an additional 48% interest. In July 1997, the Company formed a new subsidiary, ICG, which includes a registered broker/dealer and an asset management company offering individual and corporate investors a wide range of investment products and services. During the fourth quarter, in connection with the formation of ICG, the Company recognized a pre-tax charge of $3.7 million relating to the restructuring of its loan to DRI. As part of the DRI restructuring, substantially all of the assets and personnel of DRI were acquired or hired by ICG. During the fourth quarter of 1997, ICG raised $323 million for corporate clients through private placement debt and equity offerings generating investment banking fees of $7.7 million. The Company's ownership interest in ICG is 60% as of December 31, 1997. Auto Marketing Network In March 1997, the Company acquired all the outstanding common stock of AMN, a sub-prime auto lender engaged in the financing of new and used motor vehicles on a national basis, for $750,000. As part of the acquisition, the Company advanced $11.6 million to repay amounts owed pursuant to operating lines of credit and for working capital purposes. The acquisition was recorded using the purchase method of accounting. The purchase price was allocated to the net assets acquired based on their fair value, and goodwill of approximately $20.8 million was recorded. Since the March 1997 acquisition date, AMN posted operating losses and experienced significant increases in non-performing assets, loan charge-offs and loan loss provisions. In December 1997, the Company developed revised operating projections which indicated that the goodwill resulting from the AMN acquisition was not recoverable. Accordingly, the remaining goodwill balance of $20.1 million was written off during the fourth quarter of 1997. PrinCap Mortgage Warehouse In October 1997, the Company's wholly-owned subsidiary, SPB, acquired substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and PrinCap Mortgage Backed, L.P. and contributed such assets to its PMW Mortgage Warehouse, Inc. subsidiary ("PrinCap"). The acquisition was accounted for as a purchase, and the purchase price of $123.7 million was allocated to the net assets acquired based on their fair value resulting in goodwill of $6.8 million. PrinCap's primary business is residential mortgage warehouse lending to medium-sized brokers and mortgage bankers on a national basis. At December 31, 1997, PrinCap had commitments outstanding and loans of $126.4 million and $122.5 million, respectively. Imperial Credit Commercial Asset Management Corporation The Company formed ICCAMC, a wholly-owned subsidiary, to oversee the day to day operations of ICCMIC, a real estate investment trust investing primarily in performing multi-family and commercial real estate properties, loans and mortgage-backed securities. In October 1997, ICCMIC completed its initial public offering and sold approximately 34.5 million shares of common stock at $15.00 per share resulting in net proceeds of approximately $481.2 million. The Company purchased 2,970,000 shares of ICCMIC common stock for $41.4 million in October 1997. In December 1997, the Company purchased an additional 100,000 shares of ICCMIC common stock for $1.5 million. The Company owned 8.9% of the outstanding common stock of ICCMIC as of December 31, 1997. 49 YEAR 2000 COMPLIANCE The Company is aware of the issues associated with the "Year 2000" problem concerning existing computer systems. The Year 2000 problem affects every computer and subsystem the Company operates, both in-house and from independent servicers and vendors. The issue is whether the Company's computer systems will properly recognize the "00" date when the year changes to 2000. Computer systems that do not properly recognize the "00" date could generate erroneous data or cause a computer system to fail. The Company is utilizing both internal and external resources to correct, reprogram and test the computer systems for the Year 2000 compliance. It is anticipated that all reprogramming changes will be completed by December 31, 1998, allowing adequate time for testing all data from the Company's in-house, independent servicers and vendor computer systems. Management has assessed the Year 2000 compliance costs and does not believe such costs will have a material effect on the Company's consolidated financial statements. RESULTS OF OPERATIONS Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 REVENUE General The Company's consolidated net income for the year ended December 31, 1997 was $85.9 million or $2.10 diluted income per share as compared to $76.0 million or $1.95 diluted income per share for the year ended December 31, 1996. Basic consolidated income per share for the year ended December 31, 1997 was $2.23 per share as compared to $2.11 per share for the previous year. Consolidated net income for the year ended December 31, 1997, includes an extraordinary loss on early extinguishment of debt of $4.0 million, or $0.10 per common share, net of tax. The increase in net income is attributable to several factors including: gains on sale of stock in SPFC, FMC and IMH; a gain on the termination of a Real Estate Investment Trust ("REIT") advisory agreement; an increase in net interest income; and an improved net interest margin. These positive factors were partially offset by an increase in total expenses and the provision for loan and lease losses. Gain on Sale of Loans and Leases Gain on sale of loans and leases decreased to $67.7 million for the year ended December 31, 1997 from $88.2 million for 1996. Gain on sale of loans and leases consists primarily of gains recorded upon the sale of loans and leases, net of associated expenses, and to a lesser extent, fees received on the origination of loans, and fees received for commitments to fund loans. Gains on sale of loans and leases decreased during 1997 primarily as a result of the impact of the deconsolidations of SPFC and ICIFC for the entire year of 1997 and the deconsolidation of FMAC for the fourth quarter of 1997 and a lower volume of loan and lease securitizations as compared to 1996. During 1997, the Company completed loan and lease securitizations totaling $919.1 million as compared to $1.3 billion during 1996. For 1997 and 1996, total loan and lease securitizations were as follows:
1997 1996 ------ -------- (IN MILLIONS) Nonconforming residential loans......................... $ -- $ 656.9 Multifamily and commercial loans........................ 203.1 277.0 Franchise loans......................................... 343.8 325.1 Equipment leases........................................ 213.6 87.0 Auto loans.............................................. 158.6 -- ------ -------- $919.1 $1,346.0 ====== ========
The Company also completed two bulk loan sales of loans with total principal of $197.8 million for the year ended December 31, 1997. 50 Total Interest Income For the year ended December 31, 1997, total interest income increased to $227.9 million from $207.5 million for the year ended December 31, 1996. The increase in total interest income is primarily attributable to a 176 basis point or 18% increase in the average yield on interest-earning assets offset by a $148.8 million or 7% decrease in the average balance of interest-earning assets. The increase in the average yield on interest-earning assets from 1996 is primarily attributable to increases in the average yields on loans held for investment and sale reflecting a more diversified and higher-yielding mix of loan products relative to 1996. The decrease in the average balance of interest-earning assets compared to 1996 is primarily due to a decrease in the average balance of loans held for sale of $543 million offset by an increase in the average balance of loans held for investment of $340 million. The comparison of total interest income for 1997 and 1996 is also impacted by the deconsolidations of SPFC, ICIFC and FMAC. Excluding SPFC's and ICIFC's interest income for all of 1996 and FMAC's interest income for the fourth quarter of 1996, total interest income for the year ended December 31, 1996 would have been $158.0 million compared to actual of $207.5 million. Total Interest Expense For the year ended December 31, 1997, total interest expense decreased to $126.6 million from $135.0 million for the year ended December 31, 1996. The decrease in total interest expense is primarily attributable to a $161.4 million or 8% decrease in the average balance of interest-bearing liabilities offset by a 13 basis point or 2% increase in the average cost of interest- bearing liabilities. The decrease in the average balance of interest-bearing liabilities relative to 1996 resulted primarily from a decrease in the average balance of borrowings due to the deconsolidations of SPFC and ICIFC. This decrease was partially offset by an $154.3 million increase in average deposits. The increase in the average cost of interest-bearing liabilities is primarily attributable to the relatively higher borrowing costs associated with the Company's Remarketed Par Securities issued during 1997. The comparison of total interest expense for 1997 and 1996 is also impacted by the deconsolidations of SPFC, ICIFC and FMAC. Excluding SPFC's and ICIFC's interest expense for all of 1996 and FMAC's interest expense for the fourth quarter of 1996, total interest expense for the year ended December 31, 1996 would have been $93.8 million compared to actual of $135.0 million. Net Interest Margin For the year ended December 31, 1997, the consolidated net interest margin increased to 5.11%, an increase of 171 basis points, as compared to the consolidated net interest margin of 3.40% for the year ended December 31, 1996. The increase in net interest margin is due primarily to the aforementioned increases in the average yields on loans held for investment and sale due to a more diversified and higher-yielding mix of loan products relative to 1996. Provision for Loan and Lease Losses The provision for loan and lease losses increased to $39.0 million for the year ended December 31, 1997, as compared to $9.8 million for the year ended December 31, 1996. The large increase in the provision for loan losses is primarily the result of an increase in total nonaccrual loans and net charge- offs of $20.5 million and $22.5 million, respectively. The increase in total nonaccrual loans and net charge-offs came mainly from the AMN loan portfolio and are reflective of the continuing change in the composition of the overall loan portfolio to higher yielding loan products that carry higher relative credit risk. For further discussion see "Business--Loans Held for Investment" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset Quality". Loan Servicing Income Loan servicing income for the year ended December 31, 1997, increased to $10.7 million as compared to $1.7 million for the year ended December 31, 1996. Loan servicing income increased primarily due to a decrease 51 in the level of foreclosure and liquidation costs associated with the Company's former residential mortgage loan servicing portfolio and due to an increase in the average outstanding balance of loans and leases serviced for others. Equity in Net Income of SPFC Equity in the net income of SPFC for the year ended December 31, 1997 was $25.9 million as compared to $0 for the year ended December 31, 1996, and represents the Company's share of SPFC's net income based on the Company's ownership percentage. The increase in the equity in net income of SPFC is due to the difference in accounting methods used for the Company's investment in SPFC at December 31, 1997 and 1996. At December 31, 1997, the Company's ownership percentage in SPFC was 47.0%, and accordingly, the Company accounted for its investment in SPFC using the equity method. At December 31, 1996, the Company's ownership percentage in SPFC was 51.2%, and accordingly, SPFC's operating results were consolidated with those of the Company. Equity in Net Loss of FMAC Equity in the net loss of FMAC was $3.1 million for the period commencing October 1, 1997 through December 31, 1997, as compared to $0 for the year ended December 31, 1996 and represents the Company's share of FMAC's net loss for the quarter ended December 31, 1997, based on the Company's ownership percentage. FMC's net loss resulted from the deferred tax charges associated with converting to a fully taxable corporation from a limited liability entity. The increase in the equity in net loss of FMAC is due to the difference in accounting methods used for the Company's investment in FMAC at December 31, 1997 and 1996. At December 31, 1997, the Company's ownership percentage in FMAC was 38.4%, and accordingly, the Company accounted for its investment in FMAC using the equity method. At December 31, 1996, the Company's ownership percentage in FMAC was 66.7%, and accordingly, FMAC 's operating results were consolidated with those of the Company. In conjunction with the FMC initial public offering during the fourth quarter of 1997 discussed below, the Company included in its consolidated operating results nine months of FMAC's operating results for 1997. Investment Banking Fees Investment banking fees were $7.7 million for the year ended December 31, 1997, compared to $0 for the year ended December 31, 1996. During the fourth quarter of 1997, the Company formed a new subsidiary, ICG, which includes a registered broker/dealer and an asset management company offering individual and corporate investors a wide range of financial products and services. During the fourth quarter of 1997, ICG raised $323 million for corporate clients through private placement debt and equity offerings generating investment banking fees of $7.7 million. Gain on Sale of Servicing Rights Gain on sale of servicing rights decreased to $0 for the year ended December 31, 1997, from $7.6 million for the year ended December 31, 1996. During 1996, the Company sold mortgage loan servicing rights relating to $3.2 billion in loans, resulting in pre-tax gains of $7.6 million. Gains on the sale of servicing rights consist of the cash proceeds received on the "bulk" sale of servicing rights, net of the related capitalized purchased or originated servicing rights. The Company did not recognize any gain or loss on the sale of servicing rights in 1997. Gain on Sale of FMC Stock The Company recognized a gain on sale of FMC stock of $92.1 million for the year ended December 31, 1997, compared to $0 for the year ended December 31, 1996. The Company's franchise lending business was conducted through FMAC until November 1997, at which time FMAC merged into FMC, a Delaware corporation formed for the purpose of succeeding to the business of FMAC, and FMC completed an initial public 52 offering of its common stock. The Company sold into FMC's initial public offering 3.6 million shares at $18.00 per share generating net proceeds of $59.7 million and a corresponding gain of $48.9 million. Additionally, the Company recognized a gain of $43.2 million resulting from the adjustment in the basis of its investment in FMC due to the offering and its reduced ownership percentage. At the time of FMC's initial public offering and at December 31, 1997, the Company's percentage ownership of FMC common stock was 38.4%. Accordingly, FMC is no longer consolidated and the Company's investment in FMC is accounted for under the equity method. Gains on Sale of SPFC Stock The Company recognized a gain on sale of SPFC stock of $9.5 million for the year ended December 31, 1997, compared to $51.2 million for the year ended December 31, 1996. The Company's nonconforming residential lending business was conducted through SPFC until June 1996, at which time SPFC completed an initial public offering of its common stock pursuant to which the Company was a selling shareholder. During the first quarter of 1997, the Company sold 370,000 shares of SPFC common stock at $16.63 per share generating net proceeds of $6.2 million and a gain of $4.3 million. This transaction reduced the Company's ownership percentage in SPFC from 51.2% at December 31, 1996, to 49.4% at March 31, 1997. Accordingly, SPFC is no longer consolidated and the Company's investment in SPFC is accounted for under the equity method. During the third quarter of 1997, the Company sold an additional 500,000 shares of SPFC common stock generating net proceeds of $7.6 million and a gain of $5.2 million. This transaction further reduced the Company's ownership interest in SPFC to 47% at December 31, 1997. During the year ended December 31, 1996, the Company sold a total of 5.0 million shares of SPFC in two separate offerings resulting in gains totaling $51.2 million. Additionally, during 1996, as part of its initial public offering, SPFC sold 5.2 million shares to the public, resulting in a corresponding gain to the Company of $31.4 million based on the difference between the Company's equity ownership in SPFC after the sale and such equity ownership prior to the sale, using the Company's respective SPFC ownership percentages. Gain on Sale of IMH Stock The Company recognized a gain on sale of IMH stock of $11.5 million for the year ended December 31, 1997, compared to $0 for the year ended December 31, 1996. During 1995, the Company sold its mortgage conduit operations and SPB's warehouse lending operations to IMH. In exchange for these assets, the Company received approximately 11.8% of the common stock of IMH. During 1997, the Company sold its common stock in IMH resulting in a gain of $11.5 million. Gain on Termination of REIT Advisory Agreement The Company recognized a nonrecurring gain on termination of a REIT advisory agreement of $19.0 million for the year ended December 31, 1997. In conjunction with the aforementioned exchange of Company assets for IMH stock, ICAI entered into a management agreement with IMH pursuant to which ICAI advised upon the day-to-day operations of IMH and for which it was paid a management fee. In December 1997, IMH and the Company negotiated a termination of the management agreement (the "Termination Agreement"). The consideration received by the Company pursuant to the Termination Agreement was comprised of 2,009,310 shares of IMH common stock and certain securitization-related assets. Additionally, the Company agreed to cancel its note receivable from ICI Funding Corporation ("ICIFC"), a former subsidiary of ICII which is now known as Impac Funding Corporation and is the origination unit of IMH, in the amount of $29.1 million. The IMH common stock and the securitization-related assets were recorded by the Company at their fair values of approximately $35.0 million and $13.1 million, respectively, for a total of $48.1 million. This amount, when netted with the $29.1 million cancellation of the ICIFC note receivable resulted in the gain on termination of the management agreement of approximately $19.0 million. 53 EXPENSES Personnel Expense Personnel expense increased to $60.8 million for the year ended December 31, 1997 as compared to $48.4 million for the year ended December 31, 1996. This increase reflects the Company's acquisition and expansion activities. The comparison of personnel expense for 1997 and 1996 is also impacted by the deconsolidations of SPFC, ICIFC and FMAC. Excluding SPFC's and ICIFC's personnel expense for all of 1996 and FMAC's personnel expense for the fourth quarter of 1996, total personnel expense for the year ended December 31, 1996 would have been $29.8 million compared to actual of $48.4 million. Amortization of PMSR's and OMSR's Amortization of PMSR's and OMSR's increased to $3.1 million for the year ended December 31, 1997 as compared to $1.1 million for the year ended December 31, 1996. The increase primarily resulted from an increase in prepayment rates on the underlying serviced loan portfolio. The comparison of amortization of PMSR's and OMSR's for 1997 and 1996 is also impacted by the deconsolidation of ICIFC. Occupancy Expense Occupancy expense decreased to $4.3 million for the year ended December 31, 1997 as compared to $4.7 million for the year ended December 31, 1996. This decrease is a result of the deconsolidations of SPFC, ICIFC and FMAC. Excluding SPFC's and ICIFC's occupancy expense for all of 1996 and FMAC's occupancy expense for the fourth quarter of 1996, total occupancy expense for the year ended December 31, 1996 would have been $3.8 million compared to actual of $4.7 million. Net Expenses of Other Real Estate Owned Net expenses of other real estate owned ("OREO") decreased to $6.5 million for the year ended December 31, 1997 as compared to $7.0 million for the year ended December 31, 1996. The decreases in net expenses of OREO resulted from a corresponding decline in OREO losses and writedowns related to the Company's former mortgage banking operations. Professional Services Expense Professional services expense increased to $10.3 million for the year ended December 31, 1997 as compared to $9.6 million for the year ended December 31, 1996. This increase reflects the Company's acquisition and expansion activities. The comparison of professional services expense for 1997 and 1996 is also impacted by the deconsolidations of SPFC, ICIFC and FMAC. Excluding SPFC's and ICIFC's professional services expense for all of 1996 and FMAC's professional services expense for the fourth quarter of 1996, total professional services expense for the year ended December 31, 1996 would have been $7.9 million compared to actual of $9.6 million. Restructuring Provision--Exit from Mortgage Banking Operations Restructuring charges regarding mortgage banking operations were $3.8 million for the year ended December 31, 1996. The charges recognized during 1996 represented those costs incurred in connection with the Company's exit from the conforming mortgage banking business. During the first quarter of 1996, the Company committed itself to, and began the execution of, an exit plan that specifically identified the necessary actions to be taken to complete the exit from the origination, sale and servicing of conforming residential mortgage loans. The exit plan was completed during 1997, and there were no additional restructuring charges recognized during 1997 relative to the Company's exit from this business. 54 Loss on Restructuring of Dabney/Resnick/Imperial, LLC ("DRI") The Company recognized a loss on restructuring of its loan to DRI of $3.7 million for the year ended December 31, 1997, compared to $0 for the year ended December 31, 1996. During the fourth quarter of 1996, the Company announced the closing of its investment in DRI, an investment banking firm. DRI offered full service investment banking, brokerage, and asset management services. As discussed above, during the fourth quarter of 1997, the Company formed a new subsidiary, ICG, which includes a registered broker/dealer and an asset management company offering individual and corporate investors a wide range of financial products and services. In connection with the formation of ICG, the Company recognized a pre-tax charge of $3.7 million relating to the restructuring of its loan to DRI. As part of the DRI restructuring, substantially all of the assets and personnel of DRI were acquired or hired by ICG. Provision for Loss on Repurchase of Former Mortgage Banking Loans The Company recognized a provision for loss on repurchase of mortgage banking loans of $5.4 million for the year ended December 31, 1997, compared to $0 for the year ended December 31, 1996. During 1997, the Company completed an analysis of its potential exposure from losses on the repurchase of those loans still remaining from its former mortgage banking operations. The completion of this analysis resulted in the aforementioned $5.4 million charge being taken during the fourth quarter of 1997. Amortization of Goodwill The Company's amortization of goodwill was $23.3 million for the year ended December 31, 1997, compared to $1.9 million for the year ended December 31, 1996. The increase in amortization of goodwill is primarily attributable to the write off of AMN's goodwill totaling $20.1 million. Since the March 1997 acquisition date of AMN, AMN posted operating losses and experienced significant increases in nonperforming assets, loan charge-offs and loan loss provisions. In December 1997, the Company developed revised operating projections which indicated that the goodwill resulting from the AMN acquisition was not recoverable. Accordingly, the remaining balance of AMN goodwill of $20.1 million was written off through accelerated amortization during the fourth quarter of 1997. Other Expenses All other expenses (including data processing expense, FDIC insurance premiums, telephone and other communications, and general and administrative expense) for the year ended December 31, 1997 totaled $32.9 million compared to $22.7 million for the year ended December 31, 1996. This increase reflects the Company's acquisition and expansion activities. The comparison of other expenses for 1997 and 1996 is also impacted by the deconsolidations of SPFC, ICIFC and FMAC. Excluding SPFC's and ICIFC's other expenses for all of 1996 and FMAC's other expenses for the fourth quarter of 1996, total other expenses for the year ended December 31, 1996 would have been $15.5 million compared to actual of $22.7 million. Income Taxes The Company's effective tax rate was 39% and 44% for the years ended December 31, 1997 and 1996, respectively. The decrease in the effective tax rate for 1997 primarily reflects the recovery of deferred taxes related to the FMC initial public offering. For further information see Note 21 to the consolidated financial statements. Minority Interest in Income (Loss) of Consolidated Subsidiaries The Company's minority interest in income (loss) of consolidated subsidiaries was $10.5 million for the year ended December 31, 1997, compared to $12.0 million for the year ended December 31, 1996. The comparison of the Company's minority interest in income (loss) of consolidated subsidiaries for 1997 and 1996 is also impacted by the deconsolidations of SPFC, ICIFC and FMAC. Excluding the Company's minority interest in income (loss) of SPFC and ICIFC for all of 1996 and FMAC for the fourth quarter of 1996, total minority interest in income (loss) of consolidated subsidiaries for the year ended December 31, 1996 would have been $2.1 million compared to actual of $12.0 million. Extraordinary Item--Loss on Early Extinguishment of Debt During the first quarter of 1997, the Company successfully completed a $200.0 million offering of 9.875% Senior Notes due 2007. A portion of the proceeds from the offering were used to repurchase 55 $69.8 million of 9.75% Senior Notes due 2004 for which the Company recorded an extraordinary after-tax charge of $4.0 million. The Company engaged in the new issuance in order to obtain a more favorable debt covenant package and to raise new capital to support its growing businesses. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 The Company's consolidated net income for the year ended December 31, 1996 was $76.0 million or $1.95 per diluted share as compared to $14.2 million or $0.40 per diluted share for the previous year, an increase of 435%. The increase in net income is attributable to several factors: gains on sale of SPFC stock; a 123% increase in gain on sale of loans; a 115% increase in net interest income; and an improved net interest margin. These positive factors were partially offset by an increase in total expenses and the provision for loan and lease losses. Revenues for the year ended December 31, 1996 increased 201% to $256.9 million as compared to $85.3 million for the same period of the previous year. Expenses for the year ended December 31, 1996 increased 62% to $99.0 million as compared to $61.2 million for the previous year. Total revenues for the Company included a pre-tax gain of $82.7 million from the sale of SPFC's common stock through an initial public offering in August 1996 and a secondary offering in November 1996. Prior to the sale of SPFC stock, SPFC was a wholly owned subsidiary of the Company specializing in sub- prime residential mortgage lending. In the initial public offering, ICII sold 3.5 million shares, and recorded a gain of $30.6 million with SPFC selling 5.2 million primary shares to the public, resulting in a gain to the Company of $31.5 million. In November 1996, ICII sold an additional 1.5 million shares of SPFC common stock through a secondary offering in which ICII was the sole selling shareholder resulting in a gain to the Company of $20.6 million. As a result of this sale, ICII eventually reduced its ownership in SPFC to 51.2%. As a result of the Company's requirement to record income tax expense on its ownership interest in SPFC's after tax income, the Company only retained approximately 30% of SPFC's net income or loss. Gain on sale of loans increased 123% to $88.2 million for the year ended December 31, 1996 as compared to $39.6 million for the previous year. Gain on sale of loans consists primarily of gains recorded upon the sale of loans, net of associated expenses, and to a lesser extent, fees received on the origination of loans, and fees received for commitments to fund loans. The increase was primarily the result of substantially increased volume and profitability on the sale of various variable and fixed rate loan products through securitizations. Gain on sale of loans included $55.4 million in gains recorded as the result of the securitization of $657.4 million of the Company's sub-prime residential mortgage loans at SPFC, $11.2 million in gains resulting from the securitization of $277.0 million of commercial and multi-family loans at SPTL, $3.6 million gain on sale of the Company's retained interest in the securitization of $105.2 million of franchise loans at FMAC which were accounted for as a financing at December 31, 1995 and a gain on sale of $13.7 million resulting from the securitization of $325.1 million of franchise loans during the second and fourth quarters of 1996. During the year ended December 31, 1996, the Company wrote down the carrying value of its Capitalized Excess Servicing Fees Receivable by $4.7 million due to performance results differing from excess cash flows estimated by the Company. For the year ended December 31, 1996, net interest income, which consists of interest income and fees net of interest expense, increased $38.6 million or 115% to $72.4 million as compared to $33.8 million for the previous year. The increase in net interest income was due primarily to two factors. The increase in interest income can be directly attributed to the acquisitions completed throughout the last half of 1995, and the resultant change in the composition of loans held for sale and investment from primarily conforming single family residential mortgage loans to a more diversified mix of loan products. At December 31, 1996, the product mix of the Company's interest earning assets included a much larger percentage of higher-yielding loan and lease products as compared to the previous year. 56 For the year ended December 31, 1996, interest income increased $78.0 million or 60% to $207.5 million from $129.5 million. The increase in interest on loans was primarily attributable to an overall increase in the yield on outstanding loan and lease products. Interest income also increased as a result of the Company's loan and lease securitizations, which contributed interest income of $8.4 million from the accretion of discounts on the Company's Capitalized Excess Servicing Fees Receivable. For the year ended December 31, 1996, interest expense increased $39.3 million or 41% to $135.0 million from $95.7 million for the year ended December 31, 1995. The increase in interest expense for the quarter and for the year primarily resulted from increased outstanding average balances of warehouse lines of credit. For the year ended December 31, 1996, consolidated net interest margin increased to 3.40%, an increase of 132 basis points as compared to 2.08% for the year ended December 31, 1995. The improvement in net interest income and margin is largely the result of the Company's repositioning itself with the origination and acquisition of higher yielding loan and lease products. Acquisitions have added to the improvement in net interest income and net interest margin. For the year ended December 31, 1996, net interest margin and net income benefited from a full year of operation from the acquired CBCC as well as the fourth quarter purchase of equipment leases totaling $85.0 million with a weighted average interest rate of 15.5% pursuant to the Avco Acquisition. Loan servicing income for the year ended December 31, 1996 decreased 87% to $1.7 million as compared to $12.7 million for the previous year. The decrease in loan servicing income was primarily due to a decreased average balance of conforming residential mortgage loans serviced for others, primarily as a result of the Company's sale or transfer of substantially all of its conforming residential mortgage servicing rights in connection with the Company's exit from the conforming mortgage banking business. Additionally, loan servicing income continues to be negatively affected by increased direct servicing costs related to the loan foreclosure and property liquidation process of the remaining delinquent conforming residential mortgage servicing portfolio of the Company's former mortgage banking operations. During 1996 and 1995, the Company sold mortgage loan servicing rights relating to $3.2 billion and $957.2 million principal amount of loans, resulting in pre-tax gains of $7.6 million and $3.6 million, respectively. Gain on the sale of servicing rights consisted of the cash proceeds received on the "bulk" sale of servicing rights, net of the related capitalized purchased or originated servicing rights. The decline in profitability on the sale of the conforming residential mortgage servicing rights was due to a lower average sales price and the increased amounts of capitalized servicing rights on the portfolio sold during the year ended December 31, 1996 as compared to the previous year as a result of the Company's adoption of Statement of Financial Accounting Standards 122 ("SFAS 122") in the first quarter of 1995. The decision to sell servicing rights was based upon the Company's plan to exit the conforming mortgage banking business. Other income for the year ended December 31, 1996 increased to $14.2 million as compared to $1.2 million for the previous year. This increase was primarily due to fee income generated from the Company's advisory contract with IMH and dividend payments received by the Company on its investment in IMH. Additionally, increasing other income was the resolution and recovery of $2.5 million of certain outstanding reconciling items at SPB. Personnel expenses increased 42% to $48.4 million for the year ended December 31, 1996 as compared to $34.1 million for the previous year. This increase was primarily the result of personnel expenses related to the Company's acquisition and expansion activities throughout the second half of 1995, partially offset by reductions in personnel expense at the Company's former mortgage banking operations. Amortization of PMSR's and OMSR's decreased 72% to $1.1 million for the year ended December 31, 1996 as compared to $4.0 million for the previous year. The decrease was the result of a decreased outstanding 57 balance of PMSR's and OMSR's as a result of the Company's sale of servicing rights on conforming residential mortgage loans generated by the former mortgage banking operations. Occupancy expense increased 19% to $4.7 million for the year ended December 31, 1996 as compared to $3.9 million for the same period of the previous year. The increase primarily reflected an increase in lease expenses as a result of the Company's acquisition of FMAC, FCAC and CBCC in the second half of 1995, as well as to the continued expansion of SPFC throughout 1996. Net expenses of OREO increased 267% to $7.0 million for the year ended December 31, 1996 as compared to $1.9 million for the previous year. The increase in net expense of OREO was primarily the result of the increase in the volume of properties foreclosed on and liquidated by the Company's former mortgage banking operations. FDIC insurance premiums decreased 71% to $327,000 for the year ended December 31, 1996 as compared to $1.1 million for the previous year. FDIC insurance premiums decreased primarily as a result of a decrease in the rate of the insurance premium charged to SPB for FDIC deposit insurance. Restructuring charges of $3.8 million were recognized during the year ended December 31, 1996. The charge represents those costs incurred in connection with the Company's exit from the conforming mortgage banking business. During the first quarter of 1996, the Company committed itself to, and began the execution of, an exit plan that specifically identified the necessary actions to be taken to complete the exit from the origination, sale and servicing of conforming residential mortgage loans. During the year ended December 31, 1996, the Company incurred actual charges of approximately $3.2 million. The Company has included in the restructuring provision those costs resulting from the exit plan that are not associated with, nor would have benefit for, the continuing operations of the Company. All other general and administrative expenses, including data processing, professional services, and telephone and other communications, increased 109% to $33.8 million for the year ended December 31, 1996 as compared to $16.2 million for the same period of the previous year. The increase in general and administrative expenses was due primarily to the Company's acquisition of FMAC, FCAC, and CBCC, as well as to the start up of ICAI in 1995, and the continued expansion of SPFC throughout 1996. As a result of the growth in the loan portfolio and the change in its product mix, the Company continued to add to the allowance for loan and lease losses. For the year ended December 31, 1996, the provision for loan losses increased $4.3 million to $9.8 million as compared to $5.5 million for the year ended December 31, 1995. The increase in the loan and lease loss provision for the year ended December 31, 1996 was primarily the result of an increase in nonaccrual loans (specifically one purchased loan portfolio) and due to the continuing change in the composition of the Company's investment loan portfolio to include higher yielding loan products. At December 31, 1996, of the $50.1 million of nonaccrual loans, 89%, 3% and 8% were single family, multi-family and non-residential loans, respectively, as compared to 76%, 18% and 6%, respectively, at December 31, 1995. The increase in nonaccrual loans represented by residential loans was due to the expansion of the investment loan portfolio with residential (one-to-four family) loans originated by the Company's former mortgage banking operations. The Company's non-residential loans were comprised of commercial mortgages, commercial loans, indirect equipment leases and consumer loans. NPA's consist of nonaccrual loans, loans with modified terms and OREO. Total NPA's increased 63% to $63.6 million at December 31, 1996, as compared to $39.0 million at December 31, 1995. The ratio of the allowance for loan and lease losses to nonaccrual loans decreased to 38.9% at December 31, 1996 from 44.3% at December 31, 1995. NPA's as a percentage of total assets were 2.64% and 1.55% at December 31, 1996 and 1995, respectively. 58 The Company believes the overall increase in NPA's was primarily a result of the acquisition of a portfolio of sub-prime residential mortgage loans by SPB late in 1995. Nonaccrual loans in the acquired portfolio increased to $18.2 million from $0.6 million at December 31, 1996 and 1995, respectively. Although the levels of nonaccrual loans has increased, actual losses from the acquired portfolio have been minor at $337,000 and $0 in 1996 and 1995, respectively. The Company considered the level of NPA's related to its other lending activities to be acceptable due to the attractive yield on these loans. The Company evaluated expected losses on nonaccrual loans in both periods on a loan-by-loan basis and determined that the allowance was adequate to cover both expected losses on nonaccrual loans and inherent losses in the remainder of the Company's loans held for investment portfolio. LIQUIDITY AND CAPITAL RESOURCES General The Company has an ongoing need for capital to finance its lending activities. This need is expected to increase as the volume of the Company's loan and lease originations and acquisitions increases. The Company's primary cash requirements include the funding of (i) loan and lease originations and acquisitions pending their pooling and sale, (ii) points and expenses paid in connection with the acquisition of wholesale loans, (iii) fees and expenses incurred in connection with its securitization programs, (iv) overcollateralization or reserve account requirements in connection with loans and leases pooled and sold, (v) ongoing administrative and other operating expenses and (vi) the costs of the Company's warehouse credit and repurchase facilities with certain financial institutions. The Company has financed its activities through warehouse lines of credit and repurchase facilities with financial institutions, equity and debt offerings in the capital markets, deposits or borrowings at SPB and securitizations. The Company believes that such sources will be sufficient to fund the Company's liquidity requirements for the foreseeable future. There can be no assurance that the Company will have access to the capital markets in the future or that financing will be available to satisfy the Company's operating and debt service requirements or to fund its future growth. SPB historically obtained the liquidity necessary to fund the Company's former residential mortgage banking operations and its own investing activities through deposits and, if necessary through borrowings under lines of credit and from the FHLB. At December 31, 1997 and 1996, SPB had maximum FHLB borrowings available equal to $45.8 million and $212.7 million, respectively. These borrowings must be fully collateralized by qualifying mortgage loans and may be in the form of overnight funds or term borrowings at SPB's option. The highest FHLB advance outstanding during the year ended December 31, 1997 was $140.5 million, with an average outstanding balance of $56.8 million. The outstanding balance of FHLB advances was $45.0 million at December 31, 1997. The highest FHLB advance outstanding during the year ended December 31, 1996 was $338.0 million, with an average outstanding balance of $188.8 million. The outstanding balance of FHLB advances was $140.5 million at December 31, 1996. The FHLB advances are secured by the investment in FHLB stock and certain real estate loans with a carrying value of $104.7 million and $228.5 million at December 31, 1997 and 1996, respectively. During 1993 and 1994, ICII contributed $26.0 million and $25.0 million, respectively, to SPB's capital in order to provide SPB with adequate capital to increase its deposits and borrowings. Since December 31, 1991, SPB has increased deposits as necessary so that deposits, together with cash, liquid assets, intercompany borrowings, borrowing under warehouse lines and FHLB borrowings have been sufficient to provide the funding for its loans held for sale and investment. As of December 31, 1997, SPB's deposit portfolio which consists primarily of certificate accounts increased approximately $100 million to $1.2 billion at December 31, 1997 from $1.1 billion at December 31, 1996. 59 SPB has been able to acquire new deposits through its local marketing strategies as well as domestic money markets. Additionally, SPB maintains liquidity in the form of cash and interest bearing deposits with financial institutions. The Company tracks on a daily basis all new loan applications by office and, based on historical closing statistics, estimates expected fundings. Cash management systems at SPB allow SPB to anticipate both funding and sales and adjust deposit levels and short-term investments against the demands of the Company's lending activities. For a further description of SPB's deposit generating activities and available funding, see Item 1, "Business--Funding and Securitizations." In addition to warehouse lines of credit and SPB borrowings, the Company has also accessed the capital markets to fund its operations. In the second quarter of 1992, the Company completed its initial public offering of 8,750,211 shares, raising net proceeds of $15.9 million. In April 1996, the Company completed a stock offering of 4,879,808 shares of its common stock at $13.00 per share for net proceeds of $59.2 million. In January 1994, the Company issued $90.0 million principal amount of the 9.75% Senior Notes. In October 1994, the Company repurchased $8.5 million of said notes. As of December 31, 1995, the Company was not in compliance with certain debt covenants related to these notes. Subsequent to December 31, 1995, these defaults were corrected. In March 1996, the Company reissued the $8.5 million of the notes which it purchased in October 1994. At December 31, 1996, $90.0 million of these notes were outstanding. In January 1997, the Company issued $200.0 million principal amount of the 9.875% Senior Notes and used a portion of the proceeds to purchase approximately $69.8 million of the 9.75% Senior Notes. The Company contributed $35.0 million of the proceeds to SPB in the form of subordinated indebtedness. In June 1996, SPFC completed an initial public offering of its common stock pursuant to which the Company was a selling shareholder. SPFC and the Company received net proceeds from such offering of approximately $53.8 million and $35.9 million, respectively. In November 1996, (i) SPFC issued $75.0 million of convertible subordinated notes due 2006 and (ii) the Company sold 1.0 million shares of SPFC common stock held by the Company for net proceeds of approximately $28.0 million. During the first quarter of 1997, the Company sold 370,000 shares of the common stock of SPFC at $16.63 per share, generating net proceeds of $6.2 million, resulting in a gain of $4.3 million, reducing its ownership of SPFC from 51.2% at December 31, 1996 to 49.4% at March 31, 1997. Therefore, the results of SPFC operations are now accounted for in the Company's financial statements under the equity method of accounting. During the third quarter ending September 30, 1997, the Company sold an additional 500,000 shares of SPFC common stock, generating net proceeds of $7.6 million and resulting in a gain of $5.2 million, further reducing its ownership percentage to 47.0%. As of December 31, 1997, the Company's ownership in SPFC common stock was 47.0%, excluding shares issuable upon exercise of options granted or to be granted pursuant to SPFC's stock option plans and shares issuable upon conversion of the $75.0 million of convertible subordinated notes, mentioned above. During the second quarter of 1997, ICII issued $70.0 million of Senior Notes under a proprietary product known as "ROPES." These securities can be redeemed at par upon their maturity or remarketed as 30 year capital instruments. Under current tax law, the interest payments on these securities are tax-deductible. The proceeds from the offering are being used for capital contributions to subsidiaries, strategic acquisitions, investments and general corporate purposes. During the fourth quarter of 1997, FMC completed an initial public offering of its common stock pursuant to which ICII was a selling stockholder. FMC and ICII and another selling stockholder received net proceeds from such offering of approximately $114.3 million, $59.7 million and $18.5 million, respectively. As of December 31, 1997, the Company's ownership percentage in FMC was 38.4%. 60 Limitations on Dividends Under the California Industrial Loan Law, a thrift and loan may declare dividends on its capital stock only if it has at least $750,000 of unimpaired capital stock plus additional capital stock of $50,000 for each branch office. In addition, no distribution of dividends is permitted unless: (i) such distribution would not exceed a thrift and loan's retained earnings, (ii) any payment would not result in a violation of the approved minimum capital to thrift and loan certificate of deposit ratio and (iii) after giving effect to the distribution, either (y) the sum of a thrift and loan's assets (net of goodwill, capitalized research and development expenses and deferred charges) would be not less than 125% of its liabilities (net of deferred taxes, deferred income and other deferred credits), and (z) current assets would be not less than current liabilities (except that if a thrift and loan's average earnings before taxes for the last two fiscal years had been less than average interest expense, current assets must be not less than 125% of current liabilities). Under California law, in order for capital (including surplus) of an institution to be included in calculating the leverage limitation described above, thrift institutions must amend their by-laws to restrict such capital from the payment of dividends. The amount of restricted capital maintained by a thrift also provides the basis for establishing the maximum amount that a thrift may lend to one single borrower. As of December 31, 1997 and December 31, 1996, $125.0 million and $80.5 million, respectively, of SPB's capital was so restricted. The FDIC has advised insured institutions that the payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. As a result of this policy, thrift and loans may find it difficult to pay dividends out of retained earnings from historical periods prior to the most recent fiscal year or to take advantage of earnings generated by extraordinary items. Under the Financial Institutions Supervisory Act and FIRREA, federal regulators also have authority to prohibit financial institutions from engaging in business practices which are considered to be unsafe or unsound. It is possible, depending upon the financial condition of a thrift and other factors, that such regulators could assert that the payment of dividends in some circumstances might constitute unsafe or unsound practices and prohibit payment of dividends even though technically permissible. Pursuant to FDICIA, SPB is prohibited from paying dividends if the payment of such dividends would cause the institution to become "undercapitalized." These limitations on the payment of dividends may restrict the Company's ability to utilize cash from SPB which may have been otherwise available to the Company for working capital. Lines of Credit and Warehouse Facilities The Company is dependent upon its ability to access warehouse lines of credit and repurchase facilities, in addition to its ability to continue to pool and sell loans and leases in the secondary market, in order to fund new originations and purchases. The Company has warehouse lines of credit and repurchase facilities under which it had available an aggregate of approximately $435 million in financing at December 31, 1997. Securitizations The Company currently pools and sells through securitization a substantial portion of the loans and leases which it originates or purchases, other than loans sold in whole loan sales and loans held by SPB for investment. Accordingly, adverse changes in the securitization market could impair the Company's ability to originate, purchase and sell loans or leases on a favorable or timely basis. Any such impairment could have a material adverse effect upon the Company's business and results of operations. In addition, the securitization market for many types of assets is relatively undeveloped and may be more susceptible to market fluctuations or other adverse changes than more developed capital markets. Finally, any delay in the sale of a loan or lease pool could cause the Company's earnings to fluctuate from quarter to quarter. 61 In a securitization, the Company recognizes a gain on sale of the loans or leases securitized upon the closing of the securitization but does not receive all of the cash representing such gain until it receives cash flows generated by the subordinate bonds or residual interests retained, which are payable over the actual life of the loans or leases securitized. As a result, such transactions may not generate cash flows to the Company for an extended period. In addition, in order to gain access to the secondary market for loans and leases, the Company has relied on monoline insurance companies to provide guarantees on outstanding senior interests in the special purpose entities to which such loans and leases are sold to enable it to obtain investment grade ratings for such interests. To a limited extent, the Company also relies on overcollateralization to support outstanding senior interests. However, any unwillingness of the monoline insurance companies to guarantee the senior interests in the Company's loan or lease pools could have a material adverse effect on the Company's financial position and results of operations. The pooling and servicing agreements that govern the distribution of cash flows from the loans included in securitizations require either (i) the establishment of a reserve account that may be funded with an initial cash deposit by the Company or (ii) the overcollateralization of the senior interests by using interest receipts on the loans to reduce the outstanding principal balance of the senior interests. The Company's interest in each reserve account and overcollateralized amount is reflected in the Company's financial statements as Retained Interest in Loan and Lease Securitizations. To the extent that a loss is realized on the loans, the loss will either be paid out of the reserve account or the overcollateralization amount or will be reduced to the extent that funds are available and will result in a reduction in the value of the any subordinate bonds or residual interests retained. The Company may be required either to repurchase or to replace loans which do not conform to the representations and warranties made by the Company in the pooling and servicing agreements entered into when the loans are pooled and sold through securitizations. Business Finance Lending. IBC primarily funds its lease originations through the use of an interim bank warehouse facility and a permanent revolving securitization facility. The securitization facility utilizes a trust structure and has a five-year revolving period, which expires in November 2002, and a three and one-half year amortization period. The IBC Lease Receivables Trust 1997-2 ("1997-2 Trust") was created pursuant to a pooling and servicing agreement among IBC, as originator, IBC Funding Corp. ("IFC"), IBC's wholly-owned special purpose subsidiary, as seller, and Norwest Bank Minnesota, as trustee and back-up servicer. IBC sells its lease originations to IFC under a sale and contribution agreement ("IBC Agreement"), which simultaneously assigns its rights in the leases to the Trust in exchange for trust certificates. The Class A certificates are sold to Triple-A One Funding Corp., a special purpose corporation administered by Capital Markets Assurance Corporation ("CAPMAC"), which issues commercial paper to fund its acquisitions. The Class A purchase limit under the facility is $250 million and as of December 31, 1997, there was approximately $173.9 million of Class A Certificates outstanding. 62 IFC assigns all receivables acquired pursuant to the IBC Agreement to the 1997-2 Trust. The transactions are accounted for as sales for reporting purposes under generally accepted accounting principles ("GAAP") and as financings for tax purposes. IFC assigns all its rights, title and interest in the leases, together with a security interest in the underlying leased equipment, which ownership and security interests have been perfected under the Uniform Commercial Code. Payments of the purchase price are made directly from payments by lessees on the lease receivables. IBC leases business equipment, including copying, data processing, communication, printing and manufacturing equipment, exclusively to business users. IBC was formed in May 1995 to combine the Company's existing leasing business with the assets acquired from FCAC. In October 1996, IBC expanded its business through the Avco Acquisition. For the years ended December 31, 1997 and December 31, 1996, IBC originated $151.3 million and $87.2 million of leases and securitized $213.6 million and $87.0 million of leases, respectively. Commercial Mortgage Lending. During the years ended December 31, 1997 and 1996, SPB securitized $203.1 million and $277.0 million of IPLD multi-family and commercial mortgage loans, respectively. Auto Marketing Network. AMN has a warehouse lending agreement with Greenwich Capital Financial Products ("GCFP") whereby GCFP provides warehouse funding for AMN's receivables and obligations. AMN's receivables and obligations are guaranteed by ICII. The warehouse lending agreement generally allows borrowings from GCFP in respect of eligible receivables. To the extent that the receivable becomes delinquent greater than 60 days or is defaulted on, the loan in respect of such receivable must generally be repaid. The warehouse lending agreement is AMN's principal source of financing. During the year ended December 31, 1997, AMN securitized $158.6 million of auto loans. Inflation The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Inflation affects the Company primarily through its effect on interest rates, since interest rates normally increase during periods of high inflation and decrease during periods of low inflation. ASSET QUALITY The provision for loan and lease losses increased to $39.0 million for the year ended December 31, 1997, as compared to $9.8 million and $5.5 million for the years ended December 31, 1996 and 1995, respectively. The increase in the provision for loan losses was primarily the result of an increase in nonaccrual loans and net charge-offs at AMN as well as the continuing change in the composition of the investment loan portfolio to higher-yielding loan products. Total nonaccrual loans increased to $70.6 million at December 31, 1997, as compared to $50.1 million and $31.0 million at December 31, 1996 and 1995, respectively. Total nonaccrual loans as a percentage of loans held 63 for investment were 5.36%, 4.55%, and 4.50% at December 31, 1997, 1996, and 1995, respectively. The following table summarizes net charge-offs by loan type.
YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 1995 -------- ------- ------- (IN THOUSANDS) Residential mortgage......................... $ (5,920) $(2,485) $(2,013) Multifamily.................................. (420) (1,095) (334) Commercial................................... (955) (465) (169) Leases....................................... (3,920) (3,142) (461) Consumer..................................... (19,262) (816) (118) -------- ------- ------- Net charge-offs............................ $(30,477) $(8,003) $(3,095) ======== ======= =======
The allocation of the Company's allowance for loan and lease losses and the percentage of loans and leases by loan type to total loans and leases as of December 31, 1997 is as follows:
PERCENTAGE OF LOANS AND LEASES ALLOCATED TO TOTAL LOANS ALLOWANCE AND LEASES --------- ---------------- Loans secured by real estate: Single family 1-4............................ $ 8,077 18.6% Multi-family................................. 779 1.3 Commercial................................... 312 0.1 ------- ----- 9,168 20.0 Leases......................................... 124 0.6 Installment loans.............................. 15,437 11.8 Franchise loans................................ 634 4.7 Asset based loans.............................. 4,840 36.8 Commercial loans............................... 3,656 26.1 ------- ----- 24,691 80.0 Unallocated.................................... 4,188 -- ------- ----- $38,047 100.0% ======= =====
Although the above table allocates the allowance for loan and lease losses by loan types, the total allowance is available to absorb losses on all loans and leases. The ratio of the allowance for loan and lease losses to total loans held for investment was 2.89%, 1.82%, and 1.99% at December 31, 1997, 1996, and 1995, respectively. The ratio of the allowance for loan losses to nonaccrual loans was 53.9%, 38.9%, and 44.3% at December 31, 1997, 1996, and 1995, respectively. Although nonaccrual loans increased for the year ended December 31, 1997 from December 31, 1996, the Company evaluated expected losses on nonaccrual loans on a loan-by-loan basis and determined that the allowance was adequate to cover both expected losses on nonaccrual loans and inherent losses in the remainder of the Company's loans held for investment portfolio. The Company considers the allowance for loan and lease losses to be adequate. The percentage of the allowance for loan and lease losses to nonaccrual loans does not remain constant due to the nature of the Company's portfolio of loans. The collateral for each nonperforming mortgage loan is analyzed by the Company to determine potential loss exposure, and in conjunction with other factors, this loss exposure contributes to the overall assessment of the adequacy of the allowance for loan and lease losses. On an ongoing basis, management monitors the loan portfolio and evaluates the adequacy of the allowance for loan losses. 64 In determining the adequacy of the allowance for loan and lease losses, management considers such factors as historical loan loss experience, underlying collateral values, evaluations made by bank regulatory authorities, assessment of economic conditions and other appropriate data to identify the risks in the loan portfolio. Loans deemed by management to be uncollectible are charged to the allowance for loan losses. Recoveries on loans previously charged off are credited to the allowance. Provisions for loan losses are charged to expense and credited to the allowance in amounts deemed appropriate by management based upon its evaluation of the known and inherent risks in the loan portfolio. Future additions to the allowance for loan losses may be necessary. For further information, see "Item 1 Business--Loans Held for Investment." ASSET/LIABILITY MANAGEMENT AND MARKET RISK General The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest- earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of falling interest rates, the net earnings of an institution with a positive gap theoretically may be adversely affected due to its interest- earning assets repricing to a greater extent than its interest-bearing liabilities. Conversely, during a period of rising interest rates, theoretically, the net earnings of an institution with a positive gap position may increase as it is able to invest in higher yielding interest-earning assets at a more rapid rate than its interest-bearing liabilities reprice. In addition, a positive gap may not protect an institution with a large portfolio of ARMs from increases in interest rates for extended time periods as such instruments generally have periodic and lifetime interest rate caps. The Company's ARMs are predominantly tied to LIBOR. Interest rates and the resulting cost of funds increases in a rapidly increasing rate environment could exceed the cap levels on these loan products and negatively impact net interest income. The Company has managed portfolio interest rate risk through the aggressive marketing and funding of adjustable rate loans, which generally reprice at least semi-annually and are generally indexed to LIBOR. As a result of this strategy, at December 31, 1997, the Company's total interest-earning assets maturing or repricing within one year exceeded its total interest-bearing liabilities maturing or repricing in the same time by $306.2 million, representing a positive cumulative gap ratio of 124.46%. The Company closely monitors its interest rate risk as such risk relates to operational strategies. The Company's cumulative gap position is at a level satisfactory to management and the Company is currently attempting to maintain a positive gap position in light of the current interest rate environment. However, there can be no assurances that the Company will be able to maintain its positive gap position or that its strategies will not result in a negative gap position in the future. The level of the movement of interest rates, up or down, is an uncertainty and could have a negative impact on the earnings of the Company. 65 Hedging The Company has implemented various hedging strategies with respect to its origination of loans and leases for sale. To date, this has included selling short comparable maturity United States Treasury securities and preselling loans through prefunding accounts in its securitizations. The Company is subject to the risk of rising interest rates between the time it commits to fund or purchase loans at a fixed price and the time it sells or securitizes those loans. To mitigate this risk, the Company enters into transactions designed to hedge interest rate risks, including mandatory and optional forward selling of mortgage-backed securities or United States Treasury securities, and buying and selling of futures on United States Treasury securities. The nature and quantity of these hedging transactions is and will be determined by the management of the Company based on various factors including market conditions and the expected volume of mortgage loan originations and purchases. The Company believes that it has implemented a cost-effective hedging program to provide a level of protection against interest rate risks. However, an effective hedging strategy is complex and no hedging strategy can completely insulate the Company from interest rate risks. In addition, hedging involves transaction and other costs which could increase as the period covered by the hedging protection increases. Such costs could also increase in periods of risk and fluctuating interest rates. Therefore, the Company may be prevented from effectively hedging its interest rate risks, without significantly reducing the Company's return on equity. The Company does not currently engage in the speculative use of trading activities, including derivatives and synthetic instruments or hedging activities in controlling interest rate risk on its portfolio of loans held for investment. Forward Contracts The Company sells mortgage-backed securities through forward delivery contracts with major dealers in such securities. At December 31, 1997, 1996, and 1995, the Company had $0, $143 million, and $279.2 million, respectively, in outstanding commitments to sell mortgage loans through mortgage-backed securities. These commitments allow the Company to enter into mandatory commitments when the Company notifies the investor of its intent to exercise a portion of the forward delivery contracts. The Company was obligated under mandatory commitments to deliver loans to such investors at December 31, 1997, 1996, and 1995 in the amounts of $0, $0, and $97.0 million, respectively. The credit risk of forward contracts relates to the counterparties' ability to perform under the contract. The Company evaluates counterparties based on their ability to perform prior to entering into any agreements. Options The Company may purchase put options to hedge against adverse movements in the value of the loans held for sale portfolio. The Company will realize a gain or loss upon the expiration or closing of the option transaction. When an option is exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of the security for a purchased put or call option is adjusted by the amount of premium received or paid. The risk in buying an option is limited to the cost of the premium. The Company had $0, $70 million, and $20 million notional amount of written call option contracts outstanding at December 31, 1997, 1996, and 1995, respectively. The Company received $0, $366,000, and $82,600 in premiums related to the options outstanding at December 31, 1997, 1996, and 1995, respectively. There were no option contracts exercised during the years ended December 31, 1997, 1996, and 1995. 66 Total Rate of Return Swaps During the year ended December 31, 1997, the Company has entered into total rate of return swap contracts for investment purposes with various investment bank counterparties, the provisions of which entitle the Company to receive the total return on various commercial loans in exchange for a floating payment of one month LIBOR plus a spread. As of December 31, 1997, the Company is party to total rate of return swap contracts with a total notional amount of $150.6 million, under which the Company was obligated to pay one month LIBOR plus a weighted average spread of 0.78%. The weighted average remaining life of these contracts was 37.1 months as of December 31, 1997. These contracts are off-balance sheet instruments. For the year ended December 31, 1997, the Company recognized $448,000 of interest income on total return swaps. Risk Management and Market Sensitive Instruments Interest rate risk is managed within a tight duration band, and credit risk is managed by maintaining high average quality ratings and diversified sector exposure within the securities and loan portfolios. In connection with its investment and risk management objectives, the Company also uses financial instruments whose market value is at least partially determined by, among other things, levels of or changes in domestic interest rates (short-term or long-term), prepayment rates, equity markets or credit ratings/spreads. Using financial modeling and other techniques, the Company regularly evaluates the appropriateness of investments relative to its management- approved investment guidelines and the business objective of the portfolios. The Company operated within these investment guidelines by maintaining a mix of loans and investments that diversifies its assets. The following discussion about the Company's risk management activities includes "forward-looking statements" that involve risk and uncertainties. Set forth below are management's projections of hypothetical net losses in fair value of shareholders' equity of the Company's market sensitive financial instruments if certain assumed changes in market rates and prices were to occur (sensitivity analysis). While the Company believes that the assumed market rate changes are reasonably possible in the near term, actual results may differ, particularly as a result of any management actions that would be taken to mitigate such hypothetical losses in fair value of shareholders' equity. Based on the Company's overall exposure to interest rate risk and equity price risk, the Company believes that these changes in market rates and prices would not materially affect the consolidated near-term financial position, results of operations or cash flows of the Company. Interest Rate Risk. Assuming immediate increases of 100 and 200 basis points in interest rates the net hypothetical loss in fair value of shareholders' equity related to financial and derivative instruments is estimated to be $3.9 million and $8.1 million (after tax), or 1.2% and 2.5%, of total shareholders' equity, respectively, at December 31, 1997. The Company believes that an interest rate shift of this magnitude represents a moderately adverse scenario. The effect of interest rate risk on potential near-term net income, cash flow and fair value was determined based on commonly used models. The models project the impact of interest rate changes on a wide range of factors, including duration, prepayment, put options and call options. Fair value was estimated based on the net present value of cash flows or duration estimates, using a representative set of likely future interest rate scenarios. Equity Price. Risk. The Company's available for sale equity securities includes the common stock of ICCMIC and IMH. Assuming an immediate decrease of 10% in equity prices for such equity securities, the hypothetical loss in fair value of shareholder's equity related equity securities is estimated to be $4.7 million after tax, (1.4% of total shareholders' equity at December 31, 1997). 67 REPRICING/MATURITY OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1997, which are anticipated by the Company to reprice or mature in each of the future time periods shown. The amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual terms of the asset or liability.
AT DECEMBER 31, 1997 --------------------------------------------------------------------------- MORE THAN MORE THAN MORE THAN MORE THAN MORE THAN 3 YEARS 5 YEARS MORE NON 3 MONTHS 3 MONTHS TO 6 MONTHS TO 1 YEAR TO TO TO THAN INTEREST OR LESS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS 10 YEARS BEARING TOTAL ---------- ----------- ----------- --------- --------- --------- -------- -------- ---------- Interest-earning assets: Cash.................. $ 50,597 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 50,597 Interest earning deposits............. 103,738 -- -- -- -- -- -- -- 103,738 Trading securities.... 120,904 -- -- -- -- -- -- -- 120,904 Securities available for sale............. 107,727 -- -- -- -- -- -- -- 107,727 FHLB stock............ 5,646 -- -- -- -- -- -- -- 5,646 Mortgage loans held for sale............. 162,571 -- -- -- -- -- -- -- 162,571 Loans held for investment, net of unearned discount and deferred loan fees(1).............. 930,616 60,715 15,237 135,765 53,663 16,838 62,052 29,879 1,304,765 ---------- --------- --------- -------- -------- --------- -------- -------- ---------- Total interest-earning assets............... 1,481,799 60,715 15,237 135,765 53,663 16,838 62,052 29,879 1,855,948 Less: Allowance for loan losses............... -- -- -- -- -- -- -- (38,047) (38,047) ---------- --------- --------- -------- -------- --------- -------- -------- ---------- Net interest-earning assets............... 1,481,799 60,715 15,237 135,765 53,663 16,838 62,052 (8,168) 1,817,901 Non-interest-earning assets............... -- -- -- -- -- -- -- 284,193 284,193 ---------- --------- --------- -------- -------- --------- -------- -------- ---------- Total assets.......... $1,481,799 $ 60,715 $ 15,237 $135,765 $ 53,663 $ 16,838 $ 62,052 $276,025 $2,102,094 ========== ========= ========= ======== ======== ========= ======== ======== ========== Interest-bearing liabilities: Deposits.............. $ 408,146 $ 345,418 $ 308,157 $ 86,566 $ 24 $ -- $ 7,711 $ -- $1,156,022 Borrowings from FHLB.. 45,000 -- -- -- -- -- -- -- 45,000 Other borrowings...... 144,841 -- -- -- -- -- -- -- 144,841 Senior Notes.......... -- -- -- -- -- 219,813 -- -- 219,813 Remarketed Par Securities........... -- -- -- -- 70,000 -- -- -- 70,000 ---------- --------- --------- -------- -------- --------- -------- -------- ---------- Total interest-bearing liabilities.......... 597,987 345,418 308,157 86,566 70,024 219,813 7,711 -- 1,635,676 Non-interest bearing liabilities.......... -- -- -- -- -- -- -- 142,485 142,485 Shareholders' equity.. -- -- -- -- -- -- -- 323,933 323,933 ---------- --------- --------- -------- -------- --------- -------- -------- ---------- Total liabilities and shareholders' equity. $ 597,987 $ 345,418 $ 308,157 $ 86,566 $ 70,024 $ 219,813 $ 7,711 $466,418 $2,102,094 ========== ========= ========= ======== ======== ========= ======== ======== ========== Interest rate sensitivity gap(2)... $ 883,812 $(284,703) $(292,920) $ 49,199 $(16,361) $(202,975) $ 54,341 $ 29,879 $ 220,272 Cumulative interest sensitivity gap...... $ 883,812 $ 599,109 $ 306,189 $355,388 $339,027 $ 136,052 $190,393 $220,272 Cumulative interest sensitivity gap as a percentage of total assets............... 42.04% 28.50% 14.57% 16.91% 16.13% 6.47% 9.06% Cumulative net interest earning assets as a percent of interest bearing liabilities.......... 247.80% 163.50% 124.46% 126.56% 124.08% 108.36% 111.64% 113.47%
- ------- (1) For purposes of the gap analysis, unearned discount and deferred fees are pro rated for loans receivable. (2) Interest sensitivity gap represents the difference between net interest- earning assets and interest-bearing liabilities. 68 Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARMs, have features which restrict changes in interest rates on a short term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those reflected in the table. Finally, the ability of many borrowers to service their ARMs may decrease in the event of an interest rate increase. AVERAGE BALANCE SHEET The following tables set forth certain information relating to the Company for the year ended December 31, 1997, 1996, and 1995. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average month-end balances. Management does not believe that the use of average monthly balances instead of average daily balances has caused any material differences in the information presented. The average balance of loans receivable includes loans on which the Company has discontinued accruing interest. The yields and costs include fees which are considered adjustments to yields.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------- 1997 1996 1995 --------------------------- --------------------------- --------------------------- YIELD/ YIELD/ YIELD/ AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST ---------- -------- ------- ---------- -------- ------- ---------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS: Interest-earning assets: Investments and interest-earning deposits.............. $ 225,122 $ 22,912 10.18% $ 143,067 $ 9,862 6.89% $ 131,277 $ 5,641 4.30% FHLB stock............. 10,334 619 5.99 15,853 945 5.96 19,720 989 5.02 Loans held for sale.... 597,519 75,082 12.57 1,140,790 101,170 8.87 361,156 16,286 4.51 Loans held for investment, net(1).... 1,119,940 126,646 11.31 779,522 87,072 11.17 1,091,536 103,958 9.52 Capitalized excess servicing fees receivable and retained interest..... 30,619 2,678 8.75 53,052 8,422 15.87 22,257 2,608 11.72 ---------- -------- ---------- -------- ---------- -------- Total interest- earning assets...... 1,983,534 227,937 11.49 2,132,284 207,471 9.73 1,625,946 129,482 7.96 ---------- -------- ---------- -------- ---------- -------- Non interest-earning assets................. 191,573 163,055 45,167 ---------- ---------- ---------- Total assets......... $2,175,107 $2,295,339 $1,671,113 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Deposits............... $1,218,123 $ 71,014 5.83% $1,063,799 $ 60,999 5.73% $ 867,162 $ 51,565 5.95% Borrowings from Imperial Bank......... -- -- -- 3,311 302 9.12 -- -- -- Borrowings from FHLB... 57,154 3,327 5.82 201,693 12,055 5.98 310,425 19,420 6.26 Other borrowings....... 327,076 26,277 8.03 645,313 52,050 8.07 251,684 16,363 6.50 Senior Notes........... 209,672 21,671 10.34 88,365 8,955 10.13 81,500 8,380 10.28 Remarketed Par Securities............ 39,101 4,305 11.01 -- -- -- -- -- -- Convertible subordinated debentures............ -- -- -- 10,068 675 6.70 -- -- -- ---------- -------- ---------- -------- ---------- -------- Total interest- bearing liabilities(2)...... 1,851,126 126,594 6.84 2,012,549 135,036 6.71 1,510,771 95,728 6.34 ---------- -------- ---------- -------- ---------- -------- Non interest-bearing liabilities............ 78,117 115,962 88,306 Shareholders' equity.... 245,864 166,828 72,036 ---------- ---------- ---------- Total liabilities and shareholders' equity.............. $2,175,107 $2,295,339 $1,671,113 ========== ========== ========== Net interest rate spread................. $101,343 4.65% $ 72,435 3.02% $ 33,754 1.62% ======== ======== ======== Net interest margin(2).. 5.11% 3.40% 2.08% Ratio of interest- earning assets to interest-bearing liabilities............ 107.15% 105.95% 107.62%
- ------- (1) Net of deferred income and the allowance for loan losses, includes nonaccrual loans. (2) Average interest cost and net interest margin excluding the interest expense from the Senior Notes held at ICII and the convertible subordinated debentures held at SPFC during the years ended December 31, 1997, 1996 and 1995 were 6.39% and 6.21%, 6.55% and 3.85%, 6.11% and 2.59%, respectively. 69 ANALYSIS OF NET INTEREST INCOME Net interest income represents the difference between income on interest- earning assets and expense on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them, respectively. Rate/Volume Analysis The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's net interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), (iii) changes in interest due to both rate and volume and (iv) the net change.
YEAR ENDED DECEMBER 31, ----------------------- 1997 OVER 1996 1996 OVER 1995 --------------------------------------- --------------------------------------- VOLUME RATE RATE/VOLUME TOTAL VOLUME RATE RATE/VOLUME TOTAL -------- ------- ----------- -------- -------- ------- ----------- -------- (IN THOUSANDS) Increase/(decrease) in: Investments and interest-bearing deposits.............. $ 5,654 $ 4,707 $ 2,689 $ 13,050 $ 507 $ 3,400 $ 314 $ 4,221 FHLB stock............. (329) 5 (2) (326) (194) 185 (35) (44) Loans held for sale.... (48,188) 42,209 (20,109) (26,088) 35,161 15,746 33,977 84,884 Loans held for investment, net....... 38,025 1,091 458 39,574 (29,704) 18,010 (5,192) (16,886) Capitalized excess servicing fees receivable............ (3,560) (3,777) 1,593 (5,744) 3,609 924 1,281 5,814 -------- ------- -------- -------- -------- ------- ------- -------- Total interest income.............. (8,398) 44,235 (15,371) 20,466 9,379 38,265 30,345 77,989 -------- ------- -------- -------- -------- ------- ------- -------- Deposits............... 8,843 1,064 108 10,015 11,700 (1,908) (358) 9,434 Borrowings from Imperial Bank......... (302) -- -- (302) 302 -- -- 302 FHLB borrowings........ (8,643) (323) 238 (8,728) (6,807) (869) 311 (7,365) Other borrowings....... (25,682) (258) 167 (25,773) 25,586 3,951 6,150 35,687 Senior Notes........... 12,288 186 242 12,716 706 (122) (9) 575 Remarketed Par Securities............ 4,305 -- -- 4,305 -- -- -- -- Convertible Notes...... (675) -- -- (675) 675 -- -- 675 -------- ------- -------- -------- -------- ------- ------- -------- Total interest expense............. (9,866) 669 755 (8,442) 32,162 1,052 6,094 39,308 -------- ------- -------- -------- -------- ------- ------- -------- Change in net interest income................. $ 1,468 $43,566 $(16,126) $ 28,908 $(22,783) $37,213 $24,251 $ 38,681 ======== ======= ======== ======== ======== ======= ======= ========
RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted a new accounting standard on January 1, 1997, and adopted additional accounting and disclosure standards on either December 31, 1997 or January 1, 1998. For a description of these standards and the effect, if any, adoption has had or will have on the Company's consolidated financial statements, see "Note 3 of Notes to Consolidated Financial Statements." 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." 70 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report.............................................. 72 Consolidated Balance Sheets............................................... 73 Consolidated Statements of Income......................................... 74 Consolidated Statements of Changes in Shareholders' Equity................ 75 Consolidated Statements of Cash Flows..................................... 76 Notes to Consolidated Financial Statements................................ 78 All supplemental schedules are omitted as inapplicable or because the required information is included in the consolidated financial statements or notes thereto. Index to Southern Pacific Funding Corporation Consolidated Financial Statements............................................................... 123
71 INDEPENDENT AUDITORS' REPORT The Board of Directors Imperial Credit Industries, Inc.: We have audited the accompanying consolidated balance sheets of Imperial Credit Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Imperial Credit Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Los Angeles, California January 27, 1998 72 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, --------------------- 1997 1996 ---------- ---------- ASSETS ------ Cash..................................................... $ 50,597 $ 74,247 Interest bearing deposits................................ 103,738 3,369 Investment in Federal Home Loan Bank stock............... 5,646 17,152 Securities held for trading, at market................... 120,904 25,180 Securities available for sale, at market................. 107,727 59,116 Loans held for sale...................................... 162,571 940,096 Loans held for investment, net........................... 1,266,718 1,068,599 Purchased and originated servicing rights................ 4,731 14,887 Capitalized excess servicing fees receivable............. -- 23,142 Retained interest in loan and lease securitizations...... 43,105 49,548 Interest-only and residual certificates.................. -- 87,017 Accrued interest receivable.............................. 9,132 13,847 Premises and equipment, net.............................. 9,513 12,442 Other real estate owned, net............................. 10,905 12,214 Goodwill................................................. 35,607 38,490 Investment in Southern Pacific Funding Corporation ...... 65,303 -- Investment in Franchise Mortgage Acceptance Company...... 53,099 -- Other assets............................................. 52,798 31,293 ---------- ---------- Total assets........................................... $2,102,094 $2,470,639 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Deposits................................................. $1,156,022 $1,069,184 Borrowings from Federal Home Loan Bank................... 45,000 140,500 Other borrowings......................................... 144,841 694,352 Remarketed Par Securities................................ 70,000 -- Senior Notes............................................. 219,813 88,209 Convertible subordinated debentures...................... -- 75,000 Accrued interest payable................................. 21,484 14,034 Accrued income taxes payable............................. 60,528 55,327 Minority interest in consolidated subsidiaries........... 3,174 54,936 Other liabilities........................................ 57,299 39,589 ---------- ---------- Total liabilities...................................... 1,778,161 2,231,131 ---------- ---------- Commitments and contingencies (note 25) Shareholders' equity: Preferred stock, 8,000,000 shares authorized; none issued or outstanding.......................................... -- -- Common stock, no par value. Authorized 80,000,000 shares; 38,791,439 and 38,291,112 shares issued and outstanding at December 31, 1997 and 1996, respectively ............ 147,109 145,521 Retained earnings........................................ 174,898 88,977 Unrealized gain on securities available for sale, net.... 1,926 5,010 ---------- ---------- Total shareholders' equity............................. 323,933 239,508 ---------- ---------- Total liabilities and shareholders' equity............. $2,102,094 $2,470,639 ========== ==========
See accompanying notes to consolidated financial statements 73 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, --------------------------- 1997 1996 1995 -------- -------- -------- REVENUE: Gain on sale of loans and leases................. $ 67,723 $ 88,156 $ 39,557 -------- -------- -------- Interest on loans and leases..................... 201,728 188,242 120,244 Interest on investments.......................... 23,531 10,807 6,630 Interest on other finance activities............. 2,678 8,422 2,608 -------- -------- -------- Total interest income.......................... 227,937 207,471 129,482 Interest on deposits............................. 71,014 60,999 51,565 Interest on other borrowings .................... 29,604 64,407 35,783 Interest on long term debt....................... 25,976 9,630 8,380 -------- -------- -------- Total interest expense......................... 126,594 135,036 95,728 -------- -------- -------- Net interest income............................ 101,343 72,435 33,754 Provision for loan and lease losses.............. 38,951 9,773 5,450 -------- -------- -------- Net interest income after provision for loan and lease losses.................................... 62,392 62,662 28,304 -------- -------- -------- Loan servicing income............................ 10,743 1,680 12,718 Loss on sale of securities....................... (936) -- -- Equity in net income of Southern Pacific Funding Corporation..................................... 25,869 -- -- Equity in net loss of Franchise Mortgage Acceptance Company.............................. (3,050) -- -- Investment banking fees.......................... 7,702 -- -- Management fees.................................. 5,810 3,347 38 Gain on sale of servicing rights................. -- 7,591 3,578 Gain on sale of Franchise Mortgage Acceptance Company stock................................... 48,924 -- -- Gain on sale of Southern Pacific Funding Corporation stock............................... 9,488 51,243 -- Gain on sale of stock by subsidiary.............. 43,213 31,447 -- Gain on sale of Impac Mortgage Holdings stock.... 11,496 -- -- Gain on termination of REIT advisory agreement... 19,046 -- -- Other income..................................... 1,140 10,807 1,114 -------- -------- -------- Total other income............................. 179,445 106,115 17,448 -------- -------- -------- Total revenue.................................... 309,560 256,933 85,309 -------- -------- -------- EXPENSES: Personnel expense................................ 60,830 48,355 34,053 Amortization of PMSR's and OMSR's................ 3,089 1,121 3,986 Occupancy expense................................ 4,319 4,653 3,904 Data processing expense.......................... 1,503 2,163 1,461 Net expenses of other real estate owned.......... 6,527 7,014 1,913 Professional services............................ 10,303 9,559 2,769 FDIC insurance premiums.......................... 250 327 1,137 Telephone and other communications............... 2,926 2,917 2,509 Restructuring provision--exit from mortgage banking operations.............................. -- 3,800 -- Loss on restructuring of loan to Dabney/Resnick/Imperial, LLC.................... 3,709 -- -- Provision for loss on repurchase of former mortgage banking loans.......................... 5,400 -- -- Amortization of Goodwill......................... 23,260 1,875 321 General and administrative expense............... 28,268 17,265 9,127 -------- -------- -------- Total expenses................................. 150,384 99,049 61,180 -------- -------- -------- Income before income taxes, minority interest and extraordinary item.......................... 159,176 157,884 24,129 Income taxes..................................... 58,747 69,874 10,144 Minority interest in income (loss) of consolidated subsidiaries....................... 10,513 12,026 (208) -------- -------- -------- Income before extraordinary item................. 89,916 75,984 14,193 Extraordinary item--Loss on early extinguishment of debt, net of income taxes.................... (3,995) -- -- -------- -------- -------- Net income..................................... $ 85,921 $ 75,984 $ 14,193 ======== ======== ======== BASIC INCOME PER SHARE: Income before extraordinary item................. $ 2.33 $ 2.11 $ 0.45 Extraordinary item--Loss on early extinguishment of debt, net of income taxes.................... (0.10) -- -- -------- -------- -------- Net Income per common share, basic............... $ 2.23 $ 2.11 $ 0.45 ======== ======== ======== DILUTED INCOME PER SHARE: Income before extraordinary item................. $ 2.20 $ 1.95 $ 0.40 Extraordinary item--Loss on early extinguishment of debt, net of income taxes.................... (0.10) -- -- -------- -------- -------- Net Income per common share, diluted............. $ 2.10 $ 1.95 $ 0.40 ======== ======== ========
See accompanying notes to consolidated financial statements. 74 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
UNREALIZED GAIN ON COMMON SECURITIES TOTAL SHARES COMMON RETAINED AVAILABLE SHAREHOLDERS' OUTSTANDING STOCK EARNINGS FOR SALE, NET EQUITY ----------- -------- -------- ------------- ------------- (IN THOUSANDS) Balance, December 31, 1994................... 9,621 $ 51,156 $ 24,717 $ -- $ 75,873 Exercise of stock options................ 147 825 -- -- 825 3-for-2 stock split..... 4,810 -- -- -- -- Increase in unrealized gain on securities available for sale, net.................... -- -- -- 3,211 3,211 Net income, 1995........ -- -- 14,193 -- 14,193 ------ -------- -------- ------ -------- Balance, December 31, 1995................... 14,578 51,981 38,910 3,211 94,102 Exercise of stock options................ 868 1,671 -- -- 1,671 1-for-10 stock dividend. 1,460 25,917 (25,917) -- -- 2-for-1 stock split..... 18,952 -- -- -- -- Issuance of common stock.................. 2,440 59,228 -- -- 59,228 Increase in unrealized gain on securities available for sale, net.................... -- -- -- 1,799 1,799 Tax benefit from exercise of stock options................ -- 6,851 -- -- 6,851 Retirement of stock..... (7) (127) -- -- (127) Net income, 1996........ -- -- 75,984 -- 75,984 ------ -------- -------- ------ -------- Balance, December 31, 1996................... 38,291 145,521 88,977 5,010 239,508 Exercise of stock options................ 530 1,332 -- -- 1,332 Decrease in unrealized gain on securities available for sale, net.................... -- -- -- (3,084) (3,084) Tax benefit from exercise of stock options................ -- 807 -- -- 807 Retirement of stock..... (30) (551) -- -- (551) Net income, 1997........ -- -- 85,921 -- 85,921 ------ -------- -------- ------ -------- Balance, December 31, 1997................... 38,791 $147,109 $174,898 $1,926 $323,933 ====== ======== ======== ====== ========
See accompanying notes to consolidated financial statements. 75 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (IN THOUSANDS) Cash flows from operating activities: Net income............................. $ 85,921 $ 75,984 $ 14,193 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan and lease losses.. 38,951 9,773 5,450 Recovery for operational losses...... -- -- (1,819) Restructuring Provision.............. -- 3,800 -- Loss on restructuring of Dabney/Resnick/Imperial, LLC........ 3,709 -- -- Provision for loss on repurchase of former mortgage banking loans....... 5,400 -- -- Depreciation......................... 4,523 3,483 2,657 Amortization of goodwill............. 23,260 1,875 321 Amortization of PMSR's and OMSR's.... 3,089 1,121 3,986 Accretion of discount................ (2,678) (8,350) (2,608) Gain on sale of servicing rights..... -- (7,591) (3,578) Gain on sale of loans and leases..... (67,723) (88,156) (39,557) Gains on sale of SPFC stock.......... (9,488) (82,690) -- Gain on sale of FMC stock............ (92,137) -- -- Gain on sale of IMH stock............ (11,496) -- -- Gain on termination of REIT advisory agreement........................... (19,046) -- -- Equity in net earnings of SPFC....... (25,869) -- -- Equity in net loss of FMC............ 3,050 -- -- Loss on sale of OREO................. 4,453 2,843 -- Loss on sale of securities........... 936 -- -- Writedowns of capitalized excess servicing........................... -- 4,675 -- Writedowns of fixed assets........... -- 886 -- Stock option compensation expense.... -- -- 653 Writedowns on other real estate owned............................... 892 3,252 2,085 Provision for deferred income taxes.. 6,191 22,104 2,120 Originations of loans held for sale.. (1,232,100) (1,939,200) (2,813,378) Purchases of loans held for sale..... -- -- (159,122) Purchase of trading securities....... (126,083) (25,180) -- Sales of trading securities.......... 48,369 -- -- Sales and collections on loans held for sale............................ 1,309,323 2,159,055 1,923,733 Net change in accrued interest receivable.......................... (311) (3,683) (4,247) Net change in retained interest in loan and lease securitizations...... -- (21,481) (14,012) Net change in capitalized excess servicing........................... -- 33,234 (37,500) Net change in other assets........... 78,528 (210,969) (51,644) Net change in other liabilities...... 28,063 33,953 (1,436) ----------- ----------- ----------- Net cash provided by (used in) operating activities.................. 57,727 (31,262) (1,173,703) ----------- ----------- ----------- Cash flows from investing activities: Net (increase) decrease in interest bearing deposits.................... (100,369) 264,407 (257,176) Purchase of servicing rights......... -- -- (8,128) Proceeds from sale of servicing rights.............................. 2,213 10,011 12,815 Proceeds from sale of other real estate owned........................ 21,171 1,202 7,072 Purchase of securities available for sale................................ (42,938) (48,553) -- Sales of securities available for sale................................ 5,404 -- -- Net change in loans held for investment.......................... (206,172) (27,651) 566,693 Purchases of premises and equipment.. (6,839) (5,442) (1,367) Proceeds from sale of SPFC stock..... 13,707 64,625 -- Proceeds from sale of FMC stock...... 59,731 -- -- Proceeds from sale of IMH stock...... 11,950 -- -- Purchases of Federal Home Loan Bank stock............................... (3,634) (7,652) (3,933) Redemption of stock in Federal Home Loan Bank .......................... 15,140 13,250 -- Cash utilized for acquisitions....... (124,488) (20,020) (175,015) ----------- ----------- ----------- Net cash (used in) provided by investing activities.................. (355,124) 244,177 140,961 ----------- ----------- -----------
76 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 --------- --------- ---------- (IN THOUSANDS) Cash flows from financing activities: Net increase (decrease) in deposits........ $ 86,838 $ (23,805) $ 158,369 Net increase (decrease) in borrowings from Imperial Bank............................. -- (5,000) 5,000 Advances from Federal Home Loan Bank....... 50,000 434,000 347,000 Repayments of advances from Federal Home Loan Bank................................. (145,500) (483,500) (452,000) Proceeds from issuance of convertible subordinated debentures................... -- 72,162 -- Net change in other borrowings............. 143,505 (181,463) 875,815 Issuance of bonds.......................... -- -- 111,995 Repayment of bonds......................... -- (111,995) -- Proceeds from issuance of Senior Notes due 2007...................................... 194,500 -- -- Proceeds from issuance of Remarketed Par Securities................................ 68,075 -- -- Repayments of Senior Notes due 2004........ (73,241) -- -- Proceeds from resale of Senior Notes due 2004...................................... -- 7,384 -- Proceeds from issuance of common stock..... -- 59,228 -- Net change in minority interest............ (51,762) 53,484 -- Proceeds from exercise of stock options.... 1,332 1,671 825 --------- --------- ---------- Net cash provided by (used in) financing activities.................................. 273,747 (177,834) 1,047,004 Net change in cash........................... (23,650) 35,081 14,262 Cash at beginning of year.................... 74,247 39,166 24,904 --------- --------- ---------- Cash at end of year.......................... $ 50,597 $ 74,247 $ 39,166 ========= ========= ==========
See accompanying notes to consolidated financial statements. 77 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1. ORGANIZATION Imperial Credit Industries, Inc., incorporated in 1986 in the State of California, is 23.0% owned by Imperial Bank. In 1991 Imperial Bank recapitalized the Company to conduct a full service mortgage banking operation. The consolidated financial statements include Imperial Credit Industries, Inc. ("ICII"), its significant wholly-owned operating subsidiaries, significant majority-owned operating subsidiaries and significant equity investments in two publicly traded companies (collectively the "Company"). The significant wholly-owned subsidiaries include Southern Pacific Bank ("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit Advisors, Inc. ("ICAI"), Auto Marketing Network ("AMN"), Imperial Credit Commercial Asset Management Corporation, ("ICCAMC") and Imperial Credit Worldwide ("ICW"). The significant operating majority owned consolidated subsidiary is Imperial Capital Group ("ICG") which is 60% owned by the Company and 40% owned by outside private investors. The significant equity investments in publicly traded companies are Southern Pacific Funding Corporation ("SPFC") NYSE Symbol: SFC, and Franchise Mortgage Acceptance Company ("FMC") NASDAQ Symbol: FMAX. Both SPFC and FMC were former consolidated subsidiaries of the Company. All material intercompany balances and transactions with consolidated subsidiaries have been eliminated. 2. STRATEGIC FOCUS AND ACQUISITIONS Strategic Divestitures In 1995, the Company began to diversify away from the conforming residential mortgage lending business, the Company's traditional focus, and into other select lending businesses. The Company expanded several existing businesses and commenced several new businesses, including non-conforming residential mortgage banking, commercial mortgage banking, business lending and consumer lending. The Company's loans and leases by sector consist primarily of the following: sub-prime residential mortgage banking; commercial mortgage banking and income producing property loans; business lending--equipment leasing, asset-based lending, and participation in syndicated commercial lending; consumer loans--sub-prime auto loans and Title I home improvement loans. The Company solicits loans and leases from brokers on a wholesale and portfolio basis and originates loans directly from borrowers. The majority of the Company's loans and leases, other than those held by SPB for investment, are sold in secondary markets through securitizations and whole loan sales. Impac Mortgage Holdings, Inc. and Impac Funding Corporation During 1995, the Company sold its mortgage conduit operations and SPB's warehouse lending operations to Impac Mortgage Holdings, Inc. ("IMH"), formerly Imperial Credit Mortgage Holdings, Inc. In exchange for these assets, the Company received approximately 11.8% of the common stock of IMH. Additionally, ICAI entered into a management agreement with IMH pursuant to which ICAI advised upon the day-to-day operations of IMH and for which it was paid a management fee. During 1997, the Company sold its common stock interest in IMH for a gain of approximately $11.5 million. In December 1997, IMH and the Company negotiated a termination of the management agreement (the "Termination Agreement"). The consideration received by the Company pursuant to the Termination Agreement was $44 million, comprised of 2,009,310 shares of IMH common stock and certain securitization-related assets. Additionally, the Company agreed to cancel its note receivable from ICI Funding Corporation ("ICIFC"), a former subsidiary of ICII which is now known as Impac Funding Corporation and is the origination unit of IMH, in the amount of $29.1 million. The IMH common stock and the securitization-related assets were recorded by the Company at their estimated fair values of approximately $35.0 million and $13.1 million, respectively, for a total of $48.1 million. This amount, when netted with the $29.1 million cancellation of the ICIFC note receivable resulted in the gain on termination of the management agreement of approximately $19.0 million. 78 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) During the first quarter of 1997, the Company disposed of its common stock interest in ICIFC, at a loss of $100,000. At December 31, 1996, the Company owned 100% of the common stock of ICIFC which represented only a 1% economic interest as IMH owned all of the non-voting preferred stock of ICIFC which gave IMH a 99% economic interest in ICIFC. The Company's disposal of its remaining economic interest in ICIFC concluded its exit from the original mortgage banking business. Franchise Mortgage Acceptance Company On June 30, 1995, the Company completed the acquisition of certain net assets from Greenwich Capital Financial Products, Inc. and formed Franchise Mortgage Acceptance Company LLC ("FMAC"), a limited liability company, in which the Company had a 66.7% ownership interest. The acquisition was accounted for as a purchase and the purchase price of $7.6 million, which included $3.8 million in contingent consideration for loans in the pipeline, was allocated to the net assets acquired based on their fair value resulting in goodwill of approximately $4.0 million. The Company's franchise lending business was conducted through FMAC until November 1997, at which time FMAC merged into FMC, a Delaware corporation formed for the purpose of succeeding to the business of FMAC, and FMC completed an initial public offering of its common stock. The Company sold into FMC's initial public offering 3,568,175 shares at $18.00 per share generating net proceeds of $59.7 million and a gain of $48.9 million. Additionally, the Company recognized a gain of $43.2 million resulting from the adjustment in the basis of its investment in FMC due to the offering and its reduced ownership percentage. Upon the completion of FMC's initial public offering and at December 31, 1997, the Company's percentage ownership of FMC common stock was 38.4%. Accordingly, FMC's operating results are no longer consolidated with those of the Company and the Company's investment in FMC is accounted for under the equity method. Southern Pacific Funding Corporation For the year ended December 31, 1996, a substantial portion of the Company's operations were conducted through its sub-prime residential lending subsidiary, Southern Pacific Funding Corporation ("SPFC"). In June 1996, SPFC completed an initial public offering of its common stock pursuant to which ICII was a selling shareholder. SPFC and the Company sold 5.2 million shares and 3.5 million shares, respectively, at $11.33 per share. In a secondary offering, the Company sold 1.5 million SPFC shares at $19.83 per share. The Company recognized a gain on sale of the SPFC shares it owned of $51.2 million, which is net of offering expenses and the Company's cost basis in the shares. The Company also recognized a gain of $31.4 million related to the stock sold by SPFC. The gain related to the stock sold by SPFC is based on the difference between the Company's equity ownership in SPFC after the sale and such equity ownership prior to the sale, using the Company's respective SPFC ownership percentages. During the first quarter of 1997, the Company sold 370,000 shares of SPFC common stock at $16.63 per share generating net proceeds of $6.2 million and a gain of $4.3 million. Such transaction reduced the Company's ownership percentage in SPFC from 51.2% at December 31, 1996, to 49.4% at March 31, 1997. Accordingly, SPFC's operating results are no longer consolidated with those of the Company and the Company's investment in SPFC is accounted for under the equity method. During the third quarter of 1997, the Company sold an additional 500,000 shares of SPFC common stock generating net proceeds of $7.6 million and a gain of $5.2 million. At December 31, 1997, the Company's ownership interest in SPFC was 47.0%. Imperial Business Credit The Company expanded its commercial equipment leasing business conducted by IBC through the acquisitions of substantially all of the assets of First Concord Acceptance Corporation ("FCAC") for a purchase price of $21.4 million in May 1995 and all of the assets of Avco Leasing Services, Inc and Avco Financial Services of Southern California, Inc. (together "Avco") for approximately $94.8 million in October 1996. 79 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) These acquisitions were accounted for as purchases and the purchase prices were allocated to the net assets acquired based on their fair value resulting in goodwill of $1.2 million and $12.5 million for the FCAC and Avco transactions, respectively. IBC's lease originations were $151.3 million and $87.2 million, and it securitized and sold $213.6 million and $87.0 million during the years ended December 31, 1997, and 1996, respectively. Coast Business Credit In September 1995, the Company began making asset-based loans to middle market companies located mainly in California by acquiring CoastFed Business Credit. This entity, now a division of SPB, was renamed Coast Business Credit ("CBC"). The acquisition was accounted for as a purchase and the purchase price of $150 million was allocated to the net assets acquired based on their fair value resulting in goodwill of approximately $16 million. At December 31, 1997 and 1996, CBC had total commitments of $803.3 million and $547.7 million, of which $484.8 million and $288.5 million of loans were outstanding, respectively. Imperial Capital Group During the fourth quarter of 1996, the Company continued to diversify and strategically deploy its capital by announcing the closing of its investment in Dabney/Resnick/Imperial LLC ("DRI") (formerly Dabney/Resnick, Inc.), an investment banking firm. DRI was headquartered in Beverly Hills, California with offices in Chicago, Illinois, Dallas, Texas, and Sun Valley, Idaho, and offered full service investment banking, brokerage, and asset management services. DRI managed and underwrote public offerings of securities, arranged private placements and provided advisory and other services in connection with mergers, acquisitions, restructurings, and other financial transactions. The Company acquired a 1% interest in DRI and purchased a warrant to acquire an additional 48% interest. During the fourth quarter of 1997, the Company formed a new subsidiary, ICG, which includes a registered broker/dealer and an asset management company offering individual and corporate investors a wide range of financial products and services. In connection with the formation of ICG, the Company recognized a pre-tax charge of $3.7 million relating to the restructuring of its loan to DRI. As part of the DRI restructuring, substantially all of the assets and personnel of DRI were acquired or hired by ICG. During the fourth quarter of 1997, ICG raised $323 million for corporate clients through private placement debt and equity offerings generating investment banking fees of $7.7 million. At December 31, 1997, the Company's ownership interest in ICG was 60%. Auto Marketing Network In March 1997, the Company acquired all the outstanding common stock of AMN, a sub-prime auto lender engaged in the financing of new and used motor vehicles on a national basis, for $750,000. As part of the acquisition, the Company advanced $11.6 million to repay amounts owed pursuant to operating lines of credit and for working capital purposes. The acquisition was recorded using the purchase method of accounting. The purchase price was allocated to the net assets acquired based on their fair value and goodwill of approximately $20.8 million was recorded. Since the March 1997 acquisition date, AMN posted operating losses and experienced significant increases in non-performing assets, loan charge-offs and loan loss provisions. In December 1997, the Company developed revised operating projections which indicated that the goodwill resulting from the AMN acquisition was not recoverable. Accordingly, the remaining goodwill balance of $20.1 million was written off during the fourth quarter of 1997. PrinCap Mortgage Warehouse In October 1997, the Company's wholly-owned subsidiary, SPB, acquired substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and PrinCap Mortgage Backed, L.P. (collectively, "PrinCap") and 80 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) contributed such assets to a subsidiary. The acquisition was accounted for as a purchase, and the purchase price of $123.7 million was allocated to the net assets acquired based on their fair value resulting in goodwill of $6.8 million. PrinCap's primary business is residential mortgage warehouse lending to medium-sized brokers and mortgage bankers on a national basis. At December 31, 1997, PrinCap had commitments outstanding and loans of $124.6 million and $122.5 million, respectively. Imperial Credit Commercial Asset Management Corporation The Company formed ICCAMC, a wholly-owned subsidiary, to oversee the day to day operations of Imperial Credit Commercial Mortgage Investment Corporation ("ICCMIC"), a real estate investment trust intending to invest primarily in performing multi-family and commercial real estate loans and mortgage-backed securities. In October 1997, ICCMIC completed its initial public offering and sold approximately 34.5 million shares of common stock at $15.00 per share resulting in net proceeds of approximately $481.2 million. The Company purchased 2,970,000 shares of ICCMIC common stock in the offering and an additional 100,000 shares in December 1997. As of December 31, 1997, the Company owned 8.9% of the common stock of ICCMIC. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent liabilities as of the dates of the balance sheets and revenues and expenses for the periods presented. Significant balance sheet items which could be materially affected by such estimates include: loans held for investment, which is presented net of the allowance for loan and lease losses, and the valuation of the Company's securitization related assets. Actual results could differ significantly from management's estimates. Prior years' consolidated financial statements have been reclassified to conform to the 1997 presentation. Investment Securities The Company classifies investments as held to maturity, trading securities, or available for sale securities. Held to maturity investments are reported at amortized cost, trading securities are reported at fair value with unrealized gains and losses included in operations, and available for sale securities are reported at fair value with unrealized gains and losses, net of related income taxes, included as a separate component of shareholders' equity. Investment securities held to maturity are those securities that management has the positive intent and the ability to hold to maturity. Trading securities include mortgage-backed securities resulting from certain mortgage banking related activities and United States Treasury securities. 81 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Investment securities available-for-sale are those securities which are not held in the trading portfolio and are not held in the held to maturity portfolio. Realized gains and losses on securities available for sale are included in income and are derived using the specific identification method for determining the cost of securities sold. Premiums and discounts are amortized over the life of the securities by use of the interest method. When a decline in value of a security is judged to be other than temporary, it is written down to fair value by a charge to earnings. Loans Held for Sale Loans held for sale are carried at the lower of aggregate cost or market, which is based on sale commitments or prices for similar products. Loans which are ineligible for sale, generally those 90 days past due, are transferred to loans held for investment at the lower of cost or market on the day of transfer. Loans Held for Investment Loans held for investment are stated at the principal amount outstanding. Interest income is recorded on the accrual basis in accordance with the terms of the loans, except that accruals are discontinued when the payment of principal or interest is 90 or more days past due. Future collections of interest are included in interest income or applied to the loan balance based on an assessment of the likelihood that the loan will be repaid. Additionally, unearned income on installment contracts and leases is recognized in interest income over the life of the related loans using the interest method. On an ongoing basis, management monitors the loan portfolio and evaluates the adequacy of the allowance for loan and lease losses. In determining the adequacy of the allowance for loan and lease losses, management considers such factors as historical loan loss experience, underlying collateral values, known problem loans, evaluations made by bank regulatory authorities, assessment of economic conditions and other appropriate data to identify the risks in the loan portfolio. Loans deemed by management to be uncollectible are charged to the allowance for loan and lease losses. Recoveries on loans previously charged off are credited to the allowance. Provisions for loan losses are charged to expense and credited to the allowance in amounts deemed appropriate by management based upon its evaluation of the known and inherent risks in the loan portfolio. The Company considers a loan to be impaired when, based upon current information and events, it believes it will be unable to collect all amounts due according to the contractual terms of the loan agreement. Individually significant loans are evaluated for impairment separately; other loans are evaluated for impairment collectively. The value of impaired loans is established by discounting the expected future cash flows at the loan's effective interest rate, or by the current observable market price or by the fair value of its collateral. Many factors are considered in the determination of impairment. The measurement of collateral dependent impaired loans is based on the fair value of the loan's collateral. Non-collateral dependent loans are valued based on a present value calculation of expected future cash flows, discounted at the loan's effective rate. Cash receipts on impaired loans not performing according to contractual terms are generally used to reduce the carrying value of the loan, unless the Company believes it will fully recover the remaining principal balance of the loan, in which case such cash receipts are recognized as interest income. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. Adjustments to impairment losses due to changes in the fair value of collateral of impaired loans are 82 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) included in the provision for loan losses. Upon disposition of an impaired loan, loss of principal, if any, is recorded through a charge-off to the allowance for loan losses. Purchased and Originated Servicing Rights Purchased servicing represents the cost of acquiring the right to service mortgage loans. The cost relating to purchased and originated servicing is capitalized and amortized in proportion to, and over the period of, estimated future net servicing income. The Company assesses the purchased servicing rights portfolio for impairment based on the fair value of those rights on a stratum-by-stratum basis with any impairment recognized through a valuation allowance for each impaired stratum. For the purpose of measuring impairment, the Company has stratified the capitalized mortgage servicing rights using the following risk characteristics: loan program type and interest rate tranche in 100 basis point increments. In order to determine the fair value of the servicing rights, the Company uses market prices under comparable servicing sales contracts, when available, or alternatively, it uses a valuation model that calculates the present value of future cash flows. Assumptions used in the valuation model include market discount rates and anticipated prepayment speeds. The prepayment speeds are determined from market sources for fixed rate mortgages with similar coupons and prepayment rates for comparable variable rate loans. In addition, the Company uses market comparables for estimates of the cost of servicing per loan, an inflation rate, ancillary income per loan and default rates. Capitalized Excess Servicing Fees Receivable The Company has created capitalized excess servicing fees receivable as a result of the sale of loans, and to a lesser extent leases, into various trust vehicles. These various trust vehicles are majority owned by an independent third party who has made a substantial capital investment and has substantial risks and rewards of ownership of the assets of the trust; therefore, these trust vehicles are not consolidated with the Company. Retained Interest in Loan and Lease Securitizations The Company adopted on January 1, 1997, Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which establishes accounting for transfers and servicing of financial assets and extinguishment of liabilities. This statement specifies when financial assets and liabilities are to be removed from an entity's financial statements, the accounting for servicing assets and liabilities and the accounting for assets that can be contractually prepaid in such a way that the holder would not recover substantially all of its recorded investment. Under SFAS 125, an entity recognizes only assets it controls and liabilities it has incurred, discontinues recognition of assets only when control has been surrendered, and discontinues recognition of liabilities only when they have been extinguished. SFAS 125 requires that the selling entity continue to carry retained interests, including servicing assets, relating to assets it no longer recognizes. Such retained interests are based on the relative fair values of the retained interests of the subject assets at the date of transfer. Transfers not meeting the criteria for sale recognition are accounted for as a secured borrowing with a pledge of collateral. SFAS 125 requires an entity to recognize its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset or liability. The servicing asset or liability is amortized in proportion to, and over the period of, net servicing income or loss. Servicing assets and liabilities are assessed for impairment based on their fair value. 83 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The implementation of SFAS 125 did not have a material impact on the Company's financial condition or results of operation. Under the provisions of SFAS 125, securitization interests retained by the Company as a result of securitization transactions are held as either available for sale or trading. The Company may create retained interest in loan and lease securitizations as a result of the sale of loans into securitization trusts. Loan and lease securitizations have specific credit enhancement requirements in the form of overcollateralization which must be met before the Company receives cash flows due. As the securitized assets generate excess cash flows, they are initially used to pay down the balance of the pass-through certificates until such time as the ratio of securitized assets to pass-through certificates reaches the overcollateralization requirement specified in each securitization. This overcollateralization amount is carried on the balance sheet as retained interest in loan and lease securitizations. After the overcollateralization requirement and the other requirements specified in the pooling and servicing agreement have been met, the Company begins to receive the cash flows from any subordinated bonds or residual interests retained on a monthly basis. Retained interest in loan and lease securitizations is classified as available for sale, and income is amortized using the interest method. To the extent that the future performance results are less than the Company's initial performance estimates, the Company's retained interest in loan and lease securitizations will be written down through a charge to operations. Interest-only and Residual Certificates Assets reflected in the accompanying balance sheet as interest-only and residual certificates in real estate mortgage investment conduits are recorded as a result of SPB's and SPFC's securitization of loans through various trust vehicles. Loan Sales and Related Gain or Loss Loans are sold through either securitizations or whole loan sales with servicing retained by the Company. Securitizations typically require credit enhancements in the form of cash reserves or overcollateralization that are reflected as retained interest in loan and lease securitizations on the balance sheet. Sales are recognized when the transaction settles and the risks and rewards of ownership are determined to have been passed to the purchaser. Gain is recognized to the extent that the selling prices exceed the carrying value of the loans sold based on the estimated relative fair values of the assets transferred, assets obtained and liabilities incurred. The assets obtained in a sale include, generally, retained interest in loan and lease securitizations, loan servicing assets, and call options. Liabilities incurred in a sale include, generally, recourse obligations, put options, and servicing liabilities. In the securitizations completed to date, the Company retained call options giving it the right to repurchase loans sold when the outstanding amount of such loans is 1% to 10% or less of the original amount sold, depending on the terms of the related securitization. As these call options are equivalent to a cleanup call, the Company has ascribed no value to them. The securitizations completed to date had no put option features. In determining the estimated fair values of the retained interest in loan and lease securitizations, the Company estimates the cash flows therefrom and discounts such cash flows at interest rates determined by management to be rates market participants would use in similar circumstances. Discount rates ranged from 11% to 28%, as of and for the year ended December 31, 1997. Quoted market prices are not available as no active market exists for retained interest in loan and lease securitizations. In estimating the cash flows, the Company considers default and prepayment rates. The default rates used by the Company as of and for the year ended December 31, 1997 have ranged from 2.0% to 18.5%, and the prepayment rates used by the Company have ranged from 0.25% to 48.0%. 84 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Loan Origination Fees Origination fees received on loans held for sale, net of direct costs related to the origination of the loans, are deferred until the time of sale and are included in the computation of the gain or loss on the sale of the related loans. Commitment fee income is deferred until each loan is funded and sold, and recorded as a part of the gain on sale of the loan in the same percentage as such loan is to the total commitment. Any remaining deferred commitment fee income is recognized at expiration of the commitment. When exercise of such commitment is deemed remote, the fee is recognized over the remaining commitment period. Origination fees on loans held for investment, net of direct costs related to the origination of the loans, are deferred and amortized over the contractual lives of the related loans using the interest method. When a loan is classified as a nonaccrual loan, the related net deferred origination fees are no longer amortized. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation or amortization. Depreciation on premises and equipment is recorded using the straight-line method over the estimated useful lives of individual assets (3 to 7 years). Leasehold improvements are amortized over the terms of their related leases or the estimated useful lives of improvements, whichever is shorter. Interest Bearing Deposits Interest bearing deposits consist of time certificates, investment in federal funds and money market accounts. Amounts are carried at cost which approximates market value. Other Real Estate Owned Foreclosed real estate is transferred from the loan portfolio at the lower of the cost of the former mortgage loan or net fair value of the property less estimated selling costs and is classified as other real estate owned ("OREO"). The excess carrying value, if any, of the loan over the estimated fair value of the collateral based on appraisal or broker opinion of value less estimated selling costs is charged to the allowance for loan losses. Any subsequent impairments in value are recognized through a valuation allowance. Subsequent increases in fair value are credited to income and reduce the valuation allowance. Subsequent increases in the fair value of an asset are only recognized to the extent that decreases in fair value were recorded through the valuation allowance. Gains and losses from sales of OREO, provisions for losses on OREO, and net operating expenses of OREO are recorded in operations and included in the caption "net expenses of other real estate owned" in the accompanying consolidated statements of income. Income Taxes The Company files a combined California franchise tax return and a consolidated Federal income tax return with all of its subsidiaries except ICG. The Company accounts for income taxes using the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 85 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Goodwill Goodwill is amortized on a straight-line basis over its estimated useful life of 15 years. Goodwill is reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset. Impairment is measured by discounting operating income of the related entity at an appropriate discount rate. At December 31, 1997 and 1996, Goodwill is presented net of accumulated amortization of $25.5 million and $2.2 million, respectively. Debt Issue Costs Capitalized debt issue costs are included in Other Assets and are amortized to interest expense over the life of the related debt using the interest method. Hedging Loans Held for Sale The Company regularly securitizes and sells fixed and variable rate mortgage loans. To offset the effects of interest rate fluctuations on the value of its fixed-rate loans held for sale, the Company in certain cases will hedge its interest rate risk related to loans held for sale by selling United States Treasury futures contracts. Unrealized and realized gains and losses on such positions are deferred as an adjustment to the carrying value of loans and leases held for sale and included in income as gain or loss on sale of loans when the related loans are sold. Management has determined that hedge accounting is appropriate for the Company's hedging program because the hedged loans expose the Company to price risk. The futures contracts reduce that risk and are designated as hedges, and at the inception of the hedge and throughout the hedge period, there is a high correlation between the price of the futures contracts and the fair value of the loans being hedged. In the event correlation does not remain high, the futures contracts will cease to be accounted for as hedges and a gain or loss will be recognized to the extent the futures results have not been offset by the price changes of the hedged loans. Total Rate of Return Swaps The Company has entered into total rate of return swap contracts with various investment bank counterparties, the provisions of which entitle the Company to receive the total return on various commercial loans in exchange for a floating payment of one month LIBOR plus a spread. These contracts are off-balance sheet financial instruments. The Company's cash collateral held by the counterparties is included in trading securities. Net income or expense on these contracts is included in interest income, and the contracts are carried at their estimated fair values. Equity Investments Equity investments are carried under the equity method of accounting. Accordingly, the Company records as a part of its earnings, the ownership percentage of its equity investments net income. Dividends received from such subsidiaries, if any, are credited to the investment balance and not recorded as earnings. The Company records gains from the sale of stock in subsidiaries carried under the equity method based on the difference between the Company's equity ownership after the sale and such equity ownership prior to the sale, using the Company's respective ownership percentages. Deferred income tax liabilities on such gains are accrued at the time such gains are recognized. 86 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Stock Based Compensation As permitted by SFAS No. 123, "Accounting for Stock Based Compensation", the Company accounts for stock based employee compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company provides the pro forma net earnings, pro forma income per share, and plan disclosures as set forth in SFAS 123. Income Per Share Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share." This statement replaces the previously reported primary and fully- diluted income per share with basic and diluted income per share. Unlike primary income per share, basic income per share excludes any dilutive effects of stock options. Diluted income per share is similar to fully-diluted income per share. Income per share amounts for all periods ending prior to December 31, 1997, have been restated to conform to the SFAS 128 requirements. The following table reconciles the number of shares used in the computations of basic and diluted income per share for the years ended December 31:
1997 1996 1995 ---------- ---------- ---------- Weighted-average common shares outstanding during the year used to compute basic income per share.......................... 38,610,952 36,062,776 31,825,495 Assumed common shares issued on exercise of stock options............................. 2,244,321 2,912,058 3,296,167 ---------- ---------- ---------- Number of common shares used to compute diluted income per share.................. 40,855,273 38,974,834 35,121,662 ========== ========== ==========
Recent Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. All items that are required to be recognized under accounting standards as components of comprehensive income are to be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement stipulates that comprehensive income reflect the change in equity of an enterprise during a period from transactions and other events and circumstances from nonowner sources. Comprehensive income will thus represent the sum of net income and comprehensive income, although SFAS 130 does not require the use of the terms comprehensive income or other comprehensive income. The accumulated balance of other comprehensive income is required to be displayed separately from retained earnings and additional paid in capital in the statement of financial condition. This statement is effective for the fiscal years and interim periods beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. Management believes that the adoption of SFAS 130 will have no significant impact on its financial position or results of operations. 87 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires that selected information about those operating segments be reported in interim financial statements. This statement supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS 131 requires that all public enterprises report financial and descriptive information about reportable operating segments. Operating segments are defined as components regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. This statement is effective for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. Management is in the process of determining the impact, if any, this statement will have on the financial position, results of operations and disclosures of the Company. In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosures about Pensions and Other Postretirement Benefits". The statement revises the required disclosures for pensions and other post retirement plans but does not change the measurement or recognition of such plans. SFAS 132 is effective for fiscal years beginning after December 15, 1997. The Company, as required, will adopt this statement during 1998. As the Company does not offer defined benefit pension plans, Management believes that the adoption of SFAS 132 will not have a material effect on the Company's existing disclosures regarding postretirement benefits 88 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The following information supplements the statement of cash flows:
YEAR ENDED DECEMBER 31, --------------------------- 1997 1996 1995 -------- -------- -------- (IN THOUSANDS) Cash paid during the period for: Interest......................................... $119,144 $134,251 $ 93,223 Income taxes..................................... 24,611 24,134 8,283 Significant non-cash activities: Loans transferred from held for investment to held for sale................................... -- -- 505,037 Loans transferred to OREO or repossessed assets.. 29,359 14,203 12,302 Loans transferred from held for sale to held for investment...................................... 37,007 197,141 83,398 Loans to facilitate the sale of OREO............. 2,347 1,871 1,315 Retained interest in loan and lease securitizations capitalized..................... 23,592 6,908 14,002 Transfer of securities from available for sale to trading......................................... 15,178 -- -- Securities received in consideration of IMH Termination Agreement........................... 48,167 -- -- Cancellation of note receivable from ICIFC in consideration of IMH Termination Agreement...... 29,121 -- -- Change in unrealized gain on securities available for sale........................................ (3,084) 1,799 3,211 Deconsolidation of SPFC, ICIFC and FMAC: Decrease in loans held for sale.................. 768,025 -- -- Decrease in interest only and residual certificates.................................... 87,017 -- -- Decrease in retained interest in loan securitizations................................. 30,035 -- -- Decrease in capitalized excess servicing......... 23,142 -- -- Decrease in accrued interest receivable.......... 5,026 -- -- Decrease in other borrowings..................... 693,016 -- -- Decrease in convertible subordinated debt........ 75,000 -- -- Purchase of Auto Marketing Network: Assets acquired, including goodwill of $20,770... $ 82,484 -- -- Liabilities assumed.............................. 81,734 -- -- -------- Cash paid........................................ $ 750 -- -- ======== Purchase of PrinCap Mortgage Warehouse, Inc. assets: Assets acquired, including goodwill of $6,800.... $123,767 -- -- Liabilities assumed.............................. 29 -- -- -------- Cash paid........................................ $123,738 -- -- ========
5. INVESTMENT IN FHLB STOCK As a member of the FHLB system, the Company's wholly owned subsidiary, SPB, is required to maintain an investment in the capital stock of the FHLB in an amount at least equal to the greater of 1% of residential mortgage assets, or 5% of outstanding borrowings (advances), or 0.3% of total assets. FHLB stock and loans are pledged to secure FHLB advances. 89 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. SECURITIES AVAILABLE FOR SALE The following table provides a summary of securities available for sale with a comparison of amortized cost and fair values as of December 31, 1997 and 1996.
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1997 COST GAINS LOSSES VALUE ----------------- --------- ---------- ---------- -------- (IN THOUSANDS) Investment in IMH stock............... $ 35,037 $ 879 $-- $ 35,916 Investment in ICCMIC stock............ 42,938 1,961 -- 44,899 Avalon total return fund.............. 5,000 492 -- 5,492 AMN Auto Trust 1997-A Class A-2 principal-only security.............. 6,809 -- -- 6,809 IBC 1997-1 Class B-1 subordinated bond................................. 4,585 -- -- 4,585 IBC 1997-1 Class C-1 interest-only security............................. 9,638 -- -- 9,638 Other................................. 388 -- -- 388 -------- ------ ---- -------- $104,395 $3,332 $ -- $107,727 ======== ====== ==== ========
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1996 COST GAINS LOSSES VALUE ----------------- --------- ---------- ---------- ------- (IN THOUSANDS) Investment in IMH stock................ $ 454 $8,668 $-- $ 9,122 SPTL 1996 C-1 interest only securities. 9,829 -- -- 9,829 FLRT 1991-A residual interest.......... 36,571 -- -- 36,571 FLRT 1994-A interest-only security..... 1,814 -- -- 1,814 FLRT 1995-A interest-only security..... 964 -- -- 964 Other.................................. 816 -- -- 816 ------- ------ ---- ------- $50,448 $8,668 $ -- $59,116 ======= ====== ==== =======
Gross realized gains and losses on the sale of available for sale securities were $11.5 million and $936,000, respectively for the year ended December 31, 1997. There were no sales of available for sale securities for the years ended December 31, 1996 and 1995. 7. TRADING SECURITIES The following table provides a summary of trading securities as of December 31, 1997 and 1996.
1997 1996 -------- ------- (IN THOUSANDS) U.S. Treasury Securities................................. $ 79,751 $ -- FLRT 1996-A interest-only securities..................... 8,541 -- SPTL 1997 C-1 interest-only security..................... 6,637 -- SPTL 1996 C-1 interest-only securities................... 12,179 25,180 Other.................................................... 13,796 -- -------- ------- $120,904 $25,180 ======== =======
90 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Gross unrealized gains and losses on trading securities included in income were $709,000 and $835,000 for the year ended December 31, 1997. There were no gross unrealized gains or losses on trading securities included in income for the years ended December 31, 1996 and 1995. During the year ended December 31, 1997, the Company entered into total rate of return swap contracts for investment purposes with various investment bank counterparties, the provisions of which entitle the Company to receive the total return on various commercial loans in exchange for a floating payment of one month LIBOR plus a spread. These contracts are off balance sheet instruments. As of December 31, 1997, the Company was party to total rate of return swap contracts with a total notional amount of $150.6 million, under which the Company was obligated to pay one month LIBOR plus a weighted average spread of 0.78%. The weighted average remaining life of these contracts was 37.1 months as of December 31, 1997. For the year ended December 31, 1997, the Company recognized $448,000 in interest income on total return swaps. The Company's cash collateral held by the counterparties is included in trading securities. Net income or expense on these contracts is included in interest income, and the contracts are carried at their estimated fair values. 8. LOANS HELD FOR SALE Loans held for sale, at the lower of cost or market, consisted of the following at December 31, 1997 and 1996:
1997 1996 -------- -------- (IN THOUSANDS) Loans secured by real estate: Single family 1-4..................................... $ 13,169 $562,002 Multi-family.......................................... 68,294 186,391 -------- -------- 81,463 748,393 Automobile loans........................................ 9,102 -- Leases.................................................. 13,561 8,547 Commercial loans........................................ 58,445 183,156 -------- -------- $162,571 $940,096 ======== ========
9. LOANS HELD FOR INVESTMENT, NET Loans held for investment consisted of the following at December 31, 1997 and 1996:
1997 1996 ---------- ---------- (IN THOUSANDS) Loans secured by real estate: Single family 1-4................................ $ 244,588 $ 375,476 Multi-family..................................... 17,261 2,527 Commercial....................................... 1,085 11,011 ---------- ---------- 262,934 389,014 Leases............................................. 7,745 99,717 Installment loans.................................. 154,919 34,248 Franchise loans.................................... 62,219 115,910 Asset based loans.................................. 484,832 288,528 Commercial loans................................... 344,882 173,932 ---------- ---------- 1,317,531 1,101,349 Unearned income.................................... (7,850) (6,336) Deferred loan fees................................. (4,916) (6,415) ---------- ---------- 1,304,765 1,088,598 Allowance for loan and lease losses.............. (38,047) (19,999) ---------- ---------- $1,266,718 $1,068,599 ========== ==========
91 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company's loans held for investment are primarily comprised of first and second lien mortgages secured by residential and income producing real property in California, leases secured by equipment, asset based loans to middle market companies mainly in California, loans to experienced franchisees of nationally recognized restaurant concepts, and participations in syndicated commercial loans. As a result, the loan portfolio has a high concentration in the same geographic region. Although the Company has a diversified portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economy of California. Activity in the allowance for loan and lease losses was as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1997 1996 1995 -------- ------- ------- (IN THOUSANDS) Balance, beginning of year....................... $ 19,999 $13,729 $ 7,054 Provision for loan and lease losses.............. 38,951 9,773 5,450 Business acquisitions and bulk loan purchases.... 11,161 4,500 4,320 Sale of Leases................................... (900) -- -- Deconsolidation of ICIFC......................... (687) -- -- Loans charged off................................ (31,053) (8,326) (3,106) Recoveries on loans previously charged off....... 576 323 11 -------- ------- ------- Net charge-offs.................................. (30,477) (8,003) (3,095) -------- ------- ------- Balance, end of period........................... $ 38,047 $19,999 $13,729 ======== ======= =======
As of December 31, 1997 and 1996 and 1995, non-accrual loans totaled $70.6 million, $50.1 million, and $31.0 million, respectively. Interest income foregone on nonaccrual loans was $4.9 million, $1.1 million, and $492,000 for the years ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, impaired loans and the related allowance for loan and lease losses were as follows:
1997 1996 ----------------------------- ----------------------------- SPECIFIC SPECIFIC ALLOWANCE ALLOWANCE RECORDED FOR CARRYING RECORDED FOR CARRYING INVESTMENT LOSSES VALUE INVESTMENT LOSSES VALUE ---------- --------- -------- ---------- --------- -------- (IN THOUSANDS) Nonaccrual loans........ $70,631 $(5,351) $65,280 $38,297 $(3,671) $34,626 Restructured loans...... -- -- -- 800 (4) 796 ------- ------- ------- ------- ------- ------- Total impaired loans.... $70,631 $(5,351) $65,280 $39,097 $(3,675) $35,422 ======= ======= ======= ======= ======= =======
Impaired loans averaged $61.8 million, $33.3 million and $21.1 million during 1997, 1996 and 1995 respectively. During 1997 total interest income recognized on impaired loans was not material. During 1996 total interest income recognized on impaired loans was $2.0 million and was immaterial during 1995. At December 31, 1997, total impaired loans were comprised of $40.1 million which had $5.4 million of specific allowances for losses and $30.5 million with no related specific allowance. There were no impaired loans without a related allowance for losses at December 31, 1996 and 1995. 10. RESTRUCTURING Restructuring charges of $3.8 million were recognized during the year ended December 31, 1996. The charge represents those costs incurred in connection with the Company's exit from the conforming mortgage banking business. During the first quarter of 1996, the Company committed itself to, and began the execution of, an exit plan that specifically identified the necessary actions to be taken to complete the exit from the origination, 92 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) sale and servicing of conforming residential mortgage loans. During 1996, the Company sold the majority of its wholesale mortgage origination offices and disposed of fixed assets related to its former conforming residential mortgage lending business. The Company believes that significant changes to the exit plan are not likely, and that the exit plan should be completed in the second quarter of 1998. Activity in the allowance for restructuring charges during 1997 and 1996 was as follows:
1996 1997 -------- -------- ALLOWANCE CHARGES CHARGES BALANCE AT PROVIDED INCURRED INCURRED DECEMBER 31, 1997 --------- -------- -------- ----------------- (IN THOUSANDS) Disposition of wholesale mortgage origination offices............. $2,500 $(2,354) $(146) $-- Disposal of fixed assets......... 1,000 (886) (114) -- Other............................ 300 -- (229) 71 ------ ------- ----- ---- Total.......................... $3,800 $(3,240) $(489) $ 71 ====== ======= ===== ====
11. CAPITALIZED EXCESS SERVICING FEES RECEIVABLE Changes in capitalized excess servicing fees receivable were as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 -------- -------- -------- (IN THOUSANDS) Beginning Balance............................. $ 23,142 $ 33,181 $ 4,319 Present value of excess servicing fees on loans sold................................... -- 19,448 40,353 Amortization.................................. -- (24,812) (11,491) Writedowns.................................... -- (4,675) -- Deconsolidation of ICIFC...................... (23,142) -- -- -------- -------- -------- Ending balance................................ $ -- $ 23,142 $ 33,181 ======== ======== ========
Capitalized excess servicing fees receivable are net of a valuation allowance of $4.5 million at December 31, 1996. 12. PURCHASED AND ORIGINATED SERVICING RIGHTS Changes in purchased and originated servicing rights were as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1997 1996 1995 ------- -------- ------- (IN THOUSANDS) Beginning Balance............................... $14,887 $ 18,428 $16,746 Additions....................................... 2,982 10,970 7,340 Increase as a result of the FMAC acquisition.... -- -- 3,805 Decrease as a result of the ICIFC deconsolidation................................ (8,785) -- -- Bulk purchase of servicing...................... -- -- 757 Sales of servicing rights....................... (1,264) (13,390) (6,234) Amortization--accelerated....................... (2,217) -- (1,176) Amortization--scheduled......................... (872) (1,121) (2,810) ------- -------- ------- Ending balance.................................. $ 4,731 $ 14,887 $18,428 ======= ======== =======
The servicing portfolio associated with purchased and originated servicing rights at December 31, 1997 and 1996 was $665.3 million and $1.0 billion, respectively. 93 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. PREMISES AND EQUIPMENT, NET Premises and equipment consisted of the following at December 31, 1997 and 1996:
1997 1996 ------- ------- (IN THOUSANDS) Premises and equipment................................... $14,504 $19,606 Leasehold improvements................................... 1,371 1,394 ------- ------- 15,875 21,000 Less accumulated depreciation and amortization........... (6,362) (8,558) ------- ------- $ 9,513 $12,442 ======= =======
14. DEPOSITS Deposits of $100,000 and over totaled approximately $236.4 million and $220.8 million at December 31, 1997 and 1996, respectively. Interest expense associated with certificates of deposit of $100,000 and over was approximately $15.6 million, $13.6 million, and $15.4 million for the years ended December 31, 1997, 1996, and 1995, respectively. 15. BORROWINGS FROM FEDERAL HOME LOAN BANK SPB is approved as a member of the Federal Home Loan Bank ("FHLB") to borrow up to a maximum of 35% of the assets of SPB. These borrowings must be fully collateralized by qualifying mortgage loans and may be in the form of overnight funds or term borrowings at SPB's option. At December 31, 1997 and 1996, all of the outstanding borrowings from the FHLB were scheduled to mature within one year. The FHLB advances are secured by the investment in stock of the FHLB and certain real estate mortgage loans with a carrying value of $104.7 million and $228.5 million at December 31, 1997 and 1996, respectively. At December 31, 1997, 1996 and 1995, FHLB borrowings are summarized as follows:
1997 1996 1995 -------- -------- ------- (DOLLARS IN THOUSANDS) Balance at year end........................... $ 45,000 $140,500 190,000 Maximum outstanding at any month end.......... 109,500 338,000 435,000 Average balance during the year............... 56,761 188,765 292,000 Weighted average rate during the year......... 5.82% 6.10% 6.26% Weighted average rate at year end............. 6.71% 6.30% 6.10%
Interest expense on borrowings from the FHLB was $3.3 million, $12.1 million and $19.4 million for the years ended December 31, 1997, 1996 and 1995, respectively. 16. OTHER BORROWINGS Other borrowings primarily consist of revolving warehouse lines of credit to fund the Company's and its subsidiaries' lending activities. At December 31, 1997 and 1996, approximately $159 million and $700 million of loans and securities were pledged as collateral for other borrowings. These lines of credit are short term and management believes these lines will be renewed in the normal course of business. Certain covenants exist in regards to these lines of credit with which the Company was in 94 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) compliance at December 31, 1997 and 1996. ICII and its subsidiaries have various revolving warehouse lines of credit and repurchase facilities available at December 31, 1997, as follows:
INTEREST INDEX RATE COMMITMENT OUTSTANDING (BASIS POINTS) EXPIRATION DATE -------- ---------- ----------- -------------- --------------- (DOLLARS IN THOUSANDS) Greenwich Capital Financial (AMN)........ 7.25% $125,000 $ 20,058 Libor plus 125 March 10, 1998 Donaldson, Lufkin and Jenrette (Corona Film Finance Fund).......... 5.85 79,591 79,591 Fixed rate January 7, 1998 Core States (IBC)....... 8.17 30,000 10,192 Libor plus 220 October 6, 1998 Morgan Stanley (SPB).... 6.51 200,000 35,000 Libor plus 50 October 1, 1998 -------- -------- 6.37 $434,591 $144,841 ======== ========
ICII and its subsidiaries had various revolving warehouse lines of credit available at December 31, 1996, as follows:
INTEREST RATE COMMITMENT OUTSTANDING -------- ------------ ----------- (DOLLARS IN THOUSANDS) PaineWebber (ICII)........................... 6.81% $ 200,000 $ 5,686 Banco Santander (FMAC)....................... 7.63 50,000 16,229 First Boston (FMAC).......................... 7.31 200,000 48,773 Greenwich Capital Markets (FMAC) 7.36 unspecified 35,158 Lehman Brothers (SPFC)....................... -- 200,000 -- Imperial Warehouse Lending Group (ICIFC)..... 8.25 600,000 337,380 Core States (IBC)............................ 7.61 10,000 1,111 Conti (IBC).................................. 7.50 100,000 87,657 Morgan Stanley Mortgage Capital (SPFC)....... 6.16 150,000 152,681 Imperial Warehouse Lending Group (ICII)...... 8.00 20,000 5,077 Warehouse Lending Corporation of America (ICII)...................................... 7.94 20,000 4,600 ------------ -------- 7.55 $ 1,550,000 $694,352 ============ ========
Interest expense on other borrowings was $29.6 million, $64.4 million and $35.8 million for the years ended December 31, 1997, 1996 and 1995, respectively. 95 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 17. SENIOR NOTES
DECEMBER 31, 1997 --------------------------------- UNAMORTIZED FACE VALUE DISCOUNT BOOK VALUE ---------- ----------- ---------- 9.75% Senior Notes due 2004.............. $ 20,174 $(361) $ 19,813 9.875% Senior Notes due 2007............. 200,000 -- 200,000 -------- ----- -------- $220,174 $(361) $219,813 ======== ===== ========
DECEMBER 31, 1996 --------------------------------- UNAMORTIZED FACE VALUE DISCOUNT BOOK VALUE ---------- ----------- ---------- 9.75% Senior notes due 2004.............. $90,000 $(1,791) $88,209 ------- ------- ------- $90,000 $(1,791) $88,209 ======= ======= =======
During the first quarter of 1997, the Company successfully completed a $200.0 million offering of 9.875% Senior Notes due 2007 (the "9.875% Senior Notes"). A portion of the proceeds from the offering was used to repurchase $69.8 million of the outstanding 9.75% Senior Notes due 2004 (the "9.75% Senior Notes") on which the Company recorded an extraordinary after-tax loss of $4.0 million. The remaining proceeds were used to make capital contributions to subsidiaries, strategic acquisitions, investments, and for general corporate purposes. The effective interest rate on the tendered notes was approximately 10.8% after the amortization of original issue discount and deferred bond issue costs. The effective interest rate on the new notes is approximately 10.4% after the amortization of deferred bond issue costs. The Company engaged in the tender offer and new issuance in order to obtain a more favorable debt covenant package and to raise new capital to support its growing businesses. The 9.875% Senior Notes may be redeemed after January 15, 2002 at the option of the Company until maturity at a declining premium, plus accrued interest. The 9.875% Senior Notes are general unsecured obligations of the Company ranking pari passu with all senior indebtedness of the Company, but are effectively subordinated to the liabilities of SPB. The Indenture for the 9.875% Senior Notes includes provisions which limit the ability of the Company to incur additional indebtedness or issue certain stock of the Company, to make certain investments, engage in certain transactions with affiliates, create restrictions on the ability of subsidiaries to pay dividends or certain other distributions, create liens and encumbrances, or allow its subsidiaries to issue certain classes of stock. As of December 31, 1997, the Company was in compliance with the debt covenants related to the 9.875% Senior Notes. In January 1994, the Company issued $90.0 million of 9.75% Senior Notes. At December 31, 1997 and 1996, $20.2 million and $90.0 million of the 9.75% Senior Notes were outstanding, respectively. The 9.75% Senior Notes may be redeemed after January 15, 1999 at the option of the Company until maturity at a declining premium, plus accrued interest. The 9.75% Senior Notes are unsecured and rank pari passu with all other senior unsecured indebtedness of the Company, but are effectively subordinated to the liabilities of SPB. The Indenture for the 9.75% Senior Notes includes provisions which limit the ability of the Company to incur additional indebtedness or issue certain stock of the Company, to make certain investments, engage in certain transactions with affiliates, create restrictions on the ability of subsidiaries to pay dividends or certain other distributions, create liens and encumbrances, or allow its subsidiaries to issue certain classes of stock. As of December 31, 1997 and 1996, the Company was in compliance with the debt covenants related to the 9.75% Senior Notes. 96 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Total interest expense on the Senior Notes for the years ended December 31, 1997, 1996 and 1995 was $21.7 million, $9.0 million and $8.4 million, respectively. 18. CONVERTIBLE SUBORDINATED DEBENTURES At December 31, 1996, the SPFC convertible subordinated debentures were convertible into 3,151,125 shares of common stock of the Company's former consolidated subsidiary, SPFC, at a conversion price of $23.80 per share, at any time prior to maturity. Interest on the convertible subordinated debentures is payable semi-annually. Debt issuance costs of $2.8 million associated with the convertible subordinated debentures were being amortized over ten years using the effective interest method. Total interest expense on the convertible subordinated debentures for the year ended December 31, 1996 was $887,093. The convertible subordinated debentures were deconsolidated during the first quarter of 1997 when the Company reduced its ownership percentage in SPFC to below 50%. 19. REMARKETED PAR SECURITIES During the second quarter of 1997, Imperial Credit Capital Trust I ("ICCTI"), a subsidiary of the Company organized for the sole purpose of issuing trust securities, issued $70.0 million of 10.25% Remarketed Par Securities ("ROPES") due June 14, 2002 at par. The ROPES are secured by resettable rate debentures which are general unsecured obligations of the Company and can be redeemed at par upon their maturity or remarketed as 30 year capital instruments at the Company's option. Under current tax law, the interest payments on these securities are tax-deductible. The proceeds from the offering were used for capital contributions to subsidiaries, strategic acquisitions, investments and general corporate purposes. Interest expense on the ROPES was $4.3 million for the year ended December 31, 1997. The Trust Indenture for the ROPES includes provisions which limit the ability of the Company to incur additional indebtedness or issue certain stock of the Company, to make certain investments, engage in certain transactions with affiliates, create restrictions on the ability of subsidiaries to pay dividends or certain other distributions, create liens and encumbrances, or allow its subsidiaries to issue certain classes of stock. As of December 31, 1997, the Company was in compliance with the debt covenants related to the ROPES. 20. PREFERRED AND COMMON STOCK The Company has authorized 8,000,000 shares of Preferred Stock. The Board has the authority to issue the preferred stock in one or more series, and to fix the designations, rights, preferences, privileges, qualifications and restrictions, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms, any or all of which may be greater than the rights of the Common Stock. In the fourth quarter of 1997, the Company's board of directors announced the authorization to repurchase approximately 5% of the company's common stock, or as much as 1.9 million shares. During 1997, the Company repurchased and retired 25,000 shares of common stock under this program. During 1996, the Company issued an additional 2.4 million shares to the public, generating net proceeds of $59.2 million, which is net of expenses of $891,000. On October 22, 1996, the Company effected a 2-for-1 stock split to shareholders of record as of October 15, 1996. On February 26, 1996, the Company paid a stock dividend to shareholders of record as of February 12, 1996. One new share of Common Stock was issued for each, 10 shares currently held by shareholders. 97 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On October 24, 1995, the Company effected a 3-for-2 stock split to shareholders of record as of October 10, 1995. 21. INCOME TAXES The Company's income taxes for the years ended December 31, 1997, 1996 and 1995 were as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 1995 ------- ------- ------- (IN THOUSANDS) Current: Federal....................................... $41,988 $31,138 $ 7,803 State......................................... 13,551 12,210 2,452 ------- ------- ------- Total current............................... 55,539 43,348 10,255 ------- ------- ------- Deferred: Federal....................................... 4,399 16,009 1,846 State......................................... 1,792 6,095 274 ------- ------- ------- Total deferred.............................. 6,191 22,104 2,120 ------- ------- ------- Taxes credited (charged) to shareholders' equity......................................... 2,916 4,422 (2,231) Reduction of deferred tax liability due to FMC public offering ............................... (5,899) -- -- ------- ------- ------- Taxes on income before extraordinary item....... 58,747 69,874 10,144 Current taxes--extraordinary item............... (2,919) -- -- ------- ------- ------- Income taxes.................................... $55,828 $69,874 $10,144 ======= ======= =======
The Company's current income taxes payable totaled approximately $24.8 million and $25.7 million at December 31, 1997 and 1996, respectively. 98 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Deferred income taxes arise from differences in the timing of recognition of income and expense for tax and financial reporting purposes. The following table shows the primary components of the Company's net deferred tax liability at December 31, 1997 and 1996.
1997 1996 -------- -------- (IN THOUSANDS) Deferred tax assets: Allowances for loan losses............................... $ 13,156 $ 4,365 Unrealized gain on loans and securities.................. -- 1,671 State taxes.............................................. 7,099 5,677 Executive stock options.................................. 543 548 Other.................................................... 213 1,309 -------- -------- Total.................................................. 21,011 13,570 -------- -------- Valuation allowance...................................... -- -- -------- -------- Deferred tax assets, net of valuation allowance.......... 21,011 13,570 -------- -------- Deferred tax liabilities: Sales/Investments in FMAC/SPFC/ICIFC..................... (41,984) (12,934) Purchased and originated servicing rights................ -- (5,222) Gain on sale of servicing................................ (926) (8,934) Excess servicing gains................................... (1,143) (6,162) Leases................................................... (7,915) (3,930) Deferred loan fees....................................... (505) (510) Depreciation............................................. (1,160) (468) Unrealized gain on securities available for sale......... (1,363) (3,473) FHLB stock dividends..................................... (1,791) (1,522) -------- -------- Total.................................................. (56,787) (43,155) -------- -------- Net deferred tax liability................................. $(35,776) $(29,585) ======== ========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities and available tax carrybacks and future taxable income, in making this assessment. Based upon the schedule of reversals, future taxable income and available tax carrybacks, management believes it is more likely than not the Company will realize the benefits of the deferred tax assets. A reconciliation of the statutory Federal corporate income tax rate of 35% to the effective income tax rate is as follows:
YEAR ENDED DECEMBER 31, ---------------- 1997 1996 1995 ---- ---- ---- Statutory U.S. federal income tax rate.................. 35.0% 35.0% 35.0% Increase (reduction) in rate resulting from: State income taxes, net of Federal benefit............ 6.3 7.5 7.3 Reduction of deferred tax liability due to FMC public offering............................................. (3.7) -- -- Other, net............................................ (0.7) 1.8 (0.3) ---- ---- ---- Effective income tax rate............................... 36.9% 44.3% 42.0% ==== ==== ====
99 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 22. EMPLOYEE BENEFIT PLANS PROFIT SHARING AND 401(K) PLAN Under the Company's 401(k) plan, employees may elect to enroll on the first of any month, provided that they have been employed for at least six months. Employees may contribute up to 14% of their salaries. The Company will match 50% of the first 4% of employee contributions. The Company recorded 401(k) matching expense of $296,000, $305,000, and $209,000 for the years ended December 31, 1997, 1996 and 1995, respectively. An additional Company contribution may be made at the discretion of the Company. Should a discretionary contribution be made, the contribution would first be allocated to those employees deferring salaries in excess of 4%. The matching contribution would be 50% of any deferral in excess of 4% up to a maximum deferral of 8%. Should discretionary contribution funds remain following the allocation outlined above, any remaining Company matching funds would be allocated as a 50% match of employee contributions on the first 4% of the employee's deferrals. Discretionary contributions of $0, $350,000, and $200,000 were charged to operations in each of the years ending December 31, 1997, 1996, and 1995. Company matching contributions are made as of December 31st each year. 1992 STOCK OPTION PLAN A total of 2,292,632 shares of the Company's Common Stock has been reserved for issuance under the Company's 1992 Incentive Stock Option and Nonstatutory Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own terms in 2002. A total of 1,082,493 options were outstanding at December 31, 1997. The 1992 Stock Option Plan provides for the grant of "incentive stock options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options ("NQSOs") to employees, officers, directors and consultants of the Company. Incentive stock options may be granted only to employees. The 1992 Stock Option Plan is administered by the Board of Directors or a committee appointed by the Board, which determines the terms of options granted, including the exercise price, the number of shares subject to the option, and the option's exercisability. The exercise price of all options granted under the 1992 Stock Option Plan must be at least equal to the fair market value of such shares on the date of grant. The maximum term of options granted under the 1992 Stock Option Plan is 10 years. With respect to any participant who owns stock representing more than 10% of the voting rights of the Company's outstanding capital stock, the exercise price of any option must be at least equal to 110% of the fair market value on the date of grant. 1996 STOCK OPTION PLAN The Company adopted the 1996 Stock Option, Deferred Stock and Restricted Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards consisting of deferred stock, restricted stock, stock appreciation rights and limited stock appreciation rights ("Awards"). The 1996 Stock Option Plan is administered by a committee of directors appointed by the Board of Directors (the "Committee"). ISOs may be granted to the officers and key employees of the Company or any of its subsidiaries. 100 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The exercise price for any option granted under the 1996 Stock Option Plan may not be less than 100% (110% in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the outstanding Common Stock) of the fair market value of the shares of Common Stock at the time the option is granted. The purpose of the 1996 Stock Option Plan is to provide a means of performance-based compensation in order to attract and retain qualified personnel and to provide an incentive to those whose job performance affects the Company. The effective date of the 1996 Stock Option Plan was June 21, 1996. A total of 3,000,000 shares of the Company's Common Stock has been reserved for issuance under the 1996 Stock Option Plan and a total of 1,453,200 options were outstanding at December 31, 1997. If an option granted under the 1996 Stock Option Plan expires or terminates, or an Award is forfeited, the shares subject to any unexercised portion of such option or Award will again become available for the issuance of further options or Awards under the 1996 Stock Option Plan. Unless previously terminated by the Board of Directors, no options or Awards may be granted under the 1996 Stock Option Plan after June 21, 2006. Options granted under the 1996 Stock Option Plan will become exercisable upon the terms of the grant made by the Committee. Awards will be subject to the terms and restrictions of the Award made by the Committee. The Committee has discretionary authority to select participants from among eligible persons and to determine at the time an option or Award is granted and in the case of options, whether it is intended to be an ISO or a NQSO. Under current law, ISOs may not be granted to any individual who is not also an officer or employee of the Company or any subsidiary. Each option must terminate no more than 10 years from the date it is granted (or five years in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the combined voting power of the Company's outstanding Common Stock). Options may be granted on terms providing for exercise in whole or in part at any time or times during their respective terms, or only in specified percentages at stated time periods or intervals during the term of the option, as determined by the Committee. The exercise price of any option granted under the 1996 Stock Option Plan is payable in full (i) in cash, (ii) by surrender of shares of the Company's Common Stock already owned by the option holder having a market value equal to the aggregate exercise price of all shares to be purchased including, in the case of the exercise of NQSOs, restricted stock subject to an Award under the 1996 Stock Option Plan, (iii) by cancellation of indebtedness owed by the Company to the optionholder, or (iv) by any combination of the foregoing. The Board of Directors may from time to time revise or amend the 1996 Stock Option Plan, and may suspend or discontinue it at any time. However, no such revision or amendment may impair the rights of any participant under any outstanding options or Award without such participant's consent or may, without shareholder approval, increase the number of shares subject to the 1996 Stock Option Plan or decrease the exercise price of a stock option to less than 100% of fair market value on the date of grant (with the exception of adjustments resulting from changes in capitalization), materially modify the class of participants eligible to receive options or Awards under the 1996 Stock Option Plan, materially increase the benefits accruing to participants under the 1996 Stock Option Plan or extend the maximum option term under the 1996 Stock Option Plan. 101 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A summary of changes in outstanding stock options follows:
DECEMBER 31, -------------------------------------------------- 1997 1996 1995 ---------------- ---------------- ---------------- WEIGHTED WEIGHTED WEIGHTED NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE OF OPTION OF OPTION OF OPTION SHARES IN THOUSANDS SHARES PRICE SHARES PRICE SHARES PRICE ------------------- ------ -------- ------ -------- ------ -------- Options outstanding, January 1. 2,589 $8.58 1,637 $2.94 1,758 $2.46 Options granted................ 470 18.72 1,609 13.62 394 5.01 Options exercised.............. (430) 2.61 (295) 2.61 (323) 2.55 Options canceled............... (93) 10.56 (362) 8.32 (192) 2.80 ----- ----- ----- ----- ----- ----- Options outstanding, December 31............................ 2,536 11.41 2,589 8.58 1,637 2.94 ===== ===== ===== Options Exercisable............ 678 6.95 551 2.47 467 2.24
There were 1,636,431 options available for future grants at December 31, 1997. The stock option information presented in the above tables reflects the 2- for-1 stock split and 1-for-10 stock dividend in 1996, 3-for-2 stock split paid in 1995, the 1-for-10 stock dividend paid in 1993, and the 1-for-19 stock dividend paid in 1992. Effective January 1, 1996, The Company adopted the disclosure requirements of SFAS 123, and continued to measure its employee stock-based compensation arrangements under the provisions of APB 25. Accordingly, no compensation expense has been recognized for the stock option plan. Had compensation expense for the Company's stock option plan been determined based on the fair value at the grant date for awards in 1997, 1996 and 1995 consistent with the provisions of SFAS 123, the Company's net income and income per share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income: As reported...................................... $85,921 $75,984 $14,193 Pro forma........................................ 81,707 74,733 14,089 Basic income per share: As reported...................................... $ 2.23 $ 2.11 $ 0.45 Pro forma........................................ 2.12 2.07 0.44 Diluted income per share: As reported...................................... $ 2.10 $ 1.95 $ 0.40 Pro forma........................................ 2.00 1.92 0.40
The effects of applying SFAS 123 for disclosing compensation cost may not be representative of the effects on reported net income for future years. 102 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The weighted average fair value at date of grant of options granted during 1997, 1996 and 1995 was $11.27, $6.22 and $3.09 per option, respectively. The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
YEAR ENDED DECEMBER 31, ------------------- 1997 1996 1995 ----- ----- ----- Expected life (years)................................. 5.53 3.40 3.43 Interest rate......................................... 5.76% 5.48% 5.14% Volatility............................................ 64.33 57.51 60.80 Dividend yield........................................ 0.00% 0.00% 0.00%
23. EXECUTIVE COMPENSATION Employment Agreements On January 1, 1997, the Company entered into five-year employment contracts with H. Wayne Snavely, Chairman of the Board, President and Chief Executive Officer, Kevin E. Villani, Executive Vice President, Chief Financial Officer and a Director and Stephen J. Shugerman, President of SPB and a Director, which provide for minimum annual aggregate compensation of $1 million, subject to adjustment for inflation, plus an annual bonus approved by the Company's Board of the Directors based on the attainment of performance objectives, including the Company's return on equity, earnings per share and increase in the price of the Company's common stock. The total cash compensation of the three senior officers is limited in the aggregate to $2.95 million annually. Stock Options On January 1, 1992, options were granted to three senior officers of the Company to purchase a total of 2,292,628 shares, adjusted for stock dividends and splits, of the Company's Common Stock. The exercise price of these options is $0.89 per share of common stock for one-half of the options, with the other half exercisable at $1.40 per share. These options became exercisable in September 1995 (vesting was accelerated from January 1, 1997). These options expire on December 1, 2001 and are not covered by the Company's stock option plan. Compensation expense relating to these options was recorded in the Company's consolidated financial statements over a four year period which ended December 31, 1995 for an amount representing the difference between the exercise price of the options and the market price of the Company's stock at the grant date. The aggregate amount of compensation expense recognized on these stock options since their grant date is $2,178,000. The amount of compensation expense recorded for the year ended December 31, 1995 related to the stock options was $871,200. 24. INTEREST RATE SWAPS The Company may enter into interest rate cap, floor, and swap transactions to manage its exposure to fluctuations in interest rates and market movements in securities values. These instruments involve, to varying degrees, elements of credit and interest rate risk. The contract or notional amounts do not represent exposure to credit loss. Risk originates from the inability of counterparties to meet the terms of the contracts and from market movements in securities values and interest rates. The Company controls the credit risk of its interest rate cap, floor and swap agreements through credit approvals, limits and monitoring procedures. 103 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) As a part of the SPB securitization in the third quarter of 1996 of $277.0 million of multi-family and commercial mortgage loans, the Company delivered subordinate bonds of approximately $22 million into a total rate of return swap with JP Morgan. The provisions of the swap entitle the Company to receive the total return on the subordinate bonds delivered in exchange for a floating payment of LIBOR plus a spread of 1.95%. The swap was an off balance sheet instrument, and it expired on September 30, 1997. 25. COMMITMENTS AND CONTINGENCIES Loan Servicing As of December 31, 1997 and 1996 the Company was servicing loans for others, directly and through sub-servicing arrangements, totaling approximately $1.3 billion and $2.1 billion, respectively. Related fiduciary funds held in trust for investors in non-interest bearing accounts totaled $8.3 million and $1.3 million at December 31, 1997 and 1996, respectively. These funds are segregated in special bank accounts and are held as deposits at SPB. The Company is a guarantor of certain performances and lease servicing by IBC. The Company is a guarantor for AMN's performance with regards to the Auto Trust 1997-A securitization. Sales of Loans and Servicing Rights In the ordinary course of business, the Company is exposed to liability under representations and warranties made to purchasers and insurers of mortgage loans and the purchasers of servicing rights. Under certain circumstances, the Company is required to repurchase mortgage loans if there has been a breach of representations or warranties. The Company provided $5.4 million in 1997 as an allowance for losses on repurchases of former mortgage banking loans. During the years ended December 31, 1997 and 1996, the Company retained servicing rights on $197.8 million and $35.1 million of mortgage loans sold through traditional secondary market channels and $919.1 million and $1.3 billion on loans and leases sold through securitizations. Additionally, during the year ended December 31, 1996, the Company released servicing rights to the purchasers on $627.0 million of mortgage loans sold. During the year ended December 31, 1995, the Company retained servicing rights on $794.9 million of mortgage loans sold, and released servicing rights to the purchasers on $1.1 billion of mortgage loans sold. Loan Commitments As of December 31, 1997 and 1996, the Company had unfunded open loan commitments amounting to $655.3 million and $642.8 million, respectively, to fund loans. There is no exposure to credit loss in this type of commitment until the loans are funded. Interest rate risk is mitigated by the use of forward contracts to sell loans to investors. 104 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Forward Contracts The Company sold mortgage-backed securities through forward delivery contracts with major dealers in such securities, primarily through its former mortgage banking operations. At December 31, 1997 and 1996, the Company had $0 and $143.0 million, respectively, in outstanding commitments to sell mortgage loans through mortgage-backed securities. The credit risk of forward contracts relates to the counterparties' ability to perform under the contract. The Company evaluates counterparties based on their ability to perform prior to entering into any agreements. The Company regularly securitizes and sells fixed and variable-rate mortgage loans. To offset the effects of interest rate fluctuations on the value of its fixed-rate loans held for sale, the Company in certain cases will hedge its interest rate risk related to loans held for sale by selling U.S. Treasury securities short or in the forward market. As of December 31, 1997 and 1996, the Company had open positions of $16.4 million and $183.7 million related to the sales of United States Treasury futures contracts hedging the interest rate risk on fixed rate loans held for sale. At December 31, 1997, the Company had unrealized gains of $277,000 on open positions. At December 31, 1996, the Company had unrealized losses of $1.7 million on open positions. Options The Company may purchase put options or write covered call options to hedge against adverse movements in the value of the loans held for sale portfolio. The Company will realize a gain or loss upon the expiration or closing of the option transaction. When an option is exercised, the proceeds on sales for a written call option, the purchase cost for a written put option, or the cost of the security for a purchased put or call option is adjusted by the amount of premium received or paid. The risk in writing a call option is that the Company gives up the opportunity for profit if the market price of the security increases and the option is exercised. The risk in buying an option is that the Company pays a premium whether or not the option is exercised. The Company had $0 and $70.0 million notional amount of written call option contracts outstanding at December 31, 1997 and 1996, respectively. The Company received $0 and $366,000 in premiums related to the options outstanding at December 31, 1997 and 1996, respectively. There were no option contracts exercised during the year. Lease Commitments Minimum rental commitments under all noncancelable operating leases at December 31, 1997 were as follows:
(IN THOUSANDS) -------------- 1998...................................... $ 4,629 1999...................................... 3,664 2000...................................... 3,421 2001...................................... 2,828 2002...................................... 2,572 Thereafter................................ 1,493 ------- Total................................... $18,607 =======
105 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Rent expense for the years ended December 31, 1997, 1996 and 1995 was $4.0 million, $4.2 million, and $3.6 million, respectively. Legal Proceedings The Company is a defendant in Fortune Mortgage Corporation et al. vs. ICII et al., originally filed in Orange County Superior Court on March 5, 1997 and recently ordered removed to arbitration under the auspices of the American Arbitration Association. The complaint alleges breach of contract, breach of implied covenant of good faith and fair dealing, negligent misrepresentation, fraud, conspiracy to commit fraud, aiding and abetting fraud, contractual indemnity and reimbursement, money had and received, and unjust enrichment arising from the Company's sale of a group of loan production offices to plaintiffs. The plaintiffs seek rescission, restitution and general, special and/or consequential damages, and also exemplary and punitive damages as relate to the claims regarding fraud. The plantiffs are seeking approximately $3.5 million in general damages and approximately $10.0 million in punitive damages. In Steadfast Insurance Co., Inc. vs. AMN and ICII, filed on August 12, 1997 in the U.S. District Court, Northern District of Illinois, the plaintiff seeks a declaratory judgment, compensatory damages in the amount of $9 million and punitive damages arising from an alleged breach of contract and allegedly fraudulent conduct by AMN. The claim relates to an insurance policy issued to AMN in 1993 covering certain losses resulting from auto loan defaults. The Company and a Director are defendants in Judy L. Resnick v. Imperial Credit Industries, Inc., et al originally filed on January 14, 1998, in Los Angeles Superior Court. The complaint alleges conspiracies by the defendants to defraud, interfere with advantageous business relationships, defame, and breach of fiduciary duty as well as actual fraud, defamation, and breach of implied covenant of good faith and fair dealing arising out of ICG's acquisition of substantially all of the assets of Dabney/Resnick/Imperial. The plaintif is seeking actual, consequential, incidental, general and punitive damages in a sum of not less than $25 million. The Company is involved in additional litigation arising in the normal course of business. All of the above referenced actions are being actively defended and although the ultimate outcome can not be estimated, management believes, based in part upon the advice of legal counsel, that none of these proceedings will have a material effect on the Company's financial condition or results of operations. 26. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments include securities, loans receivable, time deposits and various off-balance sheet items. Because no market exists for a portion of the Company's loans held for investment and securitization related assets, fair value estimates are based on judgments regarding credit risk, investor expectation of future economic conditions, normal cost of administration and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates presented do not include the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. 106 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: FINANCIAL ASSETS The carrying values of cash, interest bearing deposits, FHLB stock, and accrued interest receivable are considered to approximate fair value. The carrying values of securities held for trading and available for sale approximate fair value. Such market value is determined by reference to quoted market prices. When quoted market prices are not available, fair value is estimated by reference to market values for similar securities or by discounting cash flows at an appropriate risk rate. The fair value of loans held for sale is based on forward sales contracts or quoted market prices. The fair value of loans held for investment is estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices for similar instruments, taking into consideration the varying degrees of credit risk. The fair value of servicing rights, excess servicing fees and securitization related assets is estimated by discounting future cash flows using appropriate risk, default and prepayment rates. The fair value of investments in unconsolidated publicly traded affiliates is based on quoted market prices. FINANCIAL LIABILITIES The carrying amounts of deposits due on demand and accrued interest payable is considered to approximate fair value. For fixed maturity deposits, fair value is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar maturities. The fair value of debt is based on rates currently available to the Company for debt with similar terms and remaining maturities. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The fair value of lending commitments is estimated using the fees currently charged to enter into similar agreements; such estimated fair value is not material. The fair value of interest rate swaps, forward treasury contracts, interest rate futures and interest rate swaps is based on quoted market prices. The fair value of option contracts is based on the unamortized premium. 107 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The estimated fair values of the Company's financial instruments at December 31, 1997 and 1996 are as follows:
1997 1996 --------------------- ---------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) ASSETS: Cash............................. $ 50,597 $ 50,597 $ 74,247 $ 74,247 Interest bearing deposits........ 103,738 103,738 3,369 3,369 Investment in Federal Home Loan Bank stock...................... 5,646 5,646 17,152 17,152 Securities held for trading...... 115,905 115,905 25,180 25,180 Securities available for sale.... 112,726 112,726 59,116 59,116 Loans held for sale.............. 162,571 168,262 940,096 954,299 Loans held for investment, net... 1,266,718 1,286,820 1,068,599 1,081,053 Purchased and originated servicing rights................ 4,731 4,731 14,887 14,887 Capitalized excess servicing fees receivable...................... -- -- 23,142 23,142 Retained interest in loan and lease securitizations........... 43,105 43,105 49,548 49,548 Interest only and residual certificates.................... -- -- 87,017 87,017 Accrued interest receivable...... 9,132 9,132 13,847 13,847 Investments in unconsolidated subsidiaries.................... 118,402 330,427 -- -- LIABILITIES: Deposits......................... $1,156,022 $1,160,294 $1,069,184 $1,069,624 Borrowings from Federal Home Loan Bank............................ 45,000 45,000 140,500 140,500 Other borrowings................. 144,841 144,841 694,352 694,352 Remarketed par securities........ 70,000 70,000 -- -- Senior notes..................... 219,813 219,474 88,209 93,150 Convertible debentures........... -- -- 75,000 75,000 Accrued interest payable......... 21,484 21,484 14,034 14,034 OFF BALANCE SHEET ITEMS: Options.......................... -- -- 366 366 Interest rate swap............... -- -- -- 1,166 Forward treasury contracts....... 277 277 (1,700) (1,700)
108 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 27. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
THREE MONTHS ENDED ------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Year ended December 31, 1997 Gain on sale of loans............. $ 8,666 $28,558 $20,512 $ 9,987 Net interest income............... 20,808 23,723 29,181 27,631 Other revenues.................... 13,691 10,960 25,405 128,517 Provision for loan and lease losses........................... 2,870 5,736 9,559 20,786 Other expenses.................... 21,134 29,064 35,090 64,224 Net income........................ 7,037 14,073 14,589 50,222 Income per share: Basic........................... $ 0.18 $ 0.37 $ 0.38 $ 1.29 Diluted......................... $ 0.17 $ 0.35 $ 0.36 $ 1.22 Year ended December 31, 1996 Gain on sale of loans............. $21,711 $19,166 $28,640 $18,639 Net interest income............... 12,737 13,405 22,163 24,130 Gain (loss) on sale of servicing.. 8,065 (257) -- (217) Other revenues.................... 3,212 65,843 2,987 26,483 Provision for loan and lease losses........................... 1,500 2,025 2,617 3,631 Other expenses.................... 27,168 20,652 24,924 26,305 Net income........................ 8,616 43,041 9,433 14,894 Income per share: Basic........................... $ 0.27 $ 1.19 $ 0.25 $ 0.39 Diluted......................... $ 0.24 $ 1.11 $ 0.23 $ 0.37
28. SELECTED FINANCIAL INFORMATION OF SUBSIDIARIES The following represents summarized financial information with respect to the operations of SPB, a significant wholly-owned subsidiary of ICII.
AS OF AND FOR THE YEAR ENDED DECEMBER 31, -------------------------------- SOUTHERN PACIFIC BANK 1997 1996 1995 --------------------- ---------- ---------- ---------- (IN THOUSANDS) Total assets................................ $1,503,807 $1,384,008 $1,432,554 Deposits.................................... 1,189,841 1,072,266 1,093,250 Borrowings from Federal Home Loan Bank...... 45,000 140,500 190,000 Other borrowings............................ 80,000 -- -- Stockholder's equity........................ 157,081 144,798 126,599 Interest income............................. 153,824 131,184 103,112 Interest expense............................ 80,453 73,141 70,819 Noninterest income.......................... 34,636 15,149 17,790 Noninterest expense......................... 39,768 21,846 13,942 Provision for loan losses................... 14,900 8,938 5,450 Income before taxes......................... 53,339 42,408 30,691 Net income.................................. 30,824 24,399 17,753
109 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following represents summarized consolidating financial information as of December 31, 1997 and December 31, 1996, and for the years ended December 31, 1997, 1996 and 1995, with respect to the financial position, results of operations and cash flows of the Company and its wholly-owned and majority- owned subsidiaries. On January 17, 1997, the Company sold $200 million of 9.875% Senior Notes due 2007. As of December 31, 1997, the 9.875% Senior Notes are guaranteed by five of the Company's wholly-owned subsidiaries, IBC, ICAI, ICCAMC, ICW and AMN (the "Guarantor Subsidiaries"). As of December 31, 1997, 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. CONSOLIDATING CONDENSED BALANCE SHEET AS OF DECEMBER 31, 1997
NON- GUARANTOR GUARANTOR ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------ ------------ ------------ (IN THOUSANDS) ASSETS Cash.................... $ 13,229 $ 6,668 $ 43,318 $ (12,618) $ 50,597 Interest bearing deposits............... 31,390 1,149 71,199 -- 103,738 Investments in Federal Home Loan Bank stock... -- -- 5,646 -- 5,646 Securities available for sale and trading....... 107,671 21,031 99,929 -- 228,631 Loans held for sale..... 12,138 23,694 126,739 -- 162,571 Loans held for investment, net........ 78,922 44,941 1,197,430 (54,575) 1,266,718 Investment in SPFC...... 65,303 -- -- -- 65,303 Purchased and originated servicing rights....... -- -- 4,731 -- 4,731 Investment in FMC....... 53,099 -- -- -- 53,099 Retained interest in loan and lease securitizations........ -- 43,105 -- -- 43,105 Investment in subsidiaries........... 281,454 -- -- (281,454) -- Goodwill................ -- 13,229 22,378 -- 35,607 Other assets............ 59,911 (1,104) 26,473 (2,932) 82,348 -------- -------- ---------- --------- ---------- Total assets.......... $703,117 $152,713 $1,597,843 $(351,579) $2,102,094 ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits................ $ -- $ -- $1,189,840 $ (33,818) $1,156,022 Other borrowings........ -- 30,250 196,528 (36,937) 189,841 Remarketed Par Securities............. 72,165 -- (2,165) -- 70,000 Senior notes............ 219,813 -- -- -- 219,813 Minority interest in consolidated subsidiaries........... 946 20 111 2,097 3,174 Other liabilities....... 86,260 7,327 45,095 629 139,311 -------- -------- ---------- --------- ---------- Total liabilities..... 379,184 37,597 1,429,409 (68,029) 1,778,161 -------- -------- ---------- --------- ---------- Shareholders' equity: Preferred stock......... -- 12,000 -- (12,000) -- Common stock............ 147,109 125,139 89,342 (214,481) 147,109 Retained earnings....... 174,898 (22,023) 79,092 (57,069) 174,898 Unrealized gain on securities available for sale............... 1,926 -- -- -- 1,926 -------- -------- ---------- --------- ---------- Total shareholders' equity............... 323,933 115,116 168,434 (283,550) 323,933 -------- -------- ---------- --------- ---------- Total liabilities and shareholders' equity. $703,117 $152,713 $1,597,843 $(351,579) $2,102,094 ======== ======== ========== ========= ==========
110 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONSOLIDATING CONDENSED INCOME STATEMENT YEAR ENDED DECEMBER 31, 1997
NON- GUARANTOR GUARANTOR ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------ ------------ ------------ (IN THOUSANDS) REVENUE: (Loss) gain on sale of loans and leases....... $ (4,427) $ 5,894 $ 65,853 $ 403 $ 67,723 -------- -------- -------- -------- -------- Interest income......... 28,916 32,736 172,894 (6,609) 227,937 Interest expense........ 25,703 11,283 96,116 (6,508) 126,594 -------- -------- -------- -------- -------- Net interest income..... 3,213 21,453 76,778 (101) 101,343 Provision for loan and lease losses........... 5,000 19,051 14,900 -- 38,951 -------- -------- -------- -------- -------- Net interest income after Provision for loan and lease losses................ (1,787) 2,402 61,878 (101) 62,392 -------- -------- -------- -------- -------- Loan servicing (expense) income................. (2,283) 5,212 7,814 -- 10,743 Investment Banking fees. -- -- 7,702 -- 7,702 Gains on sale of FMC stock.................. 92,137 -- -- -- 92,137 Gain on sale of SPFC stock.................. 9,488 -- -- -- 9,488 Gain on sale of IMH stock.................. 9,225 411 1,294 566 11,496 Gain on termination of REIT contract.......... -- 19,046 -- -- 19,046 Equity in net income SPFC................... 25,869 -- -- -- 25,869 Equity in net loss FMC.. (3,050) -- -- -- (3,050) Dividends received from subsidiaries........... 27,514 -- -- (27,514) -- Other (expense) income.. (3,447) 5,050 5,113 (702) 6,014 -------- -------- -------- -------- -------- Total other income..... 155,453 29,719 21,923 (27,650) 179,445 -------- -------- -------- -------- -------- Total revenues....... 149,239 38,015 149,654 (27,348) 309,560 -------- -------- -------- -------- -------- EXPENSES: Personnel expense....... 4,682 17,769 38,379 -- 60,830 Amortization of PMSR's and OMSR's............. 1,580 637 872 -- 3,089 Occupancy expense....... 1,310 598 2,411 -- 4,319 Data processing expense. 260 288 955 -- 1,503 Net expenses of other real estate owned...... 4,513 (254) 2,268 -- 6,527 Professional services... 3,611 1,684 5,008 -- 10,303 Amortization of goodwill............... -- 21,724 1,536 -- 23,260 Provision for loss on loan repurchase........ 5,400 -- -- -- 5,400 Loss on restructuring... 3,709 -- -- -- 3,709 General, administrative and other expense...... 4,662 13,486 13,695 (399) 31,444 -------- -------- -------- -------- -------- Total expenses......... 29,727 55,932 65,124 (399) 150,384 -------- -------- -------- -------- -------- Income before income taxes, minority interest, deferred inter-company expense and extraordinary item. 119,512 (17,917) 84,530 (26,949) 159,176 Income taxes (benefit).. 41,611 (5,670) 22,568 238 58,747 -------- -------- -------- -------- -------- Income (loss) before minority interest and extraordinary item..... 77,901 (12,247) 61,962 (27,187) 100,429 Minority interest in income of consolidated subsidiaries........... 10,513 -- -- -- 10,513 -------- -------- -------- -------- -------- Income (loss) before deferred inter-company expense and extraordinary item..... 67,388 (12,247) 61,962 (27,187) 89,916 Deferred inter-company expense, net of income taxes.................. (327) -- -- 327 -- -------- -------- -------- -------- -------- Income (loss) before equity in undistributed income of subsidiaries and extraordinary item. 67,715 (12,247) 61,962 (27,514) 89,916 Equity in undistributed income of subsidiaries. 22,201 -- -- (22,201) -- -------- -------- -------- -------- -------- Extraordinary item--Loss on early extinguishment of debt, net of income taxes.................. (3,995) -- -- -- (3,995) -------- -------- -------- -------- -------- Net income (loss)....... $ 85,921 $(12,247) $ 61,962 $(49,715) $ 85,921 ======== ======== ======== ======== ========
111 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997
NON- GUARANTOR GUARANTOR ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ (IN THOUSANDS) Net cash provided by (used in) operating activities............. $ (2,067) $ 31,657 $ 815,765 $(787,628) $ 57,727 --------- -------- --------- --------- --------- Cash flows from investing activities: Net change in interest bearing deposits..... (31,390) (986) (70,797) 2,804 (100,369) Purchase of securities available for sale... (42,938) -- -- -- (42,938) Sale of securities available for sale... -- -- 29,354 (23,950) 5,404 Net change loans held for investment....... (56,088) 15,544 (272,429) 106,801 (206,172) Proceeds of sale of SPFC stock........... 13,707 -- -- -- 13,707 Proceeds of sales of IMH stock............ 9,679 411 1,295 565 11,950 Proceeds of sales of FMC stock............ 59,731 -- -- -- 59,731 Investment in Imperial Credit Asset Resolution Inc....... (74,810) -- -- 74,810 -- Cash utilized for acquisitions......... (750) -- (123,738) -- (124,488) Net change in investment in Subsidiaries......... (11,803) -- -- 11,803 -- Other, net............ 3,645 (23,283) (40,377) 88,066 28,051 --------- -------- --------- --------- --------- Net cash (used in) provided by investing activities............. (131,017) (8,314) (476,692) 260,899 (355,124) --------- -------- --------- --------- --------- Cash flows from financing activities: Net change in deposits............. -- -- 117,575 (30,737) 86,838 Advances from Federal Home Loan Bank....... -- -- 50,000 -- 50,000 Repayments of advances from Federal Home Loan Bank............ -- -- (145,500) -- (145,500) Net change in other borrowings........... (15,363) (58,518) (290,113) 507,499 143,505 Proceeds from offering of Senior Notes...... 194,500 -- -- -- 194,500 Borrowings from Imperial Credit Investment Corp...... 10,000 -- -- (10,000) -- Proceeds from offering of Remarketed Securities........... 68,075 -- -- -- 68,075 Repurchase of Senior Notes................ (73,241) -- -- -- (73,241) Net change in minority interest............. (44,203) -- 111 (7,670) (51,762) Other, net............ 1,332 33,870 (92,754) 58,884 1,332 --------- -------- --------- --------- --------- Net cash provided by (used in) financing activities............. 141,100 (24,648) (360,681) 517,976 273,747 --------- -------- --------- --------- --------- Net change in cash.... 8,016 (1,305) (21,608) (8,753) (23,650) Cash at beginning of period............... 5,213 7,973 64,926 (3,865) 74,247 --------- -------- --------- --------- --------- Cash at end of period. $ 13,229 $ 6,668 $ 43,318 $ (12,618) $ 50,597 ========= ======== ========= ========= =========
112 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1996
NON- GUARANTOR GUARANTOR ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------ ------------ ------------ (IN THOUSANDS) ASSETS Cash.................... $ 5,213 $ 7,973 $ 64,926 $ (3,865) $ 74,247 Interest bearing deposits............... -- 163 2,594 612 3,369 Investments in Federal Home Loan Bank stock... -- -- 17,152 -- 17,152 Investment and trading securities............. 8,802 887 75,173 (566) 84,296 Loans held for sale..... 4,839 8,547 926,710 -- 940,096 Loans held for investment, net........ 34,505 86,214 948,567 (687) 1,068,599 Purchased and originated servicing rights....... -- 637 14,250 -- 14,887 Capitalized excess servicing fees receivable............. -- -- 23,142 -- 23,142 Retained interest in loan and lease securitizations........ -- 19,646 29,902 -- 49,548 Interest-only and residual certificates.. -- -- 87,017 -- 87,017 Accrued interest on loans.................. 1,425 -- 12,422 -- 13,847 Premises and equipment, net.................... 4,922 404 7,116 -- 12,442 Other real estate owned, net.................... 3,508 -- 8,706 -- 12,214 Investment in subsidiaries........... 269,651 -- -- (269,651) -- Goodwill................ -- 14,115 24,375 -- 38,490 Other assets............ 96,746 (15,385) (22,998) (27,070) 31,293 -------- -------- ---------- --------- ---------- Total assets.......... $429,611 $123,201 $2,219,054 $(301,227) $2,470,639 ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits................ $ -- $ -- $1,072,266 $ (3,082) $1,069,184 Borrowings from Federal Home Loan Bank......... -- -- 140,500 -- 140,500 Other borrowings........ 15,363 88,768 605,343 (15,122) 694,352 Senior notes............ 88,209 -- -- -- 88,209 Convertible subordinated debentures............. -- -- 75,000 -- 75,000 Minority interest in consolidated subsidiaries........... 45,149 -- -- 9,787 54,936 Other liabilities....... 41,382 9,222 71,605 (13,259) 108,950 -------- -------- ---------- --------- ---------- Total liabilities....... 190,103 97,990 1,964,714 (21,676) 2,231,131 -------- -------- ---------- --------- ---------- Shareholders' equity: Preferred stock......... -- -- 9,143 (9,143) -- Common stock............ 145,521 21,501 140,382 (161,883) 145,521 Retained earnings....... 88,977 3,525 104,815 (108,340) 88,977 Unrealized gain on securities available for sale............... 5,010 185 -- (185) 5,010 -------- -------- ---------- --------- ---------- Total shareholders' equity............... 239,508 25,211 254,340 (279,551) 239,508 -------- -------- ---------- --------- ---------- Total liabilities and shareholders' equity............... $429,611 $123,201 $2,219,054 $(301,227) $2,470,639 ======== ======== ========== ========= ==========
113 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONSOLIDATING INCOME STATEMENT YEAR ENDED DECEMBER 31, 1996
NON- GUARANTOR GUARANTOR ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------ ------------ ------------ (IN THOUSANDS) REVENUE: Gain on sale of loans... $ (937) $ 2,617 $ 86,090 $ 386 $ 88,156 ------- ------- -------- -------- -------- Interest income......... 14,877 3,811 193,963 (5,180) 207,471 Interest expense........ 16,696 1,901 127,181 (10,742) 135,036 ------- ------- -------- -------- -------- Net interest income..... (1,819) 1,910 66,782 5,562 72,435 Provision for loan and lease losses........... -- -- 9,625 148 9,773 ------- ------- -------- -------- -------- Net interest income after provision for loan and lease losses. (1,819) 1,910 57,157 5,414 62,662 ------- ------- -------- -------- -------- Loan servicing income... (3,706) 3,095 11,444 (9,153) 1,680 Gain on sale of servicing rights....... 6,249 -- -- 1,342 7,591 Gains on sale of SPFC stock.................. 82,690 -- -- -- 82,690 Dividends received from subsidiaries........... 6,200 -- -- (6,200) -- Other income............ 741 3,214 6,162 4,037 14,154 ------- ------- -------- -------- -------- Total other income..... 92,174 6,309 17,606 (9,974) 106,115 ------- ------- -------- -------- -------- Total revenues......... 89,418 10,836 160,853 (4,174) 256,933 ------- ------- -------- -------- -------- EXPENSES: Personnel expense....... 8,757 2,997 36,837 (236) 48,355 Amortization of PMSRs and OMSRs.............. 402 106 613 -- 1,121 Occupancy expense....... 1,994 229 2,352 78 4,653 Data processing expense. 1,094 62 1,007 -- 2,163 Net expenses of other real estate owned...... 4,969 -- 765 1,280 7,014 General, administrative and other expense...... 13,652 3,583 17,877 631 35,743 ------- ------- -------- -------- -------- Total expenses......... 30,868 6,977 59,451 1,753 99,049 ------- ------- -------- -------- -------- Income before income taxes, minority interest, deferred inter-company expense and extraordinary item. 58,550 3,859 101,402 (5,927) 157,884 Income taxes............ 28,830 1,606 39,135 303 69,874 ------- ------- -------- -------- -------- Income before minority interest, deferred inter-company expense and extraordinary item. 29,720 2,253 62,267 (6,230) 88,010 Minority interest in of consolidated subsidiaries........... 12,026 -- -- -- 12,026 ------- ------- -------- -------- -------- Income before deferred inter-company expense.. 17,694 2,253 62,267 (6,230) 75,984 Deferred inter-company expense, net of income taxes.................. (1,383) -- -- 1,383 -- ------- ------- -------- -------- -------- Income before equity in undistributed income of subsidiaries........... 19,077 2,253 62,267 (7,613) 75,984 Equity in undistributed income of subsidiaries. 56,907 -- -- (56,907) -- ------- ------- -------- -------- -------- Net income (loss)....... $75,984 $ 2,253 $ 62,267 $(64,520) $ 75,984 ======= ======= ======== ======== ========
114 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1996
OTHER NON- GUARANTOR GUARANTOR ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ (IN THOUSANDS) Net cash provided by (used in) operating activities............. $ 141,655 $ 28,949 $(222,480) $ 20,614 $ (31,262) --------- --------- --------- --------- --------- Cash flows from investing activities: Net change in interest bearing deposits..... -- (163) 265,206 (636) 264,407 Proceeds of sales of servicing rights..... 31,799 -- -- (21,788) 10,011 Purchase of securities available for sale... -- (887) (41,704) (5,962) (48,553) Net change in loans held for investment.. (5,310) (86,213) (37,354) 101,226 (27,651) Cash utilized for acquisitions......... -- (20,020) -- -- (20,020) Proceeds from sale of SPFC stock........... 64,625 -- -- -- 64,625 Net change in investment in Subsidiaries......... (155,759) -- -- 155,759 -- Other, net............ 3,762 (524) (6,425) 4,545 1,358 --------- --------- --------- --------- --------- Net cash (used in) provided by investing activities............. (60,883) (107,807) 179,723 233,144 244,177 --------- --------- --------- --------- --------- Cash flows from financing activities: Net change in deposits............. -- -- (20,984) (2,821) (23,805) Advances from Federal Home Loan Bank....... -- -- 434,000 -- 434,000 Repayments of advances from Federal Home Loan Bank............ -- -- (483,500) -- (483,500) Proceeds from convertible subordinated debentures........... -- -- 72,162 -- 72,162 Net change in other borrowings........... (196,363) 88,768 105,266 (184,134) (186,463) Proceeds from issuance of common stock...... 59,228 -- 53,798 (53,798) 59,228 Repayment of Bonds.... -- -- (111,995) -- (111,995) Net change in minority interest............. 43,697 -- -- 9,787 53,484 Other, net............ 9,286 -- 26,400 (26,631) 9,055 --------- --------- --------- --------- --------- Net cash (used in) provided by financing activities............. (84,152) 88,768 75,147 (257,597) (177,834) --------- --------- --------- --------- --------- Net change in cash.... (3,380) 9,910 32,390 (3,839) 35,081 Cash at beginning of period............... 8,593 (1,937) 32,536 (26) 39,166 --------- --------- --------- --------- --------- Cash at end of period. $ 5,213 $ 7,973 $ 64,926 $ (3,865) $ 74,247 ========= ========= ========= ========= =========
115 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONSOLIDATING INCOME STATEMENT YEAR ENDED DECEMBER 31, 1995
NON- GUARANTOR GUARANTOR ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------ ------------ ------------ REVENUE Gain on sale of loans... $ 12,999 $1,803 $ 36,051 $(11,296) $ 39,557 -------- ------ -------- -------- -------- Interest income......... 15,677 76 110,595 3,134 129,482 Interest expense........ 20,900 17 77,708 (2,897) 95,728 -------- ------ -------- -------- -------- Net interest income..... (5,223) 59 32,887 6,031 33,754 Provision for loan losses................. -- -- 5,450 -- 5,450 -------- ------ -------- -------- -------- Net interest income after provision for loan loss............. (5,223) 59 27,437 6,031 28,304 -------- ------ -------- -------- -------- Loan servicing income... 14,007 27 6,670 (7,986) 12,718 Gain on sale of servicing rights....... 4,889 -- 401 (1,712) 3,578 Other income............ (885) 2,465 2,676 (3,104) 1,152 -------- ------ -------- -------- -------- Total other income..... 18,011 2,492 9,747 (12,802) 17,448 -------- ------ -------- -------- -------- Total revenues......... 25,787 4,354 73,235 (18,067) 85,309 -------- ------ -------- -------- -------- EXPENSES: Personnel expense....... 20,281 1,606 12,789 (623) 34,053 Amortization of PMSRs and OMSRs.............. 3,986 -- 2,892 (2,892) 3,986 Occupancy expense....... 2,874 54 1,065 (89) 3,904 Data processing expense. 1,191 1 358 (89) 1,461 Net expense of other real estate owned...... 191 -- 1,706 16 1,913 General, administrative and other expense...... 9,938 493 9,277 (3,845) 15,863 -------- ------ -------- -------- -------- Total expenses......... 38,461 2,154 28,087 (7,522) 61,180 -------- ------ -------- -------- -------- Income before income taxes, minority interest, deferred inter-company gains and extraordinary item..... (12,674) 2,200 45,148 (10,545) 24,129 Income taxes............ (5,443) 929 19,212 (4,554) 10,144 -------- ------ -------- -------- -------- (Loss) income before minority interest, deferred inter-company gains and extraordinary item................... (7,231) 1,271 25,936 (5,991) 13,985 Minority interest in loss of consolidated subsidiaries........... (208) -- -- -- (208) -------- ------ -------- -------- -------- (Loss) income before deferred inter-company gains.................. (7,023) 1,271 25,936 (5,991) 14,193 Deferred inter-company gains, net of income taxes.................. 1,710 -- -- (1,710) -- (Loss) income before equity in undistributed income of subsidiaries. (8,733) 1,271 25,936 (4,281) 14,193 Equity in undistributed income of subsidiaries. 22,926 -- -- (22,926) -- -------- ------ -------- -------- -------- Net income (loss)....... $ 14,193 $1,271 $ 25,936 $(27,207) $ 14,193 ======== ====== ======== ======== ========
116 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1995
NON- GUARANTOR GUARANTOR ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ (IN THOUSANDS) Net cash (used in) provided by operating activities............. $(258,380) $ 22,093 $(1,076,751) $ 139,335 $(1,173,703) --------- -------- ----------- --------- ----------- Cash flows from investing activities: Net change in interest bearing deposits............. -- -- (126,700) (130,476) (257,176) Proceeds of sales of servicing rights..... 12,815 -- 5,055 (5,055) 12,815 Net change in loans held for investment.. 51,784 -- 493,749 21,160 566,693 Cash utilized for acquisitions......... -- (25,015) (150,000) -- (175,015) Net change in investment in Subsidiaries......... (15,581) -- -- 15,581 -- Other, net............ (8,310) (15) 1,194 775 (6,356) --------- -------- ----------- --------- ----------- Net cash provided by (used in) investing activities............. 40,708 (25,030) 223,298 (98,015) 140,961 --------- -------- ----------- --------- ----------- Cash flows from financing activities: Net change in deposits............. -- -- 146,390 11,979 158,369 Advances from Federal Home Loan Bank....... -- -- 347,000 -- 347,000 Repayments of advances from Federal Home Loan Bank............ -- -- (452,000) -- (452,000) Net change in other borrowings........... 211,725 -- 708,823 (39,733) 880,815 Issuance of Bonds..... -- -- 111,995 -- 111,995 Net change in minority interest............. 1,453 -- -- (1,453) -- Other, net............ 825 1,000 (1,100) 100 825 --------- -------- ----------- --------- ----------- Net cash provided by financing activities... 214,003 1,000 861,108 (29,107) 1,047,004 --------- -------- ----------- --------- ----------- Net change in cash.... (3,669) (1,937) 7,655 12,213 14,262 Cash at beginning of period............... 12,262 -- 24,881 (12,239) 24,904 --------- -------- ----------- --------- ----------- Cash at end of period. $ 8,593 $ (1,937) $ 32,536 $ (26) $ 39,166 ========= ======== =========== ========= ===========
117 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 29. SPB REGULATORY MATTERS General In August 1989, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, ("FIRREA") was enacted. This legislation was adopted in order to reform the regulation and supervision of financial institutions. Additionally legislation was adopted in 1991 with the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA provided for increased funding for Federal Deposit Insurance Commission ("FDIC") deposit insurance and for expanded regulation of financial institutions. Specifically, FDICIA requires the federal regulators to take prompt corrective action with respect to depository institutions which do not meet the minimum capital requirements. FDICIA established five capital ratio categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating and may be reclassified to a lower category by action based on other supervisory criteria. For an institution to be well capitalized it must have a total risk-based capital ratio of at least 10%, a Tier 1 risk- based capital ratio of at least 6%, and a leverage ratio of at least 5% and not be subject to any specific capital order or directive. At December 31, 1997 and 1996, SPB was categorized as well capitalized. Restrictions on Availability of Funds from SPB Under the California industrial loan law, a thrift and loan may declare dividends on its capital stock only if it has at least $750,000 of unimpaired capital stock plus additional capital stock of $50,000 for each branch office maintained. In addition, no distribution of dividends is permitted unless: (i) such distribution would not exceed a thrift and loan's retained earnings, (ii) any payment would not result in a violation of the approved minimum capital to thrift and loan certificate of deposit ratio and (iii) after giving effect to the distribution, either (y) the sum of a thrift and loan's assets (net of goodwill, capitalized research and development expenses and deferred charges) would be not less than 125% of its liabilities (net of deferred taxes, deferred income and other deferred credits), or (z) current assets would be not less than current liabilities (except that if a thrift and loan's average earnings before taxes for the last two fiscal years had been less than average interest expense, current assets must be not less than 125% of current liabilities). Subject to the above limitations, and according to SPB's by- laws, at December 31, 1997, all of SPB's capital and surplus in excess of $125.0 million is available for the payment of dividends. Additionally, SPB generally may not make any loan to, or hold an obligation of, any of its directors or officers or any director or officer of its holding company or affiliates, except in specified cases and subject to regulation by the California Commissioner of Corporations. In addition, SPB may not make any loan to, or hold an obligation of, any of its shareholders or any shareholder of its holding company or affiliates, except that this prohibition does not apply to persons who own less than 10% of the stock of a holding company or an affiliate that is listed on a national securities exchange. Recent Development On October 30, 1997, SPB announced that the Memorandum of Understanding ("MOU") entered into in September 1996 had been terminated as a result of the recent concurrent examinations by the FDIC and CDFI and their joint conclusions that the terms of the agreement have been satisfactorily met and the improvement in SPB's operations no longer warranted the MOU. On September 30, 1996 SPB entered into a MOU with the FDIC and the California Department of Financial Institutions ("CDFI"). This agreement required SPB to (i) have and retain qualified management, (ii) adopt and 118 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) implement comprehensive risk management policies, programs and systems, (iii) take all reasonable and good faith steps to ensure future compliance with all applicable laws and regulations, (iv) develop a credit review program, (v) update the lending, investments and audit policies, and (vi) provide quarterly progress reports to the FDIC and the Department of Corporations. Regulatory Capital SPB is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary-- actions by regulators that, if undertaken, could have a direct material effect on SPB's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, SPB must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. SPB's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require SPB to maintain minimum amounts and ratios, set forth in the table below, of total and Tier I capital to risk-weighted assets and Tier I capital to average assets. Management believes, as of December 31, 1997, that SPB meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the FDIC categorized SPB as well capitalized under the regulatory framework for prompt and corrective action. To be categorized as well capitalized SPB must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The following table presents SPB's actual capital ratios and the corresponding minimum and well capitalized capital ratio requirements under the (i) California Leverage limitation, (ii) FDIC Risk-based Capital and Tier 1 Capital regulations, and (iii) the FDIC Leverage ratio regulation as of December 31, 1997.
MINIMUM WELL CAPITALIZED ACTUAL REQUIREMENT REQUIREMENT -------------- -------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- --------- ------- (DOLLARS IN THOUSANDS) California Leverage Limitation................... $157,082 13.20% $ 59,476 5.00% $ -- -- Risk-based Capital............ 190,673 12.25% 124,583 8.00% 155,729 10.00% Risk-based Tier 1 Capital..... 136,206 8.75% 62,292 4.00% 93,437 6.00% FDIC Leverage Ratio........... 136,206 8.30% 65,644 4.00% 82,055 5.00%
119 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 30. IMPERIAL CREDIT INDUSTRIES, INC. (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS
DECEMBER 31, ----------------- 1997 1996 -------- -------- (IN THOUSANDS) ASSETS Cash......................................................... $ 13,229 $ 5,213 Interest bearing deposits.................................... 31,390 -- Securities available for sale................................ 86,695 8,802 Trading securities........................................... 20,976 -- Loans held for sale.......................................... 12,138 4,839 Loans held for investment, net............................... 78,922 34,505 Premises and equipment, net.................................. 2,272 4,922 Other real estate owned, net................................. 1,158 3,508 Investment in SPFC........................................... 65,303 -- Investment in FMC............................................ 53,099 -- Investment in subsidiaries................................... 281,454 269,651 Accrued interest on loans.................................... 3,320 1,425 Other assets................................................. 53,161 96,746 -------- -------- Total assets............................................... $703,117 $429,611 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Remarketed Par Securities.................................... $ 72,165 $ -- Other borrowings............................................. -- 15,363 Senior Notes................................................. 219,813 88,209 Minority interest in consolidated subsidiaries............... 946 45,149 Other liabilities............................................ 86,260 41,382 -------- -------- Total liabilities.......................................... 379,184 190,103 -------- -------- Shareholders' equity: Common stock, no par value, authorized 80,000,000 shares; 38,791,439 and 38,291,112 shares issued and outstanding at December 31, 1997 and 1996, respectively.................. 147,109 145,521 Retained earnings.......................................... 174,898 88,977 Unrealized gain on securities available for sale, net...... 1,926 5,010 -------- -------- Total shareholders' equity............................... 323,933 239,508 -------- -------- Total liabilities and shareholders' equity............... $703,117 $429,611 ======== ========
120 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONDENSED STATEMENTS OF INCOME
DECEMBER 31, -------------------------- 1997 1996 1995 -------- ------- ------- (IN THOUSANDS) Revenues: (Loss) gain on sale of loans..................... $ (4,427) $ (937) $12,999 -------- ------- ------- Interest income.................................. 28,916 14,877 15,677 Interest expense................................. 25,703 16,696 20,900 -------- ------- ------- Net interest income (expense).................. 3,213 (1,819) (5,223) -------- ------- ------- Provision for loan and lease losses.............. 5,000 -- -- -------- ------- ------- Net interest expense after provision for loan and lease losses.................................... (1,787) (1,819) (5,223) Loan servicing (expense) income.................. (2,283) (3,706) 14,007 Gain on sale of servicing rights................. -- 6,249 4,889 Gains on sale of FMC stock....................... 92,137 -- -- Gain on sale of IMH stock........................ 9,225 -- -- Gains on sale of SPFC stock...................... 9,488 82,690 -- Equity in net income of SPFC..................... 25,869 -- -- Equity in net loss of FMC........................ (3,050) -- -- Dividends received from subsidiaries............. 27,514 6,200 -- Other (loss) income.............................. (3,447) 741 (885) -------- ------- ------- Total other income............................. 155,453 92,174 18,011 -------- ------- ------- Total revenue.................................... 149,239 89,418 25,787 -------- ------- ------- Expenses: Personnel expense................................ 4,682 8,757 20,281 Occupancy expense................................ 1,310 1,994 2,874 Other expense.................................... 23,735 20,117 15,306 -------- ------- ------- Total expenses................................. 29,727 30,868 38,461 -------- ------- ------- Income (loss) before income taxes, minority interest, deferred inter-Company gains and extraordinary item.............................. 119,512 58,550 (12,674) Income taxes..................................... 41,611 28,830 (5,443) -------- ------- ------- Income (loss) before minority interest, deferred inter-company items and extraordinary item...... 77,901 29,720 (7,231) Minority interest in income (loss) of consolidated subsidiaries....................... 10,513 12,026 (208) Deferred inter-company (expense) income, net of income taxes.................................... (327) (1,383) 1,710 -------- ------- ------- Income (loss) before extraordinary item.......... 67,715 19,077 (8,733) Extraordinary item--Loss on extinguishment of debt, net of income taxes....................... (3,995) -- -- -------- ------- ------- Income (loss) before equity in undistributed income of subsidiaries.......................... 63,720 19,077 (8,733) Equity in undistributed income of subsidiaries... 22,201 56,907 22,926 -------- ------- ------- Net income..................................... $ 85,921 $75,984 $14,193 ======== ======= =======
121 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Net cash provided by (used in) operating activities................................... $ (2,067) $ 141,655 $(258,380) --------- --------- --------- Cash flows from investing activities: Net change in interest bearing deposits..... (31,390) -- -- Proceeds from bulk sale of servicing rights. -- 31,799 12,815 Purchase of servicing rights................ -- -- (8,128) Proceeds from sale of other real estate owned...................................... 4,637 2,953 -- Net change in securities available for sale. (42,938) -- -- Investment in Imperial Credit Asset Resolution Inc............................. (74,810) -- -- Proceeds from sale of SPFC stock............ 13,707 64,625 -- Proceeds from sale of FMC stock............. 59,731 -- -- Proceeds from sale of IMH stock............. 9,679 -- -- Net change in loans held for investment..... (56,088) (5,310) 51,784 Net change in investment in subsidiaries.... (11,803) (155,759) (15,581) Cash utilized for acquisitions.............. (750) -- -- (Purchase) disposal of premises and equipment.................................. (992) 809 (182) --------- --------- --------- Net cash (used in) provided by investing activities................................... (131,017) (60,883) 40,708 --------- --------- --------- Cash flows from financing activities: Net change in borrowings from Imperial Bank. -- (5,000) 5,000 Proceeds from offering of Senior Notes due 2007....................................... 194,500 -- -- Proceed from offering of Remarketed Par Securities................................. 68,075 -- -- Repayments of Senior Notes due 2004......... (73,241) -- -- Borrowings from Imperial Credit Investment Corporation................................ 10,000 -- -- Proceeds from resale of Senior Notes due 2004....................................... -- 7,615 -- Proceeds from issuance of common stock...... -- 59,228 -- Proceeds from exercise of stock options..... 1,332 1,671 825 Net change in other borrowings.............. (15,363) (191,363) 206,725 Net change in minority interest............. (44,203) 43,697 1,453 --------- --------- --------- Net cash provided by (used in) financing activities................................... 141,100 (84,152) 214,003 --------- --------- --------- Net change in cash............................ 8,016 (3,380) (3,669) Cash at beginning of year..................... 5,213 8,593 12,262 --------- --------- --------- Cash at end of year........................... $ 13,229 $ 5,213 $ 8,593 ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The following information supplements the condensed statements of cash flows:
DECEMBER 31, ------------------------- 1997 1996 1995 ------- -------- ------- (IN THOUSANDS) Cash paid during the period for: Interest........................................... $19,349 $ 16,315 $20,898 Significant non-cash activities: Loans transferred to OREO.......................... $ 6,751 $ 8,479 $ 2,419 Loans transferred from held for sale to held for investment........................................ -- 197,141 83,398 Servicing rights transferred from subsidiary....... -- -- 3,774 Change in unrealized gain on securities available for sale, net..................................... (3,084) 1,799 3,211 Contribution of fixed assets to ICIFC.............. -- -- 525
122 SOUTHERN PACIFIC FUNDING CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report............................................... 124 Consolidated Balance Sheets................................................ 125 Consolidated Statements of Earnings........................................ 126 Consolidated Statements of Changes in Shareholders' Equity................. 127 Consolidated Statements of Cash Flows...................................... 128 Notes to Consolidated Financial Statements................................. 129
All supplemental schedules are omitted as inapplicable or because the required information is included in the consolidated financial statements or notes thereto. 123 INDEPENDENT AUDITORS' REPORT The Board of Directors Southern Pacific Funding Corporation: We have audited the accompanying consolidated balance sheets of Southern Pacific Funding Corporation and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southern Pacific Funding Corporation and subsidiaries as of December 31, 1996 and 1997, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Portland, Oregon January 29, 1998 124 SOUTHERN PACIFIC FUNDING CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------- 1996 1997 ------------ ------------ ASSETS ------ Cash................................................ $ 14,175,566 $ 7,886,412 Loans held for sale................................. 223,059,102 264,384,993 Interest-only and residual certificates............. 87,016,900 277,156,343 Accrued interest receivable......................... 3,181,449 4,568,977 Premises and equipment, net......................... 3,036,388 7,660,691 Goodwill, net of accumulated amortization of $0 and $448,375 at December 31, 1996 and 1997, respectively....................................... 4,742,571 6,615,080 Other assets........................................ 5,165,048 21,072,897 ------------ ------------ Total assets.................................... $340,377,024 $589,345,393 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Borrowings under warehouse lines of credit........ $152,680,395 $205,031,055 Notes Payable..................................... -- 3,431,972 Deferred tax liability............................ 18,445,495 48,074,988 Long term debt.................................... 75,000,000 175,000,000 Other liabilities................................. 9,164,901 18,652,471 ------------ ------------ Total liabilities............................... 255,290,791 450,190,486 Shareholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued or outstanding at December 31, 1996 and 1997....................... -- -- Common stock, no par value, 75,000,000 shares authorized; 20,737,500 and 20,760,450 shares issued and outstanding at December 31, 1996 and 1997, respectively............................... 53,798,099 54,100,622 Contributed capital............................... 247,500 247,500 Translation adjustment............................ -- (8,745) Retained earnings................................. 31,040,634 84,815,530 ------------ ------------ Total shareholders' equity...................... 85,086,233 139,154,907 ------------ ------------ Total liabilities and shareholders' equity...... $340,377,024 $589,345,393 ============ ============
See accompanying notes to consolidated financial statements. 125 SOUTHERN PACIFIC FUNDING CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, ------------------------------------ 1995 1996 1997 ----------- ----------- ------------ Revenues: Gains on sales of loans................ $16,328,621 $55,360,515 $148,403,866 Interest income........................ 4,304,760 13,848,976 39,306,759 Securities valuation and other income.. 1,666,682 4,265,285 1,634,175 ----------- ----------- ------------ Total revenues....................... 22,300,063 73,474,776 189,344,800 =========== =========== ============ Expenses: Interest............................... 3,413,652 7,799,986 27,613,103 Personnel and commission expense....... 4,190,566 10,996,713 45,027,704 General and administrative expense..... 2,153,220 6,599,474 24,685,987 ----------- ----------- ------------ Total expenses....................... 9,757,438 25,396,173 97,326,794 =========== =========== ============ Earnings before taxes.................... 12,542,625 48,078,603 92,018,006 Income taxes............................. 5,205,190 20,446,614 38,243,110 ----------- ----------- ------------ Net earnings......................... $ 7,337,435 $27,631,989 $ 53,774,896 =========== =========== ============ Net earnings per share: Basic.................................. $ .47 $ 1.49 $ 2.59 Diluted................................ $ .47 $ 1.37 $ 2.23 Weighted average number of shares outstanding: Basic.................................. 15,562,500 18,552,500 20,747,665 Diluted................................ 15,562,500 20,511,936 25,358,202
See accompanying notes to consolidated financial statements. 126 SOUTHERN PACIFIC FUNDING CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ----------------------- CONTRIBUTED TRANSLATION RETAINED SHAREHOLDERS' SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS EQUITY ---------- ----------- ----------- ----------- ----------- ------------- Balance, December 31, 1994................... 15,562,500 $ -- $789,591 $ -- $ 4,761,693 $ 5,551,284 Net earnings, 1995...... -- -- -- -- 7,337,435 7,337,435 ---------- ----------- -------- ------- ----------- ------------ Balance, December 31, 1995................... 15,562,500 -- 789,591 -- 12,099,128 12,888,719 Effect of contribution transaction............ -- -- (542,091) -- (8,690,483) (9,232,574) Proceeds from initial public offering of 5,175,000 shares of common stock, net of offering expenses of $4,810,911 5,175,000 53,798,099 -- -- -- 53,798,099 Net earnings, 1996...... -- -- -- -- 27,631,989 27,631,989 ---------- ----------- -------- ------- ----------- ------------ Balance, December 31, 1996................... 20,737,500 53,798,099 247,500 -- 31,040,634 85,086,233 Exercise of stock options for 22,950 shares of common stock 22,950 302,523 -- -- -- 302,523 Translation adjustment.. -- -- -- (8,745) -- (8,745) Net earnings, 1997...... -- -- -- -- 53,774,896 53,774,896 ---------- ----------- -------- ------- ----------- ------------ Balance, December 31, 1997................... 20,760,450 $54,100,622 $247,500 $(8,745) $84,815,530 $139,154,907 ========== =========== ======== ======= =========== ============
See accompanying notes to consolidated financial statements. 127 SOUTHERN PACIFIC FUNDING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
1995 1996 1997 ------------ ------------- ------------- Cash flows from operating activities: Net earnings..................... $ 7,337,435 $ 27,631,989 $ 53,774,896 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization.. 51,488 615,258 2,714,870 Amortization of discount on note payable.................. -- -- 163,972 Translation adjustment......... -- -- (8,745) Securities valuation .......... -- (4,265,285) 427,799 Deferred tax expense........... -- 20,446,614 29,629,493 Changes in certain assets and liabilities, net of effect of acquisitions and contribution transaction: Mortgage loans held for sale... (63,536,648) (143,632,836) (41,325,891) Net change in interest only and residual certificates......... (18,235,099) (71,493,840) (186,767,242) Loans held under repurchase agreement..................... (12,800,565) 12,800,565 -- Accrued interest receivable.... (928,119) (2,204,075) (1,387,528) Other assets................... (282,831) (1,387,556) (12,465,420) Other liabilities.............. 3,186,942 3,787,856 9,487,570 ------------ ------------- ------------- Net cash used in operating activities.................. (85,207,397) (157,701,310) (145,756,226) ------------ ------------- ------------- Cash Flows Used in Investing Activities: Purchases of premises and equipment....................... (436,853) (3,028,897) (5,649,989) Purchase of interest-only and residual certificates........... -- -- (3,800,000) Payment for acquisitions......... -- (5,000,000) -- Payment for long-term investment and loan commitment............. -- (525,000) -- ------------ ------------- ------------- Net cash used in investment activities:................. (436,853) (8,553,897) (9,449,989) ------------ ------------- ------------- Cash Flows from Financing Activities: Net change in: Borrowings under warehouse lines of credit............... 96,130,120 56,550,275 52,350,660 Borrowings from SPTL........... (12,940,537) 322,053 -- Due to affiliates.............. 1,585,150 (1,504,984) -- Bank overdraft................. 619,517 (619,517) -- Proceeds from long term debt... -- 72,162,436 96,263,878 Proceeds from issuance of common stock.................. -- 53,798,099 302,523 Contribution transaction....... -- (277,589) -- ------------ ------------- ------------- Net cash provided by (used in) financing activities.... 85,394,250 180,430,773 148,917,061 ------------ ------------- ------------- Net change in cash................. (250,000) 14,175,566 (6,289,154) Cash at beginning of year.......... 250,000 -- 14,175,566 ------------ ------------- ------------- Cash at end of year................ $ -- $ 14,175,566 $ 7,886,412 ============ ============= ============= Supplementary information: Interest paid.................... $ 2,129,369 $ 6,330,097 $ 25,540,511 Taxes paid....................... $ -- $ 1,213,252 $ 9,105,917
See accompanying notes to consolidated financial statements. 128 SOUTHERN PACIFIC FUNDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1997 1. ORGANIZATION Southern Pacific Funding Corporation ("SPFC" or the "Company") is the successor to the Residential Lending Division of Southern Pacific Thrift and Loan ("SPTL"). The Company originates and acquires non-conforming single- family residential loans, including loans secured by second mortgages. In October 1994, Imperial Credit Industries, Inc. ("ICII") incorporated the Company as part of a strategic decision to form a separate subsidiary through which to operate SPTL's Residential Lending Division. In April 1995, ICII caused SPTL to contribute (the "Contribution Transaction") to SPFC certain customer lists of SPTL's Residential Lending Division to the ongoing operations of such division. In addition, in April 1995 all employees of SPTL's Residential Lending Division became employees of SPFC. The Company completed an initial public offering of its Common Stock in June 1996. At December 31, 1997, upon completion of three secondary offerings, ICII owned approximately 46.9% of the Company's outstanding Common Stock. 2. BASIS OF PRESENTATION The consolidated financial statements include the accounts of SPFC and its majority and wholly owned subsidiaries. These subsidiaries include National Capital Funding, Inc., Oceanmark Financial Corporation, Home America Financial Services, Inc. and Hallmark America Corp. which are located throughout the United States and Southern Pacific Mortgage Limited which is the Company's United Kingdom operation. All significant intercompany accounts and transactions have been eliminated in consolidation. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Mortgage Loans Held for Sale Mortgage loans held for sale are carried at the lower of aggregate cost or market. These loans are pledged against the Company's lines of credit. The cost of mortgage loans held for sale is the cost of the mortgage loans reduced or increased by the net deferred fees or costs associated with originating or acquiring the loan and increased by costs that are recognized upon sale. On an ongoing basis, management of the Company monitors the loan portfolio and considers such factors as historical loan loss experience, underlying collateral values, known problem loans, assessment of economic conditions, including changes in interest rates, and other appropriate data to identify risks in the loan portfolio. Interest-only and Residual Certificates Assets reflected in the accompanying consolidated balance sheets as interest-only and residual certificates in real estate mortgage investment conduits (REMICs) are recorded as a result of the Company's securitization of loans through various trust vehicles. The Company considers its obligations under recourse provisions in connection with its securitizations in valuing its interest-only and residual certificates. The Company estimates future cash flows from these interest-only and residual certificates and values them utilizing assumptions that it believes are consistent with those that would be utilized by an unaffiliated third party purchaser and records them as trading securities at fair value. Unrealized gains and losses are included in gains on sales of loans in the accompanying financial statements. The initial and subsequent changes in the unrealized gains and losses are included in securities valuation and other income. To the Company's knowledge, there is no active market for the sale of these interest-only and residual certificates. The fair value of interest-only and residual certificates is determined by computing the present value of the excess of the weighted average coupon on the loans sold over the sum of: (1) the coupon on the senior interests, (2) a base servicing fee paid to the loan servicer, (3) expected losses to be incurred on the portfolio of loans sold 129 SOUTHERN PACIFIC FUNDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) over the lives of the loans, and (4) fees payable to the trustee and monoline insurer. Prepayment assumptions used in the present value computation are based on recent evaluations of the actual prepayments of the Company's servicing portfolio or on market prepayment rates on new portfolios, taking into consideration the current interest rate environment and its expected impact on prepayment rates. The cash flows expected to be received by the Company are discounted at an interest rate that the Company believes an unaffiliated third-party purchaser would require as a rate of return on such a financial instrument. To the extent that actual future excess cash flows are different from estimated excess cash flows, the fair value of the Company's interest-only and residual certificates will be adjusted monthly with corresponding adjustments made to earnings in that period. In certain of its securitizations, the Company provided an initial overcollateralization on the securities sold and in all its securitizations the Company builds overcollateralization as cash flows projected as described above are used by the trustee to reduce the outstanding balance of the securities sold by the Company. The Company currently uses a 12% discount rate to calculate present value of anticipated "out of the trust" cash flows that it anticipates receiving from the securitization trust after overcollateralization requirements have been achieved. Prepayment assumptions are applied to each discrete security and further to each product (i.e. ARM's, Fixed and 2/28's) within each security. The estimated CPR varies over time based upon the relative maturity of the loans included in each pool. The estimated annual CPR is 4% at inception and increases in equal monthly increments until the peak estimated CPR is achieved, generally within 12-23 months. Peak CPR's, range from 30% to 50% for ARM's, 40% for 2/28's and 23% for fixed rate loans. These peaks are generally maintained through month 36. Thereafter, peak CPR's are reduced in two twelve month steps at which time terminal CPR's are reached. Terminal CPR's are estimated at 20% for ARM's and 2/28's and 15% for fixed rate loans. The Company also periodically provides for additional credit losses which may be incurred on loans which the Company voluntarily purchases from the trusts. Gains on Sales of Loans Gains on sales of loans are determined by deducting from the gross proceeds of the sales or securitizations the allocated basis in the loans sold or securitized and related transaction costs. The initial fair value of interest- only and residual certificates is included as proceeds in calculating gains on sales of loans. Interest Income Interest income includes interest earned on mortgage loans held for sale. Interest expense includes interest paid on the Company's outstanding warehouse lines of credit, the Company's convertible subordinated debentures and the Company's senior notes. Securities Valuation and Other Income Securities valuation and other income includes the change in unrealized gains and losses on interest-only and residual certificates. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation or amortization. Depreciation is recorded using the straight-line method over the estimated useful lives of individual assets (three to five years). Leasehold improvements are amortized over the terms of the related leases or the estimated useful lives of improvements, whichever is shorter. 130 SOUTHERN PACIFIC FUNDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Dividends The Company intends to retain all of its future earnings to finance its operations. The subsidiaries of the Company are restricted from paying dividends to the Company or any of its subsidiaries due to covenants in the Company's senior note agreement. Goodwill Goodwill, which represents the excess of purchases price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally 15 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. (See Note 14). Long-Term Investments Long-term investments, included in other assets, are carried at cost and consist of preferred stock in Hallmark Government, Inc. of $360,000 at December 31, 1997. Deferred Income Taxes The accompanying financial statements reflect income taxes for SPFC as if it had been a separate entity for all years presented. SPFC accounts for income taxes under the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the asset and liability method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Use of Estimates Management has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Net Earnings Per Share In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. SFAS No. 128 establishes standards for computing and presenting earnings per share (EPS). It simplifies the standards in APB Opinion No. 15, Earnings per Share, for computing EPS by replacing primary earnings per share with basic earnings per share and by alterning the calculation of diluted EPS, which replaces fully diluted EPS. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. All prior period EPS figures have been restated to conform to the provisions of the Statement. 131 SOUTHERN PACIFIC FUNDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following illustrates the reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations:
YEAR ENDED DECEMBER 31, 1995 ------------------------------------ WEIGHTED PER SHARE INCOME AVERAGE SHARES AMOUNT ----------- -------------- --------- Basic EPS Net income available to common shareholders......................... $ 7,337,435 15,562,500 $0.47 Effect of dilutive securities: Stock options....................... -- -- Convertible subordinated notes...... -- -- ----------- ---------- ----- Diluted EPS........................... $ 7,337,435 15,562,500 $0.47 =========== ========== ===== YEAR ENDED DECEMBER 31, 1996 ------------------------------------ WEIGHTED PER SHARE INCOME AVERAGE SHARES AMOUNT ----------- -------------- --------- Basic EPS Net Income available to common shareholders......................... $27,631,989 18,552,500 $1.49 Effect of dilutive securities: Stock options....................... 481,422 Convertible subordinated notes...... 510,078 1,478,014 ----------- ---------- ----- Diluted EPS........................... $28,142,067 20,511,936 $1.37 =========== ========== ===== YEAR ENDED DECEMBER 31, 1997 ------------------------------------ WEIGHTED PER SHARE INCOME AVERAGE SHARES AMOUNT ----------- -------------- --------- Basic EPS Net Income available to common shareholders......................... $53,774,896 20,747,665 $2.59 Effect of dilutive securities: Stock options....................... 1,459,277 Convertible subordinated notes...... 2,864,198 3,151,260 ----------- ---------- ----- Diluted EPS........................... $56,639,094 25,358,202 $2.23 =========== ========== =====
Foreign Currency Translation All assets and liabilities of the U.K. subsidiaries are translated into U.S. dollars at the rate in effect as of the date of the financial statements. Income and expense items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are recorded as a component of shareholder's equity. 5. PREMISES AND EQUIPMENT Premises and equipment consisted of the following at December 31, 1996 and 1997:
DECEMBER 31, ----------------------- 1996 1997 ---------- ----------- Premises and equipment.. $3,634,193 $ 9,938,813 Less accumulated depreciation and amortization........... (597,805) (2,278,122) ---------- ----------- $3,036,388 $ 7,660,691 ========== ===========
132 SOUTHERN PACIFIC FUNDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The table below summarizes the information about the fair value of the financial instruments recorded on the Company's financial statements at December 31, 1996 and 1997:
DECEMBER 31, 1996 DECEMBER 31, 1997 ------------------------- ------------------------- CARRY VALUE FAIR VALUE CARRY VALUE FAIR VALUE ------------ ------------ ------------ ------------ Cash....................... $ 14,175,566 $ 14,175,566 $ 7,886,412 $ 7,886,412 Loans held for sale........ 223,059,102 231,981,466 264,384,993 274,960,393 Interest-only and residual certificates.............. 87,016,900 87,016,900 277,156,343 277,156,343 Notes Payable.............. -- -- 3,431,972 3,431,972 Long Term Debt............. 75,000,000 75,000,000 175,000,000 175,000,000 Borrowings under warehouse lines of credit........... 152,680,395 152,680,395 205,031,055 205,031,055
Because no market exists for certain of the Company's assets and liabilities, fair value estimates are based on judgments regarding credit risk, investor expectations of future economic conditions, normal cost of administration and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The methodology and assumptions utilized to estimate the fair value of the Company's financial instruments, including the off balance sheet instruments disclosed in Note 15, are as follows: Loans held for sale. The Company has estimated the fair values reported based on recent sales and securitizations. Interest-only and residual certificates. Fair value determined using estimated discounted future cash flows taking into consideration anticipated prepayment rates, loss experience and prepayment penalties. The Company currently uses a 12% discount rate to calculate present value of anticipated "out of the trust" cash flows that it anticipates receiving from the securitization trust after overcollateralization requirements have been achieved. Prepayment assumptions are applied to each discrete security and further to each product (i.e. ARM's, Fixed and 2/28's) within each security. The estimated CPR varies over time based upon the relative maturity of the loans included in each pool. The estimated annual CPR is 4% at inception and increases in equal monthly increments until the peak estimated CPR is achieved, generally within 12-23 months. Peak CPR's, range from 30% to 50% for ARM's, 40% for 2/28's and 23% for fixed rate loans. These peaks are generally maintained through month 36. Thereafter, peak CPR's are reduced in two twelve month steps at which time terminal CPR's are reached. Terminal CPR's are estimated at 20% for ARM's and 2/28's and 15% for fixed rate loans. The Company also periodically provides for additional credit losses which may be incurred on loans which the Company voluntarily purchases from the trusts. Borrowings under warehouse lines of credit. The carrying value reported approximates fair value due to the short-term nature of the borrowings and the variable interest rates charged on the borrowings. Commitments to originate loans and loans in process. Many loan commitments are expected to, and typically do, expire without being drawn upon. As the rates and terms of the commitments to lend and loans in process are competitive with others in which the Company operates, the values disclosed in Note 15 are determined to be a reasonable estimate of fair value. Notes Payable. The carrying value reported approximates fair value due to the nature of the borrowings. 133 SOUTHERN PACIFIC FUNDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Long Term Debt. The carrying value reported approximates fair value based on the current debt rates. Hedging Transactions. The Company regularly securitizes and sells fixed and variable-rate mortgage loans. To offset the effects of interest rate fluctuations on the value of its fixed-rate loans held for sale, the Company in certain cases will hedge its interest rate risk related to loans held for sale by selling U.S. Treasury securities short or in the forward market. As of December 31, 1996 and 1997, the Company had open hedge positions of $32.6 million and $65.6 million respectively, related to the sales of United States Treasury securities in the forward market. The proceeds from the short sale are shown net of the related liability in the accompanying balance sheet at December 31, 1996 and 1997. 8. RELATED PARTY TRANSACTIONS Intracompany Cost Allocations During 1995 and 1996, the Company accrued allocated expenses for ICII that are included as part of personnel and commission expense and general and administrative expenses of $256,000 and $292,000, respectively. No administrative services are being provided by ICII or SPTL, effective January 1, 1997. Borrowings from Affiliates The average borrowings from affiliates and interest rates used to determine the weighted average interest on borrowings for the years ended December 31, 1995, 1996 and 1997 are as follows:
YEARS ENDED DECEMBER 31, ----------------------------------- 1995 1996 1997 ----------- ---------- ---------- Average borrowings.................. $34,777,138 $3,890,267 $1,250,000 Interest rate....................... 3.69% 6.25% 12.00% Interest on borrowings.............. $ 1,284,282 $ 230,236 $ 125,000
SPTL In March 1996, the Company entered into a $10 million revolving credit and term loan agreement with SPTL (the "SPTL Agreement") which was scheduled to expire on September 30, 1996. Advances under the SPTL Agreement were collateralized by the Company's interest-only and residual certificates (other than such interests retained by SPTL pursuant to the Contribution Transaction) and bore interest at 2% above LIBOR. In April, 1996 the Company repaid all borrowings outstanding under the SPTL Agreement and it was canceled. ICII On July 17, 1997, the Company borrowed $15 million from ICII due on October 17, 1997 and bore interest at a rate of 12%. The $15 million was repaid on August 11, 1997 along with $125,000 in interest. Loan Servicing From the point of commencement of operations until March 1994, SPTL served as the loan servicer for the Company and the Company was allocated its pro rata portion of SPTL's loan servicing expenses. In March 1994, SOUTHERN PACIFIC FUNDING CORPORATION 134 SOUTHERN PACIFIC FUNDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ICII assumed the role of loan servicer for a servicing fee of approximately $7.50 per loan per month, so that the Company could complete its first securitization. In September 1995, the Company began to utilize the services of Advanta, an independent loan servicer, as the master servicer. Fees charged by Advanta are $25 per loan and 37.5 basis points per annum on the declining principal balance of each loan serviced, paid monthly, respectively, which fees are higher than those previously paid to ICII due to the additional collection activities performed by Advanta. Consulting Agreements In June 1996, the Company entered into a five-year consulting agreement with The Dewey Consulting Group, owned by one of the Company's directors, John D. Dewey. Under the agreement, Mr. Dewey has agreed to assist the Company in the development of strategic alliances with selected mortgage lenders, including the identification of potential strategic alliance participants. The Company has agreed to compensate Mr. Dewey based upon actual strategic alliances entered into and loan production and earnings resulting from those alliances which amounts to .015% of the Company's share of warrants, interest-only cash received, and interest-only strips. No amounts were paid in 1996 or owing at December 31, 1996, $254,122 was paid in 1997 and $335,619 was owing at December 31, 1997. Other The Company has outstanding receivables from Hallmark Government, Inc. of $7,153,800, collateralized by first mortgage loans. 9. LONG TERM OBLIGATIONS Long Term Debt at December 31, 1996 and 1997 consists of the following:
DECEMBER 31, ------------------------ 1996 1997 ----------- ------------ Senior Notes, interest at 11.5%, due semi- annually, principal due November 1, 2004......... $ -- $100,000,000 Convertible subordinated debentures, interest at 6.75%, due semi-annually, principal due October 15, 2006.... 75,000,000 75,000,000
Interest on the senior notes is payable semi-annually. Debt issuance costs of $3,647,368 at December 31, 1997 are included in other assets. These costs have been deferred and are being amortized over seven years using the interest method. The Convertible subordinated debentures are convertible into 3,151,125 shares of common stock, for a conversion price of $23.80 per share, at any time prior to maturity. Interest on the debentures is payable semi-annually. Debt issuance costs of $2,794,220 and $2,521,360 at December 31, 1996 and 1997, respectively, are included in other assets. These costs have been deferred and are being amortized over ten years using the interest method. Notes Payable at December 31, 1997 represents a payable to Oceanmark Bank for the purchase of Mortgage Division Assets and has a face amount of $3,800,000. The note bears no interest and has a 36 month term. Principal is payable in three equal installments of $1,266,667 at 12 months, 24 months and 36 months. The note was initially recorded at its present value of $3,268,000, discounted at 7%. The discount will be amortized over the term of the note using the interest method. 135 SOUTHERN PACIFIC FUNDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. INCOME TAXES For the 1996 period through the effective date of the IPO in June 1996, SPFC is included in a consolidated tax return filing with ICII. For the 1996 period subsequent to the IPO and 1997, SPFC will file a separate tax return on a stand-alone basis. SPFC's income taxes were as follows for the years ended December 31, 1996 and 1997:
1995 1996 1997 ---------- ----------- ----------- Current: Federal............................... $2,731,115 $ 3,680,000 $ 7,341,259 State................................. 602,452 772,000 1,272,358 ---------- ----------- ----------- Total current....................... 3,333,567 4,452,000 8,613,617 Deferred: Federal............................... 1,533,378 11,461,414 24,977,663 State................................. 338,245 4,533,200 4,651,830 ---------- ----------- ----------- Total deferred...................... 1,871,623 15,994,614 29,629,493 ---------- ----------- ----------- Total income taxes...................... $5,205,190 $20,446,614 $38,243,110 ========== =========== ===========
The following table shows the tax effects of temporary differences which give rise to the primary components of SPFC's net deferred tax liability at December 31, 1996 and 1997.
1996 1997 ----------- ----------- Deferred tax liabilities: Interest-only and residual certificates....... $18,445,495 $48,074,988 =========== ===========
A reconciliation of the income tax provision and the amount computed by applying the statutory Federal corporate income tax rate to income before income taxes are as follows for the years ended December 31, 1996 and 1997:
1995 1996 1997 ---- ---- ---- Statutory U.S. Federal income tax rate................ 35.0% 35.0% 35.0% Increases in rate resulting from state income taxes, net of Federal benefit............................... 6.5 7.5 6.5 ---- ---- ---- Effective income tax rate............................. 41.5% 42.5% 41.5% ==== ==== ====
At the effective date of the IPO, the Company entered into a tax agreement with ICII whereby, among other things, ICII will indemnify and hold the Company harmless from any tax liability attributable to periods ending on or before the effective date of the IPO in excess of such taxes as the Company has already paid or recognized. 136 SOUTHERN PACIFIC FUNDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. EMPLOYEE BENEFIT PLANS Profit Sharing and 401(k) Plan Prior to October 1, 1997, employees of SPFC were eligible to participate in the ICII 401(k) plan. The ICII 401(k) plan matched a portion of the employee pretax contribution. Effective October 1, 1997 employees of SPFC are eligible to participate in the SPFC 401(k) plan which came into effect at that time. Employees may elect to enroll in the plan on the first day of any month, provided that they have been employed by SPFC for at least six months. Employees may contribute up to 15% of their compensation to the SPFC 401(k) Plan and SPFC will match 50% of the first 6% of employee pretax contributions. SPFC matching contributions are made as of December 31st each year. SPFC recorded 401(k) matching expense of approximately $26,000, $111,000 and $433,148 for the years ended December 31, 1995, 1996, and 1997, respectively. 12. STOCK OPTIONS Effective November 1, 1995, the Company reserved and granted options for 1,942,200 shares of Company common stock pursuant to the 1995 Senior Management Stock Option Plan (the "Senior Management Plan"). All of the options granted under the Senior Management Plan have been issued to senior management personnel at an exercise price of $7.00 per share, the fair value on the date of grant. The options vest ratably over a five-year period commencing one year after the date of grant. Also effective November 1, 1995, the Company adopted the 1995 Stock Option, Deferred Stock and Restricted Stock Plan (the "Stock Option Plan"), which provides for the grant of qualified incentive stock options, incentive stock options, and awards consisting of deferred stock, restricted stock, stock appreciation rights and limited stock appreciation rights. The Stock Option Plan authorizes the grant of options to purchase, and awards of, an aggregate of 1,942,200 shares of Company common stock. If an option granted under the Stock Option Plan expires or terminates, or an award is forfeited, the shares subject to any unexercised portion of such option or award will again become available for the issuance of further options or awards under the Stock Option Plan. All share data related to shares issued and outstanding have been restated to give retroactive recognition to a 4,150 for one stock split effective April 1, 1996 and a three for two stock split effective January 23, 1997. The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings would have been reduced to the pro forma amounts indicated below:
1995 1996 1997 ---------- ----------- ----------- Net Earnings: As reported............................... $7,337,435 $27,631,989 $53,774,896 Pro forma................................. 7,105,518 26,266,703 50,612,358 Net Earnings Per Share: As reported: Basic........................ $0.47 $1.49 $2.59 Diluted.............................. $0.46 $1.37 $2.23 Pro forma: Basic.......................... $0.47 $1.42 $2.44 Diluted............................... $0.46 $1.31 $2.11
137 SOUTHERN PACIFIC FUNDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Stock option activity during the period indicated is as follows:
NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE --------- ---------------- Balance at December 31, 1994..................... -- -- Granted........................................ 1,942,200 $7.00 Exercised...................................... -- -- Forfeited...................................... -- -- Expired........................................ -- -- --------- ----- Balance at December 31, 1995..................... 1,942,200 7.00 Granted........................................ 1,078,500 12.57 Exercised...................................... -- -- Forfeited...................................... (113,250) 11.90 Expired........................................ -- -- --------- ----- Balance at December 31, 1996..................... 2,907,450 8.85 Granted........................................ 868,750 11.15 Exercised...................................... (22,950) 11.39 Forfeited...................................... (276,300) 13.07 Expired........................................ -- -- --------- ----- Balance at December 31, 1997..................... 3,476,950 $9.09
At December 31, 1997, there were 384,500 additional shares available for grant under the Stock Option Plan. The per share weighted-average fair value of stock options granted during 1995, 1996 and 1997 was $15.74, $13.34 and $11.17, respectively, on the date of grant using the Black Scholes option pricing model with the following weighted-average assumptions: expected dividend yield 0.00%, risk free interest rate of 5.42%, an expected life of 6 years and an annualized volatility rate of 66.57%. At December 31, 1997, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $7.00-15.00 and 8.20 years and $15.01-$20.00 and 8.80 years, respectively. At December 31, 1996 and 1997 there were 388,440, and 1,129,830 options, respectively exercisable. 13. SHORT TERM BORROWINGS Lines of Credit The Company has obtained five lines of credit from investment banks, for the purpose of funding one-to-four family residential first and second mortgage loans, which is subject to certain operating and financial covenants and collateral requirements. Total borrowings under the warehouse lines are limited to $988.2 million and the lines are scheduled to expire between April 15, 1998 and December 14, 1998. As of December 31, 1996 and 1997, $152,680,395 and $205,031,055, respectively, were outstanding on the lines of credit, on which interest was charged based on the type of loan funded. Interest expense incurred for the years ended December 31, 1995, 1996 and 1997 amounted to approximately $131,000, $6,409,061 and $19,544,258, respectively with weighted average interest rates ranging from 5.7% to 8.3% for 1997. Residual Facility In May, 1997 the Company entered into a residual financing facility of $30 million that allowed the Company to obtain debt secured by interest-only and residual certificates. The Company drew upon $29.4 million of this facility and repaid the full amount on November 4, 1997. 138 SOUTHERN PACIFIC FUNDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 14. ACQUISITIONS In 1996, the Company purchased 95% of the common stock of a diversified financial services company for $5,000,000 in cash. The amount in excess of the fair value of net assets acquired is $4,742,571. The Company acquired net assets of $5,000,000 consisting primarily of goodwill of $4,742,571. The results of operations of the acquired company have been included in the consolidated financial statements since the date of acquisition. In May 1997, the Company purchased certain assets of a diversified financial services company in exchange for a $3,800,000 note payable (see Note 9). The amount in excess of the fair value of the net assets acquired was $2,320,884 which has been recorded as goodwill in the accompanying financial statements. In addition, the Company acquired interest-only and residual certificates for cash of $3.8 million. In December 1997, the Company purchased the loan servicing operation of NAMC for $400,000. The Company acquired NAMC's servicing operations assets and retained its loan servicing employees. 15. LOAN SERVICING Through December 1997 the company contracted for the servicing of substantially all loans it originated, purchased and held for sale with Advanta. This arrangement allowed the Company to increase the volume of loans it originated and purchased without incurring the overhead investment in servicing operations. As with any external service provider, the Company is subject to risks associated with inadequate or untimely services. The Company regularly reviews the delinquency of its servicing portfolio. Many of the Company's borrowers require notices and reminders to keep their loans current and to prevent delinquencies and foreclosures. A substantial increase in the Company's delinquency rate or foreclosure rate could adversely affect its ability to profitably access the capital markets for its financing needs, including future securitizations. As of December 31, 1997 the Company's servicing portfolio (inclusive of securitized loans where the Company has ongoing risk of loss) was approximately $2.5 million. Through that date substantially all of the Company's loan servicing had either been outsourced or subcontracted to Advanta. The Company's acquisition in December 1997 of NAMC's loan servicing operations allowed the Company in mid-January 1998 to begin its own loan servicing operation for all new loans originated and purchased. In the second quarter of 1998, the Company plans to transfer to its internal servicing department the servicing of the loans included in the Company's December 1997 securitization and of remaining loans originated and purchased in December 1997 and January 1998. 16. COMMITMENTS AND CONTINGENCIES Financial Instruments with Off Balance Sheet Risk The Company is a party to financial instruments with off balance sheet risk in the normal course of business. These financial instruments include agreements to fund fixed and variable-rate mortgage loans and loans in process. For agreements to fund fixed-rate loans, the contract amounts represent exposure to loss from market fluctuations as well as credit loss. The Company controls the credit risk of its agreements to fund fixed and variable-rate loans through credit approvals, limits and monitoring procedures. Agreements to fund mortgage loans are agreements to lend to customers as long as there is no violation of any condition established in the contracts. Such agreements generally have fixed expiration dates or other termination clauses. Since some agreements may expire without being drawn upon, the total agreement amounts do not necessarily represent future cash requirements. As of December 31, 1997, the Company had agreements to fund loans of approximately $43.0 million. 139 SOUTHERN PACIFIC FUNDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Sales of Loans and Servicing Rights In the ordinary course of business, SPFC is exposed to liability from representations and warranties made to purchasers and insurers of mortgage loans and the purchasers of servicing rights. Under certain circumstances, SPFC is required to repurchase mortgage loans if there has been a breach of a representation or warranty. For loans which have been securitized, the Company includes an estimate of credit loss, using a risk free rate, in determining its discounted recourse liability. On a periodic basis, the Company reviews its assumptions in light of historical experience and economic trends to evaluate their reasonableness in measuring the fair value of recorded assets. The Company's servicing agreement with Advanta provides that if the Company desires to terminate the agreement without cause upon 90 days' written notice, the Company will be required to pay Advanta an amount equal to 1.0% of the aggregate principal balance of the mortgage loans being serviced by Advanta at that time. The agreement also provides that a transfer service fee of $100 per loan shall be paid to Advanta for any mortgage loan for which the Company transfers servicing from Advanta to another servicer, without terminating the agreement. Litigation The Company, its subsidiary Oceanmark Financial Corporation, and members of its board directors are defendants in a lawsuit in US District Court for the southern District of Florida. Oceanmark Bank, F.S.B. is the plaintiff. The Company was served on March 9, 1998. The complaint relates to the Company's acquisition of mortgages and notes of Oceanmark Bank beginning in 1995 and ending with the Company's acquisition of the mortgage operations of Oceanmark Bank and certain residual assets in May 1997 and events subsequent to the May 1997 acquisition. The complaint alleges, among other things, that employees of Oceanmark Bank conspired with the Company to lower the purchase price of the assets sold to the Company by Oceanmark Bank. The plaintiff seeks relief under theories of racketeering, securities fraud, breach of contract, breach of fiduciary duty, conspiracy, and negligence and requests compensatory and punitive damages totaling $75 million. The Company's management believes that the Oceanmark claims are without merit and intends to defend the Company's position vigorously. Management believes that the resolution of this matter will not have a material adverse effect on the Company's financial condition, results of operations or liquidity. SPFC occasionally becomes involved in litigation arising in the normal course of business. Management believes that any liability with respect to such legal actions, individually or in the aggregate, will not have a material adverse effect on the Company's financial position or results of operations. Operating Leases The Company leases premises and equipment under operating leases with various expiration dates. Minimum annual rental payments at December 31, 1997 were as follows: 1998......................................................... $ 4,190,910 1999......................................................... 3,917,316 2000......................................................... 3,092,437 2001......................................................... 2,666,172 2002......................................................... 2,057,852 ----------- Total...................................................... $15,924,687 ===========
140 SOUTHERN PACIFIC FUNDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Rent expense amounted to $309,607, $484,416 and $2,394,621 for the years ended December 31, 1995, 1996 and 1997, respectively. 17. CONSOLIDATING CONDENSED FINANCIAL INFORMATION Following is consolidating condensed financial information of SPFC, the Subsidiary Guarantors of the 11 1/2% Senior Notes due 2004 issued in November 1997 and the Subsidiary which is not a Subsidiary Guarantor: CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1997 --------------------------------------------------------------------------------- SUBSIDIARY NON-GUARANTOR SPFC GUARANTORS SUBSIDIARY SUBTOTAL ELIMINATIONS TOTAL ------------ ------------ ------------- ------------ ------------- ------------ ASSETS Cash.................... $ 408,286 $ 2,047,362 $ 5,430,764 $ 7,886,412 $ -- $ 7,886,412 Loans held for sale..... 133,110,124 61,330,849 67,991,237 262,432,210 1,952,783 264,384,993 Interest-only and residual certificates.. 277,156,343 -- -- 277,156,343 -- 277,156,343 Investment in subsidiaries........... 11,220,645 -- -- 11,220,645 (11,220,645) -- Other assets............ 104,244,775 53,563,593 1,507,189 159,315,557 (119,397,912) 39,917,645 ------------ ------------ ----------- ------------ ------------- ------------ Total assets......... $526,140,173 $116,941,804 $74,929,190 $718,011,167 $(128,665,774) $589,345,393 ============ ============ =========== ============ ============= ============ Borrowings of credit under warehouse line... $143,789,768 $ -- $61,241,287 $205,031,055 $ -- $205,031,055 Deferred tax liability.. 44,111,149 4,213,931 (211,030) 48,114,050 (39,062) 48,074,988 Convertible subordinated notes.................. 175,000,000 -- -- 175,000,000 -- 175,000,000 Other liabilities....... 29,454,384 95,414,744 14,111,962 138,981,090 (116,896,647) 22,084,443 ------------ ------------ ----------- ------------ ------------- ------------ Total liabilities.... 392,355,301 99,628,675 75,142,219 567,126,195 (116,935,709) 450,190,486 ============ ============ =========== ============ ============= ============ Shareholders' equity: Common stock........... 54,100,644 25,343 -- 54,125,987 (25,365) 54,100,622 Contributed capital.... 247,500 11,649,637 -- 11,897,137 (11,649,637) 247,500 Translation adjustment............ -- -- (8,745) (8,745) -- (8,745) Retained earnings...... 79,436,728 5,638,149 (204,284) 84,870,593 (55,063) 84,815,530 ------------ ------------ ----------- ------------ ------------- ------------ Total shareholders' equity.............. 133,784,872 17,313,129 (213,029) 150,884,972 (11,730,065) 139,154,907 ------------ ------------ ----------- ------------ ------------- ------------ Total liabilities and shareholders' equity.............. $526,140,173 $116,941,804 $74,929,190 $718,011,167 $(128,665,774) $589,345,393 ============ ============ =========== ============ ============= ============
141 SOUTHERN PACIFIC FUNDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONSOLIDATING STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1997 ------------------------------------------------------------------------------- SUBSIDIARY NON-GUARANTOR SPFC GUARANTORS SUBSIDIARY SUBTOTAL ELIMINATIONS TOTAL ------------ ----------- ------------- ------------ ------------ ------------ Revenues: Gains on sales of loans................. $118,230,144 $27,091,191 $3,082,531 $148,403,866 $ -- $148,403,866 Interest income........ 36,941,438 9,213,663 2,916,618 49,071,719 (9,764,960) 39,306,759 Securities valuation and other income...... (2,766,667) 4,511,716 (110,874) 1,634,175 -- 1,634,175 ------------ ----------- ---------- ------------ ----------- ------------ Total revenues........ 152,404,915 40,816,570 5,888,275 199,109,760 (9,764,960) 189,344,800 ============ =========== ========== ============ =========== ============ Expenses: Interest on other borrowings............ 26,074,145 8,958,966 2,344,952 37,378,063 (9,764,960) 27,613,103 Personnel and commission Expense.... 28,091,560 15,184,601 1,751,543 45,027,704 -- 45,027,704 General and administrative Expense............... 15,430,810 7,020,069 2,140,983 24,591,862 94,125 24,685,987 ------------ ----------- ---------- ------------ ----------- ------------ Total expenses........ 69,596,515 31,163,636 6,237,478 106,997,629 (9,670,835) 97,326,794 ============ =========== ========== ============ =========== ============ Earnings before taxes... 82,808,400 9,652,934 (349,203) 92,112,131 (94,125) 92,018,006 Income taxes............ 34,412,306 4,014,785 (144,919) 38,282,172 (39,062) 38,243,110 ------------ ----------- ---------- ------------ ----------- ------------ Net earnings.......... $ 48,396,094 $ 5,638,149 $ (204,284) $ 53,829,959 $ (55,063) $ 53,774,896 ============ =========== ========== ============ =========== ============
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 ----------------------------------------------------------------------------------- SUBSIDIARY NON-GUARANTOR SPFC GUARANTORS SUBSIDIARY SUBTOTAL ELIMINATIONS TOTAL ------------ ----------- ------------- ------------- ------------ ------------- Net cash provided by (used in) operating activities............. $(95,039,704) $ 4,276,336 $(55,180,048) $(145,943,416) $ 187,190 $(145,756,226) Net cash used in investing activities... (3,096,096) (5,723,418) (630,475) (9,449,989) -- (9,449,989) Cash flows from financing activities: Net changes in: Borrowings under warehouse lines of credit............... (8,890,627) -- 61,241,287 52,350,660 -- 52,350,660 Proceeds from long term debt............ 96,263,878 -- -- 96,263,878 -- 96,263,878 Other................. 302,523 187,190 -- 489,713 (187,190) 302,523 ------------ ----------- ------------ ------------- --------- ------------- Net cash provided by (used in) financing activities............. 87,675,774 187,190 61,241,287 149,104,251 (187,190) 148,917,061 Net change in cash...... (10,460,026) (1,259,892) 5,430,764 (6,289,154) -- (6,289,154) Cash at beginning of period................. 14,175,566 -- -- 14,175,566 -- 14,175,566 ------------ ----------- ------------ ------------- --------- ------------- Cash at end of year..... $ 3,715,540 $(1,259,892) $ 5,430,764 $ 7,886,412 $ -- $ 7,886,412 ============ =========== ============ ============= ========= =============
142 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).............. 56 Chairman of the Board, President and Chief Executive Officer Executive Vice President and Chief Kevin E. Villani(1).............. 49 Financial Officer Irwin L. Gubman(1)............... 55 General Counsel and Secretary Paul B. Lasiter.................. 31 Senior Vice President and Controller Stephen J. Shugerman(1).......... 50 President of SPB and a Director Joseph R. Tomkinson.............. 49 Director Robert S. Muehlenbeck(2)......... 50 Director G. Louis Graziadio, III(2)....... 47 Director Perry A. Lerner(2)(3)............ 54 Director James Clayburn LaForce, Jr.(2)(3) 68 Director
- -------- (1) Member of Executive Committee. (2) Member of Compensation Committee. (3) Member of Audit Committee. H. WAYNE SNAVELY has been Chairman of the Board and Chief Executive Officer of the Company since December 1991 and President since February 1996. Mr. Snavely served as a director of Imperial Bank from 1975 to 1983 and from 1993 to January 1998. Mr. Snavely is Chairman of the Board of Southern Pacific Funding Corporation, Impac Mortgage Holdings, Inc., Franchinse Mortgage Acceptance Corporation and Imperial Credit Commercial Mortgage Investment Corporation and a director of Imperial Financial Group. KEVIN E. VILLANI has been the Executive Vice President and Chief Financial Officer of the Company since September 1995. Mr. Villani is President of ICCAMC and serves as a member of the Company's Board of Directors and is Vice- Chairman of the Board of ICCMIC. Mr. Villani joined the University of Southern California as the Wells Fargo Visiting Professor of Finance in 1990 and remained on the full-time faculty through 1997. From 1985 to 1990, he was the Executive Vice President and Chief Financial Officer for Imperial Corporation of America. From 1982 to 1985, Mr. Villani served in various capacities at the Federal Home Loan Mortgage Corporation, including Chief Economist and Chief Financial Officer. From 1975 to 1982, he served as the Financial Economist, The Director for the Division of Housing Finance Analysis and The Deputy Assistant Secretary for the Office of Economic Affairs and Chief Economist for the Department of Housing and Urban Development. From 1990 through 1995, Mr. Villani also served as a full-time consulting economist at the World Bank and International Finance Corporation on housing, banking, finance and investment issues in emerging markets. Mr. Villani has published over 100 books and articles on financial markets and instruments. IRWIN L. GUBMAN has been the General Counsel and Secretary of ICII since October 1996. From February 1992 to September 1996, Mr. Gubman was a Partner at Coudert Brothers serving in various capacities including 143 syndicated lending, structured finance, and regulatory matters. From December 1970 to September 1991, Mr. Gubman served in various capacities at Bank of America, most recently as Senior Vice President and Associate General Counsel. From March 1968 to October 1970, Mr. Gubman was an Attorney Advisor for the U.S. Arms Control and Disarmament Agency. From September 1967 to March 1968, Mr. Gubman was a Legal Advisor to the Government of Liberia. PAUL B. LASITER has been Senior Vice President and Controller of the Company since November 1992. From June 1988 to November 1992, Mr. Lasiter was a Supervising Senior Accountant for KPMG Peat Marwick, specializing in the financial institutions industry. Mr. Lasiter is a Certified Public Accountant. STEPHEN J. SHUGERMAN has been President of SPB since June 1987 and has been a Director of the Company since December 1991. From June 1985 to May 1987, Mr. Shugerman was President of ATI Thrift & Loan Association, a privately owned thrift and loan association, and, from 1979 to 1985, he was Senior Vice President of Imperial Thrift and Loan Association, a former subsidiary of Imperial Bank. Mr. Shugerman has recently served as President of the California Association of Thrift & Loan Companies. Mr. Shugerman is a director of SPFC. JOSEPH R. TOMKINSON has been a Director of the Company since December 1991. Mr. Tomkinson has been the Vice Chairman of the Board and Chief Executive Officer of IMH since August 1995. Mr. Tomkinson served as President of the Company from January 1992 to February 1996 and from 1986 to January 1992, he was President of Imperial Bank Mortgage, a subsidiary of Imperial Bank, one of the companies combined to become ICII in 1992. From 1984 to 1986, he was employed as Executive Vice President of Loan Production for American Mortgage Network, a privately owned mortgage bank. Mr. Tomkinson is the Chairman and Chief Executive Officer of Impac Commercial Holdings, Inc., a commercial REIT and a Director of BNC Mortgage, Inc., a residential real estate lending company ROBERT S. MUEHLENBECK has been a Director of the Company since December 1991. Mr. Muehlenbeck is also an Executive Vice President of Imperial Bank. Mr. Muehlenbeck was formerly the President of Seaborg, Incorporated and has been involved in commercial and residential real estate development and finance activities. G. LOUIS GRAZIADIO, III has been a Director of the Company since February 1992. Mr. Graziadio has been Chairman of the Board and Chief Executive Officer of Ginarra Holdings, Inc. (as well as predecessor and affiliated companies) since 1979. Ginarra Holdings, Inc. is a privately held California corporation engaged in a wide range of investment activities. Mr. Graziadio has been actively involved, since 1972, in real estate development, construction and home building. Mr. Graziadio is a Director of FMC and of Imperial Bancorp and Imperial Trust Company, an indirect subsidiary of Imperial Bancorp. He serves as Co-Chairman of IFG. PERRY A. LERNER has been a Director of the Company since May 1992. He has been a principal in his investment firm of Crown Capital Group, Inc., since 1996. Mr. Lerner was with the law firm of O'Melveny & Myers from 1982 to 1997, having been a partner with the firm since 1984. Mr. Lerner was an Attorney- Advisor of the International Tax Counsel of the United States Treasury Department from 1973 to 1976. Mr. Lerner is a Director of FMC and IFG. JAMES CLAYBURN LAFORCE, JR. has been a Director of the Company since May 1992. From July 1978 to July 1993, Mr. LaForce was the Dean of The Anderson School, University of California at Los Angeles. In addition, Mr. LaForce was appointed in January 1991 to the position of Acting Dean of the Hong Kong University of Science and Technology, Hong Kong. Directors of the Company hold office until the next annual meeting of shareholders and until their successors are elected and qualified, or until their earlier resignation or removal. All officers are appointed by and serve at the discretion of the Board of Directors, subject to employment agreements, where applicable. There are no family relationships between any directors or officers of the Company. George L. Graziadio, Jr., the President, Chief Executive Officer and the Chairman of the Board of Directors of Imperial Bancorp ("Bancorp"), is the father of G. Louis Graziadio, III. The Graziadio family and related entities are significant shareholders of Bancorp. 144 ITEM 11. EXECUTIVE COMPENSATION The following table provides information concerning the cash and non-cash compensation earned and received by the Company's Chief Executive Officer and its four highly compensated executive officers (the "Named Executive Officers"), other than the Company's Chief Executive Officer, whose salary and bonus during the fiscal year ended December 31, 1997 exceeded $100,000: SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION ------------------------ FISCAL OTHER ANNUAL OPTIONS NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANTED - --------------------------- ------ -------- -------- ------------ ------------ H. Wayne Snavely........... 1997 $450,000 $700,000 $29,082(1) -- President, Chief Executive 1996 300,000 700,000 28,564(1) 400,000(2) Officer and Chairman 1995 300,000 252,603 32,960(1) -- Kevin E. Villani........... 1997 300,000 266,666 17,082(3) 50,000(2) Executive Vice President and 1996 200,000 200,000 12,986(3) 84,000(2) Chief Financial Officer 1995 59,103 25,000 2,295(3) 66,000(2) Stephen J. Shugerman....... 1997 250,000 501,000 21,882(4) -- President of SPB 1996 200,000 400,000 20,963(4) 100,000(2) 1995 200,000 166,027 16,372(4) -- Irwin L. Gubman............ 1997 200,000 200,000 16,852(5) 70,000(2) General Counsel and 1996 50,000 30,000 750(5) 30,000(2) Secretary 1995 -- -- -- -- Joseph Parise.............. 1997 141,667 175,000 2,911(6) 40,000(2) Managing Director of 1996 45,032 26,000 -- 20,000(2) Capital Markets 1995 -- -- -- --
- -------- (1) In 1997, 1996 and 1995, consists of (i) a car allowance paid by the Company of $18,000, $18,000 and $18,000, respectively, and (ii) aggregate contributions paid by the Company of $11,082, $10,564 and $14,960 respectively, under employee benefit plans. (2) See "--Stock Option Plans" for details regarding the terms of such options. (3) In 1997, 1996 and 1995, consists of (i) a car allowance paid by the Company of $6,000, $6,000 and $1,773, respectively, and (ii) aggregate contributions paid by the Company of $11,082, $6,986, and $522, respectively, under employee benefit plans. (4) In 1997, 1996 and 1995, consists of (i) a car allowance paid by the Company of $10,800, $10,800, and $10,800, respectively, and (ii) aggregate contributions paid by the Company of $11,082, $10,163, and $5,572, respectively. (5) In 1997 and 1996, consists of (i) a car allowance paid by the Company of $6,000 and $750, respectively, and (ii) aggregate contributions paid by the Company of $10,852 and $0, respectively, under employee benefit plans. (6) In 1997, consists of aggregate contributions paid by the Company of $2,911 under employee benefit plans. 145 OPTION GRANTS, EXERCISES AND YEAR END VALUES
POTENTIAL REALIZED VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE EXERCISE APPRECIATION 1997 PERCENTAGE PRICE FOR OPTION TERM OPTIONS OF TOTAL PER EXPIRATION --------------- NAME GRANTED GRANTS OPTION DATE 5% 10% ---- ------- ---------- -------- ---------- ------- ------- Kevin E. Villani......... 50,000 10.64% 18.6250 8/15/02 257,287 568,537 Irwin L. Gubman.......... 70,000 14.89% 18.6250 8/15/02 360,202 795,952 Joseph Parise............ 40,000 8.51% 18.6250 8/15/02 205,830 454,830
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF UNEXERCISED NUMBER OF UNEXERCISED VALUE OF ALL OPTIONS AT FY-END SENIOR MANAGEMENT UNEXERCISED IN-THE-MONEY SHARES UNDER THE OPTION PLAN OPTIONS AT FY-END UNDER THE OPTIONS AT ACQUIRED ON VALUE EXERCISABLE/ OPTION PLAN EXERCISABLE/ DECEMBER 31, 1997 NAME EXERCISE REALIZED UNEXERCISABLE(1) UNEXERCISABLE(2) EXERCISABLE/UNEXERCISABLE(3) ---- ----------- ---------- --------------------- --------------------------- ---------------------------- H. Wayne Snavely...... 15,285 $ 269,877 80,000/320,000 917,052 $18,421,949/$2,680,000 Kevin E. Villani...... -- -- 30,000/156,800 -- / -- 35,780/ 1,246,849 Stephen J. Shugerman.. 76,422 1,368,435 20,000/ 80,000 158,524 / -- 3,164,035/ 545,000 Irwin L. Gubman....... -- -- 6,000/ 94,000 -- / -- 24,375/ 228,750 Joseph R. Parise...... -- -- 4,000/ 56,000 -- / -- 20,250/ 156,000
- -------- (1) For a description of the terms of such options, see "--Stock Option Plans--1992 Stock Option Plan." (2)For a description of the terms of such options, see "--Senior Management Stock Options." (3) Based on a price per share of $21.00, which was the price of a share of Common Stock as quoted on the Nasdaq National Market at the close of business on December 31, 1997 EMPLOYMENT AGREEMENTS As of January 1, 1997, Mr. Snavely entered into a five-year employment agreement at an annual base salary of $450,000, subject to adjustment, plus an annual bonus based on attainment of performance objectives, including the Company's return on equity, earnings per share and increase in the price of the Company's common stock. Mr. Snavely's total cash compensation may not exceed $1.5 million annually. As of January 1, 1997, Mr. Villani entered into a five-year employment agreement at an annual base salary of $300,000, subject to adjustment, plus an annual bonus based on attainment of performance objectives identical to the objectives established for Mr. Snavely. Mr. Villani's total cash compensation may not exceed $700,000 annually. As of January 1, 1997, Mr. Shugerman entered into a five-year employment agreement at an annual base salary of $250,000, subject to adjustment, plus an annual bonus based on attainment of performance objectives, including the Company's earnings per share and certain qualitative objectives with respect to the performance of SPB. Mr. Shugerman's total cash compensation may not exceed $750,000 annually. Pursuant to the employment agreements with Messrs. Snavely, Villani and Shugerman, they are each entitled to receive compensation following their termination, as follows: (i) with cause: base salary shall be paid through the date on which termination occurs, or (ii) without cause (or for "good reason" as defined in the employment agreement), base salary shall be paid through the date of termination together with the pro-rata portion of any cash bonus award the employee would be entitled to receive at year end and a severance amount equal to base salary reduced by the employee's projected primary social security benefit. The severance amount shall be further reduced if the executive becomes employed by another company or becomes an independent contractor of another company and shall be eliminated entirely if such other company is determined by the Board of Directors to compete with the Company. 146 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company's Compensation Committee consists of Messrs. Muehlenbeck, Graziadio, Lerner and LaForce. Mr. Muehlenbeck is an Executive Vice President of Imperial Bank. Mr. Graziado is a Director of Imperial Bancorp and Imperial Trust Company and Co-Chairman of IFG. Mr Lerner is the Manager of Corona Film Finance Fund (in which ICII is an investor). SENIOR MANAGEMENT STOCK OPTIONS Effective January 1992, members of senior management of the Company received ten year options to purchase shares of the Company's common stock (the "Common Stock"). Such options are not covered by the Company's option plans described below. The exercise price of these options is $0.88 per share for one-half of the options, with the other half exercisable at $1.40 per share. These options are currently exercisable. H. Wayne Snavely, Joseph R. Tomkinson, and Stephen J. Shugerman were granted 917,053, 917,053 and 458,526 of such options, respectively. In April 1996, Mr. Tomkinson sold 750,000 shares of Common Stock he acquired under the option agreement described above. In November 1996, Mr. Shugerman sold 300,000 shares of Common Stock he acquired under the option agreement described above. The Company recognizes compensation expense with respect to the senior management stock options because they were granted at less than the estimated market value of the Company's Common Stock. The total compensation expense was $2.2 million, all of which was recognized as of December 31, 1997. See Note 23 of Notes to Consolidated Financial Statements. STOCK OPTION PLANS 1992 Stock Option Plan A total of 2,292,632 shares of the Company's Common Stock has been reserved for issuance under the Company's 1992 Incentive Stock Option and Nonstatutory Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own terms in 2002. A total of 1,082,493 options were outstanding at December 31, 1997. The 1992 Stock Option Plan provides for the grant of "incentive stock options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options ("NQSOs") to employees, officers, directors and consultants of the Company. Incentive stock options may be granted only to employees. The 1992 Stock Option Plan is administered by the Board of Directors or a committee appointed by the Board, which determines the terms of options granted, including the exercise price, the number of shares subject to the option, and the option's exercisability. The exercise price of all options granted under the 1992 Stock Option Plan must be at least equal to the fair market value of such shares on the date of grant. The maximum term of options granted under the 1992 Stock Option Plan is 10 years. With respect to any participant who owns stock representing more than 10% of the voting rights of the Company's outstanding capital stock, the exercise price of any option must be at least equal to 110% of the fair market value on the date of grant. 1996 Stock Option Plan The Company has adopted the 1996 Stock Option, Deferred Stock and Restricted Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards consisting of deferred stock, restricted stock, stock appreciation rights and limited stock appreciation rights ("Awards"). 147 The 1996 Stock Option Plan is administered by a committee of directors appointed by the Board of Directors (the "Committee"). ISOs may be granted to the officers and key employees of the Company or any of its subsidiaries. The exercise price for any option granted under the 1996 Stock Option Plan may not be less than 100% (110% in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the outstanding Common Stock) of the fair market value of the shares of Common Stock at the time the option is granted. The purpose of the 1996 Stock Option Plan is to provide a means of performance-based compensation in order to attract and retain qualified personnel and to provide an incentive to those whose job performance affects the Company. The effective date of the 1996 Stock Option Plan was June 21, 1996. A total of 3,000,000 shares of the Company's Common Stock has been reserved for issuance under the 1996 Stock Option Plan and a total of 1,453,200 options were outstanding at December 31, 1997. If an option granted under the 1996 Stock Option Plan expires or terminates, or an Award is forfeited, the shares subject to any unexercised portion of such option or Award will again become available for the issuance of further options or Awards under the 1996 Stock Option Plan. Unless previously terminated by the Board of Directors, no options or Awards may be granted under the 1996 Stock Option Plan after June 21, 2006. Options granted under the 1996 Stock Option Plan will become exercisable upon the terms of the grant made by the Committee. Awards will be subject to the terms and restrictions of the Award made by the Committee. The Committee has discretionary authority to select participants from among eligible persons and to determine at the time an option or Award is granted and in the case of options, whether it is intended to be an ISO or a NQSO. Under current law, ISOs may not be granted to any individual who is not also an officer or employee of the Company or any subsidiary. Each option must terminate no more than 10 years from the date it is granted (or five years in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the combined voting power of the Company's outstanding Common Stock). Options may be granted on terms providing for exercise in whole or in part at any time or times during their respective terms, or only in specified percentages at stated time periods or intervals during the term of the option, as determined by the Committee. The exercise price of any option granted under the 1996 Stock Option Plan is payable in full (i) in cash, (ii) by surrender of shares of the Company's Common Stock already owned by the option holder having a market value equal to the aggregate exercise price of all shares to be purchased including, in the case of the exercise of NQSOs, restricted stock subject to an Award under the 1996 Stock Option Plan, (iii) by cancellation of indebtedness owed by the Company to the optionholder, or (iv) by any combination of the foregoing. The Board of Directors may from time to time revise or amend the 1996 Stock Option Plan, and may suspend or discontinue it at any time. However, no such revision or amendment may impair the rights of any participant under any outstanding options or Award without such participant's consent or may, without shareholder approval, increase the number of shares subject to the 1996 Stock Option Plan or decrease the exercise price of a stock option to less than 100% of fair market value on the date of grant (with the exception of adjustments resulting from changes in capitalization), materially modify the class of participants eligible to receive options or Awards under the 1996 Stock Option Plan, materially increase the benefits accruing to participants under the 1996 Stock Option Plan or extend the maximum option term under the 1996 Stock Option Plan. PROFIT SHARING AND 401(K) PLAN On July 1, 1993, the Company terminated its participation in Imperial Bancorp's 401(k) and profit sharing plans, establishing its own 401(k) plan. On September 30, 1993, Imperial Bancorp transferred all plan assets to the Company. 148 Under the Company's 401(k) plan, employees may elect to enroll on the first of any month, provided that they have been employed for at least six months. Employees may contribute up to 14% of their salaries. The Company will match 50% of the first 4% of employee contributions. The Company recorded 401(k) matching expense of $296,000, $305,000, and $209,000 for the years ended December 31, 1997, 1996, and 1995, respectively. An additional Company contribution may be made, at the discretion of the Company. Should a discretionary contribution be made, the contribution would first be allocated to those employees deferring salaries in excess of 4%. The matching contribution would be 50% of any deferral in excess of 4% up to a maximum deferral of 8%. Should discretionary contribution funds remain following the allocation outlined above, any remaining Company discretionary contributions would be allocated as a 50% match of employee contributions, on the first 4% of the employee's deferrals. Discretionary contributions of $600,000, $350,000, and $200,000 were charged to operations in 1997, 1996 and 1995, respectively. Company matching contributions are made as of December 31st each year. LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION The Company's and the Subsidiary Guarantors' Articles of Incorporation and Bylaws provide for indemnification of the officers and directors of the Company to the full extent permitted by law. The General Corporation Law of the State of California and the State of Florida, as applicable, permit a corporation to limit, under certain circumstances, a director's liability for monetary damages in actions brought by or in the right of the corporation. The Company's and the Subsidiary Guarantors' Articles of Incorporation also provide for the elimination of the liability of directors for monetary damages to the full extent permitted by law. The Company has entered into agreements to indemnify its directors and officers in addition to the indemnification provided for in the Articles of Incorporation and Bylaws. These agreements, among other things, indemnify the Company's directors and officers for certain expenses (including attorneys' fees), judgments, fines, and settlement amounts incurred in any action or proceeding, including any action by or in the right of the Company, on account of services as a director or officer of the Company, as a director or officer of any subsidiary of the Company, or as a director or officer of any other enterprise to which the person provides services at the request of the Company. The Company believes that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers. The Company has $20.0 million of directors' and officers' liability insurance. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Company as to which indemnification is sought, nor is the Company aware of any threatened litigation or proceeding that may result in claims for indemnification, except as set forth in Item 2. "Business--Legal Proceedings." 149 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 February 28, 1998, by (i) each director of the Company, (ii) the Chief Executive Officer and the four most highly compensated executive officers whose salary exceeded $100,000 for the year ended December 31, 1997, (iii) each person who is known to the Company to own beneficially more than 5% of the Common Stock, and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated, the Company believes that the beneficial owners of the Common Stock listed below have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
NUMBER OF SHARES % OF TOTAL BENEFICIAL OWNER(1) BENEFICIALLY OWNED OUTSTANDING(2) ------------------- ------------------ -------------- Imperial Bank(3).......................... 8,938,553 22.2% Wellington Management Co.(4).............. 4,558,540 11.3 Keefe Managers, Inc.(4)................... 2,233,900 5.5 Maverick Capital Ltd.(4).................. 2,000,000 5.0 H. Wayne Snavely(5)....................... 1,396,281 3.5 Stephen J. Shugerman(6)................... 258,768 0.6 G. Louis Graziadio, III(7)................ 133,518 0.3 Joseph R. Tomkinson(8).................... 73,474 0.2 Perry A. Lerner(9)........................ 79,722 0.2 Robert S. Muehlenbeck(10)................. 77,792 0.2 J. Clayburn LaForce(11)................... 48,422 0.1 Kevin E. Villani(12)...................... 40,000 0.1 Paul B. Lasiter(13)....................... 36,745 0.1 Irwin L. Gubman(14)....................... 10,000 * Joseph R. Parise(15)...................... 4,000 * All Directors and Officers as a Group (11 persons)(16)............................. 2,158,722 5.4%
- -------- * Less than 1%. (1) Each of such persons may be reached through the Company at 23550 Hawthorne Boulevard, Building One, Suite 110, Torrance, California 90505, telephone (310) 791-8020. (2) Percentage ownership is based on 40,343,055 shares of Common Stock outstanding as of February 28, 1998. (3) Imperial Bank, headquartered in Los Angeles, California, is a California chartered bank whose deposits are insured by the FDIC. The address of Imperial Bank is 9920 La Cienega Boulevard, Inglewood, California 90301. (4) Based upon a Schedule 13G filed with the Company reflecting beneficial ownership as of February 28, 1998. The shares are owned by various investment advisory clients of Wellington Management Company (or of Wellington Trust Company, National Association, WMC's wholly-owned subsidiary), Keefe Managers, Inc. and Maverick Capital Ltd., which is deemed a beneficial owner of the shares only by virtue of the direct or indirect investment and/or voting discretion they possess pursuant to the provisions of investment advisory agreements with such clients.(5) (5) Includes 1,037,052 shares subject to stock options exercisable within 60 days of February 28, 1998. (6) Includes 178,524 shares subject to stock options exercisable within 60 days of February 28, 1998. (7) Includes 119,422 shares subject to stock options exercisable within 60 days of February 28, 1998. (8) Includes 10,000 shares subject to stock options exercisable within 60 days of February 28, 1998. Mr. Tomkinson resigned as an officer of the Company in February 1996 but remains a director. (9) Includes 76,422 shares subject to stock options exercisable within 60 days of February 28, 1998. (10) Includes 70,022 shares subject to stock options exercisable within 60 days of February 28, 1998. (11) Includes 48,422 shares subject to stock options exercisable within 60 days of February 28, 1998. (12) Includes 40,000 shares subject to stock options exercisable within 60 days of February 28, 1998. (13) Includes 11,300 shares subject to stock options exercisable within 60 days of February 28, 1998. (14) Includes 6,000 shares subject to stock options exercisable within 60 days of February 28, 1998. (15) Includes 4,000 shares subject to stock options exercisable within 60 days of February 28, 1998. (16) Includes 1,601,164 shares subject to stock options exercisable within 60 days of February 28, 1998. 150 ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS PRINCIPAL SHAREHOLDER; LIMITATIONS ON INVESTMENT; CONFLICTS OF INTEREST At December 31, 1997, Imperial Bank owned 8,938,553 shares of Common Stock, or 23.0% of the Company. Imperial Bancorp ("Bancorp") is the owner of all of the outstanding capital stock of Imperial Bank. The Federal Reserve Board has advised Bancorp that it considers the retention by the Bank of its shares of ICII stock to be in violation of the Bank Holders Company Act. This position is apparently a consequence of the Federal Reserve Board's view that ICII is engaged in activities which are not determined by regulation to be a closely related activity and that Bancorp did not file or obtain a notice or approval to engage such activities in accordance with Regulation Y. In addition, Section 24 of the Federal Deposit Insurance Act (the "FDIA") limits the investments of state-chartered banks, such as the Bank, to investments which are permitted investments for national banks or are otherwise permitted under Section 24. On June 10, 1996, the Bank filed an application for approval of retention of its ownership of ICII stock. The Bank has submitted additional information to the FDIC in response to FDIC requests. Subsequently, the Bank has advised the FDIC of its intention to contribute all of the common stock owned by the Bank to Imperial Financial Group, Inc, a Delaware corporation, which is currently a wholly-owned subsidiary of the Bank (the "Contribution"). No action has been taken by the FDIC on the application in contemplation of consummation of the Contribution. Due to the perceived existence of significant issues as to whether approval by the Federal Reserve Board of an application to retain Bancorp's ownership in ICII or approval of the FDIC of the application to retain the Bank's ownership in ICII would be forthcoming, the Bancorp Board has determined no to seek Federal Reserve approval at this time of its ownership in ICII stock, but rather to address these regulatory concerns through the Contribution. Because Imperial Bank owns less than 50% of the outstanding shares of the Company and the Company is operated as a company independent of Imperial Bank, Bancorp, and Imperial Financial Group, Inc. the Company believes that, in the event of an insolvency, bankruptcy or receivership proceeding involving Imperial Bank, Bancorp, or Imperial Financial Group, Inc., a court, exercising reasonable judgment after full consideration of all relevant factors, would not order the substantive consolidation of the assets and liabilities of the Company with either of these entities. In February 1997, the board of directors of Bancorp approved a plan to spin off a portion of its specialty lending and finance business, including Imperial Bank's common stock interest in ICII, to IFG, a recently created subsidiary of Bancorp formed to hold various business assets of Bancorp. One director of the Company also serves on the Board of Directors of Imperial Bancorp. See Item 10. "Directors and Executive Officers of the Registrant." PAYMENT AND TERMINATION AGREEMENT On January 1, 1992, Mr. Tomkinson entered into a five-year employment agreement at an annual salary of $200,000, subject to adjustment for inflation, plus an annual bonus to be paid out of a "bonus pool" in an amount determined by the Board of Directors, but in no event to exceed his base salary. Effective July 1, 1994, Mr. Tomkinson's employment agreement was amended to reflect an annual salary of $300,000, plus a bonus based on 1.0% of the Company's pre-tax profits in excess of $10.0 million and the attainment of defined Company goals. Mr. Tomkinson's total compensation did not exceed $750,000 annually. Mr. Tomkinson resigned as an officer of the Company in February 1996. In February 1996, the Company entered into a Payment and Termination Agreement with Mr. Tomkinson. Under the terms of this agreement, Mr. Tomkinson received, as settlement for termination of Mr. Tomkinson's 151 employment with the Company on November 20, 1995 (the "Termination Date"), the following: (i) the amount by which (A) the aggregate of all compensation Mr. Tomkinson would have been entitled to receive under his employment agreement with the Company from the Termination Date through the original termination date of the employment agreement on December 31, 1996, exceeds (B) the aggregate Mr. Tomkinson was entitled to receive from IMH under his employment agreement with IMH during such period, (ii) all accrued but unpaid compensation due Mr. Tomkinson under his employment agreement with the Company through the Termination Date and (iii) the full and immediate vesting of all stock options held by Mr. Tomkinson covering shares of the capital stock of the Company. Mr. Tomkinson received $28,650 under this agreement. BANK DEPOSITS The Company had deposits (including escrow balances) with SPB which were approximately $14.7 million and $4.5 million at December 31, 1997 and 1996, respectively. BORROWING ARRANGEMENTS In October 1995, Imperial Bank extended ICII a $10.0 million revolving line of credit bearing interest at the prime rate (8.50% at December 31, 1995). All amounts outstanding under this line were repaid in May 1996. Additional or modified arrangements and transactions may be entered into by the Company, Imperial Bank, and their respective subsidiaries, after the date hereof. Any such future arrangements and transactions will be determined through negotiation between the Company and Imperial Bank, and it is possible that conflicts of interest will be involved. The Audit Committee of the Board of Directors of the Company, consisting of directors independent of both management and Imperial Bank, must independently approve all transactions by and between the Company and Imperial Bank. RELATIONSHIPS WITH SPFC THE CONTRIBUTION TRANSACTION In October 1994, ICII incorporated SPFC as part of a strategic decision to form a separate subsidiary through which to operate SPB's residential lending division. To further this strategy, in December 1994, ICII made a capital contribution of $250,000 to SPFC in exchange for 100% of its outstanding capital stock, and in April 1995, ICII caused SPB to contribute to SPFC certain customer lists of SPB's residential lending division relating to the ongoing operations of such division. In addition, in April 1996 all employees of SPB's residential lending division became employees of SPFC. SPB retained all other assets and all liabilities related to the contributed operations including all residual interests generated in connection with securitizations effected by SPB's residential lending division. ARRANGEMENTS WITH ICII AND ITS AFFILIATES The Company and SPFC have entered into agreements for the purpose of defining their ongoing relationship. The agreements have been developed in the context of a parent/subsidiary relationship and therefore are not the result of arm's length negotiations between independent parties. It is the intention of the Company and SPFC that such agreements and the transactions provided for therein, taken as a whole, are fair to both parties, while continuing certain mutually beneficial arrangements. However, there can be no assurance that each of such agreements, or the transactions provided for therein, have been effected on terms at least as favorable to the Company or to SPFC as could have been obtained from unaffiliated parties. Additional or modified arrangements and transactions may be entered into by the Company, SPFC and their respective affiliates. Any such future arrangements and transactions will be determined through negotiations between the Company and SPFC, and it is possible that conflicts of interest will develop. The unaffiliated directors of SPFC, consisting of directors independent of the Company and SPFC, must independently approve all transactions between the Company and SPFC. 152 The following is a summary of certain arrangements and transactions between the Company and SPFC. TAX AGREEMENT The Company entered into an agreement (the "SPFC Tax Agreement") with SPFC for the purposes of (i) providing for filing certain tax returns, (ii) allocating certain tax liability and (iii) establishing procedures for certain audits and contests of tax liabilities. Under the SPFC Tax Agreement, ICII agreed to indemnify and hold SPFC harmless from any tax liability attributable to periods ending on or before June 1996 in excess of such taxes as SPFC has already paid or provided for. For periods ending after June 1996, SPFC will pay its tax liability directly to the appropriate taxing authorities. To the extent that (i) there are audit adjustments that result in a tax detriment to SPFC or (ii) SPFC incurs losses that are carried back to an earlier period and such adjustment described in (i) or loss described in (ii) results in a tax benefit to ICII or its affiliates, then ICII will pay to SPFC an amount equal to the tax benefit as that benefit is realized. ICII also agreed to indemnify SPFC for any liability arising out of the filing of federal consolidated returns by ICII or any return filed with any state or local taxing authority. To the extent there are audit adjustments that result in any tax detriment to ICII or any of its affiliates with respect to any period ending on or before June 1996 and, as a result thereof, SPFC for any taxable period after June 1996 realizes a tax benefit, then SPFC shall pay to ICII the amount of such benefit at such time or times as SPFC actually realizes such benefit. ICII generally will control audits and administrative and judicial proceedings with respect to periods ending on or before June 1996, although ICII cannot compromise or settle any issue that increases SPFC's liability without first obtaining the consent of SPFC. SPFC generally controls all other audits and administrative and judicial proceedings. SERVICES PROVIDED BY ICII SPFC has been historically allocated expenses of various administrative services provided to it by ICII. The costs of such services were not directly attributable to a specific division or subsidiary and primarily included general corporate overhead, such as accounting and cash management services, human resources and other administrative functions. These expenses were calculated as a pro rata share of certain administrative costs based on relative number of employees and assets and liabilities of the division or subsidiary, which management believed was a reasonable method of allocation. The allocation of expenses for the years ended December 31, 1997 1996 and 1995 were approximately $74,000, $713,000 and $256,000, respectively. Effective April 1, 1997, ICII discontinued providing many of the services it previously provided to SPFC. ICII currently provides to SPFC mortgage loan production software and hardware and data communications management. OTHER ARRANGEMENTS From the point of commencement of operations until March 1994, SPB served as the servicer of SPFC's loans. From March 1994 through September 1995, SPFC subcontracted all of its servicing obligations under mortgage loans originated or acquired on a servicing released basis to ICII pursuant to a servicing agreement containing fees and other terms that were comparable to industry standards. In addition, ICII was the servicer of loans securitized by SPFC in 1994 and 1995 under the respective pooling and servicing agreements. Effective May 1, 1996, ICII transferred the servicing for all of SPFC's loans it serviced to Advanta Mortgage Corp. USA ("Advanta") or subcontracted with Advanta to perform such servicing functions. In February and March 1996, certain of ICII's residential mortgage origination offices were transferred to SPFC. 153 In March 1996, SPFC entered into a $10.0 million revolving credit and term loan agreement with SPB. Advances under this agreement were collateralized by the Company's interest-only and residual certificates (other than those retained by SPB pursuant to the Contribution Transaction) at an interest rate of 2% above LIBOR. In April 1996, the loan was repaid and the agreement was canceled. During 1995, SPFC borrowed approximately $1.5 million from ICII, such sum bearing interest at approximately 10.3% per annum. At June 18, 1996 the amount owed to ICII was approximately $17.0 million. As of March 31, 1997, all amounts owed to ICII had been repaid. In July 1997, SPFC borrowed $15.0 from ICII bearing interest at 12.0% per annum. As of August 31, 1997, the $15.0 million owed to ICII had been repaid. SPFC has entered into a registration rights agreement with ICII, pursuant to which SPFC has agreed to register for sale under the Securities Act in the future all of ICII's remaining shares of SPFC's common stock, subject to certain conditions. Lehman Commercial Paper, Inc. ("LCPI") has agreed to make available repurchase lines to SPFC in an amount equal to $200.0 million. LCPI has provided SPFC with these funding capabilities for its mortgage banking operations, where SPFC can close loans in its name. The loan collateral is held by an independent third-party custodian and SPFC has the ability to borrow against that collateral at a percentage of the original principal balance. The rate charged is LIBOR plus 65 basis points. Until the first quarter of 1997, this line was guaranteed by ICII. The line has an expiration date of March 26, 1998. As of December 31, 1997, SPFC had no amounts outstanding with respect to this facility. The guarantee expired on April 1, 1997. ICII does not intend to guarantee any other indebtedness of SPFC. RELATIONSHIPS WITH IMH THE CONTRIBUTION TRANSACTION In January 1998, IMH changed its name to Impac Mortgage Holdings, Inc. from Imperial Mortgage Holdings, Inc. On November 20, 1995, the effective date of IMH's initial public stock offering (the "Effective Date"), the Company contributed to ICIFC certain of the operating assets and certain customer lists of the Company's mortgage conduit operations including all of ICII's mortgage conduit operations' commitments to purchase mortgage loans subject to rate locks from correspondents (having a principal balance of $44.3 million at November 20, 1995), in exchange for shares representing 100% of the common stock and 100% of the outstanding non-voting preferred stock of ICIFC. Simultaneously, on the Effective Date, in exchange for 500,000 shares of IMH common stock, the Company (i) contributed to IMH all of the outstanding non- voting preferred stock of ICIFC, which represented 99% of the economic interest in ICIFC, (ii) caused SPB to contribute to IMH certain of the operating assets and certain customer lists of SPB's warehouse lending division and (iii) executed a non-compete agreement and a right of first refusal agreement, each having a term of two years from the Effective Date. Of the 500,000 shares issued pursuant to the contribution, 450,000 shares were issued to ICII and 50,000 shares were issued to SPB. All of the outstanding shares of common stock of ICIFC were retained by ICII. Lastly, IMH contributed all of the aforementioned operating assets of SPB's warehouse lending operations contributed to it by SPB to IWLG in exchange for shares representing 100% of the common stock of IWLG thereby forming it as a wholly owned subsidiary. At November 20, 1995, the net tangible book value of the assets to be contributed pursuant to the contribution was $525,000. The Company and SPB retained all other assets and liabilities related to the contributed operations which at November 20, 1995 consisted mostly of $11.7 million of PMSRs, $22.4 million of finance receivables and $26.6 million in advances made by the Company and SPB to fund mortgage conduit loan acquisitions and to fund finance receivables, respectively. OTHER ARRANGEMENTS AND TRANSACTIONS WITH IMH The Company and IMH have entered into agreements for the purpose of defining their ongoing relationships. These agreements have been developed in the context of a parent/subsidiary relationship and therefore are not the result of arm's-length negotiations between independent parties. 154 It is the intention of the Company and IMH that such agreements and the transactions provided for therein, taken as a whole, are fair to both parties, while continuing certain mutually beneficial arrangements. IMH has entered into a sublease with the Company to lease a portion of its facilities as IMH's executive offices and administrative facilities at an aggregate monthly rental of approximately $39,200. The sublease expires in 1999. The following is a summary of certain arrangements and transactions between and the Company and IMH. Tax Agreement IMH has entered into an agreement (the "IMH Tax Agreement") effective as of the Effective Date with the Company for the purposes of (i) providing for filing certain tax returns, (ii) allocating certain tax liability and (iii) establishing procedures for certain audits and contests of tax liability. Under the IMH Tax Agreement, the Company has agreed to indemnify and hold IMH harmless from any tax liability attributable to periods ending on or before November 20, 1995 in excess of such taxes as IMH has already paid or provided for. For periods ending after the November 20, 1995, IMH will pay its tax liability directly to the appropriate taxing authorities. To the extent (i) there are audit adjustments that result in a tax detriment to IMH or (ii) IMH incurs losses that are carried back to an earlier year and any such adjustment described in (i) or loss described in (ii) results in a tax benefit to ICII or its affiliates, then the Company will pay to IMH an amount equal to the tax benefit as that benefit is realized. ICII will also agree to indemnify IMH for any liability associated with the contribution of the preferred stock of ICIFC and certain operational assets of SPB's warehouse lending division or any liability arising out of the filing of a federal consolidated return by the Company or any return filed with any state or local taxing authority. To the extent there are audit adjustments that result in any tax detriment to the Company or any of its affiliates with respect to any period ending on or before November 20, 1995, and, as a result thereof, IMH for any taxable period after the Effective Date realizes a tax benefit, then IMH shall pay to the Company the amount of such benefit at such time or times as IMH actually realizes such benefit. ICII generally controls audits and administrative and judicial proceedings with respect to periods ending on or before the November 20, 1995, although ICII cannot compromise or settle any issue that increases IMH's liability without first obtaining the consent of IMH. IMH generally controls all other audits and administrative and judicial proceedings. Services Agreement Prior to March 31, 1997, ICIFC was allocated expenses of various administrative services provided by ICII. IWLG was also allocated expenses prior to the contribution transaction referenced above. The costs of such services were not directly attributable to a specific division or subsidiary and primarily included general corporate overhead, such as data processing, accounting and cash management services, human resources and other administrative functions. These expenses were calculated as a pro rata share of certain administrative costs based on relative assets and liabilities of the division or subsidiary, which management believed was a reasonable method of allocation. In connection with IMH's initial public offering in November 1995, IMH and ICII entered into a services agreement (the "IMH Services Agreement") under which ICII provided similar general corporate overhead services to IMH and its affiliates, including ICIFC and IWLG. The Company charged fees for each of the services which it provides under the IMH Services Agreement based upon usage. The IMH Services Agreement expired on December 31, 1996. The allocation of expenses to ICIFC and IWLG and amounts paid to ICII under the IMH Services Agreement for the years ended December 31, 1997, 1996, and 1995 aggregated $67,000, $518,000, and $269,000, respectively. Effective December 31, 1997, ICIFC and IMH entered into a services agreement whereby ICAI would provide human resource, data and phone communication services for an agreed upon fee. The initial term of this agreement expires on December 19, 1998. 155 OTHER TRANSACTIONS General ICAI, a wholly-owned subsidiary of the Company, oversaw the day-to-day operations of IMH, subject to the supervision of IMH's Board of Directors, pursuant to a management agreement (the "Management Agreement") effective as of November 20, 1995, for an initial term that expired on January 31, 1997. ICAI and IMH have concluded a five-year extension to the Management Agreement whereby amounts payable thereunder would be subordinated to a specified rate of return payable to IMH stockholders. ICAI was entitled to receive a per annum base management fee payable monthly in arrears of an amount equal to 75% of (i) 3/8 of 1% of gross mortgage assets of IMH composed of other than agency certificates, conforming mortgage loans or mortgage-backed securities secured by or representing interests in conforming mortgage loans, plus (ii) 1/8 of 1% of the remainder of gross mortgage assets of IMH plus (iii) 1/5 of 1% of the average daily asset balance of the outstanding amounts under IWLG's warehouse lending facilities. The term "gross mortgage assets" means for any month the weighted average book value of IMH's Mortgage Assets (as defined in the Management Agreement), before reserves for depreciation or bad debts or other similar noncash reserves, computed at the end of such month. During the years ended December 31, 1997, 1996 and 1995, ICAI earned $3.0 million, $2.0 million and $37,888 in management fees, respectively. ICAI was entitled to receive as incentive compensation for each fiscal quarter, an amount equal to 75% of 25% of the net income of IMH, before deduction of such incentive compensation, in excess of the amount that would produce an annualized Return on Equity (as defined in the Management Agreement) equal to the ten-year United States Treasury rate plus 2%. Return on Equity is calculated for any quarter by dividing IMH's net income for the quarter by its average net worth for the quarter. For such calculations, the "net income" of IMH means the income of IMH determined in accordance with GAAP before ICAI's incentive compensation, the deduction for dividends paid and any net operating loss deductions arising from losses in prior periods. A deduction for all of IMH's interest expenses for borrowed money is also taken in calculating net income. "Average net worth" for any period means the arithmetic average of the sum of the gross proceeds from any offering of its equity securities by IMH, before deducting any underwriting discounts and commissions and other expenses and costs relating to such offering, plus IMH's retained earnings (without taking into account any losses incurred in prior periods) computed by taking the daily average of such values during such period. The definition Return on Equity is only for purposes of calculating the incentive compensation payable, and is not related to the actual distributions received by IMH's stockholders. The incentive payment to ICAI is calculated quarterly in arrears before any income distributions are made to stockholders for the corresponding period. During the years ended December 31, 1997, 1996 and 1995, ICAI earned $1.9 million, $1.3 million and $0, respectively, for ICAI's incentive payment. The remaining 25% of the base management fee and of the incentive compensation fee are payable to participants in IMH's executive bonus pool as determined by the chief executive officer of IMH. Pursuant to the Management Agreement, IMH also paid all operating expenses except those specifically required to be borne by ICAI under the Management Agreement. The operating expenses generally required to be borne by ICAI include the compensation and other employment costs of ICAI's officers in their capacities as such and the cost of office space and out-of-pocket costs, equipment and other personnel required for oversight of IMH's operations. The expenses that are paid by IMH include issuance and transaction costs incident to the acquisition, disposition and financing of investments, regular legal and auditing fees and expenses of IMH, the fees and expenses of IMH's directors, premiums for directors' and officers' liability insurance, premiums for fidelity and errors and omissions insurance, servicing and subservicing expenses, the costs of printing and mailing proxies and reports to stockholders, and the fees and expenses of IMH's custodian and transfer agent, if any. In addition, ICAI provides various administrative services to IMH such as human resource and management information services. ICAI has subcontracted with ICII and certain of its affiliates to provide certain of such administrative services required under the Management Agreement. Reimbursements of expenses incurred by ICAI which are the responsibility of IMH are made monthly. During the years ended December 31, 1997, 1996 and 1995, there were no monies paid to ICAI as reimbursement of expenses. 156 In December 1997, IMH and the Company negotiated a termination of the management agreement (the "Termination Agreement"). The consideration received by the Company pursuant to the Termination Agreement was comprised of 2,009,310 shares of IMH common stock and certain securitization-related assets. Additionally, the Company agreed to cancel its note receivable from ICIFC, the origination unit of IMH, in the amount of $29.1 million. The IMH common stock and the securitization related assets were recorded by the Company at their estimated fair values of approximately $35.0 million and $13.1 million, respectively, for a total of $48.1 million. This amount, when netted with the $29.1 million cancellation of the ICIFC note receivable resulted in the gain on termination of the management agreement of approximately $19.0 million. IMH Registration Rights Agreement Pursuant to the IMH Registration Rights Agreement IMH has agreed to file one or more registration statements under the Securities Act in the future for shares of IMH held by ICAI pursuant to the Termination Agreement, subject to certain conditions set forth therein. Pursuant to the IMH Registration Rights Agreement, IMH will use its reasonable efforts to cause such registration statements to be kept continuously effective for the public sale from time to time of the shares of IMH held by ICAI pursuant to the aforementioned termination agreement. ICAI has contributed the shares to ICII. Residual Interests owned by ICIFC Effective December 31, 1996, ICII sold $46.9 million of residual interests to ICIFC. In connection therewith, ICII lent ICIFC 100% of the purchase price. This loan bore interest at a rate of 12% per annum, and was secured by the residual interests. On March 31, 1997, ICIFC renegotiated the loan, paying it down by $9.5 million, setting a term of ten years and reducing the interest rate from 12% to 10%. ICII had agreed to compensate ICIFC for losses related to certain loans, to the extent that such loans did not perform, with the exact terms to be determined later. The residual interests were subsequently received by the Company in consideration of the Termination Agreement and the loan was forgiven. See "Other Transactions--General". Bulk Mortgage Loan Purchases In December 1995, ICIFC entered into a number of agreements with the Company and SPB to purchase bulk mortgage loan packages. All mortgage loan purchase agreements were entered into under the following terms. On December 5, 1995 and December 13, 1995, ICIFC purchased from the Company bulk mortgage loan packages of 30-year fully amortized six-month adjustable LIBOR and one-year adjustable United States Treasury Bill rate loans and 30- and 15-year fixed rate second trust deed mortgages with servicing rights on all mortgage loans released to ICIFC. The principal balances of the mortgages at the time of purchase was $106.7 million and $66.2 million, respectively, with a premium paid of $2.1 million and $1.6 million, respectively. On December 29, 1995, ICIFC purchased from SPB two bulk mortgage loan packages of 30-year fully amortized six-month adjustable LIBOR and one-year adjustable United States Treasury Bill rate loans. The principal balances of the loans in the servicing released and servicing retained bulk package at the time of purchase was $300.0 million and $28.5 million with premiums paid of $3.4 million and $142,395, respectively. Purchase of Mortgage-Backed Securities On December 29, 1995, IMH purchased, from SPB, DLJ Mortgage Acceptance Corp. Pass-Through Certificates Series 1995-4, Class B-1 and Class B-2 issued August 29, 1995. These certificates consist primarily of a pool of certain conventional, 11th District Cost of Funds adjustable rate, one-to-four family, first lien mortgage loans, with terms to maturity of not more than 30 years. The mortgage loans underlying the certificates were originated or acquired by ICII. All of the mortgage loans are serviced by ICII in its capacity as master 157 servicer. IMH purchased Class B-1 certificates having an initial certificate principal balance of $4.8 million and the Class B-2 certificates having an initial certificate principal balance of $2.2 million for a price of 78.54 or $4.8 million and for a price of 70.01 or $2.3 million, respectively, equating to a discount of $1.0 million and $0.7 million, respectively. The Class B-1 certificates are single "B" rated mortgage securities and the Class B-2 are double "BB" rated mortgage securities. There was no gain or loss recorded by either party as a result of this transaction. Purchase of Subordinated Lease Receivables On December 29, 1995, IMH purchased a subordinated interest in a lease receivable securitization from IBC. The lease receivables underlying the security were originated by IBC. IMH purchased the subordinated lease receivable based on the present value of estimated cash flows using a discount rate of 12% which resulted in a purchase price of $8.4 million. As a result of the purchase, IBC recorded a gain of $1.6 million. The purchase price was based upon a market discount rate as confirmed by an independent third party. In March 1996, IBC repurchased the subordinated interest from IMH, and as of December 31, 1997, holds the subordinated interest as an investment vehicle. Transfer of ICIFC Stock To conclude the deconsolidation of ICIFC, in the first quarter of 1997 ICII, as sole common shareholder, contributed the common shares of ICIFC to four individuals in approximately equal number of shares, with an approximate value of $25,000 each. ICII no longer has any equity interest in ICIFC. RELATIONSHIPS WITH FMC On November 24, 1997, FMC completed an initial public offering of 10,000,000 shares of common stock. On December 3, 1997, FMC and the selling stockholders completed the sale of 1,500,000 shares pursuant to the underwriters' over- allotment option. Of the aggregate offering of 11,500,000 shares, 6,828,125 shares were sold by FMC, 3,568,175 shares were sold by the Company and 1,103,700 shares were sold by FLRT, Inc., respectively. As a result of these sales pursuant to the initial public offering, the Company's and FLRT, Inc.'s percentage ownership of FMC was reduced to approximately 38.4% and 21.6%, respectively. FMC and ICII have entered into agreements for the purpose of defining their ongoing relationships. The agreements have been developed in the context of a parent/subsidiary relationship and therefore are not the result of arm's- length negotiations between independent parties. It is the intention of FMC and ICII that such agreements and the transactions provided for therein, taken as a whole, are fair to both parties, while continuing certain mutually beneficial arrangements. However, there can be no assurance that each of such agreements, or the transactions provided for therein, have been effected on terms at least as favorable to FMC as could have been obtained from unaffiliated parties. Additional or modified arrangements and transactions may be entered into by FMC, ICII, and their respective subsidiaries, after completion of the proposed initial public offering. Any such future arrangements and transactions will be determined through negotiation between FMC and ICII, and it is possible that conflicts of interest will be involved. All transactions by and between FMC and ICII must be approved by a majority of the disinterested directors of FMC. The following is a summary of certain arrangements and transactions between FMC and ICII. FMC Services Agreement FMC and ICII have entered into a services agreement effective as of November 18, 1997 (the "FMC Services Agreement") under which ICII will continue to provide human resource administration and certain accounting functions to FMC. 158 ICII will charge fees for each of the services which it will provide under the FMC Services Agreement based upon usage. The FMC Services Agreement will have an initial term that ends one year from the date of the proposed initial public offering and is renewable annually thereafter. FMC may terminate the FMC Services Agreement, in whole or in part, upon one month's written notice. As part of the services to be provided under the FMC Services Agreement, ICII will provide FMC with insurance coverage and self insurance programs, including health insurance. The charge to FMC for coverage will be based upon a pro rata portion of the costs to ICII to the various policies. Management believes that the terms of the FMC Services Agreement are as favorable to FMC as could be obtained from independent third parties. FMC Tax Agreement Pursuant to the Reorganization, FMAC's status as a limited liability company was automatically terminated. Pursuant to the FMC tax agreement (the "FMC Tax Agreement"), FMC has agreed to indemnify each of ICII and FLRT, Inc. for any federal or state income taxes, including penalties and interest thereon, imposed by any taxing authority with respect, to, for, or fairly attributable to the operations of FMAC for the period from July 1, 1995 through November 24, 1997. Notwithstanding the foregoing, each of ICII and FLRT, Inc. has agreed to indemnify FMC for all taxes, including penalties and interest thereon, resulting from any determination made by a taxing authority that FMAC should be determined for tax purposes to be an association taxable as a corporation and only to the extent that such taxes pertain to the income of FMAC as originally reported on its income tax return for the period in question and solely to the extent of any limited liability company distributions made by FMAC to ICII and FLRT, Inc. ICII Registration Rights Agreement FMC has entered into a registration rights agreement (the "ICII Registration Rights Agreement") pursuant to which FMC has agreed to file one or more registration statements under the Securities Act in the future for shares of FMC held by ICII, subject to certain conditions set forth therein. Pursuant to the ICII Registration Rights Agreement, FMC will use its reasonable efforts to cause such registration statements to be kept continuously effective for the public sale from time to time of the shares of FMC held by ICII. Also, under the ICII Registration Rights Agreement, FLRT, Inc. may piggyback its shares onto any registration statement concerning shares of the FMC's common stock held by ICII; provided however than for a period of three years following the date of the proposed initial public offering, FLRT, Inc. is limited in the amount of shares of FMC's common stock it can sell to that amount authorized pursuant to Rule 144. Thereafter, FLRT, Inc. has registration rights similar to those granted to ICII under the ICII Registration Rights Agreement without any volume limitations. Transactions Involving SPB In July 1995, FMAC sold approximately $3.8 million of servicing rights to SPB, resulting in a gain of $31,000. At December 31, 1997, 1996 and 1995, there was approximately $0, $183 million and $262 million, respectively, of loans outstanding underlying this subservicing arrangement. FMAC received approximately 13 basis points for providing such services. ICII purchased the servicing rights from SPB in December 1997. FMC then purchased the servicing rights from ICII for $2.2 million. FMAC purchased $15.5 million in franchise loans at par value from SPB on June 26, 1997. These franchise loans were purchased at par value by SPB from FMAC in 1996 and 1997. FMC purchased $45.1 million in franchise loans at par value from SPB on December 24, 1997. These franchise loans were purchased at par value by SPB from FMAC in 1996 and 1997. On December 30, 1997, FMC sold $1.8 million of participation loans at par value to SPB. 159 FMC also has a master purchase and sale agreement with SPB to originate loans for SPB under mutual agreement, and subject to SPB underwriting each such loan prior to sale of such loans. Under this agreement, FMC also has the ability to repurchase loans, under mutual agreement with SPB. There is no specified commitment by either party, and each individual sale is negotiated separately as to pricing. This agreement has no expiration date. At December 31, 1997, loans originated for SPB (and not repurchased), totaled approximately $104 million. FMC does not expect to originate a significant volume of loans for SPB under this arrangement in the future. Borrowings and Guarantees At December 31, 1997 and 1996, FMC had borrowings from ICII outstanding of $0 and $17.7 million, respectively. FMAC paid interest at 12% on the outstanding balances. FMAC, among other subsidiaries of ICII, jointly and severally and fully and unconditionally guaranteed the 9.875% Senior Notes and the ROPES securities. Such guarantees terminated upon the deconsolidation of FMC in the financial statements of ICII. In consideration of ICII's guarantee of FMC's warehouse lines of credit and repurchase facilities, FMC pays to ICII monthly a fee equal to 15 basis points on FMC's committed warehouse lines covered by such guarantee. For the years ended December 31, 1997, 1996 and 1995, the amount of such guarantee fees was $617,000, $0 and $0, respectively. ICII will not guarantee any of FMC's future warehouse lines of credit and repurchase facilities. ICII guaranteed FMC's lease obligations for its executive and administrative offices located in Los Angeles, California and Greenwich, Connecticut. The parties to the leases are currently negotiating a release of such guarantees. ICII will not guarantee any of FMC's future leases. ICII and FLRT, Inc. have agreed to indemnify FMC against any and all liability that FMC and its stockholders (other than ICII and FLRT, Inc.) may incur as a result of the lawsuit of DeWald et al. vs. Knyal, et al. ICII Options Granted to Executive Officers and Key Employees of FMC In April 1996, ICII granted incentive stock options to purchase 25,000 shares of ICII common stock to each of Messrs. Shaughnessy and Rinaldi and incentive stock options to purchase 10,000 shares of ICII common stock to Mr. Farren. In December 1995 and July 1996, ICII granted Raedelle A. Walker incentive stock options to purchase an aggregate of 30,000 shares of ICII common stock. The exercise price of all such options was the fair market value of ICII common stock at the time of the grants. Other Arrangements and Transactions With FMC In the ordinary course of business, FMC has conducted transactions with certain of its officers and directors and with affiliated companies and entities. All such transactions are conducted at "arm's length" in accordance with FMC's policies. 160 RELATIONSHIPS WITH ICCMIC ICCMIC Management Agreement On the closing date of ICCMIC's initial public offering, ICCMIC entered into a management agreement (the "ICCMIC Management Agreement") with Imperial Credit Commercial Asset Management Corporation ("ICCAMC"), a wholly-owned subsidiary of ICII, for an initial term expiring on the second anniversary of the closing date of ICCMIC's initial public offering. Thereafter, successive extensions, each for a period not to exceed two years, may be made by agreement between ICCMIC and ICCAMC, subject to the affirmative vote of a majority of ICCMIC's independent directors. ICCMIC may terminate, or decline to renew the term of, the ICCMIC Management Agreement without cause at any time after the first two years upon 60 days written notice by a majority vote of the independent directors; provided that a termination fee will be due. In addition, ICCMIC has the right to terminate the ICCMIC Management Agreement upon the occurrence of certain specified events, including a material breach by ICCAMC of any provision contained in the ICCMIC Management Agreement that remains uncured at the end of the applicable cure period, without the payment of any termination fee. Pursuant to the provisions of the ICCMIC Management Agreement, ICCAMC is at all times subject to the supervision of ICCMIC's board of directors and has only such functions and authority as ICCMIC delegates to it. ICCAMC advises the board of directors as to the activities and operations of ICCMIC. ICCAMC is responsible for the day-to-day operations of ICCMIC pursuant to the authority granted to it by ICCMIC's board of directors under the ICCMIC Management Agreement, and ICCAMC performs (or causes to be performed) such services and activities relating to the assets and operations of ICCMIC as may be directed by ICCMIC's board of directors or as ICCAMC otherwise considers appropriate, including: (i) serving as ICCMIC's consultant with respect to the formulation of investment criteria and preparation of policy guidelines by the board of directors; (ii) advising and representing ICCMIC in connection with the acquisition and commitment to acquire assets, the sale and commitment to sell assets, and the maintenance and administration of its portfolio of assets; (iii) advising ICCMIC regarding, and arranging for, (a) the issuance of collateralized mortgage obligations ("CMOs") collateralized by ICCMIC's mortgage loans, (b) reverse repurchase agreements on ICCMIC's mortgage-backed securities ("MBS"), and (c) other borrowings, as appropriate; (iv) furnishing reports and statistical and economic research to ICCMIC regarding ICCMIC's activities and the services performed for ICCMIC by ICCAMC; (v) monitoring and providing to ICCMIC's board of directors on an ongoing basis price information and other data obtained from dealers that maintain markets in assets identified by the board of directors from time to time, and providing data and advice to the board of directors in connection with the identification of such dealers; (vi) providing executive and administrative personnel, office space and office services required in rendering services to ICCMIC; administering the day-to-day operations of ICCMIC; and performing and supervising the performance of such other administrative functions necessary in the management of ICCMIC, including the collection of revenues and the payment of ICCMIC's debts and obligations and maintenance of appropriate computer services to perform such administrative functions; (vii) communicating on behalf of ICCMIC with the holders of any equity or debt securities of ICCMIC as required to satisfy the reporting and other requirements of any governmental bodies or agencies or trading markets and to maintain effective relations with such holders; (viii) to the extent not otherwise subject to an agreement executed by ICCMIC, designating a servicer for mortgage loans sold to ICCMIC and arranging for the monitoring and administering of such servicers; (ix) counseling ICCMIC in connection with policy decisions to be made by the board of directors; (x) engaging in hedging activities on behalf of ICCMIC which are consistent with ICCMIC's status as a real estate investment trust ("REIT") and with the guidelines; (xi) upon request by and in accordance with the directions of ICCMIC's board of directors, investing or reinvesting any money of ICCMIC; (xii) counseling ICCMIC regarding the maintenance of its exemption from the Investment Company Act and monitoring compliance with the requirements for maintaining exemption from that Act; (xiii) counseling ICCMIC regarding the maintenance of its status as a REIT and monitoring compliance with the various REIT qualification tests and other rules set out in the Code and Treasury Regulations thereunder; and (xiv) counseling ICCMIC as to compliance with all applicable laws, including those that would require ICCMIC to qualify to do business in particular jurisdictions. 161 ICCAMC performs portfolio management services on behalf of ICCMIC pursuant to the ICCMIC Management Agreement with respect to ICCMIC's investments. Such services include, but are not limited to, consulting ICCMIC on purchase, sale and other opportunities, collection of information and submission of reports pertaining to ICCMIC's assets, interest rates, and general economic conditions, periodic review and evaluation of the performance of ICCMIC's portfolio of assets, acting as liaison between ICCMIC and banking, mortgage banking, investment banking and other parties with respect to the purchase, financing and disposition of assets, and other customary functions related to portfolio management. ICCAMC may enter into subcontracts with other parties, including ICII and its affiliates, to provide any such services to ICCMIC. ICCAMC performs monitoring services on behalf of ICCMIC pursuant to the ICCMIC Management Agreement with respect to loan servicing activities provided by third parties and with respect to ICCMIC's portfolio of special servicing rights. Such monitoring services include, but are not limited to, the following activities: negotiating special servicing agreements; acting as a liaison between the servicers of ICCMIC's mortgage loans and ICCMIC; review of servicers' delinquency, foreclosures and other reports on ICCMIC's mortgage loans; supervising claims filed under any mortgage insurance policies; and enforcing the obligation of any servicer to repurchase mortgage loans. ICCAMC may enter into subcontracts with other parties, including its affiliates, to provide any such services for ICCAMC. ICCAMC will receive a base management fee calculated as a percentage of the Average Invested Assets of ICCMIC for each calendar quarter and equal to 1% per annum of the first $1 billion of such Average Invested Assets, .75% of the next $250 million of such Average Invested Assets, and .50% of Average Invested Assets above $1.25 billion. The term "Average Invested Assets" for any period means the average of the aggregate book value of the assets of ICCMIC, including the assets of all of its direct and indirect subsidiaries, before reserves for depreciation or bad debts or other similar noncash reserves, computed by taking the daily average of such values during such period. ICCAMC will not receive any management fee for the period prior to the sale of the shares in ICCMIC's initial public offering. The base management fee is intended to compensate ICCAMC for its costs in providing management services to ICCMIC. The board of directors of ICCMIC may adjust the base management fee in the future if necessary to align the fee more closely with the costs of such services. ICCAMC shall be entitled to receive incentive compensation for each fiscal quarter in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) Funds from Operations of ICCMIC (before the incentive fee) per share of common stock (based on the weighted average number of shares outstanding) plus (b) gains (or minus losses) from debt restructuring and sales of property per share of common stock (based on the weighted average number of shares outstanding), exceed (2) an amount equal to (a) the weighted average of the price per share at the initial offering and the prices per share at any secondary offerings by ICCMIC multiplied by (b) the Ten-Year U.S. Treasury Rate plus four percent per annum multiplied by (B) the weighted average number of shares of common stock outstanding during such quarter. "Funds from Operations" as defined by the National Association of Real Estate Investment Trusts ("NAREIT") means net income (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds from Operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of ICCMIC's performance or to cash flows as a measure of liquidity or ability to make distributions. As used in calculating ICCAMC's compensation, the term "Ten-Year U.S. Treasury Rate" means the arithmetic average of the weekly average yield to maturity for actively traded current coupon U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years) published by the Federal Reserve Board during a quarter, or, if such rate is not published by the Federal Reserve Board, any Federal Reserve Bank or agency or department of the federal government selected by ICCMIC. If ICCMIC determines in good faith that the Ten-Year U.S. Treasury Rate cannot be calculated as provided above, then the rate shall be the arithmetic average of the per annum average yields to maturities, based upon 162 closing asked prices on each business day during a quarter, for each actively traded marketable U.S. Treasury fixed interest rate security with a final maturity date not less than eight nor more than 12 years from the date of the closing asked prices as chosen and quoted for each business day in each such quarter in New York City by at least three recognized dealers in U.S. government securities selected by ICCMIC. ICCAMC will be reimbursed for (or charge ICCMIC directly for) ICCAMC's costs and expenses in employing third-parties to perform due diligence tasks on assets purchased or considered for purchase by ICCMIC. The above referenced management fees are payable in arrears. ICCAMC's base and incentive fees and reimbursable costs and expenses shall be calculated by ICCAMC within 45 days after the end of each quarter, and such calculation shall be promptly delivered to ICCMIC. ICCMIC is obligated to pay such fees, costs and expenses within 60 days after the end of each fiscal quarter. Right of First Offer Pursuant to the ICCMIC Management Agreement, ICCAMC will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of ICCMIC's board of directors in following or declining to follow its advice or recommendations. ICCAMC, its directors and its officers will not be liable to ICCMIC, any subsidiary of ICCMIC, the independent directors, ICCMIC's stockholders or any subsidiary's stockholders for acts performed in accordance with and pursuant to the ICCMIC Management Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under the ICCMIC Management Agreement. ICCMIC has agreed to indemnify ICCAMC, its directors and its officers with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of ICCAMC not constituting bad faith, willful misconduct, gross negligence or reckless disregard of duties, performed in good faith in accordance with and pursuant to the ICCMIC Management Agreement. The ICCMIC Management Agreement does not limit or restrict the right of ICCAMC or any of its officers, directors, employees or affiliates to engage in any business or to render services of any kind to any other person, including the purchase of, or rendering advice to others purchasing, assets that meet ICCMIC's policies and criteria, except that ICCAMC may not manage or advise another REIT or other entity that invests or intends to invest primarily in commercial and multifamily mortgage loans or subordinated commercial or multifamily MBS interests. Moreover, the directors and certain of the executive officers of ICCAMC executed non-compete agreements that preclude them from leaving ICCAMC and, under certain circumstances, forming or joining another REIT that invests or intends to invest primarily in commercial and multifamily mortgage loans or subordinated CMBS interests. ICII and its affiliates, including SPB, expect to continue to originate mortgage loans and MBS interests. SPB has entered into an agreement granting ICCMIC, as long as the ICCMIC Management Agreement is in effect, a right of first offer to purchase, in addition to the initial investments made by ICCMIC, not less than $150 million annually of multifamily and commercial mortgage loans typical of those originated by SPB. Although not contractually committed to do so, ICCMIC intends to purchase mortgage loans offered to it pursuant to the foregoing right of first offer, subject to compliance with the guidelines and underwriting criteria as established and modified from time to time by ICCMIC's independent directors. ICCMIC expects to maintain a relationship with ICII and SPB in which ICCMIC will be a ready, willing and able purchaser of MBS interests that may be sold from time to time by SPB. Although no binding commitment will exist on the part of ICII, SPB or ICCMIC regarding the sale and purchase of MBS interests, ICCMIC expects to be able to purchase MBS interests from SPB at prices and on terms meeting ICCMIC's investment criteria. ICCMIC expects that ICII and SPB will offer to sell assets to ICCMIC on terms and at prices that, in the aggregate, will be fair to both parties, subject to compliance with the guidelines. In deciding whether to acquire 163 any such asset, ICCAMC may consider, among other factors, whether acquisition of the asset will enhance ICCMIC's ability to achieve or exceed ICCMIC's risk adjusted target rate of return established for that period by ICCMIC's board of directors, whether the asset otherwise is well-suited for ICCMIC and whether ICCMIC is financially able to take advantage of the investment opportunity. If an asset that otherwise meets all of ICCMIC's criteria for asset acquisition is being offered to ICCMIC at a price that is greater, or on terms that are less favorable, than would be required by third parties for similar assets in bona fide arms' length transactions, ICCAMC would be expected to recommend that ICCMIC decline to acquire that asset at the quoted price and terms, notwithstanding the relationship among ICCMIC, ICII and SPB. Other Transactions From time to time, SPB may act as the servicer for ICCMIC's loans. SPB will receive fees for such services pursuant to applicable pooling and servicing agreements. ICCMIC, on the one hand, and ICII and its affiliates, on the other, will enter into a number of relationships other than those governed by the ICCMIC Management Agreement, some of which may give rise to conflicts of interest. Moreover, three of the members of the board of directors of ICCMIC and all of its officers are also employed by ICCAMC or its affiliates. The relationships between ICCMIC, on the one hand, and ICII and its affiliates, on the other, are governed by policy guidelines approved by a majority of ICCMIC's independent directors. The guidelines establish certain parameters for the operations of ICCMIC, including quantitative and qualitative limitations on ICCMIC's assets that may be acquired. The guidelines are to assist and instruct ICCAMC and to establish restrictions applicable to transactions with ICII and its affiliates. A majority of the independent directors approved the acquisition of the initial investments by ICCMIC from ICII and SPB. However, subsequent to the acquisition of the initial investments, ICCAMC may enter into transactions on behalf of ICCMIC with ICII and its affiliates based upon the guidelines approved by the independent directors. Such transactions will be reviewed on a quarterly basis to insure compliance with the guidelines. Mortgage Loan and Other Asset Purchases On October 31, 1997, ICCMIC purchased multifamily/commercial mortgage loans and interests in certain multifamily and commercial mortgage backed securities from SPB and from the Company, for an aggregate purchase price of approximately $163 million plus interest. In December 1997, ICCMIC purchased a pool of multifamily and commercial mortgage loans from SPB for approximately $97 million plus interest. ICCMIC may acquire additional assets from ICII and its affiliates in the future. Any such acquisitions will be in accordance with the guidelines approved by a majority of ICCMIC's independent directors. The terms of a particular transaction, however, will not be approved in advance by ICCMIC's independent directors in all cases. The independent directors will review any such transactions quarterly to insure compliance with the guidelines, but in doing so they, by necessity, will rely primarily on information and analysis provided to them by ICCAMC. Equity Investment On October 20, 1997, the Company completed the initial public offering of ICCMIC. The initial public offering of 34,500,000 shares of common stock was priced at $15.00 per share, representing total net proceeds from the offering of approximately $481.2 million. All of the shares were offered by ICCMIC. In October 1997, the Company purchased 2,970,000 shares of ICCMIC common stock for $41.4 million. In December 1997, the Company purchased an additional 100,000 shares of ICCMIC common stock for $1.5 million. 164 As of December 31, 1997, the Company owns 8.9% of the outstanding common stock of ICCMIC. ICCMIC will be managed by ICCAMC, a wholly owned subsidiary of the Company. ICCMIC intends to invest primarily in performing multifamily and commercial loans and in mortgage backed securities. ICCAMC also has received stock options pursuant to the ICCMIC Option Plan. ICII will retain its shares of ICCMIC for at least two years after ICCMIC's initial public offering of shares of common stock, but may dispose of its shares any time thereafter. Notwithstanding the foregoing, if ICCMIC terminates the ICCMIC Management Agreement, ICII may dispose of its shares at that time. The market in which ICCMIC expects to acquire assets is characterized by rapid evolution of products and services and, thus, there may in the future be relationships between ICCMIC, ICCAMC, and affiliates of ICCAMC in addition to those described herein. OTHER MATTERS In October 1997, the Company loaned H. Wayne Snavely and Kevin E. Villani $1,999,998 and $999,992, respectively, for the purposes of assisting each of them to purchase ICCMIC common stock. The loans are each evidenced by a promissory note maturing June 14, 2002, secured by a deed of trust and stock of ICCMIC held by such individuals. The note bears interest at an annual rate of 10.4% and is payable in semi-annual installments commencing June 15, 1998. At February 28, 1998, the remaining balances are $1.1 million and $610,000, for Wayne Snavely and Kevin E. Villani, respectively. 165 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. By: /s/ H. Wayne Snavely ___________________________________ H. Wayne Snavely Chairman of the Board, President and Chief Executive Officer Date: March 31, 1998 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 From 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.
NAME TITLE DATE ---- ----- ---- /s/ H. Wayne Snavely Chairman of the Board, March 31, 1998 ____________________________________ President and Chief (H. Wayne Snavely) Executive Officer and Director (Principal Executive Officer) /s/ Joseph R. Tomkinson Director March 31, 1998 ____________________________________ (Joseph R. Tomkinson) /s/ Kevin E. Villani Executive Vice President March 31, 1998 ____________________________________ Chief Financial Officer (Kevin E. Villani) (Principal Financial Officer and Principal Accounting Officer) and Director /s/ Stephen J. Shugerman Director March 31, 1998 ____________________________________ (Stephen J. Shugerman)
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NAME TITLE DATE ---- ----- ---- /s/ Robert S. Muehlenbeck Director March 31, 1998 ____________________________________ (Robert S. Muehlenbeck) /s/ G. Louis Graziadio, III Director March 31, 1998 ____________________________________ (G. Louis Graziadio, III) /s/ Perry A. Lerner Director March 31, 1998 ____________________________________ (Perry A. Lerner) /s/ James Clayburn LaForce, Jr. Director March 31, 1998 ____________________________________ (James Clayburn LaForce, Jr.)
167 ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8K
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 3.1(S) Articles of Incorporation, as amended of Registrant. 3.2(S) Bylaws of Registrant. 4.1+ Certificate of Trust of Imperial Credit Capital Trust I. 4.2+ Amended and Restated Declaration of Trust of Imperial Credit Capital Trust I, with form of Remarketed Redeemable Par Securities, dated June 9, 1997. 4.3+ Indenture, by and among the Registrant, Imperial Business Credit, Inc. ("IBC"), Imperial Credit Advisors, Inc. ("ICAI"), Auto Marketing Network, Inc. ("AMN"), and the Chase Trust Company of California, dated as of June 9, 1997, with forms of Resettable Rate Debentures. 4.4+ Registration Rights Agreement, by and among, Registrant, Imperial Credit Capital Trust I (the "Trust"), IBC, ICAI, AMN, and Lehman Brothers, Inc., dated as of June 9, 1997. 4.5+ Remaketing Agreement, by and among, the Registrant, the Trust and Lehman Brothers, Inc., dated as of June 9, 1997. 4.6+ Form of Guarantee Agreement to be executed by the Registrant, for the benefit of the Holders of Remarketed Redeemable Par Securities, Series B. 4.7# Indenture, by and among the Registrant, Chemical Trust Company of California, IBC, ICAI, AMN dated as of Janury 23, 1997, with forms of Senior Notes. 4.8(S) Form of Common Stock Certificate 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, Deferrd Stock and Restricted Stock Plan effective as of June 21, 1996. 10.4** 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.
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10.13(S) Form of Lease Agreement dated January 2, 1992, as amended. 10.14*** Contribution Agreement among the Registrant, Impac Mortgage Holdings, Inc. ("IMH"), Southern Pacific Bank, ICI Funding Corporation("ICIFC") and Imperial Warehouse Lending Group, Inc. dated as of November 20, 1995. 10.15*** Non-Competition Agreement between the Registrant and IMH dated as of November 20, 1995. 10.16*** Right of First Refusal Agreement among the Registrant, IMH and ICIFC dated as of November 20, 1995. 10.17*** Tax Agreement between the Registrant and IMH dated as of November 20, 1995. 10.18*** Services Agreement between the Registrant and IMH dated as of November 20, 1995. 10.19*** Submanagement Agreement between the Registrant and ICAI dated as of November 20, 1995. 10.20 Employment agreement dated as of January 1, 1997 by and between Registrant and H. Wayne Snavely. 10.21 Employment agreement dated as of January 1, 1997 by and between Registrant and Kevin E. Villani. 10.22 Employment agreement dated as of January 1, 1997 by and between Registrant and Stephen J. Shugerman. 10.23 Registration Rights Agreement dated as of August 26, 1997, by and among Registrant, FLRT, Inc. and Franchise Mortgage Acceptance Company. 10.24 Registration Rights Agreement dated as of October 17, 1996, by and between Registrant and Southern Pacific Funding Corporation. 10.25 Registration Rights Agreement dated as of December 29, 1997, by and between ICAI and IMH. 10.26 Termination Agreement dated as of December 19, 1997, by and between ICAI and IMH. 10.27 Promissory Note Secured by Stock Pledge and Deed of Trust dated as of October 21, 1997, between Registrant and H. Wayne Snavely. 10.28 Promissory Note Secured by Stock Pledge and Deed of Trust dated as of October 21, 1997, between Registrant and Kevin E. Villani. 11 Statement Regarding Computation of Earnings Per Share. 21 Subsidiaries of Registrant. 23.1.1 Independent auditors' consent. 24 Power of Attorney (included on signature page of Form 10-K). 27.1 Financial Data Schedules for December 31, 1997 and 1996. 27.2 Financial Data Schedule for December 31, 1995.
- -------- (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, 1996. 169 EX-10.20 2 EMPLOYMENT AGREEMENT--H. WAYNE SNAVELY EXHIBIT 10.20 EMPLOYMENT AND NON-COMPETITION AGREEMENT THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (the "Agreement") is made and entered into as of January 1, 1997, by and between Imperial Credit Industries, Inc. (the "Corporation"), a California corporation, H. Wayne Snavely, an individual (the "Executive"). WITNESSETH: WHEREAS, the Corporation desires to employ the Executive as its Chairman, President and Chief Executive Officer; and WHEREAS, Executive has agreed not to compete with Corporation or use any confidential and proprietary business information regarding the business of Corporation to the detriment of Corporation during the term of this Agreement (and thereafter as applicable) in order to induce Corporation to enter into this Agreement and to perform its obligations hereunder; and WHEREAS, the Executive desires to accept such employment under the terms and conditions herein stated. NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows: 1. Employment and Term ------------------- (a) Employment - The Corporation hereby offers to employ the Executive as the Chairman, President and Chief Executive Officer of the Corporation and the Executive hereby accepts such employment, for the term set forth in Section 1(b). In addition, the Corporation agrees to use its reasonable efforts to nominate and recommend that the Executive be elected to the Board of Directors of the Corporation (the "Board") where he shall be entitled to serve as Chairman of the Board, for so long as the Executive continues to be employed hereunder. (b) Term - The employment hereunder shall be for a term of five years (the "Term") commencing on January 1, 1997 and terminating on December 31, 2002 (the "Expiration Date"), provided that such term may be extended if authorized by the Board and evidenced by a written agreement signed by the Chairman of the Board's Compensation Committee and the Executive. -1- 2. Duties ------ During his Term, the Executive shall serve as Chief Executive Officer of the Corporation and shall have all powers and duties consistent with such position subject to the direction of the Board, to whom the Executive shall report. The Executive shall devote his full time and attention and best efforts to fulfill faithfully, responsibly and to the best of his ability his duties hereunder. 3. Compensation ------------ (a) Base Salary - For services performed by the Executive for the Corporation pursuant to this Agreement during his Term, the Corporation shall pay the Executive a base salary ("Base Salary") at the rate of $450,000 per year, payable twice each month in the amount of $18,750 on the 15th day and the last day of each month, or in accordance with the Corporation's regular payroll practices. Any compensation which may be paid to the Executive under any additional compensation plan of the Corporation, or which may be otherwise authorized from time to time by the Board, shall be in addition to the Base Salary to which the Executive shall be entitled under this Agreement. (b) Annual Bonus - For each full year during his Term, commencing on January 1, 1997, the Executive shall be eligible to receive a cash bonus based on the Corporation's achievement of certain financial goals established at the beginning of such year by the Board's Compensation Committee. For calendar year 1997, and until changed by the Board's Compensation Committee, the annual cash bonus award shall be determined on the basis of the performance of three components, namely, the Corporation's return on equity, the Corporation's earnings per share and the relative change in the dollar value of a share of the Corporation's common stock. Depending on the results of each component, the Executive's cash bonus will range from $0 to $1,050,000, as follows: i) Return on Equity - If the Corporation's return on equity for the calendar year is less than 15%, no cash bonus shall be paid for this component. If the return on equity is from 15% to 20%, the cash bonus shall be $200,000 for this component; if from 20% to 25%, $250,000; and, if 25% or more, $350,000; ii) Earnings per share - If the Corporation's earnings per share are less than $1.25 for the calendar year, no cash bonus shall be paid for this component. If earnings per share are from $1.25 to $1.50, the cash bonus shall be $200,000 for this component; if from $1.50 to $1.75, $250,000; and, if $1.75 or more, $350,000; iii) Stock Performance - If the performance of the Corporation's common stock, as measured by the increase (decrease) in the average closing price reported by NASDAQ for the fourth quarter of 1997 divided by the average closing price for the fourth quarter of 1996 and stated as a percentage, is less than the fourth quarter percentage increase (or more than the fourth quarter percentage decrease) for the Standard and Poor's 500 stock index, no cash bonus shall be paid for this component. If the Corporation's common stock performance as measured on this basis equals or -2- exceeds Standard and Poor's 500 stock index performance for the same period by up to 10%, the cash bonus shall be $200,000 for this component; if from 10% to 20%, $250,000; and, if 20% or more, $350,000. The bonus payable for any calendar year shall be paid to the Executive no later than the 15th day of April of the following year. This annual bonus arrangement shall be in lieu of the Executive's participation in any other cash bonus or cash incentive plan or arrangement of the Corporation; provided, however, that the foregoing shall not preclude the Executive from participating in any equity or equity-based compensation program of the Corporation, and the bonus program set forth herein may be replaced with a different program approved by the Board's Compensation Committee and agreed with the Executive. (c) Equity - The Executive shall be eligible to receive grants of common stock of the Corporation under the 1996 Stock Option Plan (the "Plan") and any successor or addition thereto, in the sole discretion of the Board-appointed committee which administers the Plan. (d) Tax Withholding - The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state and local law with respect to any payment in cash, shares of capital stock or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option; (i) withhold such taxes from any cash payments owing from the Corporation to the Executive, including any payments owing under any other provision of the Agreement, (ii) require the Executive to pay to the Corporation in cash such amount as may be required to satisfy such withholding or (iii) make other satisfactory arrangements with the Executive to satisfy such withholding obligations. 4. Benefits -------- In addition to the Base Salary to be paid to the Executive pursuant to Section 3(a) hereof and any annual bonuses earned by, and discretionary grants of common stock awarded to, the Executive pursuant to Sections 3(b) and 3(c) hereof, the Executive shall also be entitled to the following: (a) Participation in Insurance and Healthcare Benefit Plans - Except as otherwise expressly provided herein, the Executive and his dependents shall be enrolled in the Corporation's insurance and healthcare benefit group plans in accordance with established Corporation policies. (b) Participation in the Corporation's 401(k) Plan - The Executive shall be entitled to participate in the Corporation's 401(k) Plan in accordance with established Corporation policies. (c) Expense Reimbursement - The Corporation shall reimburse the Executive, upon proper accounting, for reasonable business expenses incurred by him in the course of the performance of his duties under this Agreement. -3- (d) Vacations, Holidays, Absences and Leaves - The Executive shall be entitled to the benefit of the vacation, holiday, absence and leave policies applicable to all employees of comparable title or status in the Corporation. (e) Automobile Allowance - The Corporation shall pay the Executive a monthly automobile allowance of $1500, to be applied in the Executive's discretion. The Corporation shall not provide the Executive any vehicles, insurance or the cost of any maintenance hereunder. (f) Proration of Benefits - Any payments or benefits pursuant to this Section 4, in any year during which the Executive is employed by the Corporation for less than the entire year, shall, unless otherwise provided herein or in the applicable plan or arrangement, be prorated in accordance with the number of days in such year during which the Executive is employed by the Corporation. 5. Indemnification --------------- The Executive shall be entitled to the maximum indemnification provided by the Bylaws and the Articles of Incorporation of the Corporation for officers, directors and employees of the Corporation. The Executive's rights under this paragraph shall continue without time limit so long as he may be subject to any such liability, whether or not the Executive's term of employment by the Corporation may have ended. 6. Representations and Warranties of the Executive ----------------------------------------------- The Executive hereby represents and warrants to the Corporation that (a) the Executive's execution and delivery of this Agreement and his performance of his duties and obligations hereunder will not conflict with, or cause a default under, or give any party a right to damages under, or to terminate, any other agreement to which the Executive is a party or by which he is bound, and (b) there are no agreements or understandings that would make unlawful the Executive's execution or delivery of this Agreement or his employment hereunder. 7. Representations and Warranties of the Corporation ------------------------------------------------- The Corporation hereby represents and warrants to the Executive as follows: (a) The Corporation is duly organized and established as a corporation under the laws of the State of California and has all requisite power and authority to enter into this Agreement and to perform its obligations hereunder. The consummation of the transactions contemplated by this Agreement will neither violate nor be in conflict with any agreement or instrument to which the Corporation is a party or by which it is bound. -4- (b) The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly and validly authorized by all requisite Corporate action on the part of the corporation and are valid, legal and binding obligations of the Corporation, enforceable in accordance with their terms except as may be limited by laws of general application relating to bankruptcy, insolvency, moratorium or other similar laws relating to or affecting the enforcement of creditors' rights generally, and rules of law governing specific performance, injunctive relief or other equitable remedies. 8. Termination ----------- Executive's employment shall terminate prior to the Expiration Date upon the happening of any of the following events: A. For Cause --------- The Executive may be terminated for Cause immediately upon receipt of notice pursuant to a good faith determination to terminate for Cause made by a majority of the Board. For purposes of this Agreement, "Cause" means: (1) the Executive engages in any act of theft, embezzlement, falsification of records, misappropriation of funds or property, or fraud against, or with respect to the business of, the Corporation or any affiliate; (2) current use of illegal drugs on or off the job or current addiction to alcohol, unless the Executive voluntarily requests accommodation for rehabilitation before such time as the Corporation notifies the Executive that it suspects the Executive's use of illegal drugs or addiction to alcohol; (3) the Executive commits a breach of any material term of this Agreement or any other material legal obligation to the Corporation and, if such breach is capable of being cured, fails to cure such breach within 30 days of notice of such breach; (4) the Executive is convicted of, or pleads guilty or nolo contendere to a felony or a crime involving moral turpitude, breach of trust or dishonesty; (5) the Executive commits any act that causes, or knowingly fails to take reasonable and appropriate action to prevent, any material injury to the financial condition or business reputation of the Corporation or any of its affiliates; however, this shall not apply to any act of the Corporation or its affiliates by any other employee thereof except to the extent that such act is committed at the direction, or with the knowledge, of the Executive; or (6) the Executive ceases to devote his full time and attention and best efforts to his duties hereunder. -5- B. Good Reason (by the Executive) ------------------------------ The Executive's employment may be terminated by the Executive at any time for any of the following reasons (each of which is referred to herein as "Good Reason") by giving the Corporation notice of the effective date of such termination (which effective date may be the date of such notice): (1) the Corporation commits a breach of any material term of this Agreement and, if such breach is capable of being cured, fails to cure such breach within 30 days of receipt of notice of such breach; or (2) the Corporation removes the Executive from the position of Chief Executive Officer of the Corporation, other than for Cause. C. Executive's Rights to Terminate ------------------------------- The Executive may, at his option, terminate his employment hereunder for any reason upon 60 days prior written notice to the Corporation. D. Death ----- This Agreement shall terminate automatically upon the Executive's death. E. Disability ---------- The Corporation may terminate the Executive's employment upon a good faith determination by the Board that Executive has become so physically or mentally disabled as to be incapable of satisfactorily performing his duties hereunder for a period of 180 consecutive days, such determination to be based upon a certificate as to such physical or mental disability issued by a licensed physician or psychiatrist employed by the Corporation. F. Without Cause ------------- The Corporation may, at its option, terminate the Executive's employment without Cause at any time upon written notice to the Executive. G. Date of Termination ------------------- For purposes of this Agreement, the term "Date of Termination" shall mean the later of the date that any party gives written notice that it intends to terminate this Agreement pursuant to the terms hereof or the date, if any, specified by the terminating party in such notice as the effective date of termination. -6- 9. Obligations of the Corporation Upon Termination ----------------------------------------------- (a) Cause - If the Executive's employment shall be terminated for Cause, the Corporation's obligations to the Executive shall terminate, other than the obligation (i) to pay to the Executive his Base Salary through the Date of Termination at the rate in effect on the day preceding the Date of Termination, and (ii) to continue to provide the Executive with benefits of the type described in Section 4 through the Date of Termination. (b) Voluntary - If the Executive terminates his employment for other than Good Reason (a "Voluntary Termination"), this Agreement shall terminate without further obligation to the Executive hereunder, other than the obligation (i) to pay the Executive his Base Salary through the Date of Termination at the rate in effect on the day preceding the Date of Termination and any previously awarded but not yet paid cash bonus; and (ii) to continue to provide the Executive with benefits of the type described in section 4 through the Date of Termination. (c) Without Cause or for Good Reason - If the Corporation shall terminate the Executive's employment without Cause, or if the Executive shall terminate ------- his employment for Good Reason, the Corporation shall (i) continue in accordance with the Corporation's normal payroll procedures to pay the Executive his Base Salary through the Date of Termination and the pro rata portion of any cash bonus award the Executive would be entitled to receive as of year end, (ii) continue to provide the Executive with benefits of the type described in Section 4 through the Expiration Date and (iii) pay the Severance Amount to the Executive pro rata from the Date of Termination to the end of that month and thereafter as of the first day of each month commencing with the month immediately following the month in which the Date of Termination occurs and ending on the Expiration Date; provided, however, that payment of the Severance Amount shall be suspended during any period in which the Executive is an employee or independent contractor of a company that in the Board's opinion competes with the Corporation. "Severance Amount" shall mean an amount, calculated as of the Date of Termination, which is the monthly equivalent of a $450,000 annual compensation benefit reduced by the actuarial equivalent of the Executive's projected primary Social Security benefit. If the Executive resigns for Good Reason prior to the first anniversary of the date of this Agreement, the Severance Amount shall equal 50% of the monthly amount calculated as described in the immediately preceding sentence. In the event Executive becomes an employee or independent contractor of another company following the first anniversary of the date of this Agreement and Executive is compensated at an annual rate that is less than $450,000, the Severance Amount shall be adjusted to equal the annual rate of $450,000 minus the Executive's annual compensation pro rated at his new employer. No Severance Amount shall be paid if the Executive's total annual cash compensation at his new employer exceeds the amount calculated in the first sentence of this paragraph. 10. Non-Competition --------------- The Executive acknowledges and recognizes the highly competitive nature of the business of the Corporation and its affiliates as well as his extensive participation in the -7- ownership of the common stock of the Corporation. The Executive accordingly agrees, until the third anniversary of the Executive's termination or resignation of employment (such date being hereafter referred to as the "Restricted Date") as follows: (a) The Executive will not directly or indirectly engage (as owner, stockholder, partner or otherwise, except as a holder of fewer than 5% of the outstanding shares or other equity interests of a company whose shares or other equity interests are publicly traded) in any business which directly or indirectly competes with the business of the Corporation or any of its affiliates within the same jurisdictions in which the Corporation or any of its affiliates engages in business at the time of the Executive's termination or resignation, as the case may be. (b) The Executive will not directly or indirectly induce any employee of the Corporation or any of its affiliates to engage in any activity in which the Executive is prohibited from engaging by paragraph (a) above or to terminate his employment with the Corporation or any of its affiliates, and will not directly or indirectly employ or offer employment to any person who was employed by the Corporation or any of its affiliates unless such person shall have been terminated without cause or ceased to be employed by any such entity for a period of at least 12 months. (c) The Executive will not make any statement or take any action intended to impair the goodwill or the business reputation of the Corporation or any of its affiliates, or to be otherwise detrimental to the interests of the Corporation or any of its affiliates, including any action or statement intended, directly or indirectly, to benefit a competitor of the Corporation or any of its affiliates. (d) It is expressly understood and agreed that although the Executive and the Corporation consider the restrictions contained in this Section 10 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against the Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 11. Proprietary Information ----------------------- Through the Restricted Date, the Executive shall not use for his personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit on any person, firm, association or company other than the Corporation, any Proprietary Information. "Proprietary Information" means information relating to the properties, prospects, products, services or operations of the Corporation or any direct or indirect affiliate thereof that is not generally known, is proprietary to the Corporation or such affiliate and is made known to the Executive or learned or acquired by the Executive while in the employ of the Corporation, including, without limitation, information concerning trade secrets of the Corporation, or any of the Corporation's affiliates and any improvements relating to the products of the Corporation -8- in accounting, marketing, selling, leasing, financing and other business methods and techniques. However, Proprietary Information shall not include (A) at the time of disclosure to the Executive such information that was in the public domain or later entered the public domain other than as a result of a breach of an obligation herein; or (B) subsequent to disclosure to the Executive, Executive received such information from a third party under no obligation to maintain such information in confidence, and the third party came into possession of such information other than as a result of a breach of an obligation herein. All materials or articles of information of any kind furnished to the Executive by the Corporation or developed by the Executive in the course of his employment hereunder are and shall remain the sole property of the Corporation; and if the Corporation requests the return of such information at any time during, upon or after the termination of the Executive's employment hereunder, the Executive shall immediately deliver the same to the Corporation. 12. Ownership of Proprietary Information ------------------------------------ The Executive agrees that all Proprietary Information shall be the sole property of the Corporation and its assigns, and the Corporation and its assigns shall be the sole owner of all licenses and other rights in connection with such Proprietary Information. At all times, until the Restricted Date, the Executive will keep in the strictest confidence and trust all Proprietary Information and will not use or disclose such Proprietary Information, or anything relating to such information, without the prior written consent of the Corporation, except as may be necessary in the ordinary course of performing his duties under this Agreement. 13. Documents and Other Property ---------------------------- All materials and articles of information of any kind furnished to the Executive in the course of his employment hereunder are and shall remain the sole property of the Corporation; and if the Corporation requests the return of such information at any time during, upon or after the termination of the Executive's employment hereunder, the Executive shall immediately deliver the same to the Corporation. The Executive will not, without the prior written consent of the Corporation, retain any documents, data or property, or any reproduction thereof of any description, belonging to the Corporation or pertaining to any Proprietary Information. 14. Third Party Information ----------------------- The Corporation from time to time receives from third parties confidential or proprietary information subject to a duty on the Corporation's part to maintain the confidentiality of such information and to use it only for certain limited purposes ("Third Party Information"). At all times the Executive will hold Third Party Information in the strictest confidence and will not disclose or use Third Party Information except as permitted by the agreement between the Corporation and such third Party. -9- 15. Intellectual Property --------------------- Any and all products, including but not limited to marketing and financing materials and methods ("Products") made, developed or created by the Executive (whether at the request or suggestion of the Corporation or otherwise, whether alone or in conjunction with others, and whether during regular hours of work or otherwise) (i) during the period of this Agreement, or (ii) within a period of one year after the date of termination or resignation of employment hereunder, which may be directly or indirectly useful in, or relate to, the business of or tests being carried out by any member of the Corporation, shall be promptly and fully disclosed by the Executive to the members of the Board and, if such intellectual property was made, developed or created other than pursuant to the Executive's employment hereunder, the Executive shall grant the Corporation a perpetual, royalty free license to such intellectual property, and if such intellectual property was made, developed or created pursuant to the Executive's employment hereunder, such intellectual property shall be the Corporation's exclusive property as against the Executive, and the Executive shall promptly deliver to an appropriate representative of the Corporation as designated by the Board all papers, drawings, models, data and other material relating to any invention made, developed or created by him as aforesaid. The Executive shall, at the request of the Corporation and without any payment therefor, execute any documents necessary or advisable in the opinion of the Corporation's counsel or direct issuance of patents or copyrights to the Corporation with respect to such Products as are to be the Corporation's exclusive property as against the Executive or to vest in the Corporation title to such Products as against the Executive. The expense of securing any such patent or copyright shall be borne by the Corporation. 16. Customer Lists -------------- The Executive will not during, or for a period of three years after the termination of, his employment (i) disclose the Corporation's (including its subsidiaries') customer lists or any part thereof to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, (ii) assist in obtaining any of the Corporation's (including its subsidiaries') existing customers for any competing business, or (iii) encourage any customer to terminate its relationship with the Corporation or any of its subsidiaries. 17. Equitable Relief ---------------- The Executive acknowledges that, in view of the nature of the business in which the Corporation is engaged, the restrictions contained in Sections 10 through 16 inclusive (the "Restrictions") are reasonable and necessary in order to protect the legitimate interests of the Corporation, and that any violation thereof would result in irreparable injuries to the Corporation, and the Executive therefore further acknowledges that, if the Executive violates, or threatens to violate, any of the Restrictions, the Corporation shall be entitled to obtain from any court of competent jurisdiction, without the posting of any bond or other security, preliminary and permanent injunctive relief as well as damages and an equitable accounting of all earnings, profits and other benefits arising from such violation, which rights shall be cumulative and in addition to any other rights or remedies in law or equity to which the Corporation may be entitled. -10- 18. Binding Effect -------------- This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation or otherwise) to all or a significant portion of its assets, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had taken place. Regardless of whether such agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law and such successor shall be deemed the "Corporation" for purposes of this Agreement. 19. Notices ------- All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or sent by facsimile transmission with telephonic confirmation of receipt, or mailed within the continental United States by first-class certified mail, return receipt requested, postage prepaid, addressed as follows: (a) if to the Board or the Corporation, to: Imperial Credit Industries, Inc. Building One, Suite 240 23550 Hawthorne Boulevard Torrance, California 90505 Attention: General Counsel (b) if to the Executive, to: H. Wayne Snavely 2500 Paseo Del Mar Palos Verdes Estates, CA 90274 Such addresses may be changed by written notice sent to the other party at the last recorded address of that party. 20. Arbitration of All Disputes --------------------------- (a) Any controversy or claim arising out of or relating to this Agreement or the breach thereof (including the arbitrability of any controversy or claim), shall be settled by arbitration in the City of Los Angeles in accordance with the laws of the State of California by one arbitrator. If the parties cannot agree on the appointment of an arbitrator, then the arbitrator shall be appointed by the American Arbitration Association. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of an arbitrator which shall be as provided in this Paragraph 20. The -11- cost of any arbitration proceeding hereunder shall be borne equally by the Corporation and the Executive. The award of the arbitrator shall be binding upon the parties. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (b) If it shall be necessary or desirable for the Executive to retain legal counsel and incur other costs and expenses in connection with the enforcement of any or all of his rights under this Agreement, and provided that the Executive substantially prevails in the enforcement of such rights, the Corporation shall pay (or the Executive shall be entitled to recover from the Corporation, as the case may be) the Executive's reasonable attorneys' fees and costs and expenses in connection with the enforcement of his rights including the enforcement of any arbitration award. 21. No Assignment ------------- Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge. 22. Execution in Counterparts ------------------------- This Agreement may be executed by the parties hereto in two counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. 23. Jurisdiction and Governing Law ------------------------------ This Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of California, without reference to its conflict of laws provisions. 24. Severability ------------ If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. 25. Entire Agreement ---------------- This Agreement embodies the entire agreement of the parties hereof, and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof. No change, alteration or modification hereof may be made except in a writing, signed by each of the parties hereto. -12- 26. Headings Descriptive -------------------- The headings of the several paragraphs of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. IMPERIAL CREDIT INDUSTRIES, INC. EXECUTIVE By: /s/ Robert Muehlenbeck By: /s/ H. Wayne Snavely --------------------------- -------------------- Name: Robert Muehlenbeck H. Wayne Snavely Title: Chairman, Compensation Committee -13- EX-10.21 3 EMPLOYMENT AGREEMENT--KEVIN E. VILLANI EXHIBIT 10.21 EMPLOYMENT AND NON-COMPETITION AGREEMENT ---------------------------------------- THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (the "Agreement") is made and entered into as of January 1, 1997, by and between Imperial Credit Industries, Inc. (the "Corporation"), a California corporation, and Kevin E. Villani, an individual (the "Executive"). WITNESSETH: WHEREAS, the Corporation desires to employ the Executive as its Executive Vice President and Chief Financial Officer; and WHEREAS, Executive has agreed not to compete with Corporation or use any confidential and proprietary business information regarding the business of Corporation to the detriment of Corporation during the term of this Agreement (and thereafter as applicable) in order to induce Corporation to enter into this Agreement and to perform its obligations hereunder; and WHEREAS, the Executive desires to accept such employment under the terms and conditions herein stated. NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows: 1. Employment and Term ------------------- (a) Employment - The Corporation hereby offers to employ the Executive as the Execution Vice President and Chief Financial Officer of the Corporation on the terms and conditions set forth herein, and the Executive hereby accepts such employment, for the term set forth in Section 1(b). (b) Term - The employment hereunder shall be for a term of five years (the "Term") commencing on January 1, 1997 and terminating on December 31, 2002 (the "Expiration Date"), provided that such term may be extended if authorized by the Board and evidenced by a written agreement signed by the Chairman of the Corporation and the Executive. -1- 2. Duties ------ During his Term, the Executive shall serve as Chief Financial Officer of the Corporation and shall have all powers and duties consistent with such position subject to the direction of the Chairman of the Corporation, to whom the Executive shall report. The Executive shall devote his full time and attention and best efforts to fulfill faithfully, responsibly and to the best of his ability his duties hereunder. 3. Compensation ------------ (a) Base Salary - For services performed by the Executive for the Corporation pursuant to this Agreement during his Term, the Corporation shall pay the Executive a base salary ("Base Salary") at the rate of $300,000 per year, payable twice each month in the amount of $12,500 on the 15th day and the last day of each month, or in accordance with the Corporation's regular payroll practices. Any compensation which may be paid to the Executive under any additional compensation plan of the Corporation, or which may be otherwise authorized from time to time by the Board, shall be in addition to the Base Salary to which the Executive shall be entitled under this Agreement. (b) Annual Bonus - For each full year during his Term, commencing on January 1, 1997, the Executive shall be eligible to receive a cash bonus based on the Corporation's achievement of certain financial goals established at the beginning of such year by the Board's Compensation Committee. For calendar year 1997, and until changed by the Board's Compensation committee, the annual cash bonus award shall be determined on the basis of the performance of three components, namely, the Corporation's return on equity, the Corporation's earnings per share and the relative change in the dollar value of a share of the Corporation's common stock. Depending on the results of each component, the Executive's cash bonus will range from $0 to $400,000, as follows: i) Return on Equity - If the Corporation's return on equity for the calendar year is less than 15%, no cash bonus shall be paid for this component. If the return on equity is from 15% to 20%, the cash bonus shall be $66,667 for this component; if from 20% to 25%, $100,000; and, if 25% or more, $133,333; ii) Earnings per share - If the Corporation's earnings per share are less than $1.25 for the calendar year, no cash bonus shall be paid for this component. If earnings per share are from $1.25 to $1.50, the cash bonus shall be $66,667 for this component; if from $1.50 to $1.75, $100,000; and, if $1.75 or more, $133,333; iii) Stock Performance - If the performance of the Corporation's common stock, as measured by the increase (decrease) in the average closing price reported by NASDAQ for the fourth quarter of 1997 divided by the average closing price for the fourth quarter of 1996 and stated as a percentage, is less than the fourth quarter percentage increase (or more than the fourth quarter percentage decrease) for the Standard and Poor's 500 stock index, no cash bonus shall be paid for this component. If the Corporation's common stock performance as measured on this basis equals or -2- exceeds Standard and Poor's 500 stock index performance for the same period by up to 10%, the cash bonus shall be $66,667 for this component; if from 10% to 20%, $100,000; and, if 20% or more, $133,333. The bonus payable for any calendar year shall be paid to the Executive no later than the 15th day of April of the following year. This annual bonus arrangement shall be in lieu of the Executive's participation in any other cash bonus or cash incentive plan or arrangement of the Corporation; provided, however, that the foregoing shall not preclude the Executive from participating in any equity or equity-based compensation program of the Corporation, and the bonus program set forth herein may be replaced with a different program approved by the Board's Compensation Committee and agreed with the Executive. (c) Equity - The Executive shall be eligible to receive grants of common stock of the Corporation under the 1996 Stock option Plan (the "Plan") and any successor or addition thereto, in the sole discretion of the Board-appointed committee which administers the Plan. (d) Tax Withholding - The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state and local law with respect to any payment in cash, shares of capital stock or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option: (i) withhold such taxes from any cash payments owing from the Corporation to the Executive, including any payments owing under any other provision of the Agreement, (ii) require the Executive to pay to the Corporation in cash such amount as may be required to satisfy such withholding or (iii) make other satisfactory arrangements with the Executive to satisfy such withholding obligations. 4. Benefits -------- In addition to the Base Salary to be paid to the Executive pursuant to Section 3(a) hereof and any annual bonuses earned by, and discretionary grants of common stock awarded to, the Executive pursuant to Sections 3(b) and 3(c) hereof, the Executive shall also be entitled to the following: (a) Participation in Insurance and Healthcare Benefit Plans - Except as otherwise expressly provided herein, the Executive and his dependents shall be enrolled in the Corporation's insurance and healthcare benefit group plans in accordance with established Corporation policies. (b) Participation in the Corporation's 401(k) Plan - The Executive shall be entitled to participate in the Corporation's 401(k) Plan in accordance with established Corporation policies. (c) Expense Reimbursement - The Corporation shall reimburse the Executive, upon proper accounting, for reasonable business expenses incurred by him in the course of the performance of his duties under this Agreement. -3- (d) Vacations, Holidays, Absences and Leaves - The Executive shall be entitled to the benefit of the vacation, holiday, absence and leave policies applicable to all employees of comparable title or status in the Corporation. (e) Automobile Allowance - The Corporation shall pay the Executive a monthly automobile allowance of $500, to be applied in the Executive's discretion. The Corporation shall not provide the Executive any vehicles, insurance or the cost of any maintenance hereunder. (f) Proration of Benefits - Any payments or benefits pursuant to this Section 4, in any year during which the Executive is employed by the Corporation for less than the entire year, shall, unless otherwise provided herein or in the applicable plan or arrangement, be prorated in accordance with the number of days in such year during which the Executive is employed by the Corporation. 5. Indemnification --------------- The Executive shall be entitled to the maximum indemnification provided by the Bylaws and the Articles of Incorporation of the Corporation for officers, directors and employees of the Corporation. The Executive's rights under this paragraph shall continue without time limit so long as he may be subject to any such liability, whether or not the Executive's term of employment by the Corporation may have ended. 6. Representations and Warranties of the Executive ----------------------------------------------- The Executive hereby represents and warrants to the Corporation that (a) the Executive's execution and delivery of this Agreement and his performance of his duties and obligations hereunder will not conflict with, or cause a default under, or give any party a right to damages under, or to terminate, any other agreement to which the Executive is a party or by which he is bound, and (b) there are no agreements or understandings that would make unlawful the Executive's execution or delivery of this Agreement or his employment hereunder. 7. Representations and Warranties of the Corporation ------------------------------------------------- The Corporation hereby represents and warrants to the Executive as follows: (a) The Corporation is duly organized and established as a corporation under the laws of the State of California and has all requisite power and authority to enter into this Agreement and to perform its obligations hereunder. The consummation of the transactions contemplated by this Agreement will neither violate nor be in conflict with any agreement or instrument to which the Corporation is a party or by which it is bound. (b) The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action on -4- the part of the Corporation and are valid, legal and binding obligations of the Corporation, enforceable in accordance with their terms except as may be limited by laws of general application relating to bankruptcy, insolvency, moratorium or other similar laws relating to or affecting the enforcement of creditors' rights generally, and rules of law governing specific performance, injunctive relief or other equitable remedies. 8. Termination ----------- Executive's employment shall terminate prior to the Expiration Date upon the happening of any of the following events: A. For Cause --------- The Executive may be terminated for Cause immediately upon receipt of notice pursuant to a good faith determination to terminate for Cause made by a majority of the Board. For purposes of this Agreement, "Cause" means: (1) the Executive engages in any act of theft, embezzlement, falsification of records, misappropriation of funds or property, or fraud against, or with respect to the business of, the Corporation or any affiliate; (2) current use of illegal drugs on or off the job or current addiction to alcohol, unless the Executive voluntarily requests accommodation for rehabilitation before such time as the Corporation notifies the Executive that it suspects the Executive's use of illegal drugs or addiction to alcohol; (3) the Executive commits a breach of any material term of this Agreement or any other material legal obligation to the Corporation and, if such breach is capable of being cured, fails to cure such breach within 30 days of notice of such breach; (4) the Executive is convicted of, or pleads guilty or nolo contendere to a felony or a crime involving moral turpitude, breach of trust or dishonesty; (5) the Executive commits any act that causes, or knowingly fails to take reasonable and appropriate action to prevent, any material injury to the financial condition or business reputation of the Corporation or any of its affiliates; however, this shall not apply to any act of the Corporation or its affiliates by any other employee thereof except to the extent that such act is committed at the direction, or with the knowledge, of the Executive; or (6) the Executive ceases to devote his full time and attention and best efforts to his duties hereunder. -5- B. Good Reason (by the Executive) ----------------------------- The Executive's employment may be terminated by the Executive at any time for any of the following reasons (each of which is referred to herein as "Good Reason") by giving the Corporation notice of the effective date of such termination (which effective date may be the date of such notice): (1) the Corporation commits a breach of any material term of this Agreement and, if such breach is capable of being cured, fails to cure such breach within 30 days of receipt of notice of such breach; or (2) the Corporation removes the Executive from the position of Chief Financial Officer of the Corporation, other than for Cause. C. Executive's Rights to Terminate ------------------------------- The Executive may, at his option, terminate his employment hereunder for any reason upon 60 days prior written notice to the Corporation. D. Death ----- This Agreement shall terminate automatically upon the Executive's death. E. Disability ---------- The Corporation may terminate the Executive's employment upon a good faith determination by the Board that Executive has become so physically or mentally disabled as to be incapable of satisfactorily performing his duties hereunder for a period of 180 consecutive days, such determination to be based upon a certificate as to such physical or mental disability issued by a licensed physician or psychiatrist employed by the Corporation. F. Without Cause ------------- The Corporation may, at its option, terminate the Executive's employment without Cause at any time upon written notice to the Executive. G. Date of Termination ------------------- For purposes of this Agreement, the term "Date of Termination" shall mean the later of the date that any party gives written notice that it intends to terminate this Agreement pursuant to the terms hereof or the date, if any, specified by the terminating party in such notice as the effective date of termination. -6- 9. Obligations of the Corporation Upon Termination ----------------------------------------------- (a) Cause - If the Executive's employment shall be terminated for Cause, the Corporation's obligations to the Executive shall terminate, other than the obligation (i) to pay to the Executive his Base Salary through the Date of Termination at the rate in effect on the day preceding the Date of Termination, and (ii) to continue to provide the Executive with benefits of the type described in Section 4 through the Date of Termination. (b) Voluntary - If the Executive terminates his employment for other than Good Reason (a "Voluntary Termination"), this Agreement shall terminate without further obligation to the Executive hereunder, other than the obligation (i) to pay the Executive his Base Salary through the Date of Termination at the rate in effect on the day preceding the Date of Termination and any previously awarded but not yet paid cash bonus; and (ii) to continue to provide the Executive with benefits of the type described in Section 4 through the Date of Termination. (c) Without Cause or for Good Reason - If the Corporation shall terminate the Executive's employment without Cause, or if the Executive shall ------- terminate his employment for Good Reason, the Corporation shall (i) continue in accordance with the Corporation's normal payroll procedures to pay the Executive his Base Salary through the Date of Termination and the pro rata portion of any cash bonus award the Executive would be entitled to receive as of year end, (ii) continue to provide the Executive with benefits of the type described in Section 4 through the Expiration Date and (iii) pay the Severance Amount to the Executive pro rata from the Date of Termination to the end of that month and thereafter as of the first day of each month commencing with the month immediately following the month in which the Date of Termination occurs and ending on the Expiration Date; provided, however, that payment of the Severance Amount shall be suspended during any period in which the Executive is an employee or independent contractor of a company that in the Board's opinion competes with the Corporation. "Severance Amount" shall mean $300,000 annual compensation benefit reduced by the actuarial equivalent of the Executive's projected primary Social Security benefit. If the Executive resigns for Good Reason prior to the first anniversary of the date of this Agreement, the Severance Amount shall equal 50% of the monthly amount calculated as described in the immediately preceding sentence. In the event Executive becomes an employee or independent contractor of another company following the first anniversary of the date of this Agreement and Executive is compensated at an annual rate that is less than $300,000, the Severance Amount shall be adjusted to equal the annual rate of $300,000 minus the Executive's annual compensation pro rated at his new employer. No Severance Amount shall be paid if the Executive's total annual cash compensation at his new employer exceeds the amount calculated in the first sentence of this paragraph. 10. Non-Competition --------------- The Executive acknowledges and recognizes the highly competitive nature of the business of the Corporation and its affiliates as well as his extensive participation in the ownership of the common stock of the Corporation. The Executive accordingly agrees, until -7- the third anniversary of the Executive's termination or resignation of employment (such date being hereafter referred to as the "Restricted Date"), as follows: (a) The Executive will not directly or indirectly engage (as owner, stockholder, partner or otherwise, except as a holder of fewer than 5% of the outstanding shares or other equity interests of a company whose shares or other equity interests are publicly traded) in any business which directly or indirectly competes with the business of the Corporation or any of its affiliates within the same jurisdictions in which the Corporation or any of its affiliates engages in business at the time of the Executive's termination or resignation, as the case may be. (b) The Executive will not directly or indirectly induce any employee of the Corporation or any of its affiliates to engage in any activity in which the Executive is prohibited from engaging by paragraph (a) above or to terminate his employment with the Corporation or any of its affiliates, and will not directly or indirectly employ or offer employment to any person who was employed by the Corporation or any of its affiliates unless such person shall have been terminated without cause or ceased to be employed by any such entity for a period of at least 12 months. (c) The Executive will not make any statement or take any action intended to impair the goodwill or the business reputation of the Corporation or any of its affiliates, or to be otherwise detrimental to the interests of the Corporation or any of its affiliates, including any action or statement intended, directly or indirectly, to benefit a competitor of the Corporation or any of its affiliates. (d) It is expressly understood and agreed that although the Executive and the Corporation consider the restrictions contained in this Section 10 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against the Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 11. Proprietary Information ----------------------- Through the Restricted Date, the Executive shall not use for his personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit on any person, firm, association or company other than the Corporation, any Proprietary Information. "Proprietary Information" means information relating to the properties, prospects, products, services or operations of the Corporation or any direct or indirect affiliate thereof that is not generally known, is proprietary to the Corporation or such affiliate and is made known to the Executive or learned or acquired by the Executive while in the employ of the Corporation, including, without limitation, information concerning trade secrets of the Corporation, or any of the Corporation's affiliates and any improvements relating to the products of the Corporation in accounting, marketing, selling, leasing, financing and other business methods and -8- techniques. However, Proprietary Information shall not include (A) at the time of disclosure to the Executive such information that was in the public domain or later entered the public domain other than as a result of a breach of an obligation herein; or (B) subsequent to disclosure to the Executive, Executive received such information from a third party under no obligation to maintain such information in confidence, and the third party came into possession of such information other than as a result of a breach of an obligation herein. All materials or articles of information of any kind furnished to the Executive by the Corporation or developed by the Executive in the course of his employment hereunder are and shall remain the sole property of the Corporation; and if the Corporation requests the return of such information at any time during, upon or after the termination of the Executive's employment hereunder, the Executive shall immediately deliver the same to the Corporation. 12. Ownership of Proprietary Information ------------------------------------ The Executive agrees that all Proprietary Information shall be the sole property of the Corporation and its assigns, and the Corporation and its assigns shall be the sole owner of all licenses and other rights in connection with such Proprietary Information. At all times, until the Restricted Date, the Executive will keep in the strictest confidence and trust all Proprietary Information and will not use or disclose such Proprietary Information, or anything relating to such information, without the prior written consent of the Corporation, except as may be necessary in the ordinary course of performing his duties under this Agreement. 13. Documents and Other Property ---------------------------- All materials and articles of information of any kind furnished to the Executive in the course of his employment hereunder are and shall remain the sole property of the Corporation; and if the Corporation requests the return of such information at any time during, upon or after the termination of the Executive's employment hereunder, the Executive shall immediately deliver the same to the Corporation. The Executive will not, without the prior written consent of the Corporation, retain any documents, data or property, or any reproduction thereof of any description, belonging to the Corporation or pertaining to any Proprietary Information. 14. Third Party Information ----------------------- The Corporation from time to time receives from third parties confidential or proprietary information subject to a duty on the Corporation's part to maintain the confidentiality of such information and to use it only for certain limited purposes ("Third Party Information"). At all times the Executive will hold Third Party Information in the strictest confidence and will not disclose or use Third Party Information except as permitted by the agreement between the Corporation and such third party. -9- 15. Intellectual Property --------------------- Any and all products, including but not limited to marketing and financing materials and methods ("Products") made, developed or created by the Executive (whether at the request or suggestion of the Corporation or otherwise, whether alone or in conjunction with others, and whether during regular hours of work or otherwise) (i) during the period of this Agreement, or (ii) within a period of one year after the date of termination or resignation of employment hereunder, which may be directly or indirectly useful in, or relate to, the business of or tests being carried out by any member of the Corporation, shall be promptly and fully disclosed by the Executive to the members of the Board and, if such intellectual property was made, developed or created other than pursuant to the Executive's employment hereunder, the Executive shall grant the Corporation a perpetual, royalty free license to such intellectual property, and if such intellectual property was made, developed or created pursuant to the Executive's employment hereunder, such intellectual property shall be the Corporation's exclusive property as against the Executive, and the Executive shall promptly deliver to an appropriate representative of the Corporation as designated by the Board all papers, drawings, models, data and other material relating to any invention made, developed or created by him as aforesaid. The Executive shall, at the request of the Corporation and without any payment therefor, execute any documents necessary or advisable in the opinion of the Corporation's counsel or direct issuance of patents or copyrights to the Corporation with respect to such Products as are to be the Corporation's exclusive property as against the Executive or to vest in the Corporation title to such Products as against the Executive. The expense of securing any such patent or copyright shall be borne by the Corporation. 16. Customer Lists -------------- The Executive will not during, or for a period of three years after the termination of, his employment (i) disclose the Corporation's (including its subsidiaries') customer lists or any part thereof to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, (ii) assist in obtaining any of the Corporation's (including its subsidiaries') existing customers for any competing business, or (iii) encourage any customer to terminate its relationship with the Corporation or any of its subsidiaries. 17. Equitable Relief ---------------- The Executive acknowledges that, in view of the nature of the business in which the Corporation is engaged, the restrictions contained in Sections 10 through 16 inclusive (the "Restrictions") are reasonable and necessary in order to protect the legitimate interests of the Corporation, and that any violation thereof would result in irreparable injuries to the Corporation, and the Executive therefore further acknowledges that, if the Executive violates, or threatens to violate, any of the Restrictions, the Corporation shall be entitled to obtain from any court of competent jurisdiction, without the posting of any bond or other security, preliminary and permanent injunctive relief as well as damages and an equitable accounting of all earnings, profits and other benefits arising from such violation, which rights shall be -10- cumulative and in addition to any other rights or remedies in law or equity to which the Corporation may be entitled. 18. Binding Effect -------------- This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation or otherwise) to all or a significant portion of its assets, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had taken place. Regardless of whether such agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law and such successor shall be deemed the "Corporation " for purposes of this Agreement. 19. Notices ------- All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or sent by facsimile transmission with telephonic confirmation of receipt, or mailed within the continental United States by first-class certified mail, return receipt requested, postage prepaid, addressed as follows: (a) if to the Board or the Corporation, to: Imperial Credit Industries, Inc. Building One, Suite 240 23550 Hawthorne Boulevard Torrance, California 90505 Attention: General Counsel (b) if to the Executive, to: Kevin E. Villani 5658 Dolphin Place La Jolla, CA 92037 Such addresses may be changed by written notice sent to the other party at the last recorded address of that party. 20. Arbitration of All Disputes --------------------------- (a) Any controversy or claim arising out of or relating to this Agreement or the breach thereof (including the arbitrability of any controversy or claim), shall be settled by arbitration in the City of Los Angeles in accordance with the laws of the State of California by -11- one arbitrator. If the parties cannot agree on the appointment of an arbitrator, then the arbitrator shall be appointed by the American Arbitration Association. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of an arbitrator which shall be as provided in this Paragraph 20. The cost of any arbitration proceeding hereunder shall be borne equally by the Corporation and the Executive. The award of the arbitrator shall be binding upon the parties. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (b) If it shall be necessary or desirable for the Executive to retain legal counsel and incur other costs and expenses in connection with the enforcement of any or all of his rights under this Agreement, and provided that the Executive substantially prevails in the enforcement of such rights, the Corporation shall pay (or the Executive shall be entitled to recover from the Corporation, as the case may be) the Executive's reasonable attorneys' fees and costs and expenses in connection with the enforcement of his rights including the enforcement of any arbitration award. 21. No Assignment ------------- Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge. 22. Execution in Counterparts ------------------------- This Agreement may be executed by the parties hereto in two counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. 23. Jurisdiction and Governing Law ------------------------------- This Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of California, without reference to its conflict of laws provisions. 24. Severability ------------ If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. -12- 25. Entire Agreement ---------------- This Agreement embodies the entire agreement of the parties hereof, and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof. No change, alteration or modification hereof may be made except in a writing, signed by each of the parties hereto. 26. Headings Descriptive -------------------- The headings of the several paragraphs of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. IMPERIAL CREDIT INDUSTRIES, INC. EXECUTIVE By:/s/ H. Wayne Snavely By:/s/ Kevin E. Villani ----------------------------- -------------------------- Name: H. Wayne Snavely Kevin E. Villani Title: Chairman and Chief Executive Officer -13- EX-10.22 4 EMPLOYMENT AGREEMENT--STEPHEN J. SHUGERMAN EXHIBIT 10.22 EMPLOYMENT AND NON-COMPETITION AGREEMENT ---------------------------------------- THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (the "Agreement") is made and entered into as of January 1, 1997, by and between Southern Pacific Thrift and Loan Association (the "Corporation"), a California corporation, and Stephen J. Shugerman, an individual (the "Executive"). WITNESSETH: WHEREAS, the Corporation desires to employ the Executive as its President; and WHEREAS, Executive has agreed not to compete with Corporation or use any confidential and proprietary business information regarding the business of Corporation to the detriment of Corporation during the term of this Agreement (and thereafter as applicable) in order to induce Corporation to enter into this Agreement and to perform its obligations hereunder; and WHEREAS, the Executive desires to accept such employment under the terms and conditions herein stated. NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows: 1. Employment and Term ------------------- (a) Employment - The Corporation hereby offers to employ the Executive as the President of the Corporation on the terms and conditions set forth herein, and the Executive hereby accepts such employment, for the term set forth in Section 1(b). (b) Term - The employment hereunder shall be for a term of five years (the "Term") commencing on January 1, 1997 and terminating on December 31, 2002 (the "Expiration Date"), provided that such term may be extended if authorized by the Board and evidenced by a written agreement signed by the Chairman of the Corporation and the Executive. 2. Duties ------ During his Term, the Executive shall serve as President of the Corporation and shall have all powers and duties consistent with such position subject to the direction of the Chairman of the Corporation, to whom the Executive shall report. The Executive shall devote -1- his full time and attention and best efforts to fulfill faithfully, responsibly and to the best of his ability his duties hereunder. 3. Compensation ------------ (a) Base Salary - For services performed by the Executive for the Corporation pursuant to this Agreement during his Term, the Corporation shall pay the Executive a base salary ("Base Salary") at the rate of $250,000 per year, payable twice each month in the amount of $10,416.67 on the 15th day and last day of each month, or in accordance with the Corporation's regular payroll practices. Any compensation which may be paid to the Executive under any additional compensation plan of the Corporation, or which may be otherwise authorized from time to time by the Board, shall be in addition to the Base Salary to which the Executive shall be entitled under this Agreement. (b) Annual Bonus - For each full year during his Term, commencing on January 1, 1997, the Executive shall be eligible to receive a cash bonus based on the Corporation's achievement of certain financial and business goals established at the beginning of such year by the Chairman of the Corporation. For calendar year 1997, and until changed by the Chairman, the annual cash bonus award shall be determined on the basis of the performance of three components, namely, Imperial Credit Industries, Inc.'s earnings per share and two qualitative measures of the Corporation's performance. Depending on the results of each component, the Executive's cash bonus will range from $0 to $500,000, as follows: (i) Earnings per share - If Imperial Credit Industries Inc.'s earnings per share are less than $1.25 for the calendar year, no cash bonus shall be paid for this component. If earnings per share are from $1.25 to $1.50, the cash bonus shall be $50,000 for this component; if from $1.50 to $1.75, $100,000; and, if $1.75 or more, $167,000; (ii) Qualitative Objective No. 1 - If Southern Pacific Thrift and Loan Association's existing Memorandum of Understanding with the Federal Deposit Insurance Corporation and the California Department of Corporations is augmented with additional corrective measures following the 1997 examination or more severe agency actions are taken, no cash bonus shall be paid for this component. If the Memorandum of Understanding remains in effect without substantive change as a result of the 1997 safety and soundness examination to the date of the 1998 examination, the cash bonus shall be $50,000 for this component. If the corrective measures required to be taken under the Memorandum of Understanding are materially reduced in scope as a result of the 1997 examination, the cash bonus shall be $100,000 for this component. If the Memorandum of Understanding is removed entirely as a result of the 1997 examination or at any time prior to the 1998 safety and soundness examination, the cash bonus shall be $167,000 for this component; (iii) Qualitative Objective No. 2 - If Southern Pacific Thrift and Loan Association's 1997 safety and soundness examination rating is below the composite rating of the prior year's safety and soundness examination, no cash bonus shall be paid -2- for this component. If the safety and soundness examination rating equals the composite rating for the prior year, then the cash bonus shall be $50,000 for this component. If the safety and soundness examination rating is maintained at the prior year's level but with significant substantive improvements noted in the report of examination, the cash bonus shall be $100,000 for this component. If the 1997 safety and soundness examination rating is improved from the prior year, the cash bonus shall be $167,000 for this component. The bonus payable for any calendar year shall be paid to the Executive no later than the 15th day of April of the following year. This annual bonus arrangement shall be in lieu of the Executive's participation in any other cash bonus or cash incentive plan or arrangement of the Corporation; provided, however, that the foregoing shall not preclude the Executive from participating in any equity or equity-based compensation program of the Corporation, and the bonus program set forth herein may be replaced with a different program approved by the Chairman and agreed with the Executive. (c) Equity - The Executive shall be eligible to receive grants of common stock of Imperial Credit Industries, Inc. under the 1996 Stock Option Plan (the "Plan") and any successor or addition thereto, in the sole discretion of the Board-appointed committee which administers the Plan. (d) Tax Withholding - The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state and local law with respect to any payment in cash, shares of capital stock or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option: (i) withhold such taxes from any cash payments owing from the Corporation to the Executive, including any payments owing under any other provision of the Agreement, (ii) require the Executive to pay to the Corporation in cash such amount as may be required to satisfy such withholding or (iii) make other satisfactory arrangements with the Executive to satisfy such withholding obligations. 4. Benefits -------- In addition to the Base Salary to be paid to the Executive pursuant to Section 3(a) hereof and any annual bonuses earned by, and discretionary grants of common stock awarded to, the Executive pursuant to Sections 3(b) and 3(c) hereof, the Executive shall also be entitled to the following: (a) Participation in Insurance and Healthcare Benefit Plans - Except as otherwise expressly provided herein, the Executive and his dependents shall be enrolled in the Corporation's insurance and healthcare benefit group plans in accordance with established Corporation policies. (b) Participation in the Corporation's 401(k) Plan - The Executive shall be entitled to participate in the Corporation's 401(k) Plan in accordance with established Corporation policies. -3- (c) Expense Reimbursement - The Corporation shall reimburse the Executive, upon proper accounting, for reasonable business expenses incurred by him in the course of the performance of his duties under this Agreement. (d) Vacations, Holidays, Absences and Leaves - The Executive shall be entitled to the benefit of the vacation, holiday, absence and leave policies applicable to all employees of comparable title or status in the Corporation. (e) Automobile Allowance - The Corporation shall pay the Executive a monthly automobile allowance of $900, to be applied in the Executive's discretion. The Corporation shall not provide the Executive any vehicles, insurance or the cost of any maintenance hereunder. (f) Proration of Benefits - Any payments or benefits pursuant to this Section 4, in any year during which the Executive is employed by the Corporation for less than the entire year, shall, unless otherwise provided herein or in the applicable plan or arrangement, be prorated in accordance with the number of days in such year during which the Executive is employed by the Corporation. 5. Indemnification --------------- The Executive shall be entitled to the maximum indemnification provided by the Bylaws and the Articles of Incorporation of the Corporation for officers, directors and employees of the Corporation. The Executive's rights under this paragraph shall continue without time limit so long as he may be subject to any such liability, whether or not the Executive's term of employment by the Corporation may have ended. 6. Representations and Warranties of the Executive ----------------------------------------------- The Executive hereby represents and warrants to the Corporation that (a) the Executive's execution and delivery of this Agreement and his performance of his duties and obligations hereunder will not conflict with, or cause a default under, or give any party a right to damages under, or to terminate, any other agreement to which the Executive is a party or by which he is bound, and (b) there are no agreements or understandings that would make unlawful the Executive's execution or delivery of this Agreement or his employment hereunder. 7. Representations and Warranties of the Corporation ------------------------------------------------- The Corporation hereby represents and warrants to the Executive as follows: (a) The Corporation is duly organized and established as a corporation under the laws of the State of California and has all requisite power and authority to enter into this Agreement and to perform its obligations hereunder. The consummation of the transactions contemplated by this Agreement will neither violate nor be in conflict with any agreement or instrument to which the Corporation is a party or by which it is bound. -4- (b) The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action on the part of the Corporation and are valid, legal and binding obligations of the Corporation, enforceable in accordance with their terms except as may be limited by laws of general application relating to bankruptcy, insolvency, moratorium or other similar laws relating to or affecting the enforcement of creditors' rights generally, and rules of law governing specific performance, injunctive relief or other equitable remedies. 8. Termination ----------- Executive's employment shall terminate prior to the Expiration Date upon the happening of any of the following events: A. For Cause --------- The Executive may be terminated for Cause immediately upon receipt of notice pursuant to a good faith determination to terminate for Cause made by a majority of the Board. For purposes of this Agreement, "Cause" means: (1) the Executive engages in any act of theft, embezzlement, falsification of records, misappropriation of funds or property, or fraud against, or with respect to the business of, the Corporation or any affiliate; (2) current use of illegal drugs on or off the job or current addiction to alcohol, unless the Executive voluntarily requests accommodation for rehabilitation before such time as the Corporation notifies the Executive that it suspects the Executive's use of illegal drugs or addiction to alcohol; (3) the Executive commits a breach of any material term of this Agreement or any other material legal obligation to the Corporation and, if such breach is capable of being cured, fails to cure such breach within 30 days of notice of such breach; (4) the Executive is convicted of, or pleads guilty or nolo contendere to a felony or a crime involving moral turpitude, breach of trust or dishonesty; (5) the Executive commits any act that causes, or knowingly fails to take reasonable and appropriate action to prevent, any material injury to the financial condition or business reputation of the Corporation or any of its affiliates; however, this shall not apply to any act of the Corporation or its affiliates by any other employee thereof except to the extent that such act is committed at the direction, or with the knowledge, of the Executive; or (6) the Executive ceases to devote his full time and attention and best efforts to his duties hereunder. -5- B. Good Reason (by the Executive) ------------------------------ The Executive's employment may be terminated by the Executive at any time for any of the following reasons (each of which is referred to herein as "Good Reason") by giving the Corporation notice of the effective date of such termination (which effective date may be the date of such notice): (1) the Corporation commits a breach of any material term of this Agreement and, if such breach is capable of being cured, fails to cure such breach within 30 days of receipt of notice of such breach; or (2) the Corporation removes the Executive from the position of President of the Corporation, other than for Cause. C. Executive's Rights to Terminate ------------------------------- The Executive may, at his option, terminate his employment hereunder for any reason upon 60 days prior written notice to the Corporation. D. Death ----- This Agreement shall terminate automatically upon the Executive's death. E. Disability ---------- The Corporation may terminate the Executive's employment upon a good faith determination by the Board that Executive has become so physically or mentally disabled as to be incapable of satisfactorily performing his duties hereunder for a period of 180 consecutive days, such determination to be based upon a certificate as to such physical or mental disability issued by a licensed physician or psychiatrist employed by the Corporation. F. Without Cause ------------- The Corporation may, at its option, terminate the Executive's employment without Cause at any time upon written notice to the Executive. G. Date of Termination ------------------- For purposes of this Agreement, the term "Date of Termination" shall mean the later of the date that any party gives written notice that it intends to terminate this Agreement pursuant to the terms hereof or the date, if any, specified by the terminating party in such notice as the effective date of termination. -6- 9. Obligations of the Corporation Upon Termination ----------------------------------------------- (a) Cause -- If the Executive's employment shall be terminated for Cause, the Corporation's obligations to the Executive shall terminate, other than the obligation (i) to pay to the Executive his Base Salary through the Date of Termination at the rate in effect on the day preceding the Date of Termination, and (ii) to continue to provide the Executive with benefits of the type described in Section 4 through the Date of Termination. (b) Voluntary -- If the Executive terminates his employment for other than Good Reason (a "Voluntary Termination"), this Agreement shall terminate without further obligation to the Executive hereunder, other than the obligation (i) to pay the Executive his Base Salary through the Date of Termination at the rate in effect on the day preceding the Date of Termination and any previously awarded but not yet paid cash bonus; and (ii) to continue to provide the Executive with benefits of the type described in Section 4 through the Date of Termination. (c) Without Cause or for Good Reason -- If the Corporation shall terminate the Executive's employment without Cause, or if the Executive shall ------- terminate his employment for Good Reason, the Corporation shall (i) continue in accordance with the Corporation's normal payroll procedures to pay the Executive his Base Salary through the Date of Termination and the pro rata portion of any cash bonus award the Executive would be entitled to receive as of year end, (ii) continue to provide the Executive with benefits of the type described in Section 4 through the Expiration Date and (iii) pay the Severance Amount to the Executive pro rata from the Date of Termination to the end of that month and thereafter as of the first day of each month commencing with the month immediately following the month in which the Date of Termination occurs and ending on the Expiration Date; provided, however, that payment of the Severance Amount shall be suspended during any period in which the Executive is an employee or independent contractor of a companay that in the Board's opinion competes with the Corporation. "Severance Amount" shall mean an amount, calculated as of the day preceding the Date of Termination, which is the monthly equivalent of a $250,000 annual compensation benefit reduced by the actuarial equivalent of the Executive's projected primary Social Security benefit. If the Executive resigns for Good Reason prior to the first anniversary of the date of this Agreement, the Severance Amount shall equal 50% of the monthly amount calculated as described in the immediately preceding sentence. In the event Executive becomes an employee or independent contractor of another company following the first anniversary of the date of this Agreement and Executive is compensated at an annual rate that is less than $250,000, the Severance Amount shall be adjusted to equal the annual rate of $250,000 minus the Executive's annual compensation pro rated at his new employer. No Severance Amount shall be paid if the Executive's total annual cash compensation at his new employer exceeds the amount calculated in the first sentence of this paragraph. 10. Non-Competition --------------- The Executive acknowledges and recognizes the highly competitive nature of the business of the Corporation and its affiliates as well as his extensive participation in the -7- ownership of the common stock of the Corporation. The Executive accordingly agrees, until the third anniversary of the Executive's termination or resignation of employment (such date being hereafter referred to as the "Restricted Date"), as follows: (a) The Executive will not directly or indirectly engage (as owner, stockholder, partner or otherwise, except as a holder of fewer than 5% of the outstanding shares or other equity interests of a company whose shares or other equity interests are publicly traded) in any business which directly or indirectly competes with the business of the Corporation or any of its affiliates within the same jurisdictions in which the Corporation or any of its affiliates engages in business at the time of the Executive's termination or resignation, as the case may be. (b) The Executive will not directly or indirectly induce any employee of the Corporation or any of its affiliates to engage in any activity in which the Executive is prohibited from engaging by paragraph (a) above or to terminate his employment with the Corporation or any of its affiliates, and will not directly or indirectly employ or offer employment to any person who was employed by the Corporation or any of its affiliates unless such person shall have been terminated without cause or ceased to be employed by any such entity for a period of at least 12 months. (c) The executive will not make any statement or take any action intended to impair the goodwill or the business reputation of the Corporation or any of its affiliates, or to be otherwise detrimental to the interests of the Corporation or any of its affiliates, including any action or statement intended, directly or indirectly, to benefit a competitor of the Corporation or any of its affiliates. (d) It is expressly understood and agreed that although the Executive and the Corporation consider the restrictions contained in this Section 10 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against the Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 11. Proprietary Information ----------------------- Through the Restricted Date, the Executive shall not use for his personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit on any person, firm, association or company other than the Corporation, any Proprietary Information. "Proprietary Information" means information relating to the properties, prospects, products, services or operations of the Corporation or any direct or indirect affiliate thereof that is not generally known, is proprietary to the Corporation or such affiliate and is made known to the Executive or learned or acquired by the Executive while in the employ of the Corporation, including, without limitation, information concerning trade secrets of the Corporation, or any of the Corporation's affiliates and any improvements relating to the products of the Corporation -8- in accounting, marketing, selling, leasing, financing and other business methods and techniques. However, Proprietary Information shall not include (A) at the time of disclosure to the Executive such information that was in the public domain or later entered the public domain other than as a result of a breach of an obligation herein; or (B) subsequent to disclosure to the Executive, Executive received such information from a third party under no obligation to maintain such information in confidence, and the third party came into possession of such information other than as a result of a breach of an obligation herein. All materials or articles of information of any kind furnished to the Executive by the Corporation or developed by the Executive in the course of his employment hereunder are and shall remain the sole property of the Corporation; and if the Corporation requests the return of such information at any time during, upon or after the termination of the Executive's employment hereunder, the Executive shall immediately deliver the same to the Corporation. 12. Ownership of Proprietary Information ------------------------------------ The Executive agrees that all Proprietary Information shall be the sole property of the Corporation and its assigns, and the Corporation and its assigns shall be the sole owner of all licenses and other rights in connection with such Proprietary Information. At all times, until the Restricted Date, the Executive will keep in the strictest confidence and trust all Proprietary Information and will not use or disclose such Proprietary Information, or anything relating to such information, without the prior written consent of the Corporation, except as may be necessary in the ordinary course of performing his duties under this Agreement. 13. Documents and Other Property ---------------------------- All materials and articles of information of any kind furnished to the Executive in the course of his employment hereunder are and shall remain the sole property of the Corporation; and if the Corporation requests the return of such information at any time during, upon or after the termination of the Executive's employment hereunder, the Executive shall immediately deliver the same to the Corporation. The Executive will not, without the prior written consent of the Corporation, retain any documents, data or property, or any reproduction thereof of any description, belonging to the Corporation or pertaining to any Proprietary Information. 14. Third Party Information ----------------------- The Corporation from time to time receives from third parties confidential or proprietary information subject to a duty on the Corporation's part to maintain the confidentiality of such information and to use it only for certain limited purposes ("Third Party Information"). At all times the Executive will hold Third Party Information in the strictest confidence and will not disclose or use Third Party Information except as permitted by the agreement between the Corporation and such third party. -9- 15. INTELLECTUAL PROPERTY --------------------- Any and all products, including but not limited to marketing and financing materials and methods ("Products") made, developed or created by the Executive (whether at the request or suggestion of the Corporation or otherwise, whether alone or in conjunction with others, and whether during regular hours of work or otherwise) (i) during the period of this Agreement, or (ii) within a a period of one year after the date of termination or resignation of employment hereunder, which may be directly or indirectly useful in, or relate to, the business of or tests being carried out by any member of the Corporation, shall be promptly and fully disclosed by the Executive to the members of the Board and, if such intellectual property was made, developed or created other than pursuant to the Executive's employment hereunder, the Executive shall grant the Corporation a perpetual, royalty free license to such intellectual property, and if such intellectual property was made, developed or created pursuant to the Executive's employment hereunder, such intellectual property shall be the Corporation's exclusive property as against the Executive, and the Executive shall promptly deliver to an appropriate representative of the Corporation as designated by the Board all papers, drawings, models, data and other material relating to any invention made, developed or creted by him as aforesaid. The Executive shall, at the request of the Corporation and without any payment therefor, execute any documents necessary or advisable in the opinion of the Corporation's counsel or direct issuance of patents or copyrights to the Corporation with respect to such Products as are to be the Corporation's exclusive property as against the Executive or to vest in the Corporation title to such Products as against the Executive. The expense of securing any such patent or copyright shall be borne by the Corporation. 16. CUSTOMER LISTS -------------- The Executive will not during, or for a period of three years after termination of, his employment (i) disclose the Corporation's (including its subsidiaries') customer lists or any part thereof to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, (ii) assist in obtaining any of the Corporation's (including its subsidiaries') existing customers for any competing business, or (iii) encourage any customer to terminate its relationship with the Corporation or any of its subsidiaries. 17. EQUITABLE RELIEF ---------------- The Executive acknowledges that, in view of the nature of the business in which the Corporation is engaged, the restrictions contained in Sections 10 through 16 inclusive (the "Restrictions") are reasonable and necessary in order to protect the legitimate interests of the Corporation, and that any violation thereof would result in irreparable injuries to the Corporation, and the Executive therefore further acknowledges that, if the Executive violates, or threatens to violate, any of the Restrictions, the Corporation shall be entitled to obtain from any court of competent jurisdiction, without the posting of any bond or other security, preliminary and permanent injunctive relief as well as damages and an equitable accounting of all earnings, profits and other benefits arising from such violation, which rights shall be -10- cumulative and in addition to any other rights or remedies in law or equity to which the Corporation may be entitled. 18. BINDING EFFECT -------------- This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation or otherwise) to all or a significant portion of its assets, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had taken place. Regardless of whether such agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law and such successor shall be deemed the "Corporation" for purposes of this Agreement. 19. NOTICES ------- All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or sent by facsimile transmission with telephonic confirmation of receipt, or mailed within the continental United States by first-class certified mail, return receipt requested, postage prepaid, addressed as follows: (a) if to the Board or the Corporation, to: Imperial Credit Industries, Inc. Building One, Suite 240 23550 Hawthorne Boulevard Torrance, California 90505 Attention: General Counsel (b) if to the Executive, to: Stephen J. Shugerman 20537 Cheney Drive Topanga, CA 90290 Such addresses may be changed by written notice sent to the other party at the last recorded address of that party. -11- 20. Arbitration of All Disputes --------------------------- (a) Any controversy or claim arising out of or relating to this Agreement or the breach thereof (including the arbitrability of any controversy or claim), shall be settled by arbitration in the City of Los Angeles in accordance with the laws of the State of California by one arbitrator. If the parties cannot agree on the appointment of an arbitrator, then the arbitrator shall be appointed by the American Arbitration Association. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of an arbitrator which shall be as provided in this Paragraph 20. The cost of any arbitration proceeding hereunder shall be borne equally by the Corporation and the Executive. The award of the arbitrator shall be binding upon the parties. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (b) If it shall be necessary or desirable for the Executive to retain legal counsel and incur other costs and expenses in connection with the enforcement of any or all of his rights under this Agreement, and provided that the Executive substantialy prevails in the enforcement of such rights, the Corporation shall pay (or the Executive shall be entitled to recover from the Corporation, as the case may be) the Executive's reasonable attorney's fees and costs and expenses in connection with the enforcement of his rights including the enforcement of any arbitration award. 21. No Assignment ------------- Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge. 22. Execution in Counterparts ------------------------- This Agreement may be executed by the parties hereto in two counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. 23. Jurisdiction and Governing Law ------------------------------ This Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of California, without reference to its conflict of laws provisions. 24. Severability ------------ If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. -12- 25. Entire Agreement ---------------- This Agreement embodies the entire agreement of the parties hereof, and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof. No change, alteration or modification hereof may be made except in a writing, signed by each of the parties hereto. 26. Headings Descriptive -------------------- The headings of the several paragraphs of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. SOUTHERN PACIFIC THRIFT & LOAN ASSOCIATION EXECUTIVE By:/s/ H. Wayne Snavely By: /s/ Stephen J. Shugerman --------------------- ------------------------ Name: H. Wayne Snavely Name: Stephen J. Shugerman Title: Chairman Title: President -13- EX-10.23 5 REGISTRATION RIGHTS AGREEMENT DATED 8/26/97 EXHIBIT 10.23 - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT AMONG FRANCHISE MORTGAGE ACCEPTANCE COMPANY AND IMPERIAL CREDIT INDUSTRIES, INC. AND FLRT, INC. DATED AS OF August 26, 1997 - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into as of August 26, 1997, by and among FRANCHISE MORTGAGE ACCEPTANCE COMPANY (the "Company"), IMPERIAL CREDIT INDUSTRIES, INC. ("Imperial") and FLRT, INC. ("FLRT" and collectively, Imperial and FLRT are the "Selling Stockholders"). 1. Consideration. The Selling Stockholders and the Company have agreed to ------------- enter into this Agreement to provide the registration rights set forth herein and to otherwise perform their respective obligations hereunder in consideration of the mutual covenants contained herein. 2. Definitions. The following definitions shall apply in addition to those ----------- terms defined elsewhere herein: a. "Common Stock" means the Company's Common Stock, $0.001 par value per share. b. "Continuous Offering" means an Offering pursuant to Rule 415 under the Securities Act, 17 C.F.R. 230.415, or any successor rule of the SEC, if applicable. c. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. d. "FLRT Shares" means the shares of Common Stock, and any other securities into which the Common Stock may be changed by virtue of any merger, consolidation or recapitalization or otherwise, owned of record by FLRT as of the date hereof. e. "Imperial Shares" means the shares of Common Stock, and any other securities into which the Common Stock may be changed by virtue of any merger, consolidation or recapitalization or otherwise, owned of record by Imperial as of the date hereof. f. "Offering" means any public offering of the Common Stock of the Company, whether or not subject to the registration requirements of the Securities Act, and any other method of disposition of the Common Stock of the Company that is subject to the registration requirements of the Securities Act or any other applicable federal or state statute or regulation. g. "Offering Documents" means all documents relating to an Offering which are required to be filed with any governmental agency or authority or to be delivered to any Person to whom securities of the Company are offered for sale or sold, including, without limitation, Registration 2 Statements, Prospectuses, and preliminary Prospectuses, and all material incorporated by reference therein, and any schedule or exhibit to any of the foregoing, in each case as such documents may be amended from time to time. h. "Party" means Imperial, FLRT or the Company and "Parties" means all of Imperial, FLRT and the Company. i. "Person" means any individual, corporation, partnership, limited liability company, association, trust or unincorporated association. j. "Prospectus" means the prospectus included in a Registration Statement, relating to an Offering in which Common Stock is included, as amended or supplemented by a prospectus supplement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference in such Prospectus. k. "Registration Expenses" means, with respect to an Offering, any and all expenses incident to the Company's performance of or compliance with the provisions of this Agreement, including without limitation (a) fees for any filings required to be made with the National Association of Securities Dealers, Inc., or the SEC in connection with such Offering, and any other registration and filing fees, (b) all fees and expenses of complying with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Common Stock to be included in such Offering), (c) all printing, messenger, telephone, and delivery expenses, (d) all fees and expenses incurred in connection with the listing of the Common Stock to be included in such Offering on any securities exchange, (e) the reasonable fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits and/or "cold comfort" letters required by or incident to such performance and compliance, and (f) the reasonable fees and disbursements of the Selling Stockholders' outside counsel, outside accountants, investment bankers, and financial consultants, if any, in connection with any Offering. l. "Registration Statement" means a registration statement filed with the SEC pursuant to the Securities Act, relating to an Offering in which Common Stock is included, including any pre-or post-effective amendment thereto, the Prospectus included therein, and all material incorporated by reference therein, and any schedule or exhibit to any of the foregoing. m. "Rule 144" means Rule 144 under the Securities Act, 17 C.F.R. 230.144, or any successor rule of the SEC, if applicable. n. "SEC" means the Securities and Exchange Commission. o. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. 3 p. "Securities Offering Regulations" means any regulations promulgated by any agency or authority of the United States government, under the Securities Act, or any statute hereafter enacted into law, relating to or governing an Offering of securities by the Company. 3. a. Incidental Registration Rights. If the Company proposes to make an ------------------------------ Offering of its Common Stock and to prepare Offering Documents not required pursuant to Paragraph 4 (other than any registration by the Company on Form S-8 or a successor or substantially similar form of (A) an employee stock option, stock purchase or compensation plan or securities issued or to be issued pursuant to any such plan, or (B) a dividend investment plan), the Company will give prompt written notice to Imperial of its intention to do so and of Imperial's rights under this Paragraph 3. Upon the written request of Imperial made within thirty (30) days after the receipt of any such notice (which request shall specify the number of Imperial Shares intended to be disposed of by Imperial), the Company will include in the Offering Documents relating to such Offering all Imperial Shares that the Company has been requested to include by Imperial; provided, that if at any time after giving written notice under this Paragraph 3 the Company shall determine for any reason not to proceed with the proposed Offering, the Company may, at its election, give written notice of such determination to Imperial and thereupon shall be relieved of its obligations to Imperial with respect to such proposed Offering under this Paragraph 3. Imperial shall be entitled to withdraw its request for the inclusion of Imperial Shares in an Offering and withdraw from the Offering at any time before the time that the Offering Documents, including any Registration Statement (if applicable), are declared effective and the Offering has commenced. b. Continuous Offering. If the Company intends to effect a Continuous ------------------- Offering, the Company will give written notice thereof to Imperial and include in such Offering all of the Imperial Shares which Imperial elects to include in such Offering. During the period in which a Registration Statement (if applicable) with respect to a Continuous Offering is effective, if Imperial desires to sell Imperial Shares in a transaction covered by such Registration Statement, it shall give notice to the Company of the proposed date of such sale at least thirty (30) days before such proposed date of sale, and the Company shall take all actions necessary to permit such sale. Within fifteen (15) days of receipt of notice of a proposed sale by Imperial, the Company will advise Imperial either that it has no objection to such sale or that such sale should be delayed for up to sixty (60) days, on the basis that the Company is involved in a confidential proposed transaction or negotiations therefor (which have been previously disclosed to the Company's Board of Directors) which would not require the Company to make or amend any public filings under the securities laws at that time. If the Company has not objected to 4 such proposed sale as permitted in this subparagraph (b) within such fifteen (15) day period, the Company shall take all actions necessary to permit such sale on the proposed date of sale pursuant to such Registration Statement. c. Underwritten Offerings. In the case of an underwritten Offering ---------------------- initiated by the Company under this Paragraph 3, including underwritten Offerings effected as part of a Continuous Offering, the underwriter(s) and the managing underwriter shall be selected by the Company. If the managing underwriter advises the Company in writing that, in its opinion, the number of Imperial Shares and securities of the Company, if any, being sold exceeds the number that can be sold in such Offering, so as to be likely to have an adverse effect on the price at which the Company can sell securities for its own account, then there shall be included in such Offering (and in the Offering Documents) first, securities of the Company being sold for its own account, and second, the maximum number of Imperial Shares requested to be included in such Offering which, in the opinion of such managing underwriter, can be sold without having such adverse effect on such price. If Imperial Shares are so excluded from registration in an Offering, the Company shall, upon the request of Imperial, use its reasonable efforts to effect a registration with the SEC or take such actions as shall be reasonably required to effect an Offering (in the event the Imperial Shares are already registered with the SEC) in respect of such excluded Imperial Shares as soon as practicable after consummation of such Offering. Imperial may withdraw its Imperial Shares from such subsequent Offering without costs or penalty at any time before the effective date of the Registration Statement relating to such Offering. d. Expenses. In connection with any offering of Imperial Shares a new -------- issuance of Common Stock by the Company, Imperial and the Company shall each pay their pro rata share of Registration Expenses in proportion to the number of shares of Common Stock to be offered by each. 4. Demand Registration Rights. On or after one year from the effective date -------------------------- of the Company's initial public offering, Imperial, without limitation as to any other method of disposition available to it, shall be entitled to dispose of any or all of the Imperial Shares then held by it in accordance with the provisions of this Paragraph 4. a. Requests by Imperial. Upon the receipt by the Company of written -------------------- notice from Imperial of its intent to sell all or part of its Imperial Shares in an Offering subject to this Paragraph 4 at least 30 days before such proposed date of sale, and specifying both the number of Imperial Shares to be sold and the intended method of disposition, the Company will use its best efforts to register such Imperial Shares so as to permit as soon as practicable the requested sale of Imperial Shares. Within fifteen (15) days of receipt of notice of a proposed sale by Imperial, the Company will advise Imperial either that it has no objection of such sale or that 5 such sale should be delayed for up to sixty (60) days, on the basis that the Company is involved in a confidential proposed transaction or negotiations therefor (which have been previously disclosed to the Company's Board of Directors) which would not require the Company to make or amend any public filings under the securities laws at that time. If the Company has not objected to such proposed sale as permitted in this subparagraph (a) within such fifteen (15) day period, the Company shall take all actions necessary to permit such sale on the proposed date of sale pursuant to such Registration Statement. If, at any time after giving 30 days written notice under this Paragraph 4, Imperial shall notify the Company in writing that it has determined for any reason not to proceed with the proposed Offering, then the Company shall terminate such Offering. b. Limitation on Requests and Payment of Registration Expenses. Imperial ----------------------------------------------------------- shall be entitled to make a request to the Company to register Imperial Shares pursuant to the provisions of Paragraph 3(b) or this Paragraph 4 two times within each one year period commencing one year from the effective date of the Company's initial public offering. The Company shall not be required to register Imperial Shares in accordance with the provisions of Paragraph 4(a) if there is outstanding at the time of the request an effective Registration Statement for a Continuous Offering and Imperial can dispose of Imperial Shares in accordance with Paragraph 3(b). Imperial will pay all Registration Expenses in connection with an Offering of Imperial Shares requested by Imperial pursuant to the second sentence of Paragraph 3(b) or this Paragraph 4. Any Offering abandoned or terminated by Imperial after its filing in accordance with the provisions of Paragraph 4(a) shall be deemed to be a request pursuant to this Paragraph 4. c. Selection of Underwriters. If Imperial specifies in the notice ------------------------- delivered to the Company pursuant to the second sentence of Paragraph 3(b) or Paragraph 4 that it intends to sell Imperial Shares in an underwritten Offering pursuant to the second sentence of Paragraph 3(b) or Paragraph 4, Imperial shall be entitled to select the underwriter(s) and managing underwriter. If the Company issues and sells securities of the same class as the Imperial Shares contemporaneously with any Offering pursuant to Paragraph 3(b) or this Paragraph 4, the Company shall (i) sell such securities to the underwriter(s) selected by Imperial pursuant to this Paragraph 4(c) on the same terms and conditions as apply to Imperial and (ii) execute and deliver a copy of the underwriting agreement relating to such Offering. If the managing underwriter advises Imperial and the Company in writing that, in its opinion, the number of securities requested to be included in such Offering exceeds the number that can be sold in such Offering, so as to be likely to have an adverse effect on the price at which the Imperial Shares or securities being offered by the Company can be sold, then there shall be included in such Offering (and in the Offering Documents relating to such Offering) first, the maximum number of Imperial Shares requested to be included in such Offering by 6 Imperial and second, the maximum number of securities, if any, proposed to be sold by the Company for its own account or for the account of any other holder of the Company's securities, which in the opinion of the managing underwriter can be sold without having such adverse effect. d. Registration on Form S-3. The Company shall not be required to ------------------------ register Imperial Shares in any Continuous Offering under this Paragraph 4 until the date which is one year after the date of the Company's initial public offering. Thereafter, Imperial shall have the right to require the Company to register any or all of its shares on Form S-3 (or on Form S-1, if Form S-3 is not available). e. (1) FLRT Incidental Registration Rights. During the period ----------------------------------- commencing upon the effective date of the Company's initial public offering of Common Stock and ending upon the third anniversary of such date, if Imperial demands the Company to make an Offering of its Common Stock and causes the Company to prepare Offering Documents pursuant to this Paragraph 4, the Company will give prompt written notice to FLRT of its intention to do so and of FLRT's rights under this Paragraph 4(e). Upon the written request of FLRT made within thirty (30) days after the receipt of any such notice (which request shall specify the number of FLRT Shares intended to be disposed of by FLRT; provided, however, that the amount actually sold by FLRT pursuant to any such Offering may not at any time exceed the amount that FLRT would otherwise be authorized to sell pursuant to the volume limitations of Rule 144), the Company will include in the Offering Documents relating to such Offering all FLRT Shares that the Company has been requested to include by FLRT, subject to the limitations of Paragraph 4(e)(2) herein; provided, that if at any time after giving written notice under this Paragraph 4(e) Imperial shall determine for any reason not to proceed with the proposed Offering, the Company may, at its election, give written notice of such determination to FLRT and thereupon shall be relieved of its obligations to FLRT with respect to such proposed Offering under this Paragraph 4. FLRT shall be entitled to withdraw its request for the inclusion of FLRT Shares in an Offering and withdraw from the Offering at any time before the time that the Offering Documents, including any Registration Statement (if applicable), are declared effective and the Offering has commenced. (2) Underwritten Offerings. In the case of an underwritten Offering ---------------------- initiated by Imperial under this Paragraph 4, including underwritten Offerings effected as part of a Continuous Offering, the underwriter(s) and the managing underwriter shall be selected by Imperial. If the Company issues and sells securities of the same class as the Imperial Shares contemporaneously with any Offering pursuant to Paragraph 3(b) or this 7 Paragraph 4, the Company shall (i) sell such securities to the underwriter(s) selected by Imperial pursuant to Paragraph 4(c) on the same terms and conditions as apply to Imperial and (ii) execute and deliver a copy of the underwriting agreement relating to such Offering. If the managing underwriter advises Imperial and the Company in writing that, in its opinion, the number of Imperial Shares, shares offered by the Company, if any, and FLRT Shares, if any, being sold exceeds the number that can be sold in such Offering, so as to be likely to have an adverse effect on the price at which Imperial can sell securities for its own account, then there shall be included in such Offering (and in the Offering Documents relating to such Offering) first, the maximum number of Imperial Shares requested to be included in such Offering by Imperial, second, the maximum number of securities, if any, proposed to be sold by the Company for its own account which in the opinion of the managing underwriter can be sold with out having such adverse effect, third, the maximum number of FLRT Shares requested to be included in such Offering which, in the opinion of such managing underwriter, can be sold without having such adverse effect and fourth, the maximum number of securities, if any, proposed to be sold by the Company for the account of any other holder of the Company's securities, which in the opinion of the managing underwriter can be sold without having such adverse effect. (3) Expenses. FLRT shall pay its pro rata share of Registration -------- Expenses in proportion to the number of FLRT Shares offered by it as compared to all shares offered pursuant to the subject Offering. 5. FLRT Registration Rights. On or after three years from the effective date ------------------------ of the Company's initial public offering, FLRT, without limitation as to any other method of disposition available to it, shall be entitled to dispose of any or all of the FLRT Shares then held by it in the same manner as accorded Imperial under the provisions of Paragraphs 3 and 4 except, that for so long as any Imperial Shares are outstanding, any disposition of FLRT Shares shall be subject to the provisions of Paragraph 4 (e)(2). Notwithstanding the foregoing, in the event that Wayne Knyal's employment is terminated by the Company pursuant to Sections 8B or 8F of that Employment and Non-Competition Agreement dated November 8, 1997 to be effective as of November 1, 1997 by and between the Company and Mr. Knyal, then FLRT, without limitation as to any other method of disposition available to it, shall be entitled to dispose of any or all of the FLRT Shares then held by it in the same manner as accorded Imperial under the provisions of Paragraphs 3 and 4. 6. The Company's Duties. If and whenever the Company is required to permit -------------------- either or both of the Selling Stockholders to effect any Offering as provided in Paragraphs 3 and 8 4, the Company covenants and agrees that it will, as expeditiously as possible (but not later than sixty (60) days after receipt of a request from either or both of the Selling Stockholders to include its respective Shares in a given Offering): 1. (1) prepare all Offering Documents in accordance with all applicable requirements of the Securities Act, and the Securities Offering Regulations, including, if requested by Imperial and if permitted by the rules and regulations of the SEC, a Registration Statement pursuant to Rule 415 of the Securities Act or any successor rule of the SEC, with respect to such Offering to permit the disposition of the Selling Stockholder's Shares by the Selling Stockholder in accordance with the intended method of disposition (and, in the case of an underwritten Offering, consistent in form, substance, and scope with customary practice for the offering of securities of corporations by nationally recognized investment banking firms), (2) file with the SEC such Offering Documents and all other documents required to permit the disposition thereof; provided, that before filing any such Offering Documents (including any documents incorporated by reference therein), the Company will furnish to counsel designated by the subject Selling Stockholder and to the underwriter(s), if any, copies of all such Offering Documents, which Offering Documents shall be subject to the review of such counsel(s) and the underwriter(s), if any, and, where feasible, the Company shall make such changes in such Offering Documents as are reasonably requested by such counsel(s) or underwriter(s), and (3) use its reasonable efforts to have such Offering Documents declared effective by, and obtain all approvals from the SEC to the extent necessary to permit the Offering; provided, however, that the Company may discontinue any Offering that is being effected pursuant to Paragraph 3 at any time before the effective date of the related Offering Documents; and provided, further, that the Company shall not file any Offering Document which shall be disapproved by the subject Stockholder within a reasonable period after the same has been provided for review; 2. thereafter, prepare and file with the SEC such amendments and post- effective amendments to the Offering Documents as may be necessary to keep the Offering Documents continuously effective and cause the Offering Documents to be supplemented by any required supplement, and as so supplemented to the filed, if required, with the SEC during the period ending on the later of (i) such time as all of the Selling Stockholder's Shares covered by such Offering Documents have been disposed of in accordance with the intended method of disposition set forth in such Offering Documents or, in the case of an Offering made pursuant to Rule 415 under the Securities Act or any successor rule of the SEC (if applicable), if securities remain unsold at the expiration of the Offering, such time as the Company shall file, with the consent of the subject Selling Stockholder, a post-effective amendment with the SEC deregistering the securities which remain unsold at the termination of the Offering or (ii) so long as a dealer is required to 9 deliver a Prospectus in connection with the Offering; provided, that before filing any such post-effective amendment, the Company will furnish to counsel designated by the subject Selling Stockholder and to the underwriter(s), if any, copies of the post-effective amendment (including any other document proposed to the filed therewith), which Offering Documents shall be subject to the review of such counsel(s) and the underwriter(s), if any, and, where feasible, the Company shall make such changes in such post-effective amendment as are reasonably requested by such counsel(s) or underwriter(s); 3. furnish to the subject Selling Stockholder and to the underwriter(s), if any, such number of copies of the Offering Documents (including each amendment and supplement thereto) as they may reasonably request in order to facilitate the disposition of the Selling Stockholder's Shares included in such Offering; 4. register or qualify, or cooperate with the subject Selling Stockholder, the underwriter(s), if any, and their respective counsel in registering or qualifying, all Imperial Shares covered by the Offering Documents for offer and sale under the applicable securities or blue sky laws of such jurisdictions as Imperial and the underwriter(s), if any, shall reasonably request in writing, and do any and all other acts and things which may be reasonably necessary or advisable to enable the subject Selling Stockholder and the underwriter(s), if any, to consummate the disposition in such jurisdictions of the Common Stock covered by the Offering Documents; provided however that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any tax in any such jurisdiction where it is not then so subject; 5. use its reasonable efforts to cause such Common Stock covered by the Offering Documents to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the subject Selling Stockholder and the underwriter(s), if any, to consummate the disposition of such Common Stock; 6. cooperate reasonably with any managing underwriter to effect the sale of the subject Selling Stockholder's Shares, including but not limited to attendance of the Company's executive officers at any planned "road show" presentations'; 7. notify the subject Selling Stockholder and the underwriter(s), if any, at any time when the Offering Documents include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and at the request of the subject Selling Stockholder or any underwriter, prepare 10 and furnish to such Person(s), such reasonable number of copies of any amendment or supplement to the Offering Documents as may be necessary so that, as thereafter delivered to the purchasers of such Common Stock, such Offering Documents shall not include 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 not misleading in light of the circumstances then existing, and to deliver to purchasers of any other securities of the Company included in the Offering copies of such Offering Documents as so amended or supplemented; 8. keep the subject Selling Stockholder informed of the Company's best estimates of the earliest date on which the Offering Documents will become effective, and promptly notify the Selling Stockholder of (A) the effectiveness of such Offering Documents, (B) a request by the SEC for an amendment or supplement to such Offering Documents, (C) the issuance by the SEC of an order suspending the effectiveness of the Offering Documents, or of the threat of a proceeding for that purpose, and (D) the suspension of the qualification of any securities included in the Offering Documents for sale in any jurisdiction or the initiation or threat of any proceeding for that purpose; 9. comply with the provisions of the Securities Offering Regulations and the Securities Act with respect to the disposition of all securities covered by the Offering Documents in accordance with the intended method of distribution of the sellers thereof set forth in such Offering Documents; 10. use its reasonable efforts to list the securities proposed to be sold in such Offering on the Nasdaq National Market, or on such other securities exchange or inter-dealer quotation system on which the Common Stock is then listed, not later than the closing of the Offering contemplated thereby; 11. enter into such customary agreements (including but not limited to an underwriting agreement in customary form) and take such other reasonable actions as Imperial or the underwriter(s), if any, reasonably request in order to expedite or facilitate the disposition of such Common Stock; l2. obtain such "cold comfort" letter(s) from the Company's independent public accountants, in customary form and covering matters of the type customarily covered by "cold comfort" letter(s), as Imperial or the underwriter(s), if any, shall reasonably request; and 13. upon prior notice, make available for reasonable inspection by any underwriter(s) participating in any disposition to be effected pursuant to the Offering Documents and by any attorney, accountant, or other agent retained by any such Person(s), its financial and other records, pertinent corporate documents 11 and properties of the Company, and such opportunities to discuss the business of the Company with its officers, directors, and employees and the independent public accountants who have certified its financial statements as shall be necessary, in the opinions of such underwriters' respective counsels, to conduct a reasonable investigation; provided, that any records, information, or documents that are designated by the Company in writing as confidential shall be kept confidential by each such Person, unless disclosure of such records, information, or documents is required by law, by judicial or administrative order, or in order to defend a claim asserted against such Person in connection with such Offering. 7. Information from Selling Stockholders. ------------------------------------- 1. Information. The Company may require the Selling Stockholders to ----------- furnish it with such information regarding the Selling Stockholders and regarding the method of distribution as is pertinent to the disclosure requirements relating to the Offering of such Common Stock as the Company may from time to time reasonably request in writing. 2. Use of Offering Documents Upon Notice of Defects. The Selling ------------------------------------------------ Stockholders each agree, and shall cause underwriter(s), if any, acting on its behalf to agree, that upon receipt of any notice from the Company of the happening of any event of the kind described in Paragraph 6(f), it will immediately discontinue the use of the Offering Documents covering such Common Stock until the receipt by any Selling Stockholder and any such underwriter(s) of the copies of the supplemented or amended Offering Documents contemplated by such clause and, if so directed by the Company, any Selling Stockholder will deliver and cause each underwriter, if any, to deliver to the Company all copies, other than permanent file copies then in the possession of the Selling Stockholder or any such underwriter, of the Offering Documents covering such Common Stock at the time of receipt of such notice. If the Company shall give any such notice, the period mentioned in Paragraph 6(b) shall be extended by the number of days during which offerings were suspended (i.e., the period from and including the date of the receipt of such notice pursuant to Paragraph 6(f), to and including the date when the Selling Stockholder shall have received the copies of the supplemented or amended Offering Documents contemplated by such clause). 8. Resales; Reports Under Exchange Act. In order to permit the Selling ----------------------------------- Stockholders to sell their Shares, if they so desire, pursuant to any applicable resale exemption under the Securities Offering Regulations or the Securities Act, the Company will: 1. comply with all rules and regulations of the SEC in connection with use of any such resale exemption; 12 2. make and keep available adequate and current public information regarding the Company; 3. file with the SEC in a timely manner, all reports and other documents required to be filed under the Securities Act, the Exchange Act, or the Securities Offering Regulations; 4. furnish to the Selling Stockholders copies of annual reports required to be filed under the Exchange Act and the Securities Offering Regulations; and 5. furnish to the Selling Stockholders, upon request, (1) a copy of the most recent quarterly report of the Company and such other reports and documents filed by the Company with the SEC and (2) such other information as may be reasonably requested to permit the Selling Stockholders pursuant to any applicable resale exemption under the Securities Act or the Securities Offering Regulations, if any. 9. Indemnification. The obligations of indemnification of the Parties set --------------- forth in this Paragraph 9 shall be in addition to any liability which any Party may otherwise have to any other party. 1. Indemnification by the Company. The Company agrees to indemnify and ------------------------------ hold harmless, to the full extent permitted by law, any Selling Stockholder, its officers, directors, employees and agents, each Person who participates as an underwriter in an Offering, each officer, director, employee, or agent of such an underwriter, and each Person who controls (within the meaning of the Securities Act) Imperial and such an underwriter against any and all losses, claims, damages, liabilities, and expenses, joint or several, including without limitation reasonable legal or other expenses incurred in connection with investigating or defending against any loss, claim, damage, or liability, or action or proceeding (whether commenced or threatened) in respect thereof, caused by any untrue statement or alleged untrue statement of a material fact contained in any of the Offering Documents relating to such Offering or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, except insofar as the same are (i) made in reliance on and in conformity with any information about the Selling Stockholder or any underwriter furnished in writing to the Company by the Selling Stockholder or any underwriter specifically for inclusion in the Offering Documents relating to such Offering or (ii) the result of the fact that the Selling Stockholder or any underwriter sold Common Stock subject to an Offering to a Person to whom there was not sent or given, at or before the written configuration of such sale, a copy of the final Offering 13 Documents, if the Company has previously furnished copies thereof to Imperial or underwriter and such final Offering Documents corrected such untrue statement or alleged untrue statement or omission or alleged omission. 2. Indemnification by Imperial. Imperial agrees to indemnify and hold --------------------------- harmless, to the full extent permitted by law, the Company, its officers, directors, employees, and agents, each Person who participates as an underwriter in an Offering, each officer, director, employee or agent of such an underwriter, and each Person who controls (within the meaning of the Securities Act) the Company and such underwriter against any and all losses, claims, damages, liabilities, and expenses, joint or several, including without limitation reasonable legal or other expenses incurred in connection with investigating or defending against any loss, claim, damage, or liability, or action or proceeding (whether commenced or threatened) in respect thereof, caused by any untrue statement or alleged untrue statement of a material fact contained in any of the Offering Documents relating to such Offering or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, but only to the extent that such untrue statement or omission is made in reliance on and in conformity with any information furnished in writing by Imperial concerning Imperial to the Company specifically for inclusion in the Offering Documents relating to such Offering. 3. Indemnification by FLRT. FLRT agrees to indemnify and hold harmless, ----------------------- to the full extent permitted by law, the Company, its officers, directors, employees, and agents, each Person who participates as an underwriter in an Offering, each officer, director, employee or agent of such an underwriter, and each Person who controls (within the meaning of the Securities Act) the Company and such underwriter against any and all losses, claims, damages, liabilities, and expenses, joint or several, including without limitation reasonable legal or other expenses incurred in connection with investigating or defending against any loss, claim, damage, or liability, or action or proceeding (whether commenced or threatened) in respect thereof, caused by any untrue statement or alleged untrue statement of a material fact contained in any of the Offering Documents relating to such Offering or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, but only to the extent that such untrue statement or omission is made in reliance on and in conformity with any information furnished in writing by FLRT concerning FLRT to the Company specifically for inclusion in the Offering Documents relating to such Offering. 4. Notices of Claims; Procedures. Promptly after receipt by an ----------------------------- indemnified 14 party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Paragraph 9, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the indemnifying party of the commencement of such action; provided, that the failure of the indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Paragraph 9, except to the extent that the indemnifying party is actually materially prejudiced by such failure to give notice. If any such action is brought against an indemnified party (unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim) the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation; provided, however, that, any Person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such Person unless (A) the indemnifying party has agreed to pay such fees or expenses or (B) the indemnifying party shall have failed to assume the defense of such claim and employ counsel reasonably satisfactory to such Person or (C) in the reasonable judgment of any such Person based upon advice of its counsel, a conflict of interest may exist between such Person and the indemnifying party with respect to such claims (in which case, if the Person notifies the indemnifying party in writing that such Person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such Person). If such defense is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include, as an unconditional term thereof, the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. An indemnifying party who is not entitled to or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel in each jurisdiction for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or 15 counsels. 5. Contribution. If the indemnification provided for this in this ------------ Paragraph 9 from the indemnifying party is unavailable to an indemnified party hereunder (other than pursuant to the terms hereof) in respect of any losses, claims, damages, liabilities, or expenses referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities, or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions that resulted in such losses, claims, damages, liabilities, or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action in question, including any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such action. The amount paid or payable by a Party as a result of the losses, claims, damages, liabilities, and expense referred to above shall be deemed to include, subject to the limitations set forth in this Paragraph 9(e) any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The Parties agree that it would not be just and equitable if contributions pursuant to this Paragraph 9(e) were datelined by a pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to above. No Person guilty of fraudulent misrepresentation shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 6. This Paragraph 9 shall apply to each Registration Statement filed by the Company pursuant to this Agreement that includes Imperial Shares. 10. Miscellaneous. ------------- 1. Amendments and Waivers. This Agreement may be amended, and the ---------------------- Company may take any action herein prohibited or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent of Imperial to such amendment, action or omission to act. 2. Successors, Assigns and Transferees. This Agreement shall be binding ----------------------------------- upon the parties hereto and their respective successors and assigns. 3. Notices. Any notice, request, demand, consent, approval or other ------- 16 communication permitted or required to be given to any of the parties hereunder shall be deemed given when received, shall be in writing, and shall be delivered in person or sent by certified mail, postage prepaid, or by private courier service or by telecopy or telex, to such party at its address set forth below or at such other address as such party may hereunder furnish in writing to the other parties. (i) if to the Company, to: Franchise Mortgage Acceptance Company 2049 Century Park East, Suite 350 Los Angeles, California 90067 Attention: Secretary and Chief Financial Officer (ii) if to Imperial: Imperial Credit Industries, Inc. 23350 Hawthorne Blvd. Building 1, Suite 240 Torrance, California 90505 Attention: General Counsel with a copy to: Freshman, Marantz, Orlanski, Cooper & Klein 9100 Wilshire Blvd., East Tower, 8th Floor Beverly Hills, California 90212-3480 Attention: Thomas J. Poletti, Esq. (iii) if to FLRT: FLRT, Inc. 11560 Bellagio Road Los Angeles, California 90049 Attention: Wayne L. Knyal 4. Headings. The headings in this Agreement are for the convenience of -------- reference only and shall not limit or otherwise affect the meaning of the interpretation of this Agreement or any provision hereof. 5. Severability. In the event that any one or more of the provisions ------------ contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of such provision in every other respect and of the remaining provisions hereof 17 shall not be in any way impaired, it being intended that all rights, powers and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. 6. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which when so executed shall be deemed an original, and all such counterparts shall together constitute one and the same instrument. 7. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the United States of America and, in the absence of controlling federal law, in accordance with the laws of the State of Delaware. Any legal action or proceedings with respect to this Agreement shall be brought in the federal courts of the United States located in California and each of the parties hereto submits to the exclusive jurisdiction of such courts and hereby waives any objections on the grounds of venue, forum non conveniens or any similar grounds. 8. Entire Agreement. This Agreement embodies the entire Agreement of the ---------------- parties hereto in relation to the subject matter hereof and supersedes all prior understandings or agreements, oral or written, with respect thereto among the parties hereto. 9. Certain Remedies. Without in any way limited the remedies otherwise ---------------- available under this Agreement, the parties hereto acknowledge that, in the event of any breach or nonperformance by any party of the agreements or covenants required by this Agreement to be performed or observed by it, the other parties shall be entitled to such equitable remedies as may be appropriate, including, without limitation specific performance. 18 IN WITNESS WHEREOF, each of the undersigned has executed this Agreement or caused this Agreement to be executed on its behalf as of the date first written above. FRANCHISE MORTGAGE ACCEPTANCE COMPANY By:_________________________________________ Name: Wayne L. Knyal --------------------------------------- Title: Chief Executive Officer and President -------------------------------------- IMPERIAL CREDIT INDUSTRIES, INC. By:_________________________________________ Name: Irwin L. Gubman --------------------------------------- Title: General Counsel -------------------------------------- FLRT, INC. By:_________________________________________ Name: Wayne L. Knayl --------------------------------------- Title: Chairman -------------------------------------- 19 EX-10.24 6 REGISTRATION RIGHTS AGREEMENT DATED 10/17/1996 EXHIBIT 10.24 - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT BETWEEN SOUTHERN PACIFIC FUNDING CORPORATION AND IMPERIAL CREDIT INDUSTRIES, INC. DATED AS OF OCTOBER 17, 1996 - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT ----------------------------- THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into as of October 17, 1996, by and between SOUTHERN PACIFIC FUNDING CORPORATION (the "Company") and IMPERIAL CREDIT INDUSTRIES, INC. ("Imperial"). 1. Consideration. Imperial and the Company have agreed to enter into this ------------- Agreement to provide the registration rights set forth herein and to otherwise perform their respective obligations hereunder in consideration of the mutual covenants contained herein. 2. Definitions. The following definitions shall apply in addition to those ----------- terms defined elsewhere herein: a. "Common Stock" means the Company's Common Stock, no par value per ------------ share. b. "Continuous Offering" means an Offering pursuant to Rule 415 under the ------------------- Securities Act, 17 C.F.R. 230.415, or any successor rule of the SEC, if applicable. c. "Exchange Act" means the Securities Exchange Act of 1934, as amended, ------------ and the rules and regulations promulgated thereunder. d. "Offering" means any public offering of the Common Stock of the -------- Company, whether or not subject to the registration requirements of the Securities Act, and any other method of disposition of the Common Stock of the Company that is subject to the registration requirements of the Securities Act or any other applicable federal or state statute or regulation. e. "Offering Documents" means all documents relating to an Offering which ------------------ are required to be filed with any governmental agency or authority or to be delivered to any Person to whom securities of the Company are offered for sale or sold, including, without limitation, Registration Statements, Prospectuses, and preliminary Prospectuses, and all material incorporated by reference therein, and any schedule or exhibit to any of the foregoing, in each case as such documents may be amended from time to time. f. "Party" means Imperial or the Company and "Parties" means both Imperial ----- ------- and the Company. g. "Person" means any individual, corporation, partnership, limited ------ liability company, association, trust or unincorporated association. h. "Prospectus" means the prospectus included in a Registration Statement, ---------- relating to an Offering in which Common Stock is included, as amended or supplemented by a prospectus supplement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference in such Prospectus. -1- i. "Registration Expenses" means, with respect to an Offering, any and all --------------------- expenses incident to the Company's performance of or compliance with the provisions of this Agreement, including without limitation (a) fees for any filings required to be made with the National Association of Securities Dealers, Inc., or the SEC in connection with such Offering, and any other registration and filing fees, (b) all fees and expenses of complying with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Common Stock to be included in such Offering), (c) all printing, messenger, telephone, and delivery expenses, (d) all fees and expenses incurred in connection with the listing of the Common Stock to be included in such Offering on any securities exchange, (e) the reasonable fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits and/or "cold comfort" letters required by or incident to such performance and compliance, and (f) the reasonable fees and disbursements of Imperial's outside counsel, outside accountants, investment bankers, and financial consultants, if any, in connection with any Offering. j. "Registration Statement" means a registration statement filed with the ---------------------- SEC pursuant to the Securities Act, relating to an Offering in which Common Stock is included, including any pre- or post-effective amendment thereto, the Prospectus included therein, and all material incorporated by reference therein, and any schedule or exhibit to any of the foregoing. k. "SEC" means the Securities and Exchange Commission. --- l. "Securities Act" means the Securities Act of 1933, as amended, and the -------------- rules and regulations promulgated thereunder. m. "Securities Offering Regulations" means any regulations promulgated by ------------------------------- any agency or authority of the United States government, under the Securities Act, or any statute hereafter enacted into law, relating to or governing an Offering of securities by the Company. n. "Imperial Shares" means the shares of Common Stock, and any other --------------- securities into which the Common Stock may be changed by virtue of any merger, consolidation or recapitalization or otherwise, owned of record by Imperial as of the date hereof. 3. a. Incidental Registration Rights. If the Company proposes to make an ------------------------------ Offering of its Common Stock and to prepare Offering Documents not required pursuant to Paragraph 4 (other than any registration by the Company on Form S-8 or a successor or substantially similar form of (A) an employee stock option, stock purchase or compensation plan or securities issued or to be issued pursuant to any such plan, or (B) a dividend investment plan), the Company will give prompt written notice to Imperial of its intention to do so and of Imperial's rights under this Paragraph 3. Upon the written request of Imperial made within thirty (30) days after the receipt of any such notice (which request shall specify the number of Imperial Shares intended to be disposed of by Imperial), the Company will include in the Offering Documents relating to such Offering all Imperial Shares that the Company has been requested to include by Imperial; provided, that if at any time after giving written notice under this Paragraph 3 the Company -2- shall determine for any reason not to proceed with the proposed Offering, the Company may, at its election, give written notice of such determination to Imperial and thereupon shall be relieved of its obligations to Imperial with respect to such proposed Offering under this Paragraph 3. Imperial shall be entitled to withdraw its request for the inclusion of Imperial Shares in an Offering and withdraw from the Offering at any time before the time that the Offering Documents, including any Registration Statement (if applicable), are declared effective and the Offering has commenced. b. Continuous Offering. If the Company intends to effect a Continuous ------------------- Offering, the Company will give written notice thereof to Imperial and include in such Offering all of the Imperial Shares which Imperial elects to include in such Offering. During the period in which a Registration Statement (if applicable) with respect to a Continuous Offering is effective, if Imperial desires to sell Imperial Shares in a transaction covered by such Registration Statement, it shall give notice to the Company of the proposed date of such sale at least thirty (30) days before such proposed date of sale, and the Company shall take all actions necessary to permit such sale. Within fifteen (15) days of receipt of notice of a proposed sale by Imperial, the Company will advise Imperial either that it has no objection of such sale or that such sale should be delayed for up to four months, on the basis either that the Company is involved in a confidential proposed transaction or negotiations therefor (which have been previously disclosed to the Company's Board of Directors) which would not require the Company to make or amend any public filings under the securities laws at that time, or that such sale would have a material adverse effect upon the Company's ability to access the capital markets. If the Company has not objected to such proposed sale as permitted in this subparagraph (b) within such fifteen (15) day period, the Company shall take all actions necessary to permit such sale on the proposed date of sale pursuant to such Registration Statement. c. Underwritten Offerings. In the case of an underwritten Offering ---------------------- initiated by the Company under this Paragraph 3, including underwritten Offerings effected as part of a Continuous Offering, the underwriter(s) and the managing underwriter shall be selected by the Company. If the managing underwriter advises the Company in writing that, in its opinion, the number of Imperial Shares and securities of the Company, if any, being sold exceeds the number that can be sold in such Offering, so as to be likely to have an adverse effect on the price at which the Company can sell securities for its own account, then there shall be included in such Offering (and in the Offering Documents relating to the Offering) first, securities of the Company being sold for its own account, and second, the maximum number of Imperial Shares requested to be included in such Offering which, in the opinion of such managing underwriter, can be sold without having such adverse effect on such price. If Imperial Shares are so excluded from registration in an Offering, the Company shall, upon the request of Imperial, use its reasonable efforts to effect a registration with the SEC or take such actions as shall be reasonably required to effect an Offering (in the event the Imperial Shares are already registered with the SEC) in respect of such excluded Imperial Shares as soon as practicable after consummation of such Offering. Imperial may withdraw its Imperial Shares from such subsequent Offering without cost or penalty at any time before the effective date of the Registration Statement relating to such Offering. -3- d. Expenses. In connection with any offering of Imperial Shares and a new -------- issuance of Common Stock by the Company, Imperial and the Company shall each pay their pro rata share of Registration Expenses in proportion to the number of shares of Common Stock to be offered by each. 4. Demand Registration Rights. On or after April 1, 1997, Imperial, without -------------------------- limitation as to any other method of disposition available to it, shall be entitled to dispose of any or all of the Imperial Shares then held by it in accordance with the provisions of this Paragraph 4. a. Requests by Imperial. Upon the receipt by the Company of written notice -------------------- from Imperial of its intent to sell all or part of its Imperial Shares in an Offering subject to this Paragraph 4 at least 30 days before such proposed date of sale, and specifying both the number of Imperial Shares to be sold and the intended method of disposition, the Company will use its best efforts to register such Imperial Shares so as to permit as soon as practicable the requested sale of Imperial Shares. Within fifteen (15) days of receipt of notice of a proposed sale by Imperial, the Company will advise Imperial either that it has no objection of such sale or that such sale should be delayed for up to four months, on the basis either that the Company is involved in a confidential proposed transaction or negotiations therefor (which have been previously disclosed to the Company's Board of Directors) which would not require the Company to make or amend any public filings under the securities laws at that time, or that such sale would have a material adverse effect upon the Company's ability to access the capital markets. If the Company has not objected to such proposed sale as permitted in this subparagraph (a) within such fifteen (15) day period, the Company shall take all actions necessary to permit such sale on the proposed date of sale pursuant to such Registration Statement. If, at any time after giving 30 days written notice under this Paragraph 4, Imperial shall notify the Company in writing that it has determined for any reason not to proceed with the proposed Offering, then the Company shall terminate such Offering. b. Limitation on Requests and Payment of Registration Expenses. Imperial ----------------------------------------------------------- shall be entitled to make a request to the Company to register Imperial Shares pursuant to the provisions of Paragraph 3(b) or this Paragraph 4 two times within each one year period commencing April 1, 1997. The Company shall not be required to register Imperial Shares in accordance with the provisions of Paragraph 4(a) if there is outstanding at the time of the request an effective Registration Statement for a Continuous Offering and Imperial can dispose of Imperial Shares in accordance with Paragraph 3(b). Imperial will pay all Registration Expenses in connection with an Offering of Imperial Shares requested by Imperial pursuant to the second sentence of Paragraph 3(b) or this Paragraph 4. Any Offering abandoned or terminated by Imperial after its filing in accordance with the provisions of Paragraph 4(a) shall be deemed to be a request pursuant to this Paragraph 4. c. Selection of Underwriters. If Imperial specifies in the notice ------------------------- delivered to the Company pursuant to the second sentence of Paragraph 3(b) or Paragraph 4 that it intends to sell Imperial Shares in an underwritten Offering pursuant to the second sentence of Paragraph 3(b) or Paragraph 4, Imperial shall be entitled to select the underwriter(s) and managing underwriter. -4- If the Company issues and sells securities of the same class as the Imperial Shares contemporaneously with any Offering pursuant to Paragraph 3(b) or this Paragraph 4, the Company shall (i) sell such securities to the underwriter(s) selected by Imperial pursuant to this Paragraph 4(c) on the same terms and conditions as apply to Imperial and (ii) execute and deliver a copy of the underwriting agreement relating to such Offering. If the managing underwriter advises Imperial and the Company in writing that, in its opinion, the number of securities requested to be included in such Offering exceeds the number that can be sold in such Offering, so as to be likely to have an adverse effect on the price at which the Imperial Shares or securities being offered by the Company can be sold, then there shall be included in such Offering (and in the Offering Documents relating to such Offering) first, the maximum number of Imperial Shares requested to be included in such Offering by Imperial and second, the maximum number of securities, if any, proposed to be sold by the Company for its own account or for the account of any other holder of the Company's securities, which in the opinion of the managing underwriter can be sold without having such adverse effect. d. Registration on Form S-3. The Company shall not be required to register ------------------------ Imperial Shares in any Continuous Offering under this Paragraph 4 until July 1, 1997. Thereafter, Imperial shall have the right to require the Company to register any or all of its shares on Form S-3 (or on Form S-1, if Form S-3 is not available). 5. The Company's Duties. If and whenever the Company is required to permit -------------------- Imperial to effect any Offering as provided in Paragraphs 3 and 4, the Company covenants and agrees that it will, as expeditiously as possible (but not later than sixty (60) days after receipt of a request from Imperial to include Imperial Shares in a given Offering): a. (A) prepare all Offering Documents in accordance with all applicable requirements of the Securities Act, and the Securities Offering Regulations, including, if requested by Imperial and if permitted by the rules and regulations of the SEC, a Registration Statement pursuant to Rule 415 of the Securities Act or any successor rule of the SEC, with respect to such Offering to permit the disposition of the Imperial Shares by Imperial in accordance with the intended method of disposition (and, in the case of an underwritten Offering, consistent in form, substance, and scope with customary practice for the offering of securities of corporations by nationally recognized investment banking firms), (B) file with the SEC such Offering Documents and all other documents required to permit the disposition of the Imperial Shares by Imperial in accordance with the intended method of disposition thereof; provided, that before filing any such Offering Documents (including any documents incorporated by reference therein), the Company will furnish to counsel(s) designated by Imperial and to the underwriter(s), if any, copies of all such Offering Documents, which Offering Documents shall be subject to the review of such counsel(s) and the underwriter(s), if any, and, where feasible, the Company shall make such changes in such Offering Documents as are reasonably requested by such counsel(s) or underwriter(s), and (C) use its reasonable efforts to have such Offering Documents declared effective by, and obtain all approvals from the SEC to the extent necessary to permit the Offering; provided, however, that the Company may discontinue any Offering that is being effected pursuant to Paragraph 3 at any time before the effective date of the related Offering -5- Documents; and provided, further, that the Company shall not file any Offering Document which shall be disapproved by Imperial within a reasonable period after the same has been provided for review; b. thereafter, prepare and file with the SEC such amendments and post- effective amendments to the Offering Documents as may be necessary to keep the Offering Documents continuously effective and cause the Offering Documents to be supplemented by any required supplement, and as so supplemented to be filed, if required, with the SEC during the period ending on the later of (i) such time as all of the Imperial Shares covered by such Offering Documents have been disposed of in accordance with the intended method of disposition set forth in such Offering Documents or, in the case of an Offering made pursuant to Rule 415 under the Securities Act or any successor rule of the SEC (if applicable), if securities remain unsold at the expiration of the Offering, such time as the Company shall file, with the consent of Imperial, a posteffective amendment with the SEC deregistering the securities which remain unsold at the termination of the Offering or (ii) so long as a dealer is required to deliver a Prospectus in connection with the Offering; provided, that before filing any such post- effective amendment, the Company will furnish to counsel(s) designated by Imperial and to the underwriter(s), if any, copies of the post-effective amendment (including any other document proposed to be filed therewith), which Offering Documents shall be subject to the review of such counsel(s) and the underwriter(s), if any, and, where feasible, the Company shall make such changes in such post-effective amendment as are reasonably requested by such counsel(s) or underwriter(s); c. furnish to Imperial and to the underwriter(s), if any, such number of copies of the Offering Documents (including each amendment and supplement thereto) as they may reasonably request in order to facilitate the disposition of the Imperial Shares included in such Offering; d. register or qualify, or cooperate with Imperial, the underwriter(s), if any, and their respective counsel in registering or qualifying, all Imperial Shares covered by the Offering Documents for offer and sale under the applicable securities or blue sky laws of such jurisdictions as Imperial and the underwriter(s), if any, shall reasonably request in writing, and do any and all other acts and things which may be reasonably necessary or advisable to enable Imperial and the underwriter(s), if any, to consummate the disposition in such jurisdictions of the Common Stock covered by the Offering Documents; provided however that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any tax in any such jurisdiction where it is not then so subject; e. use its reasonable efforts to cause such Common Stock covered by the Offering Documents to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable Imperial and the underwriter(s), if any, to consummate the disposition of such Common Stock; -6- f. cooperate reasonably with any managing underwriter to effect the sale of any Imperial Shares, including but not limited to attendance of the Company's executive officers at any planned "road show" presentations; g. notify Imperial and the underwriter(s), if any, at any time when the Offering Documents include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and at the request of Imperial or any underwriter, prepare and furnish to such Person(s), such reasonable number of copies of any amendment or supplement to the Offering Documents as may be necessary so that, as thereafter delivered to the purchasers of such Common Stock, such Offering Documents shall not include 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 not misleading in light of the circumstances then existing, and to deliver to purchasers of any other securities of the Company included in the Offering copies of such Offering Documents as so amended or supplemented; h. keep Imperial informed of the Company's best estimate of the earliest date on which the Offering Documents will become effective, and promptly notify Imperial of (A) the effectiveness of such Offering Documents, (B) a request by the SEC for an amendment or supplement to such Offering Documents, (C) the issuance by the SEC of an order suspending the effectiveness of the Offering Documents, or of the threat of an proceeding for that purpose, and (D) the suspension of the qualification of any securities included in the Offering Documents for sale in any jurisdiction or the initiation or threat of any proceeding for that purpose; i. comply with the provisions of the Securities Offering Regulations and the Securities Act with respect to the disposition of all securities covered by the Offering Documents in accordance with the intended method of distribution of the sellers thereof set forth in such Offering Documents; j. use its reasonable efforts to list the securities proposed to be sold in such Offering on the New York Stock Exchange, or on such other securities exchange on which the Common Stock is then listed, not later than the closing of the Offering contemplated thereby; k. enter into such customary agreements (including but not limited to an underwriting agreement in customary form) and take such other reasonable actions as Imperial or the underwriter(s), if any, reasonably request in order to expedite or facilitate the disposition of such Common Stock; l. obtain such "cold comfort" letter(s) from the Company's independent public accountants, in customary form and covering matters of the type customarily covered by "cold comfort" letter(s), as Imperial or the underwriter(s), if any, shall reasonably request; and m. upon prior notice, make available for reasonable inspection by any underwriter(s) participating in any disposition to be effected pursuant to the Offering Documents and by any -7- attorney, accountant, or other agent retained by any such Person(s), its financial and other records, pertinent corporate documents and properties of the Company, and such opportunities to discuss the business of the Company with its officers, directors, and employees and the independent public accountants who have certified its financial statements as shall be necessary, in the opinions of such underwriters' respective counsels, to conduct a reasonable investigation; provided, that any records, information, or documents that are designated by the Company in writing as confidential shall be kept confidential by each such Person, unless disclosure of such records, information, or documents is required by law, by judicial or administrative order, or in order to defend a claim asserted against such Person in connection with such Offering. 6. Information from Imperial. -------------------------- a. Information. The Company may require Imperial to furnish it with such ----------- information regarding Imperial and regarding the method of distribution as is pertinent to the disclosure requirements relating to the Offering of such Common Stock as the Company may from time to time reasonably request in writing. b. Use of Offering Documents Upon Notice of Defects. Imperial agrees, and ------------------------------------------------ shall cause underwriter(s), if any, acting on its behalf to agree, that upon receipt of any notice from the Company of the happening of any event of the kind described in Paragraph 5(f), it will immediately discontinue the use of the Offering Documents covering such Common Stock until the receipt by Imperial and any such underwriter(s) of the copies of the supplemented or amended Offering Documents contemplated by such clause and, if so directed by the Company, Imperial will deliver and cause each underwriter, if any, to deliver to the Company all copies, other than permanent file copies then in the possession of Imperial or any such underwriter, of the Offering Documents covering such Common Stock at the time of receipt of such notice. If the Company shall give any such notice, the period mentioned in Paragraph 5(b) shall be extended by the number of days during which offerings were suspended (i.e., the period from and including the date of the receipt of such notice pursuant to Paragraph 5(f), to and including the date when Imperial shall have received the copies of the supplemented or amended Offering Documents contemplated by such clause). 7. Resales: Reports Under Exchange Act. In order to permit Imperial to sell the ----------------------------------- Imperial Shares, if it so desires, pursuant to any applicable resale exemption under the Securities Offering Regulations or the Securities Act, the Company will: a. comply with all rules and regulations of the SEC in connection with use of any such resale exemption; b. make and keep available adequate and current public information regarding the Company; c. file with the SEC in a timely manner, all reports and other documents required to be filed under the Securities Act, the Exchange Act, or the Securities Offering Regulations; -8- d. furnish to Imperial copies of annual reports required to be filed under the Exchange Act and the Securities Offering Regulations; and e. furnish to Imperial, upon request, (A) a copy of the most recent quarterly report of the Company and such other reports and documents filed by the Company with the SEC and (B) such other information as may be reasonably requested to permit Imperial pursuant to any applicable resale exemption under the Securities Act or the Securities Offering Regulations, if any. 8. Indemnification. The obligations of indemnification of the Parties set forth --------------- in this Paragraph 8 shall be in addition to any liability which any Party may otherwise have to any other Party. a. Indemnification by the Company. The Company agrees to indemnify and ------------------------------ hold harmless, to the full extent permitted by law, Imperial, its officers, directors, employees and agents, each Person who participates as an underwriter in an Offering, each officer, director, employee, or agent of such an underwriter, and each Person who controls (within the meaning of the Securities Act) Imperial and such an underwriter against any and all losses, claims, damages, liabilities, and expenses, joint or several, including without limitation reasonable legal or other expenses incurred in connection with investigating or defending against any loss, claim, damage, or liability, or action or proceeding (whether commenced or threatened) in respect thereof, caused by any untrue statement or alleged untrue statement of a material fact contained in any of the Offering Documents relating to such Offering or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, except insofar as the same are (i) made in reliance on and in conformity with any information about Imperial or any underwriter furnished in writing to the Company by Imperial or any underwriter specifically for inclusion in the Offering Documents relating to such Offering or (ii) the result of the fact that Imperial or any underwriter sold Common Stock subject to an Offering to a Person to whom there was not sent or given, at or before the written configuration of such sale, a copy of the final Offering Documents, if the Company has previously furnished copies thereof to Imperial or underwriter and such final Offering Documents corrected such untrue statement or alleged untrue statement or omission or alleged omission. b. Indemnification by Imperial. Imperial agrees to indemnify and hold --------------------------- harmless, to the full extent permitted by law, the Company, its officers, directors, employees, and agents, each Person who participates as an underwriter in an Offering, each officer, director, employee or agent of such an underwriter, and each Person who controls (within the meaning of the Securities Act) the Company and such underwriter against any and all losses, claims, damages, liabilities, and expenses, joint or several, including without limitation reasonable legal or other expenses incurred in connection with investigating or defending against any loss, claim, damage, or liability, or action or proceeding (whether commenced or threatened) in respect thereof, caused by any untrue statement or alleged untrue statement of a material fact contained in any of the Offering Documents relating to such Offering or any omission or alleged omission to state -9- therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, but only to the extent that such untrue statement or omission is made in reliance on and in conformity with any information furnished in writing by Imperial concerning Imperial to the Company specifically for inclusion in the Offering Documents relating to such Offering. c. Notices of Claims; Procedures. Promptly after receipt by an indemnified ----------------------------- party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Paragraph 8, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the indemnifying party of the commencement of such action; provided, that the failure of the indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Paragraph 8, except to the extent that the indemnifying party is actually materially prejudiced by such failure to give notice. If any such action is brought against an indemnified party (unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim) the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation; provided, however, that, any Person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such Person unless (A) the indemnifying party has agreed to pay such fees or expenses or (B) the indemnifying party shall have failed to assume the defense of such claim and employ counsel reasonably satisfactory to such Person or (C) in the reasonable judgment of any such Person based upon advice of its counsel, a conflict of interest may exist between such Person and the indemnifying party with respect to such claims (in which case, if the Person notifies the indemnifying party in writing that such Person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such Person.) If such defense is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include, as an unconditional term thereof, the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. An indemnifying party who is not entitled to or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel in each jurisdiction for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels. -10- d. Contribution. If the indemnification provided for in this Paragraph 8 ------------ from the indemnifying party is unavailable to an indemnified party hereunder (other than pursuant to the terms hereof) in respect of any losses, claims, damages, liabilities, or expenses referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities, or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions that resulted in such losses, claims, damages, liabilities, or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action in question, including any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such action. The amount paid or payable by a Party as a result of the losses, claims, damages, liabilities, and expenses referred to above shall be deemed to include, subject to the limitations set forth in this Paragraph 8(d), any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The Parties agree that it would not be just and equitable if contributions pursuant to this Paragraph 8(d) were datelined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to above. No Person guilty of fraudulent misrepresentation shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. e. This Paragraph 8 shall apply to each Registration Statement filed by the Company pursuant to this Agreement that includes Imperial Shares. 9. Miscellaneous. ------------- a. Termination. Imperial's rights to demand registration or to ----------- participate in underwritten Offerings of the Common Stock shall expire on July 1, 2002. b. Amendments and Waivers. This Agreement may be amended, and the Company ---------------------- may take any action herein prohibited or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent of Imperial to such amendment, action or omission to act. c. Successors, Assigns and Transferees. This Agreement shall be binding ----------------------------------- upon the parties hereto and their respective successors and assigns. d. Notices. Any notice, request, demand, consent, approval or other ------- communication permitted or required to be given to any of the parties hereunder shall be deemed given when received, shall be in writing, and shall be delivered in person or sent by certified mail, postage prepaid, or by private courier service or by telecopy or telex, to such party at its address set -11- forth below or at such other address as such party may hereunder furnish in writing to the other parties. (i) if to the Company, to: Southern Pacific Funding Corporation One Centerpoint Drive, Suite 500 Lake Oswego, Oregon 97035 Attention: Secretary and Chief Financial Officer with a copy to: Thacher Proffitt & Wood 40th Floor Two World Trade Center New York, New York 10048 Attention: Lauris G.L. Rall, Esq. (ii) if to Imperial: Imperial Credit Industries, Inc. 23350 Hawthorne Blvd. Building 1, Suite 210 Torrance, California 90505 Attention: Secretary with a copy to: Freshman, Marantz, Orlanski, Cooper & Klein 9100 Wilshire Blvd, East Tower, 8th Floor Beverly Hills, California 90212-3480 Attention: Thomas J. Poletti e. Headings. The headings in this Agreement are for convenience of -------- reference only and shall not limit or otherwise affect the meaning of the interpretation of this Agreement or any provision hereof. f. Severability. In the event that any one or more of the provisions ------------ contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, it being intended that all rights, powers and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. -12- g. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which when so executed shall be deemed an original, and all such counterparts shall together constitute one and the same instrument. h. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the United States of America and, in the absence of controlling federal law, in accordance with the laws of the State of California. Any legal action or proceedings with respect to this Agreement shall be brought in the federal courts of the United States located in New York and each of the parties hereto submits to the exclusive jurisdiction of such courts and hereby waives any objections on the grounds of venue, forum non conveniens or any similar grounds. i. Entire Agreement. This Agreement embodies the entire Agreement of the ---------------- parties hereto in relation to the subject matter hereof and supersedes all prior understandings or agreements, oral or written, with respect thereto among the parties hereto. j. Certain Remedies. Without in any way limiting the remedies otherwise ---------------- available under this Agreement, the parties hereto acknowledge that, in the event of any breach or nonperformance by any party of the agreements or covenants required by this Agreement to be performed or observed by it, the other parties shall be entitled to such equitable remedies as may be appropriate, including without limitation specific performance. -13- IN WITNESS WHEREOF, each of the undersigned has executed this Agreement or caused this Agreement to be executed on its behalf as of the date first written above. SOUTHERN PACIFIC FUNDING CORPORATION By:_________________________________ Name:_______________________________ Title:______________________________ IMPERIAL CREDIT INDUSTRIES, INC. By:_________________________________ Name:_______________________________ Title:______________________________ EX-10.25 7 REGISTRATION RIGHTS AGREEMENT DATED 12/29/1997 EXHIBIT 10.25 - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT BETWEEN IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND IMPERIAL CREDIT ADVISORS, INC. DATED AS OF DECEMBER 29, 1997 - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT ----------------------------- THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into as of December 29, 1997, by and between IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. a Maryland corporation (the "Company") and IMPERIAL CREDIT ADVISORS, INC. a California corporation ("Imperial"). 1. Consideration. Imperial and the Company have agreed to enter into this ------------- Agreement to provide the registration rights set forth herein and to otherwise perform their respective obligations hereunder in consideration of the mutual covenants contained herein. 2. Definitions. The following definitions shall apply in addition to those ----------- terms defined elsewhere herein: a. "Common Stock" means the Company's Common Stock, $.01 par value per ------------ share. b. "Continuous Offering" means an Offering pursuant to Rule 415 under the ------------------- Securities Act, 17 C.F.R. 230.415, or any successor rule of the SEC, if applicable. c. "Exchange Act" means the Securities Exchange Act of 1934, as amended, ------------ and the rules and regulations promulgated thereunder. d. "Offering" means any public offering of the Common Stock of the -------- Company, whether or not subject to the registration requirements of the Securities Act, and any other method of disposition of the Common Stock of the Company that is subject to the registration requirements of the Securities Act or any other applicable federal or state statute or regulation. e. "Offering Documents" means all documents relating to an Offering which ------------------ are required to be filed with any governmental agency or authority or to be delivered to any Person to whom securities of the Company are offered for sale or sold, including, without limitation, Registration Statements, Prospectuses, and preliminary Prospectuses, and all material incorporated by reference therein, and any schedule or exhibit to any of the foregoing, in each case as such documents may be amended from time to time. f. "Party" means Imperial or the Company and "Parties" means both ----- ------- Imperial and the Company. g. "Person" means any individual, corporation, partnership, limited ------ liability company, association, trust or unincorporated association. h. "Prospectus" means the prospectus included in a Registration ---------- Statement, relating to an Offering in which Common Stock is included, as amended or supplemented by a prospectus supplement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference in such Prospectus. i. "Registration Expenses" means, with respect to an Offering, any and --------------------- all expenses incident to the Company's performance of or compliance with the provisions of this Agreement, including without limitation (a) fees for any filings required to be made with the National Association of Securities Dealers, Inc., or the SEC in connection with such Offering, and any other registration and filing fees, (b) all fees and expenses of complying with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Common Stock to be included in such Offering), (c) all printing, messenger, telephone, and delivery expenses, (d) all fees and expenses incurred in connection with the listing of the Common Stock to be included in such Offering on any securities exchange, and (e) the reasonable fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits and/or "cold comfort" letters required by or incident to such performance and compliance. j. "Registration Statement" means a registration statement filed with the ---------------------- SEC pursuant to the Securities Act, relating to an Offering in which Common Stock is included, including any pre-or post-effective amendment thereto, the Prospectus included therein, and all material incorporated by reference therein, and any schedule or exhibit to any of the foregoing. k. "SEC" means the Securities and Exchange Commission. --- l. "Securities Act" means the Securities Act of 1933, as amended, and the -------------- rules and regulations promulgated thereunder. m. "Securities Offering Regulations" means any regulations promulgated by ------------------------------- any agency or authority of the United States government, under the Securities Act, or any statute hereafter enacted into law, relating to or governing an Offering of securities by the Company. n. "Imperial Shares" means the shares of Common Stock, and any other --------------- securities into which the Common Stock may be changed by virtue of any merger, consolidation or recapitalization or otherwise, owned of record by Imperial as of the date hereof. 3. a. Incidental Registration Rights. If the Company proposes to make an ------------------------------ Offering of its Common Stock and to prepare Offering Documents not required pursuant to Paragraph 4 (other than any registration by the Company on Form S-8 or a successor or substantially similar form of (A) an employee stock option, stock purchase or compensation plan or securities issued or to be issued pursuant to any such plan, or (B) a dividend investment plan), the Company will give prompt written notice to Imperial of its intention to do so and of Imperial's rights under this Paragraph 3. Upon the written request of Imperial made within thirty (30) days after the receipt of any such notice (which request shall specify the number of Imperial Shares intended to be disposed of by Imperial), the Company will include in the Offering Documents relating to such Offering all Imperial Shares that 2 the Company has been requested to include by Imperial; provided, that if at any time after giving written notice under this Paragraph 3 the Company shall determine for any reason not to proceed with the proposed Offering, the Company may, at its election, give written notice of such determination to Imperial and thereupon shall be relieved of its obligations to Imperial with respect to such proposed Offering under this Paragraph 3. Imperial shall be entitled to withdraw its request for the inclusion of Imperial Shares in an Offering and withdraw from the Offering at any time before the time that the Offering Documents, including any Registration Statement (if applicable), are declared effective and the Offering has commenced. b. Continuous Offering. If the Company intends to effect a Continuous ------------------- Offering, the Company will give written notice thereof to Imperial and include in such Offering all of the Imperial Shares which Imperial elects to include in such Offering. During the period in which a Registration Statement (if applicable) with respect to a Continuous Offering is effective, if Imperial desires to sell Imperial Shares in a transaction covered by such Registration Statement, it shall give notice to the Company of the proposed date of such sale at least thirty (30) days before such proposed date of sale, and the Company shall take all actions necessary to permit such sale. Within fifteen (15) days of receipt of notice of a proposed sale by Imperial, the Company will advise Imperial either that it has no objection of such a registered sale or that such a registered sale should be delayed for up to four months, on the basis either that the Company is involved in a confidential proposed transaction or negotiations therefor (which have been previously disclosed to the Company's Board of Directors) which would not require the Company to make or amend any public filings under the securities laws at that time, or that such sale would have a material adverse effect upon the Company's ability to access the capital markets. If the Company has not objected to such proposed registered sale as permitted in this subparagraph (b) within such fifteen (15) day period, the Company shall take all actions necessary to permit such sale on the proposed date of sale pursuant to such Registration Statement. c. Underwritten Offerings. In the case of an underwritten Offering ---------------------- initiated by the Company under this Paragraph 3, including underwritten Offerings effected as part of a Continuous Offering, the underwriter(s) and the managing underwriter shall be selected by the Company. If the managing underwriter advises the Company in writing that, in its opinion, the number of Imperial Shares and securities of the Company, if any, being sold exceeds the number that can be sold in such Offering, so as to be likely to have an adverse effect on the price at which the Company can sell securities for its own account, then there shall be included in such Offering (and in the Offering Documents) first, securities of the Company being sold for its own account, and second, the maximum number of Imperial Shares requested to be included in such Offering which, in the opinion of such managing underwriter, can be sold without have such adverse effect on such price. If Imperial Shares are so excluded from registration in an Offering, the Company shall, upon the request of Imperial, use its reasonable efforts to effect a registration with the SEC or take such actions as shall be reasonably required to effect an Offering (in the event the Imperial Shares are already registered with the SEC) in respect of such excluded Imperial Shares as soon as practicable after consummation of such Offering. Imperial may withdraw its Imperial Shares from such subsequent 3 Offering without costs or penalty at any time before the effective date of the Registration Statement relating to such Offering. d. Expenses. In connection with any offering of Imperial Shares in -------- connection with a new issuance of Common Stock by the Company, the Company shall pay all Registration Expenses. 4. Demand Registration Rights. Imperial, without limitation as to any other -------------------------- method of disposition available to it, shall be entitled to dispose of any or all of the Imperial Shares then held by it in accordance with the provisions of this Paragraph 4. a. Requests by Imperial. Upon the receipt by the Company of written -------------------- notice from Imperial of its intent to sell all or part of its Imperial Shares in an Offering subject to this Paragraph 4 at least 30 days before such proposed date of sale, and specifying both the number of Imperial Shares to be sold and the intended method of disposition, the Company will use its best efforts to register such Imperial Shares so as to permit as soon as practicable the requested sale of Imperial Shares. Within fifteen (15) days of receipt of notice of a proposed sale by Imperial, the Company will advise Imperial either that it has no objection of such a registered sale or that such a registered sale should be delayed for up to four months, on the basis either the Company is involved in a confidential proposed transaction or negotiations therefor (which have been previously disclosed to the Company's Board of Directors) which would not require the Company to make or amend any public filings under the securities laws at that time. If the Company has not objected to such proposed registered sale as permitted in this subparagraph (a) within such fifteen (15) day period, the Company shall take all actions necessary to permit such sale on the proposed date of sale pursuant to such Registration Statement. If, at any time after giving 30 days written notice under this Paragraph 4, Imperial shall notify the Company in writing that it has determined for any reason not to proceed with the proposed Offering, then the Company shall terminate such Offering. b. Limitation on Requests and Payment of Registration Expenses. Imperial ----------------------------------------------------------- shall be entitled to make a request to the Company to register Imperial Shares pursuant to the provisions of Paragraph 3(b) or this Paragraph 4 two times within each one year period. The Company shall not be required to register Imperial Shares in accordance with the provisions of Paragraph 4(a) if there is outstanding at the time of the request an effective Registration Statement for a Continuous Offering and Imperial can dispose of Imperial Share in accordance with Paragraph 3(b). The Company will pay all Registration Expenses in connection with the Offering of Imperial Shares requested by Imperial pursuant to the second sentence of Paragraph 3(b) or this Paragraph 4. Any Offering abandoned or terminated by Imperial after its filing in accordance with the provisions of Paragraph 4(a) shall be deemed to be a request pursuant to this Paragraph 4. c. Selection of Underwriters. If Imperial specifies in the notice ------------------------- delivered to the Company pursuant to Paragraph 4 that it intends to sell Imperial Shares in an underwritten Offering pursuant to the second sentence of Paragraph 3(b) or Paragraph 4, Imperial shall be entitled to select the underwriter(s) and managing underwriter. If the Company issues and sells securities of the same class as the Imperial Shares contemporaneously with any Offering pursuant to Paragraph 3(b) or this 4 Paragraph 4, the Company shall (i) sell such securities to the underwriter(s) selected by Imperial pursuant to this Paragraph 4(c) on the same terms and conditions as apply to Imperial and (ii) execute and deliver a copy of the underwriting agreement relating to such Offering. If the managing underwriter advises Imperial and the Company in writing that, in its opinion, the number of securities requested to be included in such Offering exceeds the number that can be sold in such Offering, so as to be likely to have an adverse effect on the price at which the Imperial Shares or securities being offered by the Company can be sold, then there shall be included in such Offering (and in the Offering Documents relating to such Offering) first, the maximum number of Imperial Shares requested to be included in such Offering by Imperial and second, the maximum number of securities, if any, proposed to be sold by the Company for its own account or for the account of any other holder of the Company's securities, which in the opinion of the managing underwriter can be sold without having such adverse effect. d. Registration on Form S-3. Imperial shall have the right to require ------------------------ the Company to register any or all of its shares on Form S-3 (or on Form S-1, if Form S-3 is not available). 5. The Company's Duties. If and whenever the Company is required to permit -------------------- Imperial to effect any Offering as provided in Paragraphs 3 and 4, the Company covenants and agrees that it will, as expeditiously as possible (but not later than thirty (30) days after receipt of a request from Imperial to include Imperial Shares in a given Offering): a. (A) prepare all Offering Documents in accordance with all applicable requirements of the Securities Act, and the Securities Offering Regulations, including, if requested by Imperial and if permitted by the rules and regulations of the SEC, a Registration Statement pursuant to Rule 415 of the Securities Act or any successor rule of the SEC, with respect to such Offering to permit the disposition of the Imperial Shares by Imperial in accordance with the intended method of disposition (and, in the case of an underwritten Offering, consistent in form, substance, and scope with customary practice for the offering of securities of corporations by nationally recognized investment banking firms), (B) file with the SEC such Offering Documents and all other documents required to permit the disposition thereof; provided, that before filing any such Offering Documents (including any documents incorporated by reference therein), the Company will furnish to counsel(s) designated by Imperial and to the underwriter(s), if any, copies of all such Offering Documents, which Offering Documents shall be subject to the review of such counsel(s) and the underwriter(s), if any, and, where feasible, the Company shall make such changes in such Offering Documents as are reasonably requested by such counsel(s) or underwriter(s), and (C) use its reasonable efforts to have such Offering Documents declared effective by, and obtain all approvals from the SEC to the extent necessary to permit the Offering; provided, however, that the Company may discontinue any Offering that is being effected pursuant to Paragraph 3 at any time before the effective date of the related Offering Documents; and provided, further, that the Company shall not file any Offering Document which shall be disapproved by Imperial within a reasonable period after the same has been provided for review; 5 b. thereafter, prepare and file with the SEC such amendments and post- effective amendments to the Offering Documents as may be necessary to keep the Offering Documents continuously effective and cause the Offering Documents to be supplemented by any required supplement, and as so supplemented to be filed, if required, with the SEC during the period ending on the later of (i) such time as all of the Imperial Shares covered by such Offering Documents have been disposed of in accordance with the intended method of disposition set forth in such Offering Documents or, in the case of an Offering made pursuant to Rule 415 under the Securities Act or any successor rule of the SEC (if applicable), if securities remain unsold at the expiration of the Offering, such time as the Company shall file, with the consent of Imperial, a post-effective amendment with the SEC deregistering the securities which remain unsold at the termination of the Offering or (ii) so long as a dealer is required to deliver a Prospectus in connection with the Offering; provided, that before filing any such post- effective amendment, the Company will furnish to counsel(s) designated by Imperial and to the underwriter(s), if any, copies of the post-effective amendment (including any other document proposed to be filed therewith), which Offering Documents shall be subject to the review of such counsel(s) and the underwriter(s), if any, and, where feasible, the Company shall make such changes in such post-effective amendment as are reasonably requested by such counsel(s) or underwriter(s); c. furnish to Imperial and to the underwriter(s), if any, such number of copies of the Offering Documents (including each amendment and supplement thereto) as they may reasonably request in order to facilitate the disposition of the Imperial Shares included in such Offering; d. register or qualify, or cooperate with Imperial, the underwriter(s), if any, and their respective counsel in registering or qualifying, all Imperial Shares covered by the Offering Documents for offer and sale under the applicable securities or blue sky laws of such jurisdictions as Imperial and the underwriter(s), if any, shall reasonably request in writing, and do any and all other acts and things which may be reasonably necessary or advisable to enable Imperial and the underwriter(s), if any, to consummate the disposition in such jurisdictions of the Common Stock covered by the Offering Documents; provided however that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any tax in any such jurisdiction where it is not then so subject; e. use its reasonable efforts to cause such Common Stock covered by the Offering Documents to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable Imperial and the underwriter(s), if any, to consummate the disposition of such Common Stock; f. cooperate reasonably with any managing underwriter to effect the sale of any Imperial Shares, including but not limited to attendance of the Company's executive officers at any planned "road show" presentations'; 6 g. notify Imperial and the underwriter(s), if any, at any time when the Offering Documents include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and at the request of Imperial or any underwriter, prepare and furnish to such Person(s), such reasonable number of copies of any amendment or supplement to the Offering Documents as may be necessary so that, as thereafter delivered to the purchasers of such Common Stock, such Offering Documents shall not include 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 not misleading in light of the circumstances then existing, and to deliver to purchasers of any other securities of the Company included in the Offering copies of such Offering Documents as so amended or supplemented; h. keep Imperial informed of the Company's best estimates of the earliest date on which the Offering Documents will become effective, and promptly notify Imperial of (A) the effectiveness of such Offering Documents, (B) a request by the SEC for an amendment or supplement to such Offering Documents, (C) the issuance by the SEC of an order suspending the effectiveness of the Offering Documents, or of the threat of a proceeding for that purpose, and (D) the suspension of the qualification of any securities included in the Offering Documents for sale in any jurisdiction or the initiation or threat of any proceeding for that purpose; i. comply with the provisions of the Securities Offering Regulations and the Securities Act with respect to the disposition of all securities covered by the Offering Documents in accordance with the intended method of distribution of the sellers thereof set forth in such Offering Documents; j. use its reasonable efforts to list the securities proposed to be sold in such Offering on the American Stock Exchange, or on such other securities exchange on which the Common Stock is then listed, not later than the closing of the Offering contemplated thereby; k. enter into such customary agreements (including but not limited to an underwriting agreement in customary form) and take such other reasonable actions as Imperial or the underwriter(s), if any, reasonably request in order to expedite or facilitate the disposition of such Common Stock; l. obtain such "cold comfort" letter(s) from the Company's independent public accountants, in customary form and covering matters of the type customarily covered by "cold comfort" letter(s), as Imperial or the underwriter(s), if any, shall reasonably request; and m. upon prior notice, make available for reasonable inspection by any underwriter(s) participating in any disposition to be effected pursuant to the Offering Documents and by any attorney, accountant, or other agent retained by any such Person(s), its financial and other records, pertinent corporate documents and properties of the Company, and such opportunities to discuss the business of the Company with its officers, directors, and employees and the independent public accountants who have certified its financial statements as shall be necessary, in the opinions of such 7 underwriters' respective counsels, to conduct a reasonable investigation; provided, that any records, information, or documents that are designated by the Company in writing as confidential shall be kept confidential by each such Person, unless disclosure of such records, information, or documents is required by law, by judicial or administrative order, or in order to defend a claim asserted against such Person in connection with such Offering. 6. Information from Imperial. ------------------------- a. Information. The Company may require Imperial to furnish it with such ----------- information regarding Imperial and regarding the method of distribution as is pertinent to the disclosure requirements relating to the Offering of such Common Stock as the Company may from time to time reasonably request in writing. b. Use of Offering Documents Upon Notice of Defects. Imperial agrees, ------------------------------------------------ and shall cause underwriter(s), if any, acting on its behalf to agree, that upon receipt of any notice from the Company of the happening of any event of the kind described in Paragraph 5(f), it will immediately discontinue the use of the Offering Documents covering such Common Stock until the receipt by Imperial and any such underwriter(s) of the copies of the supplemented or amended Offering Documents contemplated by such clause and, if so directed by the Company, Imperial will deliver and cause each underwriter, if any, to deliver to the Company all copies, other than permanent file copies then in the possession of Imperial or any such underwriter, of the Offering Documents covering such Common Stock at the time of receipt of such notice. If the Company shall give any such notice, the period mentioned in Paragraph 5(b) shall be extended by the number of days during which offerings were suspended (i.e., the period from and including the date of the receipt of such notice pursuant to Paragraph 5(f), to and including the date when Imperial shall have received the copies of the supplemented or amended Offering Documents contemplated by such clause). 7. Resales; Reports Under Exchange Act. In order to permit Imperial to sell ----------------------------------- the Imperial Shares, if it so desires, pursuant to any applicable resale exemption under the Securities Offering Regulations or the Securities Act, the Company will: a. comply with all rules and regulations of the SEC in connection with use of any such resale exemption; b. make and keep available adequate and current public information regarding the Company; c. file with the SEC in a timely manner, all reports and other documents required to be filed under the Securities Act, the Exchange Act, or the Securities Offering Regulations; d. furnish to Imperial copies of annual reports required to be filed under the Exchange Act and the Securities Offering Regulations; and 8 e. furnish to Imperial, upon request, (A) a copy of the most recent quarterly report of the Company and such other reports and documents filed by the Company with the SEC and (B) such other information as may be reasonably requested to permit Imperial pursuant to any applicable resale exemption under the Securities Act or the Securities Offering Regulations, if any. 8. Indemnification. The obligations of indemnification of the Parties set --------------- forth in this Paragraph 8 shall be in addition to any liability which any Party may otherwise have to any other party. a. Indemnification by the Company. The Company agrees to indemnify and ------------------------------ hold harmless, to the full extent permitted by law, Imperial, its officers, directors, employees and agents, each Person who participates as an underwriter in an Offering, each officer, director, employee or agent of such an underwriter, and each Person who controls (within the meaning of the Securities Act) Imperial and such an underwriter against any and all losses, claims, damages, liabilities, expenses, joint or several, including without limitation reasonable legal or other expenses incurred in connection with investigating or defending against any loss, claim, damage, or liability, or action or proceeding (whether commenced or threatened) in respect thereof, caused by any untrue statement or alleged untrue statement of a material fact contained in any of the Offering Documents relating to such Offering, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, except insofar as the same are (i) made in reliance on and in conformity with any information about Imperial or any underwriter furnished in writing to the Company by Imperial or any underwriter specifically for inclusion in the Offering Documents relating to such Offering or (ii) the result of the fact that Imperial or any underwriter sold Common Stock subject to an Offering to a Person to whom there was not sent or given, at or before the written configuration of such sale, a copy of the final Offering Documents, if the Company has previously furnished copies thereof to Imperial or underwriter and such final Offering Documents corrected such untrue statement or alleged untrue statement or omission or alleged omission. b. Indemnification by Imperial. Imperial agrees to indemnify and hold --------------------------- harmless, to the full extent permitted by law, the Company, its officers, directors, employees, and agents, each Person who participates as an underwriter in an Offering, each officer, director, employee or agent of such an underwriter, and each Person who controls (within the meaning of the Securities Act) the Company and such underwriter against any and all losses, claims, damages, liabilities, and expenses, joint or several, including without limitation reasonable legal or other expenses incurred in connection with investigating or defending against any loss, claim, damage, or liability, or action or proceeding (whether commenced or threatened) in respect thereof, caused by any untrue statement or alleged untrue statement of a material fact contained in any of the Offering Documents relating to such Offering or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, but only to the extent that such untrue statement or omission is made in reliance on and in conformity with any information furnished in writing by Imperial concerning Imperial to the Company specifically for inclusion in the Offering Documents relating to such Offering. 9 c. Notices of Claims; Procedures. Promptly after receipt by an ----------------------------- indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Paragraph 8, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the indemnifying party of the commencement of such action; provided, that the failure of the indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Paragraph 8, except to the extent that the indemnifying party is actually materially prejudiced by such failure to give notice. If any such action is brought against an indemnified party (unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim) the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation; provided, however, that, any Person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such Person unless (A) the indemnifying party has agreed to pay such fees or expenses or (B) the indemnifying party shall have failed to assume the defense of such claim and employ counsel reasonably satisfactory to such Person or (C) in the reasonable judgment of any such Person based upon advice of its counsel, a conflict of interest may exist between such Person and the indemnifying party with respect to such claims (in which case, if the Person notifies the indemnifying party in writing that such Person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such Person). If such defense is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include, as an unconditional term thereof, the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. An indemnifying party who is not entitled to or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel in each jurisdiction for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels. d. Contribution. If the indemnification provided for this in this ------------ Paragraph 8 from the indemnifying party is unavailable to an indemnified party hereunder (other than pursuant to the terms hereof) in respect of any losses, claims, damages, liabilities, or expenses referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities, or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and 10 indemnified parties in connection with the actions that resulted in such losses, claims, damages, liabilities, or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action in question, including any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such action. The amount paid or payable by a Party as a result of the losses, claims, damages, liabilities, and expense referred to above shall be deemed to include, subject to the limitations set forth in this Paragraph 8(d) any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The Parties agree that it would not be just and equitable if contributions pursuant to this Paragraph 8(d) were determined by a pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to above. No Person guilty of fraudulent misrepresentation shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. e. This Paragraph 8 shall apply to each Registration Statement filed by the Company pursuant to this Agreement that includes Imperial Shares. 9. Miscellaneous. ------------- a. Termination. Imperial's rights to demand registration or to ----------- participate in underwritten Offerings of the Common Stock shall expire on December 1, 2002. b. Amendments and Waivers. This Agreement may be amended, and the ---------------------- Company may take any action herein prohibited or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent of Imperial to such amendment, action or omission to act. c. Successors, Assigns and Transferees. This Agreement shall be binding ----------------------------------- upon the parties hereto and their respective successors and assigns. d. Notices. Any notice, request, demand, consent, approval or other ------- communication permitted or required to be given to any of the parties hereunder shall be deemed given when received, shall be in writing, and shall be delivered in person or sent by certified mail, postage prepaid, or by private courier service or by telecopy or telex, to such party at its address set forth below or at such other address as such party may hereunder furnish in writing to the other parties. 11 (i) if to the Company, to: Imperial Credit Mortgage Holdings, Inc. 20371 Irvine Avenue Santa Ana Heights, California 92707 Attention: Joseph R. Tomkinson (ii) if to Imperial: Imperial Credit Advisors, Inc. 23550 Hawthorne Blvd. Building 1, Suite 240 Torrance, California 90505 Attention: Irwin Gubman, Esq. e. Headings. The headings in this Agreement are for the convenience of -------- reference only and shall not limit or otherwise affect the meaning of the interpretation of this Agreement or any provision hereof. f. Severability. In the event that any one or more of the provisions ------------ contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, it being intended that all rights, powers and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. g. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which when so executed shall be deemed an original, and all such counterparts shall together constitute one and the same instrument. h. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the United States of America and, in the absence of controlling federal law, in accordance with the laws of the State of California. i. Reference Provision. ------------------- (i) Each controversy, dispute or claim between the parties arising out of or relating to this Agreement, will be settled by a reference proceeding in Orange County, California, in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor section ("CCP") , which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court of Orange County (the "Court"). The referee shall be a retired Judge of the Court selected by mutual 12 agreement of the parties, and if they cannot so agree within forty-five (45) days after the date of the Contest, the referee shall be promptly selected by the Presiding Judge of the Orange County Superior Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one preemptory challenge pursuant to CCP 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the date of the Contest and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP 644 in any court in the State of California having jurisdiction. Any party may apply for a reference at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and, request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. (ii) Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. (iii) The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. 13 (iv) In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Orange County Superior Court, in accordance with the California Arbitration Act, Sections 1280 through 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. j. Entire Agreement. This Agreement embodies the entire Agreement of the ---------------- parties hereto in relation to the subject matter hereof and supersedes all prior understandings or agreements, oral or written, with respect thereto among the parties hereto. k. Certain Remedies. Without in any way limited the remedies otherwise ---------------- available under this Agreement, the parties hereto acknowledge that, in the event of any breach or nonperformance by any party of the agreements or covenants required by this Agreement to be performed or observed by it, the other parties shall be entitled to such equitable remedies as may be appropriate, including, without limitation specific performance. 14 IN WITNESS WHEREOF, each of the undersigned has executed this Agreement or caused this Agreement to be executed on its behalf as of the date first written above. IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. By:_______________________________________________ Name: Joseph R. Tomkinson Title: Chief Executive Officer IMPERIAL CREDIT ADVISORS, INC. By:_______________________________________________ Name: H. Wayne Snavely Title: Chairman 15 EX-10.26 8 TERMINATION AGREEMENT DATED 12/19/1997 EXHIBIT 10.26 TERMINATION AGREEMENT This Termination Agreement (the "Agreement") is made and entered into as of this 19th day of December, 1997, by and among Imperial Credit Industries, Inc., a California corporation ("ICII"), Imperial Credit Advisors, Inc., a California corporation ("ICAI"), Imperial Credit Mortgage Holdings, Inc., a Maryland corporation ("IMH"), ICI Funding Corporation, a California corporation ("ICIFC"), Joseph R. Tomkinson, an individual ("Tomkinson"), William S. Ashmore, an individual ("Ashmore") and Richard J. Johnson, an individual ("Johnson") (each of Tomkinson, Ashmore and Johnson are each a "Shareholder" and together the "Shareholders"). RECITALS WHEREAS, ICAI is a wholly-owned subsidiary of ICII; WHEREAS, IMH owns 100% of the Preferred Stock of ICIFC and the Shareholders own all the Common Stock of ICIFC; WHEREAS, further to a Loan Agreement dated December 31, 1996 by and between ICIFC and ICII, ICII loaned ICIFC the sum of $45,101,800 bearing interest at 10% per annum, the proceeds of which were used to purchase from ICII certain assets, including the Residual Securities (as that term is defined herein) and on March 31, 1997 a revised loan and security agreement and promissory note (the "Loan Agreement") was executed in the amount of $28,815,223.62 bearing interest at 10% per annum (the "Loan"); WHEREAS, on January 21, 1997, IMH and ICAI entered into an Amended and Restated Management Agreement (the "Management Agreement") pursuant to which ICAI agreed primarily to provide to IMH capital, asset and operations management services in the manner and on the terms set forth therein; WHEREAS, ICII has transferred the Loan to ICAI; WHEREAS, the parties are desirous of terminating the Management Agreement and the Loan Agreement and canceling the Loan subject to the terms and exclusions and satisfaction of the conditions set forth in this Agreement; and WHEREAS, certain capitalized terms used herein are defined in Article I hereof. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein it is hereby covenanted and agreed as follows: ARTICLE I DEFINITIONS 1.1 Certain Definitions. As used in this Agreement, the following terms ------------------- have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined). "Agreed Per Share Value" of IMH's Common Stock shall mean the average of the closing price of IMH's Common Stock as reported by the American Stock Exchange for the five trading day period from and including December 19, 1997 through December 29, 1997. "Agreement" has the meaning set forth in the Recitals hereof. "Bill of Sale" has the meaning set forth in Section 2.3(b) hereof. "CCP" has the meaning set forth in Section 11.5(a) hereof. "Cash Advance" shall mean $300,000 payable by IMH to ICAI as an advance against the Final Advisory Payment. "Closing" has the meaning set forth in Section 2.1 hereof. "Closing Date" has the meaning set forth in Section 2.1 hereof. "Contest" has the meaning set forth in Section 10.2 hereof. "Court" has the meaning set forth in Section 11.5(a) hereof. "Due Amount of Loan" shall mean the outstanding principal balance plus all accrued and unpaid interest due pursuant to the Loan as of the Closing Date (the outstanding principal balance of the Loan and the amount of accrued and unpaid interest as of December 29, 1997 will be $28,903,566.19 and $217,553.72, respectively). "Fairness Opinion" has the meaning set forth in Section 3.5 hereof. "Final Advisory Payment" shall mean all compensation due by IMH to ICAI under Sections 6 and 8 of the Management Agreement for the quarter ending December 31, 1997 prorated through the Closing Date less the Cash Advance. By way of example only, if total compensation due by IMH to ICAI under Sections 6 and 8 of the Management Agreement for the quarter ending December 31, 1997 was calculated at $3.0 million and the date of this Agreement was December 1, 1997, the Final Advisory Payment would be $1,989,130.20, calculated as follows: $3.0 million multiplied by 61 (number of days from and including October 1, 1997 2 through including November 30, 1997) divided by 92 (total number of days from and including October 1, 1997 through and December 31, 1997). "GAAP" means generally accepted accounting principles in the United States as in effect from time to time. "ICII Representatives" shall mean any of the directors, officers, employees, counsel, representatives, accountants and auditors of ICII, ICAI or their subsidiaries. "IMH Common Stock" shall mean shares of Common Stock of IMH. "IMH Representatives" shall mean any of the directors, officers, employees, counsel, representatives, accountants and auditors of IMH, ICIFC or their subsidiaries. "Indemnitee" has the meaning set forth in Section 10.2 hereof. "Indemnitor" has the meaning set forth in Section 10.2 hereof. "Indemnity Claim" has the meaning set forth in Section 10.2 hereof. "Information" has the meaning set forth in Section 6.2(b) hereof. "Lien" means any lien, pledge, mortgage, deed of trust, security interest, claim, charge, option, right of first refusal, covenant, condition, restriction or servitude, transfer restriction under any shareholder or similar agreement or encumbrance. "Loan" has the meaning set forth in the Recitals hereof. "Loan Agreement" has the meaning set forth in the Recitals hereof. "Losses" has the meaning set forth in Section 10.1(a) hereof. "Management Agreement" has the meaning set forth in the Recitals hereof. "1933 Act" has the meaning set forth in Section 3.6 hereof. "Registration Rights Agreement" shall mean that Registration Rights Agreement dated as of the Closing Date by and between ICAI and IMH pursuant to which ICAI has certain rights to request the registration of the Shares; a copy of the Registration Rights Agreement is attached hereto as Exhibit "A." "Residual Securities" shall mean the following assets held by ICIFC (each as more fully described in individual files): Prudential Securities Secured Financing Corporation Trust 1995-1 3 Class R, Prudential Securities Secured Financing Corporation Trust 1994-6 Class R, Southern Pacific Secured Asset Corp. 1995-1 Class R, Southern Pacific Secured Asset Corp. 1995-2, Class R1 and DLJ Mortgage Acceptance Corporation 1995-5 Class RII. "Restricted Security" and "Restricted Securities" have the meanings set forth in Section 3.6 hereof. "Services Agreement" shall mean that Services Agreement dated as of the Closing Date by and between ICAI, on the one hand, and IMH and ICIFC, on the other hand, pursuant to which ICAI will perform certain administrative services for IMH and ICIFC all as more expressly set forth therein; a copy of the Services Agreement is attached hereto as Exhibit "B." "Shares" shall have the meaning set forth in Section 3.2 hereof. "Stifel" has the meaning set forth in Section 3.5 hereof. "Termination Payment" shall have the meaning set forth in Section 3.1(a) hereof. "Termination Payment Certificate" shall have the meaning set forth in Section 3.1(b) hereof. "Unpaid Advisory Certificate" shall have the meaning set forth in Section 3.3(a) hereof. "Unpaid Advisory Payment" shall mean all compensation due by IMH to ICAI under Sections 6 and 8 of the Management Agreement for the three months ended September 30, 1997. "Value of Residual Securities" shall mean the value of each of the Residual Securities as recorded by ICIFC on its general ledger as of the Closing Date excluding the December 25, 1997 distribution, plus all accrued interest up to but not including the date hereof. The parties hereto acknowledge and agree that the value of the Residual Securities and accrued and unpaid interest up to the Closing Date as recorded by ICIFC on its general ledger on December 29, 1997 will be $37,826,676.33 and $257,107.74, respectively, and that said carrying value is not necessarily related to the book value of such Residual Securities as determined in accordance with GAAP and may not reflect amounts which may be actually collected pursuant to said Residual Securities. None of IMH, ICIFC or the Shareholders makes any representations, express or implied, with respect to said Residual Securities, except as otherwise expressly set forth herein. 4 ARTICLE II CLOSING AND TERMINATION 2.1 Closing Date and Location. Subject to the provisions hereof, the ------------------------- closing of the transactions contemplated herein (the "Closing") shall occur at 3:00 p.m. on December 29, 1997, at the offices of Freshman, Marantz, Orlanski, Cooper & Klein, or such different time and place as the parties hereto may set by mutual agreement. The date of the Closing is referred to herein as the "Closing Date." 2.2 Termination. Upon the terms and subject to the satisfaction of the ----------- conditions set forth in this Agreement, as of the Closing Date, the parties hereto agree to terminate the Management Agreement and, the Loan Agreement and cancel the Loan by executing and delivering to each other this Agreement, which execution and delivery shall constitute their agreement that none of the parties hereto shall have any further obligations under the Management Agreement, the Loan Agreement and the Loan, except as otherwise set forth herein in Section 6.3, hereof. None of the assets of ICAI shall be transferred to IMH or ICIFC as a result of this Agreement. 2.3 Acquisition and Transfer of Residual Securities. ----------------------------------------------- (a) At the Closing Date, ICIFC shall assign, transfer, convey and deliver to IMH, and IMH shall acquire and accept from ICIFC, free and clear of Liens, except for those imposed by the Loan Agreement, all of ICIFC's right, title and interest in and to the Residual Securities and the Loan in exchange for cash in the amount of $8,962,664.15; and (b) Upon the terms and subject to the conditions hereinafter set forth, on the Closing Date, IMH shall assign, transfer, convey and deliver to ICAI, and ICAI shall acquire and accept from IMH, free and clear of all Liens, except for those imposed by the Loan Agreement, all of IMH's right, title and interest in and to the Residual Securities, including all products and proceeds of such Residual Securities. Each of IMH and ICIFC shall promptly take all actions necessary to effect the change in title to the Residual Securities at IMH's and ICIFC's sole expense. ARTICLE III TERMINATION PAYMENT, UNPAID ADVISORY PAYMENT AND SERVICES AGREEMENT 3.1 Termination Payment. ------------------- (a) In reliance on the representations and warranties of the parties hereto and in consideration for the termination of the Management Agreement, IMH agrees to pay to ICAI a 5 $44.0 million termination payment (the "Termination Payment") consisting of the following consideration: $35,037,335.85 in IMH Common Stock; and The Residual Securities; and Concurrently herewith the Loan shall be canceled. (b) On the Closing Date, IMH shall deliver to ICII and ICAI a certificate (the "Termination Payment Certificate") dated as of the Closing Date, signed by each of Tomkinson and Johnson in their role as Chief Executive Officer and Chief Financial Officer, respectively, of IMH, certifying as to IMH's calculation of the Termination Payment, the Due Amount of Loan and the Value of Residual Securities as of and through the Closing Date. 3.2 Payment of Termination Fee. The Termination Payment shall be paid by -------------------------- IMH to ICAI as of the Closing Date by delivering to ICAI, as of the Closing Date, a combination of Residual Securities and certificate(s) evidencing shares (the "Shares") of IMH Common Stock in the amounts set forth in Section 3.1(a); concurrently, ICAI shall deliver evidence to IMH that the Loan is canceled. The number of Shares delivered by IMH to ICAI as of the Closing Date shall be based on the Agreed Per Share Value of IMH's Common Stock. All costs and expenses associated with the issuance and delivery of the Shares shall be at IMH's expense. 3.3 Cash Advance. On the date hereof, IMH shall deliver to ICAI cash ------------ representing the Cash Advance by wire transfer of immediately available funds in accordance with wire instructions specified by ICAI; ICAI agrees to immediately dividend the entire amount of the Cash Advance to ICII. 3.4 Unpaid Advisory Payment. ----------------------- (a) On the Closing Date, ICAI shall deliver to IMH a certificate (the "Unpaid Advisory Certificate") dated as of the Closing Date, signed by the Chairman of ICAI, certifying as to ICAI's calculation of the Unpaid Advisory Payment; and (b) IMH shall deliver to ICAI cash representing the Unpaid Advisory Payment by wire transfer of immediately available funds in accordance with wire instructions specified by ICAI; 3.5 Services Agreement and Registration Rights Agreement. On the Closing ---------------------------------------------------- Date, each of ICAI, ICIFC and IMH will execute the Services Agreement, and each of IMH and ICAI will execute the Registration Rights Agreement. 3.6 Fairness Opinion. The parties hereto acknowledge that a condition to ---------------- the obligations of the parties hereto is that the investment banking firm of Stifel Nicolaus & Company, Incorporated ("Stifel") shall have rendered a fairness opinion (the "Fairness Opinion") 6 to IMH's special committee that the transactions referenced in Article II and Sections 3.1 and 3.2 hereof are fair to IMH from a financial point of view and that said special committee shall have approved the Fairness Opinion. 3.7 Restrictions on Transfer. Absent an effective registration statement ------------------------ under the Securities Act of 1933, as amended (the "1933 Act"), covering the disposition of the Shares (individually, a "Restricted Security" and collectively, the "Restricted Securities"), neither ICAI, ICII or any of their subsidiaries or affiliates shall sell, transfer, assign, pledge, hypothecate or otherwise dispose of any of the Restricted Securities without first providing IMH with an opinion of counsel reasonably satisfactory to IMH to the effect that such sale, transfer, assignment, pledge, hypothecation or other disposition is exempt from the registration and prospectus delivery requirements of the 1933 Act and in compliance with (or exempt from) the registration or qualification requirements of any applicable state securities law. 3.8 Restrictive Legend. IMH may cause the following legend (or other ------------------ legend in substantially the same form) to be placed upon each certificate to be delivered to ICAI representing the Restricted Securities and any other securities issued in respect thereof upon any transfer, stock split, stock dividend, recapitalization, merger, consolidation or similar event: "THE SALE, TRANSFER, ASSIGNMENT, PLEDGE OR HYPOTHECATION OF THE SHARES REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"). THESE SHARES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS SUCH TRANSACTION IS DULY REGISTERED UNDER THE ACT OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH TRANSACTION IS EXEMPT FROM THE REGISTRATION PROVISIONS OF THE ACT." 3.9 Transfer Agent. IMH may make a notation on its records or give -------------- instructions to any transfer agent of the Restricted Securities in order to implement the restrictions on transfer of the Restricted Securities set forth in this Article III. 3.10 Removal of Transfer Restrictions. The federal legend imprinted on a -------------------------------- certificate evidencing a Restricted Security pursuant to Section 3.8 shall be removed, and IMH shall issue a certificate without such legend to the holder of such security, (a) if such security is registered under the 1933 Act, (b) if the holder provides IMH with an opinion of counsel reasonably acceptable to IMH or a no-action letter or interpretive opinion of the staff of the Securities and Exchange Commission to the effect that a public sale or transfer of such security may be made without registration under the 1933 Act, or (c) if the holder has complied with the requirements of Rule 144(k) promulgated under the 1933 Act and provides a letter to that effect to IMH. 7 3.11 Delivery of Residual Interests; Instruments of Conveyance and ------------------------------------------------------------- Transfer. - -------- (a) At the Closing Date, each of IMH and ICIFC shall cause to be delivered to ICAI certificates representing the Residual Securities; and (b) IMH shall also at the Closing Date deliver title to the Residual Securities by delivering to ICAI an executed bill of sale substantially in the form of Exhibit "C" hereto (the "Bill of Sale"). ARTICLE IV REPRESENTATIONS AND WARRANTIES OF IMH AND ICIFC Each of IMH and ICIFC jointly and severally represents and warrants to each of ICII and ICAI that: 4.1 Valid Issuance. The Shares to be issued and sold by IMH pursuant to -------------- the terms hereof upon such issuance will be, duly authorized, validly issued, fully paid and nonassessable. 4.2 Corporate Power and Authority. Each of IMH and ICIFC has full ----------------------------- corporate power and authority to enter into this Agreement. This Agreement has been duly authorized, executed and delivered by each of IMH and ICIFC and constitutes a valid and binding agreement of each of IMH and ICIFC and is enforceable against each of IMH and ICIFC in accordance with its terms, except as the enforceability hereof may be limited by applicable bankruptcy, insolvency, reorganization and similar laws affecting creditors' rights generally and moratorium laws in effect from time to time and by equitable principles restricting the availability of equitable remedies. The execution and delivery by each of IMH and ICIFC of, and the performance by each of IMH and ICIFC of their respective obligations under, this Agreement, the consummation of the transactions contemplated hereby and sale of the Shares to be sold by the Company in the manner set forth herein will not result in the creation or imposition of any Lien upon any of the assets of either IMH, ICIFC or any of their subsidiaries pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under any indenture, mortgage, deed of trust, lease or other agreement or instrument to which either IMH, ICIFC or any of its subsidiaries is a party or by which either IMH, ICIFC or any of their subsidiaries or any of its properties is bound or affected, or the charter or by-laws of either IMH or ICIFC, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of either IMH, ICIFC or any of its subsidiaries the effect of any of which, individually or in the aggregate, might have a material adverse effect of either of IMH or ICIFC. 4.3 Consent and Approvals. No consent, approval, authorization or order --------------------- of, or any filing or declaration with, any court or governmental agency or body is required in connection 8 with the authorization, issuance, transfer, sale or delivery of the Shares by IMH, in connection with the execution, delivery and performance of this Agreement by either IMH, ICIFC or in connection with the taking by either IMH or ICIFC of any other action contemplated hereby. 4.4 Litigation. There is no legal proceeding pending or, to the knowledge ---------- of either of IMH or ICIFC, threatened, that seeks to enjoin or obtain damages in respect of the consummation of the transactions contemplated by this Agreement or that questions the validity of this Agreement or any action taken or to be taken by either of IMH or ICIFC in connection with the consummation of the transactions contemplated hereby. 4.5 Listing of Shares. The Shares are duly authorized for listing, ----------------- subject to official notice of issuance, on the American Stock Exchange and no procedure is pending, or to IMH or ICIFC's knowledge threatened, with respect to the delisting of IMH's Common Stock on the American Stock Exchange. Such listing shall be at IMH's expense. 4.6 Title to Residual Securities. ---------------------------- (a) At the time of the transfer of the Residual Securities from IMH to ICAI pursuant to this Agreement, IMH will own and will have good and valid, marketable title to all of the Residual Securities, free and clear of all Liens, except those imposed by the Loan Agreement; and (b) Upon consummation of the transactions contemplated hereby, ICII will have acquired, on and as of the date hereof, good and valid title in and to the Residual Securities, free and clear of all Liens. ARTICLE V REPRESENTATIONS AND WARRANTIES OF ICII AND ICAI Each of ICII and ICAI jointly and severally represents warrants and covenants to each of IMH and ICIFC that: 5.1 Organization and Good Standing. Each of ICII and ICAI is a corporation ------------------------------ duly organized, validly existing and in good standing under the laws of the State of California, and has all requisite corporate power and authority to carry on its business as it is now being conducted. 5.2 Corporate Power and Authority. Each of ICII and ICAI has full ----------------------------- corporate power and authority to enter into this Agreement. This Agreement has been duly authorized, executed and delivered by each of ICII and ICAI and constitutes a valid and binding agreement of each of ICII and ICAI and is enforceable against each of ICII and ICAI in accordance with its terms, except as the enforceability hereof may be limited by applicable bankruptcy, insolvency, reorganization and similar laws affecting creditors' rights generally and moratorium laws in effect 9 from time to time and by equitable principles restricting the availability of equitable remedies. The execution and delivery by each of ICII and ICAI of, and the performance by each of ICII and ICAI of their respective obligations under, this Agreement and the consummation of the transactions contemplated hereby will not result in the creation or imposition of any Lien upon any of the assets of either ICII, ICAI or any of their subsidiaries pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under any indenture, mortgage, deed of trust, lease or other agreement or instrument to which either ICII, ICAI or any of its subsidiaries is a party or by which either ICII, ICAI or any of their subsidiaries or any of its properties is bound or affected, or the charter or by-laws of either ICII or ICAI, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of either ICII, ICAI or any of its subsidiaries the effect of any of which, individually or in the aggregate, might have a material adverse effect on the business or operations of either ICII or ICAI. 5.3 Consent and Approvals. No consent, approval, authorization or order --------------------- of, or any filing or declaration with, any court or governmental agency or body is required in connection with the execution, delivery and performance of this Agreement by either ICII, ICAI or in connection with the taking by either ICII or ICAI of any other action contemplated hereby. 5.4 Litigation. There is no legal proceeding pending or, to the knowledge ---------- of either of ICII or ICAI, threatened, that seeks to enjoin or obtain damages in respect of the consummation of the transactions contemplated by this Agreement or that questions the validity of this Agreement or any action taken or to be taken by either of ICH or ICAI in connection with the consummation of the transactions contemplated hereby. 5.5 Investor Representations. Each of ICII and ICAI has received all ------------------------ periodic reports filed by IMH under the Securities Exchange Act of 1934, as amended, and is familiar with the terms and conditions and other information set forth therein. Each of ICII and ICAI has had the opportunity to ask of IMH and ICIFC, or a person or persons acting on their behalf, any and all relevant questions in connection with any aspect of IMH and ICIFC and has received answers which each of ICII and ICAI considers to be responsive to such questions. ICII is able to bear the economic risk of the investment represented by the Shares. In considering this investment, each of ICII and ICAI is not relying on any representation, warranty or statement made by either IMH, ICIFC or any of their respective agents, employees, officers or representatives not specifically referenced herein or in any document attached hereto. Without limiting the foregoing, each of ICII and ICAI specifically disclaims any reliance on any written or oral information, representations and warranties previously provided regarding the Residual Securities, except to the extent expressly set forth herein. Each of ICII and ICAI understands that (a) if any of the Residual Securities fail to generate cash flow, there will be no funds payable thereunder to either ICII or ICAI, (b) if any of the Residual Securities is not performing, it is subject to downgrade by one or more of the rating agencies, (c) the Residual Securities are subject to certain triggers for 10 losses and delinquencies, and (d) as a general matter, the Residual Securities involve a high degree of risk and may entail a risk of total loss. Each of ICII and ICAI covenants and representations that each of them is familiar with the risks inherent in Residual Securities. In addition, each of ICAI and ICII: (a) acknowledges that the Shares to be acquired by it pursuant to this Agreement are not registered under the 1933 Act or qualified under any applicable state securities laws on the ground that the sale provided for in this Agreement and the issuance of securities is exempt from the registration requirements of the 1933 Act, and state law exemptions relating to offers and sales in private placements to accredited investors; (b) represents that it is an accredited investor within the meaning of Rule 501 of Regulation D promulgated under the 1933 Act; (c) understands that the Shares must be held until subsequently registered under the 1933 Act or an exemption from such registration is available; and (d) represents that either it has a preexisting personal or business relationship with IMH or its principals or, by reason of its business or financial experience, it has the capacity to protect its own interests in connection with this transaction. 5.6 Sale of the Shares. ICAI agrees that it will sell the Shares received ------------------ pursuant to this Agreement as soon as practicable. ARTICLE VI ADDITIONAL AGREEMENTS 6.1 Public Announcements. The parties hereto acknowledge that a public -------------------- announcement regarding the matters set forth herein was made on December 19, 1997, a copy of which is attached hereto as Exhibit "D." Neither IMH or ICIFC on the one hand (nor any of their affiliates) nor ICII or ICAI on the other hand (nor any of their affiliates) shall make any public statement from the date of this Agreement forward, including, without limitation, any press release, with respect to this Agreement and the transactions contemplated hereby, without the prior written consent of the other party (which consent may not be unreasonably withheld), except as may be required (a) by law or (b) in the case of IMH or ICII, pursuant to the obligations of IMH or ICII resulting from the inclusion of their common stock on the American Stock Exchange and the Nasdaq National Market, respectively. 6.2 Confidential Information. ------------------------ (a) Each of IMH and ICIFC on the one hand and ICII and ICAI on the other agree: (i) to hold in trust and maintain confidential, (ii) not to disclose to others without prior 11 written approval from the disclosing party, and (iii) to prevent duplication of and disclosure to any other party, any Information received from the disclosing party or developed, presently held or continued to be held, or otherwise obtained, by the receiving party under this Agreement, the Loan Agreement or the Management Agreement; (b) "Information" shall mean all results of services provided under the Management Agreement and Information disclosed by either party orally, visually, in writing, or in other tangible form, and includes, but is not limited to, technical, economic plans, computer Information data bases, customer lists and the like obtained, prepared or otherwise provided further to this Agreement, the Loan Agreement or the Management Agreement; and (c) The foregoing obligations of confidentiality, non-disclosure and non-use shall not apply to any Information to the extent that the obligated party can show that: (i) such Information is or becomes knowledge generally available to the public other than through the acts or omissions of the obligated party; (ii) such Information is subsequently received by the obligated party on a non-confidential basis from a third party who did not receive it directly or indirectly from the disclosing party; (iii) such Information is developed independently by the obligated party without reference to the Information, or (iv) disclosure of such Information is required under applicable law or regulations. Specific elements of Information shall not be deemed to come under the above exceptions merely because they are embraced by more general Information which is or becomes public knowledge. 6.3 Payment of Final Advisory Payment. IMH shall pay the Final Advisory --------------------------------- Payment to ICAI after the date hereof in accordance with the terms and conditions set forth in Sections 6 and 8 of the Management Agreement. 6.4 Acknowledgment of Shareholders. Each of the Shareholders, by their ------------------------------ execution hereof, acknowledges that no amounts are due and owing to any of them by either ICAI or ICII pursuant to the Management Agreement and hereby release, each of ICAI and ICII from any amounts which may be owing to them by ICAI or ICII pursuant to the Management Agreement. 6.5 Termination Fee. Each of the parties hereto agrees to treat the --------------- delivery of the Termination Payment as the payment of a termination fee, which is income to ICAI. ARTICLE VII CONDITIONS TO IMH'S AND ICIFC'S OBLIGATIONS AT CLOSING 7.1 The obligations of each of IMH and ICIFC under this Agreement are subject to the fulfillment on or before the Closing Date of each of the following conditions, any of which may be waived by each of IMH and ICIFC at its sole discretion: 12 (a) The representations and warranties of each of ICII and ICAI set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date; (b) ICAI shall have entered into the Services Agreement; (c) ICAI shall have entered into the Registration Rights Agreement; (d) Each of ICII and ICAI shall have performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by each of them on or before the Closing Date; (e) Each of ICII and ICAI shall have delivered to IMH Certificates, dated as of the Closing Date executed by each of their Chairmen, certifying that, the representations made in Article V are true and correct and that the conditions specified in Sections 7.1(a) and 7.1(d) have been fulfilled; (f) Stifel shall have delivered to IMH's Special Committee verification that the Fairness Opinion, dated as of December 19, 1997, is in full force and effect as of the Closing Date; (g) If, as a result of the transactions contemplated by this Agreement, ICAI will own in excess of 9.5% of the outstanding common stock of IMH, ICAI shall have delivered to IMH a certificate, reasonably acceptable to IMH, providing that ICAI's ownership of the Shares will not cause any "individual" (as defined in Section 542 of the Internal Revenue Code) or other person (other than ICII and its affiliates) to own in excess of 9.5% of the common stock of IMH; and (h) Each of ICII and ICAI shall have delivered to IMH certified copies of resolutions of the Board of Directors of each of ICII and ICAI authorizing and approving the execution, delivery and performance of this Agreement and each additional agreement or other document required hereunder. ARTICLE VIII CONDITIONS TO ICII'S AND ICAI'S OBLIGATIONS AT CLOSING The obligations of each of ICII and ICAI under this Agreement are subject to the fulfillment on or before the Closing Date of each of the following conditions, any of which may be waived by each of ICII and ICAI at its sole discretion: (a) The representations and warranties of each of IMH and ICIFC set forth in Article III shall be true and correct as of the date of this Agreement and as of the Closing Date; 13 (b) IMH and ICIFC shall have entered into the Services Agreement; (c) IMH shall have entered into the Registration Rights Agreement; (d) Each of IMH and ICIFC shall have performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by each of IMH and ICIFC on or before the Closing Date; and (e) Each of IMH and ICIFC shall have delivered to ICII Certificates dated as of the Closing Date executed by each of their Chairmen certifying that the representations made in Article IV are true and correct and that the conditions specified in Sections 8.1(a) and 8.1(d) have been fulfilled; (f) If, as a result of the transactions contemplated by this Agreement, ICAI will own in excess of 9.5% of the outstanding common stock of IMH, IMH shall deliver to ICAI a copy of a board resolution of IMH permitting ICAI to own the Shares notwithstanding the stock ownership limit set forth in IMH's charter; and (g) Each of IMH and ICIFC shall have delivered to ICII certified copies of resolutions of the Board of Directors of each of IMH and ICIFC authorizing and approving the execution, delivery and performance of this Agreement and each additional agreement or other document required hereunder. ARTICLE IX DELIVERY 9.1 Items/Documents Delivered and Exchanged. At the Closing Date, subject --------------------------------------- to the other terms and conditions of this Agreement, the following items and documents as well as any other appropriate items and documents specified herein, properly executed, shall be delivered by and to the appropriate parties: (a) To be delivered by IMH: (i) stock certificate(s) evidencing the Shares; (ii) the Services Agreement, as executed by IMH; (iii) the Registration Rights Agreement, as executed by IMH; (iv) resolutions of IMH's Board of Directors authorizing the transactions referenced herein, certified by IMH's Secretary; 14 (v) the Closing Calculation, including the Value of Residual Securities and the Due Amount of Loan determined as of the Closing Date; (vi) the Unpaid Advisory Payment; (vii) Certificates evidencing the Residual Securities; (viii) the Bill of Sale; and (ix) the Officer's Certificate referenced in Section 7.1(e) hereof. (b) To be delivered by ICII: (i) resolutions of ICII's Board of Directors authorizing the transactions referenced herein, certified by ICII's Secretary; and (ii) the Officer's Certificate referenced in Section 8.1(e) hereof. (c) To be delivered by ICAI: (i) evidence that the Loan has been deemed repaid in full; (ii) the Services Agreement, as executed by ICAI; (iii) the Registration Rights Agreement, as executed by ICAI; (iv) resolutions of ICAI's Board of Directors authorizing the transactions referenced herein, certified by ICAI's Secretary; and (v) the Officer's Certificate referenced in Section 7.1(e) hereof. (d) To be delivered by ICIFC: (i) the Services Agreement, executed by ICIFC; (ii) resolutions of ICIFC's Board of Directors authorizing the transactions referenced herein, certified by ICIFC's Secretary; and (iii) the Officer's Certificate referenced in Section 8.1(e) hereof. 15 ARTICLE X INDEMNIFICATION 10.1 Indemnification. --------------- (a) ICII and ICAI jointly and severally agree to indemnify and hold IMH, ICIFC and each of the IMH Representatives harmless from and against any and all liabilities, obligations, damages, losses, deficiencies, costs, penalties, interest and expenses (collectively, "Losses") incurred or suffered by either IMH, ICIFC or any IMH Representative arising out of, based upon, attributable to or resulting from: (i) any breach of representation or warranty made herein by either ICII or ICAI; (ii) the failure of either ICII or ICAI to comply with any of the covenants contained in this Agreement which are required to be performed by either ICII or ICAI; (iii) any intentional misstatements of fact made by ICAI in connection with the Management Agreement and the services rendered thereunder or for any acts or omissions performed by ICAI, its directors, officers, shareholders and employees in accordance with the Management Agreement constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties; and (iv) all actions, suits, proceedings, demands, assessments, judgments, costs, penalties and expenses, including reasonable attorneys' fees, incident to the foregoing. (b) Each of IMH and ICIFC jointly and severally agrees to indemnify and hold ICII, ICAI and each of the ICII Representatives harmless from and against any and all Losses incurred or suffered by ICII, ICAI or any ICII Representative arising out of, based upon, attributable to or resulting from: (i) any breach of representation or warranty made herein by either IMH or ICIFC; (ii) the failure of either IMH or ICIFC to comply with any of the covenants contained in this Agreement which are required to be performed by either IMH or ICIFC; (iii) any acts or omissions of ICAI, its stockholders, directors, officers and employees made in good faith in the performance of ICAI's duties under the 16 Management Agreement and not constituting bad faith, willful misconduct, gross negligence or reckless disregard of its duties; and (iv) all actions, suits, proceedings, demands, assessments, judgments, costs, penalties and expenses, including reasonable attorneys' fees, incident to the foregoing. 10.2 Notice of Indemnification. In the event any legal proceeding (an ------------------------- "Indemnity Claim") shall be threatened or instituted or any claim or demand shall be asserted by any person in respect of which payment may be sought by one party hereto from the other party under the provisions of this Article X, the party seeking indemnification (the "Indemnitee") shall promptly cause written notice of the assertion of any such claim of which it has knowledge which is covered by this indemnity to be forwarded to the other party (the "Indemnitor"). Any notice of a claim by reason of any of the representations, warranties or covenants contained in this Agreement shall state specifically the representation, warranty or covenant with respect to which the Indemnity Claim is made, the facts giving rise to an alleged basis for the claim, and the amount of the liability asserted against the Indemnitor by reason of the Indemnity Claim. Within thirty (30) days of the receipt of such written notice, the Indemnitor shall notify the Indemnitee in writing of its intent to contest its obligation to indemnify or reimburse under this Agreement (a "Contest") or to accept liability hereunder. If the Indemnitor does not respond within thirty (30) days to such written notice, the Indemnitor will be deemed to accept liability. In the event of a Contest, within ten (10) business days of the receipt of the written notice thereof, the parties will submit the dispute further to Section 11.5 herein. 10.3 Indemnification Procedure for Third-Party Claims. In the event of any ------------------------------------------------ Indemnity Claim brought by a third party, Indemnitor shall promptly notify the Indemnitee of such Indemnity Claim, specifying in reasonable detail the Indemnity Claim and the circumstance under which it arose, and the amount of the liability asserted against the Indemnitee by reason of the Indemnity Claim. Within ten (10) business days of the receipt of such notice (or sooner if the nature of the Indemnity Claim so requires) the Indemnitor shall notify the Indemnitee of its intent to compromise or defend such Indemnity Claim or to Contest. Any Contest shall be governed by the provisions of Section 10.2 herein. The Indemnitor may elect to compromise or defend, at its own expense and by its own counsel, any such Indemnity Claim. If the Indemnitor elects to compromise or defend such Indemnity Claim, the Indemnitee shall cooperate, at the expense of the Indemnitor, in the compromise of, or defense against, such Indemnitee Claim. If the Indemnitor fails to notify the Indemnitee of its election as herein provided or loses the Contest as provided in 10.2 herein, the Indemnitee may pay, compromise or defend such Indemnity Claim. Except as otherwise provided herein, in the event of the initiation of any Indemnity Claim against an Indemnitee by a third party and the Indemnitor elects to compromise or defend, the Indemnitor shall have the absolute right after the receipt of notice, at its option and at its own expense, to be represented by counsel of its choice, and to defend against, negotiate, settle or otherwise deal with any Indemnity Claim,; provided, however, that the Indemnitee may participate in any -------- ------- such proceeding with counsel of its choice and at its expense and the Indemnitor shall not settle any 17 such Indemnity Claim unless the Indemnitor is fully released without any admission of liability. The parties hereto agree to cooperate fully with each other in connection with the defense, negotiation or settlement of any such Indemnity Claim. To the extent the Indemnitor elects not to defend such Indemnity Claim, and the Indemnitee defends against or otherwise deals with any such Indemnity Claim, the Indemnitee may retain counsel, at the expense of the Indemnitor, and control the defense of such Indemnity Claim. If the Indemnitee shall settle any such Indemnity Claim without the consent of the Indemnitor, the Indemnitee shall thereafter have no claim against the Indemnitor under this Article X with respect to any loss, liability, claim, obligation, damage and expense occasioned by such settlement. 10.4 Indemnification Payments. The Indemnitor shall pay any sums due and ------------------------ owing by it to the Indemnitee by wire transfer or certified check within ten (10) days after the date of the determination of liability pursuant to this Article X. Any overdue amounts payable by the Indemnitor shall bear interest at an annual rate of 9% per annum, based on a year of 365 days and the number of days elapsed. ARTICLE XI MISCELLANEOUS 11.1 Assignment or Transfer. No party shall assign or transfer any of its ---------------------- rights under this Agreement without the prior written approval of the other parties, except no such approval shall be required for an assignment to an affiliate or a successor to all or a substantial portion of the assets or the business of a party, provided that such affiliate or successor assumes such party's obligations hereunder with respect to the rights assigned or transferred. 11.2 Notices. All notices, requests, demands and other communications ------- provided for hereunder shall be in writing (including telegraphic or facsimile communications) and shall be mailed (return receipt requested), telegraphed, sent by facsimile or delivered to each party at the address set forth as follows, or at such other address as either party may designate by notice to the other, and any such notice, request, demand or other communication shall be effective upon receipt. All payments required in this Agreement shall be paid to and delivered to the party as provided herein for notice. If to IMH or ICIFC: Imperial Credit Mortgage Holdings, Inc. 20371 Irvine Avenue Santa Ana Heights, California 92707 Telephone: (714) 556-0122 Facsimile: (714) 428-2150 Attention: Joseph R. Tomkinson Chief Executive Officer 18 If to ICII or ICAI: Imperial Credit Industries, Inc. 23550 Hawthorne Boulevard Building 1, Suite 240 Torrance, California 90505 Telephone: (310) 791-8040 Facsimile: (310) 791-8230 Attention: Irwin L. Gubman, Esq. General Counsel 11.3 Severability. In the event any provision of this Agreement is held ------------ invalid or unenforceable, such holding shall not invalidate nor render unenforceable any other provision hereof. 11.4 Governing Law. This Agreement shall be construed in accordance with ------------- the laws of the State of California. 11.5 Reference Provision. ------------------- (a) Each controversy, dispute or claim between the parties arising out of or relating to this Agreement, pursuant to Article X hereof, will be settled by a reference proceeding in Orange County, California, in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor section ("CCP") , which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court of Orange County (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the date of the Contest, the referee shall be promptly selected by the Presiding Judge of the Orange County Superior Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one preemptory challenge pursuant to CCP 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the date of the Contest and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP 644 in any court in the State of California having jurisdiction. Any party may apply for a reference at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal 19 objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and, request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. (b) Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. (c) The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. (d) In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Orange County Superior Court, in accordance with the California Arbitration Act, Sections 1280 through 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. 11.6 Counterparts. This Agreement may be executed in any number of ------------ 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 instrument. 20 IN WITNESS WHEREOF, this Termination Agreement is made as of the day and year first above written. IMPERIAL CREDIT INDUSTRIES, INC. By: /s/ Irwin Gubman ------------------------------------------------ Name: Irwin Gubman Title: General Counsel and Secretary IMPERIAL CREDIT ADVISORS, INC. By: /s/ Irwin Gubman ------------------------------------------------- Name: Irwin Gubman Title: General Counsel and Secretary IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. By: /s/ Joseph R. Tomkinson --------------------------------------------- Name: Joseph R. Tomkinson Title: Chief Executive Officer ICI FUNDING CORPORATION By: /s/ Joseph R. Tomkinson -------------------------------------------- Name: Joseph R. Tomkinson Title: Chief Executive Officer /s/ Joseph R. Tomkinson --------------------------------------------- Joseph R. Tomkinson /s/ William S. Ashmore ----------------------------------------------- William S. Ashmore /s/ Richard J. Johnson ------------------------------------------------ Richard J. Johnson 21 EX-10.27 9 PROMISSORY NOTE--SECURED EXHIBIT 10.27 PROMISSORY NOTE SECURED BY -------------------------- STOCK PLEDGE AND DEED OF TRUST ------------------------------ Lender: Borrower: Imperial Credit Industries, Inc. H. Wayne Snavely 23550 Hawthorne Boulevard 2500 Paseo Del Mar Building 1, Suite 240 Palos Verdes Estates, CA 90274 Torrance, California 90505 FOR VALUE RECEIVED, the undersigned, H. Wayne Snavely, promises to pay to the order of the above-named Lender, its successors and assigns, at the above address or at such other place as Lender may designate in writing, in lawful money of the United States of America, the sum of One Million Nine Hundred Ninety Nine Thousand Nine Hundred and Ninety Eight Dollars ($1,999,998) together with interest thereon from the date hereof at the interest rate described below (the "Interest Rate") on the principal balance in the manner provided below: 1. Security, Payments, Interest. At Borrower's expense, this Promissory ---------------------------- Note has been secured by Borrower having pledged to Lender (i) 143,369 shares of common stock of Imperial Credit Commercial Mortgage Investment Corp. (the "Stock") in the form of a Security Agreement (Pledge of Securities) and (ii) that certain "Straight Note" and Deed of Trust, and the proceeds thereof, executed on June 4, 1997, by Ronald P. Padilla for the benefit of H. Wayne Snavely, in the amount of $967,500, the recorded Deed of Trust encumbering property known as Parcel 2, Book 102, Page 32 of Parcel Maps for the City of Huntington Beach, Orange County, California (the "Property"), and Lender shall have all rights and remedies to which a secured party is entitled under California law. Payments made by Borrower shall be applied first to the payment of the charges and interest accrued on the unpaid principal balance as of the date of receipt and the remainder, if any, shall be applied to the reduction of the unpaid principal, except upon default Lender will allocate payment(s) to principal, interest, and/or charges in its discretion. This Note shall bear interest on the unpaid principal balance hereof from time to time outstanding at an Interest Rate of 10.4% per annum. All interest shall be calculated on the basis of a three hundred sixty five (365) day year. Interest shall be paid to the Lender from the date hereof semi-annually in arrears on June 15 and December 15 of each year, commencing June 15, 1998. The outstanding principal and all remaining accrued interest shall be payable in one installment on June 14, 2002, unless extended by Lender at its sole discretion. This Note may be prepaid, in whole or in part, at any time without penalty. -1- 2. Default. Upon failure to pay any payment when due or to perform any ------- obligation, covenant, or agreement contained in this Note or any other documents provided by Borrower to Lender to induce Lender to make the loan evidenced by this Note, or should any statement contained therein be found to be false or misleading in any material respect; or should Borrower make an assignment for the benefit of creditors, or if a petition be filed by or against Borrower under any state insolvency law or under the Bankruptcy Code, as amended and not dismissed or discharged within 60 days; or, if the Borrower shall sell, transfer, convey or alienate the Stock or the Property, or any part thereof, or any interest therein, or shall be divested of his title or any interest therein in any manner or way, whether voluntarily or involuntarily, without the written consent of the Lender being first had and obtained; then Borrower shall be in default under this Note, and the whole sum of principal, interest, charges and advances, if any, shall become immediately due and payable at Lender's option and without notice. The acceptance of any payment of principal or interest by Lender after the time when it becomes due, as herein specified, shall not be held to establish a custom, or to waive any rights of Lender to enforce payment or assert any other rights, nor shall any failure or delay to exercise any rights be held to waive the same. The rights or remedies of Lender as provided in this Note may be pursued singly, successively, or together against Borrower at the sole discretion of the Lender. 3. Attorneys' Fees and Other Expenses. Borrower shall pay upon demand ---------------------------------- reasonable attorneys' fees, and all other out-of-pocket expenses, including filing, recording, or other costs or fees incurred by Lender in connection with this Note, including attorneys' fees incurred by Lender if: (a) legal counsel is engaged to assist in the collection of this Note after a default hereunder whether or not suit is instituted, (b) any action is brought which may significantly affect Lender's rights, such as an action to cancel, rescind, construe or enforce this Note or to enforce laws or regulations in connection therewith, or (c) Borrower becomes subject to a proceeding under the provisions of the Bankruptcy Code and Lender in the exercise of prudent business practices engages counsel to represent the interests of Lender. 4. Compliance With Laws. All of the terms and provisions of this Note -------------------- shall be construed in compliance with all applicable laws. If any charge or fee due hereunder is invalid, unenforceable or excessive under any law, then such charge or fee shall be deemed modified or reduced to the extent required by law, and any such sums collected by Lender in excess of the maximum amount permitted by such law shall, at Lender's option, be refunded to Borrower or reapplied to any principal, interest, deficiency or other amounts due hereunder and Lender shall have no further liability to Borrower as a result thereof. -2- 5. Assignment. Lender shall have the right to sell, assign, or otherwise ---------- transfer, either in part or in its entirety, this Note and any other instrument evidencing indebtedness of this Note without Borrower's consent. This Note and all of the covenants, promises, and agreements contained in it shall be binding on and inure to the benefit of their respective legal representatives, successors, and assigns. 6. Entire Agreement. This Note and the security agreements referenced in ---------------- Paragraph 2 above contain the entire agreement between the Lender and Borrower with respect to the subject matter hereof and supersede any and all prior arrangements, proposals or understandings, written or oral, by or between Lender and Borrower with respect to all transactions contemplated by this Note and the terms hereunder. In the event of any conflict or inconsistency between any provision of this Note and any provision of any other document or writing executed by Lender and/or Borrower, the provision of this Note shall take precedence and shall control, unless the conflicting or inconsistent provision in such other document or writing specifically refers to this Note and specifically states that it shall prevail. No amendment or modification of this Note shall be effective for any purpose unless the same be in writing and duly executed by both Lender and Borrower. 7. Severability of Provisions. If any provision or any portion of any -------------------------- provision of this Note or the application of any such provision or any portion thereof to any person or circumstance, shall be held invalid or unenforceable, to the extent permitted by law, the remaining portion of such provision and the remaining provisions of this Note or the application of such provision or portion of such provision as is held invalid or unenforceable to persons or circumstances other than those to which it is held invalid or unenforceable, shall not be affected thereby. 8. Miscellaneous. No delay or omission on the part of Lender in ------------- exercising any rights under this Note on default by Borrower shall operate as a waiver of such right or of any other right under this Note, for the same default or any other default. The pleading of any statute of limitations as a defense to the obligations evidenced by this Note is waived. Time is of the essence for each and every obligation under this Note. This Note shall be construed according to and governed by the laws of the State of California. IN THE EVENT ACTION IS INSTITUTED UNDER THIS NOTE, BORROWER WAIVES RIGHT TO TRIAL BY JURY. DATED: October 21, 1997 /s/ H. Wayne Snavely -------------------- H. Wayne Snavely -3- SECURITY AGREEMENT ------------------ (Pledge of Securities) THIS SECURITY AGREEMENT is made this 21st day of October 1997, between H. Wayne Snavely ("Debtor") and Imperial Credit Industries, Inc. ("Secured Party"). Recitals -------- A. Secured Party as lender has entered into a loan transaction evidenced by a promissory note of even date herewith providing for the loan of $1,999,998 (the "Loan") to Debtor as borrower. B. As a condition of the Loan, Secured Party requires that Debtor grant to Secured Party a security interest in certain securities owned by Debtor. WHEREFORE, Debtor and Secured Party, intending to be legally bound, agree as follows: Debtor hereby transfers, assigns, pledges and grants to Secured Party a security interest in all those certain securities and stock certificates (herein "Collateral") described in Exhibit A appended hereto, which Debtor has this day delivered to and deposited with Secured Party; and all new securities or other property (except dividends) which Debtor may become entitled to receive on account of any of the Collateral and all proceeds of the Collateral. This Security Agreement secures: (a) Debtor's payment and performance as and when due of all amounts and obligations under the Loan (the "Obligations") of even date executed by Debtor in favor of Secured Party; (b) any and all extensions, modifications and renewals of the Obligations; (c) repayment of all sums and amounts that may be advanced or expended by Secured Party for the protection of the Collateral or any part thereof; and (d) any and all other sums that may hereafter be advanced by Secured Party to and for the benefit of Debtor and other amounts due to Secured Party hereunder. Debtor hereby warrants and represents to Secured Party that Debtor is the sole and absolute owner of the Collateral, free and clear of all liens, encumbrances, adverse claims and security interests, except the security interest herein granted to Secured Party, and that Debtor has the power and authority to pledge, transfer and deliver the interest created hereby. Secured Party may retain custody of the Collateral until all obligations are fully paid. Secured Party will not be responsible for loss in value of the Collateral or have any duty to take steps to preserve rights against third parties by legal proceedings or otherwise. Secured Party's sole duty shall be to use reasonable care in the custody and physical preservation of the Collateral in Secured Party's possession. In the event any of the Collateral has depreciated by fifty percent (50%) or more of its closing value as quoted by the Wall Street Journal of even date herewith, then Secured Party may at its option, whether or not the Obligations are in default, upon 3 days prior notice to Debtor, and provided Debtor does not within that time provide substitute collateral satisfactory to Secured Party, sell such Collateral and deposit the proceeds of any such sale into a certificate account to be held by Secured Party. The terms of this Agreement shall continue to apply to all proceeds held in such account. At any time, at Debtor's expense and without notice to Debtor, Secured Party may register in its own name or that of its nominee any securities held as Collateral, and in connection therewith, may deposit and deliver any and all securities to any committee, depository transfer agent, registrar, or other designated agency on such terms and conditions as it may determine. If Debtor shall fail to pay any of the Obligations secured hereby at the time and in the manner required, Secured Party may, at its option, immediately proceed to enforce its security interest according to law, or Secured Party may, at its option, sell and dispose of the same and from the proceeds of sale retain all costs and charges incurred by it in the sale of the Collateral, including reasonable attorneys fees thereby incurred; take all sums due it under any of the Obligations and the provisions hereof, including reasonable attorneys fees; and any surplus of such proceeds remaining shall be paid to Debtor. In addition, Secured Party may exercise any and all rights and remedies of a Secured Party as provided by law, including without limitation all rights and remedies under the California Uniform Commercial Code. Upon the sale of Collateral, Secured Party may bid and make a purchase of the Collateral, or any part thereof. No act, delay or omission, or course of dealing between Debtor and Secured Party shall be a waiver of any of Secured Party's rights or remedies under this Agreement. No waiver, change, modification, or discharge in whole or in part of this Agreement or of any obligation will be effective unless in writing signed by Secured Party. A waiver by Secured Party of any rights or remedies by Secured Party under the terms of this Agreement or with respect to any obligation an any occasion will not be a bar to the exercise of any right or remedy of any subsequent occasion. This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective heirs, executors, administrators, successors and assigns. This Security Agreement shall be governed by and construed in accordance with California law. In the event any action is instituted under this Security Agreement, or to determine the rights or remedies of the parties thereto, the prevailing party shall be entitled to recover reasonable attorneys fees and expenses. -2- IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. Secured Party: By:/s/ Irwin L. Gubman ------------------- IRWIN L. GUBMAN Debtor: By:/s/ H. Wayne Snavely -------------------- H. WAYNE SNAVELY -3- EX-10.28 10 PROMISSORY NOTE--SECURED EXHIBIT 10.28 PROMISSORY NOTE SECURED BY -------------------------- STOCK PLEDGE AND DEED OF TRUST ------------------------------ Lender: Borrower: Imperial Credit Industries, Inc. Kevin E. Villani 23550 Hawthorne Boulevard 5658 Dolphin Place Building 1, Suite 240 La Jolla, CA 92037 Torrance, California 90505 FOR VALUE RECEIVED, the undersigned, Kevin E. Villani, promises to pay to the order of the above-named Lender, its successors and assigns, at the above address or at such other place as Lender may designate in writing, in lawful money of the United States of America, the sum of Nine Hundred Ninety Nine Thousand, Nine Hundred Ninety Two Dollars ($999,992) together with interest thereon from the date hereof at the interest rate described below (the "Interest Rate") on the principal balance in the manner provided below: 1. Security, Payments, Interest. At Borrower's expense, this Promissory ---------------------------- Note has been secured by Borrower having pledged to Lender (i) 71,684 shares of common stock of Imperial Credit Commercial Mortgage Investment Corp. (the "Stock") in the form of a Security Agreement (Pledge of Securities) and (ii) that certain Deed of Trust, and the proceeds thereof, executed by Jane E. Villani under Power of Attorney Special from Kevin E. Villani for the benefit of Imperial Credit Industries, Inc. the recorded Deed of Trust encumbering property known as 5322 Calumet Avenue, La Jolla, California (the "Property"), and Lender shall have all rights and remedies to which a secured party is entitled under California law. Payments made by Borrower shall be applied first to the payment of the charges and interest accrued on the unpaid principal balance as of the date of receipt and the remainder, if any, shall be applied to the reduction of the unpaid principal, except upon default Lender will allocate payment(s) to principal, interest, and/or charges in its discretion. This Note shall bear interest on the unpaid principal balance hereof from time to time outstanding at an interest rate of 10.4% per annum. All interest shall be calculated on the basis of a three hundred sixty five (365) day year. Interest shall be paid to the Lender from the date hereof semi-annually in arrears on June 15 and December 15 of each year, commencing June 15, 1998. The outstanding principal and all remaining accrued interest shall be payable in one installment on June 14, 2002, unless extended by Lender at its sole discretion. This Note may be prepaid, in whole or in part, at any time without penalty. -1- 2. Default. Upon failure to pay any payment when due or to perform any ------- obligation, covenant, or agreement contained in this Note or any other documents provided by Borrower to Lender to induce Lender to make the loan evidenced by this Note, or should any statement contained therein be found to be false or misleading in any material respect; or should Borrower make an assignment for the benefit of creditors, or if a petition be filed by or against Borrower under any state insolvency law or under the Bankruptcy Code, as amended and not dismissed or discharged within 60 days; or, if the Borrower shall sell, transfer, convey or alienate the Stock or the Property, or any part thereof, or any interest therein, or shall be divested of his title or any interest therein in any manner or way, whether voluntarily or involuntarily, without the written consent of the Lender being first had and obtained; then Borrower shall be in default under this Note, and the whole sum of principal, interest, charges and advances, if any, shall become immediately due and payable at Lender's option and without notice. The acceptance of any payment of principal or interest by Lender after the time when it becomes due, as herein specified, shall not be held to establish a custom, or to waive any rights of Lender to enforce payment or assert any other rights, nor shall any failure or delay to exercise any rights be held to waive the same. The rights or remedies of Lender as provided in this Note may be pursued singly, successively, or together against Borrower at the sole discretion of the Lender. 3. Attorneys' Fees and Other Expenses. Borrower shall pay upon demand ---------------------------------- reasonable attorneys' fees, and all other out-of-pocket expenses, including filing, recording, or other costs or fees incurred by Lender in connection with this Note, including attorneys' fees incurred by Lender if: (a) legal counsel is engaged to assist in the collection of this Note after a default hereunder whether or not suit is instituted, (b) any action is brought which may significantly affect Lender's rights, such as an action to cancel, rescind, construe or enforce this Note or to enforce laws or regulations in connection therewith, or (c) Borrower becomes subject to a proceeding under the provisions of the Bankruptcy Code and Lender in the exercise of prudent business practices engages counsel to represent the interests of Lender. 4. Compliance With Laws. All of the terms and provisions of this Note -------------------- shall be construed in compliance with all applicable laws. If any charge or fee due hereunder is invalid, unenforceable or excessive under any law, then such charge or fee shall be deemed modified or reduced to the extent required by law, and any such sums collected by Lender in excess of the maximum amount permitted by such law shall, at Lender's option, be refunded to Borrower or reapplied to any principal, interest, deficiency or other amounts due hereunder and Lender shall have no further liability to Borrower as a result thereof. 5. Assignment. Lender shall have the right to sell, assign, or ---------- otherwise transfer, either in part or in its entirety, this Note and any other instrument evidencing indebtedness of this Note without Borrower's consent. This Note and all of the covenants, promises, and -2- agreements contained in it shall be binding on and inure to the benefit of their respective legal representatives, successors, and assigns. 6. Entire Agreement. This Note contains the entire agreement between ---------------- the Lender and Borrower with respect to the subject matter hereof and supersedes any and all prior arrangements, proposals or understandings, written or oral, by or between Lender and Borrower with respect to all transactions contemplated by this Note and the terms hereunder. In the event of any conflict or inconsistency between any provision of this Note and any provision of any other document or writing executed by Lender and/or Borrower, the provision of this Note shall take precedence and shall control, unless the conflicting or inconsistent provision in such other document or writing specifically refers to this Note and specifically states that it shall prevail. No amendment or modification of this Note shall be effective for any purpose unless the same be in writing and duly executed by both Lender and Borrower. 7. Severability of Provisions. If any provision or any portion of any -------------------------- provision of this Note or the application of any such provision or any portion thereof to any person or circumstance, shall be held invalid or unenforceable, to the extent permitted by law, the remaining portion of such provision and the remaining provisions of this Note or the application of such provision or portion of such provision as is held invalid or unenforceable to persons or circumstances other than those to which it is held invalid or unenforceable, shall not be affected thereby. 8. Miscellaneous. No delay or omission on the part of Lender in ------------- exercising any rights under this Note on default by Borrower shall operate as a waiver of such right or of any other right under this Note, for the same default or any other default. The pleading of any statute of limitations as a defense to the obligations evidenced by this Note is waived. Time is of the essence for each and every obligation under this Note. This Note shall be construed according to and governed by the laws of the State of California. IN THE EVENT ACTION IS INSTITUTED UNDER THIS NOTE, BORROWER WAIVES RIGHT TO TRIAL BY JURY. DATED: October 21, 1997 /s/ Kevin E. Villani -------------------- Kevin E. Villani -3- SECURITY AGREEMENT ------------------ (PLEDGE OF SECURITIES) THIS SECURITY AGREEMENT is made this 21st day of October 1997, between Kevin E. Villani ("Debtor") and Imperial Credit Industries, Inc. ("Secured Party"). RECITALS -------- A. Secured Party as lender has entered into a loan transaction providing for the loan of $999,992 (the "Loan") to Debtor as borrower. B. As a condition of the Loan, Secured Party requires that Debtor grant to Secured Party a security interest in certain securities owned by Debtor. WHEREFORE, Debtor and Secured Party, intending to be legally bound, agree as follows: Debtor hereby transfers, assigns, pledges and grants to Secured Party a security interest in all those certain securities and stock certificates (herein "Collateral") described in Exhibit A appended hereto, which Debtor has this day delivered to and deposited with Secured Party; and all new securities or other property (except dividends) which Debtor may become entitled to receive on account of any of the Collateral and all proceeds of the Collateral. This Security Agreement secures: (a) Debtor's payment and performance as and when due of all amounts and obligations under the Loan (the "Obligations") of even date executed by Debtor in favor of Secured Party; (b) any and all extensions, modifications and renewals of the Obligations; (c) repayment of all sums and amounts that may be advanced or expended by Secured Party for the protection of the Collateral or any part thereof; and (d) any and all other sums that may hereafter be advanced by Secured Party to and for the benefit of Debtor and other amounts due to Secured Party hereunder. Debtor hereby warrants and represents to Secured Party that Debtor is the sole and absolute owner of the Collateral, free and clear of all liens, encumbrances, adverse claims and security interests, except the security interest herein granted to Secured Party, and that Debtor has the power and authority to pledge, transfer and deliver the interest created hereby. Secured Party may retain custody of the Collateral until all obligations are fully paid. Secured Party will not be responsible for loss in value of the Collateral or have any duty to take steps to preserve rights against third parties by legal proceeding or otherwise. Secured Party's -1- sole duty shall be to use reasonable care in the custody and physical preservation of the Collateral in Secured Party's possession. In the event any of the Collateral has depreciated by fifty percent (50%) or more of its closing value as quoted by the Wall Street Journal of even date herewith, then Secured Party may at its option, whether or not the Obligations are in default, upon 3 days prior notice to Debtor, and provided Debtor does not within that time provide substitute collateral satisfactory to Secured Party, sell such Collateral and deposit the proceeds of any such sale into a certificate account to be held by Secured Party. The terms of this Agreement shall continue to apply to all proceeds held in such account. At any time, at Debtor's expense and without notice to Debtor, Secured Party may register in its own name or that of its nominee any securities held as Collateral, and in connection therewith, may deposit and deliver any and all securities to any committee, depository transfer agent, registrar, or other designated agency on such terms and conditions as it may determine. If Debtor shall fail to pay any of the Obligations secured hereby at the time and in the manner required, Secured Party may, at its option, immediately proceed to enforce its security interest according to law, or Secured Party may, at its option, sell and dispose of the same and from the proceeds of sale retain all costs and charges incurred by it in the sale of the Collateral, including reasonable attorneys fees thereby incurred; take all sums due it under any of the Obligations and the provisions hereof, including reasonable attorneys fees; and any surplus of such proceeds remaining shall be paid to Debtor. In addition, Secured Party may exercise any and all rights and remedies of a Secured Party as provided by law, including without limitation all rights and remedies under the California Uniform Commerical Code. Upon the sale of Collateral, Secured Party may bid and make a purchase of the Collateral, or any part thereof. No act, delay or omission, or course of dealing between Debtor and Secured Party shall be a waiver of any of Secured Party's rights or remedies under this Agreement. No waiver, change, modification, or discharge in whole or in part of this Agreement or of any obligation will be effective unless in writing signed by Secured Party. A waiver by Secured Party of any rights or remedies by Secured Party under the terms of this Agreement or with respect to any obligation an any occasion will not be a bar to the exercise of any right or remedy of any subsequent occasion. This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective heirs, executors, administrators, successors and assigns. This Security Agreement shall be governed by and construed in accordance with California law. In the event any action is instituted under this Security Agreement, or to determine the rights or remedies of the parties thereto, the prevailing party shall be entitled to recover reasonable attorneys fees and expenses. -2- IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. Secured Party: By: /s/ Irwin L. Gubman -------------------- Irwin L. Gubman Debtor: By: /s/ Kevin E. Villani -------------------- Kevin E. Villani -3- EXHIBIT A --------- TO SECURITY AGREEMENT ---------------------
Certificate No. Class Issuer No. of Shares - -------------- ----- ------ ------------- Common Stock Imperial Credit Commercial Mortgage 71,684 Investment Corp.
-5- EX-11 11 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED DECEMBER 31, ---------------- 1997 1996 ------- ------- (IN THOUSANDS, EXCEPT INCOME PER SHARE) Income before extraordinary item.............................. $89,916 $75,984 ------- ------- Extraordinary item--Loss on early extinguishment of debt net of income taxes.............................................. (3,995) -- ------- ------- Net income.................................................... $85,921 $75,984 ======= ======= BASIC EARNINGS PER SHARE: Weighted average number of shares outstanding................. 38,611 36,063 ------- ------- Basic income per share before extraordinary item.............. $ 2.33 $ 2.11 Extraordinary item--Loss on early extinguishment of debt net of income taxes.............................................. (0.10) -- ------- ------- Basic net income per share.................................... $ 2.23 $ 2.11 ======= ======= DILUTED EARNINGS PER SHARE: Weighted average number of shares outstanding................. 38,611 36,063 Net effect of dilutive stock options--Based on treasury stock method using end of period market price...................... 2,244 2,912 ------- ------- Total average shares...................................... 40,855 38,975 ======= ======= Basic income per share before extraordinary item.............. $ 2.20 $ 1.95 Extraordinary item--Loss on early extinguishment of debt net of income taxes.............................................. (0.10) -- ------- ------- Diluted net income per share.................................. $ 2.10 $ 1.95 ======= =======
EX-21 12 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 SUBSIDIARIES OF REGISTRANT
SUBSIDIARY NAME STATE OF INCORPORATION --------------- ---------------------- Southern Pacific Bank California Imperial Business Credit, Inc. California Auto Marketing Network, Inc. Delaware Imperial Credit Advisors, Inc. California Imperial Credit Worldwide Ltd. California Imperial Credit Commercial Asset California Management Corporation Imperial Capital Group, LLC Delaware
EX-23.1.1 13 INDEPENDENT AUDITORS' CONSENT 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 (No. 333-13805 and No. 333-15149) on Form S-8 of Imperial Credit Industries, Inc. of our report dated January 27, 1998, relating to the consolidated balance sheets of Imperial Credit Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Imperial Credit Industries, Inc. KPMG Peat Marwick LLP Los Angeles, California April 14, 1998 EX-27.1 14 FINANCIAL DATA SCHEDULE
9 1,000 YEAR YEAR DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 50,597 74,247 103,738 3,369 0 0 120,904 25,180 107,727 59,116 0 0 0 0 1,467,336 2,028,694 38,047 19,999 2,102,094 2,470,639 1,156,022 1,069,184 189,841 834,852 142,485 163,886 289,813 163,209 0 0 0 0 147,109 145,521 174,898 88,977 2,102,094 2,470,639 201,728 188,242 23,531 10,807 2,678 8,422 227,937 207,471 71,014 60,999 126,594 135,036 101,343 72,435 38,951 9,773 (936) 0 160,897 111,075 159,176 157,884 89,916 75,984 (3,995) 0 0 0 85,921 75,984 2.33 2.11 2.10 1.95 5.11 3.40 70,631 50,109 0 0 0 1,256 0 0 19,999 13,729 31,053 8,326 576 323 38,047 19,999 38,047 19,999 0 0 4,188 0
EX-27.2 15 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 39,166 267,776 0 0 5,963 0 0 2,024,310 13,729 2,510,635 1,092,989 1,070,815 60,062 192,467 0 0 51,891 38,910 2,510,635 120,244 6,630 2,608 129,482 51,565 95,728 33,754 5,450 0 60,972 24,129 0 0 0 14,193 .45 .40 2.08 30,988 0 870 0 7,054 3,106 11 13,729 13,729 0 0 Restate 1995 Financial Data Schedule per FAS 128.
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