As filed with the Securities and Exchange Commission on April 11, 2001
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
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 No.)
23550 Hawthorne Boulevard, Building 1, Suite 110
Torrance, California 90505
(310) 373-1704
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
H. Wayne Snavely
Chairman, President and Chief Executive Officer
Imperial Credit Industries, Inc.
23550 Hawthorne Boulevard, Building 1, Suite 110
Torrance, California 90505
(310) 373-1704
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
----------------
Copies to:
James R. Walther
Richard D. Greta
Mayer, Brown & Platt
350 South Grand Avenue
25th Floor
Los Angeles, California 90071
213-229-9500
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Proposed Proposed
Title of each class of maximum maximum Amount of
securities to be Amount to be offering price aggregate registration
registered registered (1) per share offering price fee
- ------------------------------------------------------------------------------------
Common Stock, no par
value.................. 3,000,000 shares $3.00 $9,000,000 $2,250
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Consists of shares underlying warrants described herein. In accordance
with Rule 416, such indeterminate number of additional shares of Common
Stock as may become issuable pursuant to antidilution provisions of such
warrants are also being registered hereby.
----------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effectiveness date until the Registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
registration statement shall become effective on such date as the Commission
acting pursuant to said Section 8(a) may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PROSPECTUS
3,000,000 SHARES
IMPERIAL CREDIT INDUSTRIES, INC.
COMMON STOCK
----------------
This prospectus relates to an aggregate of 3,000,000 shares (the "Shares")
of common stock, no par value per share, of Imperial Credit Industries, Inc.
(the "Company," "we" or "us") that have been reserved for issuance upon
exercise of warrants (the "Settlement Warrants") we have issued as part of the
settlement of the securities class action litigation entitled In re Southern
Pacific Funding Corporation Securities Litigation, Lead Case No. CV98-1239-MA,
in the U.S. District Court for the District of Oregon. In that settlement, we
paid $3,000,000 and agreed to issue the Settlement Warrants which will entitle
the holders thereof to purchase up to 3,000,000 shares of our common stock at
an exercise price of $3.00 per share, subject to certain anti-dilution
adjustments.
If the Settlement Warrants are exercised in full at their initial exercise
price, we will receive aggregate gross proceeds of $9,000,000 before deducting
our estimated expenses of $77,250. See "Use of Proceeds." We intend to pay all
expenses with respect to this offering.
For a discussion of risks you should consider before making a decision to
purchase our common stock, see "Risk Factors" on page 3.
Our common stock is quoted on the Nasdaq National Market under the symbol
"ICII." On April 10, 2001, the closing sales price of our common stock was
$0.83 per share.
Our principal executive offices are located at 23550 Hawthorne Boulevard,
Building 1, Suite 110, Torrance, California 90505 and our telephone number is
(310) 373-1704.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
----------------
You should rely only on the information incorporated by reference or
provided in this prospectus. We have not authorized anyone else to provide you
with different information. We are not making an offer of these shares in any
state where the offer is not permitted. You should not assume that the
information in this prospectus is accurate as of any date other than the date
on the front of this document.
----------------
The date of this Prospectus is April , 2001.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION
This prospectus contains "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Act of
1934, as amended. These statements can be identified by the use of forward-
looking terminology such as "may," "will," "intend," "should," "expect,"
"anticipate," "estimate" or "continue" or the negatives thereof or other
comparable terminology. Our actual results could differ materially from those
anticipated in such forward-looking statements as a result of various factors,
including, without limitation, the factors described under the caption "Risk
Factors", actions that may be taken by the Federal Deposit Insurance
Corporation or the California Department of Financial Institutions with
respect to Southern Pacific Bank, the results of negotiations with investors,
the timing of final documentation and all of the factors incorporated by
reference in the registration statement of which this prospectus forms a part.
----------------
No one (including any dealer, salesman or broker) is authorized to provide
oral or written information about this offering that is not included in this
prospectus. You must not rely on any unauthorized information or
representations. This prospectus is an offer to sell only the Shares offered
hereby, and only under circumstances and in jurisdictions in which it is
lawful to do so. The information contained in this prospectus is current only
as of its date.
----------------
TABLE OF CONTENTS
Page
----
RISK FACTORS............................................................... 3
USE OF PROCEEDS............................................................ 19
THE COMPANY................................................................ 19
RECENT DEVELOPMENTS........................................................ 21
PLAN OF DISTRIBUTION....................................................... 24
LEGAL MATTERS.............................................................. 25
EXPERTS.................................................................... 25
WHERE YOU CAN FIND MORE INFORMATION........................................ 25
2
RISK FACTORS
An investment in our Common Stock involves a high degree of risk.
Prospective investors should carefully consider, in addition to the matters
set forth elsewhere in this prospectus and the information incorporated by
reference herein, the following factors relating to our Common Stock, our
financial condition and business and that of our principal subsidiary,
Southern Pacific Bank (the "Bank"). The matters described in any of the
following risks could materially adversely affect our and the Bank's business,
financial condition and results of operations. While the risks described below
are all the material risks of which we are currently aware, we may have other
risks and uncertainties of which we are not yet aware or which we currently
believe are immaterial that may also impair our or the Bank's financial
condition, business operations or prospects.
Regulatory Considerations
Regulatory Orders Have Been Issued Requiring Improvements In The Bank's
Regulatory Capital And Imposing Other Significant Requirements And Some Of
These Requirements Have Not Been Met
Our principal subsidiary, the Bank, is an industrial bank chartered by the
State of California. It is subject to the regulatory capital requirements of
the California Department of Financial Institutions (the "DFI") under
California law and the regulations of the Federal Deposit Insurance
Corporation (the "FDIC") governing capital adequacy for institutions whose
deposits are insured by the FDIC. The regulatory capital requirements of the
DFI and FDIC are discussed in greater detail in "Item 1. Business--
Regulations" in our Annual Report on Form 10-K for the year ended December 31,
2000 (our "Current Annual Report").
As a result of a joint examination of the Bank by the FDIC and DFI as of
June 26, 2000 (the "2000 Examination"), the Bank consented to the issuance of
the Regulatory Orders. The Regulatory Orders contain several requirements
including that the Bank's regulatory capital and capital ratios be increased
by specified amounts within specified time periods, prohibitions in payments
of Bank dividends without regulatory approval, classified asset reductions,
lending policy restrictions and procedures, and other operational
restrictions. See "Item 1. Business--Regulations--General" in our Current
Annual Report for a more detailed discussion of the provisions contained in
the Regulatory Orders.
Although we believe that consummation of the Recapitalization Transactions
(as defined and described in "Recent Developments--Recapitalization
Transactions") would provide the basis for enabling us to supply to the Bank a
significant portion of the amounts and types of additional regulatory capital
required to comply with the Regulatory Orders, such transactions would not by
themselves enable the Bank to meet such requirements nor were all of the
Recapitalization Transactions completed by March 31, 2001. Accordingly, the
Bank did not meet the increases in regulatory capital and capital ratios
required under the Regulatory Orders to have occurred by March 31, 2001. We
are evaluating further steps that will be required to enable the Bank to
comply with the regulatory capital requirements imposed by the Regulatory
Orders, which steps, among others, may include additional capital raising
transactions by us, limiting the Bank's growth and/or selling Bank assets. No
assurance can be given as to whether the DFI and FDIC will impose any
additional operating restrictions or further sanctions on the Bank for failing
to meet the March 31, 2001 requirements, nor that the Bank will be able to
take the additional steps required to meet the regulatory capital requirements
set forth in the Regulatory Orders within the other required time frames or
without additional losses. See "--The Ability Of The Bank To Comply With The
Regulatory Orders Is Uncertain And It Has Not Complied With Certain
Requirement Of The Regulatory Orders; Sanctions And Additional Restrictions
May Be Imposed To The Extent It Does Not Comply With The Regulatory Orders"
and "--The Bank Will Need Significant Additional Capital To Meet The
Requirements Of The Regulatory Orders."
The Bank Will Need Significant Additional Capital To Meet The Requirements
Of The Regulatory Orders
The Bank will require significant additional capital to meet the capital
levels and capital ratios required in the Regulatory Orders. Although on March
30, 2001 we contributed $7.2 million in cash to the Bank and purchased $36
million worth of its preferred stock constituting Tier I capital in exchange
for cash and the
3
retirement of subordinated debt of the Bank held by us, the Bank would have
still needed to obtain an additional approximately $38 million of Tier I
capital to meet the capital requirements set forth in the Regulatory Orders as
required to be met by March 31, 2001. Further, additional capital
contributions may be required during 2001 in order to meet the increasing
capital levels required under the Regulatory Orders. See "Item 1. Business--
Regulations" in our Current Annual Report for a more detailed description of
the regulatory capital requirements set forth in the Regulatory Orders. We
expect that the net proceeds of the Recapitalization Transactions will be
significantly less than the additional required Tier I Capital set forth in
the Regulatory Orders. Also, there is no assurance that the FDIC and DFI will
not amend the Regulatory Orders or impose different requirements for the level
of the allowance for loan and lease losses or other capital requirements. See
"--Business and Other Considerations--The Bank Has Significantly Increased Its
Allowance For Loan And Lease Losses And May Need To Increase It In The Future
Which Would Adversely Affect The Result Of Our Operations."
The ability of the Bank to increase its capital levels and improve its
capital ratios is also dependent upon numerous factors outside of our control,
including, but not limited to consummation of the Recapitalization
Transactions, the national economy, market interest rates, real estate values
in those states where the Bank has made loans, the regulatory environment, the
results of the operations of the Company and Bank and other factors.
Given the amount of capital that we must raise, the uncertainty regarding
the successful completion of the Recapitalization Transactions, the Bank's
recent history of losses and recent status as an "undercapitalized"
institution, and the difficulty in raising additional equity or debt capital
under current circumstances, there can be no assurance that the capital levels
and capital ratios required by the Regulatory Orders will be achieved. Because
of the various regulatory restrictions placed on institutions that do not meet
applicable capital requirements and on the anticipated need for our management
to devote substantial amounts of time and energy to further capital-raising
efforts, any continued non-compliance by the Bank with its regulatory capital
requirements following consummation of the Recapitalization Transactions would
likely significantly hamper our and the Bank's growth and business
opportunities as compared to institutions that are in compliance with their
regulatory capital requirements. Further, there can be no assurance as to the
levels of capital that the Bank may be required to maintain in the future. The
Bank's regulators have broad authority to impose additional capital
requirements on depository institutions generally or in individual cases,
including additional capital requirements relating to interest rate risk,
asset quality and earnings. See "--Business and Other Considerations--The Bank
Has Significantly Increased Its Allowance For Loan And Lease Losses And May
Need To Increase It In The Future Which Would Adversely Affect The Result Of
Our Operations."
The Bank Was Categorized An "Undercapitalized" Institution On December 31,
2000
The Bank's capital ratios on December 31, 2000 were below the minimum levels
required for the Bank to be categorized as "adequately capitalized" and it was
categorized as an "undercapitalized" institution, each as defined by
applicable banking regulations, due to increased loan and lease loss
provisions and deferred tax valuation allowances taken in the fourth quarter
of 2000 and the resulting operating losses. As a result, the Bank became
subject to additional regulatory restrictions and possible sanctions. On March
30, 2001, we purchased $36 million worth of a new series of perpetual
noncumulative preferred stock of the Bank (the "Series B Preferred") in
exchange for $14 million in cash ($9 million of which were proceeds from our
offering of Senior Secured Debt (as defined and described in "Recent
Developments--Recapitalization Transactions")), and the retirement of $22
million in aggregate principal amount of subordinated debt of the Bank held by
us. Also on that date we made a capital contribution of $7.2 million in cash,
the balance of the proceeds from our offering of Senior Secured Debt, to the
Bank. As a result of these actions, the Bank was restored to an "adequately
capitalized" level. There can be no assurance that the Bank will be able to
maintain the capital and capital ratios required for the Bank to continue at
an "adequately" capitalized level or required by the Regulatory Orders to be
achieved. See "--The Bank Will Need Significant Additional Capital to Meet the
Requirements of the Regulatory Orders" and "--The Ability of the Bank to
Comply with the Regulatory Orders is Uncertain and It Has Not Complied With
Certain Requirements of the Regulatory Orders; Sanctions and Additional
Restrictions May Be Imposed to the Extent If It Does Not Comply with the
Regulatory Orders."
4
The Ability Of The Bank To Comply With The Regulatory Orders Is Uncertain
And It Has Not Complied With Certain Requirements Of The Regulatory Orders;
Sanctions And Additional Restrictions May Be Imposed To The Extent It Does
Not Comply With The Regulatory Orders
Verification of the Bank's compliance with the Regulatory Orders is subject
to review by the FDIC and the DFI. No assurance can be given that capital in
addition to that raised pursuant to the Recapitalization Transactions can be
raised to enable the Bank to comply with the Regulatory Orders. In the event
that the FDIC or the DFI otherwise determines that the Bank is engaging in
unsafe or unsound practices in conducting its business or violating any law,
rule or regulation, each regulatory agency would have available various
remedies, including certain enforcement actions and sanctions. Among other
sanctions, if the Bank is unable to meet its regulatory capital requirements,
or is determined to have other serious regulatory or supervisory problems, the
FDIC and/or DFI may place the Bank in conservatorship or receivership, which
would have a material adverse effect on our business and operations. "--
Regulatory Orders Have Been Issued Requiring Improvements In The Bank's
Regulatory Capital And Imposing Other Significant Requirements And Some Of
These Requirements Have Not Been Met."
Risks Relating To The Recapitalization Transactions
Purchasers of the Common Stock Will Experience Significant Dilution of
their Shares If Recapitalization Transactions Are Consummated and If We
Raise Additional Capital By Issuing More Shares of Common Stock
As a result of the large amount of Common Stock expected to be issued
pursuant to the Recapitalization Agreement (as defined in "Recent
Developments--Recapitalization Transactions"), it is expected that holders of
our Common Stock will receive a greatly reduced common equity interest in the
Company. The issuance of convertible and exchangeable securities and stock
purchase warrants as part of the Recapitalization Transactions or other future
transactions may also have the effect of diluting your interests. We have
80,000,000 shares of authorized Common Stock and had 32,096,361 shares issued
and outstanding as of March 31, 2001. If the initial Recapitalization
Transactions are consummated, a total of up to 9,289,052 additional shares of
Common Stock will be issued and outstanding, representing approximately 22% of
our outstanding Common Stock (including the 9,289,052 additional shares of
Common Stock that may be then outstanding). If all of the up to $28.2 million
in aggregate principal amount of convertible subordinated debt and 7,871,681
warrants that may be issued as part of those transactions are converted into
or exercised for shares of Common Stock, a total of approximately 30,431,681
additional shares will be issued and outstanding, representing approximately
42% of our outstanding Common Stock (including the 9,289,052 and 30,431,681
additional shares of Common Stock that may be then outstanding). The ownership
interest of a holder of Common Stock may be further diluted if we issue
additional shares of Common Stock or securities convertible into Common Stock
in the future, which we may determine to be necessary to raise capital to
comply with the Regulatory Orders or other regulatory requirements. We are
authorized to issue additional common or preferred stock without your approval
subject to certain limitations set forth in the Recapitalization Agreement and
the Nasdaq shareholder approval requirements.
There Would Be Significant Adverse Federal Income Tax Consequences To Us If
The Recapitalization Transactions Were Deemed To Have Caused An Ownership
Change Under The Internal Revenue Code
Although we believe that the Recapitalization Transactions will not cause an
ownership change under Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), the interpretation of the applicable Code provisions and
regulations is not clear as it applies to our facts and the Internal Revenue
Service may disagree with our conclusions. In addition, an ownership change of
the Company may occur on a date after the Recapitalization Transactions due to
sales of stock, exercises of warrants or options or other events which may not
be within our control. A change of ownership under Section 382 would
materially restrict our use of the Company's net operating loss carryforwards
and unrecognized built in losses, each of which were $130 million at December
31, 2000, and substantially eliminate the value of those tax attributes.
5
The Recapitalization Transactions May Not All Be Consummated
All of the Recapitalization Transactions provided for in the
Recapitalization Agreement are subject to the satisfaction of certain
conditions to closing set forth in Article IV of the Recapitalization
Agreement. Such conditions include, among others, that our shareholders
approve certain elements of the Recapitalization Transactions or that we
obtain the approval of Nasdaq to rely on an exception to such required
shareholder approval. Further, there is no assurance that our placement agent,
Imperial Capital, LLC ("IC"), will be successful in its undertaking to
privately place the $10 million of Convertible Subordinated Debt. There is
also no assurance that the holders of the Old Notes who are not Signatory
Debtholders will elect to participate in the Debt Exchange. To the extent that
such holders do not so participate, we will not receive the full contemplated
benefits of the Debt Exchange. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Recapitalization
Transactions" of our Current Annual Report for a more detailed description of
the Recapitalization Agreement.
Business And Other Considerations
The Price And Liquidity Of Our Common Stock May Be Adversely Affected By
Our Possible Delisting From The Nasdaq National Market System
We were informed by Nasdaq that our Common Stock may be delisted from the
Nasdaq National Market, as further described in "Recent Developments--Possible
Nasdaq Delisting." Delisting from the Nasdaq National Market could cause our
Common Stock to become significantly less liquid, with a possible negative
impact on its value. Also, if our Common Stock is delisted and is not
thereafter traded as a "Bulletin Board Stock," our Common Stock would be
classified as a "penny stock" which, if certain disclosure and broker or
dealer qualifications are not met, could further restrict the market for
resale of the Common Stock to only such persons as are deemed to be suitable
investors of such stock, such as institutional investors, or directors,
officers, or owners of 5% or more of the Company's Common Stock. However, if
our Common Stock is delisted, it would be our intent to have it traded as a
"Bulletin Board Stock.
There Are Various Restrictions On The Bank's Ability To Pay Us Common Stock
Dividends
Under the Regulatory Orders, the Bank is prohibited from paying cash
dividends on its Common Stock without the prior approval of the DFI and the
FDIC. Because cash dividends reduce the regulatory capital of the Bank, and
because of the restrictions contained in the Regulatory Orders, it is unlikely
that the Bank will pay cash dividends to us on our Common Stock in the near
future and there is no assurance that the Bank will ever resume paying cash
dividends to us. The continued prohibition against the Bank paying to us,
unless approved in advance by the DFI and FDIC, cash dividends would adversely
affect our ability to make required payments of interest and principal on our
indebtedness and, if we were otherwise permitted to declare and pay dividends
on our Common Stock, to declare and pay dividends on our Common Stock.
We Do Not Intend To Pay Dividends On Our Common Stock
We are prohibited from paying dividends on our Common Stock under the terms
of certain indentures relating to our outstanding indebtedness. In addition,
we have never paid dividends on our Common Stock and do not anticipate in the
foreseeable future paying dividends on our Common Stock even if we were not
prohibited from doing so under the terms of indentures relating to our
outstanding indebtedness.
We Have Experienced Significant Recent Operating Losses And We May Not Be
Able To Return To Profitable Operations In The Future Which Would Result In
The Value Of Our Common Stock Decreasing
We have reported net losses of approximately $2.8 million and $73.6 million
for the years ended December 31, 1999 and 1998, respectively, and have
reported a net loss of $163.3 million for the year
6
ended December 31, 2000. For a further description of recent losses, see
"Recent Developments--Recent Operating Losses."
Our recent net losses were primarily associated with our losses from
operations, losses on impairment of equity securities, increased provisions
for loan and lease losses, increased levels of nonperforming assets and costs
incurred in maintaining and administering such nonperforming assets.
Our ability to reverse the trend of these net losses is largely dependent on
the operations of the Bank and the quality and level of its earning assets and
the reduction in the level of its nonperforming assets, the interest rate
environment and the adequacy of its allowance for loan and lease losses. The
real estate market and the overall economy in the Bank's primary service area
is likely to continue to have a significant effect on the quality and level of
its assets in the future.
There is no assurance that our operations will be profitable in the future
and the value of our Common Stock and our ability to retain and derive benefit
from our remaining $10.0 million deferred tax asset are dependent on our
future profitability. Further, even if additional capital is raised to enable
the Bank to comply with the Regulatory Orders, there can be no assurance that
the Bank will not incur additional losses and be required to make additional
provisions to its allowance for loan and lease losses. Such additional losses
could result in the Bank failing to meet applicable regulatory capital
requirements in the future, which could lead regulatory authorities to take
formal administrative actions against the Bank in addition to those that have
been imposed by the Regulatory Orders and result in a decrease in the value of
our Common Stock. See "--Regulatory Considerations" and "--The Bank Has
Significantly Increased Its Allowance For Loan And Lease Losses And May Need
To Increase It In The Future Which Would Adversely Affect The Result Of Our
Operations."
The Bank Has Significantly Increased Its Allowance For Loan And Lease
Losses And May Need To Increase It In The Future Which Would Adversely
Affect The Result Of Our Operations
Significant increases in provisions for loan and lease losses made during
1999 and 2000 resulted from decisions by the Bank made as a result of the
Bank's regulatory examinations, the Bank's internal credit review and a
deterioration in credit quality in our sectors of the banking industry. These
decisions included the need to provide for specific charged-off loans and
increase provisions based upon the levels of nonperforming assets and were
made, in part, in response to the Regulatory Orders issued by the FDIC and the
DFI. Although management utilizes its best judgment in providing for loan and
lease losses and establishing the allowance for loan and lease losses, the
allowance is an estimate which is inherently uncertain and depends on the
outcome of future events, including judgments as to asset quality made from
time to time by the Bank's regulatory authorities in their examinations of the
Bank and credit quality in our sectors of the banking industry. There can be
no assurance that the Bank will not continue or be required by its regulators
to continue to make substantial additional provisions for loan and lease
losses in the future, which provisions could adversely impact our results of
operations. In addition, no assurance can be given that the Bank will not
sustain loan and lease losses in excess of the present or future levels of the
allowance for loan and lease losses.
The level of the Bank's assets classified as "non-performing" as a
percentage of total assets and our allowance for loan and lease losses as a
percentage of non-performing loans at December 31, 2000 was approximately
4.11% and 81.02%, respectively, as compared with 2.84% and 62.18%,
respectively, at December 31, 1999. The Bank's assets are subject to scrutiny
by the FDIC and DFI. There can be no assurance that such regulatory
authorities will not require our allowances to be increased as a result of
future examinations, or require the Bank to write down or write off a
substantial amount of these loans. In its efforts to reduce its portfolio of
classified loans to more acceptable levels, the Bank could incur additional
substantial losses. Also, no assurance can be given that the Bank will be able
to sustain the incurrence of any such additional write downs or write offs
without suffering further impairments of the Bank's capital, thereby
subjecting the Bank to further administrative action by the FDIC or DFI.
7
We Have Substantial Debt Which May Impair Our Ability To Service
Outstanding Indebtedness
We are highly leveraged. At December 31, 2000, our total long term and other
indebtedness (excluding deposits and borrowings at the Bank) was approximately
$303.7 million and our total shareholders' equity was approximately $39.4
million. At December 31, 2000 we held approximately $15.9 million of cash and
cash equivalents (excluding cash and cash equivalents at the Bank) as compared
to $46.2 million of cash and cash equivalents (excluding cash and cash
equivalents at the Bank) at December 31, 1999.
Our ability to make scheduled payments of the principal of, or to pay the
interest on, our indebtedness and, if we were otherwise permitted to declare
and pay dividends on our Common Stock, to declare and pay dividends on our
Common Stock will depend upon the ability of the Bank to obtain regulatory
approvals necessary to permit it to pay us dividends on our Bank Common Stock
and Bank Preferred Stock, see "--There are Various Restrictions on the Bank's
Ability to Pay Us Common Stock Dividends," as well as upon on our future
performance and that of the Bank which, to a substantial extent, are subject
to general economic, financial, competitive, legislative, regulatory and other
factors beyond our control. The ability of the Bank to comply with the
Regulatory Orders also will impact its operations. See risk factors above
under "--Regulatory Considerations." Management believes that, based on
current levels of operations, cash flows from operations and available
borrowings, and assuming that the Bank is able to obtain the necessary
regulatory approvals to pay us dividends, we will be able to fund our
liquidity and capital expenditure requirements for the foreseeable future,
including scheduled payments of interest on the Senior Secured Debt,
Convertible Subordinated Debt and the Exchange Notes and payments of interest
and principal on our other indebtedness. There can be no assurance, however,
that the Bank will be able to obtain the regulatory approvals necessary to
permit it to pay us dividends or that our business and that of the Bank will
generate sufficient cash flow from operations or that future borrowings will
be available in an amount sufficient to enable us to service our indebtedness,
to make anticipated capital expenditures or, if we were otherwise permitted to
declare and pay dividends on our Common Stock, to declare and pay dividends on
our Common Stock.
The degree to which we are leveraged could have material adverse effects on
us, including, but not limited to, the following: (i) our ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions and general corporate or other purposes may be impaired, (ii) a
substantial portion of our cash flow from operations will be dedicated to debt
service and will be unavailable for other purposes, (iii) certain of our
borrowings may be at variable rates of interest, which could result in higher
interest expense in the event of increases in interest rates and (iv) we will
be subject to a variety of restrictive covenants, the failure to comply with
which could result in events of default that, if not cured or waived, could
adversely affect our operations and the value of our Common Stock.
We May Become Liable For Additional Federal Income Tax Payments As A Result
Of Current Internal Revenue Service Audits
Our federal income tax returns for 1996 through 1999 are currently being
audited by the Internal Revenue Service. The Internal Revenue Service is
currently reviewing a number of the deductions reflected on some of these
returns as part of their normal examination. Although there have not been to-
date any proposed adjustments relating to any of these deductions, there can
be no assurance as to the ultimate outcome of this examination, and we could
become liable for additional income tax payments if any of our deductions are
disallowed (which would reduce the amount of cash available to us).
We May Become Liable For Additional California Tax Payments As A Result Of
Current California Franchise Tax Board Audits
Our 1995 and 1996 California Franchise Tax Returns are being audited by the
California Franchise Tax Board, which has proposed to include the income from
two of our former affiliates in our combined return. The total increase to our
combined tax for the two years proposed by such auditors is approximately $2
million, of which $1.5 million may be payable (to the extent such amount is
assessed) by one of our former affiliates if we
8
are successful in an arbitration proceeding involving us and that affiliate
regarding the provisions of a related tax sharing agreement. Also, we intend
to protest our portion of any such assessment. At this time, however, there
can be no assurance as to the ultimate outcome of either our intended protest
of any such assessment or that arbitration proceeding and we could become
liable for additional income tax payments (which would reduce the amount of
cash available to us) if we are unsuccessful in our intended protest or in
that arbitration proceeding.
Our Ability To Restaff Significant Personnel Positions Will Be Important To
Our Future Operations
As a result of the 2000 Examination by the FDIC and DFI and additional
increases in charge-offs and nonperforming assets at the Bank, several Bank
executive officers, including its president and chief executive officer, chief
credit officer, risk management department head, and the executive management
of Coast Business Credit, a division of the Bank ("CBC"), resigned. The Bank's
chairman has assumed the position of president. The Bank has added an
experienced chief credit officer, who has a major commercial banking
background, and a head of the Risk Management Department, who was an FDIC
examiner. Additional key appointments have been made in credit administration
and risk management functions. CBC has been more fully integrated into the
Bank's management reporting structure and several individual managers within
CBC have been assigned increased responsibility. This restaffing of key
positions in the Bank, including at CBC, is important to our overall
restructuring efforts. The successful implementation of our and the Bank's
strategic initiatives and the resulting operating profits anticipated
therefrom are, and for the foreseeable future will be, dependent upon the
services of these and other executive officers and directors of the Company
and the Bank.
Our Share Price Has Been And May Continue To Be Highly Volatile
The market price of our Common Stock has been extremely volatile. During the
year ended December 31, 2000, our stock reached a high closing sales price of
$6.08 in the first quarter of 2000 and a low closing sales price of $0.41 in
the fourth quarter of 2000. On April 10, 2001, the closing sales price was
$0.83. The market price of our Common Stock is likely to continue to be highly
volatile and could be significantly affected by factors including:
. the ability of the Bank to comply with the requirements set forth in the
Regulatory Orders
. the possible delisting of our Common Stock from the Nasdaq National
Market System
. actual or anticipated fluctuations in our operating results
. actual or anticipated fluctuations in the operating results of those
entities in which we hold equity interests
. the outcome of the litigation in which we are involved
. interest rates
. prepayments or defaults on loans
. valuations of securitization-related assets
. cost of funds
. availability of liquidity
. volatility in the secondary loan market
. general market conditions
In addition, significant price and volume fluctuations in the stock market
have particularly affected the market prices for the common stock of specialty
finance companies such as ours. These broad market fluctuations have adversely
affected and may continue to adversely affect the market price of our Common
Stock.
If we fail to meet the expectations of securities analysts or investors in a
future quarter, the market price of our Common Stock could be materially
adversely affected.
9
We Are Engaged In Significant Litigation
We and certain of our executive officers and directors are named as
defendants in an alleged securities fraud class-action lawsuit primarily
arising out of the decline in the market price of our Common Stock (the "Class
Action Lawsuit"). In addition, we are subject to other litigation including:
(i) we and two of our directors are named in an adversary proceeding brought
by the liquidating trustee representing the bankrupt estate of Southern
Pacific Funding Corporation ("SPFC"), alleging losses suffered by SPFC were
caused by our alleged breaches of fiduciary duties and negligence, (ii) our
wholly-owned subsidiary, Imperial Credit Commercial Mortgage Investment Corp.
("ICCMIC"), and three of its present or former directors are named as
defendants in an alleged securities fraud class-action lawsuit arising out of
alleged misstatements and omissions contained in ICCMIC's offering prospectus
issued in connection with its initial public offering and (iii) Steadfast
Insurance Company has brought a lawsuit seeking damages in the amount of $27
million allegedly resulting from our subsidiary's alleged fraudulent
inducement to enter into, and subsequent breach of, a motor vehicle collateral
enhancement insurance policy.
The Class Action Lawsuit and Other Litigation could result in substantial
liability to the Company, significant costs in defending those litigation
proceedings and a diversion of our management's attention and resources from
normal business operations. For further details on the Class Action Lawsuit
and the Other Litigation, see "Part II Item 1. Legal Proceeding" in our
Current Annual Report.
Our Profitability May Be Adversely Affected by Cyclical Economic Conditions
and Fluctuations in Interest Rates
Our businesses may be adversely affected in any economic slowdown or
recession. Periods of economic slowdown or recession may be accompanied by
decreased demand for commercial credit and declining real estate and other
asset values. In the secured lending business, any material decline in
collateral values increases the loan-to-value ratios of loans previously made
and leases we previously entered into. This weakens collateral coverage and
increases the possibility of a loss in the event of a default.
Fluctuations in Interest Rates May Adversely Affect Our Operating Results
Our operations may be adversely affected by rising and falling interest
rates. Higher interest rates may discourage existing potential borrowers from
refinancing or increasing existing credit facilities, or establishing new
credit facilities and may lead to a reduction in the average size of loans and
leases. This may decrease the amount of financing opportunities available to
our operations and decrease the demand for repurchase facility financing
provided by our repurchase facility lending operations to loan originators. If
short-term interest rates exceed long-term interest rates, there is a higher
risk of increased loan prepayments, as borrowers may seek to refinance their
loans at lower long-term interest rates. Increased loan prepayments could lead
to a reduction in the number of loans we service, the fees we receive for loan
servicing, our loan servicing income and the value of our securitization
related assets. On the other hand, if interest rates decline, our loans and
investments may be prepaid earlier than expected or earlier than the payment
obligations we may then have outstanding under instruments with higher
interest rates, which, in either case, may adversely affect the results of our
operations.
Also, our principal source of revenue is net interest income, which is the
difference between the interest we earn on our interest earning assets and the
interest we pay on our interest bearing liabilities. The rates we pay on our
borrowings and deposits are independent of the rates we earn on our assets and
may be subject to more or less frequent periodic rate adjustments. Therefore,
we could experience a decrease in net interest income or a net interest loss
because the interest rates on our borrowings and deposits could increase
faster than the interest rates on our assets. In an extreme interest rate
environment, if our net interest spread were to become negative, we would be
paying more interest on our borrowings and deposits than we would be earning
on our assets and we will be exposed to a significant risk of loss.
Additionally, the rates paid on our borrowings and the rates received on our
assets may be based upon different indices, (i.e., LIBOR, U.S. Treasuries,
etc.). If the index used to determine the rate on our borrowings
10
increases faster or decreases more slowly than the index used to determine the
rate on our assets, we will experience a declining net interest spread which
will have a negative impact on our profitability.
We are subject to the risk of rising interest rates between the time we
commit to purchase or originate loans at a fixed price and the time we sell or
securitize those loans. An increase in interest rates will generally result in
a decrease in the market value of loans that we have committed to originate or
purchase at a fixed price, but have not yet hedged, sold or securitized.
Our Quarterly Operating Results May Fluctuate
Our results of operations, and more specifically our earnings, may
significantly fluctuate from quarter to quarter based on several factors,
including:
. changes in the amount of loans and leases we originate
. differences between our cost of funds on borrowings and deposits and the
average interest rates earned on originated loans
. problems generally affecting the specialty finance sector
. sales of our loans or leases at less than expected levels and/or at less
than expected prices.
We Are Subject To Extensive Government Regulation, And Regulatory Changes
May Adversely Affect Our Business And Operations
Certain of our subsidiaries, including the Bank, operate in a highly
regulated environment and are subject to supervision by several governmental
regulatory agencies, including the FDIC and the DFI. Laws and regulations
currently applicable to our subsidiaries may change. We do not know if future
changes to these laws and regulations will adversely affect our business.
The regulations and supervision to which we are subject are primarily for
the benefit and protection of our customers. Such regulation and supervision
affect the operation of our businesses. For example, state laws and federal
laws require that the Bank maintain specified amounts of capital and meet
specified capital to assets ratios. If we do not comply with applicable laws,
the Bank's ability to do business could be restricted or suspended. We also
could be adversely affected by the adoption of new laws or regulations or by
changes to existing laws and regulations or their interpretation.
Future legislation and government policy could adversely affect the
industrial banks, including the Bank. We cannot predict the full impact of
such legislation and regulation. In addition, federal and state laws impose
standards with respect to, and regulatory authorities have the power in
certain circumstances to limit or prohibit, transactions between our company
and the Bank and between the Bank and our other affiliates, the growth of the
Bank's assets and liabilities and the payment of dividends from the Bank to
our company, among other things.
Competition May Adversely Affect Us
Our markets are highly competitive and are characterized by factors that
vary based upon product and geographic region. In recent years, an improving
economy and growing marketplace liquidity have increased competition. The
markets for most of our products are characterized by a large number of
competitors. However, with respect to some of our products, competition is
more concentrated.
Our competitors include other finance companies, commercial banks and thrift
institutions, industrial banks, leasing companies, insurance companies,
manufacturers and vendors. On a local level, we compete with community banks
and smaller finance and mortgage companies. Some of our competitors have
substantial local market positions that are stronger than ours. Many of our
competitors have substantial capital and technological and marketing
resources. Some of these competitors are larger than we are and have access to
capital at a lower cost than we do.
11
We compete primarily on the basis of service, terms and structure. From time
to time, our competitors seek to compete aggressively on the basis of these
factors. We may lose market share if we are unwilling to match our
competitors' service, terms and structure. If we match our competitors' terms
or structure, we may experience lower net income and/or increased credit
losses.
General Risks Related To Our Commercial Lending And Servicing Activities
We originate commercial business and mortgage loans and equipment leases
through CBC, the Income Property Lending Division ("IPL") of the Bank,
Southern Pacific BanCapital ("SPBC"), and Lewis Horwitz Organization ("LHO"),
each a division of the Bank, and provide master repurchase facilities through
Imperial Warehouse Finance, Inc., a wholly owned subsidiary of the Bank
("IWF"). We also service various equipment leases through our wholly-owned
subsidiary, Imperial Business Credit, Inc. ("IBC"). See "The Company." We are
subject to various risks, including those described below, relating to such
activities.
Borrower Defaults May Result In Losses On Our Loans. During the time we hold
commercial business loans for investment or for sale we are subject to risks
of borrower defaults, bankruptcies and losses that are not covered by
insurance (such as those occurring from earthquakes). Commercial mortgage
lending is generally viewed as involving greater risk than residential
mortgage lending partly because it typically involves larger loans. Further,
the repayment of commercial mortgage loans secured by income-producing
properties is typically dependent upon the tenant's ability to meet its
obligations under the lease relating to the property. A borrower default may
subject us to a loss on the mortgage loan.
Also, although our commercial business loans are often collateralized by
equipment, inventory, accounts receivable or other business assets, the
liquidation value of these assets in the event of a borrower default may be an
insufficient source of repayment and the value we receive in liquidating such
assets may be less than the expected or appraised value of such assets.
Prepayments Of Commercial Business Loans May Adversely Affect Operations. To
reduce our exposure on prepayment, the Bank and our other lending subsidiaries
generally discourage their commercial borrowers from prepaying their loans by
requiring prepayment fees from the borrowers for early prepayment. However,
commercial business loan prepayment rates vary from time to time which may
change the anticipated amount of our net interest income. Prepayments on
commercial business loans are affected by the terms and credit grades of the
loans and general economic conditions. If the loans are prepaid, the Bank and
our lending subsidiaries would receive prepayment fees but would lose the
opportunity to earn interest at that rate over the expected life of the loans.
Prepayment restrictions can, but do not necessarily, provide a deterrent to
prepayments. In addition, the borrower on a commercial business loan may not
be able to pay all or a portion of any required prepayment charges. This may
occur where the prepayment results from acceleration of the commercial
business loan following a payment default. At the time any prepayment charges
are required to be made in connection with a defaulted commercial business
loan, foreclosure or other collateral proceeds may not be sufficient to make
such payments.
We also do not know that the obligation to pay such prepayment charge will
be enforceable under applicable law in all circumstances.
We Are Dependent On Small And Mid-Size Borrowers. CBC originates commercial
business loans typically to small and medium size commercial businesses
located primarily within California. Small commercial loans may entail a
greater risk of non-performance and higher delinquencies and losses than loans
to larger business. Since small to mid-size businesses are typically
privately-owned, there is generally no publicly available information about
such companies and CBC must rely on the diligence of its employees and agents
to obtain information about these companies. As a result, CBC is subject to
risks of borrower fraud or misrepresentation. Also, the success of small and
medium sized businesses depends on the management talents
12
and efforts of a small group of persons. The death, disability or resignation
of one or more of these persons could have a material adverse impact on that
company. Also, small and medium sized business:
. frequently have smaller market shares than their competition
. may be more vulnerable to economic downturns
. often need substantial additional capital to expand or compete
. may experience substantial variations in operating results.
Any of these may have an adverse effect on a borrower's ability to repay a
loan.
Asset Valuations May Vary From Collateral Values Upon A Sale. CBC's loans
are underwritten in accordance with CBC's underwriting guidelines which permit
borrowers to borrow up to a specified percentage of the value of their
accounts receivable, inventory and other business assets pledged as collateral
in connection with the loans. The value of the accounts receivable is derived
from a formula based upon the age and collectibility of the accounts and their
revenues and cash flows. We cannot assure you that CBC's valuations actually
reflect amounts that we could realize upon a current sale of the accounts
receivable, inventory and other business assets.
CBC's Concentration In Various Sectors May Expose CBC To Industry Cycles And
Other Industry Related Risks. CBC has historically concentrated its lending
efforts in the domestic technology, telecommunications and aircraft
industries. To effectively market their products and attract and retain
qualified personnel, high technology businesses have to respond rapidly to:
. competitive developments
. technological changes
. new product introductions
. changing client needs
. evolving industry standards
Borrowers' products and services could be rendered obsolete and unmarketable
by any of these factors and they may not be able to repay their loans. In
addition, technology evolves rapidly and inventory, subscriber bases and other
business assets could become obsolete, and in the domestic aircraft industry
certain existing product designs are becoming outdated, each of which may
impair the value of the inventory securing the loans. A material decrease in
borrowers' sales or the value of their accounts receivable and inventory could
impair their ability to repay their loans and our results of operations could
be adversely affected.
A Division of the Bank Has Experienced Significant Recent Charge-offs and
Loan Losses Relating to Its Nationally Syndicated Loan Investments And May
Experience Additional Charge-offs and Losses In The Future Which Would
Adversely Affect Our Results of Operations. The Loan Participation and
Investment Group ("LPIG"), a division of the Bank, experienced a significant
increase in charge offs totaling $32.3 million during the year ended December
31, 2000 as compared to $3.9 million during the previous year. Also, LPIG
recorded a provision for loan losses of $39.3 million during the year ended
December 31, 2000 as compared to $7.0 million during the previous year. The
increases in charge offs and provision for loan losses directly related to
LPIG's investment in nationally syndicated bank loans. These increases
occurred primarily as a result of high default rates on these nationally
syndicated bank loans. LPIG has no direct control in the collection policies
or procedures on these loans, as these functions are dictated and managed by
third party lead syndicating banks. Additionally, certain charge-offs taken in
the LPIG portfolio were mandated by the federal banking regulatory agency for
the lead syndicating bank as part of its annual review of these loans. We have
been reducing the amount of LPIG's commitments and outstanding loan balances,
which were $289.1 million and $123.5 million at December 31, 2000 as compared
with $459.5 million and $217.0 million at December 31,
13
1999, respectively. However, there is no assurance that LPIG will not continue
to experience significant charge-offs and losses in its nationally syndicated
bank loan portfolio as a result of future loan defaults and provisions for
loan losses and/or the level of loan charge-offs mandated by the applicable
federal banking regulatory agency, which would adversely affect our results of
operations.
The Profitability Of The Properties Securing Our Loans Is Uncertain. Profits
of commercial properties that secure our commercial mortgage loans are
dependent on the performance and viability of the property. The property
manager is responsible for responding to changes in the local market, planning
and implementing the rental structure, including establishing appropriate
rental rates, and advising the borrower so that maintenance and capital
improvements can be carried out in a timely fashion. All of these factors may
impact the borrower's ability to make payments under the commercial mortgage
loan, which may adversely affect the timing and amount of payments we receive
with respect to the loan. There is no assurance that property underlying a
commercial mortgage loan will produce a profit.
Additional Losses May Result From Our Foreclosure Of Collateral. Some of our
commercial mortgage loans may be non-recourse to the borrower. In the event of
foreclosure on a commercial mortgage loan, we may experience a loss if the
value of the property and other collateral securing the loan is less than the
unpaid amount on the loan. Also, we may experience costs and delays involved
in enforcing rights of a property owner against tenants in default under the
terms of their leases. These factors may adversely affect the timing and
amount of payment we receive on foreclosed commercial mortgage loans.
We Have Loans With Balloon Payments Which Have A Greater Chance Of
Defaults. A certain percentage of our commercial mortgage loans have a balloon
payment due at maturity. These loans involve a greater risk than loans which
are paid off gradually in equal installments since the ability of a borrower
to pay such amount will normally depend on its ability to fully refinance the
commercial mortgage or sell the related property at a price sufficient to
permit the borrower to make the balloon payment.
Environmental Factors May Adversely Affect Value Of Underlying Commercial
Mortgage Loans. Contamination of real property may give rise to a lien on that
property to assure payment of the cost of clean-up or, in certain
circumstances, may result in liability to the lender for that cost. Such
contamination may also reduce the value of the property. If we are or become
liable, we can bring an action for contribution against the owner or operator
who created the environmental hazard, but that person or entity may be
bankrupt or otherwise judgment proof. If we become responsible, environmental
clean-up costs may be substantial.
The Value Of Our Commercial Mortgage Loans May Be Adversely Affected By The
Underlying Commercial Properties. The ability of a borrower to meet the
obligations under a commercial mortgage loan and to make timely and sufficient
payments on the mortgage loan are affected by several factors depending on the
type of commercial property. These factors include the ability to lease, renew
and relet the space, regional and national economic conditions and increased
costs of operating a property.
We May Be Adversely Affected By Reductions In Demand For Commercial Loans
And Equipment Leases. The demand for our commercial loans and equipment leases
are dependent in part upon the size and level of activity in the commercial
lending and leasing market which is affected by:
. interest rates
. regional and national economic conditions
. fluctuations in commercial and multifamily property values
. fluctuations in business values
. general regulatory and tax developments
14
If our loan originations, participations or purchases decrease, we could
have:
. decreased economies of scale
. higher origination costs per loan or lease
. reduced interest and fee income
. smaller gains on the sale of loans or revenues from the servicing of our
leases
In addition, the origination by LHO of commercial production loans for motion
picture and television production may be adversely affected in the near term
if current negotiations between the Screen Actors Guild and various production
studios and other production companies fail and a strike results.
We May Incur Losses Due To The Volatile Nature Of The Mortgage
Industry. Through IWF, we offer short-term master repurchase facilities to
third party mortgage bankers. These third parties use these facilities for
their purchase of residential mortgage loans until they are able to sell the
loans. Some of our borrowers rely on the secondary market to sell or
securitize loans they originate. During 1999 and 2000, some of our borrowers
had difficulty selling their loans on a profitable basis. If such borrowers
are unable to make timely payments on their borrowings from us we may incur
losses.
The value of the collateral underlying our repurchase facilities may
decrease as a result of the large number of mortgage loans available for sale
in the secondary market and increases in interest rates. We may be required to
make margin calls on certain of our lines to further secure the borrowings.
There is no assurance that our borrowers would be able to meet these margin
calls or that any such margin calls will not adversely affect their
operations.
We May Incur Credit Losses In Providing Repurchase Facilities. As a
repurchase facility lender, we lend money to mortgage bankers on a secured
basis and are subject to many risks including fraud, borrower default and
bankruptcy. Any of these could result in credit losses for us. Our claims as a
secured lender in a bankruptcy proceeding may be subject to adjustment and
delay.
IBC's Profitability Is Dependent On Its Ability To Provide Cost Effective
And Efficient Servicing. IBC depends on its capacity to service its previously
originated equipment leases and equipment leases originated by SPBC. The net
revenues that IBC generates from such activities are dependent on its ability
to provide competent, attentive and efficient servicing and collection on a
cost effective basis and on the volume of equipment leases originated by SPBC.
The volume of originations of equipment leases by SPBC is subject to various
risks. See "--We May Be Adversely Affected By Reductions In Demand For
Commercial Loans And Equipment Leases."
Recent Credit Downgrades On Our Debt May Adversely Affect Our Results Of
Operations. As a result of the recent credit downgrades on our senior
indebtedness by Moody's and Standard and Poor's ratings services, IBC is in
technical default of the terms of the IBC Lease Receivables Trust 1997-2
("1997-2 Trust"), which trust issued certain Class A, Class B and Class C
certificates. Due to this default, the insurer of the Class A certificates may
cause the 1997-2 Trust to go into "Turbo" amortization. Under Turbo
amortization, virtually all cash flows generated in the 1997-2 Trust would be
used to pay off the outstanding balance of the Class A certificates, which was
$141.1 million at December 31, 2000, while the Class B and C Certificates, a
majority of which are owned by IBC, would receive virtually no cash flows for
principal and interest payments until the Class A certificates have been paid
in full. IBC received a monthly waiver of this technical default in March
2001. The waiver may be renewed monthly by the insurer, at its option. There
is no assurance, however, that the insurer will continue to grant the monthly
waiver to IBC. If the waiver were not to be granted, IBC's monthly cash flow
would decrease by approximately $1.0 million per month, and as a result, cash
flow to the Company would decrease by approximately $500,000 per month. The
outstanding balances of the securities and retained interests in the 1997-2
Trust owned by IBC were $9.0 million and $4.2 million at December 31, 2000,
respectively.
15
Loss Of Residual Value On Certain Assets Would Adversely Affect IBC And
SPBC's Results Of Operations. IBC and SPBC retain a residual interest in the
equipment covered by certain of their equipment leases. The estimated fair
market value of the equipment at the end of the contract term of the lease, if
any, is reflected as an asset on IBC's or the Bank's balance sheet. Results of
operations depend, to a limited degree, upon their ability to realize such
residual value. Realization of residual values depends on many factors outside
our control including:
. general market conditions at the time of expiration of the lease,
. unusual wear and tear on, or use of, the equipment,
. the cost of comparable new equipment,
. the extent to which the equipment has become technologically or
economically obsolete during the contract term, and
. the effects of any additional or amended tax or accounting rules.
Risks Related to Our Asset Management Activities and Investments
We May Be Adversely Affected By The Liquidation Of Funds Managed By ICAM Or A
Loss Of Its Management Fees. Our wholly-owned subsidiary, Imperial Credit Asset
Management, Inc. ("ICAM"), currently manages the Pacifica Partners I, a $500
million collateralized loan obligation fund (the "CLO Fund"), and the Cambria
Investment Partnership I, L.P. ("Cambria") fund and earns management fees for
managing these funds. See "The Company--Asset Management Activities." Our
primary risks relating to such management activities are that (i) the
successful management of the CLO Fund and Cambria and the resulting management
fees anticipated therefrom are dependent upon the services of the existing
officers of ICAM and in the event of the departure or death of such officers
ICAM's ability to manage these funds may be adversely impacted and (ii) the
investors in these funds have the ability under certain circumstances to cause
these funds to be liquidated (and such funds may be required to be liquidated
in the event of a default of our management obligations for such funds). The
result of such a required liquidation of such funds would be the loss of our
management fees relating to these funds and could be a substantial loss in the
value of our investments in these funds if the assets of such funds could not
be sold at a price that normally prevail in the market. See "--Risks Associated
with Investment Activities--Liquidity Risk" below.
We May Incur Losses Relating To Our Investments In Volatile Assets. Our
investments in retained interests, subordinated bonds from loan
securitizations, interest only securities and total return swaps were
$6.3 million, $21.0 million, $10.0 million and $92.8 million, respectively, at
December 31, 2000 as compared to $10.2 million, $12.2 million, $12.0 million
and $56.9 million, respectively, at December 31, 1999. The valuation of these
assets are impacted by many factors including, among others, interest rates,
prepayments or defaults on loans and leases, volatility in the secondary loan
markets and those factors described below under "--Risks Associated with
Investment Activities." During the years ended December 31, 2000 and 1999, we
incurred writedowns and mark-to-market losses primarily related to these assets
of $12.8 million and $28.6 million, respectively. There can be no assurances
that we will not continue to incur additional writedowns or mark-to-market
losses in future periods.
Risks Associated with Investment Activities. At December 31, 2000, we had
invested approximately $51.3 million and $6.0 million in the CLO Fund and
Cambria, respectively. The value of these investments are subject to certain
inherent risks, including those described below and the risks relating to a
liquidation of either or both of the CLO Fund and Cambria fund, as described
above in "--We May Be Adversely Affected By The Liquidation Of Funds Managed By
ICAM Or A Loss Of Its Management Fees."
Credit Risk. This is the risk that the issuer of a security, or the
counterparty to a contract, will default or otherwise become unable to honor a
financial obligation. Credit risk is generally higher for non-investment grade
securities. The price of a security can be adversely affected prior to actual
default as its credit status deteriorates and the probability of default rises.
16
Leverage Risk. This is the risk associated with securities or practices that
multiply small index or market movements into large changes in value. Leverage
is often associated with investments in derivatives, but also may be embedded
directly in the characteristics of other securities.
Liquidity Risk. This is the risk that certain securities may be difficult or
impossible to sell at the time and the price that would normally prevail in the
market. We may have to lower the price, sell other securities instead or forego
an investment opportunity, any of which could have a negative effect on our
investment performance. This includes the risk of missing out on an investment
opportunity because the assets necessary to take advantage of it are tied up in
less advantageous investments.
Management Risk. This is the risk that an investment strategy used by us may
fail to produce the intended result. This includes the risk that changes in the
value of a hedging instrument will not match those of the asset being hedged.
Incomplete matching can result in unanticipated risks.
Market Risk. This is the risk that the market value of a security may move up
and down, sometimes rapidly and unpredictably. These fluctuations may cause a
security to be worth less than the price originally paid for it, or less than
it was worth at an earlier time. Market risk may affect a single issuer,
industry, sector of the economy or the market as a whole. There is also the
risk that the current interest rate may not accurately reflect existing market
rates. For fixed income securities, market risk is largely, but not
exclusively, influenced by changes in interest rates. A rise in interest rates
typically causes a fall in values, while a fall in rates typically causes a
rise in values. Also, key information about a security or market may be
inaccurate or unavailable.
Prepayment Risk. This is the risk that the principal repayment of a security
will occur at an unexpected time, especially the repayment of a mortgage or
asset-backed security which occurs either significantly sooner or later than
expected. Changes in pre-payment rates can result in greater price and yield
volatility. Prepayments generally accelerate when interest rates decline. When
mortgage and other obligations are prepaid, we may have to reinvest in
securities with a lower yield. Further, with early prepayment, we may fail to
recover any premium paid, resulting in an unexpected capital loss.
Regulatory Risk. This is the risk associated with Federal and state law which
may restrict the remedies that a lender has when a borrower defaults on loans
or leases. These laws include restrictions on foreclosures, redemption rights
after foreclosure, Federal and state bankruptcy and debtor relief laws,
restrictions on "due on sale" clauses, and state usury laws.
The Value of Our Portfolio of Securitization-Related Assets is Subject to
Fluctuation
We have invested in asset or mortgage backed securities known as "interest-
only" residual interest and subordinated securities. These securities were
generally created through our own securitizations, but may have included those
of third parties. Investments in residual interest and subordinated securities
are riskier than investments in senior asset-backed securities because these
subordinated securities bear all credit losses prior to the related senior
securities. On a percentage basis, the risk associated with holding residual
interest and subordinated securities is greater than holding the underlying
loans or leases. This is due to the concentration of losses in the residual
interests and subordinated securities.
We estimate future cash flows from these securities and value them utilizing
assumptions concerning:
. discount rates
. prepayments and
. credit losses
If our actual experience adversely differs from our assumptions we would be
required to reduce the value of these securities and record a non-cash charge
to operations. The market for our asset-backed securities is
17
extremely limited and we cannot assure you that we could sell these securities
at their reported value or at all. Also, we may never recoup our initial
investment in these securities.
We also bear the risk of loss on any asset-backed securities we have
purchased in the secondary market. If third parties had been contracted to
insure against these types of losses, we would be dependent in part upon the
creditworthiness and claims paying ability of the insurer and the timeliness of
reimbursement in the event of a default on the underlying obligations. The
insurance coverage for various types of losses is limited, and we would bear
the risk of any losses in excess of the limitation or outside of the insurance
coverage.
In addition, we may not obtain our anticipated yield due to prepayments or we
may incur losses if the credit support available within certain asset-backed
securities is inadequate due to unanticipated levels of losses, or due to
difficulties experienced by the credit support provider. Delays or difficulties
encountered in servicing asset-backed securities may cause greater losses and,
therefore, greater resort to credit support than was originally anticipated.
This may also cause a rating agency to downgrade certain classes of our
securities.
We May Have Losses Related to our Asset-Backed Securities
Asset-backed securities issued in connection with our securitizations have
been non-recourse to us, except in the case of a breach of standard
representations and warranties made by us when the loans are securitized. While
we have recourse against the sellers of loans and leases, we cannot assure you
that they will honor their obligations. In the past we have engaged (and may in
the future engage) in bulk whole loan/lease sales pursuant to agreements that
provide for recourse by the purchaser against us. In some cases, the remedies
available to a purchaser of loans and leases from us are broader than those
available to us against those who sell us these loans and leases. If a
purchaser exercises its rights against us, we may not always be able to enforce
whatever remedies we may have against our sellers.
The Secondary Markets May Adversely Affect New Securitizations
Historically, as part of our strategy, we sold substantially all of our loans
and leases through securitization or whole loan sales, except loans held for
investment by the Bank. These securitizations were primarily conducted by the
Bank. We do not currently rely on securitizations as part of our business
strategy. However, as we expand into new businesses we may again become
affected by risks associated with the securitization market. Our ability to
complete any future securitizations will be dependent upon general conditions
in the securities and secondary markets and the credit quality of the loans and
leases. We may not always be able to profitably access the securitization
market to sell our loans and leases. Our future cash flows could be negatively
impacted if we cannot access this market when necessary.
In addition, delays in closing sales of our loans will increase our risk by
increasing the warehousing period for the loans, further exposing our company
to credit risk. If we are unable to profitably complete securitizations or
whole loan sales as required, we will have to utilize other sources of
financing which may be on less favorable terms or not available at all.
Our Preferred Share Purchase Rights Plan May Discourage Takeover Attempts
In October 1998, we distributed preferred share purchase rights to our
shareholders pursuant to the Shareholder Rights Plan. Each share of our Common
Stock has a preferred share purchase right attached to it. The rights will
become exercisable under certain specified circumstances involving the
acquisition of or tender offer for 15% or more of our issued and outstanding
shares of Common Stock (25% or more for any person or group holding 15% or more
of our Common Stock at October 1998). Our board may also reduce the ownership
levels to 10%. The rights may discourage hostile attempts to take over our
Company by causing substantial dilution to a person or group that attempts to
acquire our company on terms that our board of directors has not approved.
18
USE OF PROCEEDS
Assuming the Settlement Warrants are exercised in full at their initial
exercise price, we will receive aggregate gross proceeds of $9,000,000 before
deducting our estimated expenses of $77,250. Any net proceeds to the Company
from the sale of any of the Shares upon exercise of the Settlement Warrants
will be used by us for working capital and other general corporate purposes.
THE COMPANY
We are a diversified commercial lending and financial services holding
company with consolidated assets of $2.1 billion as of December 31, 2000. Our
business activities are primarily conducted through our wholly owned
commercial banking subsidiary, Southern Pacific Bank (the "Bank"). We also own
approximately 38% of Imperial Capital Group, LLC ("IC"). Our core businesses
originate commercial loans, real estate loans and commercial leases funded
primarily by the FDIC-insured deposits of the Bank.
We offer loan and lease products and provide asset management services in
the following sectors:
Business Finance Lending.
Our business finance lending is primarily conducted through the Bank, with
additional servicing activities being conducted through Imperial Business
Credit, Inc., which is another of our wholly-owned subsidiaries.
Southern Pacific Bank. The Bank is an industrial bank organized under
California law that had approximately $1.6 billion in deposits at December 31,
2000. Its business finance lending is offered through the following Bank
divisions and subsidiaries:
. Coast Business Credit. ("CBC") is the asset based lending division of
the Bank that makes revolving lines of credit and term commercial loans
available to small-to-medium-sized businesses that are primarily in the
transportation, equipment leasing, durable goods, electronics and
electronic equipment manufacturing industries. CBC's commitments and
outstanding loan balances were $1,389.7 million and $752.9 million at
December 31, 2000 as compared with $1,392.0 million and $748.1 million at
December 31, 1999.
. Imperial Warehouse Finance, Inc. ("IWF") is a wholly owned subsidiary
of the Bank which provides nationwide short-term repurchase facilities to
residential mortgage bankers. IWF's repurchase facilities provide such
mortgage bankers with the ability to do same day closings and sales of such
residential mortgage loans in the secondary market. Under a participation
agreement between the Bank and IWF, the Bank funds 100% of IWF's repurchase
facilities. IWF's repurchase facility commitments and outstanding balances
were $154.9 million and $50.6 million at December 31, 2000 as compared with
$300.4 million and $78.1 million at December 31, 1999.
. The Loan Participation and Investment Group. ("LPIG") is a division of
the Bank which invests in and purchases senior secured debt of other
companies (referred to as a "participation") offered by commercial banks in
the secondary market. The principal types of loans acquired by LPIG are
senior-secured bank loans, in the form of revolving lines of credit and
long-term loans or letters of credit. As a part of its business, LPIG
invests in loan participations through both on and off balance sheet
financing arrangements. The on balance sheet investments are funded by the
FDIC-insured deposits of the Bank, while LPIG's off balance sheet financing
is primarily conducted through various trust and total return swap
instruments. LPIG's commitments and outstanding balances were $289.1
million and $123.5 million at December 31, 2000 as compared with $459.5
million and $217.0 million at December 31, 1999. Also, at December 31,
2000, LPIG had $65.2 million in outstanding principal amount of loans
funded through total return swaps.
19
. Southern Pacific BanCapital. ("SPBC") is a division of the Bank which
originates middle market equipment leases that are funded by the Bank and
for which Imperial Business Credit, Inc., our wholly-owned subsidiary
("IBC"), is contracted as the lease servicer. SPBC originates and acquires
operating and capital equipment leases for medium-sized business in various
industries throughout the United States. SPBC had $10.0 million in leases
at December 31, 2000. We are currently evaluating our future plans with
respect to SPBC and its operations.
. Lewis Horwitz Organization. ("LHO") is a division of the Bank which is
engaged in providing financing for independent motion picture and
television production. Typically, LHO lends to independent producers of
film and television on a senior secured basis, basing its credit decisions
on the creditworthiness and reputation of distributors and sales agents who
have contracted to distribute the films. LHO's commitments and outstanding
balances were $101.4 million and $83.7 million at December 31, 2000 as
compared with $23.1 million and $15.8 million at December 31, 1999.
Imperial Business Credit, Inc. ("IBC") is a lease portfolio servicing entity
which services its existing portfolio of equipment leases and a new portfolio
of middle market equipment leases originated by SPBC. Historically, the focus
of IBC's lease activities had been small ticket equipment lease financing to
small and medium-sized businesses. During the first quarter of 2000, it was
determined that IBC could not make the returns necessary to continue in
business as an originator of new leases. Accordingly, in April, 2000, IBC
ceased originating new business and its origination offices were sold or
closed. The total amount of leases serviced by IBC at December 31, 2000 was
$170.8 million as compared with $243.5 million at December 31, 1999.
Multifamily and Commercial Mortgage Lending.
Our multifamily and commercial mortgage lending operations are conducted
through the Income Property Lending Division ("IPL") of the Bank. The focus of
IPL's lending activities is the small loan market for 5+ unit multifamily
apartments and commercial buildings. IPL generally seeks to make 70% of its
loans secured by apartment buildings and 30% of its loans secured by
commercial properties. Most of IPL's loans have been secured by properties in
California. IPL's loans funded and outstanding loan balances were $235.9
million and $364.2 million at December 31, 2000 as compared with $339.7
million and $254.1 million at December 31, 1999.
Asset Management Activities.
Our advisory and asset management services are conducted through Imperial
Credit Asset Management, Inc. ("ICAM"). Through October 22, 1999, we also
conducted asset management services through Imperial Credit Commercial Asset
Management Corp. ICAM manages Pacifica Partners I L.P., and Cambria Investment
Partnership I, L.P. ("Cambria"). Pacifica Partners I is a $500 million
collateralized loan obligation fund (the "CLO Fund") which we launched in
August 1998. Pacifica Partners I's assets consist of approximately $400
million in nationally syndicated bank loans and approximately $100 million in
high yield bonds. We had net cash of $51.3 million invested in the
subordinated and equity interests of Pacifica Partners I through December 31,
2000. We also had, at December 31, 2000, $6.0 million invested in Cambria,
which is a hedge fund that invests in syndicated bank loans. For the years
ended December 31, 2000 and 1999, ICAM or another affiliated entity generated
management fee revenues of $159,000 and $833,000, respectively, from managing
Cambria and $3.1 million and $3.1 million, respectively, from managing
Pacifica Partners I.
20
RECENT DEVELOPMENTS
Regulatory Orders; Recapitalization Transactions
As a result of the 2000 Examination, the Bank consented to the issuance of a
Cease and Desist Order by the FDIC dated December 15, 2000 and a Final Order
of the DFI dated December 27, 2000. As disclosed more fully under Item 1.
Business--Regulation--General" in our Current Annual Report, the Regulatory
Orders impose a number of requirements including, among others, increasing the
Bank's regulatory capital and regulatory capital ratios, prohibitions in
payments of Bank dividends without regulatory approval, classified asset
reductions, lending policy restrictions and procedures, and other such
restrictions. Following issuance of the Regulatory Orders, we have added
credit and risk management personnel and have reduced the Bank's classified
assets through collections and charge-off. We have also begun to improve the
capital of the Bank. In this connection, on March 30, 2001, we purchased $36
million worth of shares of Series B Preferred in exchange for $14 million in
cash ($9 million of which were proceeds from our offering of Senior Secured
Debt (as described in "--Recapitalization Transactions"), and the retirement
of $22 million in aggregate principal amount of subordinated debt of the Bank
held by us. Also on that date we made a capital contribution of $7.2 million
in cash, the balance of the proceeds from our offering of Senior Secured Debt,
to the Bank.
Recapitalization Transactions
In order to assist the Bank in complying with the Regulatory Orders, we have
entered into a Master Recapitalization Agreement, dated as of March 29, 2001
(the "Recapitalization Agreement"), with holders (the "Signatory Debtholders")
of a majority in outstanding aggregate principal amount of our 10.25%
Remarketed Redeemable Par Securities, Series B (the "ROPES") and 9.875% Senior
Notes due 2007 (the "Old Senior Notes") and with certain investors identified
therein in our Senior Secured Debt (the "Secured Debt Purchasers"). The
Recapitalization Agreement generally provides for the restructuring of our
outstanding senior indebtedness and the issuance of new equity and debt
securities of the Company through certain recapitalization transactions.
The following descriptions of the recapitalization transactions provided for
in, and the descriptions of, the Recapitalization Agreement (collectively, the
"Recapitalization Transactions") are qualified in their entirety by the more
detailed descriptions of the Recapitalization Transactions and
Recapitalization Agreement contained under Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Recapitalization
Transactions of our Current Annual Report and the corresponding terms and
provisions contained in the Recapitalization Agreement, which is attached as
Exhibit 20.1.1 to our Current Annual Report, and the other operative
agreements that are exhibits to the Recapitalization Agreement, of which the
12% Senior Secured Notes due April 30, 2002, the related Collateral Agency and
Security Agreement and the Exchange Note Registration Rights Agreement are
attached as Exhibits 20.1.3, 20.1.4 and 20.1.2, respectively, to our Current
Annual Report.
Our Recapitalization Transactions are generally as follows:
First, we intended to issue $16,200,000 in aggregate principal amount of 12%
Senior Secured Notes due April 30, 2002 (the "Senior Secured Debt") to the
Secured Debt Purchasers, and, on March 30, 2001, we did issue $16,200,000 of
Senior Secured Debt to those purchasers.
Second, we intend to offer the following securities in exchange (the "Debt
Exchange") for our three currently outstanding series of debt securities
consisting of the ROPES, the Old Senior Notes and 9.75% Senior Notes due 2004
(collectively, the "Old Notes"): (i) Senior Secured Notes due 2005 (the
"Exchange Notes"), (ii) up to 2.0 million shares of our common stock, no par
value ("Common Stock"), and (iii) warrants (the "Debt Exchange Warrants") to
purchase up to an additional 7.0 million shares of Common Stock at an exercise
price of $2.15 per share.
21
Third, on or following consummation of the Debt Exchange, we intend to issue
and sell on a best efforts basis through our placement agent, IC, $10,000,000
or more in aggregate principal amount of 12% Convertible Subordinated Notes due
2005 (the "Convertible Subordinated Debt"), which will be convertible after
three years into our Common Stock at a conversion price of $1.25 per share, to
accredited investors in a private placement (the "Convertible Subordinated Debt
Placement").
Fourth, in connection with the Debt Exchange, we are also obligated under the
Recapitalization Agreement to issue up to 7.04 million shares of our Common
Stock to the Signatory Debtholders, subject to reduction in certain events.
Fifth, subject to the occurrence of certain conditions (including
consummation of the Debt Exchange and the Convertible Subordinated Debt
Placement), all of the Senior Secured Debt will be exchanged for $18,200,000
aggregate principal amount of Exchange Notes, 249,052 shares of Common Stock
and Debt Exchange Warrants to purchase up to an additional 871,681 shares of
Common Stock. The Secured Debt Purchasers will thereafter have the right
through March 31, 2002 to elect to exchange all or a portion of their Exchange
Notes and related shares of Common Stock and Debt Exchange Warrants into an
equal aggregate principal amount of Convertible Subordinated Debt. If we do not
receive a notice of such election from any Secured Debt Purchaser during such
period, such purchaser will be deemed to have elected to retain its Exchange
Notes and the related shares of Common Stock and Debt Exchange Warrants.
Recent Operating Losses
We have reported a net loss of $104.6 million and $163.3 million,
respectively, for the fourth quarter and year ended December 31, 2000. The
losses in both periods primarily resulted from loan and lease loss provisions
for such periods of $66.3 million and $181.0 million, respectively, as a result
of increased non-performing loans, and charge-offs at CBC and LPIG. Also
contributing to the operating losses in both periods were mark-to-market
charges totaling $4.8 million and $12.8 million, respectively, primarily as a
result of increased defaults in IBC's securitized lease portfolio and declining
market values of loan participations funded through total return swaps at the
Bank. We also incurred legal, professional and lawsuit settlement costs of $3
million and $15.8 million, respectively, during these periods primarily related
to collection costs related to non-accrual loans and settlement costs related
to class action lawsuits against the Company.
As a result of these charges and costs incurred by us in the fourth quarter
of 2000, we established a $63.3 million deferred tax asset valuation allowance.
Our ability to reduce part or all of this valuation allowance will be dependent
on our returning to profitability in the future. Our ability to retain and
derive any benefits from our remaining $10.0 million deferred tax asset is
dependent on our future profitability.
The Bank's Regulatory Capital
The Bank's regulatory capital has been significantly reduced from the levels
that existed at September 30, 2000. As a result of the increased loan and lease
loss provisions, deferred tax valuation allowances, and the resulting operating
losses, the Bank's capital ratios have declined dramatically and are currently
well below the 8% and 4% minimum levels required for the Bank to be categorized
as "adequately capitalized" (as defined by applicable banking regulations). The
Bank's total risk based capital ratio and FDIC leverage ratio were 6.59% and
3.46%, respectively, at December 31, 2000 as compared to 9.35% and 5.47% at
September 30, 2000, respectively.
Accordingly, as of December 31, 2000, the Bank was considered an
"undercapitalized" institution. However, on March 30, 2001, we purchased $36
million worth of shares of Series B Preferred in exchange for $14 million in
cash and the retirement of $22 million in aggregate principal amount of
subordinated debt of the Bank held by us and also made a capital contribution
of $7.2 million in cash to the Bank. As a result of these March 30, 2001
actions, the Bank has been restored to an "adequately capitalized" level;
however, the Bank's capital levels and capital ratios remain below the levels
required by the Regulatory Orders. See "Risk Factors--
22
Regulatory Considerations--The Bank Was Categorized An "Undercapitalized"
Institution On December 31, 2000" and "--Regulatory Orders Have Been Issued
Requiring Improvements In The Bank's Regulatory Capital And Imposing Other
Significant Requirements And Some Of These Requirements Have Not Been Met."
Continued High Provisions for Loan and Lease Losses
Our results of operations for the fourth quarter of 2000 continued to be
affected by a high level of provisions for loan and lease losses. The
continued high level of loan and lease loss provisions is primarily related to
the further deterioration of previously classified problem loans and the
accelerated liquidation of these assets, resulting in higher charge-offs. We
recorded a $66.3 million provision for loan and lease losses for the quarter
ending December 31, 2000 to provide for additional losses arising during such
period in the Bank's loan portfolio. The provision for loan and lease losses
for the same period in 1999 was $7.2 million. In addition, we have increased
the provision for loan and lease losses for 2000 to $181.0 million as compared
to $35.3 million for 1999.
Possible Nasdaq Delisting
We were informed by Nasdaq in a letter dated January 18, 2001 that our
Common Stock may be delisted from the Nasdaq National Market in that it had
failed to maintain a minimum bid price of $1.00 over the prior 30 consecutive
trading days as required by NASD Rule 4450(a)(5) (the "Nasdaq Rule") unless
the Company meets the requirements for continued listing under the Nasdaq Rule
within ninety (90) days of the date of such letter, or April 18, 2001. Nasdaq
indicated that if the minimum bid price for our Common Stock was at least
$1.00 per share for at least ten consecutive trading days at any time before
April 18, 2001, Nasdaq would determine if we complied with Nasdaq Rule.
However, if we are unable to demonstrate our compliance with the Nasdaq Rule
by April 18, 2001, Nasdaq indicated that it would provide us with written
notification that our securities would be delisted. At such time, we would
have the opportunity to appeal Nasdaq's decision to a Nasdaq listing
qualification panel. Based upon market information as of the close of trading
on April 10, 2001, the Common Stock traded at a closing bid price of $0.82 per
share and a closing ask price of $0.83 per share with a closing price of $0.83
per share, resulting in a public float of approximately $26,639,980. Since the
date of the Nasdaq letter though April 10, 2001, we have not had ten
consecutive trading days in which the bid price of our Common Stock has been
at least $1.00 per share, nor do we meet as of the date of this prospectus the
requirements for continued listing. No assurance can be given that our Common
Stock will satisfy the requirements of the Nasdaq Rule to maintain its listing
on the Nasdaq National Market. See "Risk Factors--Business and Other
Considerations--The Price And Liquidity Of Our Common Stock May Be Adversely
Effected By Our Possible Delisting From Nasdaq National Market System."
Settlement of Class Action Litigation
Under an agreement between the Company and the plaintiffs' counsel in the
securities class action litigation identified as In re Southern Pacific
Funding Corporation Securities Litigation, Lead Case No. CV98-1239-MA, in the
U.S. District Court for the District of Oregon (the "Class Action
Litigation"), the Company paid $3.0 million and agreed to issue the Settlement
Warrants referred to herein to purchase three million shares of Common Stock
with an exercise price of $3.00 per share, subject to certain anti-dilution
adjustments. Under the terms of the warrant agreement pursuant to which the
Settlement Warrants are being issued, we have agreed to file the registration
statement of which this prospectus is a part to register the issuance of the
shares of our Common Stock underlying the Settlement Warrants.
23
PLAN OF DISTRIBUTION
The Shares offered hereby are being offered directly by the Company to the
holders of the Settlement Warrants. No underwriter, broker or dealer is
involved in this offering and there will be no underwriting, brokerage or
dealer commissions paid in connection with this offering.
In October 2000, we reached an agreement with the plaintiffs' counsel to
settle the Class Action Litigation. As a part of the settlement, we have
issued the Settlement Warrants referred to herein to purchase three million
shares of our Common Stock at an exercise price of $3.00 per share, subject to
certain anti-dilution adjustments. The Settlement Warrants will expire January
31, 2008 and have certain anti-dilution features. The Settlement Warrants also
have provisions that provide the holders thereof with specified rights upon
specified change of control, reorganization or going private transactions (as
defined in Section 3.4 of the Warrant Agreement) occurring after October 10,
2000. These rights include the right to either (i) conditionally exercise the
Settlement Warrants and thereby receive the difference between economic
benefit of the change of control, reorganization or going private transaction,
if any, in excess of the exercise price of the Settlement Warrants or (ii)
receive $1.00 for each right to purchase one share of our Common Stock
represented by the Settlement Warrants. The Settlement Warrants were issued in
fully registered, certificated form under the provisions of a Warrant
Agreement of Imperial Credit Industries, Inc., dated as of October 10, 2000
(the "Warrant Agreement"), between us and U.S. Stock Transfer Corporation, as
warrant agent (the "Warrant Agent"), for the benefit of the registered holders
from time to time of the Settlement Warrants issued under the Warrant
Agreement.
The holder of a Settlement Warrant may exercise the Settlement Warrant by
surrendering the Settlement Warrant, with the attached purchase form properly
completed and executed, together with payment of the exercise price at the
office of the Warrant Agent or any successor warrant agent. Payment of the
aggregate exercise price shall be made by wire transfer or by certified check,
cashier's check or money order payable in United States currency to the order
of Imperial Credit Industries, Inc. The Warrant Agent will return a
certificate evidencing the number of shares of Common Stock issued upon
exercise of the Settlement Warrant, together with a new Settlement Warrant
certificate if less than all of the shares of Common Stock covered by the
Settlement Warrant certificate are purchased. When delivered, shares of our
Common Stock issued upon exercise of a Settlement Warrant will be fully paid
and nonassessable. We are not required to issue fractions of Settlement
Warrants or fractions of shares of our Common Stock or any certificates which
evidence fractional Settlement Warrants or fractional shares of our Common
Stock, or to pay cash in lieu of fractional interests. In lieu of fractional
Settlement Warrants and fractional shares of our Common Stock, we will round
any fractional Settlement Warrant or fractional share equal to or greater than
one-half up to the next full Settlement Warrant or share of Common Stock, as
the case may be, and will eliminate any fractional Settlement Warrant or
fractional share less than one-half.
Under the terms of the Warrant Agreement, we have agreed to file the
registration statement of which this prospectus is a part to register the
issuance of the shares of our Common Stock underlying the Settlement Warrants.
We will use our commercially reasonable efforts to keep the registration
statement and any registration or qualification required under state
securities laws with respect to the shares of Common Stock offered by this
registration statement in effect until the earlier of the date by which all
the Settlement Warrants are exercised or redeemed or the Settlement Warrants
expire. The Settlement Warrants may not be exercised during any period in
which any such registration or qualification is required but is not in effect.
Copies of the form of warrant certificate and the Warrant Agreement have
been filed as exhibits to the registration statement of which this prospectus
is a part and reference is made to the exhibits for a detailed description of
the provisions summarized above.
24
LEGAL MATTERS
Mayer, Brown & Platt, Los Angeles, California, will pass upon the validity
of the Shares offered by this prospectus.
EXPERTS
The consolidated financial statements of Imperial Credit Industries, Inc. as
of December 31, 2000 and 1999, and for each of the years in the three-year
period ended December 31, 2000, have been incorporated by reference herein and
in the registration statement in reliance upon the report of KPMG LLP,
independent auditors, incorporated by reference herein, and upon the authority
of that firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the Securities
and Exchange Commission ("SEC"). You may read and copy the reports, proxy
statements and other information that we file with the SEC at the Public
Reference Room maintained by the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. You may also access the
reports, proxy statements and other materials that we file with the SEC
electronically over the Internet at the SEC's website at http://www.Sec.gov.
We filed a registration statement with the SEC on Form S-3 relating to the
shares of our Common Stock offered by this prospectus. This prospectus does
not contain all of the information included in that registration statement.
You may refer to the registration statement and the exhibits for more
information about the shares offered by this prospectus. The statements we
make in this prospectus regarding the content of any documents filed as
exhibits to the registration statement are not necessarily complete, and you
should refer to the filed copies of those documents for additional
information. All our statements about these documents are qualified in their
entirety by the exhibits to the registration statement.
The SEC allows us to incorporate into this prospectus by reference the
information we file with them. This means that:
-- the documents incorporated by reference are considered part of this
prospectus
-- we can disclose important information to you by referring to those
documents
-- information that we file with the SEC will automatically update and
supersede the information provided in this prospectus
We are incorporating by reference the following documents filed with the SEC
under our File No. 0-19861:
(1) our Annual Report on Form 10-K for the year ended December 31, 2000;
(2) our Current Report on Form 8-K filed with the SEC on February 9, 2001.
(3) the section of our Registration Statement on Form S-1 (File No. 33-
45606), filed with the SEC on February 10, 1992, entitled "Description
of Securities", as amended by Amendments Nos. 1, 2 and 3, filed with
the SEC on April 20, 1992, May 7, 1992, and May 18, 1992, respectively,
and
(4) our Registration Statement on Form 8-A filed with the SEC on October 5,
1998, pursuant to Section 12 of the Exchange Act, for registration of
our Series A Junior Preferred Share Purchase Rights.
25
We are also incorporating by reference each of the following documents that
we will file with the SEC after the date of this prospectus, but prior to the
termination of this offering:
(1) all Form 10-Q, Form 10-K, Form 8-K and other reports filed under Section
13(a) and (c) of the Exchange Act,
(2) definitive proxy or information statements filed under Section 14 of the
Exchange Act in connection with any meeting of our shareholders and
(3) any reports filed under Section 15(d) of the Exchange Act.
You may request a copy, at no cost, of any of the documents incorporated by
reference in this prospectus, except for exhibits to those documents (other
than exhibits specifically incorporated by reference therein), by contacting
us at: Imperial Credit Industries, Inc., 23550 Hawthorne Boulevard, Building
1, Suite 110, Torrance, California 90505, telephone number (310) 373-1704.
26
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 Shares
IMPERIAL CREDIT INDUSTRIES, INC.
Common Stock
----------------
PROSPECTUS
----------------
April , 2001
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
Registration Fee................................................. $ 2,250
Legal Fees and Expenses.......................................... 25,000
Accounting Fees and Expenses..................................... 20,000
Printing Expenses................................................ 25,000
Miscellaneous.................................................... 5,000
-------
TOTAL.......................................................... $77,250
=======
Item 15. Indemnification of Directors and Officers
Under Section 317 of the California General Corporation Law (the "CGCL"),
the Registrant is permitted in certain circumstances to indemnify its
directors and officers against certain expenses (including attorneys' fees),
judgments, fines, settlements and other amounts actually and reasonably
incurred in connection with threatened, pending or completed civil, criminal,
administrative or investigative actions, suits or proceedings (other than an
action by or in the right of the Registrant), in which such persons were or
are parties, or are threatened to be made parties, by reason of the fact that
they were or are directors or officers of the Registrant, if such persons
acted in good faith and in a manner they reasonably believed to be in the best
interests of the Registrant, and with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. In
addition, the Registrant is permitted in certain circumstances to indemnify
its directors and officers against certain expenses incurred in connection
with the defense or settlement of a threatened, pending or completed action by
or in the right of the Registrant, and against amounts paid in settlement of
any such action, if such persons acted in good faith and in a manner they
believed to be in the best interests of the Registrant and its shareholders
provided that the specified court approval is obtained.-
As permitted by Section 317 of the CGCL, the Articles of Incorporation and
By-Laws of the Registrant provide that the Registrant is authorized to provide
indemnification for its directors and officers for breach of their duty to the
Registrant and its shareholders through bylaw provisions or through agreements
with the directors and officers, or both, in excess of the indemnification
otherwise permitted by Section 317 of the CGCL. The Registrant's By-laws
provide for indemnification of its directors and officers to the maximum
extent permitted by Section 317 of the CGCL. In addition, agreements entered
into by the Registrant with its directors and its executive officers require
the Registrant to indemnify such persons against expenses, judgments, fines
settlements and other amounts reasonably incurred in connection with any
proceeding to which any such person may be made a party by reason of the fact
that such person was an agent of the Registrant (including judgments, fines
and settlements in or of a derivative action, unless indemnification is
otherwise prohibited by law), provided such person acted in good faith and in
a manner he reasonably believed to be in the best interests of the Registrant
and, in the case of a criminal proceeding, had no reason to believe his
conduct was unlawful. The indemnification agreements also set forth certain
procedures that will apply in the event of a claim for indemnification
thereunder.
The Articles of Incorporation of the Registrant provide that the personal
liability of the directors of the Registrant for monetary damages shall be
eliminated to the fullest extent permissible under California law. Under
Section 204(a)(10) of the CGCL, the personal liability of a director for
monetary damages in an action brought by or in the right of the corporation
for breach of the director's duty to the corporation may be eliminated, except
for the liability of a director resulting from (i) acts or omissions involving
intentional misconduct or the absence of good faith, (ii) any transaction from
which a director derived an improper personal benefit, (iii) acts or omissions
showing a reckless disregard for the director's duty, (iv) acts or omissions
constituting an unexcused pattern of inattention to the director's duty or (v)
the making of an illegal distribution to shareholders or an illegal loan or
guaranty.
II-1
Item 16. Exhibits
4.1 Form of Common Stock Certificate (incorporated herein by reference to the
Registrant's Registration Statement on Form S-1 (No. 33-45606)
4.2 Warrant Agreement dated as of October 10, 2000 between the Registrant and
U.S. Stock Transfer Corporation
4.3 Form of Warrant Certificate
5.1 Opinion of Mayer, Brown & Platt
23.1 Consent of KPMG LLP
23.2 Consent of Mayer, Brown & Platt (contained in Exhibit 5.1)
24.1 Power of Attorney
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (1)(i) and (11)(ii) do not apply if the
registration statement is on Form S-3, Form S-8, or Form F-3 and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant
pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) of 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification
II-2
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Torrance, and the State of California, on April 11, 2001.
Imperial Credit Industries, Inc.
/s/ H. Wayne Snavely
By: _________________________________
H. Wayne Snavely
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ H. Wayne Snavely Chairman of the Board and April 11, 2001
______________________________________ Chief Executive Officer
H. Wayne Snavely and President and
Director (Principal
Executive Officer)
/s/ Brad S. Plantiko* Executive Vice President, April 11, 2001
______________________________________ Chief Financial Officer
Brad S. Plantiko and Director (Principal
Financial Officer)
/s/ Stephen J. Shugerman* Director April 11, 2001
______________________________________
Stephen J. Shugerman
/s/ Robert S. Muehlenbeck* Director April 11, 2001
______________________________________
Robert S. Muehlenbeck
/s/ Perry A. Lerner* Director April 11, 2001
______________________________________
Perry A. Lerner
/s/ James P. Staes* Director April 11, 2001
______________________________________
James P. Staes
/s/ H. Wayne Snavely
*By: __________________________
H. Wayne Snavely
As attorney-in-fact
S-1