SCHEDULE 14A
(Rule 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Under Rule 14a-12
Imperial Credit Industries, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
IMPERIAL CREDIT INDUSTRIES, INC.
23550 Hawthorne Boulevard, Building 1, Suite 110
Torrance, CA 90505
Dear Shareholder:
I cordially invite you to attend the 2001 Annual Meeting of Shareholders of
Imperial Credit Industries, Inc. which will be held at 10:00 a.m. Pacific Time
on Tuesday, June 26, 2001 at the Marriott Hotel, 3635 Fashion Way, Torrance,
California 90503.
In addition to the election of seven directors to serve as our board for
the coming year, you will be asked at the Annual Meeting to approve the
issuance of Common Stock in connection with the proposed recapitalization
transactions described in the accompanying proxy statement. The issuance of
this Common Stock is an urgent matter and deserves your immediate and careful
attention. We have been engaged in an intensive effort to restructure the
business of our wholly-owned subsidiary, Southern Pacific Bank, and to restore
its capital to meet federal and state regulatory orders. We believe that the
proposed recapitalization transactions present the best available means to
further our progress toward these goals.
The recapitalization transactions will result in very substantial dilution
of your percentage ownership interest in the Company that could result in
current shareholders owning between 73% and 45% or less, of the Company's
outstanding shares of Common Stock on a fully diluted basis. If the issuance
of Common Stock is not approved and we are unable to assist Southern Pacific
Bank in complying with the regulatory orders, however, additional regulatory
action could result, in which case you could lose your entire investment in
Imperial Credit Industries, Inc.
The Board of Directors recommends approval of the proposal to issue Common
Stock as described in the accompanying proxy statement. You should note,
however, that approval of this proposal will also constitute a grant of
authority to the Board to negotiate terms of recapitalization transactions
that are materially different from those described in the accompanying proxy
statement if the Board believes that the circumstances so warrant.
Important information concerning your Company and the other proposals to be
voted on at the Annual Meeting, including approval of the Company's 2001 Long
Term Stock Incentive Plan, ratification of the selection of KPMG LLP as our
independent public accountants and amendments of our Articles of Incorporation
to change our corporate name and to permit the Board to effect a reverse stock
split of our outstanding Common Stock, is contained in the accompanying proxy
statement. You should read the proxy statement carefully before deciding how
to vote. In addition, I and the other officers of your Company welcome the
opportunity to answer your questions in person or at the telephone numbers
shown below.
Your vote is important to us no matter how many shares you own. We hope you
will attend the Annual Meeting in person if it is convenient for you to do so.
If you are unable to attend, please vote by signing, dating and returning the
enclosed proxy card today.
Sincerely,
/s/ H. Wayne Snavely
H. Wayne Snavely
Chairman, Chief Executive Officer and
President
IMPORTANT: Please send your proxy card today. Failure to vote will have
the effect of a vote against proposals that will be presented at the
Annual Meeting and that the Board of Directors believes are essential for
the future success of your company.
Company officers and representatives are available to answer your
questions at the following telephone numbers: (310) 373-1704 and (888)
267-7424.
IMPERIAL CREDIT INDUSTRIES, INC.
23550 Hawthorne Boulevard, Building 1, Suite 110
Torrance, CA 90505
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD TUESDAY, JUNE 26, 2001
----------------
To Our Shareholders:
Notice is hereby given that the Annual Meeting of Shareholders of Imperial
Credit Industries, Inc. (the "Company") will be convened at 10:00 a.m. on
Tuesday, June 26, 2001 at the Marriott Hotel, 3635 Fashion Way, Torrance,
California 90503. At the Annual Meeting, shareholders will be asked to
consider and vote on the following matters:
1. Election of a Board of seven directors to serve for the ensuing year.
2. The issuance of Common Stock or securities convertible into or
exercisable for Common Stock equal to 20% or more of the Company's
currently outstanding shares of Common Stock in connection with the
proposed recapitalization transactions provided for in the Master
Recapitalization Agreement by and among the Company and certain
investors, dated March 29, 2001, including any amendments thereto,
renegotiation thereof or in connection with any future recapitalization
agreement reached in addition thereto or in lieu thereof.
3. Approval of the Company's 2001 Long Term Stock Incentive Plan providing
for grants of stock options and other stock-based incentive compensation
awards to officers and key employees.
4. Ratification of the appointment of KPMG LLP as our independent public
accountants for the year ending December 31, 2001.
5. Amendment of our Articles of Incorporation to change our corporate name.
6. Amendment of our Articles of Incorporation to permit the Board of
Directors to effect a reverse stock split of our outstanding Common
Stock.
Only those holders of Common Stock of record at the close of business on
May 31, 2001, will be entitled to notice of and to vote at the Annual Meeting.
By Order of the Board of Directors
/s/ Irwin L. Gubman
Irwin L. Gubman
General Counsel and Secretary
Torrance, California
June 11, 2001
IMPERIAL CREDIT INDUSTRIES, INC.
23550 Hawthorne Boulevard, Building 1, Suite 110
Torrance, CA 90505
----------------
PROXY STATEMENT
----------------
FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD
June 26, 2001, at 10:00 a.m. Pacific Time
The Board of Directors of Imperial Credit Industries, Inc. (the "Company")
is soliciting your proxy for use at our Annual Meeting of Shareholders to be
held at 10:00 a.m. on Tuesday, June 26, 2001 at the Marriott Hotel, located at
3635 Fashion Way, Torrance, California 90503. The approximate date of mailing
of this proxy statement and the enclosed proxy card is June 11, 2001.
VOTING AND RELATED INFORMATION
Your shares will be voted as you direct on the accompanying proxy card. If
you sign and date your proxy card but do not indicate how your shares should
be voted on a matter, the shares represented by your proxy will be voted as
the Board of Directors recommends. You may revoke your proxy at any time prior
to its exercise by notifying our Secretary in writing, by giving another proxy
bearing a later date, or by attending and voting in person at the Annual
Meeting.
Record Date and Quorum
Only those holders of Common Stock of record at the close of business on
May 31, 2001 will be entitled to vote at the Annual Meeting. As of that date,
32,096,361 shares of Common Stock were outstanding. You are entitled to one
vote for each share you own, except that cumulative voting is authorized in
the election of directors under the circumstances described below. A majority
of the shares of Common Stock outstanding and represented by shareholders
attending in person or by proxy will constitute a quorum for the transaction
of business at the Annual Meeting. Proxies marked to abstain and proxies
returned by brokers or other nominees that are not voted (so-called "broker
non-votes") will be counted for purposes of determining a quorum.
Required Votes; Cumulative Voting
In the election of directors, you may either vote "FOR" all nominees for
election or withhold your votes from one or more nominees for election. The
nominees who receive the most votes for the number of positions to be filled
will be elected as directors. Votes that are withheld and broker non-votes
will not be included in determining the number of votes cast.
You will have cumulative voting rights in the election of directors. Under
the cumulative voting method, you may multiply the number of shares you own by
the number of directors to be elected and cast this total number of votes for
any one candidate or distribute the total number of votes in any proportion
among as many candidates as you desire. You may not cumulate votes for a
candidate unless the candidate's name has been placed in nomination prior to
the voting and you or another shareholder give notice at the Annual Meeting,
prior to the voting, of an intention to cumulate votes. The proxyholders
appointed by the Board of Directors also have authority to cumulate votes as
they see fit under these circumstances for as many nominees as they believe
can be elected.
The proposals to approve the potential issuance of Common Stock or
securities convertible into or exercisable for Common Stock and our 2001 Long
Term Stock Incentive Plan will each be approved if such
1
proposal receives the affirmative vote of a majority of the total votes cast
on the proposal in person or by proxy. The number of affirmative votes for
each proposal must also constitute a majority of the required quorum for the
Annual Meeting. Abstentions and broker non-votes will not be included in
determining the number of votes cast.
The proposal to ratify the appointment of our independent public
accountants will be approved if the number of shares voted in favor exceeds
the number of shares voted against.
The affirmative vote of a majority of the outstanding shares of our Common
Stock is required to approve the amendments to the Articles of Incorporation
to change our name and to effect the reverse stock split. Accordingly, for
purposes of the votes to amend the Articles of Incorporation to change our
name and to effect the reverse stock split, abstentions and broker non-votes
will have the effect of votes against approval of the proposals.
Costs; Proxy Solicitation
We will bear all costs of this solicitation. In addition to the
solicitation of proxies by mail, our officers and employees may solicit
proxies personally, by telephone or by other means of communication. They will
not receive any additional compensation for these solicitations. We will
request record holders of shares beneficially owned by others to send proxy
material to the beneficial owners of such shares and will reimburse banks,
brokerage firms, other custodians, nominees and fiduciaries for their
reasonable expenses incurred in doing so.
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PROPOSAL NO. 1
ELECTION OF DIRECTORS
Our directors are elected annually to serve until the next annual meeting
of shareholders and thereafter until their successors are elected and
qualified. Our bylaws provide for a variable Board of Directors with a range
of between five and nine members.
Pursuant to the Recapitalization Agreement described in this proxy
statement, the Board of Directors has agreed to set the authorized number of
directors at seven. Also pursuant to the Recapitalization Agreement, the
nominees for election as directors named herein include four persons proposed
by the Signatory Debtholders referred to in the Recapitalization Agreement.
One of these persons, Mr. Michael R. McGuire, was elected by action of the
Board on April 25, 2001 to replace one of the three directors, Messrs. Perry
A. Lerner, Brad S. Plantiko and Stephen J. Shugerman, who resigned from our
Board as provided in the Recapitalization Agreement. One of the other three
nominees proposed by the Signatory Debtholders, Mr. Michael S. Riley, is
included among the nominees to be elected at the Annual Meeting, but will not
commence service as a director, unless and until all the recapitalization
transactions contemplated by the Recapitalization Agreement are consummated.
If elected, each nominee (other than Mr. Riley as explained above) is
expected to serve until the 2002 Annual Meeting of Shareholders and thereafter
until the director's successor is duly elected and qualified. All of the
nominees have indicated their availability and willingness to serve if
elected. In the event that any nominee becomes unavailable or unable to serve
as a director prior to the voting, the proxyholders will vote for a substitute
nominee in the exercise of their best judgment.
The Board of Directors has unanimously approved all of the nominees for
director and recommends that you vote "FOR" all the nominees for director.
Information Concerning Nominees and Current Directors
Information concerning the nominees and current directors based on data
furnished by them is set forth below.
Name Age Position with Company
---- --- ---------------------
H. Wayne Snavely........ 60 Chairman of the Board, Chief Executive Officer and President
Robert S.
Muehlenbeck(1)(2)...... 53 Director
James P. Staes(2)....... 62 Director
Michael R.
McGuire(1)(2).......... 55 Director
Michael S. Riley........ 48
Theodore R. Maloney..... 40
Charles E. Underbrink... 46
- --------
* All of such persons may be reached at: Imperial Credit Industries, Inc.,
23550 Hawthorne Boulevard, Suite 110, Torrance, CA 90505.
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
H. Wayne Snavely has been Chairman of the Board and Chief Executive Officer
of the Company since December 1991 and President since February 1996. Mr.
Snavely served as a director of Imperial Bank from 1975 to 1983 and from 1993
to January 1998. He serves on the Board of Visitors of the Graduate School of
Business Management at Pepperdine University.
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Robert S. Muehlenbeck has been a director of the Company since December
1991. Mr. Muehlenbeck retired in 1998 as an Executive Vice President of
Imperial Bank with primary responsibility for corporate finance and mergers
and acquisitions. He also served as President of Imperial Ventures, Inc.,
Imperial Bank's venture capital small business investment company, and
President of Imperial Capital Corp., an investment and mezzanine lending
entity. Mr. Muehlenbeck was formerly the President of Seaborg, Incorporated
and has been involved in commercial and residential real estate development
and finance activities.
James P. Staes has been a director of the Company since December 1999. Mr.
Staes, a commercial banker and retired Navy Captain, served as President and
Chief Executive Officer of Home Bank in Signal Hill, California from 1982 to
1996, and Vice Chairman of California United Bank from 1996 to 1997. Mr. Staes
is a past President of the California Bankers Association and Southern
California Community Bankers Association. Mr. Staes also served as a director
of the Western Independent Bankers Association and as a member of the
Conference of State Bank Supervisors.
Michael R. McGuire has been a director of the Company since April 2001. He
has been the President and Chief Executive Officer of Affinity Bank, Ventura,
California since April 1996. From March 1987 to January 1996, Mr. McGuire was
President and Chief Executive Officer of LaCumbre Savings Bank, Santa Barbara,
California. Mr. McGuire is a director of the California Association of
Industrial Banks and has served as its president in 1998 and 2001. He has been
a commissioner of the City of Santa Barbara Housing Authority since 1992 and
is a leading expert in affordable housing finance. He is also a director and
the secretary of the Social Compact, a Washington, D.C. based organization
promoting business investment in inner cities and is active in several
community service non-profit organizations.
Michael S. Riley has been Chairman of the Board of Holiday RV Superstores,
Inc. since July 1999. Mr. Riley is also chairman and co-founder of
Recreational Holdings, Inc., a holding company formed to acquire and develop
companies in the leisure industry. Mr. Riley has practiced law for more than
20 years in the areas of mergers and acquisitions and corporate finance,
including eight years as principal of the Ft. Lauderdale based firm of Yonge
and Riley, LLP and as manager of the Fort Lauderdale practice for the regional
law firm of Adorno & Zeder. His background also includes serving as an
Assistant State Attorney in Florida and special counsel to federal and state
law enforcement agencies.
Theodore R. Maloney has been a partner in the law firm Nida & Maloney, LLP
with offices in Santa Barbara and Los Angeles, California since 1994. He
specializes in securities law, corporate finance, mergers and acquisitions,
and debt restructuring. Prior to founding Nida & Maloney, LLP, Mr. Maloney
practiced law with Milbank, Tweed, Hadley & McCloy from 1988 to 1994 and with
Rogers & Wells from 1986 to 1988, both in Los Angeles, California. Mr. Maloney
graduated Order of the Coif from the University of California Hastings College
of Law and earned an A.B. degree in economics from Occidental College.
Charles E. Underbrink has been Chairman of St. James Capital Corp. since
August 1996 and Chairman of SJMB, LLC since January 1998, both companies
specializing in merchant banking operations and fund management activities,
based in Houston, Texas. Since June 1995, he also has served as a director and
vice president of Hub, Inc. of which he is also a 50% shareholder. Mr.
Underbrink serves on the Board of Directors of Somerset House Publishing,
Inc., Black Warrior Wireline Corp., Industrial Holdings, Inc. and Monorail
Computer Corporation. His background includes mortgage banking, corporate
finance and securities law.
Our directors hold office until the next annual meeting of shareholders and
until their successors are elected and qualified, or until their earlier
resignation or removal. All officers are appointed by and serve at the
discretion of the Board of Directors, subject to employment agreements, where
applicable.
No directors were involved in any petitions under the federal bankruptcy
laws during the past five years, except that Mr. Snavely was the Chairman of
the Board of Southern Pacific Funding Corporation, an affiliate which filed
for Chapter 11 bankruptcy protection in October 1998.
4
Director Compensation
Directors who are not employees of the Company receive a fee of $7,500 per
quarter plus $500 per Board meeting attended. In addition, non-employee
directors annually receive options (at the then current fair market value) to
acquire 10,000 shares of our Common Stock, which vest and become exercisable
after one year. Non-employee directors who are members of the Compensation and
Audit Committees receive a fee of $500 for each committee meeting attended, if
such meeting is held on a date other than a Board meeting date.
Board Meetings and Committees
The Board of Directors held fourteen meetings in fiscal 2000.
The Audit Committee met six times during 2000. The Audit Committee
recommends the selection of independent accountants, meets with, and reviews
the scope and findings of audit activities performed by, our internal auditors
and independent accountants. Mr. Staes is the Chairman of the Audit Committee.
The Compensation Committee, which determines executive compensation, met two
times during 2000. Mr. Muehlenbeck is the Chairman of the Compensation
Committee. Mr. Perry A. Lerner served as a member of both the Audit and
Compensation Committees prior to his resignation from the Board in April 2001.
The Board of Directors currently has no Nominating Committee.
Executive Compensation
The following table provides information concerning the cash and non-cash
compensation earned and received by our Chief Executive Officer and the four
other executive officers whose salary and bonus during the fiscal year ended
December 31, 2000 exceeded $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
--------------------------------- ------------
Fiscal Other Annual Options
Name and Principal Position Year Salary Bonus Compensation Granted
- --------------------------- ------ -------- -------- ------------ ------------
H. Wayne Snavely.................. 2000 $500,000 $500,000(6) $24,767(1) --
Chairman, Chief Executive Officer 1999 500,000 500,000 76,558(1) 150,000
and President 1998 502,114 -- 78,640(1) --
Brad S. Plantiko.................. 2000 $335,571 $300,000(6) $14,151(2) --
Executive Vice President and 1999 175,000 225,471 63,828(2) 100,000
Chief Financial Officer 1998 77,403 99,519 55,815(2) 84,000
Irwin L. Gubman................... 2000 $250,000 $300,000(6) $15,851(3) --
General Counsel and Secretary 1999 210,385 100,000 64,703(3) 100,000
1998 201,532 125,000 18,557(3) 26,800
John C. Getzelman................. 2000 $205,573 -- $13,469(4) --
President, Southern Pacific Bank 1999 196,285 100,000 16,614(4) 50,000
1998 15,385 -- 923(4) 50,000
Scott B. Sampson.................. 2000 $300,000 -- $10,700(5) --
President, Coast Business Credit 1999 300,000 $391,000 10,228(5) --
Division of Southern Pacific Bank 1998 227,302 471,404 13,517(5) 67,000
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(1) In 2000, 1999 and 1998, consists of a car allowance paid by the Company of
$18,000, $18,000 and $18,000, respectively, and aggregate contributions
paid by the Company of $6,767, $58,558 and $60,640, respectively, under
employee benefit plans.
(2) In 2000 and 1999, consists of a car allowance paid by the Company of
$9,000 and $9,000, respectively, and aggregate contributions paid by the
Company of $5,151 and $54,828, respectively, under employee benefit plans.
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(3) In 2000, 1999 and 1998, consists of a car allowance paid by the Company of
$9,000, $9,000 and $8,307, respectively, and aggregate contributions paid
by the Company of $6,851, $55,703 and $10,250, respectively, under
employee benefit plans.
(4) In 2000 and 1999, consists of a car allowance paid by the Company of
$8,308 and $12,000, respectively, and aggregate contributions paid by the
Company of $5,162 and $4,614, respectively, under employee benefit plans.
(5) In 2000, 1999 and 1998, consists of a car allowance paid by the Company of
$6,000, $6,000 and $6,000, respectively, and aggregate contributions paid
by the Company of $4,700, $4,228 and $7,517, respectively, under employee
benefit plans.
(6) In 2000, consists of amounts paid primarily in connection with the
successful completion of the acquisition of Imperial Credit Commercial
Mortgage Investment Corp.
Option Grants, Exercises and Year End Values
Potential Realized Value at
Assumed Annual Rates of
Stock Price Appreciation
Exercise for Option Term
2000 Percentage of Price Expiration ----------------------------
Name Options Granted Total Grants Per Option Date 5% 10%
- ---- --------------- ------------- ---------- ---------- ------------- --------------
H. Wayne Snavely........ -- --% $ -- -- $ -- $ --
Brad S. Plantiko........ -- -- -- -- -- --
Irwin L. Gubman......... -- -- -- -- -- --
John C. Getzelman....... -- -- -- -- -- --
Scott B. Sampson........ -- -- -- -- -- --
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Value of all
Unexercised
Number of Unexercised In-the-Money
Number of Unexercised Senior Management Options Options at
Shares Options at FY-End Under at FY-End Under the 12/31/00
Acquired on Value the Option Plan Option Plan Exercisable/
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable Unexercisable(1)
- ---- ----------- -------- ------------------------- ------------------------- ----------------
H. Wayne Snavely........ -- -- 340,000/210,000 917,052/ -- $ -- /$ --
Brad S. Plantiko........ -- -- 43,600/140,400 -- / -- -- / --
Irwin L. Gubman......... -- -- 86,720/140,080 -- / -- -- / --
John C. Getzelman....... -- -- -- / -- -- / -- -- / --
Scott B. Sampson........ -- -- 26,800/ -- -- / -- -- / --
- --------
(1) Based on a price per share of $0.47, which was the price of a share of our
Common Stock as quoted on the Nasdaq National Market at the close of
business on December 31, 2000.
Employment Agreements
Mr. Snavely entered into a five-year employment agreement with the Company
as of January 1, 1997, at an annual base salary of $450,000, since increased
to $500,000. He is also entitled to an annual bonus upon attainment of
performance objectives established by the Compensation Committee of the Board
of Directors. Under the agreement, Mr. Snavely's total cash compensation may
not exceed $1.5 million annually.
Pursuant to his employment agreement, Mr. Snavely is entitled to receive
compensation following his termination, as follows: (1) on termination for
cause, Mr. Snavely would be entitled to receive his base salary through the
date on which termination occurs, and (2) on termination without cause (or for
"good reason" as
6
defined in the employment agreement), Mr. Snavely would be entitled to receive
his base salary through the date of termination, together with the pro-rata
portion of any cash bonus award he would be entitled to receive at year end
and a severance amount equal to his base salary reduced by his projected
primary social security benefit. The severance amount would be further reduced
if he becomes employed by another company or becomes an independent contractor
of another company and, except in the event of a change in control of the
Company (as defined in the termination agreements described below), would be
eliminated entirely if such other company is determined by our Board of
Directors to compete with us.
Termination Agreements
In January 1999, we entered into individual termination agreements with
Messrs. Snavely, Gubman and Plantiko. The agreements provide for severance
payments to these senior executives in the event of a change in control of the
Company (as defined in the agreements) and their voluntary departures during
the thirty-day period commencing on the first anniversary thereof or the
termination of any one of these senior executives within three years of the
change in control for any reason. The senior executives will receive a lump
sum payment of three times their respective base salaries and their highest
bonus earned in any of the last three fiscal years preceding the change in
control and a percentage of their respective bonuses for the year in which the
change of control occurs.
In addition, we will continue to provide these senior executives with
medical, dental, life insurance, disability and accidental death and
dismemberment benefits until the third anniversary of the termination unless
the executive becomes employed by another employer, in which case these
coverages will be secondary to those provided by the new employer. All
deferred compensation in respect of each senior executive will also become
fully vested and we will pay in cash all such deferred compensation and any
unpaid portion of the executive's bonus. Any amounts payable to an executive
will include additional amounts to cover certain taxes resulting from those
payments.
The election of the four nominees proposed by investors in connection with
the recapitalization transactions to be completed pursuant to the Master
Recapitalization Agreement described in this proxy statement will constitute a
change in control as defined in the termination agreements that will result in
Messrs. Snavely, Plantiko and Gubman becoming entitled to the termination
benefits thereunder if their employment terminates as described above.
However, in Mr. Snavely's case, any benefits or payments provided under his
termination agreement will be reduced by any benefits or payments he receives
under his employment agreement as a result of his termination.
Report of the Compensation Committee
The Compensation Committee sets and administers the policies governing our
compensation program, including incentive and stock option plans. We
participate in studies and surveys of compensation practices for comparable
companies in our industry. The Committee considers these studies and surveys
in determining executive base salary, bonus and long term stock based
compensation. The Committee discusses and considers executive compensation
matters and makes its decisions, subject to review by our Board of Directors.
Our compensation policies are structured to link the compensation of the
Chief Executive Officer, the Chief Financial Officer and our other executives
and those of our subsidiaries with corporate performance. Through the
establishment of annual and long-term compensation programs, we have aligned
the financial interests of our executives with the results of our performance,
which is designed both to put us in a competitive position regarding executive
compensation and to help ensure corporate performance, thereby enhancing
shareholder value.
Our executive compensation philosophy is to set base salary at a
conservative market rate and then to provide performance-based variable
compensation which allows total compensation to fluctuate according to our
earnings as well as value received by shareholders. Targeted levels of total
executive compensation are set at
7
levels that the Committee believes to be consistent with others in our
industry, with such compensation increasingly weighted toward programs
contingent upon our level of annual and long-term performance. As a result,
the Named Executive Officers' actual compensation levels in any particular
year may be above or below those of our competitors, depending upon our
performance. Due to our disappointing performance in 2000, the Committee did
not approve in 2001 any performance-based compensation awards to Messrs.
Snavely, Plantiko or Gubman for the prior year. The awards paid to them in
2000 primarily related to their successful efforts in connection with the
Company's acquisition of Imperial Credit Commercial Mortgage Investment Corp.,
a previously affiliated mortgage REIT.
Section 162(m) of the Internal Revenue Code limits our tax deduction for
compensation paid in excess of $1,000,000 to any one of the Chief Executive
Officer and the four other most highly compensated executive officers unless
(i) that compensation was based upon attainment of pre-established, objective
performance goals, (ii) the Compensation Committee consists only of "outside
directors" as defined for purposes of Section 162(m), and (iii) the
performance-based compensation has been approved by shareholders. All of the
members of the Compensation Committee qualify as "outside directors." In 1998,
shareholders approved our Executive Performance Compensation Plan. The
Committee will continue to review our existing compensation program to
determine the deductibility of future compensation paid or awarded under the
program. The Committee will seek guidance with respect to changes to our
existing compensation program that will enable us to continue to attract and
retain key individuals while optimizing the deductibility to us of amounts
paid as compensation.
The Committee believes that its overall executive compensation program has
been successful in providing competitive compensation appropriate to attract
and retain highly qualified executives and also to encourage increased
performance from the executive group, which should create added shareholder
value.
The Compensation Committee Report will not be deemed incorporated by
reference into any filing by the Company under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, except to the
extent that the Company specifically incorporates the same by reference.
COMPENSATION COMMITTEE
Robert S. Muehlenbeck, Chairman
Perry A. Lerner
Report of the Audit Committee
The Audit Committee is comprised of independent directors. It acts under a
written Audit Committee Charter adopted and approved by our Board of Directors
in 2001. Each of the members of the Audit Committee is "independent" as
defined by the Audit Committee Charter and the Nasdaq Marketplace Rules. A
copy of the Audit Committee Charter is attached as Appendix A to this proxy
statement.
The Audit Committee reviews our financial reporting process on behalf of
the Board of Directors. Management has primary responsibility for the
financial statements and reporting process. Our independent auditors are
responsible for expressing an opinion on the conformity of our audited
financial statements with generally accepted accounting principles. The Audit
Committee also meets with the internal auditors and with management to
consider the adequacy of the Company's internal controls.
The Audit Committee has reviewed and discussed our audited financial
statements with management and the independent auditors. The Audit Committee
has also discussed with the independent auditors the matters required to be
discussed by Statement on Auditing Standards No. 61 (Communications With Audit
Committees). In addition, the Audit Committee has received from the
independent auditors the written disclosures required by Independence
Standards Board Standard No. 1 (Independence Discussion with Audit Committees)
and discussed with them their independence from the Company and its
management. The Audit Committee has also considered whether the independent
auditors' provision of non-audit services to us is compatible with the
auditors' independence.
8
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to our Board of Directors that the audited financial
statements be included in our Annual Report filed with the Securities and
Exchange Commission on Form 10-K for the year ended December 31, 2000.
The Audit Committee Report will not be deemed incorporated by reference
into any filing by the Company under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended, except to the extent that
the Company specifically incorporates the same by reference.
AUDIT COMMITTEE
James P. Staes, Chairman
Perry A. Lerner
9
PROPOSAL NO. 2
APPROVAL OF ISSUANCE OF COMMON STOCK OR SECURITIES CONVERTIBLE INTO OR
EXERCISABLE FOR COMMON STOCK IN RECAPITALIZATION
At the Annual Meeting, you will be asked to approve the potential issuance
of Common Stock or securities convertible into or exercisable for Common Stock
equal to 20% or more of the Common Stock outstanding before the issuance for
less than the greater of book or market value of the Common Stock in
connection with recapitalization transactions substantially similar to those
described in the Master Recapitalization Agreement by and among the Company
and certain of our investors, dated as of March 29, 2001 (the
"Recapitalization Agreement"), including any amendments thereto or
renegotiation thereof, or in connection with any future recapitalization
agreement reached in addition thereto or in lieu thereof without further
approval of our shareholders. The amounts of Common Stock reflected in this
description do not take into account the effect of the proposed reverse stock
split described in this proxy statement. If the reverse stock split is
approved by our shareholders and effected by our Board of Directors, the
number of shares of Common Stock issuable pursuant to the Recapitalization
Agreement will be reduced by a factor of two, three or four, depending on the
reverse stock split ratio selected by the Board.
The Board recommends approval of the issuance of Common Stock as described
in this proxy statement to assist us in raising additional capital to aid our
principal subsidiary, Southern Pacific Bank, in increasing its capital levels
and improving its capital ratios. You should note, however, that approval of
this proposal will also constitute a grant of authority to the Board to
negotiate terms of recapitalization transactions that are materially different
from those described in the Recapitalization Agreement if the Board believes
that the circumstances so warrant.
The Recapitalization Agreement and related documents, which have been filed
as exhibits to our Annual Report on Form 10-K for 2000, will be provided upon
written request without charge. Written requests should be sent to Imperial
Credit Industries, Inc., 23550 Hawthorne Boulevard, Building 1, Suite 110,
Torrance, California 90505, Attention: Investor Relations.
Reasons for Our Proposed Recapitalization
Our principal subsidiary, Southern Pacific Bank (the "Bank"), is an
industrial bank chartered by the State of California and our core businesses
originate loans and leases funded primarily by the federally insured deposits
of the Bank. The Bank is subject to the regulatory capital requirements of the
California Department of Financial Institutions (the "DFI") under California
law and the Federal Deposit Insurance Corporation (the "FDIC") regulations
governing capital adequacy for institutions whose deposits are insured by the
FDIC. If the Bank is unable to meet these regulatory capital requirements, or
is determined to have other serious regulatory or supervisory problems, the
FDIC and/or the DFI may impose regulatory restrictions or sanctions which
would have a material adverse effect on our business and operations and that
could ultimately include placing the Bank in conservatorship or receivership.
As a result of a joint examination of the Bank by the FDIC and DFI as of
June 26, 2000, the Bank consented to the issuance of an FDIC order to cease
and desist from what the FDIC asserted were certain unsafe and unsound
practices relating to the Bank's operations (the "FDIC Order"), dated December
15, 2000. The Bank also consented to a similar order issued by the DFI, dated
December 27, 2000 (the "DFI Order," and, together with the FDIC Order, the
"Regulatory Orders"). The Regulatory Orders impose a number of requirements,
including, among others, under the FDIC Order that the Bank's equity capital
be increased by $19 million by March 31, 2001, and by an additional $20
million in stages through December 31, 2001. The DFI Order requires the Bank
to increase its adjusted tangible shareholder's equity by $29 million by March
31, 2001 and by an additional $15 million through June 30, 2001. In addition,
the Bank must develop and adopt a detailed business plan acceptable to the
FDIC and the DFI to control overhead and other expenses and restore the Bank
to a sound condition, among other requirements. The Bank has informed the
regulators that it did not meet the equity capital
10
targets as of March 31, 2001, although it was "adequately capitalized" for
risk-based capital purposes. The Bank has submitted a revised capital plan to
the regulators for their approval. As of the date hereof, our revised capital
plan has not been approved by the regulators. There can be no assurance that
the revised capital plan will be approved or that further regulatory action
will not be taken.
Recommendation of the Board of Directors
As described above, the Bank is subject to the Regulatory Orders issued by
the FDIC and the DFI under which the Bank was required to increase
substantially the level of its regulatory capital beginning March 31, 2001. In
addition, $41.05 million of the Company's outstanding indebtedness will mature
and become payable in full on June 14, 2002. The Board of Directors believes
that the most likely means of enabling the Bank to comply with the Regulatory
Orders is a private offering of our equity securities, including debt
securities convertible into equity securities, with the net proceeds of such
issuances being made available to the Bank in the form of contributions to its
equity capital. The Board further believes that a restructuring of the
maturities of our outstanding indebtedness through an exchange of new debt
securities for the existing indebtedness will be a necessary step in improving
the financial condition of the Company and the Bank. The Recapitalization
Agreement described in this proxy statement is intended to address these
requirements.
Although we hope that the Recapitalization Agreement will be consummated in
accordance with its terms, we may find it necessary to amend or renegotiate
the Recapitalization Agreement in its entirety at any time prior to completion
of the proposed recapitalization. Without limiting the types of amendments
which may be made to the Recapitalization Agreement, we may amend the
Recapitalization Agreement to permit changes in timing and procedures for the
individual transactions comprising the recapitalization, to change the type,
terms, amount of or price per share of the securities to be offered or
exchanged and make any other changes we deem to be in our best interests,
including negotiation of an entirely new recapitalization agreement or other
transaction with different parties.
We believe the transactions contemplated by the Recapitalization Agreement
or any future recapitalization agreement reached in addition to or in lieu
thereof will be necessary to enable us to supply the Bank with a significant
portion of the amounts and types of additional regulatory capital it needs to
comply with the Regulatory Orders. In addition, we believe that raising the
required amounts of capital will likely result in the issuance of 20% or more
of our outstanding Common Stock (which includes securities convertible into
Common Stock for this purpose) at a price less than the greater of book or
market value before the issuance. We therefore believe approval of the
issuance of Common Stock in connection with the Recapitalization Agreement or
any other recapitalization agreement that we may negotiate, is necessary to
maximize our ability, market conditions permitting, to increase the regulatory
capital of the Bank in compliance with the Regulatory Orders. The Board of
Directors further believes that absent approval of such issuance, we face a
significant risk of regulatory action, which could ultimately include the
appointment of a conservator or a receiver for the Bank. Such regulatory
action would likely have a material adverse effect on our business and
operations and our shareholders could lose their entire investment in Imperial
Credit Industries, Inc.
The Board of Directors, considering among other factors, the financial
situation of the Company and the Bank, the alternatives available to comply
with the Regulatory Orders, and the March 14, 2001 fairness opinion rendered
by Houlihan, Lokey, Howard & Zukin based on a draft of the Recapitalization
Agreement (and subsequently updated on April 13, 2001 to reflect the terms of
the final Recapitalization Agreement) has unanimously determined that the
proposed recapitalization transactions are fair to and in the best interests
of the Company and our shareholders.
The Board of Directors has unanimously approved the proposal and recommends
that you vote "FOR" approval of the potential issuance of 20% or more of the
outstanding Common Stock at less than the greater of book or market value in
connection with recapitalization transactions substantially similar to those
described in the Recapitalization Agreement, including any amendments thereto
or renegotiation thereof, or in connection with any future recapitalization
agreement reached in addition to or in lieu thereof, without further approval
of our shareholders. Your proxy will be voted "FOR" the proposal unless you
specify otherwise.
11
Fairness Opinion of Houlihan, Lokey, Howard & Zukin
The Company retained Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
("Houlihan Lokey") to render an opinion to the Board of Directors as to the
fairness from a financial point of view to the Company's public shareholders
who are not affiliates of the Company of the transactions described in the
Recapitalization Agreement (collectively, the "Transactions"). Houlihan Lokey
presented an opinion to the Board dated March 14, 2001 that the Transactions
described in the then current draft of the Recapitalization Agreement were
fair from a financial point of view to the Company's public shareholders who
are not affiliates of the Company. On April 13, 2001, Houlihan Lokey delivered
a new opinion, based upon its review of the revised terms set forth in the
final Recapitalization Agreement, confirming as of March 28, 2001 their
opinion that the Transactions are fair from a financial point of view to the
Company's public shareholders who are not affiliates of the Company. Houlihan
Lokey has performed financial advisory services for the Company in the past,
including rendering an opinion regarding the fair market value of a
termination fee contemplated in a management agreement between Imperial Credit
Commercial Mortgage Investment Corp. and Imperial Credit Commercial Asset
Management Corp., currently both subsidiaries of the Company.
The Board retained Houlihan Lokey based upon Houlihan Lokey's experience in
the valuation of businesses and their securities in connection with
recapitalizations and similar transactions, especially with respect to banks
and other financial institutions. Houlihan Lokey is a nationally recognized
investment banking firm that is continually engaged in providing financial
advisory services and rendering fairness opinions in connection with mergers
and acquisitions, leveraged buyouts, business and securities valuations for a
variety of regulatory and planning purposes, recapitalizations, financial
restructurings and private placements of debt and equity securities.
On April 13, 2001, Houlihan Lokey delivered its written opinion to the
Board to the effect that, as of March 28, 2001, on the basis of its analysis
summarized below and subject to the limitations described below, the
Transactions are fair to the Company's public shareholders who are not
affiliates of the Company from a financial point of view. The Houlihan Lokey
opinion does not address the underlying business decision to effect the
Transactions; nor does it constitute a recommendation to any shareholder as to
how they should vote at the Annual Meeting or a recommendation to any holder
of the securities of the Company as to whether such holder should exchange
such securities for other securities of the Company. Houlihan Lokey has no
obligation to update the Houlihan Lokey opinion.
The full text of Houlihan Lokey's opinion, which describes, among other
things, the assumptions made, general procedures followed, matters considered
and limitations on the review undertaken by Houlihan Lokey in rendering its
opinion is attached as Appendix B hereto and is incorporated herein by
reference. The summary of the Houlihan Lokey opinion in this proxy statement
is qualified in its entirety by reference to the full text of the Houlihan
Lokey April 13, 2001 opinion. You are urged to read Houlihan Lokey's opinion
in its entirety.
As compensation to Houlihan Lokey for its services in connection with the
Transactions, the Company agreed to pay Houlihan Lokey an aggregate fee of
$460,000 in addition to Houlihan Lokey's expenses in connection therewith. No
portion of Houlihan Lokey's fee is contingent upon the successful completion
of the Transactions, any other related transaction, or the conclusions reached
in the Houlihan Lokey opinion. The Company also agreed to indemnify Houlihan
Lokey and related persons against certain liabilities, including liabilities
under federal securities laws that arise out of the engagement of Houlihan
Lokey, and to reimburse Houlihan Lokey for certain expenses.
Houlihan Lokey did not, and was not requested by the Company or any other
person to, solicit third party indications of interest in acquiring all or any
part of the Company or to make any recommendations as to the form or amount of
consideration in connection with the Transactions, which consideration was
determined through negotiations by the Company and Imperial Holdings Group,
LLC, without the assistance of Houlihan Lokey. Houlihan Lokey was not asked to
opine and does not express any opinion as to: (1) the tax consequences of the
Transactions, including, but not limited to, tax or legal consequences to the
Company or any of its
12
shareholders; (2) the public market values or realizable value of the
Company's securities or the prices at which the Company's securities may trade
in the future following the Transactions; or (3) the fairness of any aspect of
the Transactions not expressly addressed in its fairness opinion. Houlihan
Lokey did not perform an independent appraisal of the assets of the Company or
its subsidiaries nor was it provided any such appraisal. Further, Houlihan
Lokey did not negotiate the Transactions.
In arriving at its fairness opinion, among other things, Houlihan Lokey
undertook the following:
1) interviewed certain members of the senior management of the Company to
discuss the historical operations, financial condition, future prospects
and projected operations and performance of the Company and its
subsidiaries;
2) reviewed the Company's Form 10-K for the fiscal year ended 1999, Form
10-Q for the three quarters ended September 30, 2000, Form 8-K's filed
on December 6, 2000 and February 7, 2001 and Company-prepared interim
financial statements for the period ended December 31, 2000, which the
Company's management had identified as the most current financial
statements available;
3) reviewed the Offering Memorandum for the Company dated March 8, 2001,
and the supplement thereto dated March 27, 2001, which the Company's
management identified as the most current version of the memorandum
available;
4) reviewed copies of the Board Presentation prepared by Friedman Billings
Ramsey & Co. dated December 13, 2000, and the Board's Transaction Review
Presentation as prepared by Imperial Capital, LLC dated January 31,
2001;
5) reviewed the California Department of Financial Institutions Final Order
and the Federal Deposit Insurance Corporation Order to Cease and Desist;
6) reviewed the Company's Indenture for $200 million in 9.875% Senior Notes
due 2007 dated January 23, 1997 (the "Indenture Agreement");
7) reviewed various forecasts and projections for the fiscal year ended
December 31, 2001 prepared by the Company's management with respect to
the Company and each of its subsidiaries and operating divisions (the
"Financial Forecasts");
8) reviewed the historical market prices and trading volume for the
Company's publicly-traded securities, and reviewed other publicly
available information regarding the Company, including certain analyst
reports and press releases;
9) reviewed certain other publicly available financial data for certain
companies that we deemed comparable to the Company;
10) reviewed copies of the following documents and agreements delivered to
Houlihan Lokey by the Company:
. a list of the Company's major capital projects from 1999, 2000 and
2001;
. a copy of Southern Pacific Bank's Strategic Plan for 2001-2002;
. a summary of regulatory actions;
. Company-prepared documentation on the debt obligations for certain
operating divisions of the Company;
. the Recapitalization Agreement dated as of March 29, 2001; and
. Offering Memoranda issued between 1996 and 2000.
11) reviewed certain other documents related to the Company delivered to
Houlihan Lokey by the Company; and
12) conducted such other studies, analyses and inquiries as Houlihan Lokey
have deemed appropriate.
13
Analyses
The following is a summary of the material financial analyses used by
Houlihan Lokey in connection with providing its opinion. This summary is
qualified in its entirety by reference to the full text of such opinion, which
is attached as Appendix B to this proxy statement. You are urged to read the
full text of the Houlihan Lokey opinion carefully and in its entirety.
Houlihan Lokey's analysis of the Transactions included the calculation and
comparison of the following: (1) an analysis of the Company's current equity
value and stock price as determined by the public market; (2) an analysis of
the Company's equity value and stock price without taking the Transactions
into account (the "Pre-Transactions Analysis"); (3) an analysis of the
Company's equity value and stock price after taking the Transactions into
account (the "Post-Transactions Analysis"); and (4) analysis of other
strategic alternatives available to the Company.
Houlihan Lokey performed the following analyses in order to determine the
current market value of the Company without taking into consideration the
Transactions:
Public Market Pricing
Houlihan Lokey considered the Company's public market price to estimate the
value of the Company. Houlihan Lokey calculated the aggregate market value of
the Company's equity by multiplying the Company's stock price on March 9, 2001
by its shares outstanding on a fully diluted basis as of December 31, 2000
(which it understood is not materially different than the Company's shares
outstanding as of March 9, 2001). The resulting market value of equity and per
share indications, as calculated by Houlihan Lokey, totaled $33.1 million and
$1.03, respectively.
Pre-Transactions Analysis
To determine the estimated equity value of the Company before taking the
Transactions into consideration, Houlihan Lokey primarily used the following
methodologies: (1) a market multiple approach; (2) a perpetuity discount model
approach; and (3) a comparable transaction approach. The analyses required
studies of the overall market, economic and industry conditions in which the
Company operates and the historical operating results of the Company.
Pre-Transactions Market Multiple Approach. Houlihan Lokey reviewed certain
financial information of publicly traded comparable companies in the banking
industry selected solely by Houlihan Lokey. The public comparable companies
included: CVB Financial Corp.; FirstFed Financial Corp.; Hawthorne Financial
Corp.; Humboldt Bancorp; ITLA Capital Corp.; PFF Bancorp; and Westamerica
Bancorporation (collectively, the "Comparables"). Houlihan Lokey calculated
certain financial ratios of the Comparables based on the most recent publicly
available information. The analysis showed the following: (1) the ratio of the
latest twelve months price to earnings ("LTM P/E") exhibited by the
Comparables ranged from a low of 7.8x to a high of 17.0x; (2) the ratio of the
next fiscal year price to earnings ("NFY P/E") exhibited by the Comparables
ranged from a low of 7.2x to a high of 15.3x; and (3) the ratio of price to
book value ("P/BV") for the Comparables ranged from a low of 1.05x to a high
of 4.27x.
Houlihan Lokey derived an indication of the market value of the equity for
the Company by: (a) applying a selected LTM P/E multiple to the Company's
representative net income for the fiscal year 2000, (b) applying a selected
NFY P/E multiple to the Company's representative pro forma net income for the
fiscal year 2001 based on its projected net income for the fiscal year 2000
without taking the Transactions into consideration; and (c) applying a
selected P/BV multiple to the Company's book value for the fiscal year ended
2000. Based on the above, the resulting indications of the market value of the
equity of the Company ranged from $16.4 million to $64.8 million.
Pre-Transactions Perpetuity Discount Model Approach. Houlihan Lokey
utilized the Financial Forecasts as prepared by management with respect to
fiscal year 2001 without taking the Transactions into consideration.
14
To determine the Company's pro forma market value of equity, Houlihan Lokey
calculated the Company's representative pro forma net income and applied risk-
adjusted equity discount rates ranging from 17.0% to 21.0% and a range of
growth rates ranging from 3.0% to 6.0%. Based on management's estimates and
this analysis, the resulting indications of the pro forma market value of the
Company's equity ranged from $39.3 million to $48.4 million.
Pre-Transactions Comparable Transactions Approach. Houlihan Lokey reviewed
the consideration paid in certain publicly announced acquisitions of banks and
financial institutions. Such analysis yielded median multiple of 1.82x book
value. In performing its analysis, Houlihan Lokey considered that the merger
and acquisition transaction environment varies over time because of, among
other things, interest rate and equity market fluctuations and industry
results and growth expectations.
No company or transaction used in the analysis described above was directly
comparable to the Company. Accordingly, Houlihan Lokey reviewed the
transactions to understand the range of multiples of earnings and book value
paid for companies in the banking industry. Based upon the Company's
representative book value as of fiscal year end 2000 and based upon the
multiple of book value determined under the Pre-Transactions Comparable
Transaction Approach, Houlihan Lokey calculated an indication of the market
value of equity for the Company to be $49.0 million.
The aforementioned Pre-Transactions Market Multiple Approach, Pre-
Transactions Perpetuity Discount Model Approach and Pre-Transactions
Comparable Transactions Approach provided Houlihan Lokey with an indication of
the market value of the Company of approximately $46.0 million or $1.43 per
share.
Post-Transactions Analysis
In order to determine the estimated equity value of the Company after
taking the Transactions into consideration, Houlihan Lokey primarily used the
following methodologies: (1) a market multiple approach; (2) a perpetuity
discount model approach; and (3) a comparable transaction approach. The
analyses required studies of the overall market, economic and industry
conditions in which the Company operates and the historical operating results
of the Company.
Post-Transactions Market Multiple Approach. Houlihan Lokey reviewed certain
financial information of publicly traded comparable companies in the banking
industry selected solely by Houlihan Lokey. Houlihan Lokey calculated certain
financial ratios of the Comparables based on the most recent publicly
available information. The analysis showed that NFY P/E exhibited by the
Comparables ranged from a low of 7.2x to a high of 15.3x. The analysis showed
that P/BV for the Comparables ranged from a low of 1.05x to a high of 4.27x.
Houlihan Lokey derived an indication of the pro forma market value of the
equity for the Company by: (a) applying a selected NFY P/E multiple to the
Company's representative pro forma net income for the fiscal year 2001 based
on its projected net income for the fiscal year 2001, and (b) applying a
selected P/BV multiple to the Company's book value for the fiscal year ended
2001. Based on the above, the resulting indications of the pro forma market
value of the equity of the Company ranged from $142.0 million to $144.1
million.
Post-Transactions Perpetuity Discount Model Approach. Houlihan Lokey
utilized the Financial Forecasts as prepared by management with respect to
fiscal year 2001. To determine the Company's pro forma market value of equity,
Houlihan Lokey calculated the Company's representative pro forma net income
and applied risk-adjusted equity discount rates ranging from 16.0% to 20.0%
and a range of growth rates ranging from 3.5% to 6.5%. Based on management's
estimates and this analysis, the resulting indications of the pro forma market
value of the Company's equity ranged from $110.4 million to $139.2 million.
Post-Transactions Comparable Transactions Approach. Houlihan Lokey reviewed
the consideration paid in certain publicly announced acquisitions of banks and
financial institutions. Such analysis yielded median multiples of 17.4x
earnings and 1.82x book value. In performing its analysis, Houlihan Lokey
considered that
15
the merger and acquisition transaction environment varies over time because
of, among other things, interest rate and equity market fluctuations and
industry results and growth expectations.
No company or transaction used in the analysis described above was directly
comparable to the Company. Accordingly, Houlihan Lokey reviewed the
transactions that constituted a part of our analysis to understand the range
of multiples of earnings and book value paid for companies in the banking
industry. Based upon the Company's pro forma representative earnings and book
value and based upon the lowest and highest multiples of earnings and book
value determined under the comparable transaction analysis, Houlihan Lokey
calculated an indication of the market value of equity for the Company to be
$130.0 million.
The aforementioned Post-Transactions Market Multiple Approach, Post-
Transactions Perpetuity Discount Model Approach, and Post-Transactions
Comparable Transaction Approach provided Houlihan Lokey with an indication of
the pro forma market value of the Company of approximately $132.3 million.
After taking into consideration the present value of the Company's net
operating loss carryforwards, after giving effect to the Transactions and
other potentially dilutive factors such as management options associated with
the Transactions, Houlihan Lokey calculated a pro forma market value of equity
of $124.7 million. After giving appropriate consideration to a projected
increase in the amount of shares outstanding as a result of the Transactions,
the resulting indication of the value of a share of the Common Stock of the
Company after giving effect to the Transactions was estimated to be $1.96 per
share.
Strategic Alternatives
Houlihan Lokey analyzed the Company's current financial situation and
compared it to alternatives available in the market, including the
Transactions. Given the current cease and desist order which creates an
immediate need for a capital infusion, certain restrictions in the Indenture
Agreement, and the current ownership of the Company's bonds, the Transactions
will allow the Company to raise capital without the adverse consequences and
limitations of the Indenture Agreement. Further, management indicated that
should the Transactions not occur, the Company would have to engage in a self-
liquidating scenario which would ultimately raise concerns about the Company's
ability to operate as a going concern. The Transactions benefit the Company's
common shareholders, as the Company's current financial position potentially
causes all equity value to be nominal or speculative if the existing bonds
must be redeemed.
Houlihan Lokey's analysis further determined that given the Company's
current financial situation, market perception, Indenture Agreement
restrictions, cost of capital and other factors, there were few alternatives
in the capital markets in the form of reasonably priced debt, preferred stock
and/or other equity offering available to the Company.
Conclusion
Houlihan Lokey's analyses derived a market value of equity and per share
value of the Company of $33.1 million and $1.03 per share of Common Stock,
respectively, without giving consideration to the Transactions. Houlihan
Lokey's analyses derived a market value of equity and per share value of the
Company of $124.7 million and $1.96 per share, respectively, after giving
effect to the Transactions. Based on the above analyses, Houlihan Lokey
determined that the Transactions are fair, from a financial point of view, to
the Company's public shareholders.
As a matter of course, the Company does not publicly disclose forward-
looking financial information. Nevertheless, in connection with its review,
Houlihan Lokey considered Financial Forecasts for the year ending December 31,
2001. These Financial Forecasts were prepared by the management of the
Company. The Financial Forecasts were prepared under market conditions as they
existed as of approximately February 28, 2001 and management does not intend
to provide Houlihan Lokey with any updated or revised Financial Forecasts in
connection with the Transactions. The Financial Forecasts do not take into
account any circumstances or events occurring after the date they were
prepared. In addition, factors such as industry performance, general business,
16
economic, regulatory, market and financial conditions, as well as changes in
the business, financial condition or results of operation of the Company, may
cause the Financial Forecasts or the underlying assumptions to be inaccurate.
As a result, the Financial Forecasts should not be relied upon as necessarily
indicative of future results, and readers of this proxy statement are
cautioned not to place undue reliance on such Financial Forecasts.
In arriving at its fairness opinion, Houlihan Lokey reviewed key economic
and market indicators, including, but not limited to, growth in the U.S. gross
domestic product, inflation rates, interest rates, consumer spending levels,
manufacturing productivity levels, unemployment rates and general stock market
performance. Houlihan Lokey's April 13, 2001 opinion is based on the business,
economic, market and other conditions as they existed as of March 28, 2001 and
on the Financial Forecasts provided to Houlihan Lokey as of such date. In
rendering its opinion, Houlihan Lokey has relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information provided to Houlihan Lokey by the management of the Company,
including the Financial Forecasts, that such information was reasonably
prepared and reflects the best currently available estimates of the financial
results and condition of the Company; and that no material changes have
occurred in the information reviewed between the date the information was
provided and the date of the Houlihan Lokey opinion. Houlihan Lokey did not
independently verify the accuracy or completeness of the information supplied
to it with respect to the Company and does not assume responsibility for it.
Houlihan Lokey did not make any independent appraisal of the specific
properties or assets of the Company.
The summary set forth above describes the material points of more detailed
analyses performed by Houlihan Lokey in arriving at its fairness opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinion, Houlihan Lokey made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly,
Houlihan Lokey believes that its analyses and summary set forth herein must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses and factors, or portions of this summary, could
create an incomplete and/or inaccurate view of the processes underlying the
analyses set forth in Houlihan Lokey's fairness opinion. In its analysis,
Houlihan Lokey made numerous assumptions with respect to the Company, the
Transactions, industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control
of the respective entities. The estimates contained in such analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be more or less favorable than suggested by such analyses.
Additionally, analyses relating to the value of businesses or securities of
the Company are not appraisals. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty.
Nasdaq Shareholder Vote Requirement
Our Common Stock is listed for trading on the Nasdaq National Market. As a
result, we must comply with Nasdaq corporate governance rules contained in the
Nasdaq Marketplace Rules. Nasdaq Marketplace Rule 4350(i)(l)(D) requires
shareholder approval of securities issuances in a non-public offering where:
. the securities issued are common stock or securities convertible into or
exercisable for common stock;
. the price of the securities is less than the greater of the market or
book value of the common stock; and
. the proposed issuance (including concurrent sales by officers, directors
or substantial shareholders) would result in the issuance of 20% or more
of the common stock or voting power of the issuer before issuance.
Additionally, Nasdaq Marketplace Rule 4350(i)(l)(B) requires shareholder
approval of the issuance of securities by us that would result in a change of
control. There is no concrete test to determine the amount of securities that
we may issue to a party without triggering Nasdaq Marketplace Rule
4350(i)(l)(B). Depending on the facts and circumstances, the issuance by us of
a small amount of securities may be deemed to result in a change of control
where an investor acquires a sizeable portion of our outstanding voting
securities.
17
We are seeking shareholder approval under both Nasdaq Marketplace Rule
4350(i)(l)(B) and Rule 4350(i)(l)(D)(i) and (ii).
In order to effect the recapitalization transactions described in this
proxy statement, our shareholders must authorize the issuance of in excess of
20% of the number of shares of our Common Stock outstanding as of the date of
the Recapitalization Agreement at a price less than the greater of book or
market value. On March 29, 2001, the effective date of the Recapitalization
Agreement, 32,096,361 shares of Common Stock were issued and outstanding.
Pursuant to the Recapitalization Agreement, we may issue between 11,753,852
and 38,600,000 shares of Common Stock, including shares of Common Stock
underlying the warrants and convertible securities described below,
representing between 37% and 120% of our outstanding Common Stock,
respectively. The book value per share of our Common Stock was $1.25 at March
31, 2001. On June 4, 2001 the closing price of our Common Stock was $1.18.
We cannot be certain what form the Recapitalization Agreement will
eventually take. We also believe that any future recapitalization agreement
that may be reached in addition to or in lieu of the Recapitalization
Agreement will likely result in the issuance of 20% or more of our Common
Stock at a price less than the greater of book or market value before
issuance. The Board of Directors therefore believes that the approval of the
proposal described herein is advisable in order to assure that we have
sufficient flexibility to issue Common Stock (including securities convertible
into or exchangeable for Common Stock) at prices that may be less than the
greater of the book or market value before issuance as market opportunities
arise in order to raise the capital necessary to comply with the Regulatory
Orders described above. The eventual issuance of Common Stock or securities
convertible into or exercisable for Common Stock may or may not be on the
exact terms of the Recapitalization Agreement summarized in this proxy
statement. We have no current plans, however, to issue Common Stock or
securities convertible into or exercisable for Common Stock at a price less
than the greater of book or market value for any purpose other than meeting
the requirements of the Regulatory Orders, or in connection with the potential
settlement of class action litigation.
Financing Alternatives Considered
Shortly after the issuance of the Regulatory Orders and prior to the
commencement of the discussions that ultimately led to the Board's approval of
the Recapitalization Agreement, the Board of Directors and management, in
consultation with our then financial advisor, Friedman, Billings, Ramsey & Co.
("Friedman Billings"), began considering various means of raising the needed
equity capital.
At the December 13, 2000 meeting of the Board of Directors, Friedman
Billings proposed that the Board consider a recapitalization plan that would
have involved a very substantial issuance of Common Stock to raise funds to
provide capital to the Bank and to undertake an exchange of new debt
securities for our outstanding debt securities. No specific investors were
identified as having indicated a willingness to participate in such a
transaction, nor were any specific terms proposed. In general, however, the
Board was advised that the amount of Common Stock that it would be necessary
to issue would result in a very substantial reduction in the percentage
ownership interest of our existing shareholders. Friedman Billings further
expressed its view, after taking into consideration the financial condition of
the Bank and the aggregate amount of our outstanding indebtedness, that a sale
of the Company at that time would not be likely to result in any significant
value being payable to the Company's shareholders. In this connection, it was
noted that approximately $43 million of the Company's outstanding indebtedness
would mature and become payable in full on June 14, 2002 and also that a
merger or acquisition of the Company, or any other transaction or series of
transactions that would constitute a change of control of the Company could
result in the Company being required to repurchase up to $217.85 million of
its outstanding indebtedness at a price of 101% of the principal amount
thereof under the terms of the indentures for such indebtedness. After
consideration of the alternatives that then appeared to be available, the
Board of Directors authorized management and Friedman Billings to seek to
develop Friedman Billings' proposed general recapitalization plan into a
specific proposed transaction and to approach potential investors to gauge
their potential interest in pursuing such a transaction.
18
Shortly after the December 13, 2000 Board meeting, management first became
aware that an entity, which it subsequently learned was Imperial Holdings
Group, LLC ("Imperial Holdings"), had acquired a majority in principal amount
of our two principal outstanding classes of debt securities and was thus in a
position to prevent successful completion of any debt restructuring plan to
which it did not agree. Upon learning this information, management and our
Board of Directors concluded that it would be advisable to seek to reach an
agreement with Imperial Holdings regarding a recapitalization plan for the
Company and the Bank. We retained Imperial Capital, LLC, an investment bank in
which we own an approximate 38% interest, for this purpose.
After extensive negotiation, a tentative agreement was reached that was
embodied in a nonbinding letter of intent dated January 24, 2001, and we
issued a press release regarding the general terms of the proposed
transactions. After further extensive negotiations and communications with
other potential investors to determine their interest in participating in the
recapitalization transactions, the Company and Imperial Holdings entered into
negotiations with the parties who ultimately agreed to become the Senior
Secured Debt Purchasers who are parties to the Recapitalization Agreement.
Summary of Recapitalization Agreement
The Recapitalization Agreement was executed on March 29, 2001 by the
Company, the Signatory Debtholders and certain other investors referred to
collectively in the Recapitalization Agreement as the "Senior Secured Debt
Purchasers." The Signatory Debtholders hold approximately $25 million and $87
million of our 10.25% Remarketed Redeemable Par Securities, Series B (the
"ROPES") and 9.875% Senior Notes due 2007 (the "Old Senior Notes").
The Signatory Debtholders consist solely of Imperial Holdings. The
principal equity owners of Imperial Holdings are Michael S. Riley and William
E. Curtis. Mission Capital, LLC which is an affiliate of the law firm of Nida
& Maloney, LLP, owns a less than 5% equity interest in Imperial Holdings. The
Senior Secured Debt Purchasers are entities and individuals who are not
affiliated with the Company or Imperial Holdings. Messrs. Riley and Curtis
formed Imperial Holdings for the purpose of investing in our securities and
effecting a consensual recapitalization of the Company and the Bank.
The Recapitalization Agreement provides for the restructuring of our
outstanding senior indebtedness and the issuance of new equity and debt
securities of the Company through the following recapitalization transactions:
1. Senior Secured Debt Private Placement
We sold an aggregate of $16,200,000 aggregate principal amount of 12%
Senior Secured Notes due April 30, 2002 (the "Senior Secured Debt") in
a private placement on March 30, 2001. The purchasers of the Senior
Secured Debt are referred to herein and in the Recapitalization
Agreement as the "Senior Secured Debt Purchasers."
2. Debt Exchange
We intend to exchange (the "Debt Exchange") for our existing 10.25%
Resettable Rate Debentures, 9.875% Senior Notes due 2007 and 9.75%
Senior Notes due 2004 (collectively, the "Old Notes"):
. approximately $146,154,350 of Senior Secured Notes due 2005
("Exchange Notes");
. up to 2,000,000 shares of our Common Stock, no par value; and
. warrants to purchase up to an additional 7,000,000 shares of Common
Stock with an exercise price of $2.15 per share (the "Debt Exchange
Warrants").
3. Secured Convertible Subordinated Debt Placement
On or following consummation of the Debt Exchange, we intend to issue
and sell $10,000,000 or more in aggregate principal amount of 12%
Secured Convertible Subordinated Notes due 2005 (the "Secured
19
Convertible Subordinated Debt") that will be convertible after three
years into Common Stock at a conversion price of $1.25 per share to
accredited investors in a private placement (the "Secured Convertible
Subordinated Debt Placement").
4. Common Stock Issuance
In connection with the Debt Exchange, we are also obligated under the
Recapitalization Agreement to issue up to 7,040,000 shares of our Common
Stock to the Signatory Debtholders, subject to reduction in certain
events (see "Price Protection Provision" below).
5. Senior Secured Debt Exchange
Upon consummation of the Debt Exchange and the Secured 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 Senior 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 Secured Convertible Subordinated Debt.
Description of Terms of the Senior Secured Debt and the Debt Exchange
Senior Secured Debt.
Principal Terms. The Senior Secured Debt has the following principal terms:
Title: Senior Secured Notes due April 30, 2002
Principal: $16,200,000 aggregate principal amount
Maturity: April 30, 2002.
Interest: 12.0% per annum, payable semi-annually in cash in
arrears. The interest rate on the Senior Secured
Debt will increase to 20% per annum on November
1, 2001 if the Debt Exchange is not consummated
with respect to the Signatory Debtholders on or
before that date.
Security: The Senior Secured Debt is secured by our pledge
of all the Bank's common stock, preferred stock
and subordinated debentures that we hold.
Ranking: The Senior Secured Debt is pari passu with the
Old Notes, except to the extent, as described
above, that the Senior Secured Debt is secured by
our assets.
Mandatory Exchange. Upon the later to occur of ten business days after we
give notice to the Senior Secured Debt Purchasers of (a) the occurrence of the
closing of the Debt Exchange and (b) the satisfaction of all of the conditions
described in the following paragraph, the Senior Secured Debt will be deemed
to have been automatically exchanged for Exchange Notes, shares of Common
Stock and Debt Exchange Warrants on the basis of the following exchange
ratios: (i) for each $1,000 principal amount of Senior Secured Debt, we will
issue to the holder thereof $1,123.45679 principal amount of Exchange Notes
and (ii) for every $1,000 principal amount of Exchange Notes so issued, (x)
13.684163 shares of Common Stock and (y) Debt Exchange Warrants to purchase
47.894572 shares of Common Stock (collectively, the "Initial Secured Debt
Exchange").
The conditions to the mandatory exchange described above are that (i) the
Debt Exchange shall have occurred, (ii) we shall have provided evidence to the
Senior Secured Debt Purchasers that the Exchange Notes to be held by them are
duly registered under federal securities law, (iii) the Secured Convertible
Subordinated Debt
20
Placement shall have been consummated and we shall have contributed the net
proceeds thereof to the Bank, and (iv) as of the date of the last to occur of
the conditions described in the preceding clauses (i) through (iii), either
(a) the Bank shall be in compliance with the provisions of the Regulatory
Orders then required to be satisfied, or (b) if the Bank is not in compliance,
neither the FDIC nor the DFI shall have taken or threatened to take any action
adverse to us or the Bank as a result of such noncompliance and (v) we provide
evidence to the Senior Secured Debt Purchasers that the Collateral Agency and
Security Agreement provided for in the Recapitalization Agreement creates a
valid and perfected first priority security interest in the Collateral (as
defined in the Collateral Agency and Security Agreement) in favor of the
Collateral Agent for the benefit of the holders of the Exchange Notes.
At any time during the period (the "Election Period") commencing with the
issuance of the Exchange Notes to the Senior Secured Debt Purchasers and
ending on March 31, 2002 (the "Election Expiration Date"), each holder of
Exchange Notes issued in exchange for the Senior Secured Debt will have the
right to exchange the Exchange Notes held by such holder for Secured
Convertible Subordinated Debt with the same aggregate principal amount as that
of the Exchange Notes so exchanged (the "Exchange for Convertible Debt"). A
holder may only make such an election by providing us with written notice
prior to the expiration of the Election Period and such holder is required as
part of such exchange to surrender to us the number of shares of Common Stock
and Debt Exchange Warrants it received in the Initial Secured Debt Exchange
with respect to the Exchange Notes as to which such exchange is being made.
Any of such Exchange Notes that are not so exchanged are hereinafter referred
to as the "Retained Exchange Notes."
Price Protection Provision. Holders of Retained Exchange Notes will be
entitled to certain price protection in respect of such notes to the extent
provided in the Recapitalization Agreement. The following summary description
of the price protection provisions is qualified in its entirety by reference
to the Recapitalization Agreement.
The holders of the Retained Exchange Notes, if any, will be entitled to
receive additional amounts of Exchange Notes in connection with their sale of
Retained Exchange Notes if, with respect to specified types of sales ("Private
and Limited Public Sales"), the Average Trading Price (as defined in the
Recapitalization Agreement) of the Exchange Notes during the 30-day period
ending on the last day of the month preceding the month in which such sale
occurs is less than 89% or, for other specified types of sales ("Certain
Public Sales"), if their net proceeds from such sale is less than 89% of the
principal amount of the Retained Exchange Notes that are sold. In any such
event, each of such holders will be entitled to receive from us, pro rata in
accordance with the respective aggregate principal amounts of such Retained
Exchange Notes held by such holder, such additional principal amounts of
Exchange Notes as will yield to such holder net proceeds equal to the
difference, expressed as a dollar amount, between (i) 89% of the aggregate
principal amount of the Retained Exchange Notes sold by such holder and either
(ii) as to Private and Limited Public Sales, the sum of (a) the Average
Trading Value (as defined in the Recapitalization Agreement) of such Retained
Exchange Notes and (b) the net proceeds, if any, resulting from the Required
Concurrent Actions (as defined below) or (iii) as to Certain Public Sales, the
sum of (x) the net proceeds from such sale of Retained Exchange Notes and (y)
the net proceeds, if any, resulting from the Required Concurrent Actions;
provided, that in either event, the maximum principal amount of additional
Exchange Notes so issuable to all such holders in the aggregate will be
limited to $5 million (the aggregate principal amount of such additional
Exchange Notes, if any, required to be so issued being hereinafter referred to
as the "Additional Note Principal Amount").
All sales of Retained Exchange Notes by a holder will be aggregated for
purposes of calculating the additional Exchange Notes to be issued to such
holder pursuant to the price protection provisions of the Recapitalization
Agreement. In other words, sales of Retained Exchange Notes made above the 89%
of principal amount threshold by a holder will be taken into account in
determining the amount of Exchange Notes, if any, issuable to such holder as a
result of sales below the 89% threshold.
The term "Required Concurrent Actions" means the following actions that
each holder of Retained Exchange Notes will be required to take in connection
with receiving the benefits of the price protection
21
provision provided for in the Recapitalization Agreement, as described above.
Each such holder will be required to use commercially reasonable efforts to
sell, concurrently with such holder's sale of its Retained Exchange Notes, the
number of the shares of Common Stock and the Debt Exchange Warrants received
in the Initial Secured Debt Exchange with respect to the Retained Exchange
Notes being sold. If either or both of such Common Stock and Debt Exchange
Warrants cannot be sold, such holder must surrender to us promptly following
such sale of Retained Exchange Notes, the Common Stock and/or Debt Exchange
Warrants not sold and such securities will be valued at zero.
The Debt Exchange.
The Signatory Debtholders have represented to us in the Recapitalization
Agreement that they hold a majority in principal amount of each of the ROPES
and the Old Senior Notes and have agreed to exchange all of the ROPES and Old
Senior Notes held by them for the securities and on the terms summarized
below. The Exchange Offer will also be made to all other holders of ROPES, Old
Senior Notes and the Company's 9.75% Senior Notes due 2004 (the "Old Junior
Notes"). The outstanding principal amounts of the ROPES, the Old Senior Notes
and the Old Junior Notes (collectively, the "Old Notes") are, as of December
31, 2000, approximately $42.9 million, $165.9 million and $10.9 million,
respectively.
Principal Terms. In the Debt Exchange, the Company will offer a reduced
principal amount of Exchange Notes to the holders of the Old Notes in exchange
for their Old Notes together with, at no additional cost, up to two million
shares of Common Stock and Debt Exchange Warrants on the following basis:
Exchange Ratios: The following principal amounts of Exchange Notes
will be exchanged for the following percentages
of the principal amounts of the respective series
of Old Notes:
50.0% of the Old Junior Notes
65.0% of the Old Senior Notes
80.0% of the ROPES
In addition, exchanging holders of Old Notes will
(as described above) be issued 13.684163 shares
of Common Stock and Debt Exchange Warrants to
purchase 47.894572 shares of Common Stock for
each $1,000 principal amount of Exchange Notes
issued to them in exchange for their Old Notes.
Exit Consents: In the Debt Exchange, exchanging holders of Old
Notes (other than Old Junior Notes) will be
required to consent to amendments to the
indentures governing the Old Notes that will
delete existing protective covenants, including
the change of control provisions of the Old
Notes. The consents with respect to a majority in
principal amount of the ROPES and Old Senior
Notes were obtained from the Signatory
Debtholders as a result of their execution of the
Recapitalization Agreement.
Severability: The Exchange Notes, Common Stock and Debt
Exchange Warrants to be issued in the Debt
Exchange will be tradable as separate securities.
Exchange Notes. The Exchange Notes will have the following principal terms:
Title: 12% Senior Secured Notes due 2005
Principal: Up to approximately $146,154,350 aggregate
principal amount, if all outstanding Old Notes
are exchanged in the Debt Exchange.
22
Interest: 12.0% per annum, payable semi-annually in cash in
arrears.
Maturity: , 2005 (4 years from date of issuance).
Security: The Exchange Notes will be secured by our pledge
of all the Bank's common stock, preferred stock
and subordinated debentures that we hold, with
the security interest in such collateral being
subordinate to that of the Senior Secured Debt
Purchasers during such period as the Senior
Secured Debt remains outstanding.
Ranking: The Exchange Notes will be pari passu with any of
the Old Notes that remain outstanding after the
Debt Exchange, except to the extent, as described
above, that the Exchange Notes are secured by our
assets and will be subordinate to the Senior
Secured Debt for such period as the Senior
Secured Debt remains outstanding after the Debt
Exchange.
Covenants: The indenture for the Exchange Notes will include
financial covenants with which the Company must
comply. These covenants, which will generally be
similar but not identical to those contained in
the indenture for the Old Senior Notes, will
include, among others, (1) restrictions on the
payment of dividends, repurchases of stock and
certain other "restricted payments", (2)
limitations on the incurrence of additional debt
by the Company and (3) a requirement that the
Company offer to purchase the Exchange Notes of
each holder at a purchase price equal to 101% of
the principal amounts thereof in the event of a
Change of Control of the Company (as defined in
the indenture).
Debt Exchange Warrants. The warrants to purchase up to seven million shares
of Common Stock will be issued on the following terms:
Exercisable: Commencing on August 1, 2002.
Exercise Price: $2.15 per share.
Expiration: Seven years from date of issuance.
Optional Redemption: The Debt Exchange Warrants will be redeemable by
us at a redemption price of $.01 per share upon
notice given at any time that the arithmetic mean
of the Current Market Prices of the Common Stock
for a period of 20 consecutive trading days
equals or exceeds $3.00.
Secured Convertible Subordinated Debt
Secured Convertible Subordinated Debt Placement. The Secured Convertible
Subordinated Debt will be offered on the following terms:
Title: 12% Secured Convertible Subordinated Notes due
2005.
Principal: $10,000,000 or more in aggregate principal
amount, together with up to an additional
$18,200,000 aggregate principal amount of Secured
Convertible Subordinated Debt that may be issued
in exchange for Exchange Notes issued to the
Senior Secured Debt Purchasers.
Maturity: , 2005, (one month after the maturity
date of the Exchange Notes), unless earlier
redeemed at the option of the Company.
23
Interest: 12.0% per annum, payable semi-annually in cash in
arrears, except that up to 50% of such interest
may, at the election of the Company, be paid
through the issuance of additional Secured
Convertible Subordinated Debt to the holders
thereof.
Ranking: The Secured Convertible Subordinated Debt will be
subordinate to the Exchange Notes, and any then
outstanding Senior Secured Debt. The Secured
Convertible Subordinated Debt will be pari passu
with any of the Old Notes that remain outstanding
after the issuance of the Secured Convertible
Subordinated Debt, except to the extent, as
described below, that the Secured Convertible
Subordinated Debt is secured by our assets.
Conversion: Commencing on the third anniversary of the date
of issuance, the Secured Convertible Subordinated
Debt will be convertible into shares of Common
Stock at a conversion price of $1.25 per share,
subject to adjustment in the event of stock
splits, reverse stock splits and other specified
events.
Security: The Secured Convertible Subordinated Debt will be
secured on a subordinated basis by our pledge of
all the Bank's common stock, preferred stock and
subordinated debentures that we hold. With
respect to realization on the security, the
Secured Convertible Subordinated Debt will be
subordinate to the Exchange Notes, and any then
outstanding Senior Secured Debt.
Issuance of Common Stock to Signatory Debtholders. In consideration of
their pre-offering commitment to exchange their Old Notes as part of the Debt
Exchange, the Recapitalization Agreement provides that we will issue up to
7,040,000 shares of Common Stock to the Signatory Debtholders (the "Signatory
Debtholder Shares"). 5,040,000 shares of Common Stock will be issued to the
Signatory Debtholders concurrently with the consummation of the Debt Exchange
but in no event (except as provided below) later than July 1, 2001. Promptly
after the Election Expiration Date, if we are not required to issue additional
Exchange Notes to any holder of Retained Exchange Notes, we will issue two
million additional shares of Common Stock to the Signatory Debtholders. If
additional Exchange Notes are required to be issued to any holder of Retained
Exchange Notes, the total amount of additional shares of Common Stock, if any,
to be issued by us to the Signatory Debtholders will be equal to (x) two
million, reduced by (y) 800 shares of Common Stock for each $1,000 in
principal amount of additional Exchange Notes required to be issued to the
holders of the Retained Exchange Notes.
The Recapitalization Agreement provides that if the approval of the
issuance of our Common Stock required by the Nasdaq Marketplace Rule described
herein is not obtained by July 1, 2001, we will (1) issue to the Signatory
Debtholders the maximum number of Signatory Debtholder Shares then permitted
to be issued without approval of our shareholders under applicable Nasdaq
Marketplace Rules (such number of shares, the "Issued Number of Shares") and
(2) in lieu of any further issuance of the Signatory Debtholder Shares, issue
promissory notes, payable in full on the first anniversary of issuance, in an
aggregate principal amount equal to the product of (x) the number of Signatory
Debtholder Shares required to be issued, as described above, less the Issued
Number of Shares (such amount, the "Unissued Share Amount") and (y) $3.00; but
subject to a maximum aggregate principal amount of $1,872,000. We will have
the option to repay in full all of such notes by issuing to the holders
thereof a number of shares of Common Stock equal to the Unissued Share Amount.
Such notes, if required to be issued, would have terms, other than conversion
rights and their maturity date, identical to the terms of the Secured
Convertible Subordinated Debt described above.
Timing. Under the terms of the Recapitalization Agreement, we and the other
signatories thereto agreed to use commercially reasonable efforts to complete
the issuance of the Senior Secured Debt on or before
24
March 31, 2001 and to complete the Debt Exchange and the Secured Convertible
Subordinated Debt Placement by June 15, 2001. We completed the issuance of the
Senior Secured Debt on March 30, 2001. There is no assurance as to the date by
which we will be able to complete the remaining recapitalization transactions.
Registration Obligations
The Common Stock proposed to be issued pursuant to the Recapitalization
Agreement will not be registered under the Securities Act of 1933 (the
"Securities Act") and may not be resold by the acquirors thereof absent such
registration or the availability of an applicable exemption from the
registration requirements of the Securities Act. In connection with the
Recapitalization Agreement, we have agreed that we will register (generally
within 120 days after the issuance of each category of such securities) the
Exchange Notes, the Secured Convertible Subordinated Debt, the Common Stock
issued as part of the Debt Exchange, the Common Stock issued as part of the
Initial Secured Debt Exchange and the Common Stock underlying the Secured
Convertible Subordinated Debt and the Debt Exchange Warrants. The foregoing
registration requirements will be complied with in accordance with the
provisions of a Registration Rights Agreement. We have also agreed to use our
best efforts to register the Exchange Notes that will be issuable in exchange
for the Senior Secured Debt within 120 days after such issuance. The foregoing
registration requirements in respect of the Exchange Notes will be complied
with in accordance with the provisions of a separate Exchange Note
Registration Rights Agreement.
Interests of Certain Persons in the Recapitalization Agreement
The Recapitalization Agreement provides that a management stock option pool
is to be established for grants of stock options in the discretion of our
Board's Compensation Committee for 1,500,000 shares of Common Stock with an
exercise price of $1.25 per share. Under the Recapitalization Agreement, the
allocation of these options may be determined by the existing Compensation
Committee. The Compensation Committee granted options to purchase 1,000,000
shares to our President and Chief Executive Officer, H. Wayne Snavely, and
options to purchase 250,000 shares each to our Chief Financial Officer, Brad
S. Plantiko and our General Counsel, Irwin L. Gubman. See "Approval of the
2001 Long Term Stock Incentive Plan -- New Plan Awards."
As described above, four of the nominees for election as directors of the
Company have been proposed by the Signatory Debtholders as provided for in the
Recapitalization Agreement. The election and qualification of these nominees
will constitute a change in control of the Company that will result in
severance amounts becoming payable to Messrs. Snavely, Plantiko and Gubman, if
they voluntarily terminate their employment upon the expiration of one year
thereafter or if they are terminated by the Company within three years
thereafter. See "Election of Directors -- Termination Agreements." In
addition, the exercise periods of any outstanding stock options held by
Messrs. Snavely, Plantiko and Gubman will be extended. Such options will be
exercisable for the earlier of a period of three years after termination of
their employment or until the options expire according to their terms. The
exercise periods for outstanding options held by Messrs. Lerner and Shugerman,
for 191,422 and 278,524 shares of Common Stock, respectively, will also be
extended as described above. Messrs. Lerner and Shugerman resigned from our
Board of Directors pursuant to the terms of the Recapitalization Agreement.
We will pay the reasonable out of pocket fees and expenses incurred by the
Signatory Debtholders in connection with the Recapitalization Agreement,
including, without limitation, the fees and expenses of their legal counsel
(corporate, tax, regulatory and other) up to a maximum of $750,000 plus such
additional sums as are approved by us in accordance with the Recapitalization
Agreement. Such fees and expenses that are incurred on or before the date of
consummation of the Senior Secured Debt offering will be paid from the
proceeds of that offering. We also will pay up to $375,000 of the reasonable
related costs and expenses of the Senior Secured Debt Purchasers.
Impact of Proposal on Our Capital and Our Shareholders
Our authorized equity currently consists of 80,000,000 shares of Common
Stock and 8,000,000 shares of preferred stock. Of our authorized equity, we
have 32,096,361 shares of Common Stock outstanding and no shares of preferred
stock outstanding. Upon consummation of the transactions contemplated by the
25
Recapitalization Agreement, we expect that we will potentially have between
45,850,213 and 70,696,361 shares of Common Stock outstanding. In determining
the minimum number of shares of Common Stock we may issue in connection with
the recapitalization transactions, we have assumed that 7,040,000 shares of
Common Stock constituting the Signatory Debtholder Shares are issued to the
Signatory Debtholders, that all the Signatory Debtholders tender their Old
Notes in the Debt Exchange thereby receiving approximately 1,047,523 shares of
Common Stock and Debt Exchange Warrants to purchase 3,666,329 shares of Common
Stock in exchange therefor and that the Signatory Debtholders exercise all
their Debt Exchange Warrants. If these minimum numbers of shares are issued,
we will have a total of 11,753,852 additional shares of Common Stock
outstanding, representing approximately 27% of our then outstanding Common
Stock. We determined the maximum number of shares of Common Stock we may issue
by assuming that (1) $28,200,000 of Secured Convertible Subordinated Debt is
issued (which assumes no more than $10,000,000 of Secured Convertible
Subordinated Debt is sold in the Secured Convertible Subordinated Debt
Placement and that all of the Senior Secured Debt is exchanged for Exchange
Notes that are further exchanged for Secured Convertible Subordinated Debt in
the Exchange for Convertible Debt) and converted for 22,560,000 shares of
Common Stock, (2) 100% of the Old Notes are tendered in the Debt Exchange and
therefore that all 7,000,000 Debt Exchange Warrants and 2,000,000 shares of
Common Stock are issued in the Debt Exchange (and all of the Debt Exchange
Warrants are thereafter exercised) and (3) the 7,040,000 shares of Common
Stock constituting the Signatory Debtholder Shares are issued to the Signatory
Debtholders. If these maximum numbers of shares are issued in the
recapitalization transactions, a total of 38,600,000 additional shares of
Common Stock will be issued and outstanding, representing approximately 55% of
our then outstanding Common Stock. The foregoing calculations do not take into
account our currently outstanding or proposed employee stock options or the
warrants for 3,000,000 shares of Common Stock we have agreed to issue in
settlement of litigation. See "Amendment of Articles of Incorporation to
Effect a Reverse Stock Split -- Effect of Proposed Reverse Stock Split." In
addition, our outstanding shares of Common Stock will exceed 70,696,361 to the
extent that we succeed in selling more than $10,000,000 of Secured Convertible
Subordinated Debt or that we find it necessary to issue and sell additional
Common Stock or securities convertible into or exercisable for Common Stock in
order to enable the Bank to comply with its regulatory capital requirements.
We currently have approximately $220,000,000 in outstanding Old Notes.
Pursuant to the debt restructuring transactions provided for in the
Recapitalization Agreement, we will have approximately $146,154,350 in
principal amount of Exchange Notes outstanding if all Old Notes are exchanged.
We have no existing convertible indebtedness. Following consummation of the
Recapitalization Agreement, we expect to have at least $10,000,000 and up to
$28,200,000 or more, if we sell in excess of $10,000,000 in the Secured
Convertible Subordinated Debt Placement, of Secured Convertible Subordinated
Debt outstanding.
As a result of the large amount of Common Stock expected to be issued and
issuable upon conversion or exercise of the warrants and convertible
securities, we expect that our shareholders will experience a substantial
dilution in their percentage interests in the Company. Our shareholders'
interests 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 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.
Pro Forma Financial Information
The unaudited consolidated pro forma financial information presented below
has been prepared to illustrate the intended effects of the proposed
recapitalization transactions, other than the proposed issuance and sale of
$10.0 million or more in aggregate principal amount of Secured Convertible
Subordinated Debt, described in this proxy statement as of the date indicated.
The pro forma information is based on the unaudited historical balance sheet
information of the Company at March 31, 2001 presented below, as adjusted to
reflect certain aspects of the recapitalization transactions. The pro forma
information is based on certain assumptions, including the assumption in
Scenario I that only the Signatory Debtholders tender in the Debt Exchange and
in Scenario II that all of the Old Notes are tendered in the Debt Exchange.
The March 31, 2001 unaudited historical balance
26
sheet reflects the issuance of the Senior Secured Debt. The Signatory
Debtholders are required to tender their Old Notes under the Agreement, and
all of the holders of Old Notes may elect to tender their Old Notes, in the
Debt Exchange. However, the actual principal amount of Old Notes tendered in
the Debt Exchange may vary materially from the amounts we have assumed. As a
result of the current trading discount on our Old Notes, the Debt Exchange
will be accounted for in accordance with Statement of Financial Accounting
Standards No. 15 "Accounting by Debtors and Creditors for Troubled Debt
Restructurings" ("FAS No. 15"). Under FAS No. 15, we will establish a total
liability relating to the Exchange Notes equal to the aggregate principal
amount of the Exchange Notes plus all interest payable over the term of the
Exchange Notes, less any discount or plus any premium related to the remaining
loss or gain on the Debt Exchange, while the current book values of the Old
Notes are removed. The pro forma information is not necessarily indicative of
the actual financial position that would have existed at March 31, 2001 had
the recapitalization transaction been consummated as of such date. The actual
results of our recapitalization efforts could differ materially from those
reflected in the following pro forma balance sheet. The pro forma information
should be read in conjunction with, and is qualified in its entirety by, the
consolidated financial statements and accompanying notes of the Company
included in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 2000 (the "2000 Form 10-K") and Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001, and by the indicated notes to the following
pro forma information.
27
Imperial Credit Industries, Inc.
Unaudited Pro Forma Financial Information
As of March 31, 2001
Scenario I Scenario II
Unaudited Exchange Unaudited Pro Exchange Unaudited Pro
3/31/01 Adjustments Forma 3/31/01 Adjustments Forma 3/31/01
---------- ----------- ------------- ----------- -------------
(Note A) (Note B)
(In thousands, except per share data)
ASSETS
Cash.................... $ 56,622 $ -- $ 56,622 $ -- $ 56,622
Interest bearing
deposits............... 97,068 -- 97,068 -- 97,068
Investment in Federal
Home Loan Bank stock... 4,216 -- 4,216 -- 4,216
Securities held for
trading, at market..... 105,080 -- 105,080 -- 105,080
Securities available for
sale, at market........ 61,466 -- 61,466 -- 61,466
Loans and leases held
for sale, net.......... 380,132 -- 380,132 -- 380,132
Loans and leases held
for investment......... 1,260,308 (2,572)(1) 1,257,736 -- 1,257,736
Less: allowance for
loan and lease
losses................ (64,785) -- (64,785) -- (64,785)
---------- ------- ---------- ------- ----------
Loans held for
investment, net....... 1,195,523 (2,572) 1,192,951 -- 1,192,951
Real property........... 38,694 -- 38,694 -- 38,694
Retained interest in
loan and lease
securitizations........ 3,635 -- 3,635 -- 3,635
Accrued interest
receivable............. 13,975 -- 13,975 -- 13,975
Premises and equipment,
net.................... 12,335 -- 12,335 -- 12,335
Other real estate owned
and other repossessed
assets, net............ 13,332 -- 13,332 -- 13,332
Goodwill................ 31,645 -- 31,645 -- 31,645
Other assets............ 31,201 11,137 (2) 42,338 (1,831)(9) 40,507
Net assets of
discontinued
operations............. 11,569 -- 11,569 -- 11,569
---------- ------- ---------- ------- ----------
Total assets............ $2,056,493 $ 8,565 $2,065,058 $(1,831) $2,063,227
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits................ $1,623,657 $ -- $1,623,657 $ -- $1,623,657
Borrowings from Federal
Home Loan Bank......... 50,000 -- 50,000 -- 50,000
Other borrowings........ 34,978 -- 34,978 -- 34,978
Senior Secured Notes
(Note C)............... 16,200 -- 16,200 -- 16,200
Company obligated
mandatorily redeemable
preferred securities of
subsidiary trust
holding solely
debentures of the
Company ("ROPES")...... 41,035 (25,650)(3) 15,385 (15,385)(10) --
Senior Notes............ 176,765 (88,718)(3) 88,047 (88,047)(10) --
Exchange Notes.......... -- 108,675 (4) 108,675 98,409 (11) 207,084
Accrued interest
payable................ 16,421 -- 16,421 -- 16,421
Income taxes payable.... 20,507 -- 20,507 -- 20,507
Minority interest in
consolidated
subsidiaries........... 1,141 -- 1,141 -- 1,141
Goodwill................ 22,103 -- 22,103 -- 22,103
Other liabilities....... 13,614 3,548 (5) 17,162 -- 17,162
---------- ------- ---------- ------- ----------
Total liabilities....... 2,016,421 (2,145) 2,014,276 (5,023) 2,009,253
---------- ------- ---------- ------- ----------
Shareholders' equity:
Preferred stock,
8,000,000 shares
authorized; none issued
or outstanding......... -- -- -- -- --
Common stock, no par
value. Authorized
80,000,000 shares;
32,096,361 issued and
outstanding at
March 31, 2001......... 97,778 10,710 (6) 108,488 3,191 (12) 111,679
Retained deficit........ (64,577) -- (7) (64,577) -- (13) (64,577)
Shares held in deferred
executive compensation
plan................... 5,635 -- 5,635 -- 5,635
Unrealized gain on
securities available
for sale, net.......... 1,236 -- 1,236 -- 1,236
---------- ------- ---------- ------- ----------
Total shareholders'
equity................. 40,072 10,710 50,782 3,191 53,973
---------- ------- ---------- ------- ----------
Total liabilities and
shareholders' equity... $2,056,493 $ 8,565 $2,065,058 $(1,832) $2,063,226
========== ======= ========== ======= ==========
Total shares
outstanding............ 32,096 8,110 (8) 40,206 930 (14) 41,136
Book value per share.... $ 1.25 $ 1.26 $ 1.31
28
Note A: Footnotes for Scenario I (assumes that only the Old Notes owned by
the Signatory Debtholders are exchanged as part of the Debt Exchange)
(1) Reflects an additional $2.6 million that will become available to the
Company upon consummation of the recapitalization transactions as a
result of a related agreement between the Company and our investment
advisor, Imperial Capital, LLC.
(2) Reflects the increase in deferred bond issue costs as a result of
incurring $6.1 million in underwriting fees and offering expenses, and
$7.0 million of costs, representing 7.04 million shares of Common Stock
at an estimated value of $1.00 per share, in connection with the required
issuance of the Signatory Debtholder Shares, and the write off of $2.0
million of deferred bond issue costs related to the Old Notes.
(3) Pursuant to the Recapitalization Agreement, reflects the exchange of
approximately $25.7 million of ROPES and $88.7 million of Senior Notes
owned by the Signatory Debtholders for Exchange Notes.
(4) Reflects the issuance of $78.2 million of Exchange Notes, the accrual of
$37.5 million of interest expense on the Exchange Notes over the stated
term, and the establishment of a $7.0 million discount equal to the
deferred loss on the Debt Exchange.
(5) Reflects the accrual of $3.5 million of offering expenses payable in
connection with the issuance of the Exchange Notes.
(6) Reflects the increase to shareholders' equity as a result of issuing 1.1
million shares of Common Stock with an estimated value of $1.00 per share
in connection with the Debt Exchange, issuing 3.7 million Debt Exchange
Warrants with an estimated value of $0.69 per warrant, and issuing 7.04
million shares of Common Stock with an estimated value of $1.00 per share
to the Signatory Debtholders.
(7) Does not reflect the reversal of $11.4 million of the deferred tax
valuation allowance as a result of the realization of a taxable gain on
the exchange of notes in the Debt Exchange for income tax purposes. The
ultimate realization of the deferred tax asset for accounting purposes is
subject to several variables, including our ability to generate taxable
income in the future. We have reported operating losses during the
previous three years.
(8) Reflects an increase to common shares outstanding as a result of issuing
7.04 million shares of Common Stock to the Signatory Debtholders and 1.1
million shares of Common Stock in connection with the Debt Exchange. The
increase to shares of Common Stock outstanding does not reflect the
increase in outstanding shares of Common Stock which would result from
exercise of 3.7 million of Debt Exchange Warrants at an exercise price of
$2.15 per share, which warrants would be issued in connection with the
Debt Exchange to the Signatory Debtholders.
Note B: Footnotes for Scenario II (assumes that all remaining Old Notes are
exchanged as part of the Debt Exchange)
(9) Reflects a decrease in deferred bond issuance costs as a result of
exchanging the remaining Old Notes as part of the Debt Exchange.
(10) Reflects the exchange of the remaining $103.6 million of Old Notes as
part of the Debt Exchange.
(11) Reflects the issuance of an additional $68.0 million of Exchange Notes,
the additional accrual of $32.6 million of interest expense on the
additional Exchange Notes over the stated term, and an additional $2.2
million discount equal to the additional deferred loss on the Debt
Exchange related to the remaining Old Notes.
(12) Reflects the additional increase in equity as a result of issuing an
additional 930,000 shares of Common Stock with an estimated value of
$1.00 per share in connection with the Debt Exchange and issuing an
additional 3.3 million Debt Exchange Warrants with an estimated value of
$0.69 per warrant.
(13) Does not reflect the reversal of an additional $14.0 million of the
deferred tax valuation allowance as a result of the realization of a
taxable gain on the exchange of notes in the Debt Exchange for income tax
purposes.
29
The ultimate realization of the deferred tax asset for accounting purposes
is subject to several variables, including our ability to generate taxable
income in the future. We have reported operating losses during the previous
three years.
(14) Reflects an increase to shares of Common Stock outstanding as a result of
issuing 930,000 shares of Common Stock to the remaining holders of the
Old Notes in connection with the Debt Exchange. The increase to total
shares outstanding does not reflect the increase in outstanding shares
which would result from exercise of an additional 3.3 million of Debt
Exchange Warrants at an exercise price of $2.15 per share, which warrants
would be issued in connection with the Debt Exchange to the remaining
holders of the Old Notes.
Note C: The 12% Senior Secured Notes due April 30, 2002 were issued on
March 30, 2001 as part of our Recapitalization Agreement. Upon consummation of
the Debt Exchange and the Secured Convertible Subordinated Debt Placement all
of the Senior Secured Debt will be exchanged for $18.2 million 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 at $2.15 per share. There can be no assurance that the Secured
Convertible Subordinated Debt Placement will be completed. Such placement and
exchange of Senior Secured Notes has not been reflected in the Unaudited Pro
Forma Financial Information.
30
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
This summary describes the expected material United States federal income
tax consequences to the Company from the recapitalization transactions
described herein. This summary does not consider the tax consequences of the
recapitalization transactions under state, local and foreign law.
This summary is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations, Internal Revenue Service rulings and
judicial decisions now in effect, all of which are subject to change (possibly
with retroactive effect) or different interpretations. There can be no
assurance that the Internal Revenue Service will not challenge one or more of
the conclusions described herein, and we have not obtained, nor do we intend
to obtain, a ruling from the Internal Revenue Service with respect to the
federal income tax consequences to the Company from the recapitalization
transactions.
In General. Except as described below, we do not expect that we will be
required to recognize any gain or loss as a result of the recapitalization
transactions.
Cancellation of Indebtedness Income. Under Section 108 of the Code, we will
be required to recognize cancellation of indebtedness ("COD") income to the
extent that the sum of (1) the issue price of the Exchange Notes issued
pursuant to the Debt Exchange (which we believe will be equal to the face
amount of such notes), (2) the aggregate fair market value of the Common Stock
and Debt Exchange Warrants issued pursuant to the Debt Exchange and (3) the
amount of cash paid in the Debt Exchange in lieu of the issuance of fractional
Exchange Notes, is less than the adjusted issue price of the Old Notes
exchanged pursuant to the Debt Exchange. We expect that the amount of such COD
income recognized will be approximately $72.2 million if all of the Old Notes
are exchanged pursuant to the Debt Exchange.
All of the COD income recognized pursuant to the Debt Exchange should be
offset for regular federal income tax purposes by our net operating loss
carryforwards ("NOLs"). For purposes of computing alternative minimum tax
("AMT"), however, NOLs may be used to offset only 90% of alternative minimum
taxable income. Thus, 10% of the COD income will be subject to AMT, which at a
rate of 20% will result in tax obligations of approximately $1.4 million. The
amount of COD income subject to AMT would be reduced to the extent, if any,
that the adjusted issue price of all of our indebtedness exceeds the fair
market value of all of our assets immediately prior to the date the Debt
Exchange is consummated.
Ability to Utilize NOL Carryforwards and Recognized Built-In Losses. As of
December 31, 2000, NOLs of approximately $130 million were available to offset
taxable income we recognize in periods after December 31, 2000. In addition,
we estimate that we have an aggregate tax basis in our assets that exceeds the
aggregate fair market value of those assets (referred to below as a "built-in
loss") by as much as $130 million. We have no significant tax credit carry
forwards available.
NOLs benefit us by offsetting taxable income dollar for dollar by the
amount of the NOLs, thereby eliminating (subject to the relatively modest
amount of the AMT) the 35% federal corporate tax on such income. Similarly,
built-in losses may offset other taxable income on a dollar-for-dollar basis
at the time those losses are recognized for tax purposes.
The future benefit of a company's NOLs, built-in losses and other tax
attributes can, however, be reduced or eliminated under Section 382 of the
Code. For purposes of Section 382, a company with NOLs or certain other tax
attributes is referred to as a "loss corporation." A loss corporation that has
a "Section 382 ownership change," as discussed below, is subject to an annual
limitation on its ability to use its NOLs, certain built-in losses and certain
other tax attributes arising before the ownership change to offset taxable
income arising after the ownership change date. Section 382 does not restrict
the offset against future taxable income of NOLs and other tax attributes
arising after the ownership change date. The Section 382 limitation applies on
an annual basis to tax years ending after the date of the ownership change.
31
A Section 382 ownership change generally occurs when, over a three-year
testing period (or a period starting with the first day of the first year from
which the loss corporation has carryforwards or certain built-in losses, if
shorter), the aggregate stock ownership percentage (by value) of "five-percent
shareholders" has increased by more than 50 percentage points over such
shareholders' lowest ownership percentages within the testing period. A five-
percent shareholder is a person who directly or indirectly owns five percent
or more of the total value of the outstanding stock of a loss corporation. If
a five-percent shareholder is an entity (i.e., a corporation, partnership,
trust, etc.), the loss corporation is required to look through the entity (and
through any higher tier entity) in order to determine which owners of the
entity are indirectly five-percent shareholders of the loss corporation.
All holders of a less than five percent interest in the loss corporation,
whose holdings are not otherwise attributed to a five-percent shareholder, are
aggregated into one or more "public groups" of shareholders, and each of these
groups is treated as a five-percent shareholder. Special aggregation and
segregation rules are applied to determine whether such public groups are
combined with other public groups or treated as separate five-percent
shareholders. It is the ownership of these ultimate five-percent shareholders,
including the public groups, that is considered when determining whether a
greater than 50 percentage point increase has occurred.
One such segregation rule applies to stock newly issued by a loss
corporation. Under these rules, the Signatory Debtholders who receive Common
Stock upon consummation of the Debt Exchange, and, unless a de minimis
exception applies, other holders of Old Notes who receive Common Stock
pursuant to the Debt Exchange will, to the extent such instruments are not
held by actual five-percent shareholders, be segregated as a separate public
groups treated as five-percent shareholders. The less than five-percent
shareholders who are part of the separate groups of shareholders who acquire
stock in the recapitalization transactions are presumed not to be members of
any existing public groups.
We engaged Ernst & Young, LLP to prepare a report (the "E&Y Report"), based
on publicly available information regarding ownership of our stock, concerning
changes in ownership of our stock under the rules described above. Based on
the E&Y Report, we believe that prior to the recapitalization transactions we
had not experienced a Section 382 ownership change, and that the issuance of
up to 2,000,000 shares of Common Stock in the Debt Exchange, up to 7,040,000
shares of Common Stock as Signatory Debtholder Shares and 249,052 shares of
Common Stock to the Secured Debt Purchasers upon consummation of the Debt
Exchange and the Secured Convertible Subordinated Debt purchases would not
give rise to such a change.
The conclusion that the recapitalization transactions would not give rise
to an ownership change is based on the conclusion that no warrants or options
in existence at the time of the recapitalization transactions would be treated
as exercised and that the Secured Convertible Subordinated Debt would not be
treated as converted under the rules described immediately below. Under
Section 382, the term "option" is defined broadly to include, among other
things, a warrant, convertible debt, a contingent purchase agreement, a
contract to acquire stock or a similar interest, regardless of whether it is
contingent or otherwise not currently exercisable. Under the foregoing rules,
each of the Debt Exchange Warrants, the Secured Convertible Subordinated Debt,
the compensatory options issued to management, the rights of the Signatory
Debtholders to acquire the Signatory Debtholder Shares, and the right to
acquire Secured Convertible Subordinated Debt or Common Stock and Debt
Exchange Warrants in exchange for Senior Secured Debt could be treated as
"options."
The Treasury Regulations under Section 382 provide that under certain
conditions an option is to be treated as exercised for purposes of determining
whether an ownership change has occurred. In particular, an option is treated
as exercised on the date of its issuance or transfer if, on that date, the
option satisfies one of three option tests (referred to as the ownership,
control and income tests). Each option test effectively has two criteria that
must be satisfied in order for the option to be treated as exercised. The
first criterion of all three tests is that a principal purpose for the
issuance, transfer or structuring of the option is to avoid a Section 382
ownership change or to ameliorate the impact of a Section 382 ownership change
(a "prohibited principal purpose").
An option satisfies the ownership test if it is issued, transferred or
structured with a prohibited principal purpose and the option provides its
holder (or a person related to the holder), prior to the exercise or transfer
of
32
the option, with a substantial portion of the attributes of ownership of the
underlying stock (e.g., the right to participate in the management of the loss
corporation through voting the underlying stock).
An option satisfies the control test if it is issued, transferred or
structured with a prohibited principal purpose and the holder of the option
and all related parties have an aggregate direct and indirect ownership
interest in the loss corporation of more than 50 percent, determined as if the
option and any other options of the holder were deemed exercised.
An option satisfies the income test if it is issued, transferred or
structured with a prohibited principal purpose and the issuance, transfer or
structuring of the option facilitates the creation of income (including
accelerating income or deferring deductions) or the creation of value
(including unrealized built-in gains) prior to the exercise or transfer of the
option. An additional factor in applying the income test is whether the holder
of the option purchased stock or made a capital contribution or loan to the
loss corporation that could reasonably be expected to avoid or ameliorate the
impact of an ownership change; however, such a stock purchase, capital
contribution or loan is generally not taken into account if it is made to
enable the loss corporation to continue the basic operations of its business.
We expect to obtain an opinion from Mayer, Brown & Platt, counsel to the
Company, to the effect that none of (i) the Debt Exchange Warrants, (ii) the
Secured Convertible Subordinated Debt, or (iii) any other "options" which
could be deemed created by the recapitalization transactions described herein,
should be treated as exercised or converted at the time of the
recapitalization transactions for purposes of the above rules in a manner that
would affect the conclusion that no Section 382 ownership change has occurred.
This opinion will be based on various factual assumptions and on
representations from the Company, the Secured Debt Purchasers, the Signatory
Debtholders and Imperial Capital, LLC, including but not limited to the
absence of certain types of relationships between the Signatory Debtholders,
on the one hand, and the Secured Debt Purchasers on the other. There is,
however, little authority on the application of the relevant tests to a
situation such as ours. It is therefore possible that the Internal Revenue
Service would disagree with our legal counsel's opinion.
If an ownership change of the Company were to occur, the amount of taxable
income in any one year (or portion of a year) subsequent to the ownership
change that could be offset by NOLs existing prior to such ownership change
generally could not exceed the product obtained by multiplying (i) the
aggregate value of our stock immediately prior to the ownership change (with
certain adjustments) by (ii) the federal long-term tax-exempt rate as
applicable for the month of the ownership change (4.92% as of April 2001).
Such annual limitation amount is cumulative from year to year. Thus, to the
extent NOLs or other tax attributes are not utilized up to the amount of the
annual limitation, this "unused" limitation is carried forward and added to
the following year's annual limitation.
These rules also apply in the case of a corporation that has a "net
unrealized built-in loss" at the time of the ownership change. The "net
unrealized built-in loss" of a corporation is generally equal to (i) the
excess of the adjusted tax basis of the corporation's assets immediately
before the ownership change over the fair market value of such assets at that
time adjusted by (ii) the net amount of certain other items of income and
deductions which are recognized during the five-year period beginning on the
ownership change date (the "Recognition Period") but are attributable to pre-
ownership change periods. Accordingly, losses recognized and deductions
incurred during the Recognition Period that are attributable to pre-ownership
change years ("recognized built-in losses") are treated similarly to pre-
ownership change NOLs, but only to the extent that the cumulative recognized
built-in losses do not exceed the corporation's net unrealized built-in loss.
If a Section 382 ownership change occurs, we would incur a corporate level
tax (current maximum federal rate of 35%) on any taxable income during a given
year following the ownership change in excess of the annual limitation and any
unused limitation carryforward. While the NOLs, built-in losses and other tax
attributes not used as a result of this limitation remain available to offset
taxable income in future years, the effect of an ownership change would be to
significantly defer the utilization of the NOLs or other tax attributes,
accelerate the payment of federal income tax, and/or cause a portion of the
NOLs or other tax attributes to expire prior to
33
their use. Rules similar to the above rules limiting the use of pre-change
NOLs following an ownership change also apply to limit certain other corporate
tax attributes.
As noted above, we believe that we will have an NOL carryforward after
recognition of COD income of about $58 million, and that the amount of our net
unrealized built-in loss may be as much as $130 million. An annual Section 382
limitation (which in our case might be as little as $1.5 million) would thus
materially restrict the use of these tax attributes and substantially
eliminate their value.
While we expect, for the reasons described above, that the recapitalization
transactions by themselves will not result in an "ownership change," they will
result in new 5% shareholders and will also increase the percentage points in
ownership for various shareholders. In addition, as noted, one or more new
"public groups" of shareholders will be created. Thus, even assuming no
ownership change has occurred, there will be a significantly increased
likelihood that issuances of and transactions in shares of Common Stock
following the recapitalization transactions will result in a future ownership
change and thus in the application of the rules that limit carryforwards and
the use of recognized built-in losses.
This risk will be particularly significant to the extent that we need to
raise additional capital to meet the Bank's minimum regulatory capital
requirements in the near future. If such additional capital were to be raised
through an offering of Common Stock (or in some cases an instrument
convertible into or treated as Common Stock), an ownership change could occur
at that time. Further, following the recapitalization transactions, we will
have outstanding various warrants and options that are exercisable into Common
Stock of the Company. The exercise of a significant number of these options or
warrants could cause or contribute to an ownership change. Finally, certain
five-percent shareholders hold large blocks of our stock, disposition of which
could cause or contribute to an ownership change. Thus, no assurance can be
given that an ownership change will not occur in the future, with the
consequences discussed above.
34
PROPOSAL NO. 3
APPROVAL OF 2001 LONG TERM STOCK INCENTIVE PLAN
A proposal will be presented at the Annual Meeting to approve the Imperial
Credit Industries, Inc. 2001 Long Term Stock Incentive Plan (the "Plan"). The
Plan was approved by the Board of Directors on March 28, 2001, subject to
shareholder approval. A summary of the material provisions of the Plan is set
forth below. A copy of the Plan is set forth in Appendix C.
The Plan will become effective immediately upon approval by the
shareholders, but may be terminated by the Board at any time. Awards may be
granted under the Plan at any time prior to the ten-year anniversary of the
Plan's effective date or earlier termination by the Board (except for awards
granted pursuant to commitments entered into prior to such ten-year
anniversary or earlier termination). Any awards that are outstanding at the
termination of the Plan will remain subject to the terms of the Plan and will
terminate thereafter in accordance with their terms.
Purpose
We have established the Plan to (1) attract and retain persons eligible to
participate in the Plan; (2) motivate participants, by means of appropriate
incentives, to achieve our long-range goals; (3) provide incentive
compensation opportunities that are competitive with those of other similar
companies; and (4) further identify participants' interests with those of the
Company's other shareholders through compensation that is based on the market
price of our Common Stock. The Plan is intended to promote the long-term
financial interests of the Company and our shareholders, including growth in
the value of our equity and enhancement of long-term shareholder return. To
achieve these objectives, the Plan provides for the grant of non-qualified and
incentive stock options, stock appreciation rights ("SARs"), bonus stock,
stock units, performance shares, performance units, restricted stock, and
restricted stock units.
We have proposed the Plan at this time because we believe in the merits of
linking executives' overall compensation opportunities to the enhancement of
long-term shareholder returns. We use equity-based compensation, such as
options and other stock related awards, as key elements of our executives'
compensation packages. The Board of Directors has approved the Plan, and is
recommending it to you for your approval, because we believe it is important
for our employees to have an equity interest in the Company.
General
The Plan is administered by a committee (the "Committee") selected by our
Board of Directors. The Committee selects from the eligible individuals those
persons to whom awards under the Plan will be granted ("Participants"), the
types of awards to be granted and the applicable terms, conditions,
performance criteria, restrictions and other provisions of such awards. The
Committee may delegate all or any portion of its responsibilities or powers
under the Plan to persons selected by it, except to the extent inconsistent
with Rule 16b-3 promulgated under Section 16 of the Securities Exchange Act of
1934 or other applicable rules. Rule 16b-3 exempts employee plan transactions
meeting certain requirements from the short-swing trading profit recovery
provisions of Section 16.
No more than five million shares of Common Stock may be delivered to
Participants and their beneficiaries under the Plan. This maximum share amount
will be reduced to between 1.25 and 2.5 million shares if the reverse stock
split described in Proposal No. 6 is approved by the shareholders and effected
by the Board of Directors. Any shares allocated to an award that expires,
lapses, is forfeited or terminated for any reason without issuance of the
shares (whether or not cash or other consideration is paid to the Participant
in respect of such shares) may again become subject to awards under the Plan.
Within the five million share limitation, the following additional sub-
limits apply to awards under the Plan: (i) no more than 300,000 shares of
Common Stock may be issued for bonus stock, stock unit awards, performance
share awards, performance unit awards, restricted stock awards, and restricted
stock unit awards;
35
(ii) no more than 1,500,000 shares of Stock may be issued for options and SARs
granted to any one individual in any one-calendar-year period; (iii) no more
than 300,000 shares of Common Stock may be issued for bonus stock, stock unit
awards, performance share awards, performance unit awards, restricted stock
awards, and restricted stock unit awards that are intended to be "performance-
based compensation" (as described below) granted to any one individual during
any one-calendar-year period, (iv) no more than 5,000,000 shares of Common
Stock may be issued pursuant to options intended to be incentive stock options
under the Plan, and (v) no more than $300,000 may be subject to performance
unit awards granted to any one individual that are intended to be
"performance-based compensation."
The Common Stock with respect to which awards may be made under the Plan
will be currently authorized but unissued shares. At the discretion of the
Committee, an award under the Plan may be settled in cash rather than Common
Stock. The closing price with respect to the Common Stock on June 4, 2001 was
$1.18 per share.
The Committee may authorize the use of shares of Common Stock available
under the Plan as the form of payment for compensation, grants or rights
earned or due under any other compensation plans or arrangements of the
Company or a subsidiary, including the plans and arrangements of the Company
or a subsidiary assumed in business combinations.
In the event of a corporate transaction involving the Company (including,
without limitation, any stock dividend, stock split, extraordinary cash
dividend, recapitalization, reorganization, merger, consolidation, split-up,
spin-off, combination or exchange of shares), the Committee may adjust awards
granted under the Plan to preserve the benefits or potential benefits of the
awards. Action by the Committee for this purpose may include: (1) adjustment
of the number and kind of shares which may be delivered under the Plan; (2)
adjustment of the number and kind of shares subject to outstanding awards; (3)
adjustment of the exercise price of outstanding options and SARs; and (4) any
other adjustments that the Committee determines to be equitable.
Except as otherwise provided by the Committee, awards under the Plan are
not transferable except as designated by the Participant by will or by the
laws of descent and distribution.
All employees of the Company and our subsidiaries and all directors are
eligible to become Participants in the Plan. As of December 31, 2000, we had
428 employees, including those of our subsidiaries.
Options
The Committee may grant options to purchase Common Stock which may be
either options that meet the Internal Revenue Code requirements to qualify as
"incentive stock options" or non-qualified stock options. The purchase price
of a share of Common Stock under each option must not be less than the fair
market value of a share of Common Stock on the date the option is granted.
Options granted under the Plan will be exercisable in accordance with the
terms established by the Committee. The full purchase price of each share of
Common Stock purchased upon the exercise of any option must be paid at the
time of exercise. Except as otherwise determined by the Committee, the
purchase price may be paid in cash, by promissory note or in Common Stock
(valued at fair market value as of the day of exercise), or in any combination
thereof. The Committee, in its discretion, may impose such conditions,
restrictions and contingencies on Common Stock acquired pursuant to the
exercise of an option as the Committee determines to be desirable.
Stock Appreciation Rights
The Committee may grant stock appreciation rights ("SARs") in connection
with all or any portion of a previously or contemporaneously granted option or
independent of any option grant. An SAR entitles the Participant to receive
the amount by which the fair market value of a specified number of shares on
the exercise date exceeds an exercise price established by the Committee,
which must not be less than the fair market value of the Common Stock at the
time the SAR is granted. The excess amount will be payable in Common Stock, in
cash, or in a combination thereof, as determined by the Committee. The
Committee, in its discretion, may impose such conditions, restrictions and
contingencies on Common Stock acquired pursuant to the exercise of an SAR as
the Committee determines to be desirable.
36
Other Stock Awards
The Committee may grant bonus stock (a grant of shares of Common Stock in
return for previously performed services, or in return for the Participant
surrendering other compensation that may be due), stock units (a right to
receive Common Stock in the future), performance shares and performance units
(a right to receive Common Stock or stock units, or the right to receive a
designated dollar value of Common Stock, that is contingent upon achievement
of performance or other objectives), restricted stock and restricted stock
units (a grant of Common Stock and a grant of the right to receive Common
Stock in the future, with such shares or rights being made subject to a risk
of forfeiture or other restrictions that lapse upon the achievement of one or
more goals relating to completion of service by the Participant or the
achievement of performance or other objectives, as determined by the
Committee). Any such awards will be subject to such conditions, restrictions
and contingencies as the Committee determines.
Amendment and Termination
The Plan, and any award granted under the Plan, may be amended or
terminated at any time by the Board. No amendment or termination, however, may
adversely affect the rights of any Participant without the Participant's
written consent.
United States Income Tax Considerations
Under present federal income tax laws, awards granted under the Plan will
have the following tax consequences:
Non-Qualified Options
The grant of a non-qualified option ("NQO") will not result in taxable
income to the Participant. Except as described below, the Participant will
realize ordinary income at the time of exercise of the NQO in an amount equal
to the excess of the fair market value of the shares acquired over the
exercise price for those shares, and we will be entitled to a corresponding
deduction. Gains or losses realized by the Participant upon disposition of
such shares will be treated as capital gains and losses, with the basis in
such shares being equal to the fair market value of the shares at the time of
exercise.
The exercise of an NQO through the delivery of previously acquired stock
will generally be treated as a non-taxable, like-kind exchange as to the
number of shares surrendered and the identical number of shares received under
the option. That number of shares will take the same basis and, for capital
gains purposes, the same holding period as the shares that are given up. The
value of the shares received upon such an exchange that are in excess of the
number given up will be includible as ordinary income to the Participant at
the time of the exercise. The excess shares will have a new holding period for
capital gains purposes and a basis equal to the value of such shares
determined at the time of exercise.
Incentive Stock Options
The grant of an incentive stock option ("ISO") will not result in taxable
income to the Participant. The exercise of an ISO will also not result in
taxable income to the Participant provided that the Participant was, without a
break in service, an employee of the Company or a subsidiary during the period
beginning on the date of the grant of the option and ending on the date three
months prior to the date of exercise, or one year prior to the date of
exercise if the Participant is disabled, as that term is defined in the
Internal Revenue Code.
The excess of the fair market value of the shares at the time of the
exercise of an ISO over the exercise price is an adjustment that is included
in the calculation of the Participant's alternative minimum taxable income for
the tax year in which the ISO is exercised. For purposes of determining the
Participant's alternative minimum tax liability for the year of disposition of
the shares acquired pursuant to the ISO exercise, the Participant will have a
basis in those shares equal to the fair market value of the shares at the time
of exercise.
37
If the Participant does not sell or otherwise dispose of the stock within
two years from the date of the grant of the ISO or within one year after
receiving the transfer of such stock, then, upon disposition of such shares,
any amount realized in excess of the exercise price will be taxed to the
Participant as capital gain, and we will not be entitled to any deduction for
Federal income tax purposes. A capital loss will be recognized to the extent
that the amount realized is less than the exercise price.
If the foregoing ISO holding period requirements are not met, the
Participant will generally realize ordinary income, and we will be allowed a
corresponding deduction, at the time of the disposition of the shares, in an
amount equal to the lesser of (i) the excess of the fair market value of the
shares on the date of exercise over the exercise price, or (ii) the excess, if
any, of the amount realized upon disposition of the shares over the exercise
price. If the amount realized exceeds the value of the shares on the date of
exercise, any additional amount will be capital gain. If the amount realized
is less than the exercise price, the Participant will recognize no income, and
a capital loss will be recognized equal to the excess of the exercise price
over the amount realized upon the disposition of the shares.
The exercise of an ISO through the exchange of previously acquired stock
will generally be treated in the same manner as a similar exchange would be
treated in connection with the exercise of an NQO; that is, as a non-taxable,
like-kind exchange as to the number of shares given up and the identical
number of shares received under the option. That number of shares will take
the same basis and, for capital gain purposes, the same holding period as the
shares that are given up. However, the holding period will not be credited for
purposes of the one-year holding period required for the new shares to receive
ISO treatment. Shares received in excess of the number of shares given up will
have a new holding period and will have a basis of zero or, if any cash was
paid as part of the exercise price, the excess shares received will have a
basis equal to the amount of the cash. If a disqualifying disposition (a
disposition before the end of the applicable holding period) occurs with
respect to any of the shares received from the exchange, it will be treated as
a disqualifying disposition of the shares with the lowest basis.
If the exercise price of an ISO is paid with shares of our stock acquired
through a prior exercise of an ISO, gain will be realized on the shares given
up (and will be taxed as ordinary income) if those shares have not been held
for the minimum ISO holding period (two years from the date of grant and one
year from the date of transfer), but the exchange will not affect the tax
treatment, as described in the immediately preceding paragraph, of the shares
received.
Stock Appreciation Rights
The grant of an SAR will not result in taxable income to the Participant.
Upon exercise of an SAR, the amount of cash or the fair market value of shares
received will be taxable to the Participant as ordinary income, and we will be
allowed a corresponding deduction. Gains or losses realized by the Participant
upon disposition of such shares will be treated as capital gains and losses,
with the basis in such shares equal to the fair market value of the shares at
the time of exercise.
Performance Units
A Participant who has been granted performance units will not realize
taxable income at the time of grant, and we will not be entitled to a
deduction at that time. The Participant will have compensation income at the
time of distribution equal to the cash and the then fair market value of the
distributed performance shares, and we will have a corresponding deduction.
Restricted and Other Stock
A Participant who has been granted a restricted stock award will not
realize taxable income at the time of grant, and we will not be entitled to a
deduction at that time, assuming that the restrictions constitute a
"substantial risk of forfeiture" for Federal income tax purposes. Upon the
vesting of shares subject to an award,
38
the holder will realize ordinary income in an amount equal to the then fair
market value of those shares, and we will be entitled to a corresponding
deduction. Gains or losses realized by the Participant upon disposition of
such shares will be treated as capital gains and losses, with the basis in
such shares being equal to the fair market value of the shares at the time of
vesting. Dividends paid to the holder during the restriction period will also
be compensation income to the Participant and deductible as such by the
Company.
A Participant may elect pursuant to Section 83(b) of the Internal Revenue
Code to have the income recognized and measured at the date of grant of
restricted stock and to have the applicable capital gain holding period
commence as of that date.
A Participant who has been granted a stock award that is not subject to a
substantial risk of forfeiture for Federal income tax purposes (for example,
bonus stock) will realize ordinary income in an amount equal to the fair
market value of the shares at such time, and we will be entitled to a
corresponding deduction.
Change In Control
Any acceleration of the vesting or payment of awards under the Plan in the
event of a change in control in the Company may cause part or all of the
consideration involved to be treated as an "excess parachute payment" under
the Internal Revenue Code, which may subject the Participant to a 20% excise
tax and which may not be deductible by us.
Section 162(m)
An income tax deduction is generally not available to a public corporation
for annual compensation in excess of $1 million paid to any of the five most
highly compensated officers of the public corporation. However, amounts that
constitute "performance-based compensation" are not counted toward the $1
million limit. It is expected that options and SARs granted under the Plan
will satisfy the requirements for "performance-based compensation." The
Committee may designate whether any bonus stock, stock units, performance
shares, performance units, restricted stock or restricted stock units being
granted to any Participant are intended to be "performance-based compensation"
as that term is used in Section 162(m) of the Internal Revenue Code. Any such
awards designated as being intended to be "performance-based compensation"
must be conditioned on the achievement of one or more performance measures, to
the extent required by Code Section 162(m). The measurement may be based on
absolute Company or business unit performance and/or on performance as
compared with that of other publicly-traded companies. For awards intended to
be "performance-based compensation," the grant of the awards and the
establishment of the performance measures must be made during the period
required under Code Section 162(m).
Tax Advice
The preceding discussion is based on the federal income tax laws and
regulations presently in effect, which are subject to change, and the
discussion does not purport to be a complete description of the Federal income
tax aspects of the Plan. A Participant may also be subject to state and local
taxes in connection with the grant of awards under the Plan.
New Plan Awards
As discussed in connection with the description of the Recapitalization
Agreement elsewhere in this proxy statement, that agreement provides that
options covering a total of 1,500,000 shares of Common Stock will be reserved
for grant to officers of the Company. The Compensation Committee of the Board
of Directors has authorized the granting of options to Messrs. Snavely,
Plantiko and Gubman in the amounts of 1,000,000 shares, 250,000 shares and
250,000 shares, respectively. These options will have exercise prices of $1.25
per share, vest 20% per year and expire ten years from the date of grant. The
option terms provide for accelerated vesting in the event of a "change in
control" of the Company as defined in the terms of the option grants, which
term does not
39
include the recapitalization transactions described in this proxy statement.
The term "change in control" is defined to include the following events: (1)
any person or persons become the beneficial owner of at least 30% of our
outstanding Common Stock, (2) any merger or other business combination occurs
where our shareholders and any trustee or fiduciary of our employee benefit
plans own less than 60% of the surviving corporation, (3) within any 24-month
period, the persons who were directors immediately before the beginning of
such period cease to constitute at least a majority of our Board, or the board
of any successor corporation, (4) the liquidation or dissolution of the
company or a sale of 50% or more of its consolidated assets, or (5) any other
event or transaction occurs that constitutes a change in control for reporting
purposes under Securities and Exchange Commission regulations. These options
have been granted pursuant to the Plan subject to approval of the Plan by the
shareholders at the Annual Meeting.
The following table sets forth information concerning the options to be
granted to the indicated officers subject to shareholder approval of the Plan.
No additional grants have been determined as of the date of this proxy
statement.
NEW PLAN BENEFITS
2001 Long Term Stock Incentive Plan
Option
Grants
(Number
of
Name and Position Shares)
- ----------------- ---------
H. Wayne Snavely..................................................... 1,000,000
Chairman, Chief Executive Officer and President
Brad S. Plantiko..................................................... 250,000
Executive Vice President and Chief Financial Officer
Irwin L. Gubman...................................................... 250,000
General Counsel and Secretary
Executive Group...................................................... *
Non-Executive Director Group......................................... *
Non-Executive Officer Employee Group................................. *
- --------
* No additional grants beyond those indicated in the above table have been
determined as of the date of this proxy statement.
The Board of Directors has unanimously approved, and recommends that you
vote "FOR" approval of, the 2001 Long Term Stock Incentive Plan.
40
PROPOSAL NO. 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
KPMG LLP has served as our independent public accountants since 1992 and,
on the recommendation of the Audit Committee, has been selected by the Board
of Directors as our independent public accountants for the year ending
December 31, 2001. KPMG LLP has advised us that it does not have any direct or
indirect financial interest in the Company. Representatives of KPMG LLP are
expected to attend the Annual Meeting and will be given the opportunity to
make a statement if they chose to do so. They will also be available to
respond to appropriate questions.
Before the Audit Committee recommended the selection of KPMG LLP to the
Board of Directors, it carefully considered KPMG LLP's qualifications,
including its performance for the Company in prior years and its reputation
for integrity and competence in the fields of accounting and auditing. The
Committee also considered whether the provision by KPMG LLP of the services
for which the fees referred to in the table below under the caption "All Other
Fees" were paid is compatible with maintenance of the independence of KPMG LLP
required under applicable auditing standards. The Committee determined that
the provision of those services is compatible with the maintenance of such
independence.
Shareholders will be asked at the Annual Meeting to ratify the selection of
KPMG LLP. If the shareholders ratify the selection of KPMG LLP, the Board of
Directors may still, in its discretion, decide to appoint a different
independent public accounting firm at any time during the year 2001 if it
concludes that such a change would be in our best interests and that of the
shareholders. If the shareholders fail to ratify the selection, the Board of
Directors will take that into account in considering the retention of KPMG LLP
as the Company's independent accountants.
For the fiscal year ending December 31, 2000, we paid KPMG LLP the
following fees:
Financial Information
Audit Systems Design and
Fees Implementation Fees Audit Related All Other Fees
----- --------------------- ------------- --------------
$459,450 $ -- $ -- $567,750
The Board of Directors has unanimously approved the proposal and recommends
that you vote "FOR" the ratification of KPMG LLP as our independent public
accountants.
PROPOSAL NO. 5
AMENDMENT OF ARTICLES OF INCORPORATION TO CHANGE OUR NAME
Our Board of Directors has approved an amendment to our Articles of
Incorporation to change our corporate name from Imperial Credit Industries,
Inc. to SPB Bancorp, Inc. The ownership and operation of Southern Pacific Bank
now constitutes our primary business. As a result, the Board of Directors
believes our proposed new corporate name will more accurately reflect our
business and operations.
The Board of Directors has unanimously approved the name change and
recommends that you vote "FOR" the proposed amendment of our Articles of
Incorporation to change our corporate name.
41
PROPOSAL NO. 6
AMENDMENT OF ARTICLES OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT
Our Board of Directors has unanimously approved a proposal to amend our
Articles of Incorporation to effect a reverse stock split of the Company's
Common Stock, whereby we would combine our outstanding shares of Common Stock
at a ratio of between two and four outstanding shares (as determined by the
Board of Directors in the manner described below) into one share of our Common
Stock. The Board of Directors has declared the amendment to the Articles of
Incorporation to be advisable and has recommended that the amendment be
presented to the shareholders of the Company for approval.
Except for adjustments that may result from the treatment of fractional
shares as described below, each shareholder will hold the same percentage of
Common Stock outstanding immediately following the reverse stock split as such
shareholder held immediately prior to the reverse stock split. If approved by
the shareholders of the Company as provided herein and implemented by the
Board of Directors, the reverse stock split will be effected by an amendment
to the Articles of Incorporation in substantially the form attached to this
proxy statement as Appendix D and will become effective upon the filing of the
amendment with the Secretary of State of California.
Purpose of Proposed Reverse Stock Split
The purpose of the proposed reverse stock split is to decrease the number
of the outstanding shares of Common Stock and shares subject to outstanding
options and warrants in order to increase the market value of each share of
Common Stock. On April 20, 2001, we received a Nasdaq staff determination
indicating that we were not in compliance with the $1.00 per share minimum bid
price requirement for continued listing on the Nasdaq National Market, and
that our Common Stock was therefore subject to delisting from the Nasdaq
National Market. We appealed the staff determination and requested an oral
hearing before a Nasdaq Listing Qualifications Panel. The trading price of our
Common Stock has subsequently exceeded $1.00 and the delisting proceedings
have been terminated. Nonetheless, the Board of Directors believes that it is
desirable to consider means of increasing the trading price of our Common
Stock to avoid a recurrence of this issue.
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 our 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 Common Stock.
The Board of Directors believes that the primary means of increasing the
price investors are willing to pay for a share of Common Stock is to increase
our revenues and earnings. The Board believes, however, that reducing the
number of shares of our outstanding Common Stock through a reverse stock split
should also increase the price investors are willing to pay for each share of
Common Stock. Due to fluctuating market conditions, including the changing
market price of our Common Stock, the Board believes it to be in the Company's
best interests to determine the appropriate reverse stock split ratio (the
number of outstanding shares of Common Stock to be exchanged for a single
share of Common Stock) at the time the reverse split is effected. Approval of
this proposal will constitute a grant of authority to the Board to effect, in
its sole discretion, either a two-to-one, three-to-one or four-to-one reverse
stock split or to decide not to effect a reverse stock split. The selected
ratio of the proposed reverse stock split will be intended to increase the
market price for the Common Stock on the Nasdaq National Market to a level
that enables us to continue to exceed the minimum bid price of $1.00 per share
required to maintain our Nasdaq National Market listing.
Although the Board of Directors believes that a reverse stock split should
increase the price investors are willing to pay for a share of Common Stock,
there can be no assurance that the reverse stock split will increase the price
in proportion to the reduction of shares resulting from the reverse stock
split, or that any increase in the
42
price will occur. For example, while the market price of an equity security
could be expected to increase by approximately 200%, 300% or 400% in
connection with a two-to-one, three-to-one or four-to-one reverse stock split,
respectively, if the security is an exchange traded security with a high
trading volume, the reaction of the market to the reverse stock split in a
security that is thinly traded is not as predictable. Consequently, the
trading price for the Common Stock may not increase two-, three- or four-fold,
or at all, as a result of the reverse stock split.
Effect of Proposed Reverse Stock Split
If the proposed reverse stock split is approved at the Annual Meeting and
the Board of Directors elects to effect the proposed reverse stock split, the
Board will select, in its sole discretion, one of the three proposed reverse
stock split ratios (two-to-one, three-to-one or four-to-one) based on market
and other relevant conditions and the trading prices of our Common Stock at
that time. As of the effective date of the reverse stock split, each
outstanding share of Common Stock will immediately and automatically be
exchanged into either one-half, one-third or one-fourth of a share of Common
Stock. In addition, the number of shares of Common Stock subject to
outstanding options and warrants issued by the Company will be reduced by a
factor of two, three or four. No fractional shares of Common Stock will be
issued as a result of the reverse stock split. We will instead pay each holder
of a fractional interest an amount in cash equal to the value of such
fractional interest on the effective date thereof.
As of May 31, 2001, the record date for the Annual Meeting, 32,096,361
shares of Common Stock were issued and outstanding, and 4,542,642 shares of
Common Stock were subject to options granted by the Company. If the reverse
stock split had occurred on that date, the number of shares issued and
outstanding would have been reduced to either 16,048,180 (two-to-one),
10,698,787 (three-to-one) or 8,024,090 (four-to-one) shares (subject to
adjustment due to rounding of fractional shares). If additional shares of
Common Stock are issued or redeemed between May 31, 2001 and the effective
date of the reverse stock split, the actual number of shares issued and
outstanding before and after the reverse stock split will increase or decrease
accordingly. The reverse stock split would also reduce by a factor of two,
three or four the number of shares of Common Stock issuable upon conversion or
exercise of the Secured Convertible Subordinated Debt and Debt Exchange
Warrants proposed to be issued pursuant to the Recapitalization Agreement. We
would also expect to amend the Recapitalization Agreement to reduce the number
of shares of Common Stock issuable pursuant thereto by a factor of two, three
or four.
Because the reverse stock split will apply to all issued and outstanding
shares of Common Stock and outstanding rights to purchase Common Stock or to
convert other securities into Common Stock, the proposed reverse stock split
will not alter the relative rights and preferences of existing shareholders.
The reverse stock split will, however, effectively increase the number of
shares of Common Stock available for future issuances by the Board because it
will only affect our outstanding shares and will not decrease the number of
shares the Board of Directors is authorized to issue. Our Articles of
Incorporation authorize the Board to issue 80,000,000 shares of Common Stock
and 8,000,000 shares of Preferred Stock. As of May 31, 2001, 32,096,361 shares
of Common Stock were issued and outstanding, 4,542,642 shares of Common Stock
were reserved for issuance upon exercise of outstanding options, no shares of
Preferred Stock were issued and outstanding, 1,500,000 shares of Common Stock
were reserved for options proposed to be issued under the 2001 Long Term Stock
Incentive Plan and 3,000,000 shares of Common Stock were reserved for warrants
proposed to be issued in settlement of certain litigation. The outstanding
shares of Common Stock that are effectively cancelled as a result of the
reverse stock split will be available for reissue. There are no current plans,
proposals or understandings for any use of the additional shares that would be
available for issuance as a result of the proposed reverse stock split.
If the proposed reverse stock split is approved at the Annual Meeting and
effected by the Board of Directors, some shareholders may end up owning less
than one hundred shares of Common Stock. A purchase or sale of less than one
hundred shares (an "odd lot" transaction) may result in incrementally higher
trading costs through certain brokers, particularly "full service" brokers.
Therefore, those shareholders who own less than one hundred
43
shares following the reverse stock split may be required to pay higher
transaction costs should they then determine to sell their shares in the
Company.
Exchange of Share Certificates
If the reverse stock split is approved at the Annual Meeting and effected
by the Board of Directors, the combination and reclassification of shares of
Common Stock will occur automatically without any action on your part and
without regard to the date on which you physically surrender your stock
certificates for new certificates.
As soon as practicable after the effective date of the reverse stock split,
we will mail each record holder of Common Stock a transmittal form to be used
in forwarding such holder's stock certificates for surrender and exchange for
certificates evidencing the number of shares of Common Stock such shareholder
is entitled to receive as a consequence of the reverse stock split. The
transmittal forms will be accompanied by instructions specifying other details
of the exchange. Upon receipt of such transmittal form, you should surrender
the certificates evidencing shares of Common Stock prior to the reverse stock
split in accordance with the applicable instructions. Upon surrender, you will
receive new certificates evidencing the whole number of shares of Common Stock
that you hold as a result of the reverse stock split. You will not be required
to pay any transfer fee or other fee in connection with the exchange of
certificates.
Shareholders should not submit their stock certificates for exchange until
they receive a transmittal form from the Company
As of the effective date of the reverse stock split, each certificate
representing shares of Common Stock outstanding prior to the effective date
will be deemed canceled and, for all corporate purposes, will be deemed only
to evidence the right to receive the number of shares of Common Stock into
which the shares of Common Stock evidenced by such certificate have been
converted as a result of the reverse stock split.
Board Discretion to Implement the Reverse Stock Split
If the reverse stock split is approved at the Annual Meeting, the Board of
Directors will, in its sole discretion, determine whether to complete the
reverse stock split. The determination by the Board of Directors will be based
on a number of factors, including market conditions, existing and expected
trading prices for the Common Stock and the likely effect of business
developments on the market price for the Common Stock. Notwithstanding
approval of the reverse stock split at the Annual Meeting, the Board of
Directors may, in its sole discretion, determine not to implement the reverse
stock split.
Federal Income Tax Consequences
The following discussion of the material federal income tax consequences of
the reverse stock split is based upon the Internal Revenue Code of 1986, as
amended, Treasury Regulations thereunder, judicial decisions and current
administrative rulings and practices, all as in effect on the date hereof and
all of which could be repealed, overruled or modified at any time, possibly
with retroactive effect. No ruling from the Internal Revenue Service with
respect to the matters discussed herein has been requested and there is no
assurance that the Service would agree with the conclusions set forth in this
discussion.
This discussion may not address certain federal income tax consequences
that may be relevant to particular shareholders in light of their personal
circumstances or to certain types of shareholders (such as dealers in
securities, insurance companies, foreign individuals and entities, financial
institutions and tax-exempt entities) that may be subject to special treatment
under the federal income tax laws. This discussion also does not address any
tax consequences under state, local or foreign laws.
44
You are urged to consult your tax advisers as to the particular tax
consequences to you of the reverse stock split
Except as discussed below, you should not recognize any gain or loss if you
receive only Common Stock in connection with the transactions contemplated by
the reverse stock split. The aggregate tax basis of the shares of Common Stock
held by you following the reverse stock split will equal your aggregate basis
in the Common Stock held immediately prior to the reverse stock split and
generally will be allocated among the shares of Common Stock held following
the reverse stock split on a pro-rata basis. If you have used the specific
identification method to identify your basis in shares of Common Stock
combined in the reverse stock split, you should consult your own tax advisors
to determine your basis in the shares of Common Stock received in exchange
therefor in the reverse stock split. Shares of Common Stock received should
have the same holding period as the Common Stock surrendered. The receipt of a
cash payment in lieu of a fractional interest will result in recognition of
gain or loss for federal income tax purposes.
No Dissenters' Rights
Under the California Corporations Code, holders of Common Stock are not
entitled to dissenters' rights with respect to the reverse stock split.
The Board of Directors has unanimously approved the reverse split of our
Common Stock and recommends that you vote "FOR" the proposed amendment to
authorize the Board of Directors to effect the reverse stock split.
45
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Outstanding Line of Credit
In October 1999, we purchased the Lewis Horwitz Organization and certain
loan portfolios from Imperial Bancorp. As part of the transaction, a line of
credit was established with Imperial Bank in order to fund the acquisition. As
of March 31, 2001, the outstanding balance on this line of credit was $6.1
million.
Imperial Bank has extended a $15.5 million commitment to the Bank for the
issuance of letters of credit and foreign exchange facilities for customers of
the Bank's Coast Business Credit Division and Lewis Horwitz Organization.
Other Matters
In October 1997, we loaned H. Wayne Snavely, our Chairman and Chief
Executive Officer, $1,999,998 to purchase common stock in a real estate
investment trust we sponsored, Imperial Credit Commercial Mortgage Investment
Corp. ("ICCMIC"). The loan was evidenced by a promissory note maturing June
14, 2002 and was secured by a deed of trust and stock of ICCMIC held by him.
The note bore interest at an annual rate of 10.4% payable in semi-annual
installments, commencing June 15, 1998. The loan was fully repaid as of May 1,
2000. This loan was made in the ordinary course of our business on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons,
and did not involve more than normal risk of collectibility or present other
unfavorable features.
On December 22, 1999, we loaned H. Wayne Snavely, Brad S. Plantiko, Irwin
L. Gubman, and John C. Getzelman (who was then President of the Bank) $61,050
each in connection with their purchase of $81,400 of Imperial Credit Asset
Resolution, Inc. ("ICARI") Preferred Stock. ICARI is a 100% owned consolidated
subsidiary of the Company. Each loan is evidenced by a promissory note
maturing on December 22, 2019, and is secured by the Preferred Stock of ICARI
purchased by each of the above named persons. Each note bears interest at an
annual rate of 10.4% and is payable in semi-annual installments commencing
June 15, 2000. Mr. Getzelman repaid this loan in full during the year ended
December 31, 2000. At April 1, 2001, the outstanding balance of each note was
$61,050 for each of the other above persons. Each of these loans was made in
the ordinary course of our business, on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and did not involve more than
normal risk of collectibility or present other unfavorable features.
46
SHAREHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a graph comparing the cumulative total shareholder
returns on the Company's Common Stock, the S&P 500 Stock Index, the Specialty
Finance Lending Index and an index of companies engaged in the Company's
current business focus (the "Diversified Commercial Lending Index") for the
period from January 1, 1995 through December 31, 2000. The Specialty Finance
Lending Index includes: AMRESCO, Inc., The Finova Group, Inc. and Imperial
Credit Industries, Inc. The Diversified Commercial Lending Index includes:
American Business Financial, AMRESCO, Inc., Capital Trust, Inc., CIT Group,
Inc., DVI, Inc., Financial Federal Corp., FINOVA Group, Inc., Heller
Financial, Inc., HPSC, Inc., Imperial Credit Industries, Inc., KBK Capital
Corp., PLM International, Inc., Point West Capital Corp., Resource America
Inc., Source Capital Corp. and T&W Financial.
The graph assumes $100 invested on January 1, 1995 in the Company's Common
Stock, the S&P 500 Stock Index, the Specialty Finance Company Index, and the
Diversified Commercial Lending Index.
COMPARISON OF CUMULATIVE TOTAL RETURN
OF COMPANY, PEER GROUP AND BROAD MARKET
[PERFORMANCE GRAPH APPEARS HERE]
Fiscal Year Ending
----------------------------------------------------
Dec. 29 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 29
COMPANY/INDEX/MARKET 1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- -------
Imperial Credit
Industries 100.00 212.43 207.38 84.72 63.22 4.74
Specialty Finance
Lending Index 100.00 159.78 215.74 182.65 117.01 4.22
Diversified Commercial
Lending 100.00 151.66 214.96 198.37 136.32 114.15
S&P Composite 100.00 122.96 163.98 210.84 255.22 231.98
47
OWNERSHIP OF EQUITY SECURITIES
The following table sets forth information with respect to the beneficial
ownership of our Common Stock as of March 30, 2001, by (i) each director, (ii)
each nominee for election as a director, (iii) our Chief Executive Officer and
the four other most highly compensated executive officers whose salary
exceeded $100,000 for the year ended December 31, 2000, (iv) all our directors
and executive officers as a group, and (v) each person who is known to us to
own beneficially more than 5% of our Common Stock. Unless otherwise indicated,
we believe that the beneficial owners of our Common Stock listed below have
sole investment and voting power with respect to such shares, subject to
community property laws where applicable.
Number of Shares % of Total
Beneficial Owner(1) Beneficially Owned Outstanding(2)
------------------- ------------------ --------------
Wallace R. Weitz & Company(3)............... 7,410,400 23.0%
Waveland Partners L.P.(4)................... 3,160,232 9.8
Dimensional Fund Advisors, Inc(5)........... 2,793,060 8.7
H. Wayne Snavely(6)......................... 2,088,235 6.5
Michael S. Riley............................ 310,550 *
Robert S. Muehlenbeck(7).................... 158,242 *
James P. Staes(8)........................... 23,500 *
Irwin L. Gubman(9).......................... 294,228 *
Brad S. Plantiko(10)........................ 183,365 *
Michael R. McGuire.......................... 0 *
Theodore R. Maloney......................... 0 *
Charles E. Underbrink....................... 0 *
All Directors and Officers as a Group (14
persons)(11)............................... 3,476,452 10.3
- --------
*Less than 1%.
(1) Except for Wallace R. Weitz & Company, Dimensional Fund Advisors, Inc.,
and Waveland Partners L.P., each of such persons may be reached through
our Company at 23550 Hawthorne Boulevard, Building One, Suite 110,
Torrance, California 90505, telephone (310) 373-1704.
(2) Percentage ownership is based on 32,096,361 shares of Common Stock
outstanding as of March 30, 2001.
(3) Based upon a Schedule 13G filed with the Company reflecting beneficial
ownership as of December 31, 2000. The shares are owned by various
investment advisory clients of Wallace R. Weitz & Co., which is deemed a
beneficial owner of the shares only by virtue of the direct or indirect
investment and/or voting discretion it possesses pursuant to the
provisions of investment advisory agreements with such clients. Wallace
R. Weitz & Company is located at One Pacific Place, Suite 600, 1125 South
103 Street, Omaha, NB 68124-6008.
(4) Based upon a Schedule 13G filed with the Company reflecting beneficial
ownership as of December 31, 2000. Waveland L.P. is a private investment
partnership and is located at 227 W. Monroe Street, Suite 4800, Chicago,
Illinois 60606.
(5) Based upon a Schedule 13G filed with the Company reflecting beneficial
ownership as of December 31, 2000. The shares are owned by various
investment vehicles managed by Dimensional Fund Advisors, Inc., which is
deemed the beneficial owner of the shares only by virtue of the direct or
indirect investment and/or voting discretion it possesses pursuant to its
agreement with such investment vehicles. Dimensional Fund Advisors, Inc.
is located at 1299 Ocean Avenue, 11th Floor, Santa Monica, California
90401-1038.
(6) Includes 1,367,052 shares subject to stock options exercisable within 60
days.
(7) Includes 90,022 shares subject to stock options exercisable within 60
days.
(8) Includes 10,000 shares subject to stock options exercisable within 60
days.
(9) Includes 136,720 shares subject to stock options exercisable within 60
days.
(10) Includes 93,600 shares subject to stock options exercisable within 60
days.
(11) Includes 1,775,980 shares subject to stock options exercisable within 60
days.
48
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Our officers and directors and persons owning more than 10% of our equity
securities are required, under Section 16(a) of the Securities Exchange Act of
1934, to file reports of and changes in such ownership with the SEC and to
furnish us with copies of all such forms they file. Based on our review of the
copies of such forms we have received and review of other available data, we
believe that, during 2000, our officers and directors complied with the
Section 16(a) filing requirements.
SHAREHOLDER'S PROPOSALS
Shareholders' proposals intended to be presented at our Annual Meeting of
Shareholders to be held in 2002 must be received at our principal executive
offices no later than February 11, 2002, in order to be considered for
inclusion in the proxy statement and form of proxy relating to that meeting.
The proxyholders for the proxies solicited by the board of directors for that
meeting will have discretionary authority to vote on any matters presented at
the meeting of which we have not received notice by April 27, 2002.
OTHER BUSINESS
The Board of Directors knows of no other matter to be acted upon at the
Annual Meeting. However, if any other matter shall properly come before the
Annual Meeting, the proxyholders named in the proxy accompanying this proxy
statement will have discretionary authority to vote all proxies in accordance
with their best judgment.
Our Annual Report on Form 10-K/A for the year ended December 31, 2000, as
filed with the Securities and Exchange Commission, is enclosed herewith and is
incorporated herein by this reference. Additional copies, without exhibits,
are available without charge upon your request. Exhibits to the Form 10-K will
be provided upon written request and payment to the Company of the cost of
preparing and distributing those materials. Written requests should be sent to
Imperial Credit Industries, Inc., 23550 Hawthorne Boulevard, Building 1,
Suite 110, Torrance, California 90505, Attention: Investor Relations.
By Order of the Board of Directors
/s/ Irwin L. Gubman
Irwin. L. Gubman
General Counsel and Secretary
Dated: June 11, 2001
Torrance, California
49
APPENDIX A
IMPERIAL CREDIT INDUSTRIES, INC.
AUDIT COMMITTEE CHARTER
I. Purpose
The Audit Committee of the Board of Directors of Imperial Credit
Industries, Inc. (the "Company") is appointed by the Board of Directors to
assist the Board in fulfilling its oversight responsibilities. The Audit
Committee's primary duties and responsibilities are to:
. Monitor the integrity of the Company's financial reporting process and
systems of internal controls regarding finance, accounting, and legal
compliance.
. Monitor the independence and performance of the Company's independent
and internal auditors. It also provides an avenue of communication among
the auditors, management, and the Board of Directors, and presents the
minutes of the Committee's meetings to the Board of Directors. The Audit
Committee has the authority to conduct any investigation appropriate to
fulfilling its responsibilities, and it has direct access to the
independent auditors as well as anyone in the Company. The Audit
Committee has the ability to retain, at the Company's expense, special
legal, accounting, or other consultants or experts it deems necessary in
the performance of its duties.
II. Audit Committee Composition and Meetings
Audit Committee members shall meet the qualification requirements of the
NASD. As of 2001, the Audit Committee shall be comprised of at least three
directors, appointed by the Board, each of whom shall be independent
nonexecutive directors, free from any relationship that would interfere with
the exercise of his or her independent judgment. All members of the Committee
shall have a basic understanding of finance and accounting and be able to read
and understand financial statements, and at least one member of the Committee
shall have accounting or related financial management expertise. Members shall
not maintain significant credit relationships with the Company or its
subsidiaries. Members shall serve until the earlier of the next annual meeting
of shareholders or removal by majority vote of the Board of Directors.
The Committee shall meet at least four times annually, or more frequently
as circumstances dictate. The Audit Committee Chair shall prepare and/or
approve an agenda in advance of each meeting. The Committee should meet
privately in executive session at least annually with management, the director
of internal auditing, the independent auditors, and as a committee to discuss
any matters that the Committee or any of these groups believes should be
discussed. In addition, the Committee, or at least its Chair, should
communicate with management and the independent auditors quarterly to review
the Company's financial statements and significant findings based upon the
auditors' limited quarterly review procedures.
III. Audit Committee Responsibilities and Duties
A. Review Procedures
The Audit Committee shall:
1. Review and reassess the adequacy of this Charter annually, submit
the Charter to the Board of Directors for approval and have the
document published at least every three years in accordance with SEC
regulations.
2. Review the Company's annual audited financial statements prior to
filing or distribution and include discussions with management and
independent auditors of significant issues regarding accounting
principles, practice, and judgments.
A-1
3. In consultation with management, the independent auditors, and the
internal auditors, consider the integrity of the Company's financial
reporting process and controls. Discuss significant financial risk
exposures and the steps management has taken to monitor, control,
and report such exposures. Review significant findings prepared by
the independent auditors and internal audit together with
management's responses and the status of previous recommendations.
4. Review with financial management and the independent auditors the
Company's quarterly financial results prior to the release of
earnings and/or the Company's quarterly financial statements prior
to filing with the SEC or distribution. Discuss any significant
changes to the Company's accounting principles and any items
required to be communicated by the independent auditors in
accordance with AICPA SAS 61. The Chair of the Committee may
represent the entire Audit Committee for purposes of this review.
B. Independent Auditors
1. The independent auditors are ultimately accountable to the Audit
Committee and the Board of Directors. The Audit Committee shall
review the independence and performance of the auditors and annually
recommend to the Board of Directors the appointment of the
independent auditors or approve any discharge of auditors when
circumstances warrant.
2. The Committee shall approve the fees and other significant
compensation to be paid to the independent auditors.
3. On an annual basis, the Committee shall review and discuss with the
independent auditors all significant relations they have with the
Company that could impair the auditors' independence.
4. On an annual basis, the Committee shall review and approve the
independent auditors' audit plan--discuss scope, staffing,
locations, reliance upon management, internal audit and general
audit approach.
5. Prior to the Company's release of year-end earnings, the Committee
shall discuss the results of the audit with the independent
auditors. In addition, the Committee shall discuss certain matters
required to be communicated to audit committees in accordance with
AICPA SAS 61.
6. The Committee shall consider the independent auditors' judgments
about the quality and appropriateness of the Company's accounting
principles as applied in its financial reporting.
C. Internal Audit and Legal Compliance
The Audit Committee shall:
1. Review the budget, plan, changes in plan, activities, organizational
structure, and qualifications of internal audit, as needed.
2. Review the appointment, performance, and replacement of the senior
internal audit executive, if any.
3. Review significant reports prepared by internal audit together with
management's response and follow-up to these reports.
4. On at least an annual basis, review with the Company's counsel any
legal matters that could have a significant impact on the
organization's financial statements, the Company's compliance with
applicable laws and regulations, and inquiries received from
regulators or governmental agencies.
A-2
D. Other Audit Committee Responsibilities
The Audit Committee shall:
1. Annually prepare a report to shareholders as required by the
Securities and Exchange Commission. The report should be included in
the Company's annual proxy statement.
2. Perform any other activities consistent with this Charter, the
Company's by-laws, and governing law, as the Committee or the Board
deems necessary or appropriate.
3. Maintain minutes of meetings and periodically report to the Board of
Directors on significant results of the foregoing activities.
A-3
[LETTERHEAD OF HOULIHAN LOKEY HOWARD & ZUKIN]
APPENDIX B
April 13, 2001
The Board of Directors
Imperial Credit Industries, Inc.
23550 Hawthorne Boulevard
Building 1, Suite 210
Torrance, California 90505
Dear Members of the Board of Directors:
You have requested our opinion as to the fairness from a financial point of
view to the shareholders of Imperial Credit Industries, Inc., a California
corporation (the "Company"), which hold publicly-traded Common Stock (defined
below) of the Company (collectively, the "Public Shareholders"), other than
those individuals and entities which are affiliates of the Company
(collectively, the "Affiliates"), of the recapitalization of the Company
described below (the "Recapitalization").
Pursuant to the terms and conditions of the March 29, 2001 Master
Recapitalization Agreement (the "Agreement"), by and among the Company, the
Senior Secured Debt Purchasers (defined below), the Signatory Debtholders
(defined below), and the Convertible Subordinated Debt Purchasers (defined
below), the Recapitalization consists of the following:
(i) The Company shall offer and sell in a private placement (the "Senior
Secured Debt Offering") to certain purchasers (collectively, the "Senior
Secured Debt Purchasers") $16,200,000 aggregate principal amount of the
12.0% Senior Secured Debt of the Company (the "Senior Secured Debt");
(ii) The Company shall conduct an exchange offer wherein the Company
shall offer up to an aggregate of $147,600,000 aggregate principal amount
of the 12.0% Senior Secured Notes due 2005 (the "Exchange Notes"),
2,000,000 shares of Common Stock, no par value per share, of the Company
(the "Common Stock") and warrants to purchase 7,000,000 shares of Common
Stock at an exercise price of $2.15 per share (the "Debt Exchange
Warrants") in exchange for $176,900,000 aggregate principal amount of: (A)
the 9.75% Senior Notes due 2004 of the Company (the "Old Junior Notes");
(B) the 9.875% Senior Notes due 2007 of the Company (the "Old Senior
Notes"); and (C) the Remarketed Redeemable Par Securities, Series B, of an
affiliate of the Company (the "ROPES" and, together with the Old Junior
Notes and the Old Senior Notes, the "Bonds") (collectively, the "Debt
Exchange");
B-1
(iii) Concurrent with the consummation of the Debt Exchange, the Company
shall issue to the holders of the Bonds which consented to the Debt
Exchange and executed the Agreement (collectively, the "Signatory
Debtholders") 5,040,000 shares of Common Stock;
(iv) Upon the occurrence of certain events, the Company shall issue to
the holders of the Senior Secured Debt (A) $18,200,000 aggregate principal
amount of the Exchange Notes, (B) 249,052 shares of Common Stock and (C)
Debt Exchange Warrants to purchase 871,681 shares of Common Stock in
exchange for $16,200,000 aggregate principal amount of the Senior Secured
Debt (collectively, the "Senior Secured Debt Exchange");
(v) The Company shall offer and use its reasonable best efforts to sell
in a private placement (the "Convertible Subordinated Debt Offering") to
certain purchasers by June 15, 2001 (collectively, the "Convertible
Subordinated Debt Purchasers") $10,00,000 aggregate principal amount of the
Convertible Subordinated Debt of the Company (the "Convertible Subordinated
Debt"), which shall be subordinate to the Exchange Notes and, at three
years, shall be convertible into Common Stock at a conversion price of
$1.25 per share (or an aggregate of 8,000,000 shares of Common Stock);
(vi) On or before March 31, 2002, the holders participating in the
Senior Secured Debt Exchange shall have the right to (A) exchange (1)
$18,200,000 aggregate principal amount of the Exchange Notes, (2) 249,052
shares of Common Stock and (3) Debt Exchange Warrants to purchase 871,681
shares of Common Stock for $18,200,000 aggregate principal amount of the
Convertible Subordinated Debt, which shall be subordinate to the Exchange
Notes and, at three years, shall be convertible into Common Stock at a
conversion price of $1.25 per share (or an aggregate of 12,960,000 shares
of Common Stock), or (B) refrain from participating in such exchange,
attempt to sell the Exchange Notes, the Common Stock and Debt Exchange
Warrants so issued to third parties or attempt to sell the Exchange Notes
to third parties and tender the Common Stock and Debt Exchange Warrants to
the Company and, depending on market and other conditions, receive up to
$5,000,000 of additional Exchange Notes; and
(vii) Depending upon the principal amount of the Exchange Notes tendered
in exchange for Convertible Subordinated Debt (as further described in
clause (vi) above), on or before April 15, 2002, the Company shall issue to
the Signatory Debtholders up to an additional 2,000,000 shares of Common
Stock.
The terms and conditions of the Recapitalization are more fully set forth
in the Agreement. We have assumed with your consent that the Recapitalization
and the related transactions (collectively, the "Transactions") were approved
by the Board of Directors of the Company, were or will be consummated in
accordance with the terms described herein, without any amendment or
modification thereto (including, without limitation, any adjustment to the
exchange ratios set forth herein) or any deviation therefrom, but without any
waiver by the parties thereto of any conditions to their respective
obligations thereunder.
We did not participate in negotiations with respect to the terms of the
Transactions or the draft Agreement. However, we understand that Imperial
Capital, LLC, an affiliate of the Company, is the Company's financial advisor
with respect to the Transactions and the negotiations with respect thereto. We
further understand that Michael S. Riley, the Manager of Imperial Holdings
Group, LLC, and Imperial Holdings Group, LLP, which are not affiliates of the
Company, directly own approximately 50.0% of two classes of the Bonds.
Notwithstanding the foregoing, we have assumed that negotiations were arms'-
length and that such terms are the most beneficial terms from the Company's
perspective that could be negotiated with respect to the Transactions and the
Agreement.
We were not requested to and did not (i) provide any advice concerning the
structure, the exchange ratios, the value of the securities offered or
exchanged or any other aspects of or related to the Transactions (including,
without limitation, the Senior Secured Debt Offering, the Debt Exchange, the
Convertible Subordinated Debt Offering and the Senior Secured Debt Exchange)
or (ii) provide any fairness opinion with respect to the structure,
B-2
the exchange ratios, the value of the securities offered or exchanged. We did
not provide any services other than the delivery of our opinion dated March
14, 2001 (which was a favorable opinion in accordance with its terms, as more
particularly described therein, and subject to the terms, conditions,
assumptions and qualifications set forth therein) and this opinion which
supercedes the March 14, 2001 opinion. We were not requested to and did not
solicit any expressions of interest from any other parties with respect to the
sale of all or any part of the Company or any other alternative transaction.
Consequently, no opinion is expressed as to whether any alternative
transaction might produce a result for the Company's shareholders which is
more beneficial than that contemplated by the Transactions or the draft
Agreement.
For purposes of the opinion set forth herein, we have made such reviews,
analyses and inquiries on or before March 14, 2001 (except as set forth below
in paragraph 3 and paragraph 10 with respect to the Agreement) as we have
deemed necessary and appropriate under the circumstances. Among other things,
we have:
1) interviewed certain members of the senior management of the Company
to discuss the historical operations, financial condition, future
prospects, and projected operations and performance of the Company and its
subsidiaries;
2) reviewed the Company's Form 10-K for the fiscal year ended 1999, Form
10-Q for the three quarters ended September 30, 2000, Form 8-K's filed on
December 26, 2000 and February 7, 2001 and Company-prepared interim
financial statements for the period ended December 31, 2000, which the
Company's management has identified as the most current financial
statements available;
3) reviewed the Offering Memorandum for the Company dated March 8, 2001,
and the supplement thereto dated March 27, 2001, which the Company's
management has identified as the most current version of the memorandum
available;
4) reviewed copies of the Board Presentation prepared by Friedman
Billings Ramsey & Co. ("FBR") dated December 13, 2000 and the Board
Transaction Review Presentation as prepared by Imperial Capital LLC dated
January 31, 2001;
5) reviewed the Department of Financial Institutions' Final Order In the
Matter of Southern Pacific Bank, and the Federal Deposit Insurance
Corporation's Order to Cease and Desist In the Matter of Southern Pacific
Bank;
6) reviewed the Company's Indenture for $200 million in 9.875% Senior
Notes due 2007 dated January 23, 1997;
7) reviewed various forecasts and projections for the fiscal year ended
December 31, 2001, prepared by the Company's management with respect to the
Company and each of its subsidiaries and operating divisions;
8) reviewed the historical market prices and trading volume for the
Company's publicly traded securities, and reviewed other publicly available
information regarding the Company, including certain analyst reports and
press releases;
9) reviewed certain other publicly available financial data for certain
companies that we deemed comparable to the Company;
10) reviewed copies of the following documents and agreements:
-- a list of the Company's major capital projects from 1999, 2000
and 2001;
-- a copy of Southern Pacific Bank's Strategic Plan for 2001-2002;
-- a summary of regulatory actions;
-- Company-prepared documentation on the debt obligations for
certain operating divisions of the Company;
B-3
-- the Agreement;
-- Offering Memoranda relating to the Company and dated between 1996
and 2000;
11) reviewed certain other documents related to the Company and provided
to us by the Company; and
12) conducted such other studies, analyses and inquiries and considered
such other factors as we have deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial and other information supplied to and reviewed by us with respect to
the Company and its subsidiaries as of March 14, 2001 is accurate and complete
as of the date hereof; however, we do not assume any responsibility with
respect to such information. We have further relied upon and assumed, without
independent verification, that the financial forecasts and projections
provided to us as of March 14, 2001, including information relating to certain
strategic financial and operational benefits anticipated from the
Transactions, have been reasonably prepared and reflect the best currently
available estimates and good faith judgments of the future financial results
and condition of the Company and its subsidiaries as of the date hereof. We
have relied upon and assumed, without independent verification, that there has
been no material change in the assets, financial condition, business or
prospects of the Company and its subsidiaries since the date of the most
recent financial statements made available to us.
We have relied on the advice of counsel and independent accountants to the
Company as to all legal and financial reporting matters, respectively, with
respect to the Company, the Transactions and the draft Agreement. We have not
made any physical inspection or independent appraisal of any of the properties
or assets of the Company and its subsidiaries, nor have we been furnished with
such appraisals. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us as of
March 28, 2001. It should be understood that subsequent developments may
affect this opinion and we do not have any obligation to update, revise, or
reaffirm this opinion.
It is understood that this letter is for the benefit and use of the Board
of Directors of the Company in connection with and for purposes of its
evaluation of the Transactions only and is not rendered on behalf of, and
shall not confer rights or remedies upon, any person other than the Board of
Directors.
Based upon the foregoing, including, without limitation, the various
assumptions and limitation set forth herein, and in reliance thereon, it is
our opinion as of March 28, 2001 that the Recapitalization was fair from a
financial point of view to the Public Shareholders other than the Affiliates.
Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
B-4
APPENDIX C
IMPERIAL CREDIT INDUSTRIES, INC.
LONG TERM STOCK INCENTIVE PLAN
SECTION 1
GENERAL
1.1. Purpose. The Imperial Credit Industries, Inc. Long Term Stock
Incentive Plan (the "Plan") has been established by Imperial Credit
Industries, Inc. (the "Company") to (i) attract and retain persons eligible to
participate in the Plan; (ii) motivate Participants, by means of appropriate
incentives, to achieve long-range goals; (iii) provide incentive compensation
opportunities that are competitive with those of other similar companies; and
(iv) further identify Participants' interests with those of the Company's
other shareholders through compensation that is based on the Company's common
stock; and thereby promote the long-term financial interest of the Company and
the Subsidiaries, including the growth in value of the Company's equity and
enhancement of long term shareholder return.
1.2. Participation. Subject to the terms and conditions of the Plan, the
Committee shall determine and designate, from time to time, from among the
Eligible Individuals, those persons who will be granted one or more Awards
under the Plan, and thereby become "Participants" in the Plan.
1.3. Operation, Administration, and Definitions. The operation and
administration of the Plan, including the Awards made under the Plan, shall be
subject to the provisions of Section 4 (relating to operation and
administration). Capitalized terms in the Plan shall be defined as set forth
in the Plan (including the definition provisions of Section 7 of the Plan).
SECTION 2
OPTIONS AND SARS
2.1. Definitions.
(a) The grant of an "Option" entitles the Participant to purchase shares of
Stock at an Exercise Price established by the Committee. Any Option
granted under this Section 2 may be either an incentive stock option
(an "ISO") or a non-qualified option (an "NQO"), as determined in the
discretion of the Committee. An "ISO" is an Option that is intended to
satisfy the requirements applicable to an "incentive stock option"
described in section 422(b) of the Code. An "NQO" is an Option that is
not intended to be an "incentive stock option" as that term is
described in section 422(b) of the Code.
(b) A stock appreciation right (an "SAR") entitles the Participant to
receive, in cash or Stock (as determined in accordance with subsection
2.5), value equal to (or otherwise based on) the excess of: (a) the
Fair Market Value of a specified number of shares of Stock at the time
of exercise; over (b) an Exercise Price established by the Committee.
2.2. Exercise Price. The "Exercise Price" of each Option or SAR granted
under this Section 2 shall be established by the Committee or shall be
determined by a method established by the Committee at the time the Option or
SAR is granted; except that the Exercise Price shall not be less than 100% of
the Fair Market Value of a share of Stock on the date of grant (or, if
greater, the par value of a share of Stock).
2.3. Exercise. An Option and an SAR shall be exercisable in accordance with
such terms and conditions and during such periods as may be established by the
Committee.
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2.4. Payment of Option Exercise Price. The payment of the Exercise Price of
an Option granted under this Section 2 shall be subject to the following:
(a) Subject to the following provisions of this subsection 2.4, the full
Exercise Price for shares of Stock purchased upon the exercise of any
Option shall be paid at the time of such exercise (except that, in the
case of an exercise arrangement approved by the Committee and described
in paragraph 2.4(c), payment may be made as soon as practicable after
the exercise).
(b) The Exercise Price shall be payable in cash, by promissory note, or by
tendering, by either actual delivery of shares or by attestation,
shares of Stock acceptable to the Committee, and valued at Fair Market
Value as of the day of exercise, or in any combination thereof, as
determined by the Committee.
(c) The Committee may permit a Participant to elect to pay the Exercise
Price upon the exercise of an Option by irrevocably authorizing a third
party to sell shares of Stock (or a sufficient portion of the shares)
acquired upon exercise of the Option and remit to the Company a
sufficient portion of the sale proceeds to pay the entire Exercise
Price and any tax withholding resulting from such exercise.
2.5. Settlement of Award. Settlement of Options and SARs is subject to
subsection 4.7.
SECTION 3
OTHER STOCK AWARDS
3.1. Definitions.
(a) A "Bonus Stock" Award is a grant of shares of Stock in return for
previously performed services, or in return for the Participant
surrendering other compensation that may be due.
(b) A "Stock Unit" Award is the grant of a right to receive shares of Stock
in the future.
(c) A "Performance Share" Award is a grant of a right to receive shares of
Stock or Stock Units which is contingent on the achievement of
performance or other objectives during a specified period.
(d) A "Performance Unit" Award is a grant of a right to receive a
designated dollar value amount of Stock which is contingent on the
achievement of performance or other objectives during a specified
period.
(e) A "Restricted Stock" Award is a grant of shares of Stock, and a
"Restricted Stock Unit" Award is the grant of a right to receive shares
of Stock in the future, with such shares of Stock or right to future
delivery of such shares of Stock subject to a risk of forfeiture or
other restrictions that will lapse upon the achievement of one or more
goals relating to completion of service by the Participant, or
achievement of performance or other objectives, as determined by the
Committee.
3.2. Restrictions on Awards. Each Bonus Stock Award, Stock Unit Award,
Restricted Stock Award, Restricted Stock Unit Award, Performance Share Award,
and Performance Unit Award shall be subject to the following:
(a) Any such Award shall be subject to such conditions, restrictions and
contingencies as the Committee shall determine.
(b) The Committee may designate whether any such Award being granted to any
Participant is intended to be "performance-based compensation" as that
term is used in section 162(m) of the Code. Any such Awards designated
as intended to be "performance-based compensation" shall be conditioned
on the achievement of one or more Performance Measures, to the extent
required by Code section 162(m). For Awards under this Section 3
intended to be "performance-based compensation," the grant of the
Awards and the establishment of the Performance Measures shall be made
during the period required under Code section 162(m).
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SECTION 4
OPERATION AND ADMINISTRATION
4.1. Effective Date. Subject to the approval of the shareholders of the
Company at the Company's 2001 annual meeting of its shareholders, the Plan
shall be effective as of March 28, 2001 (the "Effective Date"); provided,
however, that to the extent that Awards are granted under the Plan prior to
its approval by shareholders, the Awards shall be contingent on approval of
the Plan by the shareholders of the Company at such annual meeting. The Plan
shall be unlimited in duration and, in the event of Plan termination, shall
remain in effect as long as any Awards under it are outstanding; provided,
however, that no Awards may be granted under the Plan after the ten-year
anniversary of the Effective Date (except for Awards granted pursuant to
commitments entered into prior to such ten-year anniversary).
4.2. Shares Subject to Plan. The shares of Stock for which Awards may be
granted under the Plan shall be subject to the following:
(a) The shares of Stock with respect to which Awards may be made under the
Plan shall be shares currently authorized but unissued.
(b) Subject to the following provisions of this subsection 4.2, the maximum
number of shares of Stock that may be delivered to Participants and
their beneficiaries under the Plan shall be five million shares of
Stock.
(c) To the extent provided by the Committee, any Award may be settled in
cash rather than Stock. To the extent any shares of Stock covered by an
Award are not delivered to a Participant or beneficiary because the
Award is forfeited or canceled, or the shares of Stock are not
delivered because the Award is settled in cash or used to satisfy the
applicable tax withholding obligation, such shares shall not be deemed
to have been delivered for purposes of determining the maximum number
of shares of Stock available for delivery under the Plan.
(d) If the exercise price of any stock option granted under the Plan or any
Prior Plan is satisfied by tendering shares of Stock to the Company (by
either actual delivery or by attestation), only the number of shares of
Stock issued net of the shares of Stock tendered shall be deemed
delivered for purposes of determining the maximum number of shares of
Stock available for delivery under the Plan.
(e) Subject to paragraph 4.2(f), the following additional maximums are
imposed under the Plan.
(i) The maximum number of shares of Stock that may be issued by
Options intended to be ISOs shall be 5,000,000 shares.
(ii) The maximum number of shares that may be covered by Awards
granted to any one individual pursuant to Section 2 (relating to
Options and SARs) shall be 1,500,000 shares during any one
calendar-year period. If an Option is in tandem with an SAR, such
that the exercise of the Option or SAR with respect to a share of
Stock cancels the tandem SAR or Option right, respectively, with
respect to such share, the tandem Option and SAR rights with
respect to each share of Stock shall be counted as covering but
one share of Stock for purposes of applying the limitations of
this paragraph (ii).
(iii) The maximum number of shares of Stock that may be issued in
conjunction with Awards granted pursuant to Section 3 (relating
to Other Stock Awards) shall be 300,000 shares.
(iv) For Bonus Stock Awards, Stock Unit Awards, Restricted Stock
Awards, Restricted Stock Unit Awards and Performance Share Awards
that are intended to be "performance-based compensation" (as that
term is used for purposes of Code section 162(m)), no more than
300,000 shares of Stock may be subject to such Awards granted to
any one individual during any one-calendar-year period. If, after
shares have been earned, the delivery is deferred, any additional
shares attributable to dividends during the deferral period shall
be disregarded.
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(v) For Performance Unit Awards that are intended to be "performance-
based compensation" (as that term is used for purposes of Code
section 162(m)), no more than $300,000 may be subject to such
Awards granted to any one individual during any one-calendar-year
period. If, after amounts have been earned with respect to
performance Unit Awards, the delivery of such amounts is deferred,
any additional amounts attributable to earnings during the
deferral period shall be disregarded.
(f) In the event of a corporate transaction involving the Company
(including, without limitation, any stock dividend, stock split,
extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, split-up, spin-off, combination or exchange of shares),
the Committee may adjust Awards to preserve the benefits or potential
benefits of the Awards. Action by the Committee may include: (i)
adjustment of the number and kind of shares which may be delivered
under the Plan; (ii) adjustment of the number and kind of shares
subject to outstanding Awards; (iii) adjustment of the Exercise Price
of outstanding Options and SARs; and (iv) any other adjustments that
the Committee determines to be equitable.
4.3. General Restrictions. Delivery of shares of Stock or other amounts
under the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Company shall have
no liability to deliver any shares of Stock under the Plan or make any
other distribution of benefits under the Plan unless such delivery or
distribution would comply with all applicable laws (including, without
limitation, the requirements of the Securities Act of 1933), and the
applicable requirements of any securities exchange or similar entity.
(b) To the extent that the Plan provides for issuance of stock certificates
to reflect the issuance of shares of Stock, the issuance may be
effected on a non-certificated basis, to the extent not prohibited by
applicable law or the applicable rules of any stock exchange.
4.4. Tax Withholding. All distributions under the Plan are subject to
withholding of all applicable taxes, and the Committee may condition the
delivery of any shares or other benefits under the Plan on satisfaction of the
applicable withholding obligations. The Committee, in its discretion, and
subject to such requirements as the Committee may impose prior to the
occurrence of such withholding, may permit such withholding obligations to be
satisfied through cash payment by the Participant, through the surrender of
shares of Stock which the Participant already owns, or through the surrender
of shares of Stock to which the Participant is otherwise entitled under the
Plan; provided, however, that such shares may be used to satisfy not more than
the Company's minimum statutory withholding obligation (based on minimum
statutory withholding rates for Federal and state tax purposes, including
payroll taxes, that are applicable to such supplemental taxable income).
4.5. Grant and Use of Awards. In the discretion of the Committee, a
Participant may be granted any Award permitted under the provisions of the
Plan, and more than one Award may be granted to a Participant. Awards may be
granted as alternatives to or replacement of awards granted or outstanding
under the Plan, or any other plan or arrangement of the Company or a
Subsidiary (including a plan or arrangement of a business or entity, all or a
portion of which is acquired by the Company or a Subsidiary). Subject to the
overall limitation on the number of shares of Stock that may be delivered
under the Plan, the Committee may use available shares of Stock as the form of
payment for compensation, grants or rights earned or due under any other
compensation plans or arrangements of the Company or a Subsidiary, including
the plans and arrangements of the Company or a Subsidiary assumed in business
combinations.
4.6. Dividends and Dividend Equivalents. An Award (including without
limitation an Option or SAR Award) may provide the Participant with the right
to receive dividend payments or dividend equivalent payments with respect to
Stock subject to the Award (both before and after the Stock subject to the
Award is earned, vested, or acquired), which payments may be either made
currently or credited to an account for the Participant, and may be settled in
cash or Stock, as determined by the Committee. Any such settlements, and any
such crediting of dividends or dividend equivalents or reinvestment in shares
of Stock, may be subject to such conditions,
C-4
restrictions and contingencies as the Committee shall establish, including the
reinvestment of such credited amounts in Stock equivalents.
4.7. Settlement of Awards. The obligation to make payments and
distributions with respect to Awards may be satisfied through cash payments,
the delivery of shares of Stock, the granting of replacement Awards, or
combination thereof as the Committee shall determine. Satisfaction of any such
obligations under an Award, which is sometimes referred to as "settlement" of
the Award, may be subject to such conditions, restrictions and contingencies
as the Committee shall determine. The Committee may permit or require the
deferral of any Award payment, subject to such rules and procedures as it may
establish, which may include provisions for the payment or crediting of
interest or dividend equivalents, and may include converting such credits into
deferred Stock equivalents. Each Subsidiary shall be liable for payment of
cash due under the Plan with respect to any Participant to the extent that
such benefits are attributable to the services rendered for that Subsidiary by
the Participant. Any disputes relating to liability of a Subsidiary for cash
payments shall be resolved by the Committee.
4.8. Transferability. Except as otherwise provided by the Committee, Awards
under the Plan are not transferable except as designated by the Participant by
will or by the laws of descent and distribution.
4.9. Form and Time of Elections. Unless otherwise specified herein, each
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification, or
revocation thereof, shall be in writing filed with the Committee at such
times, in such form, and subject to such restrictions and limitations, not
inconsistent with the terms of the Plan, as the Committee shall require.
4.10. Agreement With Company. An Award under the Plan shall be subject to
such terms and conditions, not inconsistent with the Plan, as the Committee
shall, in its sole discretion, prescribe. The terms and conditions of any
Award to any Participant shall be reflected in such form of written document
as is determined by the Committee. A copy of such document shall be provided
to the Participant, and the Committee may, but need not require that the
Participant sign a copy of such document. Such document is referred to in the
Plan as an "Award Agreement" regardless of whether any Participant signature
is required.
4.11. Action by Company or Subsidiary. Any action required or permitted to
be taken by the Company or any Subsidiary shall be by resolution of its board
of directors, or by action of one or more members of the board (including a
committee of the board) who are duly authorized to act for the board, or
(except to the extent prohibited by applicable law or applicable rules of any
stock exchange) by a duly authorized officer of such company.
4.12. Gender and Number. Where the context admits, words in any gender
shall include any other gender, words in the singular shall include the plural
and the plural shall include the singular.
4.13. Limitation of Implied Rights.
(a) Neither a Participant nor any other person shall, by reason of
participation in the Plan, acquire any right in or title to any assets,
funds or property of the Company or any Subsidiary whatsoever,
including, without limitation, any specific funds, assets, or other
property which the Company or any Subsidiary, in its sole discretion,
may set aside in anticipation of a liability under the Plan. A
Participant shall have only a contractual right to the Stock or
amounts, if any, payable under the Plan, unsecured by any assets of the
Company or any Subsidiary, and nothing contained in the Plan shall
constitute a guarantee that the assets of the Company or any Subsidiary
shall be sufficient to pay any benefits to any person.
(b) The Plan does not constitute a contract of employment, and selection as
a Participant will not give any participating employee the right to be
retained in the employ of the Company or any Subsidiary, nor any right
or claim to any benefit under the Plan, unless such right or claim has
specifically accrued under the terms of the Plan. Except as otherwise
provided in the Plan, no Award under the Plan shall confer upon the
holder thereof any rights as a shareholder of the Company prior to the
date on which the individual fulfills all conditions for receipt of
such rights.
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4.14. Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting
on it considers pertinent and reliable, and signed, made or presented by the
proper party or parties.
SECTION 5
COMMITTEE
5.1. Administration. The authority to control and manage the operation and
administration of the Plan shall be vested in a committee (the "Committee") in
accordance with this Section 5. The Committee shall be selected by the Board.
If the Committee does not exist, or for any other reason determined by the
Board, the Board may take any action under the Plan that would otherwise be
the responsibility of the Committee.
5.2. Powers of Committee. The Committee's administration of the Plan shall
be subject to the following:
(a) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to select from among the Eligible Individuals
those persons who shall receive Awards, to determine the time or times
of receipt, to determine the types of Awards and the number of shares
covered by the Awards, to establish the terms, conditions, performance
criteria, restrictions, and other provisions of such Awards, and
(subject to the restrictions imposed by Section 6) to cancel or suspend
Awards.
(b) The Committee will have the authority and discretion to interpret the
Plan, to establish, amend, and rescind any rules and regulations
relating to the Plan, to determine the terms and provisions of any
Award Agreement made pursuant to the Plan, and to make all other
determinations that may be necessary or advisable for the
administration of the Plan.
(c) Any interpretation of the Plan by the Committee and any decision made
by it under the Plan is final and binding on all persons.
(d) In controlling and managing the operation and administration of the
Plan, the Committee shall take action in a manner that conforms to the
articles and by-laws of the Company, and applicable state corporate
law.
5.3. Delegation by Committee. Except to the extent prohibited by applicable
law or the applicable rules of a stock exchange, the Committee may allocate
all or any portion of its responsibilities and powers to any one or more of
its members and may delegate all or any part of its responsibilities and
powers to any person or persons selected by it. Any such allocation or
delegation may be revoked by the Committee at any time.
5.4. Information to be Furnished to Committee. The Company and Subsidiaries
shall furnish the Committee with such data and information as it determines
may be required for it to discharge its duties. The records of the Company and
Subsidiaries as to an employee's or Participant's employment, termination of
employment, leave of absence, reemployment and compensation shall be
conclusive on all persons unless determined to be incorrect. Participants and
other persons entitled to benefits under the Plan must furnish the Committee
such evidence, data or information as the Committee considers desirable to
carry out the terms of the Plan.
SECTION 6
AMENDMENT AND TERMINATION
The Board may, at any time, amend or terminate the Plan, and may amend any
Award Agreement; provided that no amendment or termination may, in the absence
of written consent to the change by the affected Participant (or, if the
Participant is not then living, the affected beneficiary), adversely affect
the rights of any Participant or beneficiary under any Award granted under the
Plan prior to the date such amendment is adopted by the Board; and further
provided that adjustments pursuant to paragraph 4.2(f) shall not be subject to
the foregoing limitations of this Section 6.
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SECTION 7
DEFINED TERMS
In addition to the other definitions contained herein, the following
definitions shall apply:
(a) Award. The term "Award" means any award or benefit granted under the
Plan, including, without limitation, the grant of Options, SARs, Bonus
Stock Awards, Stock Unit Awards, Restricted Stock Awards, Restricted
Stock Unit Awards, Performance Unit Awards, and Performance Share
Awards.
(b) Board. The term "Board" means the Board of Directors of the Company.
(c) Code. The term "Code" means the Internal Revenue Code of 1986, as
amended. A reference to any provision of the Code shall include
reference to any successor provision of the Code.
(d) Eligible Individual. For purposes of the Plan, the term "Eligible
Individual" means any employee of the Company or a Subsidiary, and any
consultant, director, or other person providing services to the Company
or a Subsidiary; provided, however, that an incentive stock option may
only be granted to an employee of the Company or a Subsidiary.
(e) Fair Market Value. For purposes of determining the "Fair Market Value"
of a share of Stock as of any date, the following rules shall apply:
(i) If the principal market for the Stock is a national securities
exchange or the Nasdaq stock market, then the "Fair Market Value"
as of that date shall be the closing price of the Stock on that
date on the principal exchange or market on which the Stock is
then listed or admitted to trading.
(ii) If sale prices are not available or if the principal market for
the Stock is not a national securities exchange and the Stock is
not quoted on the Nasdaq stock market, the average between the
highest bid and lowest asked prices for the Stock on such day as
reported on the Nasdaq OTC Bulletin Board Service or by the
National Quotation Bureau, Incorporated or a comparable service.
(iii) If the day is not a business day, and as a result, paragraphs (i)
and (ii) next above are inapplicable, the Fair Market Value of
the Stock shall be determined as of the next earlier business
day. If paragraphs (i) and (ii) next above are otherwise
inapplicable, then the Fair Market Value of the Stock shall be
determined in good faith by the Committee.
(f) Subsidiary. The term "Subsidiary" means any company during any period
in which it is a "subsidiary corporation" (as that term is defined in
Code section 424(f)) with respect to the Company.
(g) Stock. The term "Stock" means shares of common stock of the Company.
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APPENDIX D
AMENDMENT OF ARTICLES OF INCORPORATION OF IMPERIAL CREDIT INDUSTRIES, INC.
Article FOUR of the Articles of Incorporation of the Company shall be
amended by adding a new paragraph to follow the first paragraph thereof, which
new paragraph shall read as follows:
Upon filing of this Certificate of Amendment each [two (2)], [three (3)]
or [four (4)] shares of Common Stock, no par value per share, of the
corporation then issued and outstanding automatically shall be combined
into one (1) share of Common Stock, no par value per share, of the
corporation. No fractional shares shall be issued. Each holder of shares of
Common Stock who otherwise would be entitled to receive a fractional share
shall be entitled to receive a cash payment in lieu thereof at a price
equal to the fraction of a share that such holder would otherwise be
entitled to receive multiplied by the closing price of the Common Stock as
reported on the Nasdaq Stock Market on the last trading day prior to the
filing of this Certificate of Amendment to the Articles of Incorporation of
the corporation, or such other price as may be determined by the Board of
Directors of the corporation.
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IMPERIAL CREDIT INDUSTRIES, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS ON JUNE 26, 2001
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints H. Wayne Snavely, Brad S. Plantiko and Irwin
L. Gubman, or any of them, each with full power of substitution, as proxies of
the undersigned to vote all of the undersigned's shares of Imperial Credit
Industries, Inc. common stock at the Annual Meeting of Shareholders of Imperial
Credit Industries, Inc., at the Marriott Hotel, located at 3635 Fashion Way,
Torrance, California 90503, on June 26, 2001 at 10:00 a.m. Pacific Time.
1. Election of Directors:[_] FOR all nominees listed below[_]
WITHHOLD AUTHORITY
H. Wayne Snavely . Robert S. Muehlenbeck . James P. Staes . Michael R. McGuire
Michael S. Riley . Theodore R. Maloney . Charles E. Underbrink
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE
THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.
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2. To approve the issuance of Common Stock or securities convertible into or
exercisable for Common Stock to recapitalize the Company as described in
the proxy statement. The Board of Directors recommends a vote FOR:
FOR [_] AGAINST [_] ABSTAIN [_]
3. To approve the Company's 2001 Long Term Stock Incentive Plan. The Board
of Directors recommends a vote FOR:
FOR [_] AGAINST [_] ABSTAIN [_]
4. To ratify the appointment of KPMG LLP as independent public accountants
for the year ending December 31, 2001.
The Board of Directors recommends a vote FOR:
FOR [_] AGAINST [_] ABSTAIN [_]
5. To amend our Articles of Incorporation to change our corporate name. The
Board of Directors recommends a vote FOR:
FOR [_] AGAINST [_] ABSTAIN [_]
6. To amend our Articles of Incorporation to permit the Board of Directors
to effect a reverse stock split. The Board of Directors recommends a vote
FOR:
FOR [_] AGAINST [_] ABSTAIN [_]
7. In their discretion, upon any and all such other matters as may properly
come before the meeting or any adjournment or postponement thereof.
THIS PROXY WILL BE VOTED AS SPECIFIED OR, IF NO CHOICE IS SPECIFIED, WILL BE
VOTED FOR THE SEVEN NOMINEES FOR ELECTION AND FOR PROPOSALS 2 THROUGH SIX.
(Please sign exactly as name appears on this card. When shares are held by
joint tenants, both should sign. When signing as attorney, as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.)
Dated:_________________, 2001
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Signature
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Signature, if held jointly