As filed with the Securities and Exchange Commission on August 30, 2001
Registration No. 333-58728
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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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Amendment No. 1
To
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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IMPERIAL CREDIT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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California 95-4054791
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
23550 Hawthorne Boulevard, Building 1, Suite 110
Torrance, California 90505
(310) 373-1704
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Michael R. McGuire
President and Chief Executive Officer
Imperial Credit Industries, Inc.
23550 Hawthorne Boulevard, Building 1, Suite 110
Torrance, California 90505
(310) 373-1704
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
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Copies to:
James R. Walther
Richard D. Greta
Mayer, Brown & Platt
350 South Grand Avenue
25th Floor
Los Angeles, California 90071
213-229-9500
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effectiveness date until the Registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
registration statement shall become effective on such date as the Commission
acting pursuant to said Section 8(a) may determine.
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PROSPECTUS
3,000,000 SHARES
IMPERIAL CREDIT INDUSTRIES, INC.
COMMON STOCK
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This prospectus relates to an aggregate of 3,000,000 shares of common stock,
no par value per share, of Imperial Credit Industries, Inc. These shares have
been reserved for issuance upon exercise of warrants that we will issue as
part of the settlement of the securities class action litigation entitled In
re Southern Pacific Funding Corporation Securities Litigation, Lead Case No.
CV98-1239-MA, in the U.S. District Court for the District of Oregon. The
warrants will entitle the holders thereof to purchase up to 3,000,000 shares
of our common stock at an exercise price of $3.00 per share, subject to
certain anti-dilution adjustments. If these warrants are exercised in full, we
will receive aggregate gross proceeds of $9,000,000 before deducting our
estimated expenses of $157,250. See "Use of Proceeds." We will pay all
expenses with respect to this offering.
Investing in our common stock involves significant risks. You should
consider the possibility of losing your entire investment before deciding
whether to make such an investment. See "Risk Factors" on page 7.
Our principal subsidiary, Southern Pacific Bank, is currently operating
under orders issued by its federal and state banking regulators that impose
significant restrictions and requirements on its operations, including that
the bank significantly increase its regulatory capital levels.
Our common stock is quoted on the Nasdaq National Market under the symbol
"ICII," but is subject to possible delisting if it continues to be traded at a
closing bid price of less than $1.00 per share. On August 28, 2001, the
closing sales price of our common stock was $0.70 per share.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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The date of this Prospectus is , 2001.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION
This prospectus contains "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Act of
1934, as amended. These statements can be identified by the use of forward-
looking terminology such as "may," "will," "intend," "should," "expect,"
"anticipate," "estimate" or "continue" or the negatives thereof or other
comparable terminology. Our actual results could differ materially from those
anticipated in such forward-looking statements as a result of various factors,
including, without limitation, the factors described in this prospectus under
the caption "Risk Factors", actions that may be taken by the Federal Deposit
Insurance Corporation or the California Department of Financial Institutions
with respect to Southern Pacific Bank and all of the factors incorporated by
reference in the registration statement of which this prospectus forms a part.
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No one (including any dealer, salesman or broker) is authorized to provide
oral or written information about this offering that is not included in this
prospectus. You must not rely on any unauthorized information or
representations. This prospectus is an offer to sell only the shares of our
common stock offered hereby, and only under circumstances and in jurisdictions
in which it is lawful to do so. The information contained in this prospectus
is current only as of its date.
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TABLE OF CONTENTS
Page
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PROSPECTUS SUMMARY......................................................... 3
RISK FACTORS............................................................... 7
USE OF PROCEEDS............................................................ 20
RECENT DEVELOPMENTS........................................................ 20
PLAN OF DISTRIBUTION....................................................... 25
LEGAL MATTERS.............................................................. 26
EXPERTS.................................................................... 26
WHERE YOU CAN FIND MORE INFORMATION........................................ 26
2
PROSPECTUS SUMMARY
This summary highlights information regarding us and the offering of shares
of our common stock described herein. This summary does not contain all of the
information you should consider before investing in our common stock. You
should read the entire prospectus carefully, especially the risks discussed
under "Risk Factors", and the documents incorporated into this prospectus by
reference before you decide whether to invest in our common stock.
IMPERIAL CREDIT INDUSTRIES, INC.
We are a diversified commercial lending and financial services holding
company with consolidated assets of $1.9 billion as of June 30, 2001. Our
business activities are primarily conducted through our wholly owned commercial
banking subsidiary, Southern Pacific Bank (the "Bank"). Our core businesses
originate commercial loans, real estate loans and commercial leases funded
primarily by the FDIC-insured deposits of the Bank. Our principal executive
offices are located in Torrance, California at 23550 Hawthorne Boulevard,
Building 1, Suite 110, Torrance, California 90505 and our telephone number is
(310) 373-1704.
We offer loan and lease products and provide asset management services in the
sectors described below.
Business Finance Lending.
Our business finance lending is primarily conducted through the Bank, with
additional servicing activities being conducted through Imperial Business
Credit, Inc., which is another of our wholly-owned subsidiaries.
Southern Pacific Bank. The Bank is an industrial bank organized under
California law that had approximately $1.5 billion in deposits at June 30,
2001. Its business finance lending is offered through the following Bank
divisions and subsidiaries:
Coast Business Credit ("CBC") is the asset based lending division of the
Bank. It primarily makes revolving lines of credit and term commercial
loans available to small-to-medium-sized businesses that are primarily in
the transportation, telecommunications, technology, equipment leasing,
durable goods, electronics and electronic equipment manufacturing
industries. CBC also purchases undivided interests (referred to as
"participations") in senior secured debt of other companies offered by
commercial banks in the secondary market. CBC's commitments (including
standby and commercial letters of credit) and outstanding loan balances
were $1,077.7 million and $665.4 million at June 30, 2001 as compared with
$1,395.3 million and $752.9 million at December 31, 2000.
Imperial Warehouse Finance, Inc. ("IWF") is a wholly owned subsidiary of
the Bank which provides short-term repurchase facilities to residential
mortgage bankers. IWF's repurchase facilities provide the mortgage bankers
with the ability to do same day closings and sales of residential mortgage
loans in the secondary market. Under a participation agreement between the
Bank and IWF, the Bank funds 100% of IWF's repurchase facilities. IWF's
repurchase facility commitments (including standby and commercial letters
of credit) and outstanding balances were $249.2 million and $129.0 million
at June 30, 2001 as compared with $154.9 million and $50.6 million at
December 31, 2000.
The Loan Participation and Investment Group ("LPIG") is a division of the
Bank which purchases participations in senior secured debt of other
companies offered by commercial banks in the secondary market. The
principal types of loans in which LPIG purchases participations are senior-
secured bank loans, in the form of revolving lines of credit and long-term
loans or letters of credit. As a part of its business, LPIG invests in loan
participations through both on and off balance sheet arrangements. The on
balance sheet investments are funded by the FDIC-insured deposits of the
Bank, while LPIG's off balance sheet
3
financing is primarily conducted through various trust and total return
swap instruments. LPIG's commitments (including standby and commercial
letters of credit) and outstanding balances were $217.7 million and
$80.1 million at June 30, 2001 as compared with $289.1 million and $123.5
million at December 31, 2000. Also at June 30, 2001, LPIG had invested in a
total return swap with an underlying pool of loans having an aggregate
outstanding principal amount of $40.9 million.
Southern Pacific BanCapital ("SPBC") is a division of the Bank which
originates middle market equipment leases that are funded by the Bank.
Imperial Business Credit, Inc., ("IBC") our wholly-owned subsidiary,
services these leases. SPBC originates and purchases operating and capital
equipment leases for medium-sized business in various industries throughout
the United States. SPBC had $36.1 million in leases at June 30, 2001 as
compared to $10.0 million in leases at December 31, 2000.
The Lewis Horwitz Organization ("LHO") is a division of the Bank which is
engaged in providing financing for independent motion picture and
television production. Typically, LHO lends to independent film and
television producers on a senior secured basis, basing its credit decisions
on the creditworthiness and reputation of distributors and sales agents who
have contracted to distribute the films. LHO's commitments (including
standby and commercial letters of credit) and outstanding balances were
$157.0 million and $115.8 million at June 30, 2001 as compared with $101.4
million and $83.4 million at December 31, 2000.
Imperial Business Credit, Inc. IBC is a lease portfolio servicing entity
which services its existing portfolio of equipment leases and a new portfolio
of middle market equipment leases originated by SPBC. Historically, the focus
of IBC's lease activities had been small ticket equipment lease financing to
small and medium-sized businesses. During the first quarter of 2000, we
determined that IBC could not achieve the returns necessary to continue in
business as an originator of new leases. Accordingly, in April, 2000, IBC
ceased originating new leases and its origination offices were sold or closed.
The total leases serviced by IBC at June 30, 2001 were $146.3 million as
compared with $170.8 million at December 31, 2000.
Multifamily And Commercial Mortgage Lending.
Our multifamily and commercial mortgage lending operations are conducted
through the Income Property Lending Division ("IPL") of the Bank. The focus of
IPL's lending activities is the small loan market for 5+ unit multifamily
apartments and commercial buildings. IPL generally seeks to make 70% of its
loans secured by apartment buildings and 30% of its loans secured by commercial
properties. Most of IPL's loans have been secured by properties in California.
IPL funded $117.5 million of loans through June 30, 2001 and had outstanding
loan balances of $360.2 million at June 30, 2001 as compared with fundings of
$235.9 million for the year ended December 31, 2000 and outstanding loan
balances of $364.2 million at December 31, 2000.
Asset Management Activities.
Our advisory and asset management services are conducted through Imperial
Credit Asset Management, Inc. ("ICAM"). Through October 22, 1999, we also
conducted asset management services through Imperial Credit Commercial Asset
Management Corp. ICAM manages Pacifica Partners I L.P., and Cambria Investment
Partnership I, L.P. ("Cambria"). Pacifica Partners I is a $500 million
collateralized loan obligation fund (the "CLO Fund") which was launched in
August 1998. Pacifica Partners I's assets consist of approximately $400 million
in nationally syndicated bank loans and approximately $100 million in high
yield bonds. We had net cash of $51.3 million invested in the subordinated and
equity interests of Pacifica Partners I through June 30, 2001. We also had, at
June 30, 2001, $4.3 million invested in Cambria, which is a hedge fund that
invests in syndicated bank loans.
4
Regulatory Orders
The Bank is currently operating under a Cease and Desist Order issued by the
Federal Deposit Insurance Corporation (the "FDIC") dated December 15, 2000 and
a Final Order of the California Department of Financial
Institutions (the "DFI") dated December 27, 2000 (collectively, the "Regulatory
Orders"). The Regulatory Orders contain several requirements, including
requirements that the Bank's regulatory capital and capital ratios be increased
by specified amounts within specified time periods, prohibitions on payments of
Bank dividends without regulatory approval, reductions in the Bank's classified
assets, restrictions on the Bank's lending policy procedures, and restrictions
on the Bank's other operational activities. The Bank has not achieved
compliance with the increases in the Bank's regulatory capital and capital
ratios that were required to have been met at March 31, 2001 and June 30, 2001.
See "Recent Developments--The Regulatory Orders" for a more detailed
description of the requirements specified in the Regulatory Orders and the
actions that have been taken to comply with those requirements.
Recent Operating Results
We reported a net loss for the quarter ended June 30, 2001 of $39.8 million,
including an operating loss from discontinued operations of $961,000 and an
extraordinary loss on the early extinguishment of debt of $2.2 million. Our net
loss for the six months ended June 30, 2001 was $39.5 million, including an
operating loss from discontinued operations of $1.2 million and an
extraordinary loss on the early extinguishment of debt of $1.5 million. Our
operating results for the quarter and six months ended June 30, 2001 were
negatively impacted by high levels of provisions for loan and lease losses,
which totaled $26.7 million and $31.3 million for such periods, respectively.
See "Recent Developments--Recent Operating Performance" and "--Continued High
Provisions for Loan and Lease Losses." Mark-to-market and impairment charges of
$3.5 million and $4.1 million for the quarter and six months ended June 30,
2001, respectively, also negatively impacted our result of operations. These
mark-to-market charges primarily related to our investments in interest only
securities, which experienced increased prepayments and defaults.
As a result of the level of our provision for loan and lease losses in the
second quarter of 2001 and our resulting continued operating losses, we
recorded income tax expense of $10.0 million during the quarter and the six
months ended June 30, 2001. This expense was recorded during that quarter to
establish an additional deferred tax asset valuation allowance to fully reserve
our outstanding balance of deferred tax assets, after allowable offsets of
certain deferred tax liabilities.
SUMMARY OF THE OFFERING
Securities Offered: 3,000,000 shares of our common stock (the
"Shares") issuable upon exercise of warrants (the
"Settlement Warrants") that we will issue as part
of the settlement of securities class action
litigation filed against us in the U.S. District
Court for the District of Oregon. No fractional
shares of common stock will be issued upon
exercise of the Settlement Warrants.
Use of Proceeds: If the Settlement Warrants are exercised in full,
we will receive aggregate gross proceeds of
$9,000,000, before expenses. Any net proceeds to
us from the sale of the Shares upon exercise of
the Settlement Warrants will be used by us for
working capital and other general corporate
purposes.
5
SUMMARY OF THE TERMS OF THE SETTLEMENT WARRANTS
Expiration Date: The Settlement Warrants will expire at 5:00 p.m.,
Los Angeles, California time, on January 31,
2008.
Exercise Price: $3.00 per share, subject to certain anti-dilution
adjustments. None of the recapitalization
transactions that we have completed, or that we
may complete, pursuant to our Recapitalization
Agreement will require any adjustment in the
exercise price under the anti-dilution provisions
of the Settlement Warrants. For a detailed
description of the recapitalization transactions,
see "Recent Developments--Recapitalization
Transactions." An appropriate adjustment will be
made in the exercise price and the number of
Settlement Warrants if we effect a reverse stock
split of our common stock that our shareholders
have authorized our Board of Directors, in its
discretion, to effect.
Exercise of Settlement The Settlement Warrants are exercisable
Warrants: immediately upon the issuance thereof. Each
Settlement Warrant will entitle its holder to
purchase one share of our common stock.
Redemption of Settlement Upon the occurrence of specified conditions set
Warrants: forth in the Warrant Agreement, dated October 10,
2000 (the "Warrant Agreement"), each holder of
Settlement Warrants will have the right to elect
either to (i) conditionally exercise the
Settlement Warrants or (ii) receive the Warrant
Redemption Price (as defined below) for each
share of our common stock covered by the
Settlement Warrants held by that holder. None of
the recapitalization transactions that we have
completed, or that we may complete, pursuant to
our Recapitalization Agreement, will result in
any of foregoing rights becoming available to any
holder of the Settlement Warrants.
Warrant Redemption Price: $1.00 per share, subject to certain anti-dilution
adjustments.
Listing of Warrants: The Settlement Warrants are not listed, and we do
not intend to list the Settlement Warrants, on
any national securities exchange or The Nasdaq
National Market. We have agreed, however, to use
our best efforts to locate a brokerage firm that
is willing to serve as a market maker with
respect to the Settlement Warrants and which
would provide bid and ask quotations for these
warrants as an over-the-counter security not
included in the regular Nasdaq OTC listings or
the Bulletin Board.
RISK FACTORS
Before you invest in our common stock, you should consider carefully the
risks that such an investment involves, including those described in this
prospectus under the caption "Risk Factors" as well as the other information
disclosed in this prospectus and the other documents incorporated by reference
in this prospectus.
6
RISK FACTORS
An investment in our common stock involves a high degree of risk.
Prospective investors should carefully consider, in addition to the matters
set forth elsewhere in this prospectus and the information incorporated by
reference herein, the following factors relating to our common stock, our
financial condition and business and that of the Bank, our principal
subsidiary. The matters described in any of the following risks could
materially and adversely affect our and the Bank's business, financial
condition and results of operations. While the risks described below are all
the material risks of which we are currently aware, we may have other risks
and uncertainties of which we are not yet aware or which we currently believe
are immaterial that may also impair our or the Bank's financial condition,
business operations or prospects.
Regulatory Considerations
Regulatory Orders Have Been Issued Requiring Improvements In The Bank's
Regulatory Capital And Imposing Other Significant Requirements
The Bank, which is our principal subsidiary, is a California licensed
industrial bank. It is subject to the regulatory capital requirements of the
DFI and the regulations of the FDIC governing capital adequacy for
institutions whose deposits are insured by the FDIC. The regulatory capital
requirements of the DFI and the FDIC are discussed in greater detail in "Item
1. Business--Regulations" in our Annual Report on Form 10-K/A for the year
ended December 31, 2000 (our "2000 Form 10-K/A").
As a result of a joint examination of the Bank by the FDIC and the DFI as of
June 26, 2000 (the "2000 Examination"), the Bank consented to the issuance of
the Regulatory Orders. The Regulatory Orders contain several requirements,
including mandatory increases in the Bank's regulatory capital and capital
ratios by specified amounts within specified time periods, prohibitions on
payments of Bank dividends without regulatory approval, reductions in the
Bank's classified assets, restrictions on the Bank's lending policies and
procedures, and restrictions on other operational activities of the Bank. See
"Recent Developments--The Regulatory Orders" for a more detailed discussion of
the Regulatory Orders.
The Bank Has Not Met The Specified Capital Levels Within The Time Frames
Required By The Regulatory Orders And Will Need Significant Additional
Capital To Meet These Requirements; The Bank's Regulators May Impose
Additional Restrictions And Sanctions
The Bank requires significant additional capital to meet the capital levels
and capital ratios required in the Regulatory Orders. Although during the six
months ended June 30, 2001, we contributed $12.2 million in cash to the Bank
and purchased $36.0 million worth of a new series of noncumulative perpetual
preferred stock of the Bank (the "Series B Preferred") constituting Tier I
capital in exchange for cash and the retirement of subordinated debt of the
Bank held by us, the Bank did not meet the increased capital levels it was
ordered to meet by March 31, 2001 and June 30, 2001. The Bank still needed to
obtain approximately $45.3 million of additional Tier I capital to meet the
capital requirements set forth in the Regulatory Orders that were required to
have been met by June 30, 2001. Further, additional capital contributions will
be required during 2001 in order to meet the increasing capital levels
required under the Regulatory Orders. See "Recent Developments--The Regulatory
Orders--Actions Taken To Comply With The Regulatory Orders" for a more
detailed description of the regulatory capital requirements set forth in the
Regulatory Orders.
Although we completed a private placement of $10.0 million of convertible
subordinated debt on June 28, 2001 and we are seeking to obtain the additional
required Tier I Capital, there is no assurance that we will be able to do so.
We submitted an amended capital plan to the FDIC and DFI detailing how we
intended to assist the Bank in complying with the regulatory capital
requirements imposed by the Regulatory Orders by June 30, 2002. The FDIC and
the DFI, however, requested an updated capital plan showing how the Bank would
be able to comply with these regulatory capital requirements by December 31,
2001. During August 2001, we submitted an updated capital plan to the FDIC and
the DFI that reflects the Bank achieving compliance with the capital
7
requirements set forth in the Regulatory Orders by December 31, 2001. Under
this updated capital plan, the Bank plans to reduce the amount of its
outstanding assets and will seek to obtain additional capital through various
capital raising alternatives. No assurance can be given as to whether we and
the Bank will be able to take the additional steps required to meet the
regulatory capital requirements set forth in the Regulatory Orders by December
31, 2001 or be able to do so without incurring additional losses, or as to
whether the Bank will be able to maintain the capital and capital ratios
required for the Bank to continue at an "adequately" capitalized level.
Further, no assurance can be given as to whether the FDIC and the DFI will
impose any additional operating restrictions or sanctions on the Bank for
having failed to meet the increased regulatory capital levels required to have
been met by March 31, 2001 and June 30, 2001.
If the FDIC or the DFI determines that the Bank is engaging in unsafe or
unsound practices in conducting its business or violating any law, rule or
regulation, each regulatory agency would have available various remedies,
including enforcement actions and sanctions. If the Bank is unable to meet its
regulatory capital requirements, or is determined to have other sufficiently
serious regulatory or supervisory problems, the FDIC and/or the DFI may, among
other sanctions, place the Bank in conservatorship or receivership, which
would have a material adverse effect on our business and operations.
Risks Relating To The Recapitalization Transactions
Purchasers Of The Common Stock Will Experience Significant Dilution If The
Convertible Securities Or Warrants Issued As Part Of Our Recapitalization
Transactions Are Converted Or Exercised And If We Raise Additional Capital
By Issuing More Shares Of Common Stock Or Convertible Securities
We have issued a large amount of securities exercisable, convertible or
exchangeable into our common stock pursuant to a Master Recapitalization
Agreement, dated as of March 29, 2001, that we entered into with certain
investors (the "Recapitalization Agreement"). Holders of our common stock may
have a greatly reduced common equity interest in us if those securities are
exercised, converted or exchanged into shares of common stock. We have
80,000,000 shares of authorized common stock and had 42,180,798 shares of
common stock issued and outstanding as of August 28, 2001, including the
1,300,000 shares of common stock we recently issued to our former president,
H. Wayne Snavely, as part of his severance arrangements. As part of our
recapitalization transactions, we issued warrants (the "Debt Exchange
Warrants") to purchase up to an additional 6,105,544 shares of our common
stock at an exercise price of $2.15 per share (subject to anti-dilution
adjustments), $10,000,000 in aggregate principal amount of 12% Convertible
Subordinated Notes due 2005 (the "Secured Convertible Subordinated Debt")
convertible after three years into our common stock at a conversion price of
$1.25 per share (subject to anti-dilution adjustments) and $16,200,000 in
aggregate principal amount of senior secured debt that, subject to
satisfaction of certain conditions, will be automatically exchanged into
$18,200,000 aggregate principal amount of Senior Secured Notes due 2005 (the
"Exchange Notes"), 249,052 shares of our common stock and Debt Exchange
Warrants to purchase up to an additional 871,681 shares of our common stock.
The holders of these Exchange Notes will then have the right, through March
31, 2002, to exchange the $18,200,000 aggregate principal amount of Exchange
Notes, together with the 249,052 shares of common stock and 871,681 Debt
Exchange Warrants, into $18,200,000 aggregate principal amount of Secured
Convertible Subordinated Debt. If all of foregoing securities are exercised or
converted and the senior secured debt is ultimately exchanged into $18,200,000
aggregate principal amount of Secured Convertible Subordinated Debt, which is
thereafter converted into common stock, a total of approximately 28,665,544
additional shares of our common stock will be issued and outstanding,
representing approximately 40.5% of our then outstanding common stock
(including the 28,665,544 additional shares of common stock that would be then
outstanding). The ownership interest of a holder of common stock may be
further diluted if we issue additional shares of common stock or securities
convertible into common stock in the future, which we may determine to be
necessary to raise the necessary capital to comply with the Regulatory Orders
or other regulatory requirements. We are authorized to issue additional common
or preferred stock without your approval.
8
There Would Be Significant Adverse Federal Income Tax Consequences To Us If
The Recapitalization Transactions Were Deemed To Have Caused An Ownership
Change Under The Internal Revenue Code And Such Tax Liability Would
Adversely Affect Shareholders' Equity
Although we believe that the recapitalization transactions will not cause an
ownership change under Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), the interpretation of the applicable Code provisions and
regulations is not clear as it applies to our facts and the Internal Revenue
Service may disagree with our conclusions. In addition, an ownership change of
the Company may occur on a date after the recapitalization transactions due to
sales of stock, exercises of warrants or options or other events which may not
be within our control. A change of ownership under Section 382 would
materially restrict our use of our net operating loss carryforwards and
unrecognized built in losses, each of which were approximately $110 million at
June 30, 2001, and would substantially eliminate the value of those tax
attributes.
We May Be Required To Make Substantial Severance Payments To Senior
Executive Officers Should These Officers' Employment Terminate And These
Officers Therefore May Have An Incentive To Terminate Their Employment
In January 1999, we entered into individual termination agreements with
Messrs. H. Wayne Snavely, Irwin L. Gubman and Brad S. Plantiko which provide
for severance payments to these senior executives in the event we undergo a
change in control (as defined in the agreements). Pursuant to the
Recapitalization Agreement, four directors were elected to our board of
directors at our annual shareholders meeting on June 26, 2001. Their election
constituted a change in control under the termination agreements. If Messrs.
Plantiko and Gubman voluntarily terminate their employment upon the expiration
of one year after the change of control or if they are terminated by us within
three years, we will have to pay to each of these senior executives 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. Any amounts payable to an executive will include additional amounts
to cover certain taxes resulting from those payments.
Mr. Snavely resigned as the Chairman, President, and Chief Executive Officer
of Imperial Credit Industries, Inc. and the Bank on August 1, 2001. We
resolved Mr. Snavely's contractual rights under his termination protection
agreement, which were similar to those of Messrs. Plantiko and Gubman, by
agreeing to (i) issue to him 1.3 million shares of our common stock, (ii)
extend the exercise period of his existing stock options for up to four years
and (iii) provide him with continued employee health and welfare benefits for
a period of four years. We also have engaged Mr. Snavely as a consultant for
compensation of $500,000 per year for a period of four years.
There is a risk that in order to take advantage of the severance payments
and other compensation granted under the termination agreements, Messrs.
Plantiko and Gubman will terminate their employment with us. Departures of
these senior executives may adversely affect our operations to the extent that
we are not able to restaff these key positions expeditiously to avoid material
disruption in our business and operations.
Business And Other Considerations
The Price And Liquidity Of Our Common Stock May Be Adversely Affected If
Our Common Stock Is Delisted From The Nasdaq National Market System
As of August 28, 2001, the closing bid price of our common stock for the
preceding 25 consecutive business days had failed to comply with the minimum
price requirement for continued listing set forth in the Nasdaq Marketplace
rules. If the closing bid price of our common stock remains below $1.00 for a
period of 30 consecutive business days, Nasdaq may notify us that we have a
period of 90 calendar days from that notification to achieve compliance with
the minimum price requirement. Compliance can be achieved by the closing bid
price of our
9
common stock meeting or exceeding the $1.00 per share minimum price
requirement for ten consecutive business days during that 90 day compliance
period. If we were not to achieve compliance with the minimum price
requirement, our common stock would be subject to delisting from the Nasdaq
National Market. Our shareholders approved up to a 1 for 4 reverse stock split
at our 2001 annual shareholders' meeting. Our board of directors may declare a
reverse stock split in the future to attempt to achieve compliance with the
minimum bid price requirement. However, even if our board does declare a
reverse stock split, there is no assurance that the subsequent closing bid
price of our common stock would necessarily equal or exceed $1.00, or if it
did equal or exceed $1.00, the period of time that it might continue to do so.
Delisting from the Nasdaq National Market could cause our common stock to
become significantly less liquid, with a possible negative impact on its
value. Also, if our common stock is delisted and is not thereafter traded as a
"Bulletin Board Stock," our common stock would be classified as a "penny
stock" which, if certain disclosure and broker or dealer qualifications are
not met, could further restrict the market for resale of the common stock to
only such persons as are deemed to be suitable investors of such stock, such
as institutional investors, or directors, officers, or owners of 5% or more of
our common stock. However, if our common stock is delisted, we will seek to
qualify it for trading as a "Bulletin Board Stock".
The Bank Is Prohibited By The Regulatory Orders From Paying Dividends To Us
Without Regulatory Approval, Which Adversely Affects Our Ability To Pay
Interest And Principal On Our Substantial Indebtedness
Under the Regulatory Orders, the Bank is prohibited from paying cash
dividends on its common and preferred stock without the prior approval of the
DFI and the FDIC. Therefore, it is unlikely that the Bank will pay dividends
to us in the near future and there is no assurance that the Bank will ever
resume paying dividends to us. At June 30, 2001, the outstanding face amount
of our ROPES, Senior Secured Notes and long term debt decreased by $36.0
million to $183.8 million, as compared to $219.8 million at December 31, 2000,
due to the completion of our debt exchange and our repurchase of $1.9 million
of ROPES, partially offset by our issuance of $16.2 million in senior secured
notes, and our issuance of $10.0 million in secured convertible notes. At
June 30, 2001, our total shareholders' equity was approximately $11.4 million
and we had available cash and cash equivalents of $17.5 million (excluding
cash and cash equivalents at the Bank), as compared to $18.4 million of cash
and cash equivalents (excluding cash and cash equivalents at the Bank) at
December 31, 2000. The Bank's inability to pay dividends to us would adversely
affect our ability to make required payments of interest and principal on our
indebtedness.
Although we believe that we will be able to fund our liquidity and capital
expenditure requirements through December 31, 2001, our ability to continue to
make scheduled payments of the principal of, or to pay the interest on, our
indebtedness will depend upon the ability of the Bank to obtain regulatory
approvals necessary to pay us dividends, as well as upon our future
performance and that of the Bank, which are subject to general economic,
financial, competitive, legislative, regulatory and other factors that are not
within our control. There is no assurance that the Bank will be able to obtain
the regulatory approvals necessary to permit payment of dividends or that our
business and that of the Bank will generate sufficient cash flow from
operations or that future borrowings will be available in an amount sufficient
to enable us to service our indebtedness. A failure to continue to make
scheduled payments of the principal and interest on our indebtedness would
likely have a material adverse effect on our business and operations and the
price of our common stock.
Further, the degree to which we are leveraged could have material adverse
effects on us, including, but not limited to, difficulty in obtaining
additional financing for working capital, acquisitions and general corporate
purposes; greater proportions of our cash flow from operations being required
for debt service, so that less of our cash will be available for other
purposes. We will also be subject to a variety of restrictive covenants, the
failure to comply with which could result in events of default that, if not
cured or waived, could adversely affect our operations.
10
We Do Not Intend To Pay Dividends On Our Common Stock
We are prohibited from paying dividends on our common stock under the terms
of indentures relating to our outstanding indebtedness. We have never paid
dividends on our common stock and would not anticipate paying dividends on our
common stock in the foreseeable future even if we were not prohibited from
doing so under the terms of indentures relating to our outstanding
indebtedness.
We Have Experienced Significant Operating Losses
We reported a net loss of $39.5 million for the six months ended June 30,
2001 and had net losses of approximately $163.3 million, $2.8 million and
$73.6 million for the years ended December 31, 2000, 1999 and 1998,
respectively. For a further description of recent losses, see "Recent
Developments--Recent Operating Performance."
Our net losses have been primarily associated with our losses from
operations, losses on impairment of equity securities, increased provisions
for loan and lease losses, increased levels of nonperforming assets and costs
incurred in maintaining and administering such nonperforming assets.
Our ability to reverse the trend of these net losses is largely dependent on
the operations of the Bank, including the amount and quality of its earning
assets and reduction in the level of its nonperforming assets, the interest
rate environment and the adequacy of the Bank's allowance for loan and lease
losses. The real estate market and the overall economy in the Bank's primary
markets will also have significant effects on the quality and level of its
assets in the future. If we are not able to return to profitable operations in
the near future, the value of our common stock will likely be adversely
affected.
The Bank Has Recorded Significantly Increased Provisions For Loan And Lease
Losses And May Need To Record Additional Significant Provisions, Which
Would Adversely Affect Our Results of Operations
The Bank significantly increased its provisions for loan and lease losses
during 1999 and 2000, as a result of the Bank's regulatory examinations, the
Bank's internal credit review and deterioration in credit quality in our
sectors of the banking industry. The Bank's assets classified as "non-
performing" represented 4.47% of total assets at June 30, 2001, as compared
with 4.19% at December 31, 2000. The Bank's allowance for loan and lease
losses as a percentage of such non-performing assets was 76.07% at June 30,
2001, as compared with 79.47% at December 31, 2000. We recorded a $26.7
million provision for loan and lease losses for the quarter ended June 30,
2001 to provide for losses in the Bank's loan portfolio. As a result of the
high levels of non-performing assets, our provision for loan and lease losses
will be significantly higher than other banks of comparable size. The
provision for loan and lease losses for the years ended December 31, 2000 and
1999 were $181.0 million and $35.3 million, respectively. Our allowances for
loan and lease losses and the provisions we make to add to them represent
estimates made by our management on the basis of the information available
from time to time. They involve significant elements of judgement, are
inherently uncertain and are affected by judgments made by the Bank's
regulatory authorities from time to time as to asset quality and the credit
quality in our sectors of the banking industry.
There can be no assurance that the Bank will not be required by its
regulators to make substantial additional provisions for loan and lease losses
in the future, or that the actual loan and lease losses suffered by the Bank
will not exceed the estimated allowances. In either event, an increase in
provisions for loan and lease losses would adversely affect the results of our
operations and the Bank's capital would be further impaired, thereby raising
the possibility of further administrative actions by the FDIC and the DFI.
11
The Bank Has Experienced Significant Charge-offs And Losses On Its
Syndicated Loan Investments And May Experience Additional Charge-offs And
Losses
The Bank through its LPIG and CBC divisions has invested in nationally
syndicated bank loans for which it has experienced significant charge-offs.
LPIG experienced charge-offs of $6.2 million during the six months ended June
30, 2001 as compared to charge-offs totaling $32.3 million and $3.9 million
during years ended December 31, 2000 and 1999, respectively. LPIG also
recorded a provision for loan losses of $1.0 million for the six months ended
June 30, 2001 as compared to $39.3 million and $7.0 million during years ended
December 31, 2000 and 1999, respectively. In addition to LPIG's nationally
syndicated loan investments, CBC had $157.0 million of nationally syndicated
loan investments at June 30, 2001. During the six months ended June 30, 2001,
CBC experienced charge-offs of $12.2 million relating to its syndicated loan
investments. These charge-offs of LPIG and CBC occurred primarily as a result
of high default rates on these nationally syndicated bank loans. Neither LPIG
nor CBC has direct control over the collection policies or procedures on these
loans, as these functions are dictated and managed by third party lead
syndicating banks. Additionally, certain charge-offs taken in the Bank's
nationally syndicated loan portfolio were mandated by the federal banking
regulatory agency for the lead syndicating bank as part of its annual review
of these loans.
In light of the increases in loan losses that the Bank has suffered recently
and the fact that neither LPIG nor CBC has direct control over the management
of these syndicated investments, we have decided to reduce the amount of the
Bank's exposure to nationally syndicated loans, primarily at the Bank's LPIG
division. LPIG's commitments and outstanding loan balances were $217.1 million
and $80.1 million at June 30, 2001, as compared with $289.1 million and $123.5
million at December 31, 2000 and $459.5 million and $217.0 million at December
31, 1999, respectively. We anticipate that the outstanding loan balance of
these loans will decrease over time as their portfolios run off. There is no
assurance that either or both of LPIG or CBC will not continue to experience
significant charge-offs and losses in their existing syndicated bank loan
portfolios as a result of increasing loan defaults.
As A Result Of Current Internal Revenue Service Audits We May Become Liable
For Additional Federal Income Tax Payments, Which Would Reduce The Amount
Of Cash Available To Us
Our federal income tax returns for 1996 through 1999 are currently being
audited by the Internal Revenue Service. Although to date no adjustments have
been proposed relating to any deduction taken or other aspects of our tax
returns for those years, there can be no assurance as to the ultimate outcome
of this audit, and we could become liable for additional income tax payments
if any of our deductions are disallowed.
We May Become Liable For Additional California Tax Payments As A Result Of
Current California Franchise Tax Board Audits
Our 1995 and 1996 California Franchise Tax Returns are being audited by the
California Franchise Tax Board, which has proposed to include the income from
two of our former affiliates in our combined return. The total increase to our
combined tax for the two years proposed by such auditors is approximately $2
million, of which all but $300,000 will be payable (to the extent such amount
is assessed) by one of our former affiliates. Also, we intend to protest our
portion of any such assessment. At this time, however, there can be no
assurance as to the ultimate outcome of our intended protest of any such
assessment.
We Are Engaged In Significant Litigation Which Could Result In Substantial
Liability And Expense To Us
We are currently involved in a number of litigation proceedings, which could
result in substantial liability to us, significant costs in defending those
proceedings and a diversion of our management's attention and resources from
normal business operations. We are defending an alleged securities fraud
class-action lawsuit that arose out of the decline in the market price of our
common stock (the "Class Action Lawsuit"). We and certain
12
of our executive officers and directors were granted summary judgment by the
trial court in the Class Action Lawsuit. In addition, we are subject to other
litigation including the following: (1) we and two of our directors are named
in an adversary proceeding brought by the liquidating trustee representing the
bankrupt estate of Southern Pacific Funding Corporation ("SPFC"), alleging
certain losses suffered by SPFC were caused by our alleged breaches of
fiduciary duties and negligence, (2) our wholly-owned subsidiary, Imperial
Credit Commercial Mortgage Investment Corp. ("ICCMIC"), and three of its
present or former directors are named as defendants in an alleged securities
fraud class-action lawsuit arising out of alleged misstatements and omissions
contained in ICCMIC's offering prospectus issued in connection with its
initial public offering and (3) Steadfast Insurance Company has brought a
lawsuit seeking damages in the amount of $27 million allegedly resulting from
our subsidiary's alleged fraudulent inducement to enter into, and subsequent
breach of, a motor vehicle collateral enhancement insurance policy. For
further details on the Class Action Lawsuit and other litigation, see "Part II
Item 1. Legal Proceedings" in our 2000 Form 10-K/A and our Quarterly Report on
Form 10-Q for the Quarter ended June 30, 2001.
Changes In Interest Rates May Adversely Affect Our Operating Results
Our profits are derived principally from our lending activities. The
principal source of our revenue is net interest income, which is the
difference between the interest we earn on our interest earning assets and the
interest we pay on our deposits and other interest bearing liabilities. During
the recent period of falling interest rates, our net interest income has been
adversely affected, and may continue to be adversely affected depending on the
amount of any future decreases in interest rates, due to our interest-earning
assets re-pricing more quickly or to a greater extent than our interest
bearing liabilities. In an extreme interest rate environment, if our net
interest spread were to become negative, we would be paying more interest on
our borrowings and deposits than we would be earning on our assets and we
could suffer significant losses.
Additionally, the rates paid on our borrowings and the rates received on our
assets have been, and in the future may be, based upon different indices (such
as LIBOR and U.S. Treasury securities indices). If the index used to determine
the rates on our borrowings increases faster or decreases more slowly than the
index used to determine the rates on our assets, as has recently occurred, we
will experience (and recently have experienced) a declining net interest
spread which has had, and in the future will have, a negative impact on our
profitability.
Higher interest rates may discourage existing potential borrowers from
refinancing or increasing existing credit facilities, or establishing new
credit facilities and may lead to a reduction in the average size of loans and
leases. This may decrease the amount of financing opportunities available to
our operations and decrease the demand for repurchase facility financing
provided by our repurchase facility lending operations to loan originators. If
short-term interest rates exceed long-term interest rates, there is a higher
risk of increased loan prepayments, as borrowers may seek to refinance their
loans at lower long-term interest rates. Increased loan prepayments could lead
to a reduction in the number of loans we service, the fees we receive for loan
servicing, our loan servicing income and the value of our securitization
related assets. On the other hand, if interest rates decline, our loans and
investments may be prepaid, and recently have been prepaid, earlier than
expected or earlier than the payment obligations we may then have outstanding
under instruments with higher interest rates, which, in either case, has
adversely affected, and in the future may adversely affect, the results of our
operations.
We are also subject to the risk of rising interest rates between the time we
commit to purchase or originate loans at a fixed price and the time we sell or
securitize those loans. An increase in interest rates will generally result in
a decrease in the market value of loans that we have committed to originate or
purchase at a fixed price, but have not yet hedged, sold or securitized.
Because We Are Subject To Extensive Government Regulation, Our Business
Operations May Be Adversely Affected By Regulatory Changes
The Bank operates in a highly regulated environment and is subject to
supervision by several governmental regulatory agencies, including the FDIC
and the DFI. The regulations and supervision to which we are subject are
primarily for the protection of our customers rather than our shareholders.
For example, state laws and federal
13
laws require that the Bank maintain specified amounts of capital and meet
specified capital to assets ratios. If we do not comply with applicable laws,
the Bank's ability to do business could be restricted or suspended.
Future legislation and government policy could adversely affect industrial
banks, including the Bank. We cannot predict the full impact of such
legislation and regulation. In addition, federal and state laws impose
standards with respect to, and regulatory authorities have the power in
certain circumstances to limit or prohibit, transactions between us and the
Bank and between the Bank and our other affiliates, the growth of the Bank's
assets and liabilities and the payment of dividends from the Bank to us, among
other things.
Risks Related To Our Commercial Lending And Servicing Activities
We originate commercial business and mortgage loans and equipment leases
through CBC, IPL, SPBC and LHO, each of which is a division of the Bank, and
we provide master repurchase facilities through IWF, a wholly owned subsidiary
of the Bank. We also service various equipment leases through our wholly-owned
subsidiary, IBC. We are subject to various risks, including those described
below, relating to such activities.
Borrower Defaults May Result In Losses On Our Loans
During the time we hold commercial business loans for investment or for sale
we are subject to risks of borrower defaults, bankruptcies and losses that are
not covered by insurance (such as those occurring from earthquakes).
Commercial mortgage lending is generally viewed as involving greater risk than
residential mortgage lending partly because it typically involves larger
loans. Further, the repayment of commercial mortgage loans secured by income-
producing properties is typically dependent upon the tenant's ability to meet
its obligations under the lease relating to the property. A borrower default
may subject us to a loss on the mortgage loan.
Although our commercial business loans are often collateralized by
equipment, inventory, accounts receivable or other business assets, the
liquidation value of these assets in the event of a borrower default may be an
insufficient source of repayment and the value we receive in liquidating such
assets may be less than the expected or appraised value of such assets.
Prepayments Of Commercial Business Loans Reduce The Amount Of Interest
Income That We Expect To Receive Over The Life Of The Related Loans
To reduce our exposure to loan prepayments, the Bank and our other lending
subsidiaries generally discourage their commercial borrowers from prepaying
their loans by requiring prepayment fees from the borrowers for early
prepayment. Commercial business loan prepayment rates, however, vary from time
to time, which may change the anticipated amount of our net interest income.
Prepayments on commercial business loans are affected by the terms and credit
grades of the loans and general economic conditions. If the loans are prepaid,
the Bank and our lending subsidiaries may receive prepayment fees but would
lose the opportunity to earn interest at the related loan interest rate over
the expected life of the prepaid loan.
Prepayment restrictions do not necessarily provide a deterrent to
prepayments. In addition, the borrower on a commercial business loan may not
be able to pay all or a portion of any required prepayment charges. This may
occur where the prepayment results from acceleration of the commercial
business loan following a payment default. At the time any prepayment charges
are required to be made in connection with a defaulted commercial business
loan, foreclosure or other collateral proceeds may not be sufficient to make
such payments.
We also do not know that the obligation to pay such prepayment charge will
be enforceable under applicable law in all circumstances.
14
The Concentration Of CBC's Commercial Business Loan Portfolio In Small And
Mid-Size Borrowers Exposes CBC To A Greater Risk Of Non-Performance, Higher
Delinquencies And Higher Loan Losses
CBC originates commercial business loans typically to small and medium-sized
commercial businesses located primarily in California. Small commercial loans
may entail a greater risk of non-performance and higher delinquencies and
losses than loans to larger businesses. Since small to mid-size businesses are
typically privately-owned, there is generally no publicly available
information about such companies and CBC must rely on the diligence of its
employees and agents to obtain information about these companies. As a result,
CBC is subject to risks of borrower fraud or misrepresentation. Also, the
success of small and medium-sized businesses depends on the management talents
and efforts of a small group of persons. The death, disability or resignation
of one or more of these persons could have a material adverse impact on that
company. Also, small and medium-sized businesses:
. frequently have smaller market shares than their competition
. may be more vulnerable to economic downturns
. often need substantial additional capital to expand or compete
. may experience substantial variations in operating results.
Any of these may have an adverse effect on a borrower's ability to repay a
loan.
The Significant Amount Of Credit Facilities Provided By CBC To Borrowers In
The Telecommunications And Technology Industries May Adversely Affect Our
Operating Results Due To The Significant Downturn In Those Industries And
Industry Related Risks
CBC has provided a significant amount of credit facilities to borrowers in
the telecommunications and technology industries, which have suffered a
significant downturn. The downturn in the telecommunication industry was
largely due to a combination of capital overinvestment in the mid to late
1990's and unsuccessful business plans implemented by a number of companies in
that industry. Further, the high yield bond market is no longer available for
most companies in the telecommunications industry. The downturn in the
technology industry was largely due to significant declines in the market
valuations of technology companies and resulting increased difficulties in
obtaining financing for those companies. As of June 30, 2001, CBC had provided
approximately $171 million and $71 million, or approximately 9.9% and 4.1% of
the Bank's total assets, of senior secured credit facilities to
telecommunication and technology companies, respectively. CBC's credit
facilities made to borrowers in the technology industry are spread over 29
different borrowing relationships, while CBC's credit facilities made to
borrowers in the telecommunications industry are spread over 24 different
borrowing relationships and are further allocated as follows:
Paging: $41 million
Long Distance Resellers: $29 million
Fiber Optics: $22 million
Payphone: $20 million
Diversified Communications: $18 million
CLEC Facilities: $15 million
Wireless Communications: $15 million
Cable: $ 8 million
DSL Providers: $ 3 million
15
Additionally, in order to effectively market their products and attract and
retain qualified personnel, businesses in the telecommunications industry or
technology industry must respond more rapidly than businesses in many other
industries to the following:
. competitive developments
. technological changes
. new product introductions
. changing client needs
. evolving industry standards.
The products and services of CBC's telecommunications or technology
borrowers could be rendered obsolete and unmarketable by any of these factors
and they may not be able to repay their loans. In addition, technology evolves
rapidly and inventory, subscriber lists and other business assets could become
obsolete, each of which may impair the value of the inventory securing these
loans. A material decrease in these telecommunications or technology
borrowers' sales or the value of their accounts receivable and inventory,
their profitable operations or the value of their companies could impair their
ability to repay their loans with CBC and our results of operations could be
adversely affected.
The Greater Difficulty In Appraising Collateral Relating To Our Small
Business Loans Due To Less Information Being Available May Result In A
Greater Risk That Proceeds Realized From Sales Of That Collateral May Be
Less Than Our Related Apprised Values
CBC's loans are underwritten in accordance with CBC's underwriting
guidelines which permit borrowers to borrow up to a specified percentage of
the value of their accounts receivable, inventory and other business assets
pledged as collateral in connection with the loans. The value of the accounts
receivable is derived from a formula based upon the age and collectibility of
the accounts and their revenues and cash flows.
Since small to mid-size businesses are typically privately-owned, there is
generally no publicly available information about such companies. CBC must
rely on the diligence of its employees and agents to obtain information about
these companies. We cannot assure you that CBC's valuations actually reflect
amounts that we could realize upon a current sale of the accounts receivable,
inventory and other business assets. The liquidation value of these assets in
the event of a borrower default therefore may not be a sufficient source for
repayment of our loans.
The Profitability Of The Properties Securing Our Commercial Mortgage Loans
May Be Uncertain
Profits of commercial properties that secure our commercial mortgage loans
are dependent on the performance and viability of the property. The property
manager is responsible for responding to changes in the local market, planning
and implementing the rental structure, including establishing appropriate
rental rates, and advising the borrower so that maintenance and capital
improvements can be carried out in a timely fashion. Also, the ability of a
borrower to meet its obligations under a commercial mortgage loan and to make
timely payments on the mortgage loan are affected by several factors,
depending on the type of commercial property, such as the ability to lease,
renew and relet the space, regional and national economic conditions and
increased costs of operating a property. All of the foregoing factors may
affect the borrower's ability to make payments under the commercial mortgage
loan, which may adversely affect the timing and amount of payments we receive
with respect to the loan. There is no assurance that property underlying a
commercial mortgage loan will produce a profit.
16
Additional Losses May Result From Our Foreclosure Of Collateral
Some of our commercial mortgage loans may be non-recourse to the borrower.
In the event of foreclosure on a commercial mortgage loan, we may experience a
loss if the value of the property and other collateral securing the loan is
less than the unpaid amount on the loan. Also, we may experience costs and
delays involved in enforcing rights of a property owner against tenants in
default under the terms of their leases. These factors may adversely affect
the timing and amount of payment we receive on foreclosed commercial mortgage
loans.
We Have Loans With Balloon Payments Which Have A Greater Chance Of Defaults
A certain percentage of our commercial mortgage loans have a balloon payment
due at maturity. These loans involve a greater risk than loans which are paid
off gradually in equal installments since the ability of a borrower to pay
such amount will normally depend on its ability to fully refinance the
commercial mortgage or sell the related property at a price sufficient to
permit the borrower to make the balloon payment.
Environmental Factors May Adversely Affect The Value Of Properties
Underlying Commercial Mortgage Loans
Contamination of real property may give rise to a lien on that property to
assure payment of the cost of clean-up or, in certain circumstances, may
result in liability to the lender for that cost. Such contamination may also
reduce the value of the property. If we are or become liable, we can bring an
action for contribution against the owner or operator who created the
environmental hazard, but that person or entity may be bankrupt or otherwise
judgment proof. If we become responsible, environmental clean-up costs may be
substantial.
IWF's Short-Term Master Repurchase Facilities Are Susceptible To The
Volatile Economic Cycles Of The Mortgage Industry
Through IWF, we offer short-term master repurchase facilities to third party
mortgage bankers. These third parties use these facilities for their purchase
of residential mortgage loans until they are able to sell the loans. Some of
our borrowers rely on the secondary market to sell or securitize loans they
originate. During 1999 and 2000, some of our borrowers had difficulty selling
their loans on a profitable basis. If such borrowers are unable to make timely
payments on their borrowings from us, we may incur losses.
Recent Credit Downgrades On Our Debt Have Rendered IBC In Default Under The
IBC Lease Receivables Trust 1997-2, Which May Adversely Affect IBC's
Monthly Cash Flow
As a result of the recent credit downgrades on our senior indebtedness by
Moody's and Standard and Poor's ratings services, IBC is in default of the
terms of the IBC Lease Receivables Trust 1997-2 ("1997-2 Trust"), which trust
issued certain Class A, Class B and Class C certificates. Due to this default,
the insurer of the Class A certificates may cause the 1997-2 Trust permanently
to go into "turbo" amortization. Under turbo amortization, virtually all cash
flows generated in the 1997-2 Trust would be used to pay off the outstanding
balance of the Class A certificates, which was $99.2 million at June 30, 2001,
while the Class B and C Certificates, a majority of which are owned by IBC,
would receive virtually no cash flows for principal and interest payments
until the Class A certificates have been paid in full. To date, IBC has
received a monthly waiver of this default. However, the insurer of the Class A
certificates recently requested that IBC distribute, and IBC agreed to
distribute, cash flows under the "turbo" amortization schedule for the month
of August, 2001 in order to bring subordination levels of the Class A
certificates to levels acceptable to the insurer. The waiver may be renewed
monthly by the insurer, at its option. There is no assurance, however, that
the insurer will continue to grant the monthly waiver to IBC or will not make
further requests that the 1997-2 Trust distribute cash flows under the "turbo"
amortization schedule for temporary periods. If the waiver were not to be
granted or in any month where the 1997-2 Trust distributes cash flows under
the "turbo" amortization schedule, IBC's monthly cash flow would decrease by
approximately $1.0 million per month. As a result, cash flow to us would
decrease by approximately $500,000 per month, which could adversely affect our
operations. The outstanding balances of the securities and retained interests
in the 1997-2 Trust owned by IBC were $6.4 million and $3.7 million at June
30, 2001, respectively.
17
Loss Of Residual Value On Certain Assets Would Adversely Affect IBC And
SPBC's Results Of Operations
IBC and SPBC retain a residual interest in the equipment covered by certain
of their equipment leases. The estimated fair market value of the equipment at
the end of the contract term of the lease, if any, is reflected as an asset on
IBC's or the Bank's balance sheet. Results of operations depend, to a limited
degree, upon their ability to realize such residual value. Realization of
residual values depends on many factors outside our control including:
. general market conditions at the time of expiration of the lease,
. unusual wear and tear on, or use of, the equipment,
. the cost of comparable new equipment,
. the extent to which the equipment has become technologically or
economically obsolete during the contract term, and
. the effects of any additional or amended tax or accounting rules.
Risks Related to Our Asset Management Activities and Investments
We May Be Adversely Affected By The Liquidation Of A Fund Managed By
Our ICAM Subsidiary Or A Loss Of Its Management Fees
Our wholly-owned subsidiary, ICAM, currently manages the CLO Fund and earns
management fees for managing this fund. At June 30, 2001, we had invested
approximately $51.3 million in the CLO Fund. For the years ended December 31,
2000 and 1999, ICAM generated management fee revenues of $3.1 million and
$3.1 million, respectively, from managing the CLO Fund. Our primary risks
relating to ICAM's management activities are that (i) the successful
management of the CLO Fund and the resulting management fees anticipated
therefrom are dependent upon the services of the existing officers of ICAM and
in the event of the departure or death of such officers, ICAM's ability to
manage this fund may be adversely impacted and (ii) the investors in this fund
have the ability under certain circumstances to cause this fund to be
liquidated (and such fund may be required to be liquidated in the event of a
default of our management obligations for such fund). The result of such a
required liquidation of the CLO Fund would be not only the loss of our
management fees relating to this fund, but also substantial loss in the value
of our investment in this fund on the accelerated sales of the assets of this
fund.
We Recently Incurred Significant Writedowns And Mark-To-Market Losses
Related To Our Investments In Volatile Assets And There Is No Assurance
That We Will Not Incur Additional Losses On These Assets
Our investments in retained interests, subordinated bonds from loan
securitizations, interest only securities and total return swaps were $3.7
million, $6.4 million, $3.8 million and $88.0 million, respectively, at June
30, 2001 as compared to $6.3 million, $21.0 million, $10.0 million and
$92.8 million, respectively, at December 31, 2000. Additionally, the net
assets of our discontinued operations of Auto Marketing Network included
$9.8 million and $14.0 million of retained interests at June 30, 2001 and
December 31, 2000, respectively. The valuations of these assets are impacted
by many factors including, among others, interest rates, prepayments or
defaults on loans and leases and volatility in the secondary loan markets.
During the six months ended June 30, 2001 and the years ended December 31,
2000 and 1999, we incurred writedowns and mark-to-market losses primarily
related to these assets of $4.0 million, $13.4 million and $29.2 million,
respectively. There can be no assurance that we will not continue to incur
additional writedowns or mark-to-market losses in future periods.
18
The Value Of Our Portfolio Of Securitization-Related Assets Is Subject
To Fluctuation
We have invested in asset or mortgage backed securities known as "interest-
only" or "principal-only" residual interest and subordinated securities. These
securities were generally created through our own securitizations, or
securitizations by parties formerly affiliated with us. Investments in
residual interest and subordinated securities are riskier than investments in
senior asset-backed securities because these subordinated securities bear all
credit losses prior to the related senior securities. On a percentage basis,
the risk associated with holding residual interest and subordinated securities
is greater than holding the underlying loans or leases. This is due to the
concentration of losses in the residual interests and subordinated securities.
We estimate future cash flows from these securities and value them
utilizing assumptions concerning:
. discount rates
. prepayments and
. credit losses.
If our actual experience adversely differs from our assumptions, we would be
required to reduce the value of these securities and record a non-cash charge
to operations. The market for our asset-backed securities is extremely limited
and we cannot assure you that we could sell these securities at their reported
value or at all. Also, we may never recoup our initial investment in these
securities.
We also bear the risk of loss on any asset-backed securities we have
purchased in the secondary market. If third parties had been contracted to
insure against these types of losses, we would be dependent in part upon the
creditworthiness and claims paying ability of the insurer and the timeliness
of reimbursement in the event of a default on the underlying obligations. The
insurance coverage for various types of losses is limited, and we would bear
the risk of any losses in excess of the limitation or outside of the insurance
coverage.
In addition, we may not obtain our anticipated yield due to prepayments or
we may incur losses if the credit support available within certain asset-
backed securities is inadequate due to unanticipated levels of losses, or due
to difficulties experienced by the credit support provider. Delays or
difficulties encountered in servicing asset-backed securities may cause
greater losses and, therefore, greater resort to credit support than was
originally anticipated. This may also cause a rating agency to downgrade
certain classes of our securities.
We May Have Liabilities for Representations and Warranties Related To
Our Asset-Backed Securities
Asset-backed securities issued in connection with our securitizations have
been non-recourse to us, except in the case of a breach of standard
representations and warranties made by us when the loans are securitized.
While we have recourse against the sellers of loans and leases, we cannot
assure you that they will honor their obligations. In the past we have engaged
(and may in the future engage) in bulk whole loan/lease sales pursuant to
agreements that provide for recourse by the purchaser against us. In some
cases, the remedies available to a purchaser of loans and leases from us are
broader than those available to us against those who sell us these loans and
leases. If a purchaser exercises its rights against us, we may not always be
able to enforce whatever remedies we may have against our sellers.
Our Preferred Share Purchase Rights Plan May Discourage Takeover Attempts
In October 1998, we distributed preferred share purchase rights to our
shareholders pursuant to the Shareholder Rights Plan. Each share of our common
stock has a preferred share purchase right attached to it. The rights will
become exercisable under certain specified circumstances involving the
acquisition of or tender offer for 15% or more of our issued and outstanding
shares of common stock (25% or more for any person or group that held 15% or
more of our common stock as of October 1998). Our board may also reduce the
ownership levels to 10%. The rights may discourage hostile attempts to take
over our Company by causing substantial dilution to a person or group that
attempts to acquire our company on terms that our board of directors has not
approved.
19
USE OF PROCEEDS
If the Settlement Warrants are exercised in full, we will receive aggregate
gross proceeds of $9,000,000, before deducting our estimated expenses of
$157,250. Any net proceeds from the sale of the Shares upon exercise of the
Settlement Warrants will be used by us for working capital and other general
corporate purposes.
RECENT DEVELOPMENTS
The Regulatory Orders
Requirements Of The Regulatory Orders
As a result the 2000 Examination, the Bank consented to the issuance of a
Cease and Desist Order by the FDIC dated December 15, 2000 (the "FDIC Order")
and a Final Order of the DFI dated December 27, 2000 (the "DFI Order"). As
described under "Item 1. Business--Regulation--General" in our 2000 Form 10-
K/A, the Regulatory Orders impose a number of requirements, principally
including the following:
. Under the FDIC Order, the Bank was required to increase its capital by
$19 million by March 31, 2001, and must increase its capital by an
additional $20 million in stages through December 31, 2001. The Bank was
also required to attain a total risk based capital ratio of 10.50% and a
Tier 1 capital ratio of 8.00% by March 31, 2001 and to increase those
ratios, in stages through December 31, 2001, to 12.00% and 9%,
respectively. Under the DFI Order, the Bank was required to increase its
adjusted tangible shareholder's equity by $29 million by March 31, 2001
and by an additional $15 million by June 30, 2001. Also, by March 31,
2001, the Bank was required to attain an adjusted tangible shareholder's
equity of at least 7.00% of its adjusted tangible total assets, and to
increase this ratio by 0.50% each quarter to 8.50% at December 31, 2001.
The DFI order limits the maximum amount of the Bank's deferred tax
assets that may be included in the adjusted tangible shareholder's
equity calculation to the lesser of (x) the amount of deferred tax
assets that are dependent upon future taxable income expected to be
realized within one year or (y) 10% of adjusted tangible shareholder's
equity existing before any disallowed deferred tax assets. The Bank has
not reached the capital levels it was required to meet on March 31, 2001
and June 30, 2001.
. The required increases in capital stated above may be accomplished
through capital contributions by us to the Bank, the sale of common
stock or noncumulative perpetual preferred stock of the Bank, the
exchange of Bank debt held by us for such preferred stock, or any other
means acceptable to the FDIC and the DFI. The Bank was required to adopt
and implement a capital plan acceptable to the FDIC and the DFI to
achieve and maintain these capital requirements. As described below in
"--Actions Taken To Comply With The Regulatory Orders," the capital
plans submitted to the FDIC and DFI by the Bank have not been approved
and, as directed by these regulators, we are preparing a further revised
capital plan for their consideration.
. The Bank may not pay any cash dividends, make any other shareholder
distributions or pay bonuses to its executive officers without the prior
approval of the FDIC and the DFI, nor may it engage in any new lines of
business without their prior approval.
. The Bank was required to eliminate all of its assets that were
classified as "Loss" and one-half of its assets that were classified as
"Doubtful" as of March 31, 2000 under the DFI Order, and by June 26,
2000 under the FDIC Order, and to reduce by June 30, 2001 its assets
that were classified as "Substandard" or "Doubtful," as of June 26,
2000, to not more than $90 million. The Bank also must reduce by June
30, 2001 and September 30, 2001 its assets that were classified
"Substandard" or "Doubtful" as of June 26, 2000, to not more than
$70,000,000 and $50,000,000, respectively. The Bank has satisfied
foregoing March 31, 2001 and June 30, 2001 requirements by charging off
or collecting certain of its "Substandard" and "Doubtful" assets.
20
. Under the FDIC Order, the Bank may not extend additional credit to any
borrower that has a loan or other credit from the Bank that has been
charged off or classified "Loss" or "Doubtful," in whole or part, and is
uncollected. With certain exceptions, the Bank is also restricted from
extending additional credit to any borrower with a Bank loan or other
credit that has been charged off or classified "Substandard," in whole
or part, and is uncollected.
. The Bank must revise, adopt and implement policies acceptable to the
FDIC and the DFI regarding its lending and loan review procedures,
transactions with insiders and affiliates, and its requirements for
reporting lending practices and other strategies to the Bank's chief
executive officer. The Bank's board of directors must also review the
adequacy of the Bank's allowances for loan and lease losses and adopt a
policy for regularly determining the adequacy of those allowances.
. The Bank must develop and adopt a detailed business plan acceptable to
the FDIC and the DFI to control overhead and other expenses and restore
the Bank to a sound condition.
. The Bank is required to have and maintain qualified management,
including a chief executive officer and other persons experienced in
lending, collection and improving asset quality and earnings. Further,
during the effectiveness of the Regulatory Orders, the Bank must obtain
the prior approval of the FDIC and the DFI to the appointment of any new
director or senior executive officer for the Bank, and the DFI has the
right to determine whether present members of the Bank's management are
acceptable.
. The Bank must provide quarterly progress reports to the FDIC and the DFI
regarding its actions to comply with the Regulatory Orders.
Actions Taken To Comply With The Regulatory Orders
Following issuance of the Regulatory Orders, we have added credit and risk
management personnel and have reduced the Bank's classified assets through
collections and charge-offs. We have also begun to improve the capital of the
Bank. In this connection, on March 30, 2001, we purchased $36.0 million of the
Bank's Series B Preferred in exchange for $14.0 million in cash and the
exchange of $22.0 million in aggregate principal amount of subordinated debt
of the Bank held by us. Also on that date, we made a capital contribution to
the Bank of $7.2 million in cash, consisting of the balance of the proceeds
from the offering of our Senior Secured Debt. On June 29, 2001, we contributed
an additional $5.0 million in cash to the Bank.
The Bank has not to date, however, achieved compliance with the required
increases in regulatory capital specified in the Regulatory Orders. As a
result, after discussions with the FDIC and DFI in regard to the Bank's
noncompliance, we submitted an amended capital plan to these agencies
proposing steps by which the Bank would comply with these required regulatory
capital increases by June 30, 2002. The FDIC and the DFI did not approve this
amended capital plan and have directed that we provide a further revised
capital plan showing how the Bank will comply with the required regulatory
capital increases by December 31, 2001. During August 2001, we submitted an
updated capital plan to the FDIC and the DFI that reflects the Bank achieving
compliance with the capital requirements set forth in the Regulatory Orders by
December 31, 2001. Under this updated capital plan, the Bank plans to reduce
the amount of its outstanding assets and will seek to obtain additional
capital through various capital raising alternatives. There is no assurance,
however, that this amended capital plan, even if approved by the Bank's
regulators and fully implemented, will be successful in complying with the
Regulatory Orders. See "Risk Factors--Regulatory Considerations."
Recapitalization Transactions
In order to assist the Bank in complying with the Regulatory Orders, we
entered into the Recapitalization Agreement with holders (the "Signatory
Debtholders") of a majority in outstanding aggregate principal amount of our
10.25% Remarketed Redeemable Par securities, Series B (the "ROPES") and 9.875%
Senior Notes due 2007 (the "Old Senior Notes") and with certain investors
identified therein in our Senior Secured Debt (the "Secured Debt Purchasers").
The Recapitalization Agreement generally provides for the restructuring of our
21
outstanding senior indebtedness and the issuance of new equity and debt
securities by us through certain recapitalization transactions.
The following descriptions of the recapitalization transactions provided for
in, and the descriptions of, the Recapitalization Agreement (collectively, the
"Recapitalization Transactions") are qualified in their entirety by the
corresponding terms and provisions contained in the Recapitalization Agreement
and the First Amendment to Master Recapitalization Agreement, dated as of June
27, 2001, which are attached as Exhibit 20.1.1 to our 2000 Form 10-K/A and
Exhibit 10.1 to the registration statement of which this prospectus is a part,
respectively.
Our Recapitalization Transactions are generally as follows:
On March 30, 2001, we issued $16,200,000 in aggregate principal amount of
12% Senior Secured Notes due April 30, 2002 (the "Senior Secured Debt") to the
Secured Debt Purchasers.
On June 28, 2001, we issued $10,000,000 aggregate principal amount of
Secured Convertible Subordinated Debt to accredited investors in a private
placement. The Secured Convertible Subordinated Debt will be convertible after
three years into our common stock at a conversion price of $1.25 per share,
subject to anti-dilution adjustments.
On June 28, 2001, our debt exchange (the "Debt Exchange") offer closed.
Under the terms of the Debt Exchange, $39,995,000 of the $41,035,000 of our
ROPES that were then outstanding, $144,352,000 of the $165,939,000 of our Old
Senior Notes that were then outstanding, and $3,468,000 of the $10,939,000 of
9.75% Senior Notes due 2004 debt securities that were then outstanding
(collectively, the "Old Notes") were exchanged for the following:
(1) $127,479,000 aggregate principal amount of 12% Senior Secured Notes due
2005 (the "Exchange Notes"), (2) 1,744,437 shares of our common stock, (3)
Debt Exchange Warrants to purchase up to an additional 6,105,544 shares of
common stock at an exercise price of $2.15 per share, subject to anti-dilution
adjustments, and (4) $79,800 in cash as payment for fractional Old Notes.
On June 28, 2001, we issued 7.04 million shares of common stock to Imperial
Holdings Group, LLC, 2.0 million of which shares are being held in escrow in
connection with certain price protection provisions relating to the Exchange
Notes issued to the Secured Debt Purchasers.
Shortly prior to the effective date of the registration statement that we
are required to file to register resales of the Exchange Notes held by the
Secured Debt Purchasers, and further subject to our ability to provide notice
to the Secured Debt Purchasers stating that neither the FDIC nor DFI has taken
or threatened to take any action adverse to the Bank or us as a result of the
Bank's noncompliance with the Regulatory Orders, all of the Senior Secured
Debt will be exchanged for: (i) $18,200,000 aggregate principal amount of
Exchange Notes, (ii) 249,052 shares of our common stock and (iii) Debt
Exchange Warrants to purchase up to an additional 871,681 shares of common
stock. The Senior Debt Purchasers will then 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 $18,200,000
aggregate principal amount of Secured Convertible Subordinated Debt. If we do
not receive a notice of such election from a Senior Debt Purchaser during such
period, that Senior Debt Purchaser will be deemed to have elected to retain
its Exchange Notes and the related shares of common stock and Debt Exchange
Warrants.
Recent Operating Performance
We reported a net loss for the quarter ended June 30, 2001 of $39.8 million,
including an operating loss from discontinued operations of $961,000 and an
extraordinary loss on the early extinguishment of debt of $2.2 million. Our
net loss for the six months ended June 30, 2001 was $39.5 million, including
an operating loss from discontinued operations of $1.2 million and an
extraordinary loss on the early extinguishment of debt of
22
$1.5 million. Our operating results for the quarter and six months ended June
30, 2001 were negatively impacted by high levels of provisions for loan and
lease losses, which totaled $26.7 million and $31.3 million for such periods,
respectively. See --"Continued High Provisions for Loan and Lease Losses"
below. Mark-to-market and impairment charges of $3.5 million and $4.1 million
for the quarter and six months ended June 30, 2001, respectively, also
negatively impacted our result of operations. These mark-to-market charges
primarily related to our investments in interest only securities, which
experienced increased prepayments and defaults.
As a result of the level of our provision for loan and lease losses in the
second quarter of 2001 and our resulting continued operating loss, we recorded
income tax expense of $10.0 million during the quarter and the six months
ended June 30, 2001. This expense was recorded during that quarter to
establish an additional deferred tax asset valuation allowance to fully
reserve our outstanding balance of deferred tax assets, after allowable
offsets of certain deferred tax liabilities.
We decreased our operating expense and recorded reductions during the second
quarter of 2001 in all expense categories other than legal, professional and
collection related costs. These costs are primarily associated with the our
efforts to aggressively resolve our problem credits.
Continued High Provisions For Loan And Lease Losses
Our provision for loan and lease losses for the quarter and six months ended
June 30, 2001 was $26.7 million and $31.3 million as compared to $63.2 million
and $87.2 million for the same period in the year 2000, respectively. The
increase in provision for loan and lease losses for the quarter and six months
ended June 30, 2001 was primarily a result of $27.4 million and $30.1 million
in net charge-offs in the CBC loan portfolio. CBC's charge-offs in the second
quarter of 2001 primarily related to the bankruptcy of two of its borrowers in
the telecommunications and technology industries, and the discovery of fraud
related to one loan. The additional provision for loan losses related to these
credits was $21.7 million. The LPIG loan portfolio suffered from net charge-
offs of $6.2 million and $5.8 million for the quarter and six months ended
June 30, 2001. LPIG's charge-offs were related to the deterioration of
collateral supporting these credits. As a result of the high level of these
charge-offs and non-performing assets, our provision for loan and lease losses
is significantly higher than other banks of comparable size.
Continued Listing Of Our Common Stock On Nasdaq
We received a Nasdaq Staff Determination on April 20, 2001 stating that our
common stock was subject to delisting from The Nasdaq National Market due to a
failure to comply with minimum bid price requirements for continued listing.
Nasdaq's staff subsequently terminated its proceedings for delisting our
common stock because our common stock's closing bid price had increased.
However, if our common stock fails to maintain a minimum bid price of $1.00
for a period of 30 consecutive business days, Nasdaq may notify us that we
have a period of 90 calendar days from that notification to achieve compliance
with the minimum price requirement. Compliance can be achieved by the closing
bid price of our common stock meeting or exceeding the $1.00 per share minimum
price requirement for ten consecutive business days during that 90 day
compliance period. If we were not to achieve compliance with the minimum price
requirement, Nasdaq's staff could institute new proceedings to delist our
common stock. As of August 28, 2001, our common stock had failed to maintain a
minimum bid price of $1.00 over the prior 25 consecutive business days. See
"Risk Factors--Business and Other Considerations--The Price And Liquidity Of
Our Common Stock May Be Adversely Affected If Our Common Stock Is Delisted
From The Nasdaq National Market System."
23
Changes in Management
On August 1, 2001, H. Wayne Snavely resigned as both the Bank's and our
Chairman, President, and Chief Executive Officer and Michael R. McGuire was
appointed our President and Chief Executive Officer and interim President and
Chief Executive Officer of the Bank pending regulatory approval. Mr. McGuire
has been one of our directors since April 2001. Michael S. Riley, who was
initially elected to our board of directors at our 2001 annual shareholder
meeting, was appointed as Chairman of our Board of Directors on August 1,
2001. James P. Stues recently resigned from our board of directors.
Additionally, Brad S. Plantiko, the Bank's and our Chief Financial Officer,
will assume additional responsibilities as the Bank's Chief Operating Officer
pending regulatory approval.
Mr. Snavely's contractual rights under his termination protection agreement
were resolved by our agreement to (i) issue to Mr. Snavely 1.3 million shares
of our common stock, (ii) extend the exercise period of Mr. Snavely's existing
stock options for up to four years and (iii) provide Mr. Snavely with
continuous employee health and welfare benefits for a period of four years. We
also have engaged Mr. Snavely as a consultant for compensation of $500,000 per
year for a period of four years.
Settlement Of Class Action Litigation
In connection with an agreement (the "Settlement Agreement") between us and
the plaintiffs' counsel in the securities class action litigation identified
as In re Southern Pacific Funding Corporation Securities Litigation, Lead Case
No. CV98-1239-MA, in the U.S. District Court for the District of Oregon (the
"Class Action Litigation"), a fairness hearing was held by that court on
February 21, 2001 to evaluate the fairness of the terms and conditions of the
Settlement Agreement, including the proposed issuance of the Settlement
Warrants. Advance notice of that hearing was provided to prospective
recipients of the Settlement Warrants, each of whom had the right to attend
the fairness hearing and obtain to the terms and conditions of the Settlement
Agreement and to opt out of the proposed settlement entirely. After the
conclusion of the fairness hearing, the district court on the same day issued
an order approving the terms and conditions of the Settlement Agreement. The
Settlement Agreement became effective on March 23, 2001 after expiration of
the period for any appeal of the court's order.
Pursuant to the Settlement Agreement, we paid $3.0 million into a settlement
fund and agreed to issue the Settlement Warrants referred to herein to
purchase three million shares of our common stock of an exercise price of
$3.00 per share, subject to certain anti-dilution adjustments. Under the terms
of the warrant agreement pursuant to which the Settlement Warrants are to be
issued, we agreed to file a registration statement with the Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the shares of common stock issuable
upon exercise of the Settlement Warrants. This prospectus is a part of that
registration statement.
On May 2, 2001, we received notice that the United States District Court for
the Central District of California granted our motion for summary judgment in
another securities class action litigation, identified as In re Imperial
Credit Industries, Inc. Securities Litigation, Case No. CV 98-8842-SVW. The
district court has not yet issued a formal final order granting summary
judgment.
Reverse Stock Split
At our annual shareholders meeting held on June 26, 2001, our shareholders
approved a proposal to amend our Articles of Incorporation to effect a reverse
stock split at a ration of 2:1, 3:1 or 4:1, as determined by the board of
directors based on market conditions and other factors, but only if and when
our board of directors in its discretion elects to effect a reverse stock
split.
Because the reverse stock split, if one is effected, will apply to all
issued and outstanding shares of common stock, the reverse stock split will
not alter the relative rights of existing shareholders. A reverse stock split
would, however, effectively increase the number of shares of common stock
available for future issuance by the board of directors because it would only
affect our outstanding shares and would not decrease the number of shares the
board of directors is authorized to issue.
24
Election Of Directors
Pursuant to the Recapitalization Agreement, our board of directors has set
the authorized number of our directors at seven. Also pursuant to the
Recapitalization Agreement, four of the directors elected at our annual
meeting of shareholders held on June 26, 2001 were proposed by Imperial
Holdings Group, LLC, which is the only Signatory Debtholder (as defined in the
Recapitalization Agreement). One of these persons, Mr. Michael R. McGuire, was
elected by action of the board of directors 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 of directors as provided in the
Recapitalization Agreement.
PLAN OF DISTRIBUTION
The shares of our common stock offered hereby will be offered directly by us
to the holders of the Settlement Warrants. No underwriter, broker or dealer
will be involved in this offering and no underwriting, brokerage or dealer
commissions will be paid in connection with this offering.
In October 2000, we reached an agreement in principle with the plaintiffs'
counsel to settle the Class Action Litigation. As a part of the settlement we
agreed to issue the Settlement Warrants to purchase three million shares of
our common stock at an exercise price of $3.00 per share, subject to certain
anti-dilution adjustments. None of the recapitalization transactions that we
have completed, or that we may complete, pursuant to the Recapitalization
Agreement, will require any adjustment in the exercise price under the anti-
dilution provisions of the Settlement Warrants. An appropriate adjustment will
be made in the exercise price and the number of Settlement Warrants if we
effect a reverse stock split of our common stock, which our shareholders have
authorized our Board of Directors, in its discretion, to effect.
The Settlement Warrants will be issued pursuant to the Settlement Agreement
and the related Warrant Agreement, dated as of October 10, 2000 (the "Warrant
Agreement"), between us and U.S. Stock Transfer Corporation, as warrant agent
(the "Warrant Agent"). The Warrant Agreement provides, however, that
Settlement Warrants may only be issued after the registration statement to
which this prospectus is a part becomes effective. The Settlement Warrants
will expire January 31, 2008 and have certain anti-dilution features. The
Settlement Warrants also will have provisions that provide the holders thereof
with specified rights upon specified change of control, reorganization or
going private transactions (as defined in Section 3.4 of the Warrant
Agreement) occurring after October 10, 2000. These rights will include the
right to either (i) conditionally exercise the Settlement Warrants and thereby
receive the difference between economic benefit of the change of control,
reorganization or going private transaction, if any, in excess of the exercise
price of the Settlement Warrants or (ii) receive $1.00 for each right to
purchase one share of our common stock represented by the Settlement Warrants.
However, none of the recapitalization transactions that we have completed, or
that we may complete, pursuant to the Recapitalization Agreement will result
in any of foregoing rights becoming available to any holder of the Settlement
Warrants. The Settlement Warrants will be issued in fully registered,
certificated form under the provisions of the Warrant Agreement.
The holder of a Settlement Warrant may exercise the Settlement Warrant by
surrendering the Settlement Warrant, with the attached purchase form properly
completed and executed, together with payment of the exercise price at the
office of the Warrant Agent or any successor warrant agent. Payment of the
aggregate exercise price shall be made by wire transfer or by certified check,
cashier's check or money order payable in United States currency to the order
of Imperial Credit Industries, Inc. The Warrant Agent will return a
certificate evidencing the number of shares of common stock issued upon
exercise of the Settlement Warrant, together with a new Settlement Warrant
certificate if less than all of the shares of common stock covered by the
Settlement Warrant certificate are purchased. When delivered, shares of our
common stock issued upon exercise of a Settlement Warrant will be fully paid
and nonassessable. We are not required to issue fractions of Settlement
Warrants or fractions of shares of our common stock or any certificates which
evidence fractional Settlement Warrants or fractional shares of our common
stock, or to pay cash in lieu of fractional interests. In lieu of
25
fractional Settlement Warrants and fractional shares of our common stock, we
will round any fractional Settlement Warrant or fractional share equal to or
greater than one-half up to the next full Settlement Warrant or share of
common stock, as the case may be, and will eliminate any fractional Settlement
Warrant or fractional share less than one-half.
Under the terms of the Warrant Agreement, we agreed to file the registration
statement of which this prospectus is a part to register the issuance of the
shares of our common stock underlying the Settlement Warrants. We will use our
commercially reasonable efforts to keep the registration statement and any
registration or qualification required under state securities laws with
respect to the shares of common stock offered by this registration statement
in effect until the earlier of the date by which all the Settlement Warrants
are exercised or redeemed or the Settlement Warrants expire. The Settlement
Warrants may not be exercised during any period in which any such registration
or qualification is required but is not in effect.
Copies of the form of warrant certificate and the Warrant Agreement have
been filed as exhibits to the registration statement of which this prospectus
is a part and reference is made to the exhibits for a detailed description of
the provisions summarized above.
LEGAL MATTERS
Mayer, Brown & Platt, Los Angeles, California, will pass upon the validity
of the Shares offered by this prospectus.
EXPERTS
The consolidated financial statements of Imperial Credit Industries, Inc. as
of December 31, 2000 and 1999, and for each of the years in the three-year
period ended December 31, 2000, have been incorporated by reference herein and
in the registration statement in reliance upon the report of KPMG LLP,
independent auditors, incorporated by reference herein, and upon the authority
of that firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC. You
may read and copy the reports, proxy statements and other information that we
file at the Public Reference Room maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549. You may obtain information on the operation of
the Public Reference Room by telephoning the SEC at 1-800-SEC-0330. You may
also access the reports, proxy statements and other materials that we file
electronically over the Internet at the SEC's website at http://www.sec.gov.
We have filed a registration statement with the SEC on Form S-3 relating to
the shares of our common stock offered by this prospectus. This prospectus
does not contain all of the information included in that registration
statement. You may refer to the registration statement and the exhibits for
more information about the shares offered by this prospectus. The statements
we make in this prospectus regarding the content of any documents filed as
exhibits to the registration statement are not necessarily complete, and you
should refer to the filed copies of those documents for additional
information. All of our statements about these documents are qualified in
their entirety by the exhibits to the registration statement.
The SEC allows us to incorporate into this prospectus the information
contained in documents we file with the SEC by referring to those documents
herein. This means that:
. the documents incorporated by reference are considered part of this
prospectus
. we can disclose important information to you by referring to those
documents
26
. information we file with the SEC automatically updates and supersedes
the information provided in this prospectus
We incorporate into this prospectus by reference the following documents
filed by us with the SEC under our File No. 0-19861:
(1) our Annual Report on Form 10-K/A for the year ended December 31, 2000;
(2) our Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, 2001 and June 30, 2001;
(3) Proxy Statement on Schedule 14A for the 2001 annual meeting of
shareholders of the Company;
(4) our Current Reports on Form 8-K dated February 7, 2001, April 20, 2001,
May 8, 2001 and August 1, 2001;
(5) the section of our Registration Statement on Form S-1 (File No. 33-
45606), filed with the SEC on February 10, 1992, entitled "Description
of Securities", as amended by Amendments Nos. 1, 2 and 3, filed with
the SEC on April 20, 1992, May 7, 1992, and May 18, 1992, respectively;
and
(6) our Registration Statement on Form 8-A filed with the SEC on October 5,
1998, pursuant to Section 12 of the Exchange Act, for registration of
our Series A Junior Preferred Share Purchase Rights.
We also incorporate into this prospectus by reference each of the following
documents that we will file with the SEC after the date of this prospectus,
but prior to the termination of this offering:
(1) all Form 10-Q, Form 10-K, Form 8-K and other reports filed under Section
13(a) and (c) of the Exchange Act;
(2) definitive proxy or information statements filed under Section 14 of the
Exchange Act in connection with any meeting of our shareholders; and
(3) any reports filed under Section 15(d) of the Exchange Act.
You may request a copy, at no cost, of any of the documents incorporated by
reference in this prospectus, except for exhibits to those documents (other
than exhibits specifically incorporated by reference therein), by contacting
us at: Imperial Credit Industries, Inc., 23550 Hawthorne Boulevard, Building
1, Suite 110, Torrance, California 90505, telephone number (310) 373-1704.
27
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3,000,000 Shares
IMPERIAL CREDIT INDUSTRIES, INC.
Common Stock
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PROSPECTUS
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, 2001
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
Registration Fee................................................ $ 2,250
Legal Fees and Expenses......................................... 75,000
Accounting Fees and Expenses.................................... 30,000
Printing Expenses............................................... 45,000
Miscellaneous................................................... 5,000
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TOTAL......................................................... $157,250
========
Item 15. Indemnification of Directors and Officers
Under Section 317 of the California General Corporation Law (the "CGCL"),
the Registrant is permitted in certain circumstances to indemnify its
directors and officers against certain expenses (including attorneys' fees),
judgments, fines, settlements and other amounts actually and reasonably
incurred in connection with threatened, pending or completed civil, criminal,
administrative or investigative actions, suits or proceedings (other than an
action by or in the right of the Registrant), in which such persons were or
are parties, or are threatened to be made parties, by reason of the fact that
they were or are directors or officers of the Registrant, if such persons
acted in good faith and in a manner they reasonably believed to be in the best
interests of the Registrant, and with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. In
addition, the Registrant is permitted in certain circumstances to indemnify
its directors and officers against certain expenses incurred in connection
with the defense or settlement of a threatened, pending or completed action by
or in the right of the Registrant, and against amounts paid in settlement of
any such action, if such persons acted in good faith and in a manner they
believed to be in the best interests of the Registrant and its shareholders
provided that the specified court approval is obtained.
As permitted by Section 317 of the CGCL, the Articles of Incorporation and
By-Laws of the Registrant provide that the Registrant is authorized to provide
indemnification for its directors and officers for breach of their duty to the
Registrant and its shareholders through bylaw provisions or through agreements
with the directors and officers, or both, in excess of the indemnification
otherwise permitted by Section 317 of the CGCL. The Registrant's By-laws
provide for indemnification of its directors and officers to the maximum
extent permitted by Section 317 of the CGCL. In addition, agreements entered
into by the Registrant with its directors and its executive officers require
the Registrant to indemnify such persons against expenses, judgments, fines
settlements and other amounts reasonably incurred in connection with any
proceeding to which any such person may be made a party by reason of the fact
that such person was an agent of the Registrant (including judgments, fines
and settlements in or of a derivative action, unless indemnification is
otherwise prohibited by law), provided such person acted in good faith and in
a manner he reasonably believed to be in the best interests of the Registrant
and, in the case of a criminal proceeding, had no reason to believe his
conduct was unlawful. The indemnification agreements also set forth certain
procedures that will apply in the event of a claim for indemnification
thereunder.
The Articles of Incorporation of the Registrant provide that the personal
liability of the directors of the Registrant for monetary damages shall be
eliminated to the fullest extent permissible under California law. Under
Section 204(a)(10) of the CGCL, the personal liability of a director for
monetary damages in an action brought by or in the right of the corporation
for breach of the director's duty to the corporation may be eliminated, except
for the liability of a director resulting from (i) acts or omissions involving
intentional misconduct or the absence of good faith, (ii) any transaction from
which a director derived an improper personal benefit, (iii) acts or omissions
showing a reckless disregard for the director's duty, (iv) acts or omissions
constituting an unexcused pattern of inattention to the director's duty or (v)
the making of an illegal distribution to shareholders or an illegal loan or
guaranty.
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Item 16. Exhibits
4.1 Form of Common Stock Certificate (incorporated herein by reference to the
Registrant's Registration Statement on Form S-1 (No. 33-45606)
4.2 Warrant Agreement dated as of October 10, 2000 between the Registrant and
U.S. Stock Transfer Corporation*
4.3 Form of Warrant Certificate*
5.1 Opinion of Mayer, Brown & Platt*
10.1 First Amendment to Master Recapitalization Agreement, dated as of June
27, 2001**
10.2 Amended and Restated Collateral Agency and Security Agreement, dated as
of June 28, 2001**
10.3 Indenture for the 12% Secured Convertible Subordinated Notes, dated as of
June 28, 2001**
23.1 Consent of KPMG LLP**
23.2 Consent of Mayer, Brown & Platt (contained in Exhibit 5.1)
24.1 Power of Attorney (included on page S-1 of this Registration Statement)
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*Previously filed.
** Filed herewith.
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (1)(i) and (11)(ii) do not apply if the
registration statement is on Form S-3, Form S-8, or Form F-3 and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant
pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) of 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
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(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has caused this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Torrance, and the State of
California, on August 23, 2001.
Imperial Credit Industries, Inc.
/s/ Michael R. McGuire
By: _________________________________
Michael R. McGuire
President and Chief Executive
Officer
We, the undersigned directors and officers of Imperial Credit Industries,
Inc., do hereby constitute and appoint Michael R. McGuire, Brad S. Plantiko
and Irwin L. Gubman, or either one of them, our true and lawful attorneys and
agents, to do any and all acts and things in our name and behalf in our
capacities as directors and officers and to execute any and all instruments
for us and in our names in the capacities indicated below, which said
attorneys and agents, or either of them, may deem necessary or advisable to
enable said corporation to comply with the Securities Act of 1933, as amended,
and any rules, regulations, and requirements of the Securities and Exchange
Commission, in connection with this Registration Statement on Form S-3,
including specifically, but without limitation, power and authority to sign
for us or any of us in our names and in the capacities indicated below, any
and all further amendments (including post-effective amendment) to this
Registration Statement on Form S-3, or any related registration statement that
is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, as amended; and we do hereby ratify and confirm all that the said
attorneys and agents, or either one of them, shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Michael S. Riley Chairman of the Board and August 17, 2001
______________________________________ Director
Michael S. Riley
/s/ Michael R. McGuire Chief Executive Officer, August 23, 2001
______________________________________ President and Director
Michael R. McGuire (Principal Executive
Officer)
/s/ Brad S. Plantiko Executive Vice President, August 23, 2001
______________________________________ and Chief Financial
Brad S. Plantiko Officer and Director
(Principal Financial
Officer)
/s/ Robert S. Muehlenbeck Director August 17, 2001
______________________________________
Robert S. Muehlenbeck
S-1
Signature Title Date
--------- ----- ----
/s/ Theodore R. Maloney Director August 17, 2001
______________________________________
Theodore R. Maloney
Director
______________________________________
Charles E. Underbrink
/s/ Paul B. Lasiter Senior Vice President and August 23, 2001
______________________________________ Corporate Controller
Paul B. Lasiter (Principal Accounting
Officer)
S-2