As filed with the Securities and Exchange Commission on September 24, 2001
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM S-2
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)
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: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this Form, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Proposed Proposed Maximum
Title of Each Class of Securities Amount to be Offering Price Aggregate Amount of
to be Registered Registered per Security Offering Price Registration Fee
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12% Senior Secured Notes due
2005............................ $96,400,000 100% $96,400,000 $24,100
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective 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 or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The Information contained in this prospectus is subject to completion or +
+amendment. A registration statement relating to these securities has been +
+filed with the Securities and Exchange Commission. These securities may not +
+be sold nor may offers to buy be accepted prior to the time that the +
+registration statement becomes effective. This prospectus shall not +
+constitute an offer to sell or the solicitation of an offer to buy nor shall +
+there be any sale of these securities in any jurisdiction where the offer, +
+solicitation or sale would not be permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated September 24, 2001
PROSPECTUS
$96,400,000
IMPERIAL CREDIT INDUSTRIES, INC.
12% Senior Secured Notes Due 2005
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The selling security holders identified in this prospectus are offering up to
$96,400,000 aggregate principal amount of 12% Senior Secured Notes due 2005 of
Imperial Credit Industries, Inc., a California corporation. The notes are being
offered on a continuous basis.
The selling security holders received their notes in connection with two debt
exchanges that we conducted in connection with efforts to improve our
capitalization.
The selling security holders will receive all of the proceeds from the sale
of the notes. We will pay, among other expenses, certain underwriting discounts
and selling commissions, if any, applicable to the sale of the notes. We are
not offering any notes for sale under this prospectus and we will not receive
any proceeds from sales of the notes.
We do not intend to list the notes on any securities exchange.
The notes:
. bear interest at an annual rate of 12%, payable in cash in arrears semi-
annually on January 30 and July 30;
. are secured by our pledge of all of the common stock, preferred stock and
indebtedness of our wholly-owned subsidiary, Southern Pacific Bank, that
we hold; and
. are pari passu in right of payment with any of our unsecured outstanding
10.25% Remarketed Redeemable Par Securities Series B, 9.875% Senior Notes
due 2007 and 9.75% Senior Notes due 2004.
Investing in the notes involves significant risks. You should consider
carefully the information contained in "RISK FACTORS" beginning on page 8
before buying any of the notes.
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.
The selling security holders may sell the notes offered by this prospectus
from time to time directly to purchasers, or through underwriters, or through
agents in ordinary brokerage transactions, in negotiated transactions or
otherwise, at prices that represent or relate to then prevailing market prices
or are negotiated. The selling security holders reserve the right to withdraw,
cancel or modify the offer or solicitations of offers made hereby without
notice. The selling security holders may reject any offer to purchase notes in
whole or in part. The selling security holders and any broker/dealers that
participate in the distribution of the notes may be deemed to be "underwriters"
as defined in the Securities Act of 1933, and profits realized by selling
security holders and broker/dealers purchasing notes for their own account may
be deemed underwriting discounts or commissions under that act in connection
with the sale of securities.
A copy of our Annual Report on Form 10-K/A for the year ended December 31,
2000 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2001
accompany this prospectus. This prospectus may not be used to consummate sales
of the notes unless accompanied by our most recently filed Annual Report on
Form 10-K and Quarterly Report on Form 10-Q.
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.
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 contained in
documents that are incorporated by reference in the registration statement of
which this prospectus forms a part.
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. The
selling security holders may not make an offer of these notes in any state or
other jurisdiction where the offer is not permitted. You should not assume that
the information provided by this prospectus is accurate as of any date other
than the date on the front of this prospectus.
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TABLE OF CONTENTS
Page
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Cautionary Statement About Forward Looking Information..................... 2
Prospectus Summary......................................................... 3
Risk Factors............................................................... 8
Recent Developments........................................................ 21
Ratio of Earnings to Fixed Charges......................................... 26
Use of Proceeds............................................................ 26
Selling Security Holders................................................... 26
Description of The Notes................................................... 28
Plan of Distribution....................................................... 52
Legal Matters.............................................................. 53
Experts.................................................................... 53
Where You Can Find More Information........................................ 54
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2
PROSPECTUS SUMMARY
This summary highlights information regarding us and the offering of the
notes contained elsewhere in this prospectus. This summary does not contain all
of the information you should consider before investing in the notes. You
should read carefully this entire prospectus, including the risks discussed
under "Risk Factors" and the documents incorporated into this prospectus by
reference, before you decide whether to purchase any notes.
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 business 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 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 $1,412.9 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 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 financing is primarily conducted
through various trust and total return swap instruments.
3
LPIG's commitments (including standby and commercial letters of credit)
and outstanding 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. 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 $10.7 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 $155.3 million and $116.5 million at June 30,
2001 as compared with $101.4 million and $83.7 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, at June 30, 2001, net cash of $51.3 million invested in
the subordinated and equity interests of Pacifica Partners I. 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 $5.3 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.
Potential Repurchase Of Certain Of The Notes
We have executed a letter of intent dated August 30, 2001 with Imperial
Holdings Group, LLC ("IHG") to repurchase up to $78.2 million of the notes held
by IHG at a mutually agreed discount to the face amount of those notes. This
repurchase is subject to (1) the completion of a definitive purchase agreement
mutually acceptable to us and IHG and (2) our arrangement of all financing
necessary to pay the agreed upon purchase price for the notes.
5
SUMMARY OF THE OFFERING
Securities Offered by Selling $96,400,000 aggregate principal amount of
Security Holders................ 12% Senior Secured Notes due 2005
Issuer........................... Imperial Credit Industries, Inc.
We will not receive any proceeds from the
Use of proceeds.................. sale of the notes.
SELLING SECURITY HOLDERS
The selling security holders consist of IHG and the purchasers (the "Secured
Debt Purchasers") of our 12% Senior Secured Notes due 2002 (the "Senior Secured
Debt"). See "Selling Security Holders." As of the date of this prospectus, the
selling security holders held approximately $96,400,000 aggregate principal
amount of the notes. The selling security holders may sell the notes from time
to time directly to purchasers, or through underwriters, or through agents in
ordinary brokerage transactions, in negotiated transactions or otherwise, at
prices that represent or relate to then prevailing market prices or are
negotiated. The selling security holders reserve the right to withdraw, cancel
or modify the offer or solicitation of offers made by this prospectus without
notice. The selling security holders may reject any offer in whole or in part.
SUMMARY OF THE NOTES
Title............................ 12% Senior Secured Notes due 2005
Principal........................ $127,479,000 aggregate principal amount
Interest......................... 12.0% per annum, payable semi-annually in
cash in arrears on January 30 and July 30
Maturity......................... June 30, 2005
Security......................... The notes are secured by our pledge of all
the common stock, preferred stock and
indebtedness of the Bank that we hold.
Ranking.......................... The notes rank pari passu in right of
payment with any of our unsecured
outstanding 10.25% Remarketed Redeemable
Par Securities Series B, 9.875% Senior
Notes due 2007 and 9.75% Senior Notes due
2004 (collectively, the "Old Notes") that
were not exchanged as a part of the debt
exchange described in this prospectus (the
"Debt Exchange"), except to the extent, as
described above, that the notes are secured
by our assets. Immediately after
consummation of the Debt Exchange, we had
$30,091,000 in aggregate principal amount
of Old Notes outstanding.
Covenants........................ The indenture for the notes includes
financial covenants with which we must
comply. These covenants include, among
others, (1) restrictions on the payment of
dividends, repurchases of stock and certain
other "restricted payments", (2)
limitations on our incurrence of additional
debt and (3) a requirement that we offer to
purchase each holder's notes at a purchase
price equal to 101% of the principal
amounts thereof in the event of a change of
control of us (as defined in the indenture
relating to the notes).
6
RISK FACTORS
Before you invest in the notes, you should consider carefully the risks such
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 herein.
7
RISK FACTORS
An investment in the notes 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 the notes, 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, results of operations and our
ability to make required payments of interest and principal on the notes. 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").
The Bank's capital ratios on December 31, 2000 were below the minimum levels
required for the Bank to be categorized as "adequately capitalized," due to
increased loan and lease loss provisions and deferred tax valuation allowances
taken in the fourth quarter of 2000 and the resulting operating losses.
Accordingly, the Bank was categorized as an "undercapitalized" institution, as
defined by applicable banking regulations. The Bank was restored to an
"adequately capitalized" level as of March 31, 2001, as a result of our
additional capital contributions and acquisitions of preferred stock of the
Bank that constituted Tier I Capital in exchange for cash and the retirement of
subordinated debt of the Bank held by us, as described below.
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 that 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 Stock") 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 would have needed
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. Additional capital will be required during 2001 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.
8
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, have 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 pursuant to which the Bank would achieve 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. 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. Nor can any
assurance be given 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 or 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, operations and ability
to make required payments of interest and principal on the notes.
Risks Relating To The Recapitalization Transactions
We Would Incur Significant Adverse Federal Income Tax Consequences If Our
Recapitalization Transactions Were Deemed To Have Caused An Ownership Change
Under The Internal Revenue Code
Although we believe that the recapitalization transactions by themselves
did 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 may occur on a date after the recapitalization
transactions due to sales of stock, exercises of warrants or options or other
events. Such events may not be within our control, or may result from future
transactions which our management deems to be in our best interest
notwithstanding the adverse tax consequences. Any resulting 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 Master
Recapitalization Agreement, dated as of March 29, 2001 between us and certain
investors, as amended (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
9
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 (1)
issue to him 1.3 million shares of our common stock, (2) extend the exercise
period of his existing stock options for up to four years and (3) 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
Lack Of Public Market For The Notes
There is no existing trading market for the notes, and there can be no
assurance regarding the future development of a market for the notes. We do not
intend to apply for listing or quotation of the notes on any securities
exchange or market and we are not aware that any dealer intends to maintain
quotations relating to, or otherwise assist in the development of a market for,
the notes.
Historically, the market for noninvestment grade debt, such as the notes,
has been subject to disruptions that have caused a lack of liquidity and
substantial volatility in the prices of such securities. There can be no
assurance that the market for the notes will not be subject to similar
disruptions or that the notes may be resold.
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 The Notes And May Adversely Affect Our Business and
Operations
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 was 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
Debt, 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 the notes.
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
10
the interest on, the notes and our other 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
the notes and our other indebtedness. A failure to continue to make scheduled
payments of the principal and interest on the notes or our other indebtedness
would likely have a material adverse effect on our business and operations,
including the possibility of our being forced into bankruptcy.
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; and 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.
Our Ability to Obtain Additional Funding Through Equity Financing May Be
Adversely Affected By Our Possible Delisting From The Nasdaq National Market
System
We were informed by Nasdaq that our common stock may be delisted from the
Nasdaq National Market, as further described in "Recent Developments--Possible
Nasdaq Delisting Of Our Common Stock," if we do not achieve compliance with
its minimum price requirement for continued listing by December 10, 2001.
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 the 90-day period from September 10, 2001 to
December 10, 2001. If we do not achieve compliance with the minimum price
requirement, our common stock will be subject to delisting from the Nasdaq
National Market. Our board of directors may declare a reverse stock split in
the future to attempt to achieve compliance with the minimum bid price
requirement. Our shareholders approved up to a 1 for 4 reverse stock split at
our 2001 annual shareholders' meeting. 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, as to 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. If our common stock were to be delisted, our ability to raise
additional funds to assist the Bank in complying with the increased capital
levels and capital level ratios required by the Regulatory Orders, as
contemplated in our revised capital plan, could be adversely affected.
Further, our ability to obtain equity financing needed to repurchase the notes
at a discount from IHG could be adversely affected. See "Recent Developments--
The Regulatory Orders--Actions Taken To Comply With The Regulatory Orders;"
and "--Potential Repurchase Of Certain Of The Notes".
The Collateral Securing The Notes May Be Insufficient, Unavailable Or
Difficult To Realize On In the Event of Default
No appraisals of any of the collateral have been prepared by or on our
behalf in connection with the issuance and sale of the notes. In the event of
a default under the notes, there can be no assurance that the proceeds from
the sale of the collateral remaining after satisfaction of all obligations
owed under the Senior Secured Debt would be sufficient to satisfy payments due
on the notes. By its nature some or all of the collateral will be illiquid and
may have no readily ascertainable market value. There can be no assurance that
the collateral can be sold in a short period of time or at all.
The collateral securing the notes includes the stock of the Bank. The Bank
is a California chartered industrial bank with deposits insured by the FDIC.
Since the Bank is a regulated entity subject to oversight and
11
supervision by the DFI and FDIC, any note holder who attempts to foreclose on
the stock of the Bank may face certain federal and state legal requirements
that would impose limitations or restrictions with respect to the ownership of
the Bank's stock. These limitations or restrictions include limits on, or
prohibitions against, the acquisition through foreclosure, holding, or sale of
the Bank's stock; the requirement that regulatory approval be obtained prior to
acquiring, holding or disposing of the stock; or restriction on a stock
holder's ability to exercise its voting or control rights with respect to the
Bank's stock or to participate in the management and operations of the Bank.
In addition, the ability of the note holders to realize upon the collateral
may be subject to bankruptcy law limitations in the event of a bankruptcy. The
right of the collateral agent to repossess and dispose of, or otherwise
exercise remedies in respect of, the collateral upon the occurrence of a
default would be likely to be significantly impaired by applicable bankruptcy
law if a bankruptcy proceeding were to be commenced by or against us prior to
the collateral agent having repossessed and disposed of, or the collateral
agent otherwise having exercised remedies in respect of, the collateral. Under
applicable bankruptcy law, a secured creditor such as the collateral agent is
prohibited from repossessing its security from a debtor in a bankruptcy case,
or from disposing of security repossessed from such debtor, without bankruptcy
court approval.
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, our ability to make required payments of interest and
principal on the notes will be impaired.
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 judgment, 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.
12
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.
The Bank Has Experienced Significant Charge-offs And Losses On Its Syndicated
Loan Investments And May Experience Additional Charge-offs And Loan Losses
The Bank has invested through its LPIG and CBC divisions 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 portfolios 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 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 aggregate outstanding loan
balance of these loans of the Bank will decrease over time as its portfolios
run off. There is no assurance that either or both of LPIG and 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 Pending 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
Pending 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.
13
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 that 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 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, as interest rates have recently declined,
certain of our loans and investments have been repaid earlier than expected or
earlier than the payment obligations we then had outstanding under instruments
with higher interest rates, which, has adversely affected the results of our
operations. Further, if interest rates continue to decline, our loans and
investments may continue to be repaid earlier than expected or earlier than the
payment obligations we may then have outstanding under instruments with higher
interest rates, which will 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
14
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 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
15
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.
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 significant credit to borrowers in the telecommunications
and technology industries, which industries 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. The credit
facilities CBC has provided to borrowers in the technology industry are spread
over 29 different borrowing relationships, while CBC has credit facilities
provided to 24 borrowers in the telecommunications industry that are 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
16
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,
as could the borrowers' inventory, subscriber lists and other business assets
thereby impairing the value of the inventory securing CBC's loans to these
borrowers. A material decrease in these telecommunications or technology
borrowers' sales, profits, or the value of their accounts receivable and
inventory could impair their ability to repay their loans with CBC and our
results of operations could be adversely affected.
The 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
Appraised 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, 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.
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
17
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 Rating Downgrades On Our Debt Have Put IBC In Default Under The
IBC Lease Receivables Trust 1997-2, Which May Adversely Affect IBC's Ongoing
Monthly Cash Flow
As a result of the recent credit rating 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 has
the right to cause the 1997-2 Trust permanently to go into "turbo"
amortization. Under turbo amortization, virtually all cash flows generated in
the 1997-2 Trust are required to be used to pay off the outstanding balance of
the Class A certificates, which was $99.2 million at June 30, 2001. In that
event while the Class B and C Certificates, a majority of which are owned by
IBC, would receive virtually no cash flows for principal and interest payments
until the Class A certificates are paid in full. To date, IBC has received a
monthly waiver of this default. However, the insurer of the Class A
certificates requested that IBC distribute, and IBC agreed to distribute, cash
flows under the "turbo" amortization schedule for the months of July and
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 that it will
not make further requests that the 1997-2 Trust distribute cash flows under
the "turbo" amortization schedule for temporary periods. In any month in which
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, and for the month of
August, 2001 did decrease, by approximately $500,000 per month, which could
and did 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.
18
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 received management fee revenues of $3.1 million and
$3.1 million, respectively, for managing the CLO Fund. Our primary risks
relating to ICAM's management activities are that (1) 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 (2) 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 the fund due to the required acceleration of the sale of
the fund's assets.
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 Auto Marketing Network operations 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
is no assurance that we will not continue to incur additional writedowns or
mark-to-market losses in future periods.
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
19
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.
20
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 is required to adopt and
implement a capital plan acceptable to the FDIC and the DFI to achieve
and maintain these capital requirements.
. 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 as of 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 was required to 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 the foregoing March 31,
2001 and June 30, 2001 requirements by charging off or collecting certain
of its Substandard and Doubtful assets.
. 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.
21
. 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 increase the capital of the
Bank. In this connection, on March 30, 2001, we purchased $36.0 million of the
Bank's Series B Preferred Stock 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. 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 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 indicates how the Bank proposes to achieve
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 total amount of its outstanding assets and we will seek to obtain
additional capital through various capital raising alternatives, which may
include one or more of the following: the issuance of additional debt
securities, the issuance of additional shares of our common stock, and the
issuance of additional shares of the Bank's Series B Preferred Stock or,
subject to regulatory approval, the issuance of shares of new series of
noncumulative perpetual preferred stock of the Bank constituting Tier I
capital. 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 IHG, which held 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 the Secured Debt Purchasers. The Recapitalization Agreement
generally provides for the restructuring of our outstanding senior indebtedness
and the issuance of new equity and debt securities by us through certain
recapitalization transactions.
The following descriptions of the recapitalization transactions
(collectively, the "Recapitalization Transactions") provided for in, and the
descriptions of, the Recapitalization Agreement are qualified in their entirety
by the provisions of the Recapitalization Agreement and the First Amendment to
Master Recapitalization Agreement, dated as of June 27, 2001, and Second
Amendment to Master Recapitalization Agreement, dated as of , 2001
("Second Amendment"), which are attached as Exhibit 20.1.1 to our 2000 Form 10-
K/A, Exhibit 10.1 to Amendment No. 1 to our Registration Statement
22
on Form S-3 that we filed on August 30, 2001 and Exhibit 10.18 to the
registration statement of which this prospectus forms 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 12%
Secured Convertible Subordinated Notes due 2005 ("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 offer (the "Debt Exchange") 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 the 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 our 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 IHG, 2.0
million of which shares are being held in escrow in connection with certain
price protection provisions relating to the notes issued to the Secured Debt
Purchasers, in connection with IHG's agreement to approve and participate in
the Debt Exchange.
Under the provisions of the Recapitalization Agreement, subject to the
occurrence of certain conditions, all of the Senior Secured Debt is to be
exchanged for: (1) $18,200,000 aggregate principal amount of the notes,
(2) 249,052 shares of our common stock and (3) Debt Exchange Warrants to
purchase up to an additional 871,681 shares of our common stock. One of the
conditions to this exchange under the Recapitalization Agreement as originally
executed was that we have an effective registration statement on file
registering the resale by the Secured Debt Purchasers of the notes they were to
receive as part of this exchange. Under a Second Amendment to the
Recapitalization Agreement, dated , 2001, this condition has been
changed to provide that the exchange will be effected shortly prior to the
effective date of the registration statement of which this prospectus is a
part, if the other conditions to the exchange have been satisfied, including
the condition that neither the FDIC nor the DFI shall have 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. The Senior Debt Purchasers will then
have the right, through March 31, 2002, to elect to exchange all or a portion
of the notes held by them 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
Secured Debt Purchaser during such period, that Secured Debt Purchaser will be
deemed to have elected to retain the notes it held 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 $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.
Mark-to-market and impairment charges of $3.5 million and $5.3 million for the
23
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 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
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.
Possible Nasdaq Delisting Of Our Common Stock
Although Nasdaq's staff terminated its proceedings for delisting our common
stock from the Nasdaq National Market arising from its April 20, 2001
determination that our common stock failed to comply with Nasdaq's minimum bid
price listing requirements, we received a Nasdaq staff determination on
September 10, 2001 stating that our common stock was again subject to delisting
from the Nasdaq National Market in that it had failed to maintain a minimum bid
price of $1.00 over the preceding 30 consecutive trading days unless we meet
the requirements for continued listing by December 10, 2001. 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 a 90-day compliance period from September 10, 2001 to December 10, 2001.
However, if we are unable to demonstrate our compliance with the minimum bid
price listing requirements by December 10, 2001, Nasdaq indicated that it would
provide us with written notification that our securities would be delisted. At
such time, we would have the opportunity to appeal Nasdaq's decision to a
Nasdaq listing qualification panel. On September 20, 2001, the closing sales
price of our common stock was $0.56. Since the date of the Nasdaq letter
through September 21, 2001, we have not had ten consecutive business days in
which the bid price of our common stock has been at least $1.00 per share, nor
do we meet as of the date of this prospectus the requirements for continued
listing. No assurance can be given that our common stock will satisfy the
minimum bid price requirements to maintain its listing on the Nasdaq National
Market. See "Risk Factors--Business and Other Considerations--Our Ability to
Obtain Additional Funding Through Equity Financing May Be Adversely Affected By
Our Possible Delisting From The Nasdaq National Market System."
Potential Repurchase Of Certain Of The Notes
We have executed a letter of intent dated August 30, 2001 with IHG to
repurchase up to $78.2 million of the notes held by IHG at a mutually agreed
discount to the face amount of those notes. This repurchase is subject to (1)
the completion of a definitive purchase agreement mutually acceptable to us and
IHG and (2) our
24
arrangement of all financing necessary to pay the agreed upon purchase price
for those notes. We intend to seek this necessary financing through the
issuance of new debt or equity securities. There can be no assurance that we
and IHG will be able to complete a mutually agreeable definitive purchase
agreement, nor that, even if a definitive agreement is completed, we will be
able to obtain the financing necessary to pay the agreed upon purchase price
for those notes.
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, subject to regulatory approval that was
received on September 5, 2001. Mr. McGuire has been one of our directors since
April 2001 and has been, and currently is, the chief executive officer of
Affinity Bank Holdings, Inc. Michael S. Riley, who was initially elected to our
board of directors at our 2001 annual shareholders' meeting, was appointed as
chairman of our board of directors on August 1, 2001. Mr. Riley also is one of
the principal equity owners of IHG, which is the entity from which we may
repurchase some of the note as described above. James P. Staes recently
resigned from our board of directors. Additionally, Brad S. Plantiko, the
Bank's and our Chief Financial Officer, has assumed additional responsibilities
as the Bank's Chief Operating Officer following regulatory approval of that
appointment on September 5, 2001.
Mr. Snavely's contractual rights under his termination protection agreement
were resolved by our agreement to (1) issue to Mr. Snavely 1.3 million shares
of our common stock, (2) extend the exercise period of Mr. Snavely's existing
stock options for up to four years and (3) 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.
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 ratio 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.
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 IHG, one of the selling
security holders. 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.
25
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of our earnings to fixed charges
before and after interest expense on deposits for each of the years in the five
year period ended December 31, 2000 and for the six months ended June 30, 2001:
Six
Months
Ended Year Ended
-------- ------------------------------------------
June 30, Dec. 31, Dec. 31, Dec. 31, Dec 31, Dec 31,
2001 2000 1999 1998 1997 1996
-------- -------- -------- -------- ------- -------
Ratio of Earnings to Fixed
Charges (before interest
expense on deposits)*.... (0.77)x (3.63)x 0.80x (2.18)x 4.64x 3.09x
Ratio of Earnings to Fixed
Charges (after interest
expense on deposits)*.... 0.59x (0.12)x 0.94x 0.04x 2.48x 2.16x
--------
* For the six months ended June 30, 2001, and for each of the years ended
December 31, 2000, 1999 and 1998, earnings were insufficient to cover fixed
charges by $27,634,000, $158,640,000, $7,497,000 and $120,627,000,
respectively.
For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income (loss) from continuing operations before income taxes,
minority interest and extraordinary item and fixed charges (interest expense
(both before and after interest expense on deposits), amortization of debt
costs and an estimate of interest portion of occupancy expense).
USE OF PROCEEDS
We will not receive any proceeds from the sale of the notes by the selling
security holders under this prospectus.
SELLING SECURITY HOLDERS
We originally issued the notes to the selling security holders in
transactions exempt from the registration requirements of the Securities Act.
The selling security holders consist of IHG and the Secured Debt Purchasers. As
part of the Debt Exchange, IHG received approximately $78,200,000 aggregate
principal amount of the notes. The Secured Debt Purchasers will receive prior
to the effective date of the registration statement $18,200,000 aggregate
principal amount of notes in exchange for the Senior Secured Debt they
purchased in connection with our recapitalization. See "Recent Developments--
The Recapitalization Transactions" for a more detailed description of this
exchange.
At our annual shareholders' meeting on June 26, 2001, Michael S. Riley was
elected to our board of directors and also serves as the chairman of our board
of directors. Mr. Riley is one of the principal equity owners of IHG, which is
one of the selling security holders listed below. On August 1, 2001, Michael R.
McGuire was appointed our President and Chief Executive Officer and interim
President and Chief Executive Officer of the Bank, subject to regulatory
approval that was received on September 5, 2001. Mr. McGuire has been one of
our directors since April 2001 and has been, and currently is, the chief
executive officer of Affinity Bank Holdings, Inc., which is another of the
selling security holders. Also, H. Wayne Snavely, our former chief executive
officer, controls Imperial Credit Charitable Foundation, which is another of
the selling security holders. None of the other selling security holders has
had a material relationship with us or any of our affiliates within the past
three years.
26
The following table sets forth, as of the date of this prospectus, the
beneficial ownership of notes of each of the selling security holders, the
aggregate principal amount of notes begin offered by each of the selling
security holders and the aggregate principal amount of notes that would be
owned by each selling security holder after sale of all notes covered by this
prospectus.
Principal
Amount of Principal
Notes Amount
Beneficially Principal Beneficially
Name of Selling Security Holder Owned Prior to Amount of Owned after
of Notes Offering Notes Offered the Offering
------------------------------- -------------- -------------- ------------
Imperial Holdings Group, LLC..... $78,200,000.00 $78,200,000.00 $ 0
Denise Adams Living Trust........ 224,691.36 224,691.36 $ 0
Affinity Bank Holdings, Inc...... 8,987,654.32 8,987,654.32 $ 0
Adams Imperial Limited
Partnership I................... 449,382.72 449,382.72 $ 0
Adams Imperial Limited
Partnership II.................. 449,382.72 449,382.72 $ 0
Kent Adams....................... 56,172.84 56,172.84 $ 0
Andris Baltins................... 786,419.76 786,419.76 $ 0
Mark Adams....................... 112,345.68 112,345.68 $ 0
Scott Adams...................... 112,345.68 112,345.68 $ 0
KMBY, Inc. dba AdComm IV, Inc.... 112,345.68 112,345.68 $ 0
Wayne Boysen..................... 224,691.36 224,691.36 $ 0
Gregg A. Boysen.................. 112,345.68 112,345.68 $ 0
K & B Associates, Inc............ 112,345.68 112,345.68 $ 0
John Ehlert...................... 280,864.20 280,864.20 $ 0
Quarta, L.P...................... 280,864.20 280,864.20 $ 0
David Frith-Smith................ 168,518.52 168,518.52 $ 0
Gleason, L.P..................... 1,404,320.99 1,404,320.99 $ 0
JJZ Limited Partnership.......... 702,160.49 702,160.49 $ 0
AGI Holding Corp. KEYSOP......... 561,728.40 561,728.40 $ 0
George Parker.................... 224,691.36 224,691.36 $ 0
Dr. George Pransky............... 112,345.68 112,345.68 $ 0
Dewey, Helpum & Howe, Inc.
Defined Benefit Plan............ 224,691.36 224,691.36 $ 0
Gerald I. Rich................... 112,345.68 112,345.68 $ 0
Imperial Credit Charitable
Foundation...................... 561,728.40 561,728.40 $ 0
Harvest Opportunity Partners,
L.P............................. 1,825,617.28 1,825,617.28 $ 0
-------------- -------------- ---
Total.......................... $ 96,400,000* $ 96,400,000* $0
--------
* The actual amounts of notes listed in the table may not equal this total due
to rounding.
27
DESCRIPTION OF THE NOTES
The following description sets forth certain general terms and provisions of
the notes. The notes are issued pursuant to the Indenture, dated July 3, 2001,
between us and The Chase Manhattan Bank and Trust Company, National
Association, as Trustee (the "Indenture"), a copy of which has been filed by us
with the Commission. The terms of the notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summaries of certain provisions of the notes and the Indenture do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all the provisions of the Indenture, including the definition
therein of certain terms. Wherever particular sections, articles or defined
terms of the Indenture are referred to herein, such sections, articles or
defined terms shall be as specified in the Indenture. You can find definitions
of certain terms used in the following summary under the subheading "Certain
Definitions." Copies of the forms of the Indenture and related documents are
available from us upon request.
General
The notes are limited in aggregate principal amount to $164,354,350 million
and will mature on June 30, 2005. Interest on the notes accrues at the rate of
12% per annum and is payable in cash semi-annually in arrears on each July 30
and January 30, commencing on January 30, 2002, to Holders of record on the
immediately preceding July 15 and January 15. Interest on the notes generally
will accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Holders of notes on
January 1, 2002 will receive, on January 30, 2002, the amount of interest
accrued on the notes during the period from, and including, July 3, 2001 to,
and excluding, January 30, 2002. Interest is computed on the basis of a 360-day
year comprised of twelve 30-day months. Principal, interest and premium, if
any, on the notes is payable at our office or agency maintained for such
purpose within the City and State of New York or, at our option, payment of
interest may be made by check mailed to the Holders of the notes at their
respective addresses set forth in the register of Holders of notes; provided
that all payments with respect to global notes are required to be made by wire
transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by us, our office or agency in New
York is the office of the Trustee maintained for such purpose. The notes are
issuable in minimum denominations of $1,000 and integral multiples thereof.
Except as set forth below, the notes represent senior secured obligations
and rank equally in right of payment with all of our existing and future
unsubordinated debt, including the Old Notes that remain outstanding after the
Exchange Offer, and senior in right of payment to all of our existing and
future subordinated debt. The notes, and the Lien on our assets securing the
notes, are subordinated to all amounts owing on the Senior Secured Debt for the
period that the Senior Secured Debt remains outstanding. The notes are
effectively senior to the Old Notes that remain outstanding after the Exchange
Offer, to the extent of the notes' second priority Lien (described below) on
certain of our assets securing the notes.
Security
The notes are secured by a second priority Lien on the outstanding common
stock, preferred stock and subordinated debentures of the Bank, all of which
are held by us and comprise our principal assets. For the period that the
Senior Secured Debt remains outstanding, the Senior Secured Debt will have a
first priority lien on these assets. The Secured Convertible Subordinated Debt
will have a Lien on these assets that is subordinate to the Lien securing the
notes. The Old Notes will not be secured and thus will be effectively
subordinated to the notes. On March 29, 2001, we entered a Security Agreement
with the Collateral Agent pursuant to which we granted the foregoing security
interests for the benefit of the Secured Debt Purchasers, the Trustee as
trustee for the holders of notes and the subordinated debt trustee as trustee
for the holders of the Secured Convertible Subordinated Debt, in priorities and
subject to the terms and conditions set forth in the Security Agreement.
Upon instruction from the Required Noteholders, which term means solely a
majority in principal amount of the Senior Secured Debt until such time as the
Senior Secured Debt is no longer outstanding, the Collateral
28
Agent will have the right to foreclose upon the Collateral in accordance with
the terms of the Security Agreement. In accordance with the terms of the
Security Agreement, the proceeds realized by the Collateral Agent from the
Collateral will be applied:
. first, to amounts owing to the Collateral Agent in its capacity as
Collateral Agent;
. second, to the payment of interest on the Senior Secured Debt;
. third, to all amounts of principal outstanding under the Senior Secured
Debt;
. fourth, to all other amounts due on the Senior Secured Debt, including
fees and expenses;
. fifth, to all out-of-pocket expenses owed to the Trustee and to the
trustee for the Secured Convertible Subordinated Debt under the
Indenture for the Secured Convertible Subordinated Debt, as the case may
be;
. sixth, to the payment of interest on the notes;
. seventh, to all amounts of principal outstanding under the notes;
. eighth, to all other amounts due on the notes, including fees and
expenses;
. ninth, to the payment of interest on the Secured Convertible
Subordinated Debt;
. tenth, to all amounts of principal outstanding under the Secured
Convertible Subordinated Debt;
. eleventh, to all other amounts due on the Secured Convertible
Subordinated Debt, including fees and expenses; and
. twelfth, the balance, if any, to us or other persons entitled thereto.
The Collateral includes, among other things, the stock of the Bank. The Bank
is a California-chartered industrial bank whose customer deposits are insured
by the FDIC. As the Bank is a regulated entity subject to oversight and
supervision by the DFI and the FDIC, any Holder of notes who attempts to
foreclose on the stock of the Bank may face certain federal and state legal
requirements that would impose limitations or restrictions with respect to
ownership of the Bank's stock. These limitations or restrictions include limits
on, or prohibitions against, the acquisition through foreclosure, holding, or
sale of the Bank's stock; the requirement that regulatory approval be obtained
prior to acquiring, holding, or disposing of the stock; and restrictions on a
shareholder's ability to exercise its voting or control rights with respect to
the Bank's stock or to participate in the management and operations of the
Bank. In addition, no appraisals of any of the Collateral have been prepared by
us or on our behalf in connection with the issuance and sale of the notes.
There can be no assurance that the proceeds from the sale of the Collateral
remaining after the satisfaction of all obligations owed to the holders of the
Senior Secured Debt, which are secured by the above-described Lien having
priority over the Lien granted to the Collateral Agent for the benefit of the
Holders of the notes, would be sufficient to satisfy payments due on the notes.
By its nature, the Collateral will be illiquid and may have no readily
ascertainable market value. Accordingly, there can be no assurance that the
Collateral can be sold in a short period of time or at all.
In addition, the ability of the Holders to realize upon the Collateral may
be subject to certain bankruptcy law limitations in the event of a bankruptcy.
The right of the Collateral Agent to repossess and dispose of, or otherwise
exercise remedies in respect of, the Collateral upon the occurrence of an Event
of Default and notice to the Required Noteholders would be likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy proceeding
were to be commenced by or against us prior to the Collateral Agent having
repossessed and disposed of, or the Collateral Agent otherwise having exercised
remedies in respect of, the Collateral. Under the Bankruptcy Law, a secured
creditor such as the Collateral Agent is prohibited from repossessing its
security from a debtor in a bankruptcy case, or from disposing of security
repossessed from such debtor, without bankruptcy court approval.
29
Optional Redemption
We may redeem the notes in whole or in part, in integral multiples of $1,000
only, at the redemption prices (expressed as percentages of principal amount)
set forth below, plus accrued and unpaid interest thereon to the applicable
redemption date if redeemed during the twelve-month period beginning on the
Exchange Date or the anniversary of the Exchange Date, as the case may be, in
the years indicated below:
Year Percentage
---- ----------
2001............................................................ 106
2002............................................................ 103
2003 and thereafter............................................. 100
Selection and Notice
Notices of redemption will be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each Holder of notes to be
redeemed at such Holder's registered address. If any note is to be redeemed in
part only, the notice of redemption that relates to such note shall state the
portion of the principal amount thereof to be redeemed. A replacement note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original note. On and after
the redemption date, unless we default in payment of the redemption price,
interest ceases to accrue on notes or portions of notes called for redemption.
Mandatory Redemption
We are not required to make mandatory redemption or sinking fund payments
with respect to the notes.
Certain Covenants
Change of Control
The Indenture provides that upon the occurrence of a Change of Control, each
Holder of notes will have the right to require us to repurchase all or any part
(in increments of $1,000 or an integral multiple thereof) of such Holder's
notes pursuant to the offer procedure described below (the "Change of Control
Offer") at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest to the date of purchase (the
"Change of Control Payment").
Within 10 days following any Change of Control, we will mail a notice to
each Holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase notes pursuant to the procedures
required by the Indenture and described in such notice. We will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the notes as a result of a
Change of Control.
The Change of Control Offer will remain open for a period of 20 Business
Days following its commencement and no longer, except to the extent that a
longer period is required by applicable law (the "Change of Control Offer
Period"). No later than five Business Days after the termination of the Change
of Control Offer Period (the "Change of Control Purchase Date"), we will
purchase all notes tendered in response to the Change of Control Offer. Payment
for any notes so purchased will be made in the same manner as interest payments
are made.
If the Change of Control Purchase Date is on or after an interest record
date and on or before the related interest payment date, any accrued and unpaid
interest will be paid to the Person in whose name a note is registered at the
close of business on such record date, and no additional interest will be
payable to Holders who tender notes pursuant to the Change of Control Offer.
30
On the Change of Control Purchase Date, we will, to the extent lawful, (a)
accept for payment all notes or portions thereof properly tendered pursuant to
the Change of Control Offer, (b) deposit with the Paying Agent an amount equal
to the Change of Control Payment in respect of all notes or portions thereof so
tendered and (c) deliver or cause to be delivered to the Trustee the notes so
accepted together with an Officer's Certificate stating the aggregate principal
amount of notes or portions thereof being purchased by us. The Paying Agent
will promptly mail to each Holder of notes so tendered the Change of Control
Payment for such notes, and the Trustee will promptly authenticate and mail (or
cause to be transferred by book entry) to each Holder a new note equal in
principal amount to any unpurchased portion of the notes surrendered, if any;
provided that each such new note will be in a principal amount of $1,000 or an
integral multiple thereof. We will publicly announce the results of the Change
of Control Offer on or as soon as practicable after the Change of Control
Purchase Date.
Asset Sales
The Indenture provides that we may not consummate an Asset Sale in excess of
$1.0 million unless (i) we receive consideration at the time of such Asset Sale
at least equal to the fair market value of the assets or Equity Interests
issued, sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by us is in the form of cash or Cash
Equivalents; provided that the amount of (x) any of our liabilities (as shown
on our most recent balance sheet, excluding contingent liabilities and trade
payables), that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases us from further liability and (y)
any securities, notes or other obligations received by us from such transferee
that are promptly, but in no event more than 30 days after receipt, converted
by us into cash (to the extent of the cash received), shall be deemed to be
cash for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale in
an amount less than $5,000,000, we may apply such Net Proceeds, (a) to
permanently reduce our Senior Indebtedness (other than the notes), or (b) to an
Investment (excluding Guarantees of Indebtedness or other obligations), the
making of a capital expenditure or the acquisition of other tangible assets, in
each case in or with respect to a Related Business. Any Net Proceeds from Asset
Sales that are not applied or invested as provided in the first sentence of
this paragraph will be deemed to constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $5.0 million, unless we use such
Excess Proceeds within 90 days to increase the Bank's capital, we will be
required to make an offer to all Holders of notes (an "Asset Sale Offer") to
purchase the maximum principal amount of notes that may be purchased with one-
half of the Excess Proceeds, at an offer price in cash in an amount equal to
100% of the principal amount thereof plus accrued and unpaid interest thereon,
if any, thereon to the date of purchase, in accordance with the procedures set
forth in the Indenture. To the extent that the aggregate amount of notes
tendered pursuant to an Asset Sale Offer is less than one-half of the Excess
Proceeds, we may use any remaining Excess Proceeds (together with one-half of
the Excess Proceeds) for general corporate purposes. Upon completion of such
offer to purchase, the amount of Excess Proceeds shall be deemed to be reset at
zero.
An Asset Sale Offer will remain open for a period of 20 Business Days
following its commencement and no longer, except to the extent that a longer
period is required by applicable law (the "Asset Sale Offer Period"). No later
than five Business Days after the termination of the Asset Sale Offer Period
(the "Asset Sale Purchase Date"), we will purchase the principal amount of
notes required to be purchased pursuant to this covenant (the "Asset Sale Offer
Amount") or, if less than the Asset Sale Offer Amount has been tendered, all
notes tendered in response to the Asset Sale Offer. Payment for any notes so
purchased will be made in the same manner as interest payments are made.
If the Asset Sale Purchase Date is on or after an interest record date and
on or before the related interest payment date, any accrued and unpaid interest
will be paid to the Person in whose name a note is registered at the close of
business on such record date, and no additional interest will be payable to
Holders who tender notes pursuant to the Asset Sale Offer.
31
On or before the Asset Sale Purchase Date, we will, to the extent lawful,
accept for payment, on a pro rata basis to the extent necessary, the Asset Sale
Offer Amount of notes or portions thereof tendered pursuant to the Asset Sale
Offer, or if less than the Asset Sale Offer Amount has been tendered, all notes
tendered, and will deliver to the Trustee an Officer's Certificate stating that
such notes or portions thereof were accepted for payment by us in accordance
with the terms of the Indenture. We, DTC or the Paying Agent, as the case may
be, will promptly (but in any case not later than five days after the Asset
Sale Purchase Date) mail or deliver to each tendering Holder an amount equal to
the purchase price of the notes tendered by such Holder and accepted by us for
purchase, and we will promptly issue a new note, the Trustee, upon written
request from us will authenticate and mail or deliver such new note to such
Holder, in a principal amount equal to any unpurchased portion of the note
surrendered. Any note not so accepted will be promptly mailed or delivered by
us to the Holder thereof. We will publicly announce the results of the Asset
Sale Offer on the Asset Sale Purchase Date.
Restricted Payments
The Indenture provides that we will not, and will not permit any of our
Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or
make any other payment or distribution on account of our or any of our
Subsidiaries' Equity Interests (including, without limitation, any payment in
connection with any merger or consolidation involving us) or to the direct or
indirect holders of our or any of our Subsidiaries' Equity Interests in their
capacity as such (other than dividends or distributions payable in our Equity
Interests (other than Disqualified Stock) or dividends or distributions payable
to us or any Subsidiary); (ii) purchase, redeem or otherwise acquire or retire
for value (including without limitation in connection with any merger or
consolidation involving us) any of our Equity Interests or of our direct or
indirect parent or other Affiliate (other than any such Equity Interests owned
by us or any of our Subsidiaries); (iii) make any payment on or with respect
to, or purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to, the notes (other than notes, Existing
Indebtedness and Secured Convertible Subordinated Debt), except a payment of
interest or principal at Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i)
through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) at the time of and immediately after giving effect to such
Restricted Payment, we would be able to incur at least $1.00 of additional
Indebtedness pursuant to the test described in the first sentence of the
covenant described under "Incurrence of Indebtedness and Issuance of
Preferred Stock" in this prospectus; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by us and our Subsidiaries after the date of the
Indenture (excluding Restricted Payments permitted by clauses (x) and (y)
of the next succeeding paragraph), is less than the sum of (i) our
Consolidated Net Income for the period (taken as one accounting period)
from the beginning of the first fiscal quarter commencing after the date of
the Indenture to the end of our most recently ended fiscal quarter for
which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period is
a deficit, less such deficit), plus (ii) the aggregate net cash proceeds
received by us from the issue or sale since the date of the Indenture of
Equity Interests (other than Disqualified Stock) or of debt securities that
have been converted into such Equity Interests (other than Equity Interests
or convertible debt securities sold to one of our Subsidiaries and other
than Disqualified Stock or debt securities that have been converted into
Disqualified Stock), (iii) to the extent that any Restricted Investment
that was made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of capital
with respect to such Restricted Investment (less the cost of disposition,
if any) and (B) the initial amount of such Restricted Investment, (iv) any
dividends received by us or a Wholly Owned Subsidiary, plus (v) $25.0
million.
32
The foregoing provisions will not prohibit: (u) the payment of any dividend
within 60 days after the date of declaration thereof, if at the date of
declaration the payment would have complied with the provisions of the
Indenture; (v) the payment of any dividend on or the redemption, repurchase,
retirement or other acquisition of Bank Trust Preferred Stock; (w) the
redemption, repurchase, retirement or other acquisition of any of our Equity
Interests in exchange for, or out of the proceeds of, the substantially
concurrent sale (other than to our Subsidiaries) of other Equity Interests
(other than any Disqualified Stock); provided that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase, retirement
or other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph; (x) the defeasance, redemption or repurchase of subordinated
Indebtedness with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness or the substantially concurrent sale (other than to
our Subsidiaries) of Equity Interests (other than Disqualified Stock); provided
that the amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement or other acquisition shall be excluded from
clause (c)(ii) of the preceding paragraph; (y) the payment of any dividends on
or the repurchase, redemption or other acquisition or retirement for value of
any of our Equity Interests or of any of our Subsidiaries held by any member of
our (or any of our Subsidiaries') management pursuant to any management equity
subscription agreement or stock option agreement or other management agreement
or plan; provided that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed $5.0 million in
any twelve-month period plus the aggregate cash proceeds received by us during
such twelve-month period from any reissuance of Equity Interests by us to
members of our management and that of our Subsidiaries; and (z) the repurchase,
redemption or other retirement for value of any Equity Interests of any
Subsidiary in a Strategic Investor Repurchase Transaction, in each case so long
as no Default or Event of Default shall have occurred and be continuing
immediately after such transaction.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that we will not, and will not permit any of our
Subsidiaries to, directly or indirectly, create, incur, assume, guaranty or
otherwise become directly or indirectly liable with respect to (collectively,
"incur") any Indebtedness (including Acquired Debt) and that we will not permit
any of our Subsidiaries other than the Bank or any Subsidiary of the Bank to
issue any shares of preferred stock; provided, however, that we or any
Subsidiary may incur Indebtedness (including Acquired Debt) and any Subsidiary
may issue preferred stock if, on the date of such incurrence and after giving
effect thereto our Consolidated Leverage Ratio does not exceed 2.0 to 1.0, or
1.5 to 1.0 in the case of any Indebtedness in principal amount in excess of
$75.0 million (less any subordinated Indebtedness issued pursuant to the
Recapitalization Agreement) which is subordinated to the notes.
The foregoing provisions will not apply to:
(i)Our and our Subsidiaries' Indebtedness existing on the date of the
Indenture;
(ii)the incurrence by us of Indebtedness represented by the notes, the
Secured Convertible Subordinated Debt and up to $75.0 million of
Indebtedness (less any subordinated Indebtedness issued pursuant to the
Recapitalization Agreement) which is subordinated to the notes and which
matures after the Stated Maturity of the notes;
(iii)the incurrence of Permitted Warehouse Indebtedness by us or any of
our Subsidiaries, and any Guarantee by us of such Indebtedness incurred by
a Subsidiary, provided, however, that to the extent any such Indebtedness
ceases to constitute Permitted Warehouse Indebtedness, such Indebtedness
shall be deemed to be incurred at such time by us or such Subsidiary, as
the case may be;
(iv)the incurrence by us or any of our Subsidiaries of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund, Indebtedness
that was permitted by the Indenture to be incurred or that was outstanding
at the date of the Indenture;
33
(v)the incurrence by us or a Subsidiary of Hedging Obligations directly
related to (A) our or a Subsidiary's Indebtedness incurred in conformity
with the provisions of the Indenture, (B) Receivables held by us or our
Subsidiaries pending sale, (C) our Receivables or that of our Subsidiaries
that have been sold, (D) Receivables that we or our Subsidiaries reasonably
expect to purchase or commit to purchase, finance or accept as collateral,
or (E) other assets owned or financed by us or our Subsidiaries in the
ordinary course of business; provided, however, that, in the case of each
of the foregoing clauses (A) through (E), such Hedging Obligations are
eligible to receive hedge accounting treatment in accordance with GAAP as
applied by us and our Subsidiaries on and after the date of the first
issuance of notes under the Indenture;
(vi)Indebtedness of the Subsidiaries to us to the extent that such
Indebtedness constitutes a Permitted Investment by us of the type permitted
under the definition of Permitted Investments;
(vii)the incurrence by us or any of our Subsidiaries of intercompany
Indebtedness owing us or any of our Subsidiaries; provided, however, that
(i) any subsequent issuance or transfer of any Capital Stock which results
in any such Indebtedness being held by a Person other than a Subsidiary and
(ii) any sale or transfer of any such Indebtedness to a Person besides us
or a Subsidiary shall be deemed, in each case, to constitute the incurrence
of such Indebtedness by us or such Subsidiary, as the case may be;
(viii)the incurrence by a Subsidiary of Non-Recourse Debt; provided,
however, that if any such Indebtedness ceases to be Non-Recourse Debt of
the Subsidiary, such event shall be deemed to constitute an incurrence of
Indebtedness by our Subsidiary;
(ix)the maintenance by us or any of our Subsidiaries of Indebtedness
incurred to finance Receivables or repurchase facilities in the ordinary
course of business; and
(x)the incurrence by us and our Subsidiaries of Indebtedness in an
aggregate principal amount which, together with the principal amount of all
our and our Subsidiaries' outstanding Indebtedness on the date of
incurrence (other than Indebtedness otherwise permitted by this covenant),
does not exceed $25.0 million.
Liens
The Indenture provides that the we will not, and will not permit any of our
Subsidiaries to, create, incur or otherwise cause or suffer to exist or become
effective any Lien for the benefit of any Indebtedness ranking pari passu with
or junior to the notes, other than Permitted Liens, upon any of our or any
Subsidiaries' property or assets or any shares of stock or debt of our
Subsidiaries which own property or assets, now owned or hereafter acquired,
unless (i) if such lien secures Indebtedness which is pari passu with the
notes, then the notes are secured on an equal and ratable basis or (ii) if such
lien secures Indebtedness which is junior to the notes, any such lien shall be
junior to a lien granted to the holders of the notes.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that we will not, and will not permit any of our
Subsidiaries to, directly or indirectly, create or otherwise cause to become
effective any encumbrance or restriction on the ability of any Subsidiary to
(i)(a) pay dividends or make any other distributions to us or any of our
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (b) pay any indebtedness
owed to us or any of our Subsidiaries, (ii) make loans or advances to us or any
of our Subsidiaries or (iii) transfer any of its properties or assets to us or
any of our Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness as in effect on the date of the
Indenture, (b) the Warehouse Facilities as in effect as of the date of the
Indenture, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, additions, replacements or refinancings
thereof; provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, additions, replacements or refinancings are
no more restrictive with respect to such
34
dividend and other payment restrictions than those contained in the Warehouse
Facilities as in effect on the date of the Indenture, (c) the Indenture and the
notes, (d) applicable law, regulation or order of or agreement with a
governmental authority, (e) any instrument governing Indebtedness or Capital
Stock of a Person acquired by us or any of our Subsidiaries as in effect at the
time of such acquisition (except to the extent such Indebtedness was incurred
in connection with or in contemplation of such acquisition), which encumbrance
or restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person, so
acquired; provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred, (f) by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (g) purchase money
obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in this clause (iii) on the
property so acquired, or (h) Permitted Refinancing Indebtedness; provided that
the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
Transactions with Affiliates
The Indenture provides that we will not, and will not permit any of our
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of our properties or assets to, or purchase any property or
assets from, or enter into or make or amend any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such
Affiliate Transaction is on terms that are no less favorable to us or the
relevant Subsidiary than those that would have been obtained in a comparable
transaction by us or such Subsidiary with an unrelated Person and (ii) we
deliver to the Trustee (a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess
of $2.0 million, a resolution of the Board of Directors set forth in an
Officer's Certificate certifying that such Affiliate Transaction complies with
clause (i) above and that such Affiliate Transaction has been approved by a
majority of the disinterested members of the Board of Directors and (b) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $10.0 million, in
addition to such Officer's Certificate, an opinion as to the fairness to the
Holders of such Affiliate Transaction from a financial point of view issued by
an investment banking firm of national standing which is not our Affiliate;
provided, however, that such fairness opinion shall not be required with
respect to a transaction that is made in the ordinary course of our or such
Subsidiary's business, as the case may be, and is consistent with our or such
Subsidiary's past business practice. Notwithstanding the foregoing, the
following shall not be deemed Affiliate Transactions: (i) any employment
agreement entered into by us or any of our Subsidiaries in the ordinary course
of business and consistent with our or such Subsidiary's past practice, (ii)
any issuance of securities, or other payments, compensation, benefits, awards
or grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans approved by
the Board of Directors in the ordinary course of business and consistent with
our or such Subsidiary's past practice, (iii) the grant of stock options or
similar rights to our employees and directors pursuant to plans approved by the
Board of Directors in the ordinary course of business and consistent with our
or such Subsidiary's past practice, (iv) loans or advances to employees in the
ordinary course of business in accordance with our or such Subsidiaries' past
practices, but in any event not to exceed $500,000 in aggregate principal
amount outstanding at any one time, (v) the payment of reasonable fees to our
directors and those of our Subsidiaries who are not our or our Subsidiaries'
employees, (vi) transactions between or among us and/or our Subsidiaries, and
(vii) Restricted Payments and Permitted Investments (other than Strategic
Investor Repurchase Transactions) that are permitted by the provisions of the
Indenture described above under the caption "--Restricted Payments."
Business Activities
The Indenture provides that we will not, and will not permit any Subsidiary
to, engage in any line of business that is not a Related Business (except as a
result of Investments in other businesses made or acquired in connection with
the activities or conduct of the Related Businesses in the ordinary course of
business by us
35
and our Subsidiaries, including Investments obtained as a result of the
foreclosure of Liens securing amounts lent by us or any of our Subsidiaries).
Merger, Consolidation or Sale of Assets
The Indenture provides that we may not consolidate or merge with or into
(whether or not we are the surviving corporation), or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of our
properties or assets in one or more related transactions to, another
corporation, Person or entity unless:
(1) We are the surviving corporation or the entity or the Person formed
by or surviving any such consolidation or merger (if other than us) or to
which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia;
(2) the entity or Person formed by or surviving any such consolidation
or merger (if other than us) or the entity or Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have
been made assumes all our Obligations under the notes, the Indenture and
the Security Documents pursuant to a supplemental Indenture in a form
reasonably satisfactory to the Trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) we shall have delivered to the Trustee an Officer's Certificate and
an Opinion of Counsel each stating that such transaction and supplemental
Indenture comply with the provisions of this paragraph.
Reports
The Indenture provides that, within 15 days after such information would be
required to be filed (or is filed) with the Commission and whether or not
required by the rules and regulations of the Commission, so long as any notes
are outstanding, we will furnish to the Trustee:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if we were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report thereon by our
auditors, and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if we were required to file such reports.
In addition, we agreed that, for so long as any notes remain outstanding, we
will furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of
Default:
(1) default for 30 days in the payment when due of interest on the
notes;
(2) default in payment when due of the principal of or premium, if any,
on the notes;
(3) our failure for 60 days after notice from the Trustee or the
Holders of at least 25% in aggregate principal amount of the then
outstanding notes to comply with any of our other covenants, agreements or
warranties in the Indenture, the notes and the Security Documents;
(4) default under any mortgage, Indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by us (or the payment of which is
guaranteed by us) whether such Indebtedness or guarantee existed on the
date of, or is created after the date of, the Indenture which results in
the acceleration of such Indebtedness prior to its express
36
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness the
maturity of which has been so accelerated, aggregates $5.0 million or more;
(5) failure us or any of our Significant Subsidiaries to pay final
judgments aggregating in excess of $5.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days;
(6) other than as permitted under the Security Documents or the terms
of the Indenture, any of the Security Documents cease to be in full force
and effect, or any of the Security Documents cease to give the Trustee the
Security Interests, rights, powers and privileges purported to be created
thereby, or any Security Document is declared null and void, or we shall
deny or disaffirm any of our obligations under any Security Document or any
Collateral becomes subject to any Lien other than Permitted Liens; and
(7) certain events of bankruptcy or insolvency with respect to us or
any of our Significant Subsidiaries.
If any Event of Default, other than an Event of Default under clause (7) of
the preceding paragraph with respect to us or any Significant Subsidiary,
occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the then outstanding notes, by notice to the Trustee and
us, may declare all the notes to be due and payable immediately. In the case of
an Event of Default arising from certain events of bankruptcy or insolvency
described in clause (7) of the preceding paragraph, with respect to us or any
Significant Subsidiary, all outstanding notes will become due and payable
without further action or notice. If an Event of Default exists solely by
reason of an acceleration of Indebtedness under clause (4) of the preceding
paragraph, and such acceleration is rescinded by the holders of such
Indebtedness affected thereby in accordance with the terms of the Indenture,
such Event of Default shall cease to exist. Holders of the notes may not
enforce the Indenture or the notes except as provided in the Indenture. Subject
to certain limitations, Holders of a majority in principal amount of the then
outstanding notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders of the notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal, interest or Liquidated Damages, if any) if it
determines that withholding notice is in their interest.
The Indenture provides that, at any time after a declaration of acceleration
with respect to the notes, the Holders of a majority in principal amount of the
notes may rescind and cancel such declaration and its consequences if:
(1) the rescission would not conflict with any judgment or decree, and
(2) all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
the acceleration.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the notes may waive any
existing Default or Event of Default under the Indenture and its consequences,
except a default in the payment of the principal of or interest on any notes.
Notwithstanding any other provision of the Indenture, the right of any Holder
of a note to receive payment of principal, premium and interest on the notes,
on or after the respective due dates expressed in the notes (including in
connection with an offer to purchase), or to bring suit for the enforcement of
any such payment on or after such respective dates, shall not be impaired or
affected without the consent of such Holder except to the extent that the
institution or prosecution of such suit or the entry of judgment therein would,
under applicable law, result in the surrender, impairment or waiver of the Lien
of the Indenture and the Security Documents upon the Collateral.
We are required to deliver to the Trustee annually a statement regarding
compliance with the Indenture, and we are required upon becoming aware of any
Default or Event of Default, to deliver to the Trustee a statement specifying
such Default or Event of Default.
37
No Personal Liability of Directors, Officers, Employees and Shareholders
None of our directors, officers, employees, incorporators or shareholders,
as such, shall have any liability for any of our obligations under the notes,
the Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of notes by accepting a note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
Legal Defeasance and Covenant Defeasance
We may, at our option and at any time, elect to have all of our obligations
discharged with respect to the outstanding notes ("Legal Defeasance") except
for:
(1) the rights of Holders of outstanding notes to receive payments in
respect of the principal of, premium, and interest on such notes when such
payments are due from the trust referred to below,
(2) our obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or
stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust,
(3) the rights, powers, trusts, duties and immunities of the Trustee,
and our obligations in connection therewith, and
(4) the Legal Defeasance provisions of the Indenture.
In addition, we may, at our option and at any time, elect to have our
obligations released with respect to certain covenants that are described in
the Indenture ("Covenant Defeasance") and thereafter any omission to comply
with such obligations shall not constitute a Default or Event of Default with
respect to the notes. In the event Covenant Defeasance occurs, certain events
(not including nonpayment or certain bankruptcy, receivership, rehabilitation
and insolvency events) described above under the caption "--Events of Default
and Remedies" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) We must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, and interest on the
outstanding notes on the stated maturity or on the applicable redemption
date, as the case may be, and we must specify whether the notes are being
defeased to maturity or to a particular redemption date;
(2) either:
(a) in the case of Legal Defeasance (other than when the notes are
being defeased within one year prior to the stated maturity or the
applicable maturity date), we shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that:
(i) We have received from, or there has been published by, the
Internal Revenue Service a ruling, or
(ii) since the date of the Indenture, there has been a change
in the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel shall confirm
that, the Holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would
have been the case if such Legal Defeasance had not occurred, or
38
(b) in the case of Covenant Defeasance, we shall have delivered to
the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding
notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Covenant Defeasance had
not occurred;
(3) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day
after the date of such deposit;
(4) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument to which we are a party or by which we are bound;
(5) We must deliver to the Trustee an Officer's Certificate stating
that the deposit was not made by us with the intent of preferring the
Holders of notes over our other creditors with the intent of defeating,
hindering, delaying or defrauding our creditors or others; and
(6) We must deliver to the Trustee an Officer's Certificate and an
opinion of counsel, each stating that all conditions precedent provided for
or relating to the Legal Defeasance or the Covenant Defeasance, as the case
may be, have been complied with.
Transfer and Exchange
A Holder may transfer or exchange notes in accordance with the Indenture.
The registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and we may require a
Holder to pay any taxes and fees required by law or permitted by the
Indenture. We are not required to transfer or exchange any note selected for
redemption. Also, we are not required to transfer or exchange any note for a
period of 15 days before a selection of notes to be redeemed.
The registered Holder of a note is treated as the owner of it for all
purposes.
Form, Denomination, Transfer, Exchange and Book-Entry Procedures
The notes are issued in fully registered form, without interest coupons.
Except as described below, the notes have been deposited with, or on behalf
of, DTC, and registered in the name of Cede & Co. as DTC's nominee. The notes
are in the form of a global new note Certificate (the "Global New Note") and
will stay in the custody of the Trustee pursuant to the FAST Balance
Certificate between DTC and the Trustee.
Exchanges of Interests in Global New Note for Certificated Notes
A beneficial interest in a Global New Note may not be exchanged for a note
in certificated form unless:
(1) DTC
(a) notices us that it is unwilling or unable to continue as
depositary for the Global New Note, or
(b) has ceased to be a clearing agency registered under the
Securities Exchange Act of 1934, and in either case we thereupon fail to
appoint a successor depositary,
(2) We, at our option, notice the Trustee in writing that we elect to
cause the issuance of the new notes in certificated form, or
39
(3) there shall have occurred and be continuing an Event of Default or
any event which after notice or lapse of time or both would be an Event of
Default with respect to the new notes.
In all cases, certificated new notes delivered in exchange for the Global
New Note or beneficial interests therein will be registered in the names, and
issued in any approved denominations, requested by or on behalf of the
depositary (in accordance with its customary procedures). Any certificated new
note issued in exchange for an interest in the Global New Note will bear the
legend restricting transfers that is borne by such Global New Note. Any such
exchange will be effected through the DWAC System and an appropriate adjustment
will be made in the records of the security registrar to reflect a decrease in
the principal amount of the Global New Note.
Depository Procedures
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its Participants and to facilitate the clearance and
settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of its Participants. The Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with an Indirect
Participant. Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests and transfer of ownership interests of
each actual purchaser of each security held by or on behalf of DTC are recorded
on the records of the Participants and Indirect Participants.
DTC has also advised us that, pursuant to procedures established by it, (1)
upon deposit of the Global New Note, DTC will credit the respective accounts of
Participants in the principal amount at maturity of the new notes of the
individual beneficial interests represented by such Global New Note and (2)
ownership of such interests in the Global New Note will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by DTC or its nominee (with respect to the Participants) or by the Participants
and the Indirect Participants (with respect to other owners of beneficial
interests in the Global New Note).
Investors in the Global New Note may hold their interests therein directly
through DTC, if they are participants in such system, or indirectly through
organizations (including Euroclear and Clearstream Banking S.A. ("Clearstream")
which are participants in such system. All interests in the Global New Note,
including those held through Euroclear or Clearstream, may be subject to the
procedures and requirements of DTC. Those interests held through Euroclear or
Clearstream may also be subject to the procedures and requirements of such
systems. The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer beneficial interests in the Global New Note to such persons
will be limited to that extent. Because DTC can act only on behalf of
Participants, which in turn act on behalf of Indirect Participants and certain
banks, the ability of a person having beneficial interests in the Global New
Note to pledge such interests to persons or entities that do not participate in
the DTC system, or otherwise take actions in respect of such interests, may be
affected by the lack of a physical Certificate evidencing such interests. For
certain other restrictions on the transferability of the notes, see "--
Exchanges of Interests in the Global New Note for Certificated Notes."
Except as described below, owners of interests in the Global New Note will
not have new notes registered in their names, will not receive physical
delivery of new notes in certificated form and will not be considered the
registered owners or holders thereof under the Indenture for any purpose.
40
Payments in respect of the principal of and premium and interest on the
Global New Note registered in the name of DTC or its nominee are payable by the
Trustee to DTC in its capacity as the registered Holder under the Indenture.
Under the terms of the Indenture, we and the Trustee will treat the persons in
whose names the new notes, including the Global New Note, are registered as the
owners thereof for the purpose of receiving such payments and for any and all
other purposes whatsoever. Consequently, neither we, the Trustee nor our or the
Trustee's agent has or will have any responsibility or liability for (1) any
aspect of DTC's records or any Participant's or Indirect Participant's records
relating to or payments made on account of beneficial ownership interests in
the Global New Note, or for maintaining, supervising or reviewing any of DTC's
records or any Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global New Note or (2) any other matter
relating to the actions and practices of DTC or any of its Participants or
Indirect Participants. DTC has advised us that its current practice, upon
receipt of any payment in respect of securities such as the new notes
(including principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in the principal amount of beneficial interests in
the relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of new
notes will be governed by standing instructions and customary practices and
will be the responsibility of the Participants or the Indirect Participants and
will not be the responsibility of DTC, the Trustee or us. Neither we nor the
Trustee will be liable for any delay by DTC or any of its Participants in
identifying the beneficial owners of the new notes, and we and the Trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
Except for trades involving only Euroclear and Clearstream participants,
interests in the Global New Note are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity in such
interests will therefore settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds, and transfers between
participants in Euroclear and Clearstream will be effected in the ordinary way
in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the new
notes described herein, cross-market transfers between the Participants in DTC,
on the one hand, and Euroclear or Clearstream participants, on the other hand,
will be effected through DTC in accordance with DTC's rules on behalf of
Euroclear or Clearstream, as the case may be, by its respective depositary;
however such cross-market transactions will require delivery of instructions to
Euroclear or Clearstream, as the case may be, by the counterparty in such
system in accordance with the rules and procedures and within the established
deadlines (Brussels time) of such system. Euroclear or Clearstream, as the case
may be, will, if the transaction meets its settlement requirements, deliver
instructions to its respective depositary to take action to effect final
settlement on its behalf by delivering or receiving interests in the Global New
Note in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. Euroclear
participants and Clearstream participants may not deliver instructions directly
to the depositories for Euroclear or Clearstream.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in the Global New Note from a
Participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Clearstream participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Clearstream) immediately following the settlement date of DTC. DTC has advised
us that cash received in Euroclear or Clearstream as a result of sales of
interests in the Global New Note by or through a Euroclear or Clearstream
participant to a Participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or
Clearstream cash account only as of the business day for Euroclear or
Clearstream following DTC's settlement date.
41
DTC has advised us that it will take any action permitted to be taken by a
Holder of new notes only at the direction of one or more Participants to whose
account with DTC interests in the Global New Note are credited and only in
respect of such portion of the aggregate principal amount of the new notes as
to which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the new notes, DTC reserves the
right to exchange the Global New Note for legended new notes in certificated
form, and to distribute such new notes to its Participants.
The information in this section concerning DTC, Euroclear and Clearstream
and their book-entry systems has been obtained from sources that we believe to
be reliable, but we take no responsibility for the accuracy thereof.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the Global New Note among
participants in DTC, Euroclear and Clearstream, they are under no obligation to
perform or to continue to perform such procedures, and such procedures may be
discontinued at any time. Neither we nor the Trustee will have any
responsibility for the performance by DTC, Euroclear or Clearstream or their
respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture, the
notes and the Security Documents may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the notes
then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes),
and any existing default or compliance with any provision of the Indenture, the
notes, or the Security Documents may be waived with the consent of the Holders
of a majority in principal amount of the then outstanding notes (including
consents obtained in connection with a tender offer or exchange offer for
notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must consent to
an amendment, supplement or waiver of the Indenture, the notes or the
Security Documents,
(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes (other
than pursuant to the provisions of the Indenture described above under the
captions "--Change of Control" and "--Asset Sales"),
(3) reduce the rate of or change the time for payment of interest on
any note,
(4) waive a Default or Event of Default, in each case in the payment of
principal of or premium or interest on the notes (except a rescission of
acceleration of the notes by the Holders of at least a majority in
aggregate principal amount of the notes and a waiver of the payment default
that resulted from such acceleration),
(5) make any note payable in money other than that stated in the notes,
(6) make any change in the provisions of the Indenture relating to
waivers of past Defaults (other than to add sections of the Indenture or
the notes which are subject thereto) or the rights of Holders of notes to
receive payments of principal of or premium or interest on the notes,
(7) waive a redemption payment with respect to any note (other than a
payment required by the provisions of the Indenture described above under
the caption "--Change of Control" and "--Asset Sales"), or
(8) make any change in the foregoing amendment and waiver provisions.
42
Notwithstanding the foregoing, without the consent of any Holder of notes,
we and the Trustee may amend or supplement the Indenture, the notes and the
Security Documents to cure any ambiguity, defect or inconsistency, to provide
for uncertificated notes in addition to or in place of certificated notes, to
provide for the assumption of our obligations to Holders of notes in the case
of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the Holders of notes or that does not
adversely affect the legal rights under the Indenture and the Security
Documents of any such Holder, to comply with requirements of the Commission in
order to effect or maintain the qualification of the Indenture under the Trust
Indenture Act to mortgage, pledge or grant a Security Interest in favor of the
Trustee as additional security for the payment and performance of Obligations
under the Indenture and the notes, in any property or assets, including any
which are required to be mortgaged, pledged or hypothecated, or in which a
Security Interest is required to be granted pursuant to the provisions of the
Security Documents or otherwise.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become our creditor, to obtain payment of claims in certain cases, or
to realize on certain property received in respect of any such claim as
security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, and apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability
or expense.
Additional Information
Anyone who receives this prospectus may obtain a copy of the Indenture and
the Security Documents without charge by writing to Imperial Credit Industries,
Inc., 23550 Hawthorne Boulevard, Building 1, Suite 210, Torrance, California
90505; Attention: Secretary.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person (i) Indebtedness
of any other Person existing at the time such other Person is merged with or
into or became a Subsidiary of such specified Person, including, without
limitation, Indebtedness incurred in connection with, or in contemplation of,
such other Person merging with or into or becoming a Subsidiary of such
specified Person and (ii) Indebtedness secured by a Lien encumbering any asset
acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
43
"Asset Sale" means (a) any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by us, including
any disposition by means of a merger, consolidation or similar transaction
(other than as permitted under "--Certain Covenants--Merger, or Consolidation
or Sale of Assets") (each referred to for the purposes of this definition as a
"disposition"), of (i) any shares of Capital Stock of the Bank (other than Bank
Trust Preferred Stock or directors' qualifying shares or shares required by
applicable law to be held by a Person other than us or the Bank, as the case
may be), (ii) all or substantially all the assets of any of our divisions or
lines of business, (iii) any of our other assets outside of our ordinary course
of business; or (b) any issuance of Capital Stock (other than Bank Trust
Preferred Stock or non-convertible preferred stock that is not Disqualified
Stock) by the Bank, except any such issuance to us. Notwithstanding the
foregoing, an "Asset Sale" does not include (a) a disposition by us or a Wholly
Owned Subsidiary, (b) a disposition that constitutes a Restricted Payment
permitted by the covenant described under "--Certain Covenants--Restricted
Payments"), and (c) any trade or exchange by us of any assets for similar
assets of a Related Business owned or held by another Person; provided that (1)
the fair market value of the assets traded or exchanged by us (including any
cash or Cash Equivalents to be delivered by us) is reasonably equivalent to the
fair market value of the asset or assets (together with any cash or Cash
Equivalents) to be received by us and (2) such exchange is approved by a
majority of our directors. who are not our employees or employees of our
Subsidiaries.
"Bank Trust Preferred Stock" means equity interests issued by a special
purpose entity which is a wholly-owned subsidiary of the Bank and which exists
for the purpose only of issuing equity interests, investing the gross proceeds
of such equity issuances in debt securities of the Bank and engaging in other
activities necessary or incidental thereto.
"Bankruptcy Law" means Title 11 of the U.S. Code or any similar federal or
state law for the relief of debtors.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet of the
lessee thereof in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means: (i) United States dollars; (ii) Government
Securities (except that for purposes of this definition, Government Securities
must have a remaining Weighted Average Life to Maturity of not more than one
year from the date of investment therein); (iii) commercial paper or other
short-term corporate obligation that has received a rating of at least A-1 or
AA from Standard & Poor's Corporation ("S&P"), P-1 or Aa2 from Moody's Investor
Services, Inc. ("Moody's"), F-1 or AA from Fitch, Inc. ("Fitch"); (iv) time
deposits, certificates of deposit, bank acceptances or bank notes issued by any
bank having capital surplus and undivided profits aggregating at least $500
million (or the foreign currency equivalent thereof) and at least a high A
rating (or the equivalent) from any two of the following: S&P, Moody's, Thomson
Bankwatch, Inc. or IBCA, Inc.; (v) money market preferred stocks which, at the
date of acquisition and at all times thereafter, are accorded ratings of at
least mid AA by any two of the following: S&P, Moody's or Fitch; (vi) tax-
exempt obligations that are accorded ratings at the time of investment therein
of at least mid AA (or equivalent short-term ratings) by any two of the
following; S&P, Moody's or Fitch; (vii) master repurchase agreements with
44
foreign or domestic banks having capital and surplus of not less than $500
million (or the foreign currency equivalent thereof) or primary dealers so
long as (a) such bank or dealer has a rating of at least mid AA from any two
of the following: S&P, Moody's or Fitch; (b) such agreements are
collateralized with obligations of the United States government or its
agencies at a ratio of 102%, or with other collateral rated at least mid AA
from any two of the following: S&P, Moody's or Fitch, at a rate of 103% and,
in either case marked to market weekly and (c) such securities shall be held
by a third-party agent; (viii) guaranteed investment contracts and/or
agreements of a bank, insurance company or other institution whose unsecured,
uninsured and unguaranteed obligations (or claims-paying ability) are, at the
time of investment therein, rated AAA by any two of the following: S&P,
Moody's, Fitch or Duff; (ix) money market funds, the portfolio of which is
limited to investments described in clauses (i) through (viii); (x) with
respect to Non-Domestic Persons, instruments that are comparable to those
described in clauses (i), (ii), (iv) and (vii) in the country in which such
Non-Domestic Person is organized or has its principal business operations; and
(xii) up to $1.0 million in the aggregate of other financial assets held by
Subsidiaries. In no event shall any of the Cash Equivalents described in
clauses (iii) through (viii), (x) and (xi) above have a final maturity more
than one year from the date of investment therein.
"Change of Control" means the occurrence of one or more of the following
events: (i) a person or entity or group (as that term is used in Section
13(d)(3) of the Exchange Act) of persons or entities shall have become the
beneficial owner of a majority of our securities ordinarily having the right
to vote in the election of directors; (ii) during any consecutive two-year
period, individuals who at the beginning of such period constituted our Board
of Directors (together with any directors who are members of such Board of
Directors on the date hereof and any new directors whose election by such
Board of Directors or whose nomination for election by our shareholders was
approved by a vote of 66 2/3% of the directors then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of our Board of Directors then in office; (iii) any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, our and our Subsidiaries'
assets, taken as a whole, to any person or entity or group (as so defined) of
persons, or entities (other than to any of our Wholly Owned Subsidiaries);
(iv) our merger or consolidation with or into another corporation or the
merger of another corporation into us with the effect that immediately after
such transaction any person or entity or group (as so defined) of persons or
entities shall have become the beneficial owner of securities of the surviving
corporation of such merger or consolidation representing a majority of the
combined voting power of the outstanding securities of the surviving
corporation ordinarily having the right to vote in the election of directors;
or (v) the adoption of a plan relating to our liquidation or dissolution.
"Collateral" means, collectively, all of the property and assets that are
from time to time subject to the Lien of the Security Documents.
"Collateral Agent" means Wilmington Trust Company, as collateral agent
under the Security Agreement.
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of all our consolidated Indebtedness and
that of our Subsidiaries, excluding Warehouse Indebtedness, Guarantees thereof
and other Indebtedness permitted to be incurred pursuant to clauses (c) and
(i) of the covenant described under "--Incurrence of Indebtedness and Issuance
of Preferred Stock" to (ii) our Consolidated Net Worth.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary
or that is accounted for by the equity method of accounting shall be included
only to the extent of the amount of dividends or distributions paid in cash to
the referent Person or a Wholly Owned Subsidiary thereof and (ii) the
cumulative effect of a change in accounting principles shall be excluded.
45
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common shareholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that
by its terms is not entitled to the payment of dividends unless such dividends
may be declared and paid only out of net earnings in respect of the year of
such declaration and payment, but only to the extent of any cash received by
such Person upon issuance of such preferred stock, less (x) all write-ups
(other than write-ups resulting from foreign currency translations and write-
ups of tangible assets of a going concern business made within 12 months after
the acquisition of such business) subsequent to the date of the Indenture in
the book value of any asset owned by such Person or a consolidated Subsidiary
of such Person and (y) all investments as of such date in unconsolidated
Subsidiaries and in Persons that are not Subsidiaries (except, in each case,
Permitted Investments and Investments existing as of such date), all of the
foregoing determined in accordance with GAAP.
"Secured Convertible Subordinated Debt" means our Obligations under or in
respect of our 12% Secured Convertible Subordinated Notes due 2005.
"Custodian" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the Holder thereof, in whole or in part, on or prior to the
date that is 91 days after the Stated Maturity of the notes.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock of any Person (but excluding any debt security
that is convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any private offering, or any underwritten primary
public offering pursuant to an effective registration statement under the
Securities Act, in each case, of our Equity Interests (other then Disqualified
Stock).
"Existing Indebtedness" means our and our Subsidiaries' Indebtedness (other
than Indebtedness under the Warehouse Facilities and Indebtedness to finance
Receivables or repurchase facilities in the ordinary course of business) in
existence on the date of the Indenture, until such amounts are repaid.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the net obligations
of such Person under (1) currency exchange or interest rate swap agreements,
currency exchange or interest rate cap agreements and
46
currency exchange or interest rate collar agreements and (2) other agreements
or arrangements designed to protect such Person against fluctuations in
interest rates or in currency exchange or interest rates or credit or other
business risks, in any case in the ordinary course of business and not for
speculative or investment purposes.
"Holder" means a holder of any of the notes.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable, (ii) all Capital
Lease Obligations of such Person, (iii) all obligations of such Person issued
or assumed as the deferred purchase price of property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable and expense accruals
arising in the ordinary course of business), (iv) all obligations of such
Person for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction (other than obligations with respect
to letters of credit securing obligations (other than obligations described in
(i) through (iii) above) entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon or, if and
to the extent drawn upon, such drawing is reimbursed no later than the tenth
Business Day following receipt by such Person of a demand for reimbursement
following payment on the letter of credit), (v) all obligations of the type
referred to in clauses (i) through (iv) of other Persons and all dividends of
other Persons for the payment of which, in either case, such Person is
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise, including by means of any Guarantee, (vi) all obligations of the
type referred to in clauses (i) through (iv) of other Persons secured by any
Lien on any property or asset of such Person (whether or not such obligation is
assumed by such Person), the amount of such obligation being deemed to be the
lesser of the value of such property or assets or the amount of the obligation
so secured and (vii) to the extent not otherwise included in this definition,
Hedging Obligations of such Person. The amount of Indebtedness of any Person at
any date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence
of the contingency giving rise to the obligation, of any contingent obligations
at such date. Notwithstanding the foregoing, the term "Indebtedness" does not
include deposit liabilities of any Subsidiary, the deposits of which are
insured by the Federal Deposit Insurance Corporation or any successor agency or
Indebtedness of any Subsidiary to the Federal Home Loan Bank of San Francisco
or any successor thereto incurred in the ordinary course of business and
secured by qualifying mortgage loans or mortgage-backed securities or other
collateral permitted by credit policies of Federal Home Loan Bank of San
Francisco.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
us for consideration consisting of our Equity Interests shall not be deemed to
be an Investment.
"Legal Holiday" is a Saturday, a Sunday or a day on which banking
institutions in The City of New York or at a place of payment are authorized or
obligated by law, regulation or executive order to remain closed.
"Lien" means, with respect to any Person, any mortgage, pledge, security
interest, encumbrance, lien or charge of any kind on the assets of such Person,
including any conditional sale or other title retention agreement or lease in
the nature thereof.
"Master Recapitalization Agreement" means the Master Recapitalization
Agreement dated as of March 29, 2001, as amended, by and among us and each of
the investors referenced therein.
47
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP, excluding, however, (i) any
gain, together with any related provision for taxes on such gain, realized in
connection with any Asset Sale (including, without limitation, dispositions
pursuant to sale and leaseback transactions) and (ii) any extraordinary gain or
loss, together with any related provision for taxes on such extraordinary or
nonrecurring gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by us or any of
our Subsidiaries in respect of any Asset Sale (including, without limitation,
any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and
investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"Non-Domestic Person" means a Person not organized under the laws of the
United States, any State or territory thereof or the District of Columbia.
"Non-Recourse Debt" means Indebtedness (i) as to which neither we nor any of
our Subsidiaries (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute Indebtedness), or
(b) is directly or indirectly liable (as a guarantor or otherwise); and (ii) no
default with respect to which would permit (upon notice, lapse of time or both)
any holder of any of our or our Subsidiaries' other Indebtedness (other than
the notes being offered hereby) to declare a default on such other Indebtedness
or cause the payment thereof to be accelerated or payable prior to its stated
maturity; and (iii) as to which the lenders have been notified in writing that
they will not have any recourse to our stock or assets or that of any of our
Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officer's Certificate" means a Certificate signed on our behalf by any two
of the Chairman of the Board, the Chief Executive Officer, the President, the
Chief Operating Officer, the Chief Financial Officer, the Treasurer, any
Assistant Treasurer, the Controller, the Secretary or any Vice-President that
meets the requirements set forth in the Indenture.
"Paying Agent" means an office or agency within the City and State of New
York maintained by us where Notes may be presented for payment.
"Permitted Investment" means an Investment by us or any Subsidiary (i) in a
Subsidiary or in the Bank or a Person that will, upon the making of such
Investment, become a Subsidiary; provided, however, that the primary business
of such Subsidiary is a Related Business, (ii) in another Person if as a result
of such Investment such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, us or a
Subsidiary; provided, however, that such Person's primary business is a Related
Business, (iii) comprised of Cash Equivalents, (iv) comprised of Receivables
owing to us or any Subsidiary if created or acquired in the ordinary course of
business and payable or dischargeable in accordance with customary banking or
trade terms, (v) comprised of payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses for accounting purposes and that are made in the ordinary course of
business, (vi) comprised of stock, mortgages, deeds of trust, obligations or
securities received in settlement of debts created in the ordinary course of
business and owing to us or any Subsidiary or in satisfaction of judgments,
(vii) in any Person to the extent such Investment represents the non cash
portion of the consideration received for an Asset Sale as permitted pursuant
to the covenant described
48
under "--Certain Covenants --Asset Sales," or (viii) comprised of our or any of
our Wholly Owned Subsidiaries' Receivables.
"Permitted Liens" means, with respect to any Person: (a) pledges or deposits
by such Person under worker's compensation laws, unemployment insurance laws or
similar legislation, or good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Indebtedness) or leases to which such
Person is a party, or deposits to secure public or statutory obligations of
such Person or deposits of cash or United States government bonds to secure
surety or appeal bonds to which such Person is a party, or deposits as security
for contested taxes or import duties or for the payment of rent, in each case
incurred in the ordinary course of business; (b) Liens imposed by law, such as
carriers', warehousemen's and mechanics' Liens, in each case for sums not yet
due or being contested in good faith by appropriate proceedings or other Liens
arising out of judgments or awards against such Person with respect to which
such Person shall then be proceeding with an appeal or other proceedings for
review; (c) Liens for property taxes not yet subject to penalties for non-
payment or which are being contested in good faith and by appropriate
proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of credit
do not constitute Indebtedness; (e) minor survey exceptions, minor
encumbrances, easements or reservations of, or rights of others for, licenses,
rights of way, sewers, electric lines, telegraph and telephone lines and other
similar purposes, or zoning or other restrictions as to the use of real
property or Liens incidental to the conduct of the business of such Person or
to the ownership of its properties which were not incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens securing Indebtedness incurred to finance
the construction, purchase or lease of, or repairs, improvements or additions
to, property of such Person (but excluding Capital Stock of another Person);
provided, however, that the Lien may not extend to any other property owned by
such Person or any of its Subsidiaries at the time the Lien is incurred, and
the Indebtedness secured by the Lien may not be incurred more than 180 days
after the latest of the acquisition, completion of construction, repair,
improvement, addition or commencement of full operation of the property subject
to the Lien; (g) Liens on Receivables owned by us or a Subsidiary, as the case
may be, to secure Indebtedness permitted under the provisions described in
clause (ii) under "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock"; (h) Liens existing on the date of the Indenture; (i) Liens
on property or shares of Capital Stock of another Person at the time such other
Person becomes a Subsidiary of such Person; provided, however, that such Liens
are not created, incurred or assumed in connection with, or in contemplation
of, such other Person becoming such a Subsidiary; provided further, however,
that such Lien may not extend to any other property owned by such Person or any
of its Subsidiaries; (j) Liens on property at the time such Person or any of
its Subsidiaries acquires the property, including, any acquisition by means of
a merger or consolidation with or into such Person or a Subsidiary of such
Person; provided, however, that such Liens are not created, incurred or assumed
in connection with, or in contemplation of such acquisition; provided further,
however, that the Liens may not extend to any other property owned by such
Person or any of its Subsidiaries; (k) Liens securing Indebtedness or other
obligations of a Subsidiary of such Person owing to such Person or a Subsidiary
of such Person; (l) Liens securing Hedging Obligations; (m) Liens on cash or
other assets securing our or our Subsidiaries' Warehouse Indebtedness; (n)
Liens to secure any Permitted Refinancing Indebtedness as a whole, or in part,
with any Indebtedness permitted under the Indenture to be incurred and secured
by any Lien referred to in the foregoing clauses; provided, however, that (x)
such new Lien shall be limited to all or part of the same property that secured
the original Lien (plus improvements to or on such property) (y) the
Indebtedness secured by such Lien at such time is not increased to any amount
greater than the sum of (A) the outstanding, principal amount or, if greater,
committed amount of the Indebtedness, at the time the original Lien became a
Permitted Lien and (B) an amount necessary to pay any fees and expenses,
including premiums, related to such Refinancing, refunding, extension, renewal
or replacement; (o) Liens securing deposit liabilities of any Subsidiary, the
deposits of which are insured by the Federal Deposit Insurance Corporation or
any successor agency or Indebtedness of any Subsidiary to the Federal Home Loan
Bank of San Francisco or any successor thereto incurred in the ordinary course
of business and secured by qualifying mortgage loans or mortgage-backed
securities; (p) Liens securing the Secured Convertible
49
Subordinated Debt; (q) Liens on assets of Subsidiaries that secure Non-Recourse
Debt of Subsidiaries; and (r) Liens incurred to secure Indebtedness of up to
$25.0 million aggregate principal amount which is permitted by the covenant
described under "Incurrence of Indebtedness and Issuance of Preferred Stock" in
this prospectus.
"Permitted Refinancing Indebtedness" means any of our or our Subsidiaries'
Indebtedness issued in exchange for, or the net proceeds of which are used to
extend, refinance, renew, replace, defease or refund any of our other
Indebtedness or that of any of our Subsidiaries; provided that: (i) the
principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount (or accreted
value, if applicable) of the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the notes, such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and is subordinated in right of payment
to, the notes on terms at least as favorable to the Holders of notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iv) such Indebtedness is
incurred either by us or by the Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (v) such Indebtedness may not include a Guarantee of Indebtedness
of a Person that is not our Subsidiary.
"Permitted Warehouse Indebtedness" means Warehouse Indebtedness in
connection with a Warehouse Facility; provided, however, that (i) the assets as
to which such Warehouse Indebtedness relates are or, prior to any funding under
the related Warehouse Facility with respect to such assets, were eligible to be
recorded as held for sale or investment on our consolidated balance sheet in
accordance with GAAP, (ii) such Warehouse Indebtedness will be deemed to be
Permitted Warehouse Indebtedness (a) in the case of a Purchase Facility, only
to the extent the holder of such Warehouse Indebtedness has no contractual
recourse to us and our Subsidiaries to satisfy claims in respect of such
Permitted Warehouse Indebtedness in excess of the realizable value of the
Receivables financed thereby, and (b) in the case of any other Warehouse
Facility, only to the extent of the lesser of (A) the amount advanced by the
lender with respect to the Receivables financed under such Warehouse Facility,
and (B) the principal amount of such Receivables and (iii) any such
Indebtedness has not been outstanding in excess of 364 days.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Purchase Facility" means any Warehouse Facility in the form of a purchase
and sale facility pursuant to which we or our Subsidiary sells Receivables to a
financial institution.
"Receivables" means consumer, mortgage and commercial loans, equipment or
other lease receivables and other assets purchased or originated by us or any
Subsidiary in the ordinary course of business; provided, however, that for
purposes of determining the amount of a Receivable at any time, such amount
shall be determined in accordance with GAAP, consistently applied, as of the
most recent practicable date.
"Related Business" means any consumer or commercial finance or banking
business or any financial advisory or financial service business, or any
investment or asset management business.
"Required Noteholders" means the holders of at least 51% of the outstanding
principal amount of all Senior Secured Debt, until such time as no Senior
Secured Debt is outstanding, at which time Required Noteholders means the
Trustee acting pursuant to the Indenture.
"Restricted Investment" means an Investment other than a Permitted
Investment.
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"Security Agreement" means the Amended and Restated Collateral Agency and
Security Agreement dated as of June 28, 2001 among us and the Collateral Agent
and, effective as of Exchange Date, the Trustee for the benefit of the Holders
of the notes, together with the trustee under the indenture for the Secured
Convertible Subordinated Debt for the benefit of the holders of the Secured
Convertible Subordinated Debt proposed to be issued by us as part of the
Recapitalization Transactions.
"Security Documents" means, collectively, the Security Agreement and all
other security agreements, mortgages, deeds of trust, pledges, collateral
assignments or other instruments evidencing or creating any Security Interests
in favor of the Trustee in all or any portion of the Collateral, in each case,
as amended, amended and restated, supplemented or otherwise modified from time
to time, in accordance with the terms thereof.
"Security Interests" means the Liens on the Collateral created by the
Security Documents in favor of the Trustee for its benefit and the benefit of
the Holders of the notes.
"Senior Indebtedness" means all our Indebtedness or that of our Subsidiaries
that is not, by its terms, subordinated in right of payment to the notes.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"Stated Maturity" means, with respect to any installment of principal or
interest on any series of Indebtedness, the date on which such payment of
principal or interest was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such principal or interest prior to the date
originally scheduled for the payment thereof.
"Strategic Investor Repurchase Transaction" means the repurchase, redemption
or other retirement for value of any Equity Interests of any Subsidiary (a)
from a strategic partner or investor owning such Equity Interests that, except
for such Investment, would not be our Affiliate or an Affiliate of our
Subsidiaries and (b) in a transaction whose terms comply with the provisions
set forth in "--Transactions with Affiliates."
"Subsidiary" means, with respect to any Person, (1) any corporation, limited
liability company, association or other business entity of which more than 50%
of the total voting power of shares of Capital Stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
managers or Trustees thereof is at the time owned or controlled, directly or
indirectly by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (2) any partnership (a) the sole general
partner or the managing general partner of which is such Person or a Subsidiary
of such Person or (b) the only general partners of which are such Person or one
or more Subsidiaries of such Person (or any combination thereof).
"Warehouse Facility" means any funding arrangement, including a Purchase
Facility, with a financial institution or other lender or purchaser, to the
extent (and only to the extent) funding thereunder is used exclusively to
finance or refinance the purchase or origination of Receivables by us or our
Subsidiary for the purpose of (i) pooling such Receivables prior to
securitization, (ii) sale or (iii) investment in each case in the ordinary
course of business.
"Warehouse Indebtedness" means the greater of (x) the consideration received
by us or our Subsidiaries under a Warehouse Facility and (y) in the case of a
Purchase Facility, the book value of the Receivables financed under such
Warehouse Facility until such time as such Receivables are (i) securitized,
(ii) repurchased by us or our Subsidiaries or (iii) sold by the counterparty
under the Warehouse Facility to a Person who is not our Affiliate.
51
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person.
Governing Law
The Indenture and the notes are governed by and are to be construed in
accordance with the laws of the State of New York.
Information Concerning the Trustee
We maintain banking relationships in the ordinary course of business with
the Trustee. The Trustee's principal corporate trust office is located at 101
California Street, Suite 2575, San Francisco, California 94111.
PLAN OF DISTRIBUTION
The selling security holders may offer and sell the notes from time to time
and will act independently of us in deciding the timing, manner and size of any
sale. We expect that sales generally will be made at then prevailing market
prices, but prices in negotiated transactions may differ considerably. We
cannot predict the extent, if any, to which selling security holders may sell
the notes.
Selling security holders may sell the notes in the over-the-counter market
or otherwise, at prices that (1) represent or relate to then prevailing market
prices or (2) are negotiated, including by means of purchase by a broker-dealer
as principal and resale by such broker or dealer for its account pursuant to
this prospectus, ordinary brokerage transactions, transactions in which a
broker solicits purchasers, and block trades in which a broker-dealer so
engaged will attempt to sell the notes as agent but may take a position and
resell a portion of the block as principal to facilitate the transaction. The
selling security holders reserve the right to withdraw, cancel or modify the
offer or solicitations of offers made hereby without notice. The selling
security holders may reject any offer in whole or in part.
Underwriters, brokers, dealers or agents (collectively, "underwriters") may
participate in sales of notes as principals or agents and, in that capacity,
may be deemed underwriters for purposes of the Securities Act. Their sale
proceeds (together with any profits received by the selling security holders)
may be deemed underwriting discounts and commissions under the Securities Act.
To comply with the securities laws of certain jurisdictions, if applicable,
the notes will be offered or sold in those jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain
jurisdictions, the notes may not be offered or sold unless they have been
registered or qualified for sale in those jurisdictions or unless an exemption
from the otherwise applicable registration or qualification requirements is
available and is complied with.
We may suspend the use of this prospectus in certain circumstances because
of pending corporate developments or a need to file a post-effective amendment.
In any such event, we will use reasonable efforts to ensure that the
availability of an appropriate prospectus is resumed as soon as practicable.
52
We have agreed to pay substantially all reasonable expenses incident to the
registration of the notes, including underwriting discounts and commissions,
incurred in connection with registrations, filings or qualifications,
including, without limitation, all registration, listing and qualification
fees, printers and accounting fees, and fees and disbursements of our counsel
and fees and disbursements of one counsel for the selling security holders. We
have also agreed to indemnify the selling security holders against certain
liabilities in connection with certain statements made or omitted herein, or to
make contribution with respect thereto.
LEGAL MATTERS
The validity of the notes offered hereby has been passed upon for us by
Mayer, Brown & Platt, Los Angeles, California.
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 to which this prospectus relates 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.
53
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-2 relating to
the notes 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 notes
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
. 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 Quarters ended March 31,
2001 and June 30, 2001; and
(3) our Current Reports on Form 8-K dated February 7, 2001, April 20,
2001, May 8, 2001 and August 1, 2001.
You may request a copy, at no cost, of any of the documents incorporated by
reference in this prospectus that are not delivered with 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, Attention: Investor
Relations.
54
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$96,400,000
IMPERIAL CREDIT INDUSTRIES, INC.
12% Senior Secured Notes Due 2005
----------------
PROSPECTUS
----------------
, 2001
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
Registration Fee................................................. $24,100
Legal Fees and Expenses.......................................... 40,000
Accounting Fees and Expenses..................................... 10,000
Printing Expenses................................................ 10,000
Miscellaneous.................................................... 5,000
-------
TOTAL.......................................................... $89,100
=======
Item 15. Indemnification of Directors and Officers
Under Section 317 of the California General Corporation Law (the "CGCL"),
the Registrant is permitted in certain circumstances to indemnify its directors
and officers against certain expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with threatened, pending or completed civil, criminal,
administrative or investigative actions, suits or proceedings (other than an
action by or in the right of the Registrant), in which such persons were or are
parties, or are threatened to be made parties, by reason of the fact that they
were or are directors or officers of the Registrant, if such persons acted in
good faith and in a manner they reasonably believed to be in the best interests
of the Registrant, and with respect to any criminal action or proceeding, had
no reasonable cause to believe their conduct was unlawful. In addition, the
Registrant is permitted in certain circumstances to indemnify its directors and
officers against certain expenses incurred in connection with the defense or
settlement of a threatened, pending or completed action by or in the right of
the Registrant, and against amounts paid in settlement of any such action, if
such persons acted in good faith and in a manner they believed to be in the
best interests of the Registrant and its shareholders provided that the
specified court approval is obtained.
As permitted by Section 317 of the CGCL, the Articles of Incorporation and
By-Laws of the Registrant provide that the Registrant is authorized to provide
indemnification for its directors and officers for breach of their duty to the
Registrant and its shareholders through bylaw provisions or through agreements
with the directors and officers, or both, in excess of the indemnification
otherwise permitted by Section 317 of the CGCL. The Registrant's By-laws
provide for indemnification of its directors and officers to the maximum extent
permitted by Section 317 of the CGCL. In addition, agreements entered into by
the Registrant with its directors and its executive officers require the
Registrant to indemnify such persons against expenses, judgments, fines
settlements and other amounts reasonably incurred in connection with any
proceeding to which any such person may be made a party by reason of the fact
that such person was an agent of the Registrant (including judgments, fines and
settlements in or of a derivative action, unless indemnification is otherwise
prohibited by law), provided such person acted in good faith and in a manner he
reasonably believed to be in the best interests of the Registrant and, in the
case of a criminal proceeding, had no reason to believe his conduct was
unlawful. The indemnification agreements also set forth certain procedures that
will apply in the event of a claim for indemnification thereunder.
The Articles of Incorporation of the Registrant provide that the personal
liability of the directors of the Registrant for monetary damages shall be
eliminated to the fullest extent permissible under California law. Under
Section 204(a)(10) of the CGCL, the personal liability of a director for
monetary damages in an action brought by or in the right of the corporation for
breach of the director's duty to the corporation may be eliminated, except for
the liability of a director resulting from (i) acts or omissions involving
intentional misconduct or the absence of good faith, (ii) any transaction from
which a director derived an improper personal benefit, (iii) acts or omissions
showing a reckless disregard for the director's duty, (iv) acts or omissions
constituting an unexcused pattern of inattention to the director's duty or (v)
the making of an illegal distribution to shareholders or an illegal loan or
guaranty.
II-1
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
Exhibit No. Description
----------- -----------
4.1++ Indenture dated as of July 3, 2001 between us and The Chase
Manhattan Bank and Trust Company, National Association, as
Trustee (including form of 12% Senior Secured Note due 2005).
4.2(S)(S) Amended and Restated Collateral Agency and Security Agreement,
dated as of June 28, 2001, for the benefit of Wilmington Trust
Company, as Collateral Agent.
4.3+ Exchange Notes Registration Rights Agreement dated as of March 29,
2001 by and among us and certain investors named therein.
4.4++ Registration Rights Agreement, dated as of July 3, 2001.
4.5(S)(S) Indenture for the 12% Secured Convertible Subordinated Notes due
2005, dated as of June 28, 2001 (including form of 12% Secured
Convertible Subordinated Notes due 2005)
5++ Opinion of Mayer, Brown & Platt.
10.1(S) Form of Indemnification Agreement for directors and officers.
10.2(S) 1992 Incentive Stock Option Plan and Nonstatutory Stock Option
Plan and form of Stock Option Agreement thereunder.
10.3* 1996 Stock Option, Deferred Stock and Restricted Stock Plan
effective as of June 21, 1996.
10.4(S) Senior Management Stock Option Agreement dated effective as of
January 1, 1992 by and between Registrant and H. Wayne Snavely.
10.5** Amendment No. 1 to Senior Management Stock Option Agreement by and
between Registrant and H. Wayne Snavely, effective as of January
1, 1992.
10.6** Amendment No. 2 to Senior Management Stock Option by and between
Registrant and H. Wayne Snavely, effective as of September 30,
1995.
10.7*** Employment agreement dated as of January 1, 1997 by and between
Registrant and H. Wayne Snavely.
10.8*** Promissory Note Secured by Stock Pledge and Deed of Trust dated as
of October 21, 1997, between Registrant and H. Wayne Snavely.
10.9## Deferral of Executive Compensation Plan effective July 1, 1998.
10.10## Deferral of Executive Compensation Plan, Plan I, effective January
1, 1999.
10.11## Deferral of Executive Compensation Plan, Plan II, Effective
January 1, 1999.
10.12### Employment Severance Agreement, Settlement Agreement and General
Release, effective September 30, 1999, between Registrant and
Kevin E. Villani.
10.13& Amended Termination Protection Agreement, effective January 27,
1999, by and between Registrant and H. Wayne Snavely which
supersedes exhibit 10.28##.
10.14& Amended Termination Protection Agreement, effective January 27,
1999, by and between Registrant and Irwin L. Gubman.
10.15& Amended Termination Protection Agreement, effective January 27,
1999, by and between Registrant and Brad S. Plantiko.
10.16+ Master Recapitalization Agreement, dated as of March 29, 2001.
10.17(S)(S) First Amendment to Master Recapitalization Agreement, dated as of
June 27, 2001.
10.18+++ Second Amendment to Master Recapitalization Agreement, dated as of
, 2001.
II-2
Exhibit No. Description
----------- -----------
12++ Statement Regarding Computation of Ratio of Earnings To Fixed
Charges.
13.1&& Annual Report on Form 10-K/A for the year ended December 31, 2001
13.2&& Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
23++ Consent of KPMG LLP.
24 Power of Attorney (included on signature page).
25++ Statement of Eligibility and Qualification (Form T-1) under the
Trust Indenture Act of 1939 of The Chase Manhattan Bank and Trust
Company, National Association.
--------
(S) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33-45606)
and Amendments No. 1, 2 and 3 filed with the SEC on February 10, 1992, April 20, 1992, May 7, 1992
and May 18, 1992, respectively.
(S)(S) Incorporated by reference to the Registrant's Amendment No. 1 to Registration Statement on Form S-3
(File No. 333- 58728) filed with the SEC on August 30, 2001.
+ Incorporated by reference to Registrant's Annual Report on Form 10-K/A, as amended, dated
December 31, 2000, filed with the SEC on June 11, 2001.
++ Filed herewith.
+++ To be filed by amendment.
* Incorporated by reference to Registrant's Registration Statement on Form S-8
(Registration No. 333-13805) filed October 9, 1996.
** Incorporated by reference to Registrant's Registration Statement on Form S-8
(Registration No. 333-15149) filed October 31, 1996.
*** Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
+ Incorporated by reference to Imperial Credit Commercial Mortgage Investment Corp.'s Form 10-Q
for the quarter ended September 30, 1997.
# Incorporated by reference to Registrant's Registration Statement on Form S-4
(Registration No. 333-22141) filed with the SEC on February 19, 1997.
## Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.
### Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999.
& Incorporated by reference to Registrant's Registration Statement of Form S-4
(Registration No. 333-30809) filed on July 3, 1997.
&& Previously filed with the SEC, as to our 2000 Form 10-K/A, on June 11, 2001 and, as to our
2nd Quarter Form 10-Q, on August 14, 2001.
II-3
Item 17. Undertakings.
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% 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;
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.
4. The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is
sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished pursuant to
and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the
Securities Exchange Act of 1934; and where interim financial information
required to be presented by Article 3 of Regulation S-X are not set
forth in the prospectus, to deliver, or cause to be delivered to each
person to whom the prospectus is sent or given, the latest quarterly
report that is specifically incorporated by reference in the prospectus
to provide such interim financial information.
5. 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 Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than 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 Securities Act and will be governed by the final
adjudication of such issue.
II-4
SIGNATURES AND POWER OF ATTORNEY
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-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Torrance, State of California, on September 21,
2001.
Imperial Credit Industries, Inc.
/s/ H. 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-2, 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
amendments (including post-effective amendment) to this Registration Statement
on Form S-2, 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 September 7, 2001
____________________________________ Director
Michael S. Riley
/s/ Brad S. Plantiko Executive Vice President and September 21, 2001
____________________________________ Chief Financial Officer
Brad S. Plantiko (Principal Financial
Officer)
/s/ Michael R. McGuire Chief Executive Officer, September 21, 2001
____________________________________ President and Director
Michael R. McGuire (Principal Executive
Officer)
/s/ Robert S. Muehlenbeck Director September 7, 2001
____________________________________
Robert S. Muehlenbeck
Director
____________________________________
Theodore R. Maloney
II-5
Signature Title Date
--------- ----- ----
/s/ Charles E. Underbrink Director September 7, 2001
____________________________________
Charles E. Underbrink
/s/ Paul B. Lasiter Senior Vice President and September 21, 2001
____________________________________ Corporate Controller
Paul B. Lasiter (Principal Accounting
Officer)
II-6