As filed with the Securities and Exchange Commission on February 20, 1998
Registered No. 333-_________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
___________________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
___________________
IMPAC MORTGAGE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
___________________
MARYLAND 33-0675505
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
20371 IRVINE AVENUE
SANTA ANA HEIGHTS, CALIFORNIA 92707
(714) 556-0122
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING ARE CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
___________________
JOSEPH R. TOMKINSON
CHIEF EXECUTIVE OFFICER
IMPAC MORTGAGE HOLDINGS, INC.
20371 IRVINE AVENUE
SANTA ANA HEIGHTS, CALIFORNIA 92707
(714) 556-0122
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
COPY TO:
THOMAS J. POLETTI, ESQ.
KATHERINE J. BLAIR, ESQ.
FRESHMAN, MARANTZ, ORLANSKI,
COOPER & KLEIN
9100 WILSHIRE BLVD., 8TH FLOOR EAST
BEVERLY HILLS, CALIFORNIA 90212
TELEPHONE: (310) 273-1870
FACSIMILE: (310) 274-8357
___________________
APPROPRIATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Form time
to time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, 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 delivery of the prospectus expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
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TITLE OF CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES BEING REGISTERED REGISTERED OFFERING PRICE PER AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
SHARE(1)
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Common Stock, $.01 par value 2,009,310 $17.00 $34,158,270 $10,077
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended,
and based on the average of the high and low sale prices of the Common
Stock reported on the American Stock Exchange on February 13, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVENESS DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRANT STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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Information contained herein 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 the registrant 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 State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED FEBRUARY 20, 1998
PROSPECTUS
2,009,310 SHARES
IMPAC MORTGAGE HOLDINGS, INC.
COMMON STOCK
This Prospectus relates to the offer and sale from time to time by
Imperial Credit Industries, Inc., a California corporation (the "Selling
Stockholder"), of up to an aggregate of 2,009,310 shares of Common Stock
(the "Shares"), $.01 par value per share (the "Common Stock"), of Impac
Mortgage Holdings, Inc., a Maryland corporation (the "Company"). See "Plan
of Distribution" for information relating to resales of the Shares by the
Selling Stockholder.
SEE "RISK FACTORS" STARTING ON PAGE 6 FOR A DISCUSSION OF MATERIAL
RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON
STOCK.
The Shares may be sold from time to time pursuant to this Prospectus
by the Selling Stockholder. The Shares may be sold by the Selling
Stockholder to or through underwriters, in block trades, purchases and
resales by a broker-dealer, exchange and/or secondary distributions,
ordinary brokerage transactions and in transactions in which brokers
solicit purchases, in privately negotiated transactions, through the
writing of options on Shares (whether such options are listed on an options
exchange or otherwise), or in a combination of such methods of sale, at
market prices prevailing at the time of sale, at prices relating to such
prevailing market prices or at negotiated prices. Broker-dealers may
receive compensation in the form of discounts, concessions or commissions
from the Selling Stockholder and/or the purchasers of Shares for whom such
broker-dealers may act as agent or to whom they sell as principal or both
(which compensation as to a particular broker-dealer might be in excess of
customary commission). The Selling Stockholder may also sell Common Stock
pursuant to Rule 144 promulgated under the Securities Act of 1933, as
amended (the "Securities Act"), or pledge the Shares as collateral for
margin accounts, and such Shares could be resold pursuant to the terms of
such accounts. See "Plan of Distribution." The Company will receive no
part of the proceeds of sales of Common Stock by the Selling Stockholder.
All expenses of registration incurred in connection with this offering are
being borne by the Company, but all selling and other expenses incurred by
the Selling Stockholder will be borne by the Selling Stockholder.
The Common Stock is quoted on the American Stock Exchange under the
symbol "IMH." The last reported sale price of the Common Stock on February
19, 1998, was $17.25.
The Selling Stockholder and any agents or broker-dealers that
participate with the Selling Stockholder in the distribution of the Shares
may be deemed to be "underwriters" within the meaning of the Securities
Act, and any commissions received by them and any profit on the resale of
the Shares may be deemed to be underwriting commissions or discounts under
the Securities Act.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is ________________, 1998.
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER, AGENT OR DEALER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES BEING OFFERED PURSUANT TO THIS
PROSPECTUS SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO PURCHASE SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING THE OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied, at prescribed rates, at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, Room 1024, as well
as at the regional offices of the Commission at Seven World Trade Center, 13th
Floor, New York, New York 10048, and the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60601. Copies of such material may
also be obtained at prescribed rates by writing to the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a website that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the site is http://www.sec.gov. The Common
Stock is listed on the American Stock Exchange. Reports, proxy statements and
other information described above may also be inspected and copied at the
offices of the American Stock Exchange at 86 Trinity Place, New York, New York
10006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (therein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Shares of Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Securities offered hereby, reference is made to
the Registration Statement and the exhibits and schedules thereto. Statements
contained herein concerning the provisions of any documents are necessarily
summaries of those documents, and each statement is qualified in its entirety by
reference to the copy of the applicable document filed with the Commission. The
Registration Statement and any amendments thereto, including exhibits filed as a
part thereof, are available for inspection and copying as set forth above.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed with the Commission are
incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the year ended December
31, 1996 and as amended by its Annual Report on Form 10-K/A;
(2) The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A, including all amendments and reports filed
for the purpose of updating such description;
(3) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1997;
(4) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1997;
(5) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997; and
(6) The Company's Current Reports on Form 8-K, dated August, 8, 1997,
September 22, 1997, December 19, 1997, as amended, and January 28, 1998, as
amended.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of this offering shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus. Subject to the
foregoing, all information appearing in this Prospectus is qualified in its
entirety by the information appearing in the documents incorporated herein by
reference.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any and all of the documents described above under "Incorporation of
Certain Documents by Reference," other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference therein. Such requests
should be directed to: Impac Mortgage Holdings, Inc., 20371 Irvine Avenue, Santa
Ana Heights, California 92707, Attention: Investor Relations, Telephone: (714)
556-0122.
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THE COMPANY
Unless the context otherwise requires, references herein to the "Company"
refer to Impac Mortgage Holdings, Inc. ("IMH"), Impac Funding Corporation
(together with its wholly owned subsidiary, Impac Secured Assets Corp., "IFC"),
IMH Assets Corp. ("IMH Assets"), and Impac Warehouse Lending Group, Inc.
("IWLG"), collectively.
GENERAL
Impac Mortgage Holdings, Inc. is a specialty finance company, which,
together with its subsidiaries and related companies, operates three businesses:
(1) the Long-Term Investment Operations, (2) the Conduit Operations, and (3) the
Warehouse Lending Operations. The Long-Term Investment Operations invests
primarily in non-conforming residential mortgage loans and securities backed by
such loans. The Conduit Operations purchases and sells or securitizes primarily
non-conforming mortgage loans, and the Warehouse Lending Operations provides
warehouse and repurchase financing to originators of mortgage loans. These
latter two businesses include certain ongoing operations contributed to the
Company in 1995 by Imperial Credit Industries, Inc. (the "Selling Stockholder"
or "ICII"), a leading specialty finance company (the "Contribution
Transaction"). IMH is organized as a real estate investment trust ("REIT") for
federal income tax purposes, which generally allows it to pass through qualified
income to stockholders without federal income tax at the corporate level.
Long-Term Investment Operations. The Long-Term Investment Operations,
conducted by IMH, invests primarily in non-conforming residential mortgage loans
and mortgage-backed securities secured by or representing interests in such
loans and, to a lesser extent, in second mortgage loans. Non-conforming
residential mortgage loans are residential mortgages that do not qualify for
purchase by government-sponsored agencies such as the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
Such loans generally provide higher yields than conforming loans. The principal
differences between conforming loans and non-conforming loans include the
applicable loan-to-value ratios, the credit and income histories of the
mortgagors, the documentation required for approval of the mortgagors, the type
of properties securing the mortgage loans, the loan sizes, and the mortgagors'
occupancy status with respect to the mortgaged properties. Second mortgage loans
are higher yielding mortgage loans secured by a second lien on the property and
made to borrowers owning single-family homes for the purpose of debt
consolidation, home improvements, education and a variety of other purposes.
Conduit Operations. The Conduit Operations, conducted by IFC, purchases
primarily non-conforming mortgage loans and, to a lesser extent, second mortgage
loans from its network of third party correspondents and subsequently
securitizes or sells such loans to permanent investors, including the Long-Term
Investment Operations. IFC's ability to design non-conforming mortgage loans
which suit the needs of its correspondent loan originators and their borrowers
while providing sufficient credit quality to investors, as well as its efficient
loan purchasing process, flexible purchase commitment options and competitive
pricing, enable it to compete effectively with other non-conforming mortgage
loans conduits. In addition to earnings generated from ongoing securitizations
and sales to third party investors, IFC supports the Long-Term Investment
Operations of the Company by supplying IMH with non-conforming mortgage loans
and securities backed by such loans. Prior to the Contribution Transaction, IFC
was a division or subsidiary of ICII since 1990. IMH owns 99% of the economic
interest in IFC, while Joseph R. Tomkinson, the Company's Chief Executive
Officer, William S. Ashmore, the Company's President, and Richard J. Johnson,
the Company's Chief Financial Officer, are the holders of all the outstanding
voting stock of, and 1% of the economic interest in, IFC.
Warehouse Lending Operations. The Warehouse Lending Operations, conducted
by IWLG, provides warehouse and repurchase financing to IFC and to approved
mortgage banks, most of which are correspondents of IFC, to finance mortgage
loans during the time from the closing of the loans to their sale or other
settlement with pre-approved investors.
IMH's principal sources of income are (1) income from the Long-Term
Investment Operations, (2) income from the Warehouse Lending Operations, and (3)
income from IMH's equity investment in the Conduit Operations. In addition, the
Company expects to receive dividend income from its investment in the common
stock of Impac Commercial Holdings, Inc. (formerly IMH Commercial Holdings,
Inc.) ("ICH"), a REIT in which IMH currently holds shares of Common Stock and
shares of non-voting Class A Common Stock which are convertible into an
equivalent number of shares of ICH's Common Stock. The net income of the Conduit
Operations is fully subject to federal and state
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income taxes. The principal source of income from IMH's Long-Term Investment
Operations is net interest income, which is the net spread between interest
earned on mortgage loans and securities held for investment and the interest
costs associated with the borrowings used to finance such loans and securities,
including CMO debt. "CMO" means an adjustable or fixed-rate debt obligation
(bond) that is collateralized by mortgage loans or mortgage certificates and
issued by private institutions or issued or guaranteed by FNMA, FHLMC or the
Government National Mortgage Association. The principal sources of income from
the Warehouse Lending Operations are net interest income, which is the net
spread between interest earned on warehouse loans and the interest costs
associated with the borrowings used to finance such loans, and the fee income
received from the borrowers in connection with such loans. The principal sources
of income from the Conduit Operations are gains recognized on the sale of
mortgage loans and securities, net interest income earned on loans purchased by
IFC pending their securitization or resale, servicing fees, commitment fees and
processing fees.
The Company is located at 20371 Irvine Avenue, Santa Ana Heights,
California 92707 and its telephone number is (714) 556-0122.
DIVIDEND POLICY AND DISTRIBUTIONS
To maintain its qualification as a REIT, IMH intends to make annual
distributions to stockholders of at least 95% of its taxable income (which does
not necessarily equal net income as calculated in accordance with generally
accepted accounting principles) determined without regard to the deduction for
dividends paid and excluding any net capital gains. Any taxable income remaining
after the distribution of regular quarterly dividends or other dividends will be
distributed annually, on or prior to the date of the first regular quarterly
dividend payment date of the following taxable year. The dividend policy is
subject to revision at the discretion of the Board of Directors. All
distributions in excess of those required for IMH to maintain REIT status will
be made by IMH at the discretion of the Board of Directors and will depend on
the taxable earnings of IMH, the financial condition of IMH and such other
factors as the Board of Director deems relevant. The Board of Directors has not
established a minimum distribution level.
5
RISK FACTORS
Before investing in the Shares, prospective investors should give special
consideration to the information set forth below, in addition to the information
set forth elsewhere in this Prospectus. The following risk factors are
interrelated and, consequently, investors should treat such risk factors as a
whole.
This Prospectus contains forward-looking statements that inherently involve
risks and uncertainties within the meaning of Section 27A of the Securities Act
and Section 21E of the Exchange Act. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this Prospectus.
NET INTEREST INCOME MAY BE ADVERSELY AFFECTED BY INTEREST RATE FLUCTUATIONS;
PREPAYMENTS OF MORTGAGE LOANS MAY ADVERSELY AFFECT NET INCOME
The Company's income may be affected by changes in market interest rates.
In conducting its Conduit Operations, the Company is subject to the risk of
rising mortgage interest rates between the time the Company commits to purchase
mortgage loans at a fixed price and the time the Company sells or securitizes
those mortgage loans. An increase in interest rates will generally result in a
decrease in market value of loans that the Company has committed to purchase at
a fixed price, but has not yet sold or securitized.
Higher rates of interest may discourage potential mortgagors from
refinancing mortgage loans, borrowing to purchase a home or seeking a second
mortgage loan, thus decreasing the volume of mortgage loans available to be
purchased by the Conduit Operations. In addition, an increase in short-term
interest rates may decrease or eliminate or, under certain circumstances, cause
to be negative, the Company's net interest spread during the accumulation of
mortgage loans held for sale or the net interest spread on mortgage loans held
for investment when such loans are financed through reverse repurchase
agreements. Should short-term interest rates exceed long-term interest rates (an
"inverted yield curve" scenario), the negative effect on the Company's net
interest spread would likely be coupled with a reduction in any income on any
servicing portfolio held by the Company to the extent prepayments on the
underlying mortgage loans increased as long-term interest rates declined.
In conducting its Long-Term Investment Operations, a significant portion of
the Company's mortgage assets held for long-term investment bear adjustable
interest ("ARMs") or pass-through rates based on short-term interest rates, and
substantially all of the Company's borrowings bear interest at fixed rates and
have maturities of less than 60 days. Consequently, changes in short-term
interest rates may significantly influence the Company's net interest income.
Mortgage loans owned by the Company that are ARMs or mortgage-backed securities
backed by ARMs are subject to periodic interest rate adjustments based on
objective indices such as the CMT Index, which is the one year constant maturity
Treasury index, or LIBOR, the London interbank offered rate. Interest rates on
the Company's borrowings are also based on short-term indices. To the extent any
of the Company's mortgage assets are financed with borrowings bearing interest
based on an index different from that used for the related mortgage assets, so-
called "basis" interest rate risk will arise. In such event, if the index used
for the subject mortgage assets is a "lagging" index (such as the 11th District
Cost of Funds) that reflects market interest rate changes on a delayed basis,
and the rate borne by the related borrowings reflects market rate changes more
rapidly, the Company's net interest income will be adversely affected in periods
of increasing market interest rates. Additionally, the Company's mortgage assets
are subject to periodic interest rate adjustments that may be less frequent than
the increases or decreases in rates borne by the borrowings or financings
utilized by the Company. Accordingly, in a period of increasing interest rates,
the Company could experience a decrease in net interest income or a net interest
loss because the interest rates on borrowings could adjust faster than the
interest rates on the Company's ARMs or mortgage-backed securities backed by
ARMs. Moreover, ARMs are typically subject to periodic and lifetime interest
rate caps, which limit the amount an ARMs interest rate can change during any
given period. The Company's borrowings are not subject to similar restrictions.
Hence, in a period of rapidly increasing interest rates, the Company could also
experience a decrease in net interest income or a net interest loss in the
absence of effective hedging because the interest rates on borrowings could
increase without limitation by caps while the interest rates on the Company's
ARMs and mortgage-backed securities backed by ARMs would be so limited. Further,
some ARMs may be subject to periodic payment caps that result in some portion of
the interest accruing on the ARMs being deferred and added to the principal
outstanding. This could result in less cash received by the Company on its ARMs
than is required to pay interest on the related borrowings, which will not have
such payment caps. The Company expects that the net effect of these factors, all
other factors being equal, will be to lower the Company's net interest income or
6
cause a net interest loss during periods of rapidly rising interest rates, which
could negatively impact the market price of the Shares. No assurance can be
given as to the amount or timing of changes in income. To the extent that the
Company utilizes short-term debt financing for fixed rate mortgages or mortgage-
backed securities backed by fixed rate mortgages, the Company may also be
subject to interest rate risks. To the extent that some of the warehouse loans
made by the Company bear interest based upon an intermediate-term index while
the Company's borrowings to fund such loans bear interest based upon a short-
term index, the Company will be subject to the risk of narrowing interest rate
spreads.
Higher rates of interest may have a negative effect, in particular, on the
yield of any Company portfolio of "principal-only" securities and other types of
mortgage-backed securities purchased at a discount. If the Company were required
to dispose of any "principal-only" securities held in its portfolio in a rising
rate environment, a loss could be incurred. Lower long-term rates of interest
may negatively affect the yield on any Company portfolio of "interest-only"
securities, servicing fees receivable, and other mortgage loan and mortgage-
backed securities purchased at a premium. It is also possible that in certain
low interest rate environments the Company would not fully recoup any initial
investment in such securities or investments.
Mortgage prepayment rates vary from time to time and may cause changes in
the amount of the Company's net interest income. Prepayments on ARMs and
mortgage-backed securities backed by ARMs generally increase when mortgage
interest rates fall below the then current interest rates on such ARMs.
Conversely, prepayments of such mortgage loans generally decrease when mortgage
interest rates exceed the then-current interest rate on such mortgage loans.
Prepayment experience also may be affected by the geographic location of the
property securing the mortgage loans, the credit grade of the mortgage loan, the
assumability of the mortgage loans, the ability of the borrower to convert to a
fixed-rate loan, conditions in the housing and financial markets and general
economic conditions. In addition, prepayments on ARMs are affected by conditions
in the fixed-rate mortgage market. If the interest rates on ARMs increase at a
rate greater than the interest rates on fixed-rate mortgage loans, prepayments
on ARMs will tend to increase. In periods of fluctuating interest rates,
interest rates on ARMs may exceed interest rates on fixed-rate mortgage loans,
which may tend to cause prepayments on ARMs to increase at a greater rate than
anticipated. Prepayment rates also vary by credit grade. Second mortgage loans
generally have smaller average principal balances than first mortgage loans and
are not viewed by borrowers as permanent financing. Accordingly, second mortgage
loans may experience a higher rate of prepayment than first mortgage loans. In
addition, any future limitations on the right of borrowers to deduct interest
payments on mortgage loans for Federal income tax purposes may result in a
higher rate of prepayment on mortgage loans.
Prepayments of mortgage loans could affect the Company in several adverse
ways. A substantial portion of the ARMs acquired by the Company (either directly
as mortgage loans or through mortgage-backed securities backed by ARMs) have
been newly originated within six months of purchase and generally bear initial
interest rates which are lower than their "fully-indexed" rates (the applicable
index plus the margin). In the event that such an ARM is prepaid prior to or
soon after the time of adjustment to a fully-indexed rate, the Company will have
experienced an adverse effect on its net interest income during the time it held
such ARM compared with holding a fully-indexed ARM and will have lost the
opportunity to receive interest at the fully-indexed rate over the expected life
of the ARM.
The prepayment of any mortgage loan that had been purchased at a premium by
the Company would result in the immediate write-off of any remaining capitalized
premium amount and a consequent decrease in the Company's interest income. The
Conduit Operations' strategy at the present time is to purchase mortgage loans
on a "servicing released" basis (i.e., the Company will acquire both the
mortgage loans and the rights to service them). This strategy requires payment
of a higher purchase price by the Company for the mortgage loans, and to the
extent a premium is paid, the Company is more exposed to the adverse effects of
early prepayments of the mortgage loans, as described above.
COMPANY OPERATIONS MAY BE ADVERSELY AFFECTED IF THE COMPANY FAILS TO EFFECTIVELY
HEDGE AGAINST INTEREST RATE CHANGES OR IF LOSSES ARE INCURRED IN CONNECTION WITH
HEDGING ACTIVITIES
To mitigate risks associated with its Conduit Operations, the Company,
through IFC, enters into transactions designed to hedge interest rate risks,
which may include mandatory and optional forward selling of mortgage loans or
mortgage-backed securities, interest rate caps, floors and swaps and buying and
selling of futures and options on futures. To mitigate risks associated with its
Long-Term Investment Operations, the Company's policy is to attempt to match
7
the interest rate sensitivities of its adjustable rate mortgage assets held for
investment with the associated liabilities. The Company may purchase interest
rate caps, interest rate swaps or similar instruments to attempt to mitigate the
cost of its variable rate liabilities increasing at a faster rate than the
earnings on its subject assets during a period of rising interest rates. The
nature and quantity of the hedging transactions for the Conduit Operations and
the Long-Term Investment Operations is determined by the management of the
Company based on various factors, including market conditions and the expected
volume of mortgage loan purchases, and there have been no limitations placed on
management's use of certain instruments in such hedging transactions. No
assurance can be given that such hedging transactions will offset the risks of
changes in interest rates, and it is possible that there will be periods during
which the Company could incur losses after accounting for its hedging
activities.
ACQUIRING AND INVESTING IN MORTGAGE LOANS MAY ENTAIL SUBSTANTIAL RISKS
The Company makes long-term investments in mortgage loans and mortgage-
backed securities. The Company does not obtain credit enhancements such as
mortgage pool or special hazard insurance for its mortgage loans and investments
other than private mortgage insurance and only when specified by its
underwriting criteria. Accordingly, during the time it holds mortgage loans for
investment, the Company is subject to risks of borrower defaults and
bankruptcies and special hazard losses that are not covered by standard hazard
insurance (such as those occurring from earthquakes or floods). In the event of
a default on any mortgage loan held by the Company, the Company bears the risk
of loss of principal to the extent of any deficiency between the value of the
related mortgaged property, plus any payments from an insurer or guarantor, and
the amount owing on the mortgage loan. Defaulted mortgage loans will also cease
to be eligible collateral for borrowings, and will have to be financed by the
Company out of other funds until ultimately liquidated.
Credit risks associated with non-conforming mortgage loans, especially "B"
and "C" grade loans, may be greater than those associated with conforming
mortgage loans that comply with FNMA and FHLMC guidelines. Non-conforming
mortgage loans generally consist of jumbo mortgage loans (loans with a principal
balance in excess of $227,400) or loans that are originated in accordance with
underwriting or product guidelines that differ from those applied by FNMA or
FHLMC. The principal differences between conforming loans and the non-conforming
loans purchased by the Company include the applicable loan-to-value ratios, the
credit and income histories of the mortgagors, the documentation required for
approval of the mortgagors, the types of properties securing the mortgage loans,
loan sizes and the mortgagors' occupancy status with respect to the mortgaged
property. As a result of these and other factors, the interest rates charged on
non-conforming loans are often higher than those charged for conforming loans.
The combination of different underwriting criteria and higher rates of interest
may lead to higher delinquency rates and/or credit losses for non-conforming as
compared to conforming loans and could have an adverse effect on the Company's
operations to the extent that the Company invests in such loans or securities
evidencing interests in such loans.
In addition, with respect to second mortgage loans, the Company's security
interest in the property securing such loans is subordinated to the interest of
the first mortgage holder. If the value of the property securing the second
mortgage loan is not sufficient to repay the borrower's obligation to the first
mortgage holder upon foreclosure or if there is no additional value in such
property after satisfying the borrower's obligation to the first mortgage loan
holder, the borrower's obligation to the Company will likely not be satisfied.
The yield derived from certain classes of mortgage-backed securities
created in connection with securitizations by IFC and subsequently retained by
the Company, including, but not limited to, "interest-only," "principal-only"
and subordinated securities, is particularly sensitive to interest rate,
prepayment and credit risks. The Company's investment portfolio includes each of
these classes of securities. See "--Net Interest Income May be Adversely
Affected by Interest Rate Fluctuations; Prepayment's of Mortgage Loans May
Adversely Affect Net Income." Because subordinated securities, in general, bear
all credit losses prior to the related senior securities, the amount of credit
risk associated with any investment in such subordinated securities is
significantly greater than that associated with a comparable investment in the
related senior securities and, on a percentage basis, the risk is greater than
holding the underlying mortgage loans directly. See "--Value of Interest-Only,
Principal-Only, Residual Interest and Subordinated Securities Subject to
Fluctuation."
The Company also bears risk of loss on any mortgage-backed securities it
purchases in the secondary mortgage market. To the extent third parties have
been contracted to insure against these types of losses, the Company would be
dependent in part upon the creditworthiness and claims paying ability of the
insurer and the timeliness of reimbursement
8
in the event of a default on the underlying obligations. Further, the insurance
coverage for various types of losses is limited, and losses in excess of the
limitation would be borne by the Company.
As a warehouse lender, the Company is a secured creditor of mortgage
bankers and is subject to the risks associated with such businesses, including
the risks of fraud, borrower default and bankruptcy, any of which could result
in credit losses for the Company. Any claim of the Company as a secured lender
in a bankruptcy proceeding may be subject to adjustment and delay.
In connection with its Conduit Operations, IFC has engaged in
securitizations and bulk whole loan sales. In connection with the issuance of
mortgage-backed securities by IFC, such securities have been non-recourse to
IFC, except in the case of a breach of the standard representations and
warranties made by IFC when mortgage loans are securitized. While IFC has
recourse to the sellers of mortgage loans for any such breaches, there can be no
assurance of the sellers' abilities to honor their respective obligations. IFC
has engaged in bulk whole loan sales pursuant to agreements that provide for
recourse by the purchaser against IFC (and, in certain cases, IMH as guarantor)
in the event of a breach of representation or warranty made by IFC, any fraud or
misrepresentation during the mortgage loan origination process or upon early
default on such mortgage loans. IFC has generally limited the remedies of such
purchasers to the remedies IFC receives from the persons from whom IFC purchased
such mortgage loans. However, in some cases, the remedies available to a
purchaser of mortgage loans from IFC are broader than those available to IFC
against its seller, and should a purchaser exercise its rights against IFC, IFC
may not always be able to enforce whatever remedies IFC may have against its
sellers. IFC may from time to time make provisions for loan losses related to
estimated losses from the breach of a standard representation and warranty.
DEPENDENCE ON SECURITIZATIONS MAY CREATE LIQUIDITY RISKS
The Company securitizes a substantial portion of the mortgage loans it
purchases. IFC relies significantly upon securitizations to generate cash
proceeds for repayment of its warehouse line and to create credit availability.
Further, gains on sales from IFC's securitizations represent a significant
portion of IFC's earnings. Several factors affect the Company's ability to
complete securitizations of its mortgage loans, including conditions in the
securities markets generally, conditions in the asset-backed securities market
specifically, the credit quality of the mortgage loans purchased by the Conduit
Operations and the Company's ability to obtain credit enhancement. If IFC were
unable to securitize profitably a sufficient number of its mortgage loans in a
particular financial reporting period, then IFC's revenues for such period would
decline, which could result in lower income or a loss for such period. In
addition, unanticipated delays in closing a securitization could also increase
IFC's interest rate risk by increasing the warehousing period for its mortgage
loans.
IFC endeavors to effect quarterly public securitizations of its loan pools.
However, market and other considerations, including the volume of IFC's mortgage
acquisitions and the conformity of such loan pools to the requirements of
insurance companies and rating agencies, may affect the timing of such
transactions. Any delay in the sale of a loan pool beyond the end of a fiscal
quarter would postpone the recognition of gain related to such loans and would
likely result in lower income or a loss for such quarter being reported by IFC.
In order to gain access to the securitization market, the Company has
relied, and in the future may rely, on credit enhancements provided by insurance
companies to guarantee senior interests in the related trusts to enable them to
obtain "AAA/Aaa" ratings for such interests. Any unwillingness of insurance
companies to guarantee the senior interests in the Company's loan pools could
have a material adverse effect on the Company's results of operations and
financial condition.
The Company also relies on securitizations in the form of CMO borrowings to
finance a substantial portion of the loans held by the Long-Term Investment
Operations. Any reduction in the Company's ability to complete additional
securitizations would require the Company to utilize other sources of financing
which may be on less favorable terms.
VALUE OF INTEREST-ONLY, PRINCIPAL-ONLY, RESIDUAL INTEREST AND SUBORDINATED
SECURITIES SUBJECT TO FLUCTUATION
The Company's assets include "interest-only," "principal-only," residual
interest and subordinated securities, valued by the Company in accordance with
SFAS No. 115, "Accounting for Certain Debt and Equity Securities," if
9
purchased by the Company in the secondary market or in accordance with SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," if created in connection with the securitization
of mortgages held for sale by IFC. IMH records its retained interest in IFC
securitizations (including "interest-only," "principal-only" and subordinated
securities) as investments classified as trading securities and records its
purchased residual interests and subordinated securities as available for sale
securities. Realization of these "interest-only," "principal-only," residual
interest and subordinated securities in cash is subject to the timing and
ultimate realization of cash flows associated therewith, which is in turn
effected by the prepayment and loss characteristics of the underlying loans.
Because subordinated securities, in general, bear all credit losses prior to the
related senior securities, the amount of credit risk associated with any
investment in such subordinated securities is significantly greater than that
associated with a comparable investment in the related senior securities and, on
a percentage basis, the risk associated with holding subordinated securities is
greater than holding the underlying mortgage loans directly due to the
concentration of losses in such subordinated securities and because subordinated
securities receive payments of principal and interest after such payments on
related senior securities and the underlying mortgages. The Company estimates
future cash flows from these "interest-only," "principal-only," residual
interest and subordinated securities and values such securities utilizing
assumptions that it believes to be consistent with those that would be utilized
by an unaffiliated third party purchaser. If actual experience differs from the
assumptions used in the determination of the asset value, future cash flows and
earnings could be negatively impacted, and the Company could be required to
reduce the value of its "interest-only," "principal-only," residual interest and
subordinated securities in accordance with SFAS No. 115 and SFAS 125. The value
of such securities can fluctuate widely and may be extremely sensitive to
changes in discount rates, projected mortgage loan prepayments and loss
assumptions. The Company believes that its aggregate delinquency and loan loss
experience will increase as its mortgage portfolio matures. To the Company's
knowledge, the market for the sale of the "interest- only," "principal-only,"
residual interest and subordinated securities is limited. No assurance can be
given that "interest-only," "principal-only," residual interest and subordinated
securities could be sold at their reported value, if at all.
The risks of investing in mortgage-backed securities include risks that the
existing credit support will prove to be inadequate, either because of
unanticipated levels of losses or, if such credit support is provided by a third
party, because of difficulties experienced by such credit support provider.
Delays or difficulties encountered in servicing mortgage-backed securities may
cause greater losses and, therefore, greater resort to credit support than was
originally anticipated, and may cause a rating agency to downgrade a security.
The Company also bears risk of loss on any mortgage-backed securities it
purchases in the secondary market. To the extent third parties have contracted
to insure against these types of losses, the Company 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. Further, the insurance coverage for various types of losses is
limited, and losses in excess of the limitation would be borne by the Company.
MORTGAGE SERVICING RIGHTS SUBJECT TO VOLATILITY
When IFC purchases loans that include the associated servicing rights or
originates loans, the allocated cost of the servicing rights will be reflected
on its financial statements as Mortgage Servicing Rights ("MSRs"). MSRs are
amortized in proportion to, and over the period of, expected net servicing
income.
SFAS No. 125 requires that a portion of the cost of acquiring a mortgage
loan be allocated to the mortgage loan servicing rights based on its fair value
relative to the fair value of the components of the loan. To determine the fair
value of the servicing rights created, IFC uses a valuation model that
calculates the present value of future net servicing revenues to determine the
fair value of the servicing rights. In using this valuation method, IFC
incorporates assumptions that it believes market participants would use in
estimating future net servicing income which include estimates of the cost of
servicing, an inflation rate, ancillary income per loan, a prepayment rate, a
default rate and a discount rate commensurate with the risks involved.
MSRs are subject to some degree of volatility in the event of unanticipated
prepayments or defaults. Prepayments in excess of those anticipated at the time
MSRs are recorded could result in a decline in the fair value of the MSRs below
their carrying value requiring a provision to increase the MSRs' valuation
allowance. The rate of prepayment of loans is affected by a variety of economic
and other factors, including prevailing interest rates and the availability of
alternative financing. The effect of those factors on loan prepayment rates may
vary depending on the
10
particular type of loan. Estimates of prepayment rates are made based on
management's expectations of future prepayment rates, which are based, in part,
on the historical rate of prepayment of IFC's loans, and other considerations.
There can be no assurance of the accuracy of the Company's prepayment estimates.
If actual prepayments with respect to loans serviced occur more quickly than
were projected at the time such loans were sold, the carrying value of the MSRs
may have to be reduced through a provision recorded to increase the MSRs'
valuation allowance in the period the fair value declined below the MSRs'
carrying value. If actual prepayments with respect to loans occur more slowly
than estimated, the carrying value of MSRs would not increase except for the
impact of a reduction in the valuation allowance.
BORROWINGS AND SUBSTANTIAL LEVERAGE HAVE THE POTENTIAL FOR NET INTEREST AND
OPERATING LOSSES; LIQUIDITY
The Company has employed a financing strategy to increase the size of its
investment portfolio by borrowing a substantial portion (up to approximately
98%, depending on the nature of the underlying asset) of the market value of
substantially all of its investments in mortgage loans and mortgage-backed
securities. The Company initially intended to maintain a ratio of equity capital
(book value of stockholders' equity) to total assets of approximately 15%. This
target ratio was developed on the assumption that the Company would utilize the
sale of pass-through mortgage-backed securities as its primary securitization
technique, as compared to financing the loans in the Company's long-term
investment portfolio through CMOs. Subsequently, the Company has elected to
utilize CMO borrowings to a substantial degree because CMOs are more consistent
with IMH's maintenance of its REIT tax status. CMOs receive financing treatment
as opposed to sale treatment. Financing treatment allows the Company to
recognize spread income over time as qualifying interest income under the REIT
gross income tests, as compared to gains at IFC from the issuance of pass-
through securities, which receives sale treatment and is fully taxable. The
value of the assets collateralizing CMO borrowings are reflected on the
Company's balance sheet, while the value of the assets backing pass-through
securities are not reflected on the balance sheet. Consequently, CMO borrowings
tend to increase the assets of the Company and to reduce the Company's ratio of
equity capital to total assets, as compared to the sale of pass-through
securities. It is currently expected that the continued use of CMOs will likely
result in a ratio of equity capital to total assets generally between 8% to 13%,
although such ratio may vary substantially depending upon, among other things,
the timing of IFC's securitizations and the Company's offerings of equity
capital.
The use of CMOs as financing vehicles tends to increase the Company's
leverage as mortgage loans held for CMO collateral are retained for investment
rather than sold in a secondary market transaction. Retaining mortgage loans as
CMO collateral exposes the Company to greater potential credit losses than from
the use of securitization techniques that are treated as sales. The creation of
a CMO involves an equity investment by the Company to fund collateral in excess
of the amount of the securities issued. Should the Company experience credit
losses greater than expected, the value of the Company's equity investment in
its CMOs would decrease and the Company's financial condition and results of
operations would be materially adversely affected.
A majority of other Company borrowings are collateralized, primarily in the
form of reverse repurchase agreements, which are based on the market value of
the Company's assets pledged to secure the specific borrowings. The cost of
borrowings under a reverse repurchase agreement corresponds to the referenced
interest rate (e.g., the CMT Index or LIBOR) plus or minus a margin. The margin
over or under the referenced interest rate varies depending upon the lender, the
nature and liquidity of the underlying collateral, the movement of interest
rates, the availability of financing in the market and other factors. If the
returns on the assets and mortgage-backed securities financed with borrowed
funds fail to cover the cost of the borrowings, the Company will experience net
interest losses and may experience net losses.
The ability of the Company to achieve its investment objectives depends not
only on its ability to borrow money in sufficient amounts and on favorable terms
but also on the Company's ability to renew or replace on a continuous basis its
maturing short-term borrowings. The Company's business strategy relies on short-
term borrowings to fund long-term mortgage loans and investment securities
available for sale. In the event the Company is not able to renew or replace
maturing borrowings, the Company could be required to sell, under adverse market
conditions, all or a portion of its mortgage loans and investment securities
available for sale, and could incur losses as a result. In addition, in such
event the Company may be required to terminate hedge positions, which could
result in further losses to the Company. Such events could have a materially
adverse effect on the Company.
11
Certain of the Company's mortgage loans may be cross-collateralized to
secure multiple borrowing obligations of the Company to a single lender. A
decline in the market value of such assets could limit the Company's ability to
borrow or result in lenders initiating margin calls (i.e., requiring a pledge of
cash or additional mortgage loans to reestablish the ratio of the amount of the
borrowing to the value of the collateral). The Company could be required to sell
mortgage loans under adverse market conditions in order to maintain liquidity.
If these sales were made at prices lower than the carrying value of its mortgage
loans, the Company would experience losses. A default by the Company under its
collateralized borrowings could also result in a liquidation of the collateral,
including any cross-collateralized assets, and a resulting loss of the
difference between the value of the collateral and the amount borrowed.
Additionally, in the event of a bankruptcy of the Company, certain reverse
repurchase agreements may qualify for special treatment under the Bankruptcy
Code, the effect of which is, among other things, to allow the creditors under
such agreements to avoid the automatic stay provisions of the Bankruptcy Code
and to liquidate the collateral under such agreements without delay. Conversely,
in the event of a bankruptcy of a party with whom the Company had a reverse
repurchase agreement, the Company might experience difficulty repurchasing the
collateral under such agreement if it were to be repudiated and the Company's
claim against the bankrupt lender for damages resulting therefrom were to be
treated simply as one of an unsecured creditor. Should this occur, the Company's
claims would be subject to significant delay and, if and when received, may be
substantially less than the damages actually suffered by the Company. Although
the Company has entered into reverse repurchase agreements with several
different parties and has developed procedures to reduce its exposure to such
risks, no assurance can be given that the Company will be able to avoid such
third party risks.
The REIT provisions of the Code require IMH to distribute to its
stockholders substantially all of its taxable income. As a result, such
provisions restrict the Company's ability to retain earnings and replenish the
capital committed to its business activities.
The Company's liquidity is also affected by its ability to access the debt
and equity capital markets. To the extent that the Company is unable to
regularly access such markets, the Company could be forced to sell assets at
unfavorable prices or discontinue various business activities in order to meet
its liquidity needs. As a result, any such inability to access the capital
markets could have a negative impact on the Company's earnings.
Substantially all of the assets of the Conduit Operations have been pledged
to secure the repayment of mortgage-backed securities issued in the
securitization process, reverse repurchase agreements or other borrowings. In
addition, substantially all of the mortgage loans that the Company has acquired
and will in the future acquire have been or will be pledged to secure borrowings
pending their securitization or sale or as a part of their long- term financing.
The cash flows received by the Company from its investments that have not yet
been distributed, pledged or used to acquire mortgage loans or other investments
may be the only unpledged assets available to unsecured creditors and
stockholders in the event of liquidation of the Company.
REDUCTION IN DEMAND FOR RESIDENTIAL MORTGAGE LOANS AND THE COMPANY'S NON-
CONFORMING LOAN PRODUCTS MAY ADVERSELY AFFECT THE COMPANY'S OPERATIONS
The availability of mortgage loans meeting the Company's criteria is
dependent upon, among other things, the size and level of activity in the
residential real estate lending market and, in particular, the demand for non-
conforming mortgage loans. The size and level of activity in the residential
real estate lending market depend on various factors, including the level of
interest rates, regional and national economic conditions and inflation and
deflation in residential property values, as well as the general regulatory and
tax environment as it relates to mortgage lending. To the extent the Company is
unable to obtain sufficient mortgage loans meeting its criteria, the Company's
business will be adversely affected.
FNMA and FHLMC are not currently permitted to purchase mortgage loans with
original principal balances above $227,400. If this dollar limitation is
increased without a commensurate increase in home prices, the Company's ability
to maintain or increase its current acquisition levels could be adversely
affected as the size of the non-conforming mortgage loan market may be reduced,
and FNMA and FHLMC may be in a position to purchase a greater percentage of the
mortgage loans in the secondary market than they currently acquire.
In general, lower interest rates prompt greater demand for mortgage loans,
because more individuals can afford to purchase residential properties, and
refinancing and second mortgage loan transactions increase. However, if low
12
interest rates are accompanied by a weak economy and high unemployment, demand
for housing and residential mortgage loans may decline. Conversely, higher
interest rates and lower levels of housing finance and refinance activity may
decrease mortgage loan purchase volume levels, resulting in decreased economies
of scale and higher costs per unit, reduced fee income, smaller gains on the
sale of non-conforming mortgage loans and lower net income.
Although the Company seeks geographic diversification of the properties
underlying the Company's mortgage loans and mortgage-backed securities, it does
not set specific limitations on the aggregate percentage of its portfolio
composed of such properties located in any one area (whether by state, zip code
or other geographic measure). Concentration in any one area will increase
exposure of the Company's portfolio to the economic and natural hazard risks
associated with such area. In addition, management estimates that a majority of
the loans included in securitizations in which IMH holds subordinated interests
are secured by properties in California. Certain parts of California have
experienced an economic downturn in past years, particularly in areas of high
defense industry concentration, and have suffered the effects of certain natural
hazards such as earthquakes, fires and floods, as well as riots.
DELINQUENCY RATIOS AND COMPANY PERFORMANCE MAY BE AFFECTED BY CONTRACTED SUB-
SERVICING
IFC currently contracts for the sub-servicing of all loans it purchases and
holds for sale or investment with third-party sub-servicers. This arrangement
allows the Conduit Operations to increase the volume of loans it originates and
purchases without incurring the expenses associated with servicing operations.
As with any external service provider, IFC is subject to risks associated with
inadequate or untimely services. Many of IFC's borrowers require notices and
reminders to keep their loans current and to prevent delinquencies and
foreclosures. A substantial increase in the IFC's delinquency rate or
foreclosure rate could adversely affect its ability to access profitably the
capital markets for its financing needs, including future securitizations. IFC
regularly reviews the delinquencies of its servicing portfolio. Although the
Conduit Operations periodically reviews the costs associated with establishing
operations to service the loans it purchases, it has no plans to establish and
perform servicing operations at this time.
Each of IFC's sub-servicing agreements with its third-party sub-servicers
provides that if IFC terminates the agreement without cause (as defined in the
agreement), IFC will be required to pay the third-party sub-servicer a fee.
Further, one such agreement provides that IFC shall pay the third-party sub-
servicer a transfer fee per loan for any mortgage loan which IFC transfers to
another sub-servicer without terminating the agreement. Depending upon the size
of IFC's loan portfolio sub-serviced at any point in time, the termination
penalty that IFC would be obligated to pay upon termination without cause, may
be substantial.
IFC also subcontracts with sub-servicers to service the loans in each of
the Company's public securitizations. With respect to such loans, the related
pooling and servicing agreements permit IFC to be terminated as servicer under
specific conditions described in such agreements, which generally include the
failure to make payments, including advances, within specific time periods. Such
termination would generally be at the option of the trustee and/or the financial
guaranty insurer for such securitization, if applicable, but not at the option
of the Company. If, as a result of a sub-servicer's failure to perform
adequately, IFC were terminated as servicer of a securitization, the value of
any servicing rights held by IFC would be adversely impacted. In addition, poor
performance by a sub-servicer with respect to any such securitization may result
in greater than expected delinquencies and losses on the related loans, which
would adversely impact the value of any "interest-only," "principal-only" and
subordinated securities held by the Company in connection with such
securitization, which are more sensitive to credit risk. See "--Value of
Interest-Only, Principal-Only, Residual Interest and Subordinated Securities
Subject to Fluctuation."
RISKS REGARDING PURCHASE OF MORTGAGE LOANS FROM PREFERRED
New Product Offerings May Entail Substantial Risks
Pursuant to a mortgage loan purchase agreement (the "Preferred Purchase
Agreement") entered into in July 1997, as amended and restated in August 1997,
with Preferred Credit Corporation ("Preferred"), the Company agreed to purchase
up to $500.0 million in mortgage loans. As of December 31, 1997, the Company has
purchased an aggregate of $554.8 million in principal balance of mortgage loans
from Preferred. The Company has limited experience with the type of mortgage
loans originated by Preferred, and there can be no assurance that the return on
the Company's investment in these new products will be consistent with the
Company's historical financial results.
13
Representations and Warranties
Resale of mortgage loans purchased from Preferred may subject the Company
to risk. As of December 31, 1997, $218.9 million in principal balance of
mortgage loans purchased from Preferred have been sold by the Company, and in
February 1998, the Company is negotiating a letter agreement pursuant to which
it agreed to sell approximately up to $300.0 million in principal balance of the
mortgage loans. IFC primarily intends to sell substantially all of the mortgage
loans purchased from Preferred and, to a lesser extent, securitize the mortgage
loans. In connection with the issuance of mortgage backed securities by IFC,
such securities have been, and are expected, to be non-recourse to IFC, except
in the case of a breach of the standard representations and warranties made by
IFC when the mortgage loans are securitized. While IFC may have recourse to
Preferred for any such breaches, there can be no assurance of Preferred's
ability to honor its obligations. IFC has generally limited the remedies of such
purchasers to the remedies IFC receives from Preferred. However, in some cases,
the remedies available to a purchaser of mortgage loans from IFC may be broader
than those available to IFC against Preferred and should a purchaser exercise
its remedies against IFC, IFC may not always be able to enforce whatever
remedies IFC may have against Preferred. Furthermore, even if IFC were able to
enforce remedies available against Preferred, the effect of such enforcement may
be limited by the current financial position and operations of Preferred. There
can be no assurance that sanctions imposed on Preferred by the Department of
Real Estate or the effect of the settlement with the Department of Corporations
will not have a material adverse effect on the financial condition and results
of operations of Preferred, the effect of which could adversely affect the
ability of Preferred to honor its repurchase or indemnity obligations under the
Preferred Purchase Agreement.
Limited Information Regarding Loss and Prepayment History; Lack of Seasoning
Preferred has had a limited operating history and as a result, Preferred's
historical loss and prepayment experience may be of limited relevance in
quantifying delinquency, loss, prepayment or other characteristics of these
loans. Furthermore, Preferred's mortgage loans represent a relatively new loan
product within the consumer finance industry and accordingly the Company cannot
rely on the historical experience of other companies issuing a comparable
product. Any material change in delinquencies, prepayments and losses from
management's assumptions and estimates may adversely affect the Company's
financial condition and results of operations including the value of any
residual interest retained in any securitization of such loans. The actual
performance of such mortgage loans will not be known until sometime in the
future.
Credit Risk Associated with Preferred's Loan Products
Although mortgage loans originated by Preferred and purchased by the
Company under the Preferred Purchase Agreement are secured by real estate,
because of the relatively high loan-to-value ("LTV") of said loans, in most
cases the value of the underlying collateral will be less than the principal
amount of the mortgage loans, and effectively unsecured. Accordingly, in making
underwriting decisions, Preferred relies principally on the creditworthiness of
the borrower, rather than the underlying collateral for repayment. Because of
the relatively high combined LTV ratios of such mortgage loans and because the
mortgage loans are second mortgages giving the Company a position as a
subordinate lien holder with respect to the collateral underlying such mortgage
loans, the Company is likely to incur a total loss in the event that a customer
defaults on its mortgage loan obligations to the Company or to the senior lien
holder.
Credit Risks Associated With Mortgage Loans Not Securitized
Mortgage loans purchased from Preferred may not be readily securitizeable,
or may be securitizeable only after individual mortgage loan portfolio
characteristics become apparent over time. To the extent that such mortgage
loans are not securitized, the Company must fund such assets with borrowings or
internally generated funds and bear the credit risk associated with such assets.
The Company's inability ultimately to sell or securitize substantially all of
the mortgage loans it purchases from Preferred could have a material adverse
effect on the Company's business and results of operations.
14
RISKS REGARDING PURCHASE OF MORTGAGE LOANS FROM GREENWICH
Representations and Warranties
In August 1997, IFC purchased $80.2 million of non-conforming residential
mortgage loans from Greenwich Capital Financial Products, Inc. ("Greenwich")
pursuant to a mortgage loan purchase agreement (the "WSI Purchase Agreement").
Greenwich previously purchased such loans from Walsh Securities, Inc. ("WSI") a
firm affiliated with James Walsh, a Director of the Company. Resale of mortgage
loans purchased from Greenwich may subject the Company to risk. As of December
31, 1997, an aggregate of $68.8 million in principal balance of the mortgage
loans have been sold, of which $7.3 million were repurchased by WSI. The Company
recorded a loss of $112,000 on the resale of the mortgage loans to WSI. See
"Certain Transactions." IFC intends to continue to sell, through bulk whole
loans sales conducted by IFC, substantially all of the mortgage loans purchased
from Greenwich. In connection with such bulk whole loan sales IFC has entered
into, and expects to continue to enter into, agreements that provide for
recourse by the purchaser against IFC (and, in certain cases, IMH as guarantor)
in the event of a breach of representation or warranty made by IFC, any fraud or
misrepresentation during the mortgage loan origination process or upon early
default on such mortgage loans. IFC has generally limited the remedies of such
purchasers to the remedies IFC receives from WSI and Greenwich. However, in some
cases, the remedies available to a purchaser of mortgage loans from IFC may be
broader than those available to IFC against WSI or Greenwich, and should a
purchaser exercise its remedies against IFC, IFC may not always be able to
enforce whatever remedies IFC may have against WSI or Greenwich.
Furthermore, even if IFC were able to enforce remedies available against
WSI or Greenwich, the effect of such enforcement may be limited by the current
financial position and operations of WSI or Greenwich. Pursuant to the WSI
Purchase Agreement, WSI and Greenwich made representations and warranties
regarding the mortgage loans. In the event of a breach of their respective
representations and warranties, WSI and Greenwich would be responsible for the
repurchase of an affected mortgage loan or for indemnifying IFC for losses
suffered in connection with such loan. According to published reports, WSI
financed loans for independent mortgage loan brokers that engaged in fraudulent
misconduct in connection with the origination of such mortgage loans. There can
be no assurance that the effect of such fraudulent activity will not result in a
material adverse effect on the financial condition and results of operations of
WSI which would adversely affect its ability to repurchase any mortgage loan or
honor any indemnification obligations under the WSI Purchase Agreement.
LIMITED HISTORY OF OPERATIONS OF LIMITED RELEVANCE IN PREDICTING FUTURE
PERFORMANCE
The Company commenced operations on November 20, 1995. Prior to the date of
the Contribution Transaction, IFC was a division or subsidiary of ICII, and IWLG
was a division of Southern Pacific Bank (formerly Southern Pacific Thrift and
Loan Association) ("SPB"), a subsidiary of ICII. Although the Company has
experienced substantial growth in mortgage loan originations and total revenues,
there can be no assurance that the Company will be profitable in the future or
that these rates of growth will be sustainable or indicative of future results.
Prior to the Company's initial public offering in November 1995 (the "Initial
Public Offering"), each of IFC and IWLG benefited from the financial,
administrative and other resources of ICII and SPB, respectively.
In light of this growth, the historical financial performance of the
Company may be of limited relevance in predicting future performance. Since the
Company commenced operations in November 1995, its growth in purchasing loans
has been significant. Also, the loans purchased by the Company and included in
the Company's securitizations have been outstanding for a relatively short
period of time. Consequently, the delinquency and loss experience of the
Company's loans to date may not be indicative of future results. It is unlikely
that the Company will be able to maintain delinquency and loan loss ratios at
their present levels as the portfolio becomes more seasoned.
COMPETITION FOR MORTGAGE LOANS MAY ADVERSELY AFFECT THE COMPANY'S OPERATIONS
In purchasing non-conforming mortgage loans and issuing securities backed
by such loans, the Company competes with established mortgage conduit programs,
investment banking firms, savings and loan associations, banks, thrift and loan
associations, finance companies, mortgage bankers, insurance companies, other
lenders and other entities purchasing mortgage assets. Continued consolidation
in the mortgage banking industry may also reduce the number of current sellers
to the Conduit Operations, thus reducing the Company's potential customer base,
resulting in the Company purchasing a larger percentage of mortgage loans from a
smaller number of sellers. Such changes could
15
negatively impact the Conduit Operations. Mortgage-backed securities issued
through the Conduit Operations face competition from other investment
opportunities available to prospective investors. See "--Reduction in Demand for
Residential Mortgage Loans and the Company's Non-Conforming Loan Products May
Adversely Affect the Company's Operations."
The Company's operations may be affected by the activities of ICII and its
affiliates. As an end-investor in non-conforming mortgage loans, SPB may compete
with the Company. Also, Southern Pacific Funding Corporation ("SPFC") is an
affiliate of ICII whose business is primarily to act as a wholesale originator
and a bulk purchaser of non-conforming mortgage loans. ICII or any of its
affiliates may compete with the Company's Long-Term Investment Operations, the
Conduit Operations and the Warehouse Lending Operations. While the Company
believes such activities will not have a material adverse effect on the
Company's operations, there can be no assurance of this. See "--Relationship
with ICII and its Affiliates; Conflicts of Interest."
NO ASSURANCE OF CONTINUED EXPANSION
The Company's total revenues and net income have grown significantly since
the Company's inception, primarily due to increased mortgage purchasing, sales
and investing activities. The Company intends to continue to pursue a growth
strategy for the foreseeable future, and its future operating results will
depend largely upon its ability to expand its Long-Term Investment Operations,
its Conduit Operations and its Warehouse Lending Operations. Each of these plans
requires additional personnel and assets and there can be no assurance that the
Company will be able to successfully expand and operate its expanded operations
profitably. There can be no assurance that the Company will anticipate and
respond effectively to all of the changing demands that its expanding operations
will have on the Company's management, information and operating systems, and
the failure to adapt its systems could have a material adverse effect on the
Company's results of operations and financial condition. There can be no
assurance that the Company will successfully achieve its continued expansion or,
if achieved, that the expansion will result in profitable operations.
CONFLICTS OF INTEREST WITH AFFILIATED ENTITIES
Benefit to Insiders; Interlocking Relationships; Other Considerations
The Company is subject to conflicts of interest arising from its
relationships with ICH, RAI Advisors, LLC ("RAI") and their officers, directors
and affiliates. First, IMH owns a substantial number of shares of ICH's common
stock. Second, RAI renders management services to ICH and will be paid certain
incentive compensation for each quarter, resulting in a direct benefit to its
owners, who are officers or directors of ICH and IMH. Third, IFC has entered
into a submanagement agreement with RAI pursuant to which ICH will pay IFC
(through RAI) for all costs and services under such contract, plus a 15% service
charge. Fourth, many of the officers and directors of the Company are officers,
directors and owners of ICH, RAI and Impac Commercial Capital Corporation
(formerly Imperial Commercial Capital Corporation) ("ICCC").
RAI oversees the day-to-day operations of ICH, pursuant to a management
agreement (the "RAI Management Agreement") entered into in August 1997. RAI is
owned one-third by Joseph R. Tomkinson, IMH's Vice Chairman of the Board and
Chief Executive Officer and ICH's Chairman of the Board and Chief Executive
Officer; one-third by William S. Ashmore, IMH's and ICH's President and Chief
Operating Officer; and one-third by Richard J. Johnson, IMH's and ICH's Senior
Vice President, Chief Financial Officer, Treasurer and Secretary. Pursuant to
the RAI Management Agreement, ICH pays incentive compensation to RAI on a
quarterly basis, resulting in a direct benefit to its owners.
The Company is subject to conflicts of interest arising from its
relationship with RAI, and with RAI's affiliates. RAI has interests that may
conflict with those of the Company in fulfilling certain of its duties.
Specifically, all of the persons who are officers of RAI are also officers or
directors of IMH and ICH. In order to utilize the IMH infrastructure, RAI has
entered into a submanagement agreement with IMH and IFC to provide substantially
all of the administrative services required by ICH. IMH owns all of the
outstanding shares of non-voting preferred stock of IFC, representing 99% of the
economic interest in IFC, and Messrs. Tomkinson, Johnson and Ashmore own all of
the outstanding shares of common stock of IFC, representing 1% of the economic
interest. Each of Messrs. Tomkinson, Ashmore and Johnson and Mrs. Glass-
Schannault has modified his or her employment agreement with IFC to allow him or
her to become an
16
officer of RAI (and of ICH and ICCC). However, such officers are expected to
devote the majority of their time and effort towards the management and
operations of IMH and IFC. RAI has agreed to cause each of its officers to
devote as much of his or her time to the operations of ICH as is necessary. ICH
will reimburse RAI, who will reimburse IFC, on a dollar for dollar basis, for
the actual cost of providing the services of its officers to ICH based upon the
compensation payable to them by IFC, plus a 15% service charge. ICH will
reimburse RAI for expenses incurred by RAI, plus a service charge of 15% on all
expenses owed by RAI to IFC for costs and services under the submanagement
agreement with IFC and RAI will pay all such third parties on a dollar for
dollar basis for the aforementioned amounts received by it from the ICH; no such
15% service charge will be paid to third party service providers other than IFC.
For the first three years of the RAI Management Agreement, there will be a
minimum amount of $500,000 (including the 15% service charge) payable by ICH in
connection with services provided and expenses incurred by RAI and payable by
RAI to IFC. After the third year, ICH will only be responsible for reimbursing
expenses and services provided, plus the 15% service charge for amounts due to
IFC. RAI's officers are expected to devote the majority of their time and effort
towards the management and operations of IMH and IFC. Should the operations of
ICH and ICCC and those of the Company require immediate attention or action by
RAI or any of its officers, there can be no assurance that the officers of RAI
will be able to properly allocate sufficient time to the operations of the
Company. The failure or inability of the Company's officers and directors to
provide the services required of them under their respective employment
agreements or any other agreements or arrangements with the Company could have a
material adverse effect on the Company's business and results of operations.
Many of the affiliates of IMH, RAI and IFC have interlocking executive
positions and share common ownership. Joseph R. Tomkinson, IMH's Vice Chairman
of the Board and Chief Executive Officer and IFC's Chief Executive Officer and a
Director, is the Chief Executive Officer and Chairman of the Board of ICH, a
one-third owner of RAI, an owner of one-third of the common stock of IFC, and an
owner of 25% of the common stock of ICCC. William S. Ashmore, IMH's President,
Chief Operating Officer and a Director and IFC's President and a Director, is
the President and Chief Operating Officer of ICH, a one-third owner of RAI, an
owner of one-third of the common stock of IFC, and an owner of 25% of the common
stock of ICCC. Richard J. Johnson, IMH's and IFC's Senior Vice President, Chief
Financial Officer, Treasurer and Secretary, and a Director of IFC, is a Senior
Vice President, Chief Financial Officer, Treasurer and Secretary of ICH, a one-
third owner of RAI, an owner of one-third of the common stock of IFC, and a 25%
owner of the common stock of ICCC. Mary C. Glass-Schannault, IMH's and IFC's
Senior Vice President, is a Senior Vice President of ICH. Each of James Walsh,
Frank P. Filipps and Stephan R. Peers, Directors of IMH, are Directors of ICH.
In addition, as owners of all of the outstanding shares of voting stock of IFC,
Messrs. Tomkinson, Ashmore, and Johnson, have the right to elect all directors
of IFC and the ability to control the outcome of all matters for which the
consent of the holders of the common stock of IFC is required. Ownership of 100%
of the common stock of IFC entitles the owners thereof to an aggregate of 1% of
the economic interest in IFC.
Effect of Non-Compete Agreement
The Company's operations may be affected by the activities of ICH and ICCC.
Pursuant to a non-compete agreement (the "Non-Compete Agreement") among IMH,
IFC, ICH and ICCC, effective as of August 8, 1997, for a period of the earlier
of nine months from August 1997 or the date upon which ICH accumulates (for
investment or sale) $300.0 million of commercial mortgages and/or commercial
mortgage-backed securities ("CMBSs"), neither IMH nor IFC will originate or
acquire any commercial mortgages or CMBSs; however, the Non-Compete Agreement
shall not preclude IMH (either directly or through IFC) from purchasing any
commercial mortgages or CMBSs as permitted under the Right of First Refusal
Agreement (as that term is defined below). After the termination of the Non-
Compete Agreement, and subject to the Right of First Refusal Agreement, the
Company, as a mortgage REIT, and IFC, may compete with the operations of ICH.
Effect of Right of First Refusal Agreement
It is anticipated that RAI will act as the Manager for other REITs, some of
which may have been or will be affiliated with the Company, ICH, or their
respective conduit operations (an "Affiliated REIT"). In such an event, any
Affiliated REIT utilizing RAI as its Manager may be in competition with the
Company. RAI, ICH, ICCC, IMH and IFC have entered into a ten-year right of first
refusal agreement (the "Right of First Refusal Agreement"). It is expected that
any Affiliated REIT utilizing RAI as its Manager will become a party to the
Right of First Refusal Agreement, but such event is outside the control of the
Company and there can be no assurance that any or all Affiliated REITs will
actually become parties to the Right of First Refusal Agreement. Pursuant to
this Agreement, RAI has agreed that any mortgage
17
loan or mortgage-backed security investment opportunity (an "Investment
Opportunity") which is offered to it on behalf of either the Company, ICH or any
Affiliated REIT will first be offered to that entity (the "Principal Party")
whose initial primary business as described in its initial public offering
documentation (the "Initial Primary Business") most clearly aligns with such
Investment Opportunity. In addition, both IMH and IFC on the one hand and ICH
and ICCC on the other have agreed that any Investment Opportunity offered to
either of them which falls outside the scope of its Initial Primary Business
shall be offered to the Principal Party. Should the Principal Party decline to
take advantage of an Investment Opportunity offered to RAI, RAI will make an
independent evaluation of which REIT's business is more greatly enhanced by such
Investment Opportunity. Should all of said REITs decline such Investment
Opportunity, RAI may offer the investment opportunity to any third party. Should
the Principal Party decline to take advantage of an Investment Opportunity
offered to a REIT which is a party to the Right of First Refusal Agreement, said
REIT shall then be free to pursue the Investment Opportunity. In such an event
there can be no assurance that the Company will be able to take advantage of any
such Investment Opportunity or that any competitive activity of ICH, or any
Affiliated REIT will not adversely affect the Company's operations. In addition,
the Company may become further prejudiced by the Right of First Refusal
Agreement to the extent that the Company desires to pursue or pursues a business
outside its Initial Primary Business.
Effect of Termination Agreement
In December 1997, IMH and IFC entered into a termination agreement with
Imperial Credit Advisors, Inc. ("ICAI") and ICII and Joseph R. Tomkinson,
William S. Ashmore and Richard J. Johnson (the "Termination Agreement"),
pursuant to which ICAI discontinued providing management services to the Company
under a management agreement entered into in November 1995, and as amended and
restated in January 1997 (the "Management Agreement"), in return for a $44.0
million termination payment consisting of $35.0 million or 2,009,310 shares of
Common Stock of IMH and other assets comprising the balance. The $44.0 million
termination payment was treated as a non-recurring, non-cash expense and
resulted in a charge of $44.4 million to the earnings for the three months ended
December 31, 1997. The Company is currently negotiating with the principals of
RAI to provide the management services. See "Benefit to Insiders; Interlocking
Relationships; Other Considerations" for a description of affiliations between
the Company and RAI. In either case, the arrangement pursuant to which
management services will be provided to the Company will be on terms no less
favorable to the Company on a pro rata basis than the terms of the agreement
with ICAI. The inability of the Company to contract with the principals of RAI
would have a material adverse effect on the Company's operations. Furthermore,
if RAI or its principals are contracted with to provide management services to
the Company, there may be conflicts of interest as described in "--Conflicts of
Interest with Affiliated Entities."
RISKS OF INVESTMENT IN ICH
As of January 31, 1998, IMH owned 719,789 shares of ICH Common Stock and
674,211 shares of ICH non-voting Class A Common Stock which are convertible into
an equivalent number of shares of ICH Common Stock. IMH's investment in ICH is
recorded on the Company's financial statements in "Investment in Impac
Commercial Holdings, Inc." Of the net income or loss of ICH, 17.4% is recognized
on a pre-tax basis in the Company's financial statements. Any such recognized
net loss may adversely affect the Company's ability to conduct future activities
under borrowing facilities. As an originator of mortgage loans, each of ICH
and/or ICCC is or may be subject to many of the same risks applicable to IMH and
IFC. In addition, as an originator of commercial mortgages, each of ICH and/or
ICCC is or may be specifically subject to additional risks relating to the
following:
Limited History of Operations of Limited Relevance in Predicting Future
Performance
Since each of ICH and ICCC recently commenced operations in 1997, their
historical performance may be of limited relevance in predicting future
performance. In addition, the commercial mortgages purchased to date by ICH have
been outstanding for a relatively short period of time. Consequently, the
delinquency and loss experience of ICH's commercial mortgages to date may not be
indicative of future results. It is unlikely that ICH will be able to maintain
delinquency and loan loss ratios at their present levels as the portfolio grows
and becomes more seasoned. ICH intends to pursue a growth strategy for the
foreseeable future, and its future operating results will depend largely upon
its ability to expand its operations. These plans require additional personnel
and assets and there can be no assurance that ICH will be able to successfully
expand and operate its expanded operations profitably.
18
Competition in the Commercial Mortgage Industry May Adversely Affect ICH's
Operations
Other multifamily residences, self-storage facilities, retail shopping
facilities, office buildings and combination warehouse/industrial facilities
located in the areas of the mortgaged properties securing ICH's commercial
mortgages will compete with the mortgaged properties of such types to attract
residents, retail correspondents, tenants and customers. Increased competition
could adversely affect income from, and the market value, of the mortgaged
properties. In addition, the business conducted at each mortgaged property may
face competition from other industries and industry segments.
Originating and Investing in Commercial Mortgages May Entail Substantial Risks
ICH makes long-term investments in commercial mortgages. Accordingly,
during the time it holds commercial mortgages for investment, ICH is subject to
risks of borrower defaults, bankruptcies and losses that are not covered by
insurance (such as those occurring from earthquakes or floods). Commercial
mortgage lending is generally viewed as exposing the lender to a greater risk of
loss than residential mortgage lending in part, because it typically involves
larger loans to single borrowers or groups of related borrowers than residential
mortgage loans. Further, the repayment of commercial mortgages secured by
income-producing properties is typically dependent upon the tenants ability to
meet its obligations under the lease relating to such property, which in turn
depends upon profitable operation of the related property. Furthermore, the
value of commercial mortgages may be adversely affected due to characteristics
of underlying commercial properties and facilities.
Balloon Payment at Maturity and Extension Maturity Increases Lender Risks
It is expected that a substantial percentage of ICH's commercial mortgages
will have a balloon payment due for each such commercial mortgage at its
respective maturity date. Commercial mortgages with balloon payments involve a
greater risk to a lender than self-amortizing loans, because 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 payments. The ability of a
borrower to effect a refinancing or sale will be affected by a number of
factors, including, without limitation, the value of the related property, the
level of available mortgage interest rates at the time of refinancing, the
related borrower's equity in the property, the financial condition and operating
history of the borrower and the related property, the strength of the commercial
and multifamily real estate markets, tax laws, and prevailing general economic
conditions.
Environmental Risks May Adversely Affect Value of Underlying Commercial
Mortgages
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. Environmental clean-up costs may be substantial. It is
possible that such costs could become a liability of ICH reducing the return to
holders of its Common Stock if such remedial costs were incurred.
RELATIONSHIP WITH ICII AND ITS AFFILIATES; CONFLICTS OF INTEREST
The Company is subject to conflicts of interest arising from its
relationship with ICAI, and ICAI's affiliates. In December 1997, IMH and IFC
entered into a services agreement (the "Services Agreement") with ICAI pursuant
to which ICAI agreed to provide certain human resource, data and phone
communications services for IMH and IFC. ICAI, through its affiliation with
ICII, has interests that may conflict with those of the Company in fulfilling
certain of its duties. In addition, certain of the officers and Directors of
ICII or its affiliates are also officers and Directors of the Company, including
H. Wayne Snavely and Joseph R. Tomkinson, Chairman of the Board and Chief
Executive Officer of IMH, respectively. The Company relies upon ICAI to provide
the services under the Services Agreement. All other operations of the Company
are conducted through IFC and IWLG. No assurance can be given that the Company's
relationships with ICAI and its affiliates will continue indefinitely. The
failure or inability of ICAI to provide the services required of it under the
Services Agreement or any other agreements or arrangements with the Company may
have a material adverse effect on the Company's business.
19
It is the intention of the Company and ICII that any agreements and
transactions, taken as a whole, between the Company, on the one hand, and ICII
or its affiliates, on the other hand, are fair to both parties. To minimize or
avoid potential conflicts of interests, all three Unaffiliated Directors must
independently and by majority vote approve all such agreements and transactions.
However, there can be no assurance that each of such agreements or transactions
will be on terms at least as favorable to the Company as could have been
obtained from unaffiliated third parties.
CONSEQUENCES OF FAILURE TO MAINTAIN REIT STATUS MAY INCLUDE IMH BEING SUBJECT TO
TAX AS A REGULAR CORPORATION
Commencing with its taxable year ended December 31, 1995, IMH has operated
and intends to continue to operate so as to qualify as a REIT under the Code.
Although IMH believes that it has operated and will continue to operate in such
a manner, no assurance can be given that IMH was organized or has operated, or
will be able to continue to operate, in a manner which will allow it to qualify
as a REIT. Qualification as a REIT involves the satisfaction of numerous
requirements (some on an annual and others on a quarterly basis) established
under highly technical and complex Code provisions for which there are only
limited judicial and administrative interpretations, and involves the
determination of various factual matters and circumstances not entirely within
IMH's control. For example, in order to qualify as a REIT, at least 95% of IMH's
gross income (including the gross income of IWLG and IMH Assets) in any year
must be derived from qualifying sources, and IMH must pay distributions to
stockholders aggregating annually at least 95% of its (including IWLG's and IMH
Assets) taxable income (determined without regard to the dividends paid
deduction and by excluding net capital gains). No assurance can be given that
IMH's actual operating results will meet the various requirements for
qualification as a REIT. Moreover, no assurance can be given that legislation,
new regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. See "Federal Income Tax
Considerations--Taxation of IMH."
Among the requirements for REIT qualification is that the value of any one
issuer's securities held by a REIT may not exceed the value of 5% of the REIT's
total assets on certain testing dates. See "Federal Income Tax Considerations--
Taxation of IMH--Requirements for Qualification." IMH believes that the
aggregate value of the securities of IFC held by IMH have been and will continue
to be less than 5% of the value of IMH's total assets.
IMH owns 100% of the nonvoting preferred stock of IFC. IMH does not and
will not own any of the voting securities of IFC, and therefore IMH will not be
considered to own more than 10% of the voting securities of IFC. President
Clinton's 1999 federal budget proposal contains a provision which would amend
the Code so as to prohibit REITs from owning stock of a corporation possessing
more than 10% of the vote or value of all classes of stock of the corporation.
This proposal would be effective with respect to stock acquired on or after the
date of the first Congressional committee action with respect to the proposal
(the "Action Date"). In addition, to the extent that a REIT's stock ownership is
grandfathered by virtue of this effective date, such grandfathered status will
terminate if the subsidiary corporation engages in a trade or business that it
is not engaged in on the Action Date or acquires substantial new assets on or
after such date. Accordingly, if this provision of the budget proposal is
enacted in its present form, IMH's stock ownership in IFC would be
grandfathered, but such grandfathered status would terminate if IFC engages in a
trade or business that it is not engaged in on the Action Date or acquires
substantial new assets on or after such date. In the event that such
grandfathered status is terminated and IMH does not dispose of its interest in
IFC, IMH would likely fail the 10% asset test and fail to qualify as a REIT. See
"Federal Income Tax Considerations--Failure To Qualify."
If IMH were to fail to qualify as a REIT in any taxable year, IMH would be
subject to federal income tax (including any applicable alternative minimum tax)
on its (including IWLG's and IMH Assets') taxable income at regular corporate
rates and would not be allowed a deduction in computing its taxable income for
amounts distributed to its stockholders. Moreover, unless entitled to relief
under certain statutory provisions, IMH also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This treatment would reduce the net income of IMH
available for investment or distribution to stockholders because of the
additional tax liability to IMH for the years involved. In addition,
distributions to stockholders would no longer be required to be made. See
"Federal Income Tax Considerations--Taxation of IMH--Requirements for
Qualification."
Even if IMH maintains its REIT status, it may be subject to certain
federal, state and local taxes on its income. For example, if IMH has net income
from a prohibited transaction, such income will be subject to a 100% tax. See
20
"Federal Income Tax Considerations--Taxation of IMH." In addition, the net
income, if any, from the Conduit Operations conducted through IFC is subject to
federal income tax at regular corporate tax rates. See "Federal Income Tax
Considerations--Other Tax Consequences."
COMPANY'S OPERATIONS MAY BE ADVERSELY AFFECTED IF THE COMPANY IS SUBJECT TO THE
INVESTMENT COMPANY ACT
The Company at all times intends to conduct its business so as not to
become regulated as an investment company under the Investment Company Act.
Accordingly, the Company does not expect to be subject to the restrictive
provisions of the Investment Company Act. The Investment Company Act exempts
entities that are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interests"). Under the current interpretation of the staff of the
Commission, in order to qualify for this exemption, the Company must maintain at
least 55% of its assets directly in mortgage loans, qualifying pass-through
certificates and certain other Qualifying Interests in real estate. In addition,
unless certain mortgage securities represent all the certificates issued with
respect to an underlying pool of mortgages, such mortgage securities may be
treated as securities separate from the underlying mortgage loans and, thus, may
not qualify as Qualifying Interests for purposes of the 55% requirement. The
Company's ownership of certain mortgage loans therefore may be limited by the
provisions of the Investment Company Act. In addition, in meeting the 55%
requirement under the Investment Company Act, the Company intends to consider
privately issued certificates issued with respect to an underlying pool as to
which the Company holds all issued certificates as Qualifying Interests. If the
Commission, or its staff, adopts a contrary interpretation with respect to such
securities, the Company could be required to restructure its activities to the
extent its holdings of such privately issued certificates did not comply with
the interpretation. Such a restructuring could require the sale of a substantial
amount of privately issued certificates held by the Company at a time it would
not otherwise do so. Further, in order to insure that the Company at all times
continues to qualify for the above exemption from the Investment Company Act,
the Company may be required at times to adopt less efficient methods of
financing certain of its mortgage loans and investments in mortgage-backed
securities than would otherwise be the case and may be precluded from acquiring
certain types of such mortgage assets whose yield is somewhat higher than the
yield on assets that could be purchased in a manner consistent with the
exemption. The net effect of these factors will be to lower at times the
Company's net interest income, although the Company does not expect the effect
to be material. If the Company fails to qualify for exemption from registration
as an investment company, its ability to use leverage would be substantially
reduced, and it would be unable to conduct its business as described herein. Any
such failure to qualify for such exemption could have a material adverse effect
on the Company.
FUTURE REVISIONS IN POLICIES AND STRATEGIES AT THE DISCRETION OF THE BOARD OF
DIRECTORS MAY BE AFFECTED WITHOUT STOCKHOLDER CONSENT
The Board of Directors, including a majority of the Unaffiliated Directors,
has established the investment policies and operating policies and strategies.
With respect to other matters, the Company may, in the future, but currently has
no present plans to, invest in the securities of other REITs for the purpose of
exercising control, offer securities in exchange for property or offer to
repurchase or otherwise reacquire its shares or other securities. The Company
may also, but does not currently intend to underwrite the securities of other
issuers. However, any of the policies, strategies and activities referenced
above or described in this Prospectus may be modified or waived by the Board of
Directors, subject in certain cases to approval by a majority of the
Unaffiliated Directors, without stockholder consent.
EFFECT OF FUTURE OFFERINGS MAY ADVERSELY AFFECT MARKET PRICE OF COMMON STOCK
The Company in the future may increase its capital resources by making
additional private or public offerings of its Common Stock, securities
convertible into its Common Stock, preferred stock or debt securities. The
actual or perceived effect of such offerings, the timing of which cannot be
predicted, may be the dilution of the book value or earnings per share of the
Company's Common Stock or other securities then outstanding, which may result in
the reduction of the market price of such Common Stock or other securities.
21
RESTRICTIONS ON OWNERSHIP OF COMMON STOCK MAY INHIBIT MARKET ACTIVITY; POSSIBLE
ANTI-TAKEOVER EFFECT MAY DETER TAKE-OVER OF THE COMPANY
In order for IMH to maintain its qualification as a REIT, not more than 50%
in value of the outstanding shares of IMH's stock, including Common Stock, may
be owned, actually or constructively, by or for five or fewer individuals (as
defined in the Code to include certain entities) at any time during the last
half of a taxable year (other than the first year for which the election to be
treated as a REIT has been made). Furthermore, after the first taxable year for
which the REIT election was made, IMH's shares of stock, including Common Stock,
must be held by a minimum of 100 persons for at least 335 days of a 12-month
taxable year (or a proportionate part of a shorter taxable year). In order to
protect IMH against the risk of losing REIT status due to a concentration of
ownership among its stockholders, the Charter limits actual or constructive
ownership of (i) the outstanding shares of Common Stock by any person to 9.5%
(the "Ownership Limit") (in value or in number of shares, whichever is more
restrictive) of the then outstanding shares of Common Stock or (ii) the
outstanding shares of stock of IMH by any person to 9.5% in value (the
"Aggregate Ownership Limit"). See "Description of Capital Stock--Capital Stock--
Repurchase of Shares and Restrictions on Transfer." Although the Board of
Directors presently has no intention of doing so (except as described below),
the Board of Directors, in its sole discretion, could waive the Ownership Limit
or the Aggregate Ownership Limit with respect to a particular person if it were
satisfied, based upon the advice of tax counsel or otherwise, that ownership by
such person in excess of the Ownership Limit would not jeopardize IMH's status
as a REIT. The Board of Directors may from time to time increase or, subject to
certain limitations, decrease the Ownership Limit or the Aggregate Ownership
Limit.
Actual or constructive ownership of shares of stock in excess of the
Ownership Limit or the Aggregate Ownership Limit, or, with the consent of the
Board of Directors, such other limit, which would cause IMH not to qualify as a
REIT, will cause the violative transfer of ownership to be void with respect to
the intended transferee or owner as to that number of shares in excess of such
limit, and such shares will be automatically transferred to a trustee for the
benefit of a trust for the benefit of a charitable beneficiary. The trustee of
such trust shall sell such shares and distribute the net proceeds generally as
follows: the intended transferee shall receive the lesser of (i) the price paid
by the intended transferee for such excess shares and (ii) the sales proceeds
received by the trustee for such excess shares. Any proceeds in excess of the
amount distributable to the intended transferee will be distributed to the
charitable beneficiary. In addition, shares of stock held in trust shall be
deemed to have been offered for sale to IMH, or its designee, at a price per
share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the trust and (ii) the Market Price (as defined
below) on the date IMH, or its designee, accepts such offer. IMH shall have the
right to accept such offer until the trustee has sold the shares held in the
trust. Upon such a sale to IMH, the interest of the charitable beneficiary in
the shares sold shall terminate and the trustee shall distribute the net
proceeds of the sale to the intended transferee. Also, such intended transferee
shall have no right to vote such shares or be entitled to dividends or other
distributions with respect to such shares. See "Description of Capital Stock--
Capital Stock--Repurchase of Shares and Restrictions on Transfer" for additional
information regarding the Ownership Limit.
These provisions may inhibit market activity in shares of Common Stock
and may delay, defer or prevent a change of control or other transaction
involving the opportunity for IMH's stockholders to receive a premium for their
shares that might otherwise exist if any person were to attempt to assemble a
block of shares of Common Stock in excess of the number of shares permitted
under the Charter. Such provisions also may make IMH an unsuitable investment
vehicle for any person seeking to obtain ownership of more than 9.5% of the
outstanding shares of Common Stock.
In addition, certain provisions of the Maryland General Corporation Law
("MGCL") and of IMH's Charter and Bylaws may also have the effect of delaying,
deferring or preventing a change in control of the Company or other transaction
that may involve a premium price for holders of Common Stock or otherwise be in
their best interest. See "Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws."
22
CERTAIN TRANSACTIONS
TERMINATION AGREEMENT
Pursuant to the Termination Agreement, ICAI received a $44.0 million
termination payment consisting of $35.0 million or 2,009,310 Shares of Common
Stock of IMH and of other assets comprising the balance. The Shares were
transferred by ICAI to ICII. In December 1997, IMH and IFC entered the Services
Agreement with ICAI pursuant to which ICAI agreed to provide certain human
resource, data and phone communications services for IMH and IFC. H. Wayne
Snavely, Chairman of the Board of each of ICII and ICAI, is the Chairman of the
Board of IMH, and Joseph R. Tomkinson, a Director of ICII, is Vice Chairman of
the Board and Chief Executive Officer of IMH. See "Risk Factors--Conflicts of
Interest with Affiliated Entities" and "--Relationships with ICII and its
Affiliates; Conflicts of Interest" for a description of various affiliations
with IMH.
CREDIT ARRANGEMENTS
Pursuant to an Interim Whole Loan Financing Facility and Pledge Agreement,
in March 1997, IWLG extended a $5.0 million line of credit to WSI (the "WSI
Credit Line"). In October 1997, IWLG increased the WSI Credit Line to $7.5
million. Any advances under the WSI Credit Line will be evidenced by a secured
promissory note bearing interest at rates determined at the time of each advance
as of December 31, 1997, WSI had an aggregate of $5.9 million outstanding under
the WSI Credit Line.
Effective August 1997, ICH entered into a Revolving Credit and Term Loan
Agreement (the "ICH Credit Agreement") with IMH pursuant to which ICH may borrow
up to an aggregate of $15.0 million until August 1998. Any advances under the
ICH Credit Agreement will be evidenced by an unsecured promissory note bearing
interest rates determined at the time of each advance. As of December 31, 1997,
ICH had an aggregate of $9.1 million outstanding under the ICH Credit Agreement.
In October 1997, IFC entered into a Revolving Credit and Term Loan
Agreement (the "IFC Credit Agreement") with ICH pursuant to which IFC may borrow
up to an aggregate of $15.0 million. The IFC Credit Agreement expired in
December 1997 and as of December 31, 1997 there were no amounts outstanding.
OTHER MATTERS
In June 1997, IMH canceled debt in the amount of $9.0 million owed to IMH
by IFC. Of the canceled amount, $8.91 million was contributed as a contribution
to Preferred Stock and $90,000 was contributed on behalf of IFC's common
shareholders, Messrs. Tomkinson, Ashmore and Johnson so as to maintain their 1%
economic interest.
In August 1997, the Company purchased $80.2 million of non-conforming
residential mortgage loans pursuant to the WSI Purchase Agreement with WSI, of
which James Walsh, a Director of the Company, is Executive Vice President, and
with Greenwich. In December 1997, WSI repurchased from the Company an aggregate
of $7.3 million in principal balance of non-conforming residential mortgage
loans which were originally purchased by the Company from Greenwich and WSI. The
Company recorded a loss of $112,000 on the resale of the mortgage loans to WSI.
See "Risk Factors - Risks Regarding Purchase of Mortgage Loans from Greenwich."
In connection with the repurchase, IWLG extended loans of an aggregate of
approximately $5.1 million to WSI each at a rate of prime plus 2% to 4% per
annum. Of the $5.1 million, 100% and 90% were financed on approximately $2.3
million and $3.1 million, respectively, of unpaid principal balance of mortgage
loans repurchased by WSI. As of December 31, 1997, an aggregate of approximately
$40,000 had been repaid on the loans.
In October 1997, IFC entered into a forward commitment with WSI to purchase
or broker approximately $500.0 million of certain mortgage loans until April 30,
1998. The net premium spread IFC receives on the loans depends on whether the
loans are purchased and resold or brokered by IFC. As of December 31, 1997, IFC
has brokered approximately $20.0 million of mortgage loans for WSI.
23
USE OF PROCEEDS
The Selling Stockholder will receive all of the net proceeds from the sale
of the Shares offered hereby. The Company will not receive any proceeds from the
sale of such Shares.
SELLING STOCKHOLDER
The Shares offered by this Prospectus may be offered from time to time by
the Selling Stockholder named below. The following table sets forth the name of
and the number of shares of Common Stock beneficially owned by the Selling
Stockholder as of February 19, 1998 and the maximum number of Shares to be
offered by the Selling Stockholder. Since the Selling Stockholder may sell all,
some or none of its Shares, no estimate can be made of the actual aggregate
number of Shares that will be offered hereby. See "Plan of Distribution." If all
of the Shares offered hereby are sold, the Selling Stockholder will not own any
of the outstanding shares of Common Stock of the Company.
Shares Beneficially Maximum Number
Name Owned Before Offering of Shares to be Offered
- ----- --------------------- -----------------------
Imperial Credit Industries, Inc. (1) 2,009,310 2,009,310
(1) May be reached at 23550 Hawthorne Blvd., Building #1, Suite 110, Torrance,
California 90505.
The Selling Stockholder received the Shares from ICAI, a subsidiary of the
Selling Stockholder, which obtained the Shares pursuant to the Termination
Agreement. Pursuant to the Termination Agreement, the parties agreed to
terminate the Management Agreement between the Company and ICAI, and IMH agreed
to pay ICAI a $44.0 million termination payment which included the issuance of
shares of IMH Common Stock. IMH and ICAI also entered into a Registration Rights
Agreement (the "Registration Rights Agreement") whereby IMH agreed to register
the Shares and IMH and IFC entered into the Services Agreement with ICAI. H.
Wayne Snavely, Chairman of the Board of IMH, is Chairman of the Board of each of
ICII and ICAI. Joseph R. Tomkinson, Vice Chairman of the Board of IMH, is a
Director of ICII.
PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to time by the
Selling Stockholder of up to 2,009,310 shares of Common Stock (the "Shares").
Such sales may be made in underwritten offerings or in open market or block
transactions or otherwise on the AMEX, or such other national securities
exchange or automated interdealer quotation system on which shares of Common
Stock are then listed, in the over-the-counter market, in private transactions
or otherwise at market prices prevailing at the time of sale, at prices related
to prevailing market prices at the time of the sale or at negotiated prices. The
methods by which the Shares may be sold include: (a) block transactions (which
may involve crosses) in which the broker-dealer so engaged will attempt to sell
the securities as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (b) purchases by a broker-dealer as
principal and resale by such broker-dealer for its own account pursuant to this
Prospectus; (c) special offerings, exchange distributions and/or secondary
distributions in accordance with the rules of the AMEX; (d) ordinary brokerage
transactions and transactions in which the broker solicits purchasers; (e) sales
"at the market" to or through a market maker or into an existing trading market,
or on an exchange or otherwise, for such shares; (f) sales not involving market
makers or established trading markets, including direct sales or distributions
to institutions or individual purchasers; or (g) a combination of such methods
of sale. The Selling Stockholder may offer to sell and may sell the Shares in
options transactions (whether such option are listed on an options exchange or
otherwise) or deliver such Shares to cover short sales "against the box." Some
or all of the Shares may be sold through brokers acting on behalf of the Selling
Stockholder or to dealers for resale by such dealers. In connection with such
sales, such brokers and dealers may receive compensation in the form of
discounts or commissions from the Selling Stockholder and may receive
commissions from the purchasers of such shares for whom they act as broker or
agent (which discounts and commissions may exceed those customary in the types
of transactions involved). If necessary, a supplemental or amended Prospectus
will describe the method of sale in greater detail. In effecting sales, broker-
dealers engaged by the Selling Stockholder and/or purchasers of the Common Stock
may arrange for other broker-dealers to participate. In addition, any of the
Shares covered by this Prospectus which qualifies for sale pursuant to Rule 144
under the Securities Act may be sold under Rule 144 rather
24
than pursuant to this Prospectus or the Shares may be pledged as collateral for
margin accounts, and such shares could be resold pursuant to the terms of such
account.
If the Shares are sold in an underwritten offering, the Shares will be
acquired by the underwriters for their own accounts and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or prices at the time of the sale or at negotiated
prices. The Shares may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more firms acting as underwriters. The underwriter or underwriters with
respect to a particular underwritten offering of Shares will be named in a
supplemental or amended Prospectus relating to such offering, and if an
underwriting syndicate is used, the managing underwriter or underwriters will be
set forth on the cover of such supplemental or amended Prospectus. Any initial
public offering price and any discounts or commissions allowed or reallowed or
paid to dealers may be changed from time to time. Underwriters may sell shares
to or through broker-dealers, and such broker-dealers may receive compensation
in the form of discounts, commissions or commissions from the underwriters and
may receive commissions from the purchasers of such shares for whom they act as
broker or agent or to whom they sell as principal or both (which discounts and
commissions may exceed those customary in the types of transactions involved).
Pursuant to the Registration Rights Agreement, the Company has agreed to
pay all expenses in connection with the registration of the Shares being offered
hereby. The Selling Stockholder is responsible for paying any other selling
expenses, including underwriting discounts and brokers' commissions, and
expenses of Selling Stockholder's counsel.
The Selling Stockholder and any underwriter, broker, dealer or agent who
acts in connection with the sale of the Shares hereunder may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any compensation received by them and any profit on any resale of the Shares as
principals may be deemed to be underwriting discounts and commissions under the
Securities Act.
In order to comply with the securities laws of certain jurisdictions, the
securities offered hereby will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers. In addition, in certain
jurisdictions the securities offered hereby may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied with.
Pursuant to the Registration Rights Agreement, IMH has agreed to indemnify
the Selling Stockholder, its officers and directors and any person who controls
such Selling Stockholder, against certain liabilities and expenses arising out
of or based upon the information set forth or incorporated by reference in this
Prospectus, and the Registration Statement of which this Prospectus is a part,
including liabilities under the Securities Act.
In the event of a "distribution" of the shares, the Selling Stockholder,
any selling broker-dealer or agent and any "affiliated purchasers" may be
subject to Rule 102 under the Exchange Act, which would prohibit, with certain
exceptions, any such person from bidding for or purchasing any security which is
the subject of such distribution until its participation in that distribution is
completed.
DESCRIPTION OF CAPITAL STOCK
The following is a brief description of the material terms of the
Securities. This description does not purport to be complete and is subject and
qualified in its entirety by reference to Maryland law and to the Company's
Charter and Bylaws, copies of which are on file with the Commission, and are
incorporated by reference herein. See "Incorporation of Certain Documents by
Reference" and "Available Information."
GENERAL
The authorized stock of IMH consists of 50,000,000 shares of Common Stock,
$0.01 par value per share, and 10,000,000 shares of Preferred Stock, $0.01 par
value per share. It is expected that meetings of the stockholders of IMH will be
held annually. Special meetings of the stockholders may be called by the
President, Chief Executive Officer, a majority of the entire Board of Directors
or a majority of the Unaffiliated Directors and must be called upon the written
request of holders of shares entitled to cast at least 25% of all the votes
entitled to be cast at the meeting. The Charter reserves to IMH the right to
amend any provision thereof in the manner prescribed by Maryland law upon the
25
affirmative vote of stockholders entitled to cast at least a majority of all the
votes entitled to be cast on the matter, except that the provision requiring the
affirmative vote of the holders of two-third of votes entitled to be cast in the
election of directors to remove a director may only be amended upon the
affirmative vote of the holders of two-thirds of the votes entitled to be cast
in the election of directors. The Common Stock is listed on the American Stock
Exchange.
COMMON STOCK
Each share of Common Stock is entitled to participate equally in dividends
when and as authorized by the Board of Directors and in the distribution of
assets of IMH upon liquidation. Each share of Common Stock is entitled to one
vote, subject to the provisions of the Charter regarding restrictions on
transfer of stock, and will be fully paid and nonassessable by IMH upon
issuance. Shares of Common Stock have no preference, conversion, exchange,
redemption, appraisal, preemptive or cumulative voting rights. The authorized
stock of IMH may be increased and altered from time to time in the manner
prescribed by Maryland law upon the affirmative vote of stockholders entitled to
cast at least a majority of all the votes entitled to be cast on the matter. The
Charter authorizes the Board of Directors to reclassify any unissued shares of
its Common Stock in one or more classes or series of stock.
PREFERRED STOCK
The Charter authorizes the Board of Directors to issue shares of Preferred
Stock and to classify or reclassify any unissued shares of Preferred Stock into
one or more classes or series of stock. The Preferred Stock may be issued from
time to time with such designations, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions of redemption as shall be determined by
the Board of Directors for each class or series of stock subject to the
provisions of the Charter regarding restrictions on transfer of stock. Preferred
Stock is available for possible future financing of, or acquisitions by, IMH and
for general corporate purposes without further stockholder authorization, unless
such authorization is required by applicable law or the rules of either the
American Stock Exchange or the principal national securities exchange on which
such stock is listed or admitted to trading. Thus, the Board could authorize the
issuance of shares of Preferred Stock with terms and conditions which could have
the effect of delaying, deferring or preventing a change in control of IMH by
means of a merger, tender offer, proxy contest or otherwise. The Preferred
Stock, if issued, may have a preference on dividend payments which could reduce
the assets available to IMH to make distributions to the common stockholders. As
of the date hereof, no shares of Preferred Stock have been issued.
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER
For IMH to qualify as a REIT under the Code, no more than 50% in value of
its outstanding shares of stock may be owned, actually or constructively, by or
for five or fewer individuals (as defined in the Code to include certain
entities) at any time during the last half of a taxable year (other than the
first year for which an election to be treated as a REIT has been made). In
addition, a REIT's stock must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year (other than the first year for
which an election to be treated as a REIT has been made).
Because IMH expects to continue to qualify as a REIT, the Charter contains
restrictions on the transfer of Common Stock which are intended to assist IMH in
complying with these requirements. The Charter prohibits any person, subject to
certain specified exceptions discussed below, from owning, actually or
constructively, (i) shares of Common Stock in excess of 9.5% (in value or in
number, whichever is more restrictive) of the outstanding shares of Common Stock
or (ii) shares of stock of IMH in excess of 9.5% in value the aggregate value of
the outstanding shares of stock of the Company (the "Aggregate Ownership
Limit"). The constructive ownership rules are complex, and may cause shares of
stock owned actually or constructively by a group of related individuals and/or
entities to be constructively owned by one individual or entity. As a result,
the acquisition of less than 9.5% of the outstanding shares of Common Stock (or
the acquisition of an interest in an entity that owns, actually or
constructively, shares of Common Stock) by an individual or entity, could
nevertheless cause that individual or entity, or another individual or entity,
to own constructively shares of stock in excess of the Ownership Limit or the
Aggregate Ownership Limit, or such other limit as provided in the Charter or as
otherwise permitted by the Board of Directors. The Board of Directors may, but
in no event will be required to, exempt a person from the Ownership Limit or the
Aggregate Ownership Limit if it determines that such person's ownership of
shares of stock in excess of such limits will not jeopardize IMH's status as a
REIT. As a condition of such waiver, the Board of Directors may require a ruling
from the Internal Revenue Service
26
or opinions of counsel satisfactory to it and/or undertakings or representations
from the applicant with respect to IMH's status as a REIT.
IMH's Charter further prohibits (a) any person from actually or
constructively owing shares of Common Stock that would result in IMH being
"closely held" under Section 856(h) of the Code or otherwise cause IMH to fail
to qualify as a REIT, and (b) any person from transferring shares of Common
Stock if such transfer would result in shares of Common Stock being owned by
fewer than 100 persons. Any person who acquires or attempts or intends to
acquire actual or constructive ownership of shares of stock of IMH that will or
may violate any of the foregoing restrictions on transferability and ownership
is required to give written notice immediately to IMH and provide IMH with such
other information as it may request in order to determine the effect of such
transfer on its status as a REIT. The foregoing restrictions on transferability
and ownership will not apply if the Board of Directors determines that it is no
longer in the best interest of IMH to attempt to qualify, or to continue to
qualify, as a REIT. The Board of Directors may from time to time increase the
Ownership Limit and the Aggregate Ownership Limit.
Pursuant to the Charter, if any purported transfer of Common Stock or any
other event would otherwise result in any person owning shares of stock in
excess of the Ownership Limit or the Aggregate Ownership Limit or in IMH being
"closely held" as described above or otherwise failing to qualify as a REIT,
then that number of shares of stock the actual or constructive ownership of
which otherwise would cause such person to violate such restrictions (rounded to
the nearest whose share) will be automatically transferred to a trustee (the
"Trustee") as trustee of a trust (the "Trust") for the exclusive benefit of one
or more charitable beneficiaries (the "Charitable Beneficiary"), and the
intended transferee will not acquire any rights in such shares. Shares held by
the Trustee will constitute issued and outstanding shares of stock. The intended
transferee will not benefit economically from ownership of any shares held in
the Trust, will have no rights to dividends and will not possess any rights to
vote or other rights attributable to the shares held in the Trust. The Trustee
will have all voting rights and rights to dividends or other distributions with
respect to shares held in the Trust, which rights will be exercised for the
exclusive benefit of the Charitable Beneficiary. Any dividend or other
distribution paid prior to the discovery by IMH that shares of stock have been
transferred to the Trustee will be paid with respect to such shares to the
Trustee upon demand and any dividend or other distribution authorized but unpaid
will be paid when due to the Trustee. Any dividends or distributions so paid
over to the Trustee will be held in trust for the Charitable Beneficiary.
Subject to Maryland law, effective as of the date that such shares have been
transferred to the Trustee, the Trustee will have the authority (at the
Trustee's sole discretion) (i) to rescind as void any vote cast by an intended
transferee prior to the discovery by IMH that such shares have been transferred
to the Trustee and (ii) to recast such vote in accordance with the desires of
the Trustee acting for the benefit of the Charitable Beneficiary.
Within 20 days of receiving notice from IMH that shares of stock have been
transferred to the Trust, the Trustee will sell the shares held in the Trust to
a person designated by the Trustee whose ownership of the shares will not
violate the ownership restrictions set forth in the Charter. Upon such sale, the
interest of the Charitable Beneficiary in the shares sold will terminate and the
Trustee will distribute the net proceeds of the sale to the intended transferee
and to the Charitable Beneficiary as follows: the intended transferee will
receive the lesser of (1) the price paid by the intended transferee for the
shares or, if the intended did not give value for the shares in connection with
the event causing the shares to be held in the Trust (e.g., in the case of a
gift, devise or other such transaction), the Market Price (as defined below) of
the shares on the day of the event causing the shares to be held in the Trust
and (2) the price per share received by the Trustee from the sale or other
disposition of the shares held in the Trust. Any net sales proceeds in excess of
the amount payable to the intended transferee will be immediately paid to the
Charitable Beneficiary.
In addition, shares of stock held in Trust will be deemed to have been
offered for sale to IMH, or its designee, at a price per share equal to the
lesser of (i) the price per share in the transaction that resulted in such
transfer to the Trust (or, in the case of a devise or gift, the Market Price (as
defined below) at the time of such devise or gift) and (ii) the Market Price on
the date IMH, or its designee, accepts such offer. IMH will have the right to
accept such offer until the Trustee has sold the shares held in the Trust. Upon
such a sale to IMH, the interest of the Charitable Beneficiary in the shares
sold will terminate and the Trustee will distribute the net proceeds of the sale
to the intended transferee.
The Charter defines the term "Market Price" on any date, with respect to
any class or series of outstanding shares of IMH's stock, as the Closing Price
(as defined below) for such shares on such date. The "Closing Price" on any date
shall mean the last sale price for such shares, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, for such shares, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the NYSE or, if such
27
shares are not listed or admitted to trading on the NYSE, as reported on the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which such shares are
listed or admitted to trading or, if such shares are not listed or admitted to
trading on any national securities exchange, the last quoted price, or, if not
so quoted, the average of the high bid and low asked prices in the over-the-
customer market, as reported by the National Association of Securities Dealers,
Inc. Automated Quotation System or, if such system is no longer in use, the
principal other automated quotation system that may then be in use or, if such
shares are not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
such shares selected by the Board of Directors or, in the event that no trading
price is available for such shares, the fair market value of the shares, as
determined in good faith by the Board of Directors.
If any purported transfer of shares of stock of IMH shall cause IMH to
be beneficially owned be fewer than 100 persons, such transfer will be null and
void in its entirety and the intended transferee will acquire no rights to such
shares.
All certificates representing shares of Common Stock bear a legend
referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by the
Code or the regulations promulgated thereunder) of all classes or series of the
Company's stock, including shares of Common Stock, within 30 days after the end
of each taxable year, is required to give written notice to the Company stating
the name and address of such owner, the number of shares of each class and
series of stock of the Company beneficially owned and a description of the
manner in which such shares are held. Each such owner shall provide to the
Company such additional information as the Company may request in order to
determine the effect, if any, of such beneficial ownership on IMH's status as a
REIT and to ensure compliance with the Ownership Limit.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company has established a Dividend Reinvestment and Stock Purchase Plan
pursuant to which holders of record and beneficial owners of shares of Common
Stock of IMH may elect to have all or a portion of their dividends reinvested
automatically in additional shares of Common Stock of the Company, and to make
optional cash purchases of Common Stock of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Boston
EquiServe, L.P., North Quincy, Massachusetts.
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of the MGCL and of the Charter
and the Bylaws of IMH does not purport to be complete and is subject to and
qualified in its entirety by reference to Maryland law and to the Charter and
the Bylaws of IMH, copies of which are filed with the Commission. See "Available
Information." For a description of additional restrictions on transfer of the
Common Stock, see "Description of Securities--Capital Stock-- Repurchase of
Shares and Restrictions on Transfer."
REMOVAL OF DIRECTORS
The Charter provides that a director may be removed from office at any time
but only by the affirmative vote of the holders of at least two-thirds of the
votes entitled to be cast in the election of directors.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of the corporation's shares or an
28
affiliate of the corporation who, at any time within the two-year period prior
to the date in question, was the beneficial owner of 10% or more of the voting
power of the then outstanding voting stock of the corporation (an "Interested
Stockholder") or an affiliate of such an Interested Stockholder are prohibited
for five years after the most recent date on which the Interested Stockholder
becomes an Interested Stockholder. Thereafter, any such business combination
must be recommended by the board of directors of such corporation and approved
by the affirmative vote of at least (a) 80% of the votes entitled to be cast by
holders of outstanding shares of voting stock of the corporation and (b) two-
thirds of the votes entitled to be cast by holders of voting stock of the
corporation other than shares held by the Interested Stockholder with whom (or
with whose affiliate) the business combination is to be effected, unless, among
other conditions, the corporation's common stockholders receive a minimum price
(as defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. These provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. Pursuant to the statute, IMH has exempted any business
combinations involving ICII and, consequently, the five-year prohibition and the
super-majority vote requirements of the statute will not in any event apply to
business combinations between ICII and IMH. As a result, ICII may be able to
enter into business combinations with IMH which may not be in the best interest
of the stockholders, without compliance by IMH with the super-majority vote
requirements and the other provisions of the statute.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror, by officers or by directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquiror or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (1) one-fifth or more but less than
one-third, (2) one-third or more but less than a majority, or (3) a majority or
more of all voting power. Control shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation and adopted at any time before the acquisition of
shares.
The Bylaws of IMH contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of IMH's shares of
stock. There can be no assurance that such provision will not be amended or
eliminated at any time in the future.
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AMENDMENT TO THE CHARTER
IMH reserves the right from time to time to make any amendment to its
Charter, now or hereafter authorized by law, including any amendment which
alters the contract rights as expressly set forth in the Charter, of any shares
of outstanding stock. The Charter may be amended only by the affirmative vote of
holders of shares entitled to cast not less than a majority of all the votes
entitled to be cast on the matter; provided, however, that provisions on removal
of directors may be amended only by the affirmative vote of holders of shares
entitled to cast not less than two-thirds of all the votes entitled to be cast
in the election of directors.
DISSOLUTION OF THE COMPANY
The dissolution of IMH must be approved by the affirmative vote of holders
of shares entitled to cast not less than a majority of all the votes entitled to
be cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors and
the proposal of business to be considered by stockholders may be made only (1)
pursuant to IMH's notice of the meeting, (2) by the Board of Directors or (3) by
a stockholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the Bylaws and (b) with respect to
special meetings of stockholders, only the business specified in IMH's notice of
meeting may be brought before the meeting of stockholders and nominations of
persons for election to the Board of Directors may be made only (1) pursuant to
IMH's notice of the meeting, (2) by the Board of Directors or (3) provided that
the Board of Directors has determined that directors shall be elected at such
meeting, by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the Bylaws.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
CHARTER AND BYLAWS
The business combination provisions and, if the applicable provision in the
Bylaws is rescinded, the control share acquisition provisions of the MGCL, the
provisions of the Charter on ownership and transfer of stock and on removal of
directors and the advance notice provisions of the Bylaws could delay, defer or
prevent a change in control of IMH or other transaction that might involve a
premium price for holders of Common Stock or otherwise be in their best
interest.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations
regarding the Company and holders of Common Stock is based on current law, is
for general information only and is not tax advice. The information set forth
below, to the extent that it constitutes matters of law, summaries of legal
matters or legal conclusions, is the opinion of Latham & Watkins, tax counsel to
the Company. The tax treatment of a holder of Common Stock will vary depending
on his or her particular situation, and this summary does not purport to deal
with all aspects of taxation that may be relevant to prospective purchasers of
Common Stock in light of such purchasers' particular investment or tax
circumstances, or to certain types of purchasers subject to special treatment
under the federal income tax laws, including, without limitation, insurance
companies, certain financial institutions, broker- dealers, stockholders holding
Common Stock as part of a conversion transaction, as part of a hedge or hedging
transaction, or as a position in a straddle for tax purposes, tax-exempt
organizations (except to the extent discussed under the heading "--Taxation of
Tax-Exempt Stockholders"), or foreign corporations, foreign partnerships and
persons who are not citizens or residents of the United States. In addition, the
summary below does not consider the effect of any foreign, state, local or other
tax laws that may be applicable to prospective purchasers of Common Stock.
The information in this section is based on the Code, current, temporary
and proposed Treasury Regulations promulgated under the Code, the legislative
history of the Code, current administrative interpretations and practices of the
Internal Revenue Service (the "Service") (including its practices and policies
as expressed in certain private letter rulings which are not binding on the
Service except with respect to the particular taxpayers who requested and
received such rulings), and court decisions, all as of the date hereof. No
assurance can be given that future legislation, Treasury Regulations,
administrative interpretations and practices and/or court decisions will not
adversely affect existing
30
interpretations. Any such change could apply retroactively to transactions
preceding the date of the change. IMH has not requested, and does not plan to
request, any ruling from the Service concerning the tax treatment of IMH. Thus,
no assurance can be provided that the statements set forth herein (which are, in
any event, not binding on the Service or courts) will not be challenged by the
Service or will be sustained by a court if so challenged.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
SALE OF COMMON STOCK, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAXATION OF IMH
General. IMH elected to be taxed as a REIT under Sections 856 through 860
of the Code, commencing with its taxable year ended December 31, 1995. IMH
believes that, commencing with such taxable year, it has been organized and has
operated in such a manner as to qualify for taxation as a REIT under the Code,
and IMH intends to continue to operate in such a manner, but no assurance can be
given that it has operated or will continue to operate in such a manner so as to
qualify or remain qualified.
The sections of the Code and Treasury Regulations governing REITs are
highly technical and complex. The following summary sets forth the material
aspects of the sections that govern the federal income tax treatment of a REIT
and its stockholders. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations thereof.
If IMH qualifies for taxation as a REIT, it generally will not be subject
to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a regular corporation. However, IMH will be subject to federal
income tax as follows: First, IMH will be taxed at regular corporate rates on
any undistributed "REIT taxable income," including undistributed net capital
gains. Second, under certain circumstances, IMH may be subject to the
"alternative minimum tax" on its items of tax preference. Third, if IMH has (i)
net income from the sale or other disposition of "foreclosure property" (defined
generally as property acquired through foreclosure or otherwise as a result of a
default on a loan secured by the property or a lease of such property) which is
held primarily for sale to customers in the ordinary course of business, or (ii)
other nonqualifying net income from foreclosure property, it will be subject to
tax at the highest corporate rate on such income. Fourth, if IMH has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property held primarily for sale to customers in the ordinary
course of business other than foreclosure property), such income will be subject
to a 100% tax. Fifth, if IMH should fail to satisfy the 75% gross income test or
the 95% gross income test (as discussed below), but has nonetheless maintained
its qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on an amount equal to (a) the gross income
attributable to the greater of the amount by which IMH fails the 75% or 95% test
multiplied by (b) a fraction intended to reflect IMH's profitability. Sixth, if
IMH should fail to distribute during each calendar year at least the sum of (i)
85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain
net income for such year, and (iii) any undistributed taxable income from prior
periods, IMH would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, if IMH has excess
inclusion income (attributable to its interest, if any, in a residual interest
in a REMIC or if all or a portion of IMH, IMH Assets, or IWLG is treated as a
taxable mortgage pool) and a disqualified organization (generally, tax-exempt
entities not subject to tax on unrelated business income, including governmental
organizations) holds shares of stock in IMH, IMH will be taxed at the highest
corporate tax rate on the amount of excess inclusion income for the taxable year
allocable to the shares held by such disqualified organization. Eighth, with
respect to any asset (a "Built-In Gain Asset") acquired by IMH from a
corporation which is or has been a C corporation (i.e., generally a corporation
subject to full corporate-level tax) in a transaction in which the basis of the
Built-In Gain Asset in the hands of IMH is determined by reference to the basis
of the asset in the hands of the C corporation, if IMH recognizes gain on the
disposition of such asset during the ten-year period (the "Recognition Period")
beginning on the date on which such asset was acquired by IMH, then, to the
extent of the Built-In Gain (i.e., the excess of (a) the fair market value of
such asset over (b) IMH's adjusted basis in such asset, determined as of the
beginning of the Recognition Period), such gain will be subject to tax at the
highest regular corporate rate pursuant to Treasury Regulations that have not
yet been promulgated. The results described above with respect to the
recognition of Built-In Gain assume that IMH will make
31
an election pursuant to IRS Notice 88-19 and that the availability or nature of
such election is not modified as proposed in President Clinton's 1999 federal
budget proposal.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) which would be
taxable as a domestic corporation but for Sections 856 through 859 of the Code;
(iv) which is neither a financial institution nor an insurance company subject
to certain provisions of the Code; (v) the beneficial ownership of which is held
by 100 or more persons; (vi) during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, actually or
constructively, by or for five or fewer individuals (as defined in the Code to
include certain entities); and (vii) which meets certain other tests, described
below, regarding the nature of its income and assets and the amount of its
distributions. The Code provides that conditions (i) to (iv), inclusive, must be
met during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of twelve months, or during a proportionate
part of a taxable year of less than twelve months. For purposes of conditions
(v) and (vi), pension funds and certain other tax-exempt entities are treated as
individuals, subject to a "look-through" exception in the case of condition
(vi). In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. IMH has a calendar taxable year.
The Company believes that it has previously issued sufficient shares of
Common Stock with sufficient diversity of ownership to allow IMH to satisfy
conditions (v) and (vi). In addition, the Charter provides for restrictions
regarding the transfer and ownership of shares, which restrictions are intended
to assist IMH in continuing to satisfy the share ownership requirements
described in (v) and (vi) above. Such ownership and transfer restrictions are
described in "Description of Capital Stock--Repurchase of Shares and
Restrictions on Transfer." These restrictions, however, may not, in all cases,
ensure that IMH will be able to satisfy the share ownership requirements
described above. If IMH fails to satisfy such share ownership requirements,
IMH's status as a REIT will terminate; provided, however, that if IMH complies
with the rules contained in the applicable Treasury Regulations requiring IMH to
attempt to ascertain the actual ownership of its shares, and IMH does not know,
and would not have known through the exercise of reasonable diligence, whether
it failed to meet the requirement set forth in condition (vi) above, IMH will be
treated as having met such requirement. See "--Failure to Qualify."
Ownership of IWLG and IMH Assets. IMH has owned 100% of the stock of IWLG
and IMH Assets (the "QRSs") at all times such QRSs have been in existence. As a
result, the QRSs will be treated as "qualified REIT subsidiaries." Code Section
856(I) provides that a corporation which is a "qualified REIT subsidiary" will
not be treated as a separate corporation, and all assets, liabilities, and items
of income, deduction, and credit of a "qualified REIT subsidiary" will be
treated as assets, liabilities and such items (as the case may be) of the REIT
for all purposes of the Code including the REIT qualification tests. Thus, in
applying the requirements described herein, the QRSs will be ignored, and all
assets, liabilities and items of income, deduction and credit of such
subsidiaries will be treated as assets, liabilities and such items (as the case
may be) of IMH. For this reason, references under "Federal Income Tax
Considerations" to the income and assets of IMH shall include the income and
assets of the QRSs. Because the QRSs will be treated as "qualified REIT
subsidiaries" they will not be subject to federal income tax. In addition, IMH's
ownership of the voting stock of the QRSs will not violate the restrictions
against ownership of securities of any one issuer which constitute more than 10%
of such issuer's voting securities or more than 5% of the value of IMH's total
assets, described below under "-- Asset Tests."
Income Tests. In order to maintain its qualification as a REIT, IMH
annually must satisfy three gross income requirements. First, at least 75% of
IMH's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived directly or indirectly from: (i) rents from
real property; (ii) interest on obligations secured by mortgages on real
property or on interests in real property; (iii) gain from the sale or other
disposition of real property (including interests in real property and interests
in mortgages on real property) not held primarily for sale to customers in the
ordinary course of business; (iv) dividends or other distributions on, and gain
(other than gain from prohibited transactions) from the sale or other
disposition of, transferable shares in other real estate investment trusts; (v)
abatements and refunds of taxes on real property; (vi) income and gain derived
from foreclosure property; (vii) amounts (other than amounts the determination
of which depend in whole or in part on the income or profits of any person)
received or accrued as consideration for entering into agreements (a) to make
loans secured by mortgages on real property or on interests in real property or
(b) to purchase or lease real property (including interests in real property and
interests in mortgages on real property); (viii) gain from the sale or other
disposition of a real estate asset which is not
32
a prohibited transaction; and (ix) qualified temporary investment income.
Second, at least 95% of IMH's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from the sources
described above with respect to the 75% gross income test, dividends, interest,
and gain from the sale or disposition of stock or securities (or from any
combination of the foregoing). Third, for taxable years beginning prior to
August 5, 1997, short-term gain from the sale or other disposition of stock or
securities, gain from prohibited transactions, and gain on the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and sales or other dispositions of foreclosure property)
must represent less than 30% of IMH's gross income (including gross income from
prohibited transactions). The 30% gross income test has been repealed and will
not apply beginning with IMH's 1998 taxable year.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
Generally, if a loan is secured by both personal property and real
property, interest must be allocated between the personal property and the real
property, with only the interest allocable to the real property qualifying as
mortgage interest under the 75% gross income test. Treasury Regulations provide
that if a loan is secured by both personal and real property and the fair market
value of the real property as of the commitment date (generally, the date on
which the REIT's obligation to make the loan becomes binding) equals or exceeds
the amount of the loan, the entire interest amount will qualify under the 75%
gross income test. If the amount of the loan exceeds the fair market value of
the real property as of the commitment date, the interest income allocated to
the real property is an amount equal to the interest income multiplied by a
fraction, the numerator of which is the fair market value of the real property
as of the commitment date, and the denominator of which is the amount of the
loan. The interest income allocated to the personal property is an amount equal
to the excess of the total interest income over the interest income allocated to
the real property.
Interest earned on mortgage loans, and mortgage-backed securities secured
by or representing an interest in such loans, will qualify as "interest" for
purposes of both the 95% and 75% gross income tests to the extent such assets
are treated as obligations secured by mortgages on real property or on interests
in real property. However, income attributable to securities or other
obligations that are not treated as obligations secured by mortgages on real
property or on interests in real property (and which are not otherwise
"Qualified REIT Assets", as defined below), dividends on stock (including any
dividends IMH receives from IFC, but not including dividends IMH receives from
other qualifying REITs or from the QRSs), and gains from the sale or disposition
of such stock or such securities or other obligations will not qualify under the
75% gross income test. Such income will qualify under the 95% gross income test,
however, if such income constitutes interest, dividends or gain from the sale or
disposition of stock or securities. Income from loan guarantee fees, mortgage
servicing contracts or other contracts will not qualify under either the 95% or
75% gross income test if such income constitutes fees for services rendered by
IMH or is not treated as interest (on obligations secured by mortgages on real
property or on interests in real property for purposes of the 75% gross income
test). Similarly, income from hedging, including the sale of hedges, will not
qualify under the 75% or 95% gross income tests unless such hedges constitute
certain qualified hedges, in which case such income will qualify under the 95%
gross income test. For purposes of the discussion herein, the term "Qualified
REIT Assets" shall mean (i) real property (including interests in real property
and interests in mortgages on real property), (ii) shares (or transferable
certificates of beneficial interest) in other REITs which meet the requirements
of Sections 856-859 of the Code, (iii) stock or debt instruments (not otherwise
described in (i), (ii) or (iv)) held for not more than one year that were
purchased with the proceeds of (a) an offering of stock in IMH (other than
amounts received pursuant to a dividend reinvestment plan) or (b) a public
offering of debt obligations of IMH which have maturities of at least five
years, and (iv) a regular or residual interest in a REMIC, but only if 95% or
more of the assets of such REMIC are assets described in (i) through (iii).
Furthermore, IFC receives servicing and processing fees and income from
gain on the sale of certain mortgage loans and mortgage securities. Such fees do
not accrue to IMH, but IMH receives dividends on its nonvoting preferred stock
in IFC. Such dividends will qualify under the 95% gross income test, but will
not qualify under the 75% gross income test.
In order to comply with the 95% and 75% gross income tests, IMH has limited
and will continue to limit substantially all of the assets that it acquires to
mortgage loans or other securities or obligations that are treated as
33
obligations secured by mortgages on real property or on interests in real
property or to other Qualified REIT Assets. As a result, IMH may limit the type
of assets, including hedging contracts, that it otherwise might acquire and,
therefore, the type of income it otherwise might receive, including income from
hedging, other than income from certain qualified hedges.
In order to comply with the REIT gross income tests, IMH has monitored and
will continue to monitor its income, including income from dividends, warehouse
lending, hedging transactions, futures contracts, servicing and sales of
mortgage assets, gains on the sale of securities, and other income not derived
from Qualified REIT Assets. IMH believes that the aggregate amount of any
nonqualifying income in any taxable year has not exceeded and will not exceed
the limit on nonqualifying income under the gross income tests.
If IMH fails to satisfy one or both of the 75% or 95% gross income for any
taxable year, it may nevertheless qualify as a REIT for such if it is entitled
to relief under certain provisions of the Code. These relief provisions will be
generally available if IMH's failure to meet such tests was due to reasonable
cause and not due to willful neglect, IMH attaches a schedule of the sources of
its income to its federal income tax return, and any incorrect information on
the schedule was not due to fraud with intent to evade tax. It is not possible,
however, to state whether in all circumstances IMH would be entitled to the
benefit of these relief provisions. For example, if IMH fails to satisfy the
gross income tests because nonqualifying income that IMH intentionally incurs
exceeds the limits on such income, the Service could conclude that IMH's failure
to satisfy the tests was not due to reasonable cause. If these relief provisions
are inapplicable to a particular set of circumstances involving IMH, IMH will
not qualify as a REIT. As discussed above in "Federal Income Tax Considerations
Taxation of IMH-- General," even if these relief provisions apply and IMH
retains its status as a REIT, a 100% tax would be imposed on an amount equal to
(a) the gross income attributable to the greater of the amount by which IMH
failed the 75% or 95% test multiplied by (b) a fraction intended to reflect
IMH's profitability. There can be no assurance that IMH will always be able to
maintain compliance with the gross income tests for REIT qualification despite
its periodic monitoring procedures. No similar mitigation provision provides
relief if IMH fails the 30% gross income test. In such case, IMH would cease to
qualify as a REIT. See "--Failure to Qualify."
Any gain realized by IMH on the sale of any property (including loans and
mortgage-backed securities) held as inventory or other held primarily for sale
to customers in the ordinary course of business will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. Such prohibited
transaction income may also have an adverse effect upon IMH's ability to satisfy
the income tests for qualification as a REIT. Under existing law, whether
property is held as inventory or primarily for sale to customers in the ordinary
course of a trade or business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction. IFC
securitizes mortgage loans and sells the resulting mortgage securities. If IMH
were to sell such mortgage securities on a regular basis, there is a substantial
risk that such sales would constitute prohibited transactions and that all of
the profits therefrom would be subject to a 100% tax. Therefore, such sales have
been made and will be made only by IFC. IFC is not subject to the 100% penalty
tax on income from prohibited transactions, which is only applicable to a REIT.
Asset Tests. IMH, at the close of each quarter of its taxable year, must
also satisfy three tests relating to the nature of its assets. First, at least
75% of the value of IMH's total assets must be represented by Qualified REIT
Assets, cash, cash items and government securities. Second, not more than 25% of
IMH's total assets may be represented by securities other than those in the 75%
asset class. Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by IMH may not exceed 5% of the value
of IMH's total assets and IMH may not own more than 10% of any one issuer's
outstanding voting securities. IMH believes that substantially all of its
assets, other than the nonvoting preferred stock of IFC, and the amount of any
loans made to ICCC and certain loans made to IFC, are Qualified REIT Assets.
As described above, IMH will be treated as owning all assets, liabilities
and items of income, deduction, and credit of the QRSs. IWLG provides short-
term lines of credit ("warehouse loans") to IFC and approved mortgage banks,
most of which are correspondents of IFC, to finance mortgage loans during the
time from the closing of the loans to their sale or other settlement with pre-
approved investors, including IMH. IWLG's warehouse loans are secured by
assignments of first priority perfected security interests in and liens on,
among other items of collateral, mortgages loans and related mortgage notes
owned by the customer that in turn are secured by mortgages on real property.
The Service has issued a Revenue Ruling in which it ruled that loans similar to
IWLG's warehouse loans to IFC were obligations secured by mortgages on real
property and interests in mortgages on real property, and therefore that such
loans were
34
Qualified REIT Assets. Based on such Revenue Ruling, IMH believes that IWLG's
warehouse loans are Qualified REIT Assets. However, in the event that the IWLG's
warehouse loans are not treated as Qualified REIT Assets, IMH would likely fail
the 5% asset test and fail to qualify as a REIT. See "-- Failure to Qualify."
As described above, IMH owns 100% of the nonvoting preferred stock of IFC.
IMH does not and will not own any of the voting securities of IFC, and therefore
IMH will not be considered to own more than 10% of the voting securities of IFC.
President Clinton's 1999 federal budget proposal contains a provision which
would amend the Code so as to prohibit REITs from owning stock of a corporation
possessing more than 10% of the vote or value of all classes of stock of the
corporation. This proposal would be effective with respect to stock acquired on
or after the date of the first Congressional committee action with respect to
the proposal (the "Action Date"). In addition, to the extent that a REIT's stock
ownership is grandfathered by virtue of this effective date, such grandfathered
status will terminate if the subsidiary corporation engages in a trade or
business that it is not engaged in on the Action Date or acquires substantial
new assets on or after such date. Accordingly, if this provision of the budget
proposal is enacted in its present form, IMH's stock ownership in IFC would be
grandfathered, but such grandfathered status would terminate if IFC engages in a
trade or business that it is not engaged in on the Action Date or acquires
substantial new assets on or after such date. In the event that such
grandfathered status is terminated and IMH does not dispose of its interest in
IFC, IMH would likely fail the 10% asset test and fail to qualify as a REIT. See
"--Failure To Qualify."
IMH believes that the aggregate value of its securities of IFC has not at
any time exceeded 5% of the total value of IMH's assets, and will not exceed
such amount in the future. There can be no assurance that the Service will not
contend that the value of the securities of IFC held by IMH exceeds the 5% value
limitation. The 5% asset test requires that IMH revalue its assets at the end of
each calendar quarter in which IMH acquires additional securities in IFC for the
purpose of applying such test. Although IMH plans to take steps to ensure that
it satisfies the 5% asset test for any quarter with respect to which retesting
is to occur, there can be no assurance that such steps will always be
successful, or will not require a reduction in IMH's overall interest in IFC.
IMH has taken and will continue to take measures to prevent the value of
securities issued by any one entity that do not constitute Qualified REIT Assets
from exceeding 5% of the value of IMH's total assets as of the end of each
calendar quarter. In particular, as of the end of each calendar quarter, IMH has
limited and diversified and will continue to limit and diversify its ownership
of securities of IFC and other securities that do not constitute Qualified REIT
Assets as necessary to satisfy the REIT asset tests described above.
When purchasing mortgage-related securities, IMH and its counsel may rely
on opinions of counsel for the issuer or sponsor of such securities given in
connection with the offering of such securities, or statements made in related
offering documents, for purposes of determining whether and to what extent those
securities constitute Qualified REIT Assets for purposes of the REIT asset tests
and produce income which qualifies under the REIT gross income tests discussed
above. The inaccuracy of any such opinions or statements may have an adverse
impact on IMH's qualification as a REIT.
A regular or residual interest in a REMIC will be treated as a Qualified
REIT Asset for purposes of the REIT asset tests and income derived with respect
to such interests will be treated as interest on obligations secured by
mortgages on real property, assuming that at least 95% of the assets of the
REMIC are Qualified REIT Assets. If less than 95% of the assets of the REMIC are
Qualified REIT Assets, only a proportionate share of the assets of and income
derived from the REMIC will be treated as qualifying under the REIT asset and
income tests. Based on information provided to IMH by each REMIC in which IMH
holds an interest, IMH believes that its REMIC interests fully qualify for
purposes of the REIT gross income and asset tests. IMH has not acquired and does
not expect to acquire or retain residual interests issued by REMICs.
If IMH invests in a partnership, it will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to the
income of the partnership attributable to such share. In addition, the character
of the assets and gross income of the partnership shall retain the same
character in the hands of IMH for purposes of the REIT gross income and asset
tests.
After initially meeting the asset tests at the close of any quarter, IMH
will not lose its status as a REIT for failure to satisfy the asset tests at the
end of a later quarter solely by reason of changes in asset values. If the
failure to satisfy the asset tests results from an acquisition of securities or
other property during a quarter, the failure can be cured
35
by the disposition of sufficient nonqualifying assets within 30 days after the
close of that quarter. IMH intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests and to take such other
actions within 30 days after the close of any quarter as may be required to cure
any noncompliance. If IMH fails to cure noncompliance with the asset tests
within such time period, IMH would cease to qualify as a REIT.
Annual Distribution Requirements. IMH, in order to maintain its
qualification as a REIT, is required to distribute dividends (other than capital
gain dividends) to its stockholders in an amount at least equal to (i) the sum
of (a) 95% of IMH's "REIT taxable income" (generally, income of IMH computed
without regard to the dividends paid deduction and by excluding its net capital
gain) and (b) 95% of the excess of the net income, if any, from foreclosure
property over the tax imposed on such income, minus (ii) the excess of the sum
of certain items of non-cash income (i.e., income attributable to leveled
stepped rents, original issue discount or purchase money debt, or a like-kind
exchange, that is later determined to be taxable) over 5% of "REIT taxable
income." In addition, if IMH disposes of any Built-In Gain Asset during its
Recognition Period, IMH will be required, pursuant to Treasury Regulations which
have not yet been promulgated, to distribute at least 95% of the Built-in Gain
(after tax), if any, recognized on the disposition of such asset. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before IMH timely files its tax return for
such year and if paid on or before the first regular dividend payment date after
such declaration and if IMH so elects and specifies the dollar amount on its tax
return. Such distributions are taxable to holders of Common Stock (other than
certain tax-exempt entities, as discussed below) in the year in which paid, even
if such distributions relate to the prior year for purposes of IMH's 95%
distribution requirement. The amount distributed must not be preferential (e.g.,
each holder of shares of Common Stock must receive the same distribution per
share). To the extent that IMH does not distribute all of its net capital gain
or distributes at least 95%, but less than 100%, of its "REIT taxable income,"
as adjusted, it will be subject to tax on the undistributed portion at regular
ordinary and capital gain corporate tax rates. Furthermore, if IMH should fail
to distribute during each calendar year (or, in the case of distributions with
declaration and record dates falling in the last three months of the calendar
year, by the end of January immediately following such year) at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain income for such year, and (iii) any undistributed taxable income from prior
periods, IMH would be subject to a 4% excise tax on the excess of such required
distributions over the amounts actually distributed. Any REIT taxable income and
net capital gain on which this excise tax is imposed for any year is treated as
an amount distributed that year for purposes of calculating such tax. IMH
believes that it has and intends to continue to make timely distributions
sufficient to satisfy these annual distribution requirements.
IMH anticipates that it will generally have sufficient cash or liquid
assets to enable it to satisfy the distribution requirements described above. It
is possible, however, that IMH, from time to time, may not have sufficient cash
or other liquid assets to meet these distribution requirements due to timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of IMH. For instance, IMH may realize
income without a corresponding cash payment, as in the case of original issue
discount or accrued interest on defaulted mortgage loans. In the event that such
timing differences occur, in order to meet the distribution requirements, IMH
may find it necessary to sell assets, arrange for short-term, or possibly long-
term, borrowings, or pay dividends in the form of taxable stock dividends.
The Service has ruled that if a REIT's dividend reinvestment plan allows
stockholders of the REIT to elect to have cash distributions reinvested in
shares of the REIT at a purchase price equal to at least 95% of fair market
value on the distribution date, then such cash distributions reinvested pursuant
to such a plan qualify under the 95% distribution test. IMH expects that the
terms of its DRP will comply with this ruling.
Under certain circumstances, IMH may be able to rectify a failure to meet
the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in IMH's deduction for
dividends paid for the earlier year. Thus, IMH may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, IMH will be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends.
FAILURE TO QUALIFY
If IMH fails to qualify for taxation as a REIT in any taxable year, and the
relief provisions do not apply, IMH will be subject to tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Distributions to stockholders in any year in which IMH fails to qualify
will not be deductible by IMH nor will they be
36
required to be made. As a result, IMH's failure to qualify as a REIT would
substantially reduce the cash available for distribution by IMH to its
stockholders. In addition, if IMH fails to qualify as a REIT, all distributions
to stockholders will be taxable as ordinary income, to the extent of IMH's
current and accumulated earnings and profits, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, IMH will also be disqualified from taxation as a REIT for the four
taxable years following the year during which qualification was lost. It is not
possible to state whether in all circumstances IMH would be entitled to such
statutory relief. Failure to qualify for even one year could result in the IMH's
incurring substantial indebtedness (to the extent borrowings are feasible) or
liquidating substantial investments in order to pay the resulting taxes. In
addition, President Clinton's 1999 federal budget proposal contains a provision
which, if enacted in its present form, would result in the immediate taxation of
all gain inherent in a C corporation's assets upon an election by the
corporation to become a REIT in taxable years beginning after January 1, 1999,
and thus could effectively preclude IMH from re-electing to be taxed as a REIT
following a loss of its REIT status.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (iii) is an estate the income of which is
subject to United States federal income taxation regardless of its source, or
(iv) is a trust, the administration of which is subject to the primary
supervision of a United States court and which has one or more United States
persons who have the authority to control all substantial decisions of the
trust. Notwithstanding the preceding sentence, to the extent provided in
regulations, certain trusts in existence on August 20, 1996, and treated as
United States persons prior to such date that elect to continue to be treated as
United States persons, shall also be considered U.S. Stockholders.
As long as IMH qualifies as a REIT, distributions made by IMH out of its
current or accumulated earnings and profits (and not designated as capital gain
dividends) will constitute dividends taxable to its taxable U.S. Stockholders as
ordinary income. Such distributions will not be eligible for the dividends
received deduction in the case of U.S. Stockholders that are corporations.
Distributions made by IMH that are properly designated by IMH as capital gain
dividends will be taxable to taxable U.S. Stockholders as gain (to the extent
that they do not exceed IMH's actual net capital gain for the taxable year) from
the sale or disposition of a capital asset. Depending upon the period of time
that IMH held the assets to which such gains were attributable, and upon certain
designations, if any, which may be made by IMH, such gains will be taxable to
non-corporate U.S. Stockholders at a rate of either 20%, 25% or 28%. U.S.
Stockholders that are corporations may, however, be required to treat up to 20%
of certain capital gain dividends as ordinary income. To the extent that IMH
makes distributions (not designated as capital gain dividends) in excess of its
current and accumulated earnings and profits, such distributions will be treated
first as a tax-free return of capital to each U.S. Stockholder, reducing the
adjusted basis which such U.S. Stockholder has in his shares of Common Stock for
tax purposes by the amount of such distribution (but not below zero), with
distributions in excess of a U.S. Stockholder's adjusted basis in his shares
taxable as capital gains (provided that the shares have been held as a capital
asset). With respect to non-corporate U.S. Stockholders, amounts described as
being treated as capital gains in the preceding sentence will be taxable as
long-term capital gains if the shares to which such gains are attributable have
been held for more than eighteen months, mid-term capital gains if the shares
have been held for more than one year but not more than eighteen months, or
short-term capital gains if the shares have been held for one year or less.
Dividends declared by IMH in October, November, or December of any year and
payable to a stockholder of record on a specified date in any such month shall
be treated as both paid by IMH and received by the stockholder on December 31 of
such year, provided that the dividend is actually paid by IMH on or before
January 31 of the following calendar year. Stockholders may not include in their
own income tax returns any net operating losses or capital losses of IMH.
IMH may elect to retain, rather than distribute as a capital gain dividend,
its net long-term capital gains. In such event, IMH would pay tax on such
retained net long- term capital gains. In addition, to the extent designated by
IMH, a U.S. Stockholder generally would (i) include its proportionate share of
such undistributed long-term capital gains in computing its long-term capital
gains in its return for its taxable year in which the last day of IMH's taxable
year falls (subject to certain limitations as to the amount so includable), (ii)
be deemed to have paid the capital gains tax imposed on IMH on the designated
amounts included in such U.S. Stockholder's long-term capital gains, (iii)
receive a credit or refund for such amount of tax deemed paid by it, (iv)
increase the adjusted basis of its shares of Common Stock by the difference
between the amount of such includable gains and the tax deemed to have been paid
by it, and (v) in the case
37
of a U.S. Stockholder that is a corporation, appropriately adjust its earnings
and profits for the retained capital gains in accordance with Treasury
Regulations to be prescribed by the Service.
Distributions made by IMH and gain arising from the sale or exchange by a
U.S. Stockholder of shares of Common Stock will not be treated as passive
activity income, and, as a result, U.S. Stockholders generally will not be able
to apply any "passive losses" against such income or gain. Distributions made by
IMH (to the extent they do not constitute a return of capital) generally will be
treated as investment income for purposes of computing the investment interest
limitation. Gain arising from the sale or other disposition of Common Stock (or
distributions treated as such), however, will not be treated as investment
income unless the U.S. Stockholder elects to reduce the amount of such U.S.
Stockholder's total net capital gain eligible for the maximum capital gains rate
by the amount of such gain with respect to such Common Stock.
Upon any sale or other disposition of Common Stock, a U.S. Stockholder will
recognize gain or loss for federal income tax purposes in an amount equal to the
difference between (i) the amount of cash and the fair market value of any other
property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares of Common Stock for tax purposes. Such gain or
loss will be capital gain or loss if the shares have been held by the U.S.
Stockholder as a capital asset, and, with respect to non-corporate U.S.
Stockholders, will be mid-term or long-term gain or loss if such shares have
been held for more than one year or eighteen months, respectively. In general,
any loss recognized by a U.S. Stockholder upon the sale or other disposition of
shares of Common Stock that have been held for six months or less (after
applying certain holding period rules) will be treated as a long- term capital
loss, to the extent of distributions received by such U.S. Stockholder from IMH
which were required to be treated as long-term capital gains.
IMH has not acquired and does not expect to acquire or retain residual
interests issued by REMICs. Such residual interests, if acquired by a REIT,
could generate excess inclusion income taxable to the REIT's stockholders in
proportion to the dividends received from the REIT. Excess inclusion income
cannot be offset by net operating losses of a stockholder. If the stockholder of
a REIT holding a residual interest in a REMIC is a tax-exempt entity, the excess
inclusion income is fully taxable to such stockholder as unrelated business
taxable income. If allocated to a Non-U.S. Stockholder (as defined below), the
excess inclusion income is subject to federal income tax withholding without
reduction pursuant to any otherwise applicable tax treaty. Potential investors,
and in particular, tax-exempt entities, are urged to consult with their tax
advisors concerning this issue. A REIT, rather than its stockholders, will be
taxed (at the highest corporate tax rate) on the amount of excess inclusion
income for the taxable year allocable to shares of Common Stock held by
disqualified organizations (generally, tax-exempt entities not subject to tax on
unrelated business income, including governmental organizations).
IMH (either directly or through its QRSs) has financed and intends to
continue to finance the acquisition of mortgage assets by entering into reverse
repurchase agreements (which are essentially loans secured by IMH's mortgage
assets), CMOs or other secured lending transactions. If the Service were to
successfully take the position that such transactions result in IMH having
issued debt instruments (i.e., the reverse repurchase agreements, CMOs or other
secured loans) with differing maturity dates secured by a pool of mortgage
loans, IMH or either of the QRSs could be treated, in whole or in part, as a
taxable mortgage pool. In this case, a portion of IMH's income could be
characterized as excess inclusion income which would subject stockholders (or
IMH, to the extent Common Stock is held by disqualified organizations) to the
tax treatment described above with respect to residual interests in REMICs. IMH
intends to take the position that its existing arrangements do not create a
taxable mortgage pool or excess inclusion income. In the absence of any
definitive authority on this issue, there can be no assurance regarding whether
IMH's reverse repurchase agreements, CMOs or other secured loans will not cause
IMH to realize excess inclusion income.
BACKUP WITHHOLDING
IMH will report to its U.S. Stockholders and the Service the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. Stockholder that does not provide IMH with his correct taxpayer
identification number may also be subject to penalties imposed by the Service.
Any amount paid as backup
38
withholding will be creditable against the stockholder's income tax liability.
In addition, IMH may be required to withhold a portion of capital gain
distributions to any stockholders who fail to certify their non-foreign status
to IMH. See "--Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Generally, a tax-exempt investor that is exempt from tax on its investment
income, such as an individual retirement account (IRA) or a 401(k) plan, that
holds Common Stock as an investment will not be subject to tax on dividends paid
by IMH. However, if such tax-exempt investor is treated as having purchased its
Common Stock with borrowed funds, some or all of its dividends from the Common
Stock will be subject to tax. In addition, under some circumstances certain
pension plans (including 401(k) plans but not including IRAs and government
pension plans) that own more than 10% (by value) of IMH's outstanding stock,
including Common Stock, could be subject to tax on a portion of their Common
Stock dividends even if their Common Stock is held for investment and is not
treated as acquired with borrowed funds. The ownership limit set forth in the
Company's Charter with respect to the Company's capital stock, however, should
prevent this result. Tax-exempt investors may also be subject to tax on
distributions from IMH to the extent IMH has excess inclusion income. See "--
Taxation of Taxable U.S. Stockholders."
TAXATION OF NON-U.S. STOCKHOLDERS
The preceding discussion does not address the rules governing United States
federal income taxation of the ownership and disposition of Common Stock by
persons that are not U.S. Stockholders ("Non-U.S. Stockholders"). In general,
Non-U.S. Stockholders may be subject to special tax withholding requirements on
distributions from IMH and with respect to their sale or other disposition of
Common Stock, except to the extent reduced or eliminated by an income tax treaty
between the United States and the Non-U.S. Stockholder's country. A Non-U.S.
Stockholder who is a stockholder of record and is eligible for reduction or
elimination of withholding must file an appropriate form with IMH in order to
claim such treatment. Non-U.S. Stockholders should consult their own tax
advisors concerning the federal income tax consequences to them of a purchase of
shares of IMH's Common Stock including the federal income tax treatment of
dispositions of interests in, and the receipt of distributions from, IMH.
OTHER TAX CONSEQUENCES
IFC does not qualify as a REIT and will pay federal, state and local income
taxes on its taxable income at normal corporate rates. As a result, IFC is able
to distribute only its net after-tax earnings to its shareholders, including
IMH, as dividend distributions, thereby reducing the cash available for
distribution by IMH to its stockholders.
IMH and its stockholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of IMH and its
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
IMH.
ERISA INVESTORS
A fiduciary of a pension, profit-sharing, stock bonus plan or individual
retirement account, including a plan for self-employed individuals and their
employees or any other employee benefit plan (collectively, a "Plan") subject to
the prohibited transaction provisions of the Code or the fiduciary
responsibility provisions of the Employee Retirement Income Security Act of 1974
("ERISA"), should consider (1) whether the ownership of the Common Stock is in
accordance with the documents and instruments governing the Plan, (2) whether
the ownership of the Common Stock is consistent with the fiduciary's
responsibilities and satisfies the requirements of Part 4 of Subtitle A of Title
I of ERISA (if applicable) and, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA, (3) the prohibitions under ERISA
on improper delegation of control over, or responsibility for "plan assets" and
ERISA's imposition of co-fiduciary liability on a fiduciary who participates in,
or permits (by action or inaction) the occurrence of, or fails to remedy a known
breach of duty by another fiduciary with respect to plan assets, and (4) the
need to value the assets of the Plan annually.
39
LEGAL MATTERS
The validity of the Shares offered hereby will be passed on for the Company
by Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, Beverly
Hills, California, certain tax matters will be passed on for the Company by
Latham & Watkins, Los Angeles, California, and certain legal matters with
respect to Maryland law will be passed on for the Company by Ballard Spahr
Andrews & Ingersoll LLP, Baltimore, Maryland.
EXPERTS
The financial statements of Impac Mortgage Holdings, Inc. and Impac Funding
Corporation incorporated in this Prospectus by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 have been so
incorporated by references herein in reliance upon the reports of KPMG Peat
Marwick LLP, independent auditors, and upon the authority of said firm as
experts in auditing and accounting. Each of the reports of KPMG Peat Marwick LLP
covering the December 31, 1996 financial statements contains an explanatory
paragraph that states the Company adopted the provisions of Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" for the year ended December 31, 1995.
40
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY OF THE COMMON STOCK OFFERED HEREBY IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
_____________________________
TABLE OF CONTENTS
Page
Available Information............................................... 2
Incorporation of Certain Documents By
Reference........................................................ 3
The Company......................................................... 4
Risk Factors........................................................ 6
Certain Transactions................................................ 22
Use of Proceeds..................................................... 23
Selling Stockholder................................................. 23
Plan of Distribution................................................ 23
Description of Capital Stock........................................ 25
Certain Provisions of Maryland Law and of
the Company's Charter and Bylaws................................. 28
Federal Income Tax Considerations................................... 30
Legal Matters....................................................... 39
Experts............................................................. 39
2,009,310 SHARES
IMPAC MORTGAGE HOLDINGS, INC.
COMMON STOCK
______________________
PROSPECTUS
______________________
__________, 1998
================================================================================
PART III
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses, other than underwriting discounts and commissions,
in connection with the registration of Common Stock are:
Registration Fee.......................................... $10,007
Legal Fees and Expenses................................... 30,000
Accounting Fees and Expenses.............................. 5,000
American Stock Exchange Listing Fee....................... 17,500
Printing Expenses......................................... 10,000
Miscellaneous............................................. 7,423
-------
TOTAL................................................ $80,000
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The charter of the
Company contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law.
The charter of the Company authorizes it, to the maximum extent permitted
by Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his or her stature as
a present or former director or office of the Company. The Bylaws of the Company
obligate it, to the maximum extent permitted by Maryland law, to indemnify and
to pay or reimburse reasonable expenses in advance of final disposition of a
proceeding to (a) any present or former director or officer who is made a party
to the proceeding by reason of his service in that capacity or (b) any
individual who, while a director of the Company and at the request of the
Company, serves or has served another corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a director, officer,
partner or trustee of such corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The charter and Bylaws
also permit the Company to indemnify and advance expenses to any person who
served a predecessor of the Company in any of the capacities described above and
to any employee or agent of the Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act of omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, under the MGCL, a Maryland corporation may
not indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court orders indemnification
and then only
II-1
for expenses. In addition, the MGCL permits a corporation to advance reasonable
expenses to a director or officer upon the corporation's receipt of (a) a
written affirmation by the director or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the corporation
and (b) a written statement by him or on his behalf to repay the amount paid or
reimbursed by the corporation if it shall ultimately be determined that the
standard of conduct was not met.
ITEM 16. EXHIBITS
4.1 Form of Common Stock Certificate (incorporated herein by reference to
Amendment No. 3 of the Registrant's Registration Statement on Form S-11
(No. 33-96670), dated November 8, 1995)
4.2 Articles of Incorporation (incorporated herein by reference to the
Registrant's Registration Statement on Form S-11 (No. 33-96670), dated
November 8, 1995)
4.2(a) Amendment to Articles of Incorporation of the Registrant (incorporated
herein by reference to the Registrant's Current Report on Form 8-K,
dated January 28, 1998, as amended)
4.3 Bylaws of the Registrant (incorporated herein by reference to the
Registrant's Registration Statement on Form S-11 (No. 33-96670), dated
November 8, 1995)
4.3(a) Amendment to Bylaws of the Registrant (incorporated herein by reference
to the Registrant's Current Report on Form 8-K, dated January 28, 1998,
as amended)
4.4 Registration Rights Agreement, dated December 29, 1997, between the
Registrant and Imperial Credit Advisors, Inc. (incorporated herein by
reference to the Registrant's Current Report on Form 8-K, dated December
19, 1997, as amended)
5.1 Opinion of Freshman, Marantz, Orlanski, Cooper & Klein
5.2 Opinion of Ballard Sphar Andrews & Ingersoll LLP
8.1 Opinion of Latham & Watkins
23.1 Consent of KPMG Peat Marwick LLP regarding the Registrant
23.2 Consent of KPMG Peat Marwick LLP regarding Impac Funding Corporation
23.3 Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained in
Exhibit 5.1)
23.4 Consent of Ballard Spahr Andrews & Ingersoll LLP (contained in Exhibit
5.2)
23.5 Consent of Latham & Watkins (contained in Exhibit 8.1)
24.1 Power of Attorney (included on signature page)
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ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in value 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 and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(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 the registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) of 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the response to Item 15, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefor, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in . the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(d) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
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(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus 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.
(e) The undersigned registrant hereby undertakes to file an application for
the purpose of deter-mining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Santa Ana Heights, and the State of California, on February 20, 1998.
IMPAC MORTGAGE HOLDINGS. INC.
By: /s/ Joseph R. Tomkinson
---------------------------------------
Joseph R. Tomkinson
Vice Chairman of the Board
and Chief Executive Officer
We, the undersigned directors and officers of Impac Mortgage Holdings,
Inc., do hereby constitute and appoint Joseph R. Tomkinson and Richard J.
Johnson, or either 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, 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, 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 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/ Joseph R. Tomkinson Vice Chairman of the Board and Chief February 20, 1998
- ---------------------------------------- Executive Officer (Principal Executive
Joseph R. Tomkinson Officer
/s/ Richard J. Johnson Chief Financial Officer (Principal February 20, 1998
- ---------------------------------------- Financial and Accounting Officer)
Richard J. Johnson
/s/ H. Wayne Snavely Chairman of the Board February 20, 1998
- ----------------------------------------
H. Wayne Snavely
/s/ James Walsh Director February 20, 1998
- ----------------------------------------
James Walsh
/s/ Frank Filipps Director February 20, 1998
- ----------------------------------------
Frank Filipps
/s/ Stephan R. Peers Director February 20, 1998
- ----------------------------------------
Stephan R. Peers
/s/ William S. Ashmore Director February 20, 1998
- ----------------------------------------
William S. Ashmore
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