-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DY0T4yvNEbPH1Hm/C54cLyth0HmQipdq3k/tchXVdYhoeHa76dWsG0IsSCOO4fy0 xJnWXrUvB48h/hpmTzWLsg== 0000944209-97-000761.txt : 19970611 0000944209-97-000761.hdr.sgml : 19970611 ACCESSION NUMBER: 0000944209-97-000761 CONFORMED SUBMISSION TYPE: S-11/A PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19970610 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMPERIAL CREDIT COMMERCIAL HOLDINGS INC CENTRAL INDEX KEY: 0001036615 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 330745075 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-11/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-25423 FILM NUMBER: 97621923 BUSINESS ADDRESS: STREET 1: 1 PARK PLAZA STREET 2: SUITE 430 CITY: IRVINE STATE: CA ZIP: 92614 BUSINESS PHONE: 7144779100 MAIL ADDRESS: STREET 1: 1 PARK PLAZA STREET 2: SUITE 430 CITY: IRVINE STATE: CA ZIP: 92614 S-11/A 1 AMENDMENT #1 TO FORM S-11 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1997 REGISTRATION NO. 333-25423 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 1 TO FORM S-11 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- 20371 IRVINE AVENUE SANTA ANA HEIGHTS, CALIFORNIA 92707 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) JOSEPH R. TOMKINSON CHIEF EXECUTIVE OFFICER IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. 20371 IRVINE AVENUE SANTA ANA HEIGHTS, CALIFORNIA 92707 (714) 556-0122 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- COPIES TO: THOMAS J. POLETTI, ESQ. THOMAS A. HALE, ESQ. KATHERINE J. BLAIR, ESQ. GARY P. CULLEN, ESQ. FRESHMAN, MARANTZ, ORLANSKI, SKADDEN, ARPS, SLATE, MEAGHER & FLOM COOPER & KLEIN (ILLINOIS) 9100 WILSHIRE BOULEVARD, 8TH FLOOR 333 WEST WACKER DRIVE BEVERLY HILLS, CALIFORNIA 90212 CHICAGO, ILLINOIS 60606 TELEPHONE: (310) 273-1870 TELEPHONE: (312) 407-0700 FACSIMILE: (310) 274-8357 FACSIMILE: (312) 407-0411 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration 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 is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM MAXIMUM AMOUNT AGGREGATE AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE - ------------------------------------------------------------------------------------------------------ 10,039,908 Common Stock, $.01 par value per share. shares $15.00 $150,598,620 $45,635.95*
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- * $36,363.64 previously paid. (1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +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 REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED JUNE 10, 1997 [LOGO OF IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.] MINIMUM OF 2,600,000 AND UP TO A MAXIMUM OF 10,039,908 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF SUBSCRIPTION RIGHTS FOR SUCH SHARES ---------- Imperial Credit Commercial Holdings, Inc. ("ICH" or the "Company") is offering to Imperial Credit Mortgage Holdings, Inc.'s ("IMH") holders (the "IMH Holders") of IMH Shares (as defined herein) the right to subscribe (the "Subscription Rights") for an aggregate of up to 7,000,000 shares (the "ICH Shares") of the Company's common stock, $0.01 par value per share (the "Common Stock"), at a rate of one ICH Share for each IMH Share held as of the close of business on June , 1997 (the "Record Date") at a price of $15.00 per ICH Share (the "Subscription Price") (the "Subscription Offer"). ICH was incorporated in February 1997. IMH is not offering any of its securities pursuant to this Prospectus or otherwise. The minimum purchase in the Subscription Offer is 100 ICH Shares ($1,500). IMH Holders who fully exercise their Subscription Rights may be entitled to subscribe for additional ICH Shares pursuant to the Over- Subscription Privilege described herein. The Subscription Rights are non- transferable, may not be purchased or sold and expire on the Expiration Date (as defined herein). The Board of Directors of the Company has determined to limit the amount of ICH Shares that may be subscribed for pursuant to the Subscription Offer to 7,000,000 (the "Maximum Subscription Offer Amount"). As of the Record Date, there were IMH Shares outstanding. If all 7,000,000 Subscription Rights with respect to such IMH Shares were exercised, the number of ICH Shares would exceed the Maximum Subscription Offer Amount. Accordingly, in the event of the exercise of Subscription Rights in an amount greater than the Maximum Subscription Offer Amount, the ICH Shares available pursuant to the Subscription Offer are subject to allotment among IMH Holders on a pro rata basis. In addition to the Subscription Offer, the Company is offering (the "Standby Offer") to certain persons that may or may not be IMH Holders (the "Standby Purchasers"), pursuant to Standby Purchase Agreements (as defined herein), rights to subscribe for at least 998,326 shares of ICH Common Stock (the "Minimum Standby Offer Amount") but no more than 3,039,908 shares of ICH Common Stock (the "Maximum Standby Offer Amount") (the shares of Common Stock being offered pursuant to the Standby Offer are hereinafter referred to as the "Standby Shares"; the Standby Shares and the ICH Shares are hereinafter collectively referred to as the "Shares"). The Subscription Offer and the Standby Offer are referred to collectively as the "Offering." The Maximum Subscription Offer Amount and the Maximum Standby Offer Amount are hereinafter collectively referred to as the "Maximum Offering Amount." The Board of Directors of the Company has determined not to proceed with the Offering unless an aggregate amount of at least 2,600,000 Shares (the "Minimum Offering Amount") are subscribed for (inclusive of Standby Shares that may be subscribed for pursuant to the Standby Purchase Agreements). The Company has reserved up to 200,000 ICH Shares for sale at the Subscription Price to certain employees of the Company and its affiliates. THE SUBSCRIPTION OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON JULY , 1997 (THE "EXPIRATION DATE"). Prior to this Offering, there has been no public market for the Common Stock of the Company. The Subscription Price has been determined by the Company and is not necessarily related to the Company's asset value or any other established criterion of value. See "Risk Factors" and "Distribution Arrangements" for information relating to the determination of the Subscription Price. The Company has applied to list its Common Stock on the American Stock Exchange under the symbol "ICH." SEE "RISK FACTORS" STARTING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED HEREBY. THESE RISKS INCLUDE: . Limited History of . Risk of Decrease in Net Interest Income Due to Operations of Limited Interest Rate Fluctuations; Prepayment Risks of Relevance in Predicting Commercial Mortgages Future Performance . Risks of Potential Net Interest and Operating . No Assurance of Planned Losses in Connection with Borrowings and Expansion Substantial Leverage; Liquidity . Conflicts of Interest; . Risks Associated with Dependence on Executive Officers and Securitizations Directors to Receive . Risks of Failing to Hedge Against Interest Rate Extensive Benefits Changes Effectively; Risk of Losses Associated . Competition in the with Hedging Commercial Mortgage . Risks of Contracted Sub-Servicing may Adversely Industry May Adversely Affect Delinquency Ratios and Otherwise Affect Affect the Company's Company Performance Operations . Experience of the Manager in Managing a . Risks Particular to Commercial Mortgage REIT Commercial Properties . Adverse Consequences of Failure to Maintain and Facilities May REIT Status; ICH Subject to Tax as a Regular Adversely Affect Value Corporation of Underlying . Future Revisions in Policies and Strategies at Commercial Mortgages the Discretion of the Board of Directors . Geographic . Effect of Future Offerings on Market Price of Concentration of Common Stock Commercial Mortgages May Expose Commercial Mortgage Portfolio to Regional Economic Fluctuations . Environmental Risks May Adversely Affect Value of Underlying Commercial Mortgages . Reduction in Demand for Commercial Mortgages and the Company's Loan Products May Adversely Affect the Company's Operations
---------- 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. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Solicitation Subscription and Dealer Proceeds to Price Manager Fees (1) Company (2)(3) - ------------------------------------------------------------------------------ Per Share........... $15.00 $0.64 $14.36 - ------------------------------------------------------------------------------ Total Minimum....... $15.00 $1,657,500 $37,342,500 - ------------------------------------------------------------------------------ Total Maximum ...... $15.00 $6,400,441 $144,198,179
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) In connection with the Offering, the Company has agreed to pay PaineWebber Incorporated and Stifel, Nicolaus & Company, Incorporated (collectively, the "Dealer Managers") a fee for their financial advisory, marketing and soliciting services equal to 4.25% of the aggregate Subscription Price for the Shares issued pursuant to the Offering and to reimburse the Dealer Managers for out-of-pocket expenses. The Dealer Managers will reallow to certain broker-dealers a concession of 2.50% of the Price to Public per ICH Share issued pursuant to the Subscription Offer. The Company and REIT Advisors, Inc. have agreed to indemnify the Dealer Managers and each soliciting dealer against certain liabilities under the Securities Act of 1933, as amended. See "Distribution Arrangements." (2) Before deducting expenses estimated at $1,050,000 payable by the Company, including up to $200,000 to be paid to the Dealer Managers as partial reimbursement of their expenses relating to the Offering. (3) Funds received by check prior to the Expiration Date (as defined herein) will be deposited in a segregated interest-bearing account. ---------- PAINEWEBBER INCORPORATED STIFEL, NICOLAUS & COMPANY INCORPORATED THE DATE OF THIS PROSPECTUS IS , 1997 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. 20549, a Registration Statement (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 and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document referred to as an exhibit to the Registration Statement. A copy of the Registration Statement may be inspected without charge at the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549 upon the payment of the fees prescribed by the Commission. 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. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Table of Contents located on inside front cover of Prospectus THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS CONTAINING FINANCIAL STATEMENTS AUDITED BY ITS INDEPENDENT AUDITORS AND QUARTERLY REPORTS FOR THE FIRST THREE QUARTERS OF EACH FISCAL YEAR CONTAINING UNAUDITED FINANCIAL INFORMATION. TABLE OF CONTENTS PROSPECTUS SUMMARY......................................................... 1 The Company............................................................... 1 The Offering.............................................................. 6 Tax Status of ICH......................................................... 10 Dividend Policy and Distributions......................................... 10 The Manager............................................................... 10 RISK FACTORS............................................................... 13 General................................................................... 13 Limited History of Operations of Limited Relevance in Predicting Future Performance............................................................ 13 No Assurance of Planned Expansion....................................... 13 Conflicts of Interest; Executive Officers and Directors to Receive Extensive Benefits..................................................... 13 Competition in the Commercial Mortgage Industry May Adversely Affect the Company's Operations................................................... 15 Certain Aspects of Commercial Mortgages................................... 16 General................................................................. 16 Risks Particular to Commercial Properties and Facilities May Adversely Affect Value of Underlying Commercial Mortgages........................ 17 Geographic Concentration of Commercial Mortgages May Expose Commercial Mortgage Portfolio to Regional Economic Fluctuations................... 18 Prepayment Restrictions on Commercial Mortgages May Be Insufficient to Deter Prepayments...................................................... 18 Balloon Payment at Maturity and Extension Maturity Increases Lender Risks.................................................................. 19 Environmental Risks May Adversely Affect Value of Underlying Commercial Mortgages.............................................................. 19 Certain Aspects of CMBSs.................................................. 20 General................................................................. 20 Value of Interest-Only, Principal-Only, Residual Interest and Subordinated Securities Subject to Fluctuation......................... 21 Risks Related to Operations............................................... 21 Reduction in Demand for Commercial Mortgages and the Company's Loan Products May Adversely Affect the Company's Operations................. 21 Risk of Decrease in Net Interest Income Due to Interest Rate Fluctuations; Prepayment Risks of Commercial Mortgages................. 22 Risks of Potential Net Interest and Operating Losses in Connection with Borrowings and Substantial Leverage; Liquidity......................... 24 Risks Associated with Dependence on Securitizations..................... 25 Risks of Failing to Hedge Against Interest Rate Changes Effectively; Risk of Losses Associated with Hedging................................. 26 Commercial Mortgage Servicing Rights Subject to Volatility.............. 27 Risks of Contracted Sub-Servicing May Adversely Affect Delinquency Ratios and Otherwise Affect Company Performance........................ 27 Costs of Compliance with Americans with Disabilities Act of 1990 May Be Substantial............................................................ 28
Other Considerations...................................................... 28 Subordinate Indebtedness May Affect Value of Underlying Commercial Mortgages.............................................................. 28 Junior Mortgages May Affect Company's Rights............................ 29 Experience of the Manager in Managing a Commercial Mortgage REIT........ 29 Adverse Consequences of Failure to Maintain REIT Status; ICH Subject to Tax as a Regular Corporation........................................... 29 Potential Characterization of Distributions as UBTI; Taxation of Tax- Exempt Investors....................................................... 30 Taxable Mortgage Pool Risk; Increased Taxation.......................... 30 Investment Company Act Risk............................................. 31 Future Revisions in Policies and Strategies at the Discretion of the Board of Directors..................................................... 31 Effect of Future Offerings on Market Price of Common Stock.............. 31 Market Considerations................................................... 32 Shares Eligible for Future Sale......................................... 32 Classification and Reclassification of Stock; Issuance of Preferred Stock; Restrictions on Ownership of Common Stock; Possible Anti- Takeover Effect........................................................ 32 THE OFFERING............................................................... 34 USE OF PROCEEDS............................................................ 41 DIVIDEND POLICY AND DISTRIBUTIONS.......................................... 41 DIVIDEND REINVESTMENT PLAN................................................. 41 DILUTION................................................................... 43 CAPITALIZATION............................................................. 44 SELECTED FINANCIAL DATA.................................................... 45 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................................ 48 Results of Operations; Imperial Credit Commercial Holdings, Inc. ......... 48 Results of Operations; Imperial Commercial Capital Corporation............ 48 Liquidity and Capital Resources........................................... 48 Inflation................................................................. 49 Accounting for Servicing Rights........................................... 49 BUSINESS................................................................... 51 The Company's Operations.................................................. 51 Long-Term Investment Operations........................................... 52 Conduit Operations........................................................ 54 Securitization and Sale Process........................................... 61 Hedging................................................................... 62 Servicing................................................................. 63 Regulation................................................................ 66 Competition............................................................... 67 Employees................................................................. 67 Facilities................................................................ 67 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. ................................. 68 Directors and Executive Officers.......................................... 68 Limitation of Liability and Indemnification............................... 70 Executive Compensation.................................................... 71 Stock Option and Award Plans.............................................. 72 401(k) Plan............................................................... 74 REIT ADVISORS, INC. ....................................................... 75 The Manager............................................................... 75
Directors and Executive Officers.......................................... 75 Management Agreement...................................................... 76 RELATIONSHIPS WITH AFFILIATES.............................................. 79 CERTAIN TRANSACTIONS....................................................... 79 The Organizational Transactions........................................... 79 Non-Compete Agreement and Right of First Refusal Agreement................ 80 Management, Submanagement and Servicing Agreements........................ 81 Other Transactions........................................................ 81 SHARES ELIGIBLE FOR FUTURE SALE............................................ 82 PRINCIPAL STOCKHOLDERS..................................................... 83 DESCRIPTION OF CAPITAL STOCK............................................... 84 General................................................................... 84 Common Stock.............................................................. 84 Preferred Stock........................................................... 85 Repurchase of Shares and Restrictions on Transfer......................... 87 Transfer Agent and Registrar.............................................. 89 DISTRIBUTION ARRANGEMENTS.................................................. 90 The Subscription Offer.................................................... 90 The Standby Offer......................................................... 90 Other Matters............................................................. 90 CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND BYLAWS. 91 Removal of Directors...................................................... 91 Business Combinations..................................................... 91 Control Share Acquisitions................................................ 92 Amendment to the Charter.................................................. 92 Dissolution of the Company................................................ 93 Advance Notice of Director Nominations and New Business................... 93 Possible Anti-Takeover Effect of Certain Provisions of Maryland Law and of the Charter and Bylaws................................................... 93 FEDERAL INCOME TAX CONSIDERATIONS.......................................... 93 The Rights Offering....................................................... 93 Taxation of ICH........................................................... 94 Recordkeeping Requirements................................................ 100 Failure to Qualify........................................................ 100 Taxation of Taxable U.S. Stockholders..................................... 101 Withholding............................................................... 102 Taxation of Tax-Exempt Stockholders....................................... 102 Taxation of Non-U.S. Stockholders......................................... 102 Special Considerations.................................................... 102 Other Tax Consequences.................................................... 103 ERISA INVESTORS............................................................ 103 LEGAL MATTERS.............................................................. 104 EXPERTS.................................................................... 104 GLOSSARY................................................................... 105 INDEX TO FINANCIAL STATEMENTS.............................................. F-1
PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and related notes appearing elsewhere in this Prospectus. Unless otherwise indicated, the Prospectus gives effect to the conversion of shares of convertible preferred stock held by Imperial Credit Mortgage Holdings, Inc. ("IMH") into that number of shares of ICH's Common Stock not greater than 9.8% of the outstanding shares of Common Stock of ICH upon the closing of this Offering. Unless the context otherwise requires, references herein to the "Company" refer to Imperial Credit Commercial Holdings, Inc. ("ICH") and Imperial Commercial Capital Corporation ("ICCC"), collectively. Capitalized and certain other terms used herein shall have the meanings assigned to them in the Glossary. This Prospectus contains forward-looking statements that inherently involve risks and uncertainties. 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 under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY GENERAL BACKGROUND Imperial Credit Commercial Holdings, Inc. is a recently formed specialty commercial property finance company which will elect to be taxed at the corporate level as a real estate investment trust ("REIT") for federal income tax purposes, which generally will allow the Company to pass through income to stockholders without payment of corporate level federal income tax. The Company was incorporated in February 1997 for the purpose of originating, purchasing, securitizing and selling commercial mortgages and investing in commercial mortgages and commercial mortgage-backed securities. Imperial Credit Mortgage Holdings, Inc. capitalized the Company with $15.0 million in cash in March 1997. Upon the closing of this Offering, IMH will own 9.8% of the Company's outstanding Common Stock and 1,078,922 or 270,595 shares of ICH Class A Stock (as defined herein), assuming the Minimum Offering Amount and the Maximum Offering Amount, respectively, which shares represent the right to receive additional shares of ICH Common Stock. See "--The Organizational Transactions." IMH was formed in August 1995 for the purpose of purchasing, selling and securitizing primarily non-conforming residential mortgage loans and investing in such mortgage loans and securities backed by such loans. IMH, which became a public company in November 1995, has an investment portfolio which has grown from $18.0 million at September 30, 1995 to $924.1 million at December 31, 1996. A key aspect of the success of IMH has been the development of its infrastructure by its management team. This infrastructure oversees the daily capital, asset and operation management, investor relations and human resources functions of IMH and its affiliates. The management team of IMH and its affiliates consists of Joseph R. Tomkinson, William S. Ashmore, Richard J. Johnson and Mary C. Glass-Schannault, who have over 60 years of combined experience in the mortgage industry. This management team will oversee the day- to-day operations of the Company pursuant to a Management Agreement (see "--The Manager"). ICH was formed to seek opportunities in the commercial mortgage market. William D. Endresen, who has over 24 years of experience in the commercial mortgage sector, including senior executive positions at two national commercial lending organizations, will serve as the Company's Senior Vice President and President of ICCC, the Company's Conduit Operations. 1 Commercial mortgage assets include mortgage loans on condominium-conversions, multifamily and cooperative apartment properties and mortgage loans on commercial properties, such as industrial and warehouse space, office buildings, retail space and shopping malls, hotels and motels, nursing homes, hospitals, congregate care facilities and senior living centers (collectively, "Commercial Mortgages"). The Company will also purchase mortgage-backed securities on commercial properties, such as pass-through certificates, and REMICs (collectively, "CMBSs"). IMH's management believes that the formation of ICH will enable the Company to build a business focused on Commercial Mortgages while allowing IMH to continue to concentrate its efforts on the residential mortgage business. The Company has determined to utilize the structure of the Subscription Offer and Standby Offer to give IMH Holders, and select Standby Purchasers, an exclusive opportunity to participate early in the investment represented by the ICH Shares. COMMERCIAL MORTGAGE INDUSTRY The Commercial Mortgage securitization market has experienced significant growth in recent years. In 1996, $43.5 billion of Commercial Mortgages and multifamily mortgages were securitized, representing a 73% increase over 1995 and a 106% increase over 1994 according to the Mortgage Market Statistical Annual for 1997 published by Inside Mortgage Finance Publications, Inc. The Company believes that the growth of the Commercial Mortgage securitization market (including the emergence of an efficient secondary market for Commercial Mortgages and CMBSs) and the creation of uniform underwriting and document standards for Commercial Mortgages are significant factors driving Commercial Mortgage originations by conduits. PURPOSE OF THE OFFERING The Company believes that the market for Commercial Mortgages has historically been underserved by financial service providers. In addition, the Company believes that the consolidation and recent changes to various regulated financial services providers have created an opportunity for unregulated financial service providers to increase their participation in this market. Commercial Mortgages historically have had higher yields than residential mortgages; the Company has developed its Commercial Mortgage programs to allow it to invest in Commercial Mortgages on terms the Company believes are attractive. Key aspects of these Commercial Mortgage programs generally include the protection against pre-payment risks through short-term lock-outs and prepayment penalties, compensating cash reserves, conservative loan-to-value and debt service coverage ratios ("DSCRs"), personal guarantees and upfront fees to the originator. The Company believes that it will be able to benefit from the experience of its senior officers and that of its Manager (as defined herein), as well as the infrastructure developed at IMH. The Manager intends to enter into a submanagement agreement with ICI Funding Corporation ("ICIFC"), the conduit operations of IMH, to provide substantially all of the administrative services required by the Company. By not having to duplicate many of the administrative functions which exist at IMH and its affiliates, the Company believes it will be able to operate with lower costs than if it were to create a new administrative infrastructure and will be able to efficiently and economically manage its operations. The Company believes that ICH's tax and corporate structure as a REIT will provide it with an advantage over certain other financial institutions and commercial mortgage originators. As a REIT, the Company generally will be able to pass through earnings as dividends to stockholders without payment of corporate level federal income tax. Thus, ICH expects to be able to pay higher dividends than traditional commercial mortgage lending institutions, which are subject to corporate level federal income tax. In addition, management believes that ICH, as an unregulated company, provides a more attractive method of investing in commercial mortgages than regulated financial institutions because ICH will not be subject to the costs associated with the federal and state regulations imposed upon insured financial institutions. 2 THE COMPANY'S OPERATIONS The Company currently operates the Long-Term Investment Operations, which invests primarily in Commercial Mortgages and CMBSs and, as of the closing of this Offering, will engage in the Conduit Operations, which originates, purchases and sells or securitizes Commercial Mortgages. ICH has secured a $200.0 million warehouse line agreement to finance the origination and purchase of Commercial Mortgages. The Company's Conduit Operations will operate through three divisions: the Condominium Division, the Retail Division, and the Correspondent and Bulk Purchase Division. LONG-TERM INVESTMENT OPERATIONS The Long-Term Investment Operations invests primarily in adjustable rate Commercial Mortgages and CMBSs backed by such Commercial Mortgages for long- term investment. Income is earned principally from the net interest income received by the Company on the Commercial Mortgages and CMBSs purchased and held in its portfolio. At March 31, 1997, the Company's investment portfolio consisted of $17.5 million in Commercial Mortgages and a $10.0 million CMBS. CONDUIT OPERATIONS The Company's Conduit Operations will operate through three divisions: the Condominium Division, the Retail Division, and the Correspondent and Bulk Purchase Division. Condominium Division. This Division will offer on a retail basis adjustable rate financing to developers and project owners who have completed the development of a condominium complex or the conversion of an apartment complex to a condominium complex on property with a typical loan amount of $3.0 million to $10.0 million. All originations, underwriting, processing and funding will be performed at ICCC's executive offices. The Company anticipates that the Condominium Division's Commercial Mortgages will be offered on a nationwide basis and that Commercial Mortgages originated through the Condominium Division will be financed through the utilization of CMO borrowings by the Long-Term Investment Operations. Retail Division. This Division, which is expected to become operational by the closing of the Offering, will originate Commercial Mortgages for properties including general purpose apartment complexes, general retail property such as shopping centers, super markets and department stores, light industrial property, and office buildings. The Retail Division will offer smaller balance ($500,000 to $1.5 million) fixed and adjustable rate Commercial Mortgages to developers and project owners for smaller properties and projects than those funded by the Correspondent and Bulk Purchase Division. Although processing and funding operations relating to these Commercial Mortgages will be performed centrally at ICCC's executive offices, the Company has targeted major metropolitan areas for the opening of satellite offices for regional originations. A portion of the adjustable rate Commercial Mortgages that will be originated by the Retail Division may be held in portfolio by the Long-Term Investment Operations, while the balance thereof and a substantial portion of the fixed rate Commercial Mortgages originated will be resold by the Conduit Operations through REMIC securitizations. Correspondent and Bulk Purchase Division. This Division will both originate Commercial Mortgages on a retail basis and purchase Commercial Mortgages on a bulk and flow basis. This Division will offer larger principal balance ($1.5 million to $10.0 million) Commercial Mortgages for commercial projects than those funded by the Retail Division. The Correspondent and Bulk Purchase Division will offer adjustable rate and fixed rate Commercial Mortgages offered through specified correspondents who may in the future be provided with Company-sponsored warehouse facilities. In addition, the Division will purchase Commercial Mortgages in bulk and flow from selected financial institutions and mortgage bankers. A portion of the adjustable rate Commercial Mortgages originated or purchased by this Division may be held in portfolio by the Long- Term Investment Operations, while the balance thereof and a substantial portion of the fixed rate Commercial Mortgages originated or purchased will be resold through REMIC securitizations. 3 THE ORGANIZATIONAL TRANSACTIONS The following is a summary of transactions entered into or to be entered into in connection with the organization of the Company: . In January and February 1997, ICCC and ICH were incorporated, respectively. . In February 1997, Joseph R. Tomkinson, ICH's Chairman of the Board and Chief Executive Officer, William S. Ashmore, ICH's President and Chief Operating Officer, Richard J. Johnson, ICH's Senior Vice President, Chief Financial Officer, Treasurer and Secretary, William D. Endresen, ICH's Senior Vice President, Mary C. Glass-Schannault, ICH's Senior Vice President, and each of H. Wayne Snavely, James Walsh, Frank P. Filipps, Stephan R. Peers and Thomas J. Poletti, Directors of ICH, purchased 76,800, 76,800, 62,400, 12,000 and 12,000 shares of the Common Stock of ICH, respectively, at a per share price of $.01. In addition, IMH purchased 299,000 shares of the Common Stock of ICH at a per share price of $.01. . In February 1997, IMH purchased all shares of the non-voting preferred stock of ICCC, which represent 95% of the economic interest in ICCC, for $500,000, and each of Messrs. Tomkinson, Ashmore, Johnson and Endresen purchased all of the outstanding shares of common stock of ICCC (125 shares each at a per share price of $1.00), which represent 5% of the economic interest in ICCC. . In February 1997, ICCC brokered ICH's purchase of $7.3 million and $10.2 million of condominium conversion loans which were financed with $16.6 million in borrowings under a warehouse lending facility provided by a subsidiary of IMH, and $900,000 in borrowings from IMH. All of such condominium conversion loans were purchased from ICIFC, the conduit operations of IMH, and $7.3 million of such mortgage loans were originated by a company with which William D. Endresen was an affiliate. IMH owns all of the outstanding non-voting preferred stock of ICIFC, which represents 99% of the economic interest in ICIFC and Messrs. Tomkinson, Johnson, Ashmore and Snavely own 100% of the Common Stock of ICIFC, representing 1% of the economic interest. . In March 1997, IMH lent ICH $15.0 million evidenced by a promissory note convertible into shares of the non-voting convertible preferred stock of ICH (the "ICH Preferred Stock") at the rate of one share of ICH Preferred Stock for each $5.00 principal amount of said note (the "Conversion Rate"). . In March 1997, IMH converted the aforementioned $15.0 million principal amount promissory note into an aggregate of 3,000,000 shares of ICH Preferred Stock. All ICH Preferred Stock is automatically convertible upon the closing of this Offering into shares of ICH Common Stock determined by multiplying the number of shares of ICH Preferred Stock to be converted by a fraction, the numerator of which is $5.00 and the denominator of which is the Subscription Price. Notwithstanding the foregoing, consistent with IMH's classification as a REIT, IMH shall not be entitled to have converted into ICH Common Stock more than that number of shares of ICH Preferred Stock whereby IMH would own, immediately after such conversion, greater than 9.8% of ICH's outstanding Common Stock. Any shares of ICH Preferred Stock not converted into ICH Common Stock upon the closing of this Offering shall on such date automatically convert into shares of ICH non-voting Class A Common Stock (the "ICH Class A Stock") at the same rate as the ICH Preferred Stock converted into Common Stock on said date. Shares of ICH Class A Stock convert into shares of Common Stock on a one-for-one basis and each such class of Common Stock is entitled to cash dividends on a pro rata basis. Upon any subsequent issuances of Common Stock by ICH or sales of ICH Common Stock held by IMH, shares of ICH Class A Stock shall automatically convert into additional shares of the Common Stock of ICH, subject to said 9.8% limitation. . In March 1997, ICH purchased a $10.1 CMBS from ICIFC which was financed with a promissory note. In March 1997, the promissory note was repaid with cash from IMH's above-referenced $15.0 million investment. Concurrently therewith, ICH repaid the $900,000 owed to IMH in connection with its purchase of condominium conversion loans. 4 . In April 1997, IMH exchanged the 299,000 shares of ICH Common Stock held by it for an equivalent number of shares of ICH Class A Stock. . On the closing of this Offering, IMH will contribute to ICH (the "Contribution") 100% of the outstanding shares of non-voting preferred stock of ICCC in exchange for 95,000 shares of ICH Class A Stock. Upon the closing of this Offering, IMH will own 315,078 shares of ICH Common Stock and 1,078,922 shares of ICH Class A Stock, assuming the Minimum Offering Amount is sold, and 1,123,405 shares of ICH Common Stock and 270,595 shares of ICH Class A Stock, assuming the Maximum Offering Amount is sold. 5 THE OFFERING TERMS OF THE SUBSCRIPTION OFFER SUBSCRIPTION RIGHTS The Company is offering to the holders (the "IMH Holders") of shares of common stock and options to purchase shares of common stock of IMH (collectively, the "IMH Shares") as of the close of business on June , 1997, the record date for the Subscription Offer (the "Record Date"), the right to subscribe (the "Subscription Rights") for an aggregate of up to 7,000,000 ICH Shares at a rate of one ICH Share for each IMH Share held on the Record Date at a price of $15.00 per ICH Share (the "Subscription Price"), subject to reduction as described in "--Maximum Subscription Offer Amount." The Subscription Rights are evidenced by subscription notification certificates (the "Subscription Notification Certificates"), which will be mailed to all IMH Holders, except as described below under "Foreign Restrictions." An IMH Holder's right to acquire during the Subscription Rights Period (as defined below) at the Subscription Price one ICH Share for every IMH Share held is hereinafter referred to as the "Primary Subscription Privilege." An IMH Holder who fully exercises all Subscription Rights pursuant to the Primary Subscription Privilege may be entitled to subscribe for additional ICH Shares at the Subscription Price (the "Over-Subscription Privilege"). Subscription Rights may be exercised at any time during the period (the "Subscription Rights Period") commencing on June , 1997 and ending at 5:00 p.m., New York City time, on July , 1997 (the "Expiration Date"). See "-- Expiration of the Subscription Offer." OVER-SUBSCRIPTION PRIVILEGE To the extent Record Date IMH Holders do not exercise all of their Subscription Rights pursuant to the Primary Subscription Privilege, any ICH Shares represented by such unexercised Subscription Rights will be offered to those IMH Holders who exercise all of their Subscription Rights. Pursuant to the Over-Subscription Privilege, IMH Holders who exercise all of their Subscription Rights will be asked to indicate, on the Subscription Notification Certificate, how many additional ICH Shares, if any, they would like to purchase pursuant to the Subscription Offer. As discussed below, under "-- Maximum Subscription Offer Amount," if sufficient ICH Shares remain unsubscribed for in the Primary Subscription Privilege, all over-subscription requests may be honored in full. MAXIMUM SUBSCRIPTION OFFER AMOUNT The Board of Directors of the Company has determined to limit the amount of ICH Shares that may be subscribed for pursuant to the Subscription Offer to 7,000,000 (the "Maximum Subscription Offer Amount"). As of the Record Date, there were IMH Shares outstanding. If all Subscription Rights were to be exercised pursuant to the Primary Subscription Privilege, the amount of ICH Shares to be issued pursuant to such exercise requests would exceed the Maximum Subscription Offer Amount. Accordingly, if the amount of ICH Shares requested to be purchased pursuant to the exercise of Subscription Rights in the Primary Subscription Privilege exceeds the Maximum Subscription Offer Amount, the ICH Shares will be issued pro rata among the IMH Holders that exercised their Subscription Rights based upon the number of IMH Shares held of record by such IMH Holders on the Record Date. If the Primary Subscription Privilege is oversubscribed, the effect of the Maximum Subscription Offer Amount would be that each IMH Holder would receive ICH shares of Common Stock for each IMH share held. To the extent that money is returned as excess payment, interest on such amounts will be paid to the IMH Holder. See "The Offering--Terms of the Subscription Offer." SUBSCRIPTION PRICE; MINIMUM PURCHASE The Subscription Price for the ICH Shares to be issued pursuant to the Subscription Offer is $15.00 per ICH Share. The minimum purchase pursuant to the Subscription Offer is 100 ICH Shares ($1,500). Accordingly, 6 holders of fewer than 100 IMH Shares will be able to participate in the purchase of ICH Shares pursuant to the Subscription Offer only if such IMH Holders fully exercise their Subscription Rights pursuant to the Primary Subscription Privilege and request sufficient additional ICH Shares in the Over-Subscription Privilege such that the aggregate number of ICH Shares subscribed for is at least 100. NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS The Subscription Rights are non-transferable and, therefore, may not be purchased or sold. The Subscription Rights are offered to Record Date IMH Holders, which term, for purposes of the Subscription Offer, includes (i) the person or persons who are the owners, co-owners and beneficiaries of the account in which the IMH Shares are held (collectively, the "Designated Persons") and (ii) any account (including a trust, Individual Retirement Account, qualified plan account or other similar arrangement) for which any Designated Person is directly or indirectly an owner, a co-owner or a beneficiary. EXPIRATION OF THE SUBSCRIPTION OFFER The Subscription Offer will expire at 5:00 p.m., New York City time, on July , 1997. The Subscription Rights will expire on the Expiration Date and thereafter may not be exercised. METHOD OF EXERCISE OF SUBSCRIPTION RIGHTS Subscription Rights are evidenced by Subscription Notification Certificates which will be mailed to IMH Holders or, if an IMH Holder's IMH Shares are held by Cede & Co., Inc. ("Cede") or any other depository or nominee on their behalf, to Cede or such depository or nominee, except as discussed below under "Foreign Restrictions." Subscription Rights may be exercised by completing the Subscription Notification Certificate which accompanies this Prospectus and mailing it in the envelope provided, or otherwise delivering the completed Subscription Notification Certificate to the Subscription Agent (as defined below), together with payment in full for the ICH Shares at the Subscription Price. Subscription Notification Certificates may also be exercised by contacting your broker, banker or trust company, which can arrange, on your behalf, to guarantee delivery of payment and of a properly completed Subscription Notification Certificate (the "Notice of Guaranteed Delivery"). A fee may be charged for this service. Completed Subscription Notification Certificates must be received by the Subscription Agent prior to 5:00 p.m., New York City time, on the Expiration Date (unless the guaranteed delivery procedures are complied with as described herein at the offices of the Subscription Agent.) PAYMENT FOR ICH SHARES An IMH Holder can send the Subscription Notification Certificate, together with payment for the ICH Shares subscribed for in the Primary Subscription Privilege and for additional ICH Shares requested to be subscribed for pursuant to the Over-Subscription Privilege, to BankBoston, N.A. (the "Subscription Agent"), calculating the total payment on the basis of the Subscription Price of $15.00 per ICH Share. To be accepted, such payment, together with the completed Subscription Notification Certificate, must be received by the Subscription Agent at the Subscription Agent's office prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Offering--Terms of the Subscription Offer." Alternatively, a subscription will be accepted by the Subscription Agent if, prior to 5:00 p.m., New York City time, on the Expiration Date, the Subscription Agent has received (i) full payment of the Subscription Price of $15.00 per ICH Share subscribed for pursuant to the Primary Subscription Privilege and for any additional ICH Shares requested to be subscribed for pursuant to the Over-Subscription Privilege and (ii) a Notice of Guaranteed Delivery from a bank, trust company or a New York Stock Exchange member guaranteeing delivery of a properly completed Subscription Notification Certificate. The Subscription Agent will not honor a Notice of Guaranteed Delivery unless a properly completed Subscription Notification Certificate is received by the Subscription Agent by the close of business not later than three business days (the "Settlement Date") after the Expiration Date. 7 CONFIRMATION OF PURCHASES Assuming the Minimum Offering Amount is achieved, on or within one business day after the Settlement Date (the "Initial Confirmation Date") the Subscription Agent or someone on its behalf will send to the Dealer Managers, for confirmation to each subscribing IMH Holder (or if the IMH Shares are held by Cede or any other depository or nominee, to Cede or such depository or nominee), an initial statement showing (i) the number of ICH shares to be acquired on the Initial Closing Date (as defined below) in the Primary Subscription Privilege and the number, if any, of ICH Shares to be acquired on the Initial Closing Date pursuant to the Over-Subscription Privilege and (ii) the estimated number, if any, of ICH Shares that may be acquired on a date, within 30 calendar days from the Initial Closing Date, to be determined by the Company and the Dealer Managers (the "Supplemental Closing Date"). Stock Certificates for ICH Shares designated as acquired on the Initial Confirmation Date will be delivered three business days following the Initial Confirmation Date (the "Initial Closing Date"). Upon determination of the Supplemental Closing Date, the Subscription Agent or someone on its behalf will send to the Dealer Managers a supplemental statement showing (i) the number, if any, of ICH Shares to be acquired on the Supplemental Closing Date in the Primary Subscription Privilege and pursuant to the Over-Subscription Privilege and (ii) any excess payment to be refunded to Record Date IMH Holders (or if the IMH Shares are held by Cede or any other depository or nominee, to Cede or such depository or nominee) in connection with a proration or reduction of ICH Shares issuable to IMH Holders. If applicable, the Subscription Agent will mail any refund, with interest, due such Record Date IMH Holders as promptly as possible. Stock Certificates for ICH Shares, if any, designated to be acquired on the Supplemental Closing Date will be delivered on the Supplemental Closing Date. If the Company believes, following the Initial Closing Date, that the issuance of all or a portion of the estimated number, if any, of ICH Shares that may be acquired on the Supplemental Closing Date will have an adverse effect upon the operations of the Company or the market for the Company's Common Stock, then the Company will have the right, subject to the consent of the Dealer Managers, to reduce the number of ICH Shares issuable on the Supplemental Closing Date to Record Date IMH Holders, to the extent necessary in the opinion of the Company, upon consultation with the Dealer Managers, to avoid such adverse effect. Such opinions and determinations of the Company shall be conclusive and binding. FOREIGN RESTRICTIONS Subscription Notification Certificates will not be mailed to Record Date IMH Holders whose record addresses are outside the United States (the term "United States" includes the District of Columbia and the territories and possessions of the United States) (the "Foreign Record Date IMH Holders"). Foreign Record Date IMH Holders will receive written notice of the Subscription Offer. The Subscription Rights to which such Subscription Notification Certificates relate will be held by the Subscription Agent for such Foreign Record Date IMH Holders' accounts until instructions are received to exercise the Subscription Rights. If no instructions have been received by the Expiration Date, the Subscription Rights of those Foreign Record Date IMH Holders will expire. FEDERAL INCOME TAX CONSEQUENCES The delivery of the Subscription Rights to the IMH Holders will not result in taxable income to an IMH Holder, nor will an IMH Holder realize taxable income as a result of the exercise of the Subscription Rights. If a Subscription Right is allowed to expire, there will be no loss realized. TERMS OF THE STANDBY OFFER In addition to the Subscription Offer, the Company is offering (the "Standby Offer", and together with the Subscription Offer, the "Offering") to institutions that may or may not be Record Date IMH Holders (the "Standby Purchasers"), pursuant to standby purchase agreements (the "Standby Purchase Agreements"), rights to subscribe for least 998,326 shares of Common Stock (the "Minimum Standby Offer Amount") but no more 8 than 3,039,908 shares of Common Stock, (the "Maximum Standby Offer Amount") (the shares of Common Stock being offered pursuant to the Standby Offer are hereinafter referred to as the "Standby Shares"; the Standby Shares and the ICH Shares offered in the Offering are collectively referred to as the "Shares"). MINIMUM OFFERING AMOUNT The Board of Directors of the Company has determined not to proceed with the Offering unless an aggregate of at least 2,600,000 Shares (the "Minimum Offering Amount") are subscribed for in the Offering (inclusive of Standby Shares that may be subscribed for pursuant to Standby Purchase Agreements). In the event the Minimum Offering Amount is not reached, amounts delivered to the Subscription Agent in connection with the exercise of Subscription Rights or by Standby Purchasers will be returned promptly after the Expiration Date to the IMH Holders that exercised such Subscription Rights or to such Standby Purchasers, as the case may be, in each case, together with any interest earned thereon. MAXIMUM OFFERING AMOUNT The term "Maximum Offering Amount" as used herein shall refer to the Maximum Subscription Offer Amount and the Maximum Standby Offer Amount, collectively. REGULATORY LIMITATIONS The Company will not be required to issue Shares pursuant to the Primary Subscription Privilege or the Over-Subscription Privilege, or pursuant to Standby Purchase Agreements, to any person who, in the opinion of the Company, would (i) be required to obtain prior clearance or approval from any state or federal regulatory authority to own or control such Shares if, at the Expiration Date, such clearance or approval has not been obtained or any required waiting period has not expired; or (ii) acquire such Shares in violation of the ownership restrictions set forth in the Company's Charter which are intended to preserve the Company's tax status as a REIT. In addition, under current interpretations by the National Association of Securities Dealers, Inc. (the "NASD") of its rules concerning initial public offerings, member firms of the NASD and associated persons of such member firms may be precluded from requesting additional ICH Shares pursuant to the Over- Subscription Privilege. USE OF PROCEEDS To provide funding for the Company's Long-Term Investment Operations and its Conduit Operations and for general corporate purposes. LISTING The Company has applied to have the Shares listed on the AMEX under the Symbol "ICH." Assuming the Minimum Offering Amount is sold the Company anticipates that trading in the Shares on the AMEX will commence on the Initial Confirmation Date. RISK FACTORS The Shares offered hereby involve a high degree of risk. See "Risk Factors." 9 TAX STATUS OF ICH ICH will elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year ending December 31, 1997, and believes its organization and manner of operation have enabled and will continue to enable it to meet the requirements for qualification as a REIT. To maintain REIT status, an entity must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 95% of its taxable income (determined without regard to the dividends paid deduction and excluding net capital gains) to its stockholders. As a REIT, ICH generally will not be subject to federal income tax on net income it distributes currently to its stockholders. If ICH fails to qualify as a REIT in any taxable year, it will be subject to federal income tax at regular corporate rates. See "Federal Income Tax Considerations" and "Risk Factors--Adverse Consequences of Failure to Maintain REIT Status; ICH Subject to Tax as a Regular Corporation." Even if ICH qualifies for taxation as a REIT, ICH may be subject to certain federal, state and local taxes on its income. In addition, ICCC is subject to federal and state income tax at regular corporate rates on its net income. DIVIDEND POLICY AND DISTRIBUTIONS To maintain its qualification as a REIT, ICH intends to make annual distributions to its stockholders of at least 95% of its REIT taxable income (which does not necessarily equal net income as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and by excluding any net capital gains. Any taxable income remaining after the distribution of regular quarterly dividends will be distributed annually in a special dividend 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 ICH to maintain REIT status will be made by the Company at the discretion of the Board of Directors and will depend on the taxable earnings of the Company, the financial condition of ICH and such other factors as the Board of Directors deems relevant. The Board of Directors has not established a minimum distribution level. The Company anticipates adopting a Dividend Reinvestment Plan ("DRP") that allows stockholders of ICH who have enrolled in the DRP to reinvest their dividends automatically in additional shares of Common Stock at a discount from the current market price, in some cases. The shares of Common Stock to be acquired for distribution under the DRP may be purchased on the open market or directly from the Company at the option of the Company. The shares issuable by ICH pursuant to the DRP are not being registered by means of the Registration Statement of which this Prospectus forms a part. See "Dividend Reinvestment Plan." THE MANAGER REIT Advisors, Inc. ("RAI" or the "Manager") will oversee the day-to-day operations of the Company, subject to the supervision of the Company's Board of Directors, pursuant to a management agreement (the "Management Agreement") which will become effective on the closing of this Offering. The Company has selected an outside advisor in order to coordinate, assist and manage the duties and responsibilities of the Company. The Company believes that RAI will be more adequately suited to provide the following services relating to the operations of the Company due to the expertise of RAI's senior officers: securitization oversight, contract negotiation, market information, implementation of cost controls, asset/liability modeling and management, and servicing systems. In order to utilize the IMH infrastructure, RAI intends to enter into a submanagement agreement with ICIFC, the conduit operations of IMH, upon the closing of this Offering to provide substantially all of the administrative services required by the Company including facilities and costs associated therewith, technology, human resources, management information systems, general ledger accounts, check processing and accounts payable as RAI deems necessary. IMH owns all of the outstanding non-voting 10 preferred stock of ICIFC, which represents 99% of the economic interest in ICIFC and Messrs. Tomkinson, Johnson, Ashmore and Snavely own 100% of the Common Stock of ICIFC representing 1% of the economic interest. The Manager will be involved in three primary activities: (1) asset-liability management--primarily the analysis and oversight of the purchasing, financing and disposition of Company assets; (2) capital management-- primarily the oversight of the Company's structuring, analysis, capital raising and investor relations activities; and (3) operations management--primarily the oversight of ICH's operating subsidiaries. The Management Agreement will have an initial term of five years, renewable annually by agreement between the Company and the Manager, subject to the approval of a majority of the Unaffiliated Directors. The Management Agreement may be terminated by the Company at any time upon 60 days' written notice. In the event that the Management Agreement is terminated or not renewed by the Company without cause, the Company will be obligated to pay the Manager a termination or non-renewal fee determined by an independent appraisal. See "REIT Advisors, Inc.--Management Agreement." RAI is owned 30% by each of Messrs. Tomkinson, Ashmore and Johnson and 10% by Mr. Snavely. Pursuant to a voting trust agreement, the Chief Executive Officer of RAI has the right to control the vote of 51% of the outstanding voting securities of RAI. See "REIT Advisors, Inc." All of the persons designated to become officers of the Manager upon the closing of this Offering are also officers of IMH and ICIFC. Each of these officers has modified his or her employment agreement with ICIFC to also become an officer of the Manager (and of ICH and ICCC) upon the closing of this Offering. The Manager will agree to cause each of its officers to devote as much of his or her time to the operations of the Company as is reasonably necessary. ICH will reimburse the Manager, who will reimburse ICIFC on a dollar for dollar basis (including the service charge referenced below), for the actual cost of providing the services of its officers to the Company based upon the compensation payable to them by ICIFC, plus a 15% service charge. ICH will reimburse the Manager for expenses incurred by the Manager, plus a service charge of 15% on all expenses owed by the Manager to ICIFC for costs and services under any submanagement agreement between ICIFC and the Manager. The Manager will pay all such third parties on a dollar for dollar basis for the aformentioned amounts received by it from the Company; no such 15% service charge will be paid to third party service providers other than ICIFC. For the first three years of the Management Agreement, there will be a minimum annual amount of $500,000 (including the 15% service charge) payable by the Company in connection with services provided and expenses incurred by RAI and payable by RAI to ICIFC. After the third year, the Company will only be responsible for reimbursing expenses and services provided, with the 15% service charge for amounts due to ICIFC. The Company does not believe that its operations will be adversely affected as a result of these relationships. In addition, the Company will pay the Manager, as compensation for each fiscal quarter, an amount equal to 25% of the Net Income of the Company, before deduction of such compensation, in excess of the amount that would produce an annualized Return on Equity equal to the Ten Year U.S. Treasury Rate plus 2% (the "25% Payment"). "Return on Equity" is computed on Average Net Worth and has no necessary correlation with the actual distributions received by stockholders. The 25% Payment to the Manager will be calculated quarterly in arrears before any income distributions are made to stockholders for the corresponding period. See "REIT Advisors, Inc.--Management Agreement" for a more detailed explanation of the management fee arrangement and "Glossary" for full definitions of the terms "Net Income," "Return on Equity," "Ten Year U.S. Treasury Rate" and "Average Net Worth." 11 The following chart demonstrates the relationships between ICH, ICCC and RAI. REIT MANAGER [CHARTS APPEARS HERE] 12 RISK FACTORS Before investing in the Shares offered hereby, 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. 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. GENERAL LIMITED HISTORY OF OPERATIONS OF LIMITED RELEVANCE IN PREDICTING FUTURE PERFORMANCE Since ICCC commenced operations in February 1997, its historical performance may be of limited relevance in predicting future performance of the Company. Also, ICH is a recently formed entity whose only assets consist of $17.3 million of Commercial Mortgages purchased in February 1997. 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 the Company will be able to maintain delinquency and loan loss ratios at their present levels as the portfolio grows and becomes more seasoned. NO ASSURANCE OF PLANNED EXPANSION The Company intends 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 and its Conduit 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 planned expansion or, if achieved, that the expansion will result in profitable operations. CONFLICTS OF INTEREST; EXECUTIVE OFFICERS AND DIRECTORS TO RECEIVE EXTENSIVE BENEFITS Benefit to Insiders; Interlocking Relationships; Other Considerations. The Company is subject to conflicts of interest arising from its relationships with IMH, RAI and their officers, directors and affiliates. First, after this Offering, IMH will own a substantial number of shares of the Company's Common Stock. Second, RAI, will render management services to the Company and will be paid the 25% Payment on a quarterly basis, resulting in a direct benefit to its owners, who are officers or directors of ICH. Third, ICIFC, the conduit operations of IMH, will enter into a submanagement agreement with RAI pursuant to which the Company will pay ICIFC (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 IMH, RAI and ICCC. See "Imperial Credit Commercial Holdings, Inc.--Directors and Executive Officers," "REIT Advisors, Inc.--Directors and Executive Officers," and "Principal Stockholders." On the closing of this Offering, IMH will effectuate the Contribution to ICH of 100% of the outstanding shares of non-voting preferred stock of ICCC in exchange for 95,000 shares of ICH Class A Stock. Upon the closing of this Offering, IMH will own 315,078 shares of ICH Common Stock and 1,078,922 shares of ICH Class A Stock, assuming the Minimum Offering Amount is sold, and 1,123,405 shares of ICH Common Stock and 270,595 shares of ICH Class A Stock, assuming the Maximum Offering Amount is sold. 13 RAI will oversee the day-to-day operations of the Company, subject to the supervision of ICH's Board of Directors, pursuant to the Management Agreement. RAI is owned 30% by Joseph R. Tomkinson, ICH's Chairman of the Board and Chief Executive Officer, 30% by William S. Ashmore, ICH's President and Chief Operating Officer, 30% by Richard J. Johnson, ICH's Senior Vice President, Chief Financial Officer, Treasurer and Secretary, and 10% by H. Wayne Snavely, a Director of ICH. Pursuant to the Management Agreement, ICH will pay the 25% Payment to RAI on a quarterly basis, resulting in a direct benefit to its owners. See "REIT Advisors, Inc.--Management Fees." 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 will become officers of RAI upon the closing of the Offering are also officers or directors of IMH. In order to utilize the IMH infrastructure, RAI intends to enter into a submanagement agreement with ICIFC, the conduit operations of IMH, upon the closing of this Offering to provide substantially all of the administrative services required by the Company. IMH owns all of the outstanding shares of non-voting preferred stock of ICIFC, representing 99% of the economic interest in ICIFC, and Messrs. Tomkinson, Johnson, Ashmore and Snavely own all of the outstanding shares of common stock of ICIFC, representing 1% of the economic interest. Each of these persons who are officers of ICIFC has modified his or her employment agreement with ICIFC to allow him or her to become an officer of RAI (and of ICH and ICCC) upon the closing of this Offering. RAI will agree to cause each of its officers to devote as much of his or her time to the operations of the Company as is necessary. The Company will reimburse RAI, who will reimburse ICIFC, on a dollar for dollar basis (including the service charge referenced below), for the actual cost of providing the services of its officers to the Company based upon the compensation payable to them by ICIFC, plus a 15% service charge. ICH will reimburse the Manager for expenses incurred by the Manager, plus a service charge of 15% on all expenses owed by the Manager to ICIFC for costs and services under any submanagement agreement between ICIFC and the Manager. The Manager will pay all such third parties on a dollar for dollar basis for the aformentioned amounts received by it from the Company; no such 15% service charge will be paid to third party service providers other than ICIFC. For the first three years of the Management Agreement, there will be a minimum amount of $500,000 (including the 15% service charge) payable by the Company in connection with services provided and expenses incurred by RAI and payable by RAI to ICIFC. After the third year, the Company will only be responsible for reimbursing expenses and services provided, with the 15% service charge for amounts due to ICIFC. However, such officers are expected to devote the majority of their time and effort towards the management and operations of IMH and ICIFC. Should the operations of IMH and ICIFC 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. No assurance can be given that the Company's relationships with RAI and its affiliates will continue indefinitely. The failure or inability of RAI to provide the services required of it under the Management Agreement (or of ICIFC to perform its obligations under its submanagement agreement with RAI) or any other agreements or arrangements with the Company would have a material adverse effect on the Company's business. Many of the affiliates of IMH, RAI and ICCC have interlocking executive positions and share common ownership. Joseph R. Tomkinson, ICH's Chairman of the Board and Chief Executive Officer, is the Chief Executive Officer and Vice Chairman of the Board of IMH, a 30% owner of RAI and an owner of 25% of the common stock of ICCC. William S. Ashmore, ICH's President and Chief Operating Officer, is the President and a Director of IMH, a 30% owner of RAI and an owner of 25% of the common stock of ICCC. Richard J. Johnson, ICH's Senior Vice President, Chief Financial Officer, Treasurer and Secretary, is a Senior Vice President, Chief Financial Officer, Treasurer and Secretary of IMH, a 30% owner of RAI and a 25% owner of the common stock of ICCC. William D. Endresen, ICH's Senior Vice President, is an owner of 25% of the common stock of ICCC. H. Wayne Snavely, a Director of ICH, is the Chairman of the Board of IMH and a 10% owner of RAI. Each of James Walsh, Frank P. Filipps and Stephan R. Peers, Directors of ICH, are Directors of IMH. In addition, since Messrs. Tomkinson, Ashmore, Johnson and Endresen own all of the outstanding shares of voting stock of ICCC, they have the right to elect all directors of ICCC and the ability to control the outcome of all matters for which the consent of the holders of the common stock of ICCC is required. Ownership of 100% 14 of the common stock of ICCC entitles the owners thereof to an aggregate of 5% of the economic interest in ICCC. Effect of Non-Compete Agreement. The Company's operations may be affected by the activities of IMH and ICIFC. Pursuant to a non-compete agreement (the "Non-Compete Agreement") between IMH, ICIFC, ICH and ICCC which will become effective upon the closing of this Offering, for a period of the earlier of nine months from the closing of this Offering or the date upon which the Company accumulates (for investment or sale) $300.0 million of Commercial Mortgages and/or CMBSs, neither IMH nor ICIFC will originate or acquire any Commercial Mortgages or CMBSs; however, this Agreement shall not preclude IMH (either directly or through ICIFC) 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, IMH, as a mortgage REIT, and ICIFC, as its conduit operations, may compete with the operations of the Company. 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, IMH, 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. Upon the closing of this Offering, RAI, ICH, ICCC, IMH and ICIFC will enter 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 (other than IMH) will actually become parties to the Right of First Refusal Agreement. Pursuant to this Agreement, RAI will agree that any mortgage loan or mortgage-backed security investment opportunity (an "Investment Opportunity") which is offered to it on behalf of either the Company, IMH or any Affiliated REIT will first be offered to that entity (the "Principal Party") whose initial primary business as described its initial public offering documentation (the "Initial Primary Business") most closely aligns with such Investment Opportunity. In addition, both IMH and ICIFC on the one hand and ICH and ICCC on the other will agree that any Investment Opportunity offered to either of them which falls outside the scope of its Initial Primary Business should 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 REITs 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 IMH, ICIFC 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. Unaffiliated Directors. It is the intention of the Company and IMH that any agreements and transactions, taken as a whole, between the Company, on the one hand, and IMH or its affiliates, on the other hand, are fair to both parties. To minimize or avoid potential conflicts of interests, all Unaffiliated Directors must 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. See "Imperial Credit Commercial Holdings, Inc.," "REIT Advisors, Inc.," "Relationships with Affiliates" and "Certain Transactions." COMPETITION IN THE COMMERCIAL MORTGAGE INDUSTRY MAY ADVERSELY AFFECT THE COMPANY'S OPERATIONS In purchasing Commercial Mortgages and issuing CMBSs, the Company will compete with established mortgage conduit programs, investment banking firms, savings and loan associations, banks, thrift and loan 15 associations, finance companies, mortgage bankers, insurance companies, other lenders and other entities purchasing mortgage assets. Continued consolidation in this industry may also reduce the number of current correspondents to the Conduit Operations, thus reducing the Company's potential customer base, resulting in the Company purchasing a larger percentage of Commercial Mortgages from a smaller number of correspondents. Such changes could negatively impact the Conduit Operations. CMBSs issued through the Conduit Operations will face competition from other investment opportunities available to prospective investors. See "--Reduction in Demand for Commercial Mortgages and the Company's Loan Products May Adversely Affect the Company's Operations," "Business--Conduit Operations," and "Business--Competition." 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 the Company's Commercial Mortgages will compete with the mortgaged properties of such types to attract residents, retail correspondents, tenants and customers. The leasing of real estate is highly competitive. The principal means of competition are price, location and the nature and condition of the facility to be leased. A borrower under a Commercial Mortgage competes with all lessors and developers of comparable types of real estate in the area in which the mortgaged property is located. Such lessors or developers could have lower rentals, lower operating costs, more favorable locations or better facilities. While a borrower under a Commercial Mortgage may renovate, refurbish or expand the mortgaged property to maintain it and remain competitive, such renovation, refurbishment or expansion may itself entail significant risk. Increased competition could adversely affect income from 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. CERTAIN ASPECTS OF COMMERCIAL MORTGAGES GENERAL The Company makes long-term investments in Commercial Mortgages. Accordingly, during the time it holds Commercial Mortgages for investment, the Company 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. In the event of a default on any Commercial Mortgage 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 owed on the Commercial Mortgage. Defaulted Commercial Mortgages 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. The profitable operation of multifamily properties and multitenant retail office and industrial properties is also dependent on the performance and viability of the property manager of such project. The property manager is responsible for responding to changes in the local market, planning and implementing the rental structure, including establishing appropriate rental rates, and advising the borrower so that maintenance and capital improvements can be carried out in a timely fashion all of which may impact the borrower's ability to make payments under the related Commercial Mortgage, which may adversely affect the timing and amount of payments received by the Company with respect to such Commercial Mortgages. There is no assurance regarding the performance of any operators and/or managers or persons who may become operators and/or managers upon the expiration or termination of leases or management agreements or following any default or foreclosure under a Commercial Mortgage. Commercial Mortgages generally are non-recourse to the borrower. In the event of foreclosure on a Commercial Mortgage, the value of the property and other collateral securing the Commercial Mortgage may be 16 less than the principal amount outstanding on the Commercial Mortgage and the accrued but unpaid interest. Also, there may be costs and delays involved in enforcing rights of a property owner against tenants in default under the terms of leases with respect to commercial properties, who may seek the protection of the bankruptcy laws which can result in termination of lease contracts all of which may adversely affect the timing and amount of payment received by the Company with respect to such Commercial Mortgages. RISKS PARTICULAR TO COMMERCIAL PROPERTIES AND FACILITIES MAY ADVERSELY AFFECT VALUE OF UNDERLYING COMMERCIAL MORTGAGES Multifamily Properties. Adverse economic conditions, either local, regional or national, may limit the amount of rent that can be charged and may result in a reduction in timely rent payments or a reduction in occupancy levels. Further, the costs of operating a property may increase, including the costs of utilities and the costs of required capital expenditures. Occupancy and rent levels may also be affected by construction of additional housing units, local military base closings and national and local politics, including current or future rent stabilization and rent control laws and agreements. In addition, the level of mortgage interest rates may encourage tenants to purchase single-family housing. All of these conditions and events may increase the possibility that a borrower may be unable to meet its obligation under the related Commercial Mortgage all of which may adversely affect the timing and amount of payment received by the Company with respect to such Commercial Mortgages. Retail, Office and Industrial Properties. Income from and the market value of properties which are retail or office properties would be adversely affected if space in such properties could not be leased, if tenants are unable to meet their lease obligations, if a significant tenant were not able to make its lease payments or were to become a debtor in a bankruptcy case under the United States Bankruptcy Code and the lease of the related property was rejected, or if for any other reason rental payments could not be collected. If tenant sales in the properties that contain retail space were to decline, percentage rents may decline or tenants may be unable to pay their base rent or delays in enforcing the lessor's rights could be experienced. Repayment of the related Commercial Mortgages will be affected by the expiration of space leases and the ability of the respective borrowers to renew their leases or relet the space on comparable terms. Even if vacated space is successfully relet, the costs associated with reletting, including tenant improvements and leasing commissions (to the extent not reserved), could be substantial and could reduce cash flow from the properties. Shopping centers (and other retail properties) are, in general, affected by the health of the retail industry, which is currently undergoing a consolidation and is experiencing changes due to the growing market share of "off-price" and direct mail retailing, and a particular shopping center may be adversely affected by the bankruptcy, decline in drawing power, departure or cessation of operations of an anchor tenant, a shift in consumer demand due to demographic changes (for example, population decreases or changes in average age or income) and/or changes in consumer preference. Office properties may also be adversely affected if there is an economic decline in the business operated by their tenants. The risk of such an adverse effect is increased if revenue is dependent on a single tenant or if there is a significant concentration of tenants in a particular business or industry. Office properties generally require their owners to expend significant amounts of cash to pay for general capital improvements, tenant improvements and costs or re-leasing space. Also, office properties that are not equipped to accommodate the needs of modern businesses may become functionally obsolete and thus non-competitive. Industrial and warehouse properties may be adversely affected by reduced demand for industrial space occasioned by a decline in a particular industry segment (for example, a decline in defense spending), and a particular industrial or warehouse property that suited the needs of its original tenant may be difficult to relet to another tenant or may become functionally obsolete relative to newer properties. Self-Storage Facilities. Self-storage properties are considered vulnerable to competition, because both acquisition costs and break-even occupancy are relatively low. The conversion of self-storage facilities to alternative uses would generally require substantial capital expenditures. Thus, if the operation of any of the self-storage properties becomes unprofitable due to decreased demand, competition, age or improvements or other 17 factors such that the borrower becomes unable to meet its obligations on the related Commercial Mortgage, the liquidation value of that self-storage property may be substantially less, relative to the amount owing on the Commercial Mortgage, than would be the case if the self-storage property were readily adaptable to other uses. Tenant privacy, anonymity and efficient access may heighten environmental risks. Congregate Care Facilities. Mortgaged properties that operate as hospitals and nursing homes may present special risks to lenders due to the significant governmental regulation of the ownership, operation, maintenance and financing of health care institutions. GEOGRAPHIC CONCENTRATION OF COMMERCIAL MORTGAGES MAY EXPOSE COMMERCIAL MORTGAGE PORTFOLIO TO REGIONAL ECONOMIC FLUCTUATIONS Although the Company anticipates no geographic diversification of the properties underlying the Company's Commercial Mortgages, it does not expect to 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). For the period from the Company's commencement of operations to March 31, 1997, 58% and 42% of the Commercial Mortgages purchased by the Company were secured by properties located in Arizona and California, respectively. Concentration in any one area will increase exposure of the Company's portfolio to the economic and natural hazard risks associated with such area. Repayments by borrowers and the market value of the mortgaged properties on the related Commercial Mortgage may be affected by economic conditions generally or in regions where the mortgaged properties are located, conditions in the real estate market where the mortgaged properties securing the related Commercial Mortgage are located, changes in governmental rules and fiscal policies, acts of nature, including floods, tornadoes and earthquakes (which may result in uninsured losses), and other factors which are beyond the control of the borrowers. Management estimates that a majority of the Commercial Mortgages held by the Company for portfolio investment will be secured by properties in California. Certain parts of California have experienced an economic downturn in recent years, particularly in areas of high defense industry concentration, and have suffered the effects of certain natural hazards such as earthquakes, fires and floods. PREPAYMENT RESTRICTIONS ON COMMERCIAL MORTGAGES MAY BE INSUFFICIENT TO DETER PREPAYMENTS It is expected that substantially all of the Commercial Mortgages (other than Commercial Mortgages associated with condominium conversions and other multifamily properties) originated by the Company will contain provisions restricting prepayments of such Commercial Mortgages. Such restrictions may prohibit prepayments in whole or in part during a specified period of time and/or require the payment of a prepayment charge in connection with the prepayment thereof. Such prepayment restrictions can, but do not necessarily, provide a deterrent to prepayments. Prepayment charges may be in an amount which is less than the figure which would fully compensate for the difference in yield upon reinvestment of the prepayment proceeds against its expected yield to maturity of the Commercial Mortgage. There can be no assurance that the borrower on a Commercial Mortgage which is being prepaid will have sufficient financial resources to pay all or a portion of any required prepayment charges, particularly where the prepayment results from acceleration of the Commercial Mortgage following a payment default. No assurance can be given that, at the time any prepayment charges are required to be made in connection with a defaulted Commercial Mortgage, foreclosure proceeds will be sufficient to make such payments. No representation or warranty is made as to the effect of such prepayment charges on the rate of prepayment of the related Commercial Mortgage. In addition, prepayments on Commercial Mortgages held by the Long-Term Investment Operations during periods of low or declining interest rates may decrease net income if the Long-Term Investment Operations is unable to invest in Commercial Mortgages with a comparable interest rate. The enforceability, under the laws of a number of states, of provisions similar to the provisions in the Commercial Mortgages providing for the payment of prepayment charges upon a voluntary or involuntary prepayment is unclear. In particular, no assurance can be given that, at any time that any prepayment charge is 18 required to be made in connection with an involuntary prepayment, the obligation to pay such prepayment charge will be enforceable under applicable law or, if enforceable, that foreclosure proceeds will be sufficient to make such payment. Proceeds recovered in respect of any defaulted Commercial Mortgage will, in general, be applied to cover outstanding property protection expenses and servicing expenses and unpaid principal and interest prior to being applied to cover any prepayment charge due in connection with the liquidation of such Commercial Mortgage. BALLOON PAYMENT AT MATURITY AND EXTENSION MATURITY INCREASES LENDER RISKS The Company expects that a substantial percentage of its 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. Neither ICH nor any of its affiliates is under any obligation to refinance any Commercial Mortgage. 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. A "Phase I" environmental site assessment will generally be performed on mortgaged properties with a loan balance over $1.5 million. For loan balances below $1.5 million, the Company will require the borrower to prepare an environmental worksheet. Depending on the results of the worksheet, the Company may require a Phase I environmental site assessment. For certain of the mortgaged properties, depending on the result of the Phase I environmental site assessment, a further regulatory file review and/or Phase II environmental site assessment will be performed. ICCC's servicing guidelines require it to obtain an environmental site assessment of a mortgaged property prior to acquiring title thereto or assuming its operation. Such requirement effectively precludes enforcement of the security for the related Commercial Mortgage until a satisfactory environmental site assessment is obtained or until any required remedial action is thereafter taken but will decrease the likelihood that ICH will become liable for a material adverse environmental condition at the mortgaged property. However, there can be no assurance that the servicing guidelines will effectively insulate ICH from potential liability for a materially adverse environmental condition at any mortgaged property. On April 29, 1992, the United States Environmental Protection Agency ("EPA") issued a final rule intended to protect lenders from liability under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"). This rule was in response to a 1990 decision of the United States Court of Appeals for the Eleventh Circuit, United States v. Fleet Factors Corp., which narrowly construed the security interest exemption under CERCLA to hold lenders liable if they had the capacity to influence their borrower's management of hazardous waste. On February 4, 1994, the United States Court of Appeals for the District of Columbia Circuit in Kelley v. Environmental Protection Agency invalidated this EPA rule. As a result of the Kelley case, the state of the law with respect to the secured creditor exemption and the scope of permissible activities in which a lender may engage to protect its security interest remain uncertain. EPA and the Department of Justice ("DOJ"), however, issued a joint policy memorandum in which these agencies announced that they would continue to follow the "Lender Liability Rule" vacated by the Kelley case. These agencies indicated that prior to its invalidation, several courts adhered to the terms of the "Lender Liability Rule" or interpreted CERCLA in a manner consistent with the "Lender Liability Rule." EPA and DOJ 19 indicated in the September 22, 1995 memorandum that they intend to follow this line of cases. This EPA/DOJ policy, however, would not necessarily affect the potential for lender liability in actions by parties other than EPA or under laws or legal theories other than CERCLA. If a lender is or becomes liable, it can bring an action for contribution against the owner or operator who created the environmental hazard, but that person or entity may be bankrupt or otherwise judgment proof. 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 the Company's Common Stock if such remedial costs were incurred. CERTAIN ASPECTS OF CMBSS GENERAL CMBSs are securities that represent an interest in, or are secured by, Commercial Mortgages. The CMBS market is newer and in terms of total outstanding principal amount of issues is relatively small compared to the total size of the market for residential mortgage-backed securities. CMBSs have been issued in public and private transactions by a variety of agency and private-label issuers. CMBSs have been issued using a variety of structures, some of which were developed in the residential mortgage context, including multi-class structures featuring senior and subordinated classes. Because of the great diversity in characteristics of the Commercial Mortgages that secure CMBSs, however, such securities have unique features and characteristics. CMBSs may pay fixed or floating rates of interest. CMBSs generally have been structured as mortgage pass-through securities or as mortgage pay-through securities, although other structures are possible. With a typical mortgage pass-through security, payment of principal and interest on the underlying mortgages, following deduction of servicing expenses, is passed through directly to holders of the securities. Mortgage pay-through securities represent an obligation of the issuer, secured by a pool of mortgage loans pledged as collateral for payments of principal and interest on the debt instrument. The issuer's obligation to pay principal and interest under a mortgage pay-through security is limited to the pledged collateral. CMBSs generally are structured with some form of credit enhancement to protect against potential losses on the underlying Commercial Mortgages. Credit support increases the likelihood of timely and full payment of principal and interest to the more senior class of CMBSs. Because of the particular risks that accompany CMBSs, the amount of such credit support may be substantial. Credit supports used in the CMBSs market has included issuer guarantees, reserve funds, subordinated securities (which bear the risks of default before more senior classes of securities of the same issuer), cross- collateralization and over-collateralization. In addition to credit support, CMBSs may be structured with liquidity protections intended to provide assurance of timely payment of principal and interest. Such protections may include surety bonds, letters of credit and payment advance agreements. The value of a liquidity credit support provided by a third party will depend on the continued ability of the party providing the support to do so. Consequently, as part of the process of monitoring the credit quality of a CMBSs, rating agencies will monitor the creditworthiness of providers of related liquidity supports. Unanticipated demands for liquidity assistance or other difficulties encountered by the liquidity support provider that may adversely affect its ability to provide support to an issue may lead to a decline in credit quality and rating downgrades. Delays or difficulties encountered in servicing CMBSs may cause earlier reliance on liquidity supports than was originally anticipated and also may lead to downgrades in credit quality. The CMBS market is relatively new and unseasoned. Rating agencies have not had substantial experience over a long period through different economic cycles in assigning ratings to CMBSs or monitoring previously rated CMBSs. The process of rating CMBSs generally involves a more complicated credit analysis than applies to ratings of residential mortgage-backed securities. The process of servicing CMBSs also is more complicated than the servicing of residential mortgage-backed securities, and difficulties encountered in servicing may cause a rating agency to reevaluate or downgrade the credit quality of an issue of CMBSs. 20 VALUE OF INTEREST-ONLY, PRINCIPAL-ONLY, RESIDUAL INTEREST AND SUBORDINATED SECURITIES SUBJECT TO FLUCTUATION ICH's assets will 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 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 Commercial Mortgages held for sale by ICCC. ICH will record its retained interest in ICCC's securitizations (including "interest-only," "principal-only" and subordinated securities) as investments classified as trading securities and will record 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 that subordinated securities receive payments of principal and interest after such payments on related senior securities and the underlying Commercial Mortgages. The Company will estimate future cash flows from these "interest-only," "principal-only," residual interest and subordinated securities and value 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 therefore 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 Commercial 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. See "Business--Long-Term Investment Operations--Investments in Commercial Mortgage-Backed Securities." The risks of investing in CMBSs 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 CMBSs 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 CMBSs it purchases in the secondary 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 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. RISKS RELATED TO OPERATIONS REDUCTION IN DEMAND FOR COMMERCIAL MORTGAGES AND THE COMPANY'S LOAN PRODUCTS MAY ADVERSELY AFFECT THE COMPANY'S OPERATIONS The availability of Commercial Mortgages meeting the Company's criteria is dependent upon, among other things, the size and level of activity in the commercial and multi-family real estate lending market. The size and level of activity in the commercial and multifamily real estate lending market depend on various factors, 21 including the level of interest rates, regional and national economic conditions and inflation and deflation in commercial and multifamily property values, as well as the general regulatory and tax environment as it relates to mortgage lending. See "Business--Regulation." To the extent the Company is unable to obtain sufficient Commercial Mortgages meeting its criteria, the Company's business will be adversely affected. In general, lower interest rates prompt greater demand for Commercial Mortgages, because more entities can afford to purchase commercial and multi- family properties, and refinancing transactions increase. However, if low interest rates are accompanied by a weak economy and high unemployment, demand for Commercial Mortgages may decline. Conversely, higher interest rates and decreased levels of commercial and multi-family activity may lower Commercial Mortgage purchase volume levels, resulting in decreased economies of scale and higher costs per unit, reduced fee income, smaller gains on the sale of Commercial Mortgages and lower net income. RISK OF DECREASE IN NET INTEREST INCOME DUE TO INTEREST RATE FLUCTUATIONS; PREPAYMENT RISKS OF COMMERCIAL MORTGAGES The Company's earnings 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 Commercial Mortgages at a fixed price and the time the Company sells or securitizes those Commercial Mortgages. An increase in interest rates will generally result in a decrease in market value of Commercial Mortgages 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 borrowers from refinancing Commercial Mortgages or borrowing to purchase or expand a multifamily building or office complex or other type of commercial mortgage property, thus decreasing the volume of Commercial Mortgages available to be purchased by the Conduit Operations. In addition, an increase in short-term interest rates may decrease or eliminate or, in certain circumstances, cause to be negative, the Company's net interest spread during the accumulation of Commercial Mortgages held for sale or the net interest spread on Commercial Mortgages 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 earnings on any servicing portfolio held by the Company to the extent prepayments on the underlying Commercial Mortgages increased as long-term interest rates declined. See "--Risks Associated with Dependence on Securitizations." In conducting its Long-Term Investment Operations, a significant portion of the Company's commercial mortgage assets held for long-term investment consist of Commercial Mortgages that bear interest at an adjustable rate ("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. Commercial Mortgages owned by the Company that are ARMs or CMBSs backed by ARMs are subject to periodic interest rate adjustments based on objective indices such as the Prime Rate, CMT Index or LIBOR. Interest rates on the Company's borrowings are also based on short-term indices. To the extent any of the Company's commercial mortgage assets are financed with borrowings bearing interest based on an index different from that used for the related commercial mortgage assets, so-called "basis" interest rate risk may arise. In such event, if the index used for the subject commercial 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 commercial 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 loss because the interest rates on borrowings could adjust faster than the interest rates on the Company's Commercial Mortgages that are ARMs or CMBSs 22 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 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 Commercial Mortgages that are ARMs and CMBSs 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 Commercial Mortgages that are ARMs than is required to pay interest on the related borrowings, which will not have such payment caps and may result in an increased level of default on such Commercial Mortgages. 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 cause a net loss during periods of rapidly rising interest rates, which could negatively impact the market price of the Company's Common Stock. 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 Commercial Mortgages or CMBSs backed by fixed rate mortgages, the Company may also be subject to interest rate risks. To the extent that any 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" CMBSs and other types of CMBSs purchased at a discount. If the Company were required to dispose of any "principal-only" CMBSs 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" CMBSs, servicing fees receivable, and other Commercial Mortgages and CMBSs 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. See "--Risks of Potential Net Interest and Operating Losses in Connection with Borrowing and Substantial Leverage; Liquidity." Although the Company's Commercial Mortgages that are ARMs generally contain lock-outs on prepayments and prepayment penalties to reduce exposure to prepayments, mortgage prepayment rates vary from time to time and may cause changes in the amount of the Company's net interest income. Prepayments on Commercial Mortgages that are ARMs and CMBSs backed by ARMs generally increase when fixed mortgage interest rates fall below the then-current interest rates on such Commercial Mortgages and generally decrease when fixed mortgage interest rates exceed the then-current interest rate on such Commercial Mortgages. Prepayment experience also may be affected by the geographic location of the property securing the Commercial Mortgages, the credit grade of the Commercial Mortgage, the assumability of the Commercial Mortgage, the ability of the borrower to convert to a fixed-rate loan, conditions in the Commercial Mortgage and financial markets and general economic conditions. In addition, prepayments on ARMs are affected by conditions in the fixed-rate mortgage market. Furthermore, the existence of balloon payments may result in obligors refinancing their Commercial Mortgage earlier than if such mortgages fully amortize over the maturity of the Commercial Mortgage. See "Business-- Conduit Operations." Prepayments of Commercial Mortgages could affect the Company in several adverse ways. A substantial portion of the ARMs purchased by the Company (either directly as Commercial Mortgages or through CMBSs backed by ARMs) will be newly originated within six months of purchase and generally may 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. In the event that the Company experiences a significant level of prepayments on Commercial Mortgages that are ARMs in a declining interest rate environment, the Company could experience a 23 drop in net interest income due to an inability to reinvest such prepayments in comparable Commercial Mortgages or CMBSs. The prepayment of any Commercial Mortgages 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 originate or purchase Commercial Mortgages on a "servicing released" basis (i.e., the Company will acquire both the Commercial Mortgages and the rights to service them). This strategy requires payment of a higher purchase price by the Company for the Commercial Mortgages, and to the extent a premium is paid, the Company is more exposed to the adverse effects of early prepayments of the Commercial Mortgages, as described above, and may not recognize a significant level of gain or may experience a loss with respect to its servicing operations. RISKS OF POTENTIAL NET INTEREST AND OPERATING LOSSES IN CONNECTION WITH BORROWINGS AND SUBSTANTIAL LEVERAGE; LIQUIDITY The Company anticipates employing a financing strategy to increase the size of its investment portfolio by borrowing a substantial portion (up to approximately 88%, depending on the nature of the underlying asset) of the market value of substantially all of its investments in Commercial Mortgages and CMBSs. The Company initially intends to maintain a ratio of equity capital (book value of stockholders' equity) to total assets of approximately 15%. The Company has elected to utilize CMO borrowings to a substantial degree because CMOs are more consistent with ICH'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 ICCC 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. A majority of other Company borrowings are collateralized, currently in the form of warehouse line agreements. In the future, such borrowings may be collateralized in the form of reverse repurchase agreements. Both forms of collateralization are based on the market value of the Company's assets pledged to secure the specific borrowings. The cost of borrowings under such agreements corresponds to the referenced interest rate (e.g., the Prime Rate, 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 Commercial Mortgages and CMBSs financed with borrowed funds fail to cover the cost of the borrowings, the Company will experience net interest losses. See "Business--Long-Term Investment Operations." The use of CMOs as financing vehicles tends to increase the Company's leverage as Commercial Mortgages 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. 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 Commercial Mortgages 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 Commercial Mortgages and investment securities available for 24 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 material adverse effect on the Company. Certain of the Company's Commercial Mortgages 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 Commercial Mortgages to re-establish the ratio of the amount of the borrowing to the value of the collateral). The Company could be required to sell Commercial Mortgages under adverse market conditions in order to maintain liquidity. If these sales were made at prices lower than the carrying value of its Commercial Mortgages, 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. See "Business--Long-Term Investment Operations--Financing." To the extent the Company is compelled to liquidate Commercial Mortgages or CMBSs classified as Qualified REIT Assets to repay borrowings, ICH may be unable to comply with the REIT asset and income tests, possibly jeopardizing ICH's status as a REIT. Gain from the sale or other disposition of such assets may be included under the 30% gross income test, which requires, in general, that 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 represent less than 30% of the REIT's gross income for each taxable year. The Code does not provide for any mitigating provisions with respect to the 30% gross income test. Accordingly, if ICH failed to meet the 30% gross income test, its status as a REIT would terminate automatically. See "Federal Income Tax Considerations--Taxation of ICH--Income Tests." The REIT provisions of the Code require ICH 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 will be pledged to secure the repayment of reverse repurchase agreements or other borrowings. In addition, substantially all of the Commercial Mortgages that the Company has originated or purchased and will in the future originate or purchase 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 originate or purchase Commercial Mortgages or other investments may be the only unpledged assets available to unsecured creditors and stockholders in the event of liquidation of the Company. RISKS ASSOCIATED WITH DEPENDENCE ON SECURITIZATIONS In connection with its Conduit Operations, ICCC will engage in securitizations and bulk whole loan sales. In connection with the issuance of CMBSs by ICCC, such securities are expected to be non-recourse to ICCC, 25 except in the case of a breach of the standard representations and warranties made by ICCC when Commercial Mortgages are securitized. While ICCC may have recourse to the correspondents of Commercial Mortgages for any such breaches, there can be no assurance of such correspondents' abilities to honor their respective obligations. ICCC may engage in bulk whole loan sales pursuant to agreements that provide for recourse by the purchaser against ICCC (and, in certain cases, ICH as guarantor) in the event of a breach of representation or warranty made by ICCC, any fraud or misrepresentation during the Commercial Mortgage origination process or upon early default on such Commercial Mortgages. ICCC has generally limited the remedies of such purchasers to the remedies ICCC receives from the persons from whom ICCC purchased such Commercial Mortgages. However, in some cases, the remedies available to a purchaser of Commercial Mortgages from ICCC are broader than those available to ICCC against its correspondents, and should a purchaser exercise its remedies against ICCC, ICCC may not always be able to enforce whatever remedies ICCC may have against its correspondents. ICCC may from time to time provide provisions for loan losses related to estimated losses from the breach of a standard representation and warranty. The Company plans on securitizing a substantial portion of the Commercial Mortgages it originates and purchases. ICCC expects to rely significantly upon securitizations to generate cash proceeds for repayment of any warehouse lines and to create credit availability. Further, gains on sales from ICCC's securitizations are expected to represent a significant portion of ICCC's earnings. Several factors are expected to affect the Company's ability to complete securitizations of its Commercial Mortgages, including conditions in the securities markets generally, conditions in the CMBSs market specifically, the credit quality of the Commercial Mortgages originated or purchased by the Conduit Operations, the volume of ICCC's Commercial Mortgage originations and purchases, and the Company's ability to obtain credit enhancement. If ICCC were unable to securitize profitably a sufficient number of its Commercial Mortgages in a particular financial reporting period, then the Company'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 ICCC's interest rate risk by increasing the warehousing period for its Commercial Mortgages. The Company also expects to rely on securitizations in the form of CMO borrowings to finance a substantial portion of the Commercial Mortgages held by the Long-Term Investment Operations. Any reduction in the Company's ability to complete securitizations would require the Company to utilize other sources of financing which may be on less favorable terms. In connection with its securitizations the Company will endeavor to sell all securities subjecting it to a first loss risk. However, the market for such securities in securitizations of Commercial Mortgages is generally limited. Such investment decision may subject the Company to a greater degree of credit risk than in traditional securitizations involving residential mortgage loans. As a result, the Company may be required to hold securities subjecting the Company to a first loss risk in order to effectuate its securitizations of Commercial Mortgages. RISKS OF FAILING TO HEDGE AGAINST INTEREST RATE CHANGES EFFECTIVELY; RISK OF LOSSES ASSOCIATED WITH HEDGING To mitigate risks associated with its Conduit Operations, the Company, through ICCC, enters into transactions designed to hedge interest rate risks, which may include mandatory and optional forward selling of Commercial Mortgages or CMBSs, U.S. Treasuries, 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 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 Company based on various factors, including market conditions and the expected volume of Commercial Mortgage originations and purchases, and there have been no limitations placed on the Company's use of certain 26 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. See "Business--Hedging." COMMERCIAL MORTGAGE SERVICING RIGHTS SUBJECT TO VOLATILITY When ICCC purchases Commercial Mortgages that include the associated servicing rights or originates Commercial Mortgages, the allocated cost of the servicing rights will be reflected on its financial statements as Commercial Mortgage Servicing Rights ("CMSRs"). CMSRs are amortized in proportion to, and over the period of, expected future 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 loan as a whole. To determine the fair value of the servicing rights created, ICCC 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, ICCC 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 Commercial Mortgage, a prepayment rate, a default rate and a discount rate commensurate with the risks involved. CMSRs are subject to some degree of volatility in the event of unanticipated prepayments or defaults. Prepayments in excess of those anticipated at the time CMSRs are recorded could result in a decline in the fair value of the CMSRs below their carrying value requiring a provision to increase the CMSRs' valuation allowance. The rate of prepayment of Commercial Mortgages 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 Commercial Mortgage prepayment rates may vary depending on the particular type of Commercial Mortgage. 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 ICCC's Commercial Mortgages, and other considerations. There can be no assurance of the accuracy of the Company's prepayments estimates. If actual prepayments with respect to loans serviced occur more quickly than were projected at the time such Commercial Mortgages were sold, the carrying value of the CMSRs may have to be reduced through a provision recorded to increase the CMSRs' valuation allowance in the period the fair value declined below the CMSRs' carrying value. If actual prepayments with respect to Commercial Mortgages occur more slowly than estimated, the carrying value of CMSRs would not increase, although total income would exceed previously estimated amounts and the related valuation allowances, if any, could be unnecessary. RISKS OF CONTRACTED SUB-SERVICING MAY ADVERSELY AFFECT DELINQUENCY RATIOS AND OTHERWISE AFFECT COMPANY PERFORMANCE ICCC currently contracts for the sub-servicing of all Commercial Mortgages it originates or purchases and holds for sale or investment with third-party sub-servicers. As with any external service provider, ICCC is subject to risks associated with inadequate or untimely services. Many of ICCC's borrowers require notices and reminders to keep their Commercial Mortgages current and to prevent delinquencies and foreclosures. A substantial increase in the ICCC's delinquency rate or foreclosure rate could adversely affect its ability to access profitably the capital markets for its financing needs, including future securitizations. ICCC 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. See "Business--Servicing." Each of ICCC's sub-servicing agreements with its third-party sub-servicers are expected to provide that if ICCC terminates the agreement without cause (as defined in the agreement), ICCC may be required to pay the third-party sub-servicer a fee. Further, one such agreement currently provides that ICCC shall pay the third-party sub-servicer a transfer fee per Commercial Mortgage for any Commercial Mortgage which ICCC transfers to another sub-servicer without terminating the agreement. Depending upon the size of ICCC's loan portfolio sub-serviced at any point in time, the termination penalty that ICCC would be obligated to pay upon termination without cause, may be substantial. 27 ICCC intends to subcontract with sub-servicers to service the Commercial Mortgages for any of the Company's public securitizations. With respect to such Commercial Mortgages, the related pooling and servicing agreements would permit ICCC 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 but not at the option of the Company. If, as a result of a sub-servicer's failure to perform adequately, ICCC were terminated as servicer of a securitization, the value of any servicing rights held by ICCC would be adversely impacted. In addition, if a new sub-servicer were selected with respect to any such securitization, the change in sub-servicing may result in greater delinquencies and losses on the related loans, which would adversely impact the value of any "interest-only," "principal-only," residual interest and subordinated securities held by the Company in connection with such securitization. COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT OF 1990 MAY BE SUBSTANTIAL Under the Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. To the extent a mortgaged property securing one of the Company's Commercial Mortgages does not comply with the ADA, ICH or the related borrower, as the case may be, is likely to incur costs of complying with the ADA. In addition, noncompliance could result in the imposition of fines by the federal government or an award of damages to private litigants. OTHER CONSIDERATIONS In connection with a commercial or multifamily property, the property owner may utilize tenant leases, including anchor tenant leases, which contain certain provisions that require the tenant to attorn to (that is, recognize as landlord under the lease) a successor owner of the property following foreclosure. Some of such leases, including anchor tenant leases, may be either subordinate to the liens created by the Commercial Mortgages purchased by the Company or else contain a provision that requires the tenant to subordinate the lease if the mortgagee agrees to enter into a non-disturbance agreement. In some states, if tenant leases are subordinate to the liens created by the Commercial Mortgages and such leases do not contain attornment provisions, such leases may terminate upon the transfer of the property to a foreclosing lender or purchaser at foreclosure. Accordingly, in the case of the foreclosure of a mortgaged property located in such a state and leased to one or more desirable tenants under leases that do not contain attornment provisions, such mortgaged property could experience a further decline in value if such tenants' leases were terminated (e.g., if such tenants were paying above-market rents). If a Commercial Mortgage is subordinate to a lease, the lender will not (unless it has otherwise agreed with the tenant) possess the right to dispossess the tenant upon foreclosure of the property, and if the lease contains provisions inconsistent with the Commercial Mortgage (e.g., provisions relating to application of insurance proceeds or condemnation awards), the provisions of the lease will take precedence over the provisions of the Commercial Mortgage. Part of the foregoing could have a material adverse effect on the value of the Commercial Mortgage. Certain of Commercial Mortgages may be secured in part by an assignment of leases and rents pursuant to which the borrower typically assigns its right, title and interest as landlord under the leases on the related mortgaged property and the income derived therefrom to the lender as further security for the related Commercial Mortgage, while retaining a license to collect rents for so long as there is no default. In the event the borrower defaults, the license terminates and the lender is entitled to collect rents. Such assignments are typically not perfected as security interests prior to actual possession of the cash flows. Some state laws may require that the lender take possession of the mortgage property and obtain a judicial appointment of a receiver before becoming entitled to collect the rents. In addition, if bankruptcy or similar proceedings are commenced by or in respect to the borrower, the lender's ability to collect the rents may be adversely affected. SUBORDINATE INDEBTEDNESS MAY AFFECT VALUE OF UNDERLYING COMMERCIAL MORTGAGES Substantially all of the Company's Commercial Mortgage documents either permit the borrower or do not prohibit the borrower from entering into subordinate indebtedness. Where subordinate indebtedness is permitted, 28 the subordinate lender is not required to enter into an intercreditor agreement; however, in many cases there are preconditions (such as minimum combined debt service coverage ratios) which must be satisfied prior to the mortgagor being permitted to incur subordinate indebtedness. The encumbrance of a property by subordinate indebtedness without execution of an intercreditor agreement increases the risk to the senior lienholder posed by the subordinate debt. In such cases, there would be no restriction on the junior lienholder's exercise of remedies. The presence of subordinate debt can hinder conveyance to the senior lienholder by deed in lieu of foreclosure, effectively forcing foreclosure. Similarly, the presence of subordinate debt can hinder loan modification due to the concern that modification may corrupt subordination and place the subordinate lender in pari passu status with the senior lienholder in whole or in part. JUNIOR MORTGAGES MAY AFFECT COMPANY'S RIGHTS In certain circumstances, Commercial Mortgages originated by the Company may be secured by junior mortgages which are subordinate to senior mortgages or deeds of trust held by other lenders or institutional investors. The rights of ICH, as beneficiary under a junior mortgage, are subordinate to those of the mortgagee or beneficiary under the senior mortgage or deed of trust, including the prior rights of the senior mortgagee or beneficiary to receive rents, hazard insurance and condemnation proceeds and to cause the mortgaged property securing the junior mortgage unless the ICH's subordinate interest in the mortgaged property in foreclosure litigation or satisfies the defaulted senior loan. EXPERIENCE OF THE MANAGER IN MANAGING A COMMERCIAL MORTGAGE REIT The Company will be dependent for the monitoring of its day-to-day operations, including, but not limited to, the selection, structuring and monitoring of its assets and associated borrowings and on the diligence and skill of the officers and employees of the Manager. The Manager is a recently formed entity with no significant assets and no prior history of operations. Although all of the persons who will become officers of the Manager upon the closing of this Offering have experience in the operations of a REIT due to their involvement as officers of IMH, none of such persons has any prior experience in managing a Commercial Mortgage REIT. See "REIT Advisors, Inc." for further descriptions of the business experience of key management personnel. ADVERSE CONSEQUENCES OF FAILURE TO MAINTAIN REIT STATUS; ICH SUBJECT TO TAX AS A REGULAR CORPORATION ICH has operated and intends to continue to operate so as to qualify as a REIT under the Code. Although ICH believes that it has operated and will continue to operate in such a manner, no assurance can be given that ICH 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 ICH's control. For example, in order to qualify as a REIT, at least 95% of ICH's gross income in any year must be derived from qualifying sources, and ICH must pay distributions to stockholders aggregating annually at least 95% of its REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains). 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. At the closing of the Offering, ICH will receive an opinion from Latham & Watkins, tax counsel to ICH, that, commencing with ICH's taxable year ending December 31, 1997, ICH has been organized in conformity with the requirements for qualification as a REIT, and its proposed method of operation has enabled and will enable it to meet the requirements for qualification and taxation as a REIT under the Code. See "Federal Income Tax Considerations--Taxation of ICH" and "Legal Matters." Such legal opinion is based on various assumptions and factual representations by ICH regarding ICH's ability to meet the various requirements for qualification as a REIT, and no assurance can be given that actual operating results will meet these requirements. Such legal opinion is not binding on the Internal Revenue Service (the "Service") or any court. 29 Among the requirements for REIT qualification is that the value of any one issuer's securities held by a REIT may not exceed 5% of the value of the REIT's total assets on certain testing dates. See "Federal Income Tax Considerations--Taxation of ICH--Requirements for Qualification." ICH believes that the aggregate value of the securities of ICCC held by ICH have been and will continue to be less than 5% of the value of ICH's total assets. In rendering its opinion as to the qualification of ICH as a REIT, Latham & Watkins is relying on the representation of ICH regarding the value of its securities in ICCC. If ICH were to fail to qualify as a REIT in any taxable year, ICH would be subject to federal income tax (including any applicable alternative minimum tax) on its 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, ICH 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 earnings of ICH available for investment or distribution to stockholders because of the additional tax liability to ICH for the years involved. In addition, distributions to stockholders would no longer be required to be made. See "Federal Income Tax Considerations-- Taxation of ICH--Requirements for Qualification." Even if ICH maintains its REIT status, it may be subject to certain federal, state and local taxes on its income. For example, if ICH has net income from a prohibited transaction, such income will be subject to a 100% tax. See "Federal Income Tax Considerations--Taxation of ICH." In addition, the net income, if any, from the Conduit Operations conducted through ICCC is subject to federal income tax at regular corporate tax rates. See "Federal Income Tax Considerations--Other Tax Consequences." POTENTIAL CHARACTERIZATION OF DISTRIBUTIONS AS UBTI; TAXATION OF TAX-EXEMPT INVESTORS In the event that (i) the Company is subject to the rules relating to taxable mortgage pools (discussed below) or the Company is a "pension-held REIT," (ii) a tax-exempt stockholder has incurred indebtedness to purchase or hold its Common Stock or is not exempt from federal income taxation under certain special sections of the Code, or (iii) the residual REMIC interests acquired by the Company generate "excess inclusion income," distributions to and, in the case of a stockholder described in (ii), gains realized on the sale of Common Stock by, such tax-exempt stockholder may be subject to federal income tax as unrelated business taxable income as defined in section 512 of the Code ("UBTI"). See "Federal Income Tax Considerations." TAXABLE MORTGAGE POOL RISK; INCREASED TAXATION A REIT that incurs debt obligations with two or more maturities and which are secured by mortgage loans or mortgage-backed securities may be classified as a "taxable mortgage pool" under the Code if payments required to be made on such debt obligations bear a relationship to the payments received on such assets. If all or a portion of the Company was treated as a taxable mortgage pool, the Company's status as a REIT would not be impaired, but a portion of the taxable income generated by the Company may, under regulations to be issued by the Treasury Department, be characterized as "excess inclusion" income and allocated to the stockholders. Any such excess inclusion income (i) would not be allowed to be offset by the net operating losses of a stockholder, (ii) would be subject to tax as UBTI to a tax-exempt stockholder (iii) would be subject to the application of federal income tax withholding at the maximum rate (without reduction for any otherwise applicable income tax treaty) with respect to amounts allocable to foreign stockholders, and (iv) would be taxable (at the highest corporate tax rate) to a REIT, rather than its stockholders, to the extent allocable to shares of stock held by disqualified organizations (generally, tax-exempt entities not subject to tax on unrelated business income, including governmental organizations). See "Federal Income Tax Considerations." The Company intends to enter into reverse repurchase agreements, warehouse lines agreement, CMOs and other secured lending transactions pursuant to which the Company may borrow funds with differing maturity dates which are cross- collateralized by specific Commercial Mortgages or CMBSs. The Company intends to take 30 the position that its existing financing arrangements do not create a taxable mortgage pool. No assurances can be given, however, that the IRS might not successfully maintain that the Company's financing arrangements constitute a taxable mortgage pool. In addition, the Company may enter into arrangements creating such excess inclusion income in the future. INVESTMENT COMPANY ACT RISK 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 Commercial Mortgages, qualifying pass- through certificates and certain other Qualifying Interests in real estate. In addition, unless certain CMBSs represent all the certificates issued with respect to an underlying pool of Commercial Mortgages, such CMBs may be treated as securities separate from the underlying Commercial Mortgages and, thus, may not qualify as Qualifying Interests for purposes of the 55% requirement. The Company's ownership of certain Commercial Mortgages 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 Commercial Mortgages and CMBSs 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 The Board of Directors, including a majority of the Unaffiliated Directors, has established the investment policies and operating policies and strategies set forth in this Prospectus as the investment policies and operating policies and strategies of the Company. With respect to other matters, the Company may, in the future, except as described in this Prospectus 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 ON 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 Common Stock outstanding, which may result in the reduction of the market price of the Common Stock. 31 MARKET CONSIDERATIONS There is currently no market for the ICH Common Stock, nor is one expected to develop until after the Expiration Date of the Subscription Offer. There can be no assurance that the market price of the ICH Common Stock will not decline after the Subscription Rights Period or that, following the sale of the ICH Shares upon exercise of Subscription Rights or pursuant to the Standby Purchase Agreement, a holder of ICH shares will be able to sell Shares purchased in the Offering at a price equal to or greater than the Subscription Price. The election to exercise Subscription Rights in the Offering is irrevocable. Moreover, until certificates for ICH Shares are delivered, purchasers of ICH Shares may not be able to sell the ICH Shares that they have purchased in the Offering. Certificates representing ICH Shares purchased pursuant to the Primary Subscription Privilege will be delivered as soon as practicable after the Expiration Date. For ICH Shares purchased pursuant to the Over-Subscription Privilege, delivery of certificates will occur as soon as practicable after all prorations and adjustments contemplated by the terms of the Subscription Offer have been effected. There can be no assurance that the market price of the ICH Common Stock purchased pursuant to the Subscription Offer will not decline below the Subscription Price before such ICH Shares are delivered. THE BOARD OF DIRECTORS OF IMH HAS NOT MADE ANY RECOMMENDATION TO IMH HOLDERS REGARDING WHETHER THEY SHOULD EXERCISE THEIR SUBSCRIPTION RIGHTS. SHARES ELIGIBLE FOR FUTURE SALE Sale of substantial amounts of the Company's Common Stock in the public market or the prospect of such sales could materially and adversely affect the market price of the Common Stock. The Shares issuable upon exercise in full of all Subscription Rights and the Standby Purchase Agreements will be immediately eligible for sale in the public market without restriction. The remaining 615,078 or 1,423,405 shares of Common Stock to be outstanding upon the closing of this Offering, assuming the Minimum Offering Amount and the Maximum Offering Amount, respectively, is sold, will be restricted in nature; 300,000 of such Shares will not be saleable pursuant to Rule 144 or otherwise until February 1998 and the balance of such shares will not be saleable until March 1998. In addition, upon the closing of this Offering, IMH will also hold 1,078,922 or 270,595 shares of ICH Class A Stock, assuming the Minimum Offering Amount and the Maximum Offering Amount, respectively, is sold. The number of shares of ICH Common Stock and ICH Class A Stock held by IMH, and the eligibility of such shares for future sales, will be affected by future issuances of ICH Common Stock by the Company and dispositions of shares of ICH Common Stock by IMH. The Company, IMH and other stockholders of the Company have agreed with the Dealer Managers that, for a period of 120 days following the commencement of this Offering, they will not sell, contract to sell or otherwise dispose of any shares of Common Stock or rights to acquire such shares (other than pursuant to employee plans or the DRP) without the prior written consent of the Dealer Managers. See "Shares Eligible for Future Sale." Stock options for 200,000 shares of Common Stock will be granted to executive officers, employees and Directors of the Company upon the closing of this Offering exercisable at the Subscription Price, none of which, except in the event of a change of control of the Company, will be exercisable until 1998; an estimated additional 500,000 shares of Common Stock are reserved for future issuance after the closing date of this Offering pursuant to the Company's Stock Option and Awards Plan. The shares reserved for issuance pursuant to the Company's Stock Option and Awards Plan will be increased or decreased to an amount equal to 10% of the Shares sold in this Offering, subject to a minimum of 400,000 shares. The Company intends to register under the Securities Act shares reserved for issuance pursuant to the DRP and the Stock Option and Awards Plan. See "Dividend Reinvestment Plan," "Imperial Credit Commercial Holdings, Inc.--Stock Option and Awards Plan" and "Description of Capital Stock." CLASSIFICATION AND RECLASSIFICATION OF STOCK; ISSUANCE OF PREFERRED STOCK; RESTRICTIONS ON OWNERSHIP OF COMMON STOCK; POSSIBLE ANTI-TAKEOVER EFFECT ICH's Articles of Incorporation and the amendments thereto (the "Charter") authorize the Board of Directors to issue shares of Preferred Stock, to reclassify any unissued shares of Common Stock and to classify any unissued shares of Preferred Stock and reclassify any previously classified but unissued shares of Preferred Stock into one or more classes or series of stock. Unissued shares of Preferred Stock may be issued from time to 32 time in one or more classes or series of stock with such designations, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption as shall be determined by the Board of Directors, 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, ICH and for general corporate purposes without further stockholder authorization. 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 ICH or other transaction that might involve a premium price for holders of Common Stock or otherwise be in their best interest. The Preferred Stock, if issued, may have a preference on dividend payments which could reduce the assets available to ICH to make distributions to the common stockholders. See "Description of Capital Stock." In order for ICH to maintain its qualification as a REIT under the Code not more than 50% in value of the outstanding shares of ICH'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 a REIT election is made, ICH'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 ICH against the risk of losing REIT status due to a concentration of ownership among its stockholders, the Charter limits actual or constructive ownership of the outstanding shares of Common Stock by any person to 9.8% (the "Ownership Limit") (in value or in number of shares, whichever is more restrictive) of the then outstanding shares of Common Stock. See "Description of 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 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 ICH's status as a REIT. The Board of Directors may from time to time increase or, subject to certain limitations, decrease the Ownership Limit. Actual or constructive ownership of shares of Common Stock in excess of the Ownership Limit, or, with the consent of the Board of Directors, such other limit, 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 in 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 payable to the intended transferee will be paid immediately to the charitable beneficiary. In addition, shares of Common Stock held in trust shall be deemed to have been offered for sale to ICH, 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 ICH, or its designee, accepts such offer. ICH shall have the right to accept such offer until the trustee has sold the shares held in the trust. Upon such a sale to ICH, 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--Repurchase of Shares and Restrictions on Transfer" for additional information regarding the Ownership Limit. These provisions may inhibit market activity and the resulting opportunity for ICH'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 ICH an unsuitable investment vehicle for any person seeking to obtain ownership of more than 9.8% of the outstanding shares of Common Stock. In addition, certain provisions of the Maryland General Corporation Law ("MGCL") and of ICH'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 might 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." 33 THE OFFERING TERMS OF THE SUBSCRIPTION OFFER The Company is offering to the holders (the "IMH Holders") of shares of common stock and options to purchase shares of common stock of IMH (collectively, the "IMH Shares") as of the close of business on June , 1997, the record date for the Subscription Offer (the "Record Date"), the right to subscribe (the "Subscription Rights") for an aggregate of up to 7,000,000 shares (the "ICH Shares") of the Company's Common Stock at a rate of one ICH Share for each IMH Share held on the Record Date at a price of $15.00 per ICH Share (the "Subscription Price"). The Subscription Rights are evidenced by subscription notification certificates (the "Subscription Notification Certificates"), which will be mailed to all IMH Holders, except as described below under "Foreign Restrictions." An IMH Holder's right to acquire during the Subscription Rights Period (as defined below) at the Subscription Price one ICH Share for every IMH Share held is hereinafter referred to as the "Primary Subscription Privilege." Any IMH Holder who fully exercises all Subscription Rights pursuant to the Primary Subscription Privilege may be entitled to subscribe for additional ICH Shares at the Subscription Price (the "Over-Subscription Privilege"). Subscription Rights may be exercised at any time during the period (the "Subscription Rights Period") commencing on June , 1997 and ending at 5:00 p.m., New York City time, on July , 1997 (the "Expiration Date"). See "-- Expiration of the Subscription Offer." Over-Subscription Privilege. To the extent Record Date IMH Holders do not exercise all of their Subscription Rights pursuant to the Primary Subscription Privilege, any ICH Shares represented by such unexercised Subscription Rights will be offered to those IMH Holders who exercise all of their Subscription Rights. Pursuant to the Over-Subscription Privilege, IMH Holders who exercise all of their Subscription Rights will be asked to indicate, on the Subscription Notification Certificate, how many additional ICH Shares they would like to purchase pursuant to the Subscription Offer. As discussed below under "--Maximum Subscription Offer Amount," assuming that sufficient ICH Shares remain after exercise of the Primary Subscription Privilege and assuming that the Company does not exercise its right to reduce the number of ICH Shares issuable pursuant to the Over-Subscription Privilege, as discussed below, all over-subscription requests will be honored in full; otherwise, over-subscription requests will be honored pro rata. Maximum Subscription Offer Amount. The Board of Directors of the Company has determined to limit the amount of ICH Shares that may be subscribed for pursuant to the Subscription Offer to 7,000,000 (the "Maximum Subscription Offer Amount"). As of the Record Date, there were IMH Shares outstanding. If all Subscription Rights were to be exercised pursuant to the Primary Subscription Privilege, the amount of ICH Shares to be issued pursuant to such exercise requests would exceed the Maximum Subscription Offer Amount. Accordingly, if the amount of ICH Shares requested to be purchased pursuant to the exercise of Subscription Rights in the Primary Subscription Privilege exceeds the Maximum Subscription Offer Amount, the ICH Shares issued will be pro rated among the IMH Holders that exercised their Subscription Rights based upon the number of IMH Shares held of record by such IMH Holders on the Record Date. If each IMH Holder were to exercise its Subscription Right in the Primary Subscription Privilege to the fullest extent, the effect of the Maximum Subscription Offer Amount would be that each IMH Holder would receive ICH shares for each IMH Share held. In the event that the number of ICH Shares requested to be purchased pursuant to the exercise of Subscription Rights in the Primary Subscription Privilege does not exceed the Maximum Subscription Offer Amount, such requests for purchase pursuant to the Primary Subscription Privilege will be honored in full. After honoring the requests for purchase of ICH Shares pursuant to the Primary Subscription Privilege, the Company will determine the additional amount of ICH Shares requested to be purchased pursuant to the Over- Subscription Privilege. If the number of such ICH Shares requested to be purchased pursuant to the Over-Subscription Privilege, taken together with the ICH Shares to be issued pursuant to the Primary Subscription Privilege, would not exceed the Maximum Subscription Offer Amount, the requests for purchase pursuant to the Over- 34 Subscription Privilege will, subject to the Company's determination as described above, be honored in full. In the event that the number of ICH Shares requested to be purchased pursuant to the Over-Subscription Privilege, after honoring in full all requests for purchase pursuant to the Primary Subscription Privilege, would exceed the Maximum Subscription Offer Amount, then the ICH Shares to be issued pursuant to the Over-Subscription Privilege will be pro rated among the IMH Holders that exercised their Over-Subscription Privileges based upon the number of IMH Shares held of record by such IMH Holders on the Record Date. For purposes of determining the maximum number of ICH Shares an IMH Holder may acquire pursuant to the Subscription Offer, broker-dealers whose IMH Shares are held of record by Cede or by any other depository or nominee will be deemed to be the holders of the Subscription Rights delivered to Cede or such other depository or nominee on their behalf. Subscription Price. The Subscription Price for the ICH Shares to be issued pursuant to the Subscription Offer will be equal to $15.00 per ICH Share. The minimum purchase pursuant to the Subscription Offer is 100 ICH Shares ($1,500). Accordingly, holders of fewer than 100 IMH Shares will be able to participate in the purchase of ICH Shares pursuant to the Subscription Offer only if such IMH Holders fully exercise their Subscription Rights pursuant to the Primary Subscription Privilege and request sufficient additional ICH Shares in the Over-Subscription Privilege such that the aggregate number of ICH Shares subscribed for is at least 100 ICH Shares and that the fulfillment of such requests, after taking into account the provisions referred to above, would result in at least 100 ICH Shares being issued in the Offering to such IMH Holder. Non-Transferability of Subscription Rights. The Subscription Rights are non- transferable and, therefore, may not be purchased or sold. The Subscription Rights are offered to Record Date IMH Holders, which term, for purposes of the Subscription Offer, includes (i) the person or persons who are the owners, co- owners and beneficiaries of the account in which the IMH Shares are held (collectively, the "Designated Persons") and (ii) any account (including a trust, Individual Retirement Account, qualified plan account or other similar arrangement) for which any Designated Person is directly or indirectly an owner, a co-owner or a beneficiary. Expiration of the Subscription Offer. The Subscription Offer will expire at 5:00 p.m., New York City time, on July , 1997. The Subscription Rights will expire on the Expiration Date and thereafter may not be exercised. Method of Exercise of Subscription Rights. Subscription Rights are evidenced by Subscription Notification Certificates which will be mailed to IMH Holders or, if an IMH Holder's IMH Shares are held by Cede, or any other depository or nominee on their behalf, to Cede, or such depository or nominee, except as discussed below under "--Foreign Restrictions." Subscription Rights may be exercised by completing the Subscription Notification Certificate which accompanies this Prospectus and mailing it in the envelope provided, or otherwise delivering the completed Subscription Notification Certificate to the Subscription Agent, together with payment in full for the ICH Shares at the Subscription Price. Subscription Notification Certificates may also be exercised by contacting your broker, banker or trust company, which can arrange, on your behalf, to guarantee delivery of payment and of a properly completed Subscription Notification Certificate (the "Notice of Guaranteed Delivery"). A fee may be charged for this service. Completed Subscription Notification Certificates must be received by the Subscription Agent prior to 5:00 p.m., New York City time, on the Expiration Date (unless the guaranteed delivery procedures are complied with as described below under "--Information Agent--Payment for ICH Shares") at the offices of the Subscription Agent at the address set forth below under "--Subscription Agent." . IMH Holders Who Are Record Owners. IMH Holders who are record owners can choose between either option set forth under "--Information Agent-- Payment for ICH Shares" below. If time is of the essence, option (2) will permit delivery of the Subscription Notification Certificate and payment after the Expiration Date. . IMH Holders Whose IMH Shares Are Held By A Nominee. IMH Holders whose IMH Shares are held by a nominee, such as a broker or trustee, must contact that nominee to exercise their Subscription Rights. In that case, the nominee will complete the Subscription Notification Certificate on behalf of the investor and arrange for proper payment by one of the methods set forth under "--Information Agent--Payment for ICH Shares" below. 35 . Nominees. Nominees who hold IMH Shares for the account of others should notify the beneficial owners of such IMH Shares as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to the Subscription Privileges. If the beneficial owner so instructs, the nominee should complete the Subscription Notification Certificate and submit it to the Subscription Agent with the proper payment described under "--Information Agent--Payment for ICH Shares" below. Foreign Restrictions. Subscription Notification Certificates will not be mailed to Record Date IMH Holders whose record addresses are outside the United States (the term "United States" includes the District of Columbia and the territories and possessions of the United States) ("Foreign Record Date IMH Holders"). Foreign Record Date IMH Holders will receive written notice of the Subscription Offer. The Subscription Rights to which such Subscription Notification Certificates relate will be held by the Subscription Agent for such Foreign Record Date IMH Holders' accounts until instructions are received to exercise the Subscription Rights. If no instructions have been received by the Expiration Date, the Subscription Rights of those Foreign Record Date IMH Holders will expire. Subscription Agent. The Subscription Agent is BankBoston, N.A., which will receive a fee estimated to be not greater than $25,000 for its administrative, processing, invoicing and other services, inclusive of its out-of-pocket expenses related to the Offer, which fee will be paid by the Company. SIGNED SUBSCRIPTION NOTIFICATION CERTIFICATES TOGETHER WITH PAYMENT OF THE SUBSCRIPTION PRICE MUST BE SENT TO BANKBOSTON, N.A. BY ONE OF THE METHODS DESCRIBED BELOW. THE COMPANY WILL ACCEPT ONLY SUBSCRIPTION NOTIFICATION CERTIFICATES ACTUALLY RECEIVED ON A TIMELY BASIS AT ANY OF THE ADDRESSES LISTED. (1) BY FIRST CLASS MAIL, OVERNIGHT COURIER OR BY HAND: BY MAIL: BY OVERNIGHT COURIER: To: Boston EquiServe LP To: BankBoston, N.A. Attention: Corporate Reorganization Attention: Corporate Department Reorganization Department P.O. Box 9061 c/o Boston EquiServe LP Boston, MA 02205-8686 70 Campanelli Drive Braintree, MA 02184 BY HAND: Securities Transfer & Reporting Services Inc. c/o Boston EquiServe LP 55 Broadway 3rd Floor New York, New York 10006
(2) BY FACSIMILE (TELECOPIER), with the original Subscription Notification Certificate to be sent by one of the methods described above: Facsimile number: (617) 794-6333 Confirm by telephone: (617) 794-6388 DELIVERY TO AN ADDRESS OTHER THAN THOSE LISTED ABOVE WILL NOT CONSTITUTE VALID DELIVERY. 36 INFORMATION AGENT Any question or requests for assistance may be directed to the information agent (the "Information Agent") at its telephone number and address listed below: Shareholder Communications Corp. 1(800) 733-8481 ext. 353 IMH Holders may also contact their brokers or nominees for information with respect to the Subscription Offer. The Information Agent will receive a fee estimated to be $40,000 including reimbursement for its out-of-pocket expenses related to the Subscription Offer, which fee will be paid by the Company. Payment for ICH Shares. IMH Holders who acquire ICH Shares pursuant to the Primary Subscription Privilege and pursuant to the Over-Subscription Privilege may choose the following methods of payment: (1) An IMH Holder can send the Subscription Notification Certificate together with payment for the ICH Shares subscribed for in the Primary Subscription Privilege and for additional ICH Shares subscribed for pursuant to the Over- Subscription Privilege to the Subscription Agent, calculating the total payment on the basis of the Subscription Price of $15.00 per ICH Share. To be accepted, such payment, together with the completed Subscription Notification Certificate, must be received by the Subscription Agent at the Subscription Agent's office at the address set forth above prior to 5:00 p.m., New York City time, on the Expiration Date. The Subscription Agent will deposit all checks and money orders received by it prior to the final payment date into a segregated interest-bearing account (which interest will, except as described below, be paid to the Company) pending proration and distribution of the ICH Shares. A PAYMENT PURSUANT TO THIS METHOD MUST BE IN UNITED STATES DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES, MUST BE PAYABLE TO "IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC." AND MUST ACCOMPANY AN EXECUTED SUBSCRIPTION NOTIFICATION CERTIFICATE TO BE ACCEPTED. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF A CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER. (2) Alternatively, a subscription will be accepted by the Subscription Agent if, prior to 5:00 p.m., New York City time, on the Expiration Date, the Subscription Agent has received (i) payment of the Subscription Price of $15.00 per ICH Share subscribed for pursuant to the Primary Subscription Privilege and for any additional ICH Shares subscribed for pursuant to the Over-Subscription Privilege and (ii) a Notice of Guaranteed Delivery by facsimile (telecopy) or otherwise from a bank, a trust company,or a New York Stock Exchange member guaranteeing delivery of a properly completed Subscription Notification Certificate. The Subscription Agent will not honor a Notice of Guaranteed Delivery unless a properly completed Subscription Notification Certificate for the ICH Shares is received by the Subscription Agent by the close of business not later than three business days after the Expiration Date (July , 1997) (the "Settlement Date"). The Subscription Agent will deposit all checks received by it prior to the final date into a segregated interest bearing account pending distribution of the ICH Shares. To the extent such amounts are delivered to the Company in connection with the purchase of ICH Shares, interest on such amounts will accrue to the benefit of the Company; to the extent that any such amounts are returned to the IMH Holders as excess payment, as 37 described above, or are returned as a result of the failure to sell the Minimum Subscription Offering Amount, interest on such excess amount will be paid to such IMH Holders. Whichever of the two methods described above is used, issuance of the ICH Shares is subject to collection of checks and actual payment pursuant to any Notice of Guaranteed Delivery. IMH HOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION AFTER RECEIPT OF THEIR PAYMENT FOR ICH SHARES BY THE SUBSCRIPTION AGENT. THE METHOD OF DELIVERY OF SUBSCRIPTION NOTIFICATION CERTIFICATES AND PAYMENT OF THE SUBSCRIPTION PRICE TO THE COMPANY WILL BE AT THE ELECTION AND RISK OF THE HOLDERS OF THE SUBSCRIPTION RIGHTS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES AND PAYMENT BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO THE COMPANY AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER. All questions concerning the timeliness, validity, form and eligibility of any exercise of Subscription Rights will be determined by the Company, whose determinations will be final and binding. The Company in its sole discretion may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as it may determine, or reject the purported exercise of any Subscription Right. Subscriptions will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as the fund determines in its sole discretion. The Company will not be under any duty to waive notification of any defect or irregularity in connection with the submission of Subscription Notification Certificates or incur any liability for failure to give such notification. Confirmation of Purchases. Subscription Rights may be exercised at any time during the Subscription Period, which commences on the date of this Prospectus and ends at 5:00 p.m., New York City time, on July , 1997 (the "Expiration Date"). Subscription Rights will expire on the Expiration Date and thereafter may not be exercised. Assuming the Minimum Offer Amount is achieved, on or within one business day after the Settlement Date (the "Initial Confirmation Date"), the Subscription Agent or someone on its behalf will send to the Dealer Managers for confirmation to each subscribing IMH Holder (or, if the IMH Shares are held by Cede or any other depository or nominee, to Cede or such depository or nominee), an initial statement showing (i) the number of ICH Shares to be acquired on the Initial Closing Date in the Primary Subscription Privilege and the number, if any, of ICH Shares to be acquired on the Initial Closing Date pursuant to the Over-Subscription Privilege, and (ii) the estimated number, if any, of ICH Shares that may be acquired on the Supplemental Closing Date which amount is subject to reduction, adjustment and proration. The "Supplemental Closing Date" is a date, to be determined by the Company and the Dealer Managers, within 30 calendar days from the Initial Closing Date. Upon determination of the Supplemental Closing Date, the Subscription Agent or someone on its behalf will send to the Dealer Managers a supplemental confirmation statement showing (i) the number, if any, of ICH Shares acquired on the Supplemental Confirmation Date pursuant to the Over- Subscription Privilege and (ii) any excess payment to be refunded to each subscribing IMH Holder (or, if the IMH Shares are held by Cede or any other depository or nominee, to Cede or such depository or nominee), in connection with a proration of ICH Shares. If applicable, the Subscription Agent will mail any refund, with interest, due a Record Date IMH Holder as promptly as possible. If the Company believes, following the Initial Closing Date, that the issuance of all or a portion of the estimated number, if any, of ICH Shares that may be acquired on the Supplemental Closing Date will have an adverse effect upon the operations of the Company or the market for the Company's Common Stock, then the Company will have the right, subject to the consent of the Dealer Managers, to reduce the number of ICH Shares 38 issuable on the Supplemental Closing Date to all Record Date IMH Holders, to the extent necessary in the opinion of the Company, upon consultation with the Dealer Managers, to avoid such adverse effect. Such opinions and determinations of the Company shall be conclusive and binding. Pending issuance of certificates representing ICH Shares, funds received for the exercise of Subscription Rights in the Primary Subscription Privilege and, if applicable, pursuant to the Over-Subscription Privilege will be held in a segregated escrow account. If ICH Shares are not issued pursuant to the Primary Subscription Privilege or if a Record Date IMH Holder requesting ICH Shares pursuant to the Over-Subscription Privilege is allocated less than all of the ICH Shares so requested, then the funds held in escrow paid by that Record Date IMH Holder as the Subscription Price for ICH Shares not so issued or allocated shall be returned by mail with interest as soon as practicable after the Supplemental Closing Date and after all prorations and adjustments contemplated by the terms of the Subscription Offer have been effected. IMPORTANT DATES TO REMEMBER
EVENT ----- Record Date............................................... June , 1997 Subscription Rights Period................................ June , 1997 to July , 1997 Expiration Date........................................... July , 1997 Subscription Notification Certificates and Payment Due*... July , 1997 Notice of Guaranteed Delivery Due*........................ July , 1997 Guarantees of Delivery Due*............................... July , 1997 Initial Confirmation Date................................. July , 1997 Initial Closing Date...................................... July , 1997 Supplemental Closing Date................................. August , 1997
- -------- *An IMH Holder exercising Subscription Rights must deliver either (i) a Subscription Notification Certificate and payment for ICH Shares or (ii) a Notice of Guaranteed Delivery and payment for ICH Shares by July , 1997. TERMS OF THE STANDBY OFFER In addition to the Subscription Offer, the Company is offering (the "Standby Offer," and together with the Subscription Offer, the "Offering") to certain persons that may or may not be Record Date IMH Holders (the "Standby Purchasers"), pursuant to standby purchase agreements (the "Standby Purchase Agreements") Subscription Rights for at least 998,326 shares of Common Stock (the "Minimum Standby Offer Amount") but not more than 3,039,908 shares of Common Stock (the "Maximum Standby Offer Amount"). The purchase price per Standby Share is equal to the Subscription Price of $15.00. The number of Standby Shares subscribed for will be included for purposes of achieving the Minimum Offering Amount, as described below. It is anticipated that each Standby Purchase Agreement may be subject to an individual minimum and maximum Standby purchase amount. In addition, the obligation of the Standby Purchasers will be subject to the sale of the Minimum Offering Amount in connection with the Offering. The Company has agreed to pay the Dealer Managers a fee for their financial advisory, marketing and soliciting services equal to 4.25% of the aggregate Subscription Price for Standby Shares issued and sold to Standby Purchasers pursuant to the Standby Purchase Agreements. 39 MINIMUM OFFERING AMOUNT The Board of Directors of the Company has determined not to proceed with the Offering unless an aggregate of at least 2,600,000 Shares (the "Minimum Offering Amount") are subscribed for in the Offering (inclusive of Standby Shares that may be subscribed for pursuant to Standby Purchase Agreements). In the event the Minimum Offering Amount is not reached, amounts delivered to the Subscription Agent in connection with the exercise of Subscription Rights or by Standby Purchasers will be returned promptly after the Expiration Date to the IMH Holders that exercised such Subscription Rights or to such Standby Purchasers, as the case may be, in each case, together with any interest earned thereon. MAXIMUM OFFERING AMOUNT The team "Maximum Offering Amount" as used herein shall refer to the Maximum Subscription Offer Amount and the Maximum Standby Offer Amount, collectively. REGULATORY LIMITATIONS The Company will not be required to issue Shares pursuant to the Primary Subscription Privilege or the Over-Subscription Privilege, or pursuant to Standby Purchase Agreements, to any person who, in the opinion of the Company, would (i) be required to obtain prior clearance or approval from any state or federal regulatory authority to own or control such Shares if, at the Expiration Date, such clearance or approval has not been obtained or any required waiting period has not expired; or (ii) acquire such Shares in violation of the ownership restrictions set forth in the Charter which are intended to preserve the Company's tax status as a REIT. In addition, under current interpretations by the NASD of its rules concerning initial public offerings, member firms of the NASD and associated persons of such member firms may be precluded from requesting additional ICH Shares pursuant to the Over-Subscription Privilege. 40 USE OF PROCEEDS Achievement of (i) the Minimum Offering Amount only, (ii) the Maximum Subscription Offer Amount or (iii) the Maximum Offering Amount would result in net proceeds to the Company of approximately $36.3 million, $99.5 million or $143.1 million, respectively, in each case after deducting estimated offering expenses and Solicitation and Dealer Manager fees. It is expected that approximately 70% and 25% of such proceeds will be used to provide funding for the Company's Long-Term Investment Operations and its Conduit Operations, respectively. See "Business--Long-Term Investment Operations" and "--Conduit Operations." The balance of such proceeds will be used for working capital and general corporate purposes. Pending these uses, the proceeds may be invested temporarily to the extent consistent with the REIT provisions of the Code. The Company anticipates that it will fully invest its net proceeds of this Offering in Commercial Mortgages, CMBSs and finance receivables within 90 days after completion of this Offering. DIVIDEND POLICY AND DISTRIBUTIONS The Company intends to distribute 95% or more of its taxable income (which may not necessarily equal net income as calculated in accordance with GAAP) to its common stockholders in each year so as to comply with the REIT provisions of the Code. The Company intends to declare regular quarterly dividends distributions on or about the twenty-second day of the month following said quarter. The Company intends to declare its initial dividend on or about September 30, 1997. Any taxable income remaining after the distribution of the regular quarterly dividends will be distributed annually in a special dividend or prior to the date of the first regular quarterly dividends 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 the Company to maintain REIT status will be made by the Company at the discretion of the Board of Directors and will depend on the taxable earnings of the Company, the financial condition of the Company and such other factors as the Board of Directors deems relevant. The Board of Directors has not established a minimum distribution level. See "Federal Income Tax Considerations." Distributions to stockholders will generally be taxable as ordinary income, although a portion of such distributions may be designated by the Company as capital gain or may constitute a tax-free return of capital. The Company will furnish annually to each of its stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, capital gains or return of capital. For a discussion of the federal income tax treatment of distributions by the Company, see "Federal Income Tax Considerations." DIVIDEND REINVESTMENT PLAN The Company intends to adopt a Dividend Reinvestment Plan ("DRP") for stockholders who wish to reinvest their dividend distributions in additional shares of Common Stock. All ICH common stockholders will be eligible to participate in the DRP. The following is a description of the anticipated terms of the DRP, which may be subject to change. The DRP will provide common stockholders of ICH with a convenient method of investing cash dividends (in some cases, at a discount and without payment of any brokerage commission or service charge) and investing optional cash payments in additional shares of Common Stock. The price to be paid for shares of Common Stock purchased under the DRP will likely be a price reflecting (i) a discount of approximately 3% (subject to change) from the current market price for the reinvestment of cash dividends and the investment of optional cash payments of up to $10,000, to the extent shares are purchased directly from ICH, (ii) no discount (subject to change) from the market price for the reinvestment of cash dividends and for the investment of optional cash payments of up to $10,000, to the extent shares are purchased on the open market, and (iii) a discount of 0% to 5% (the "Waiver Discount") from the market price for the investment of optional 41 cash payments that exceed $10,000. Each of the discounts will be subject to change (but will not vary from the range of 0% to 5%) from time to time or discontinuance at ICH's discretion after a review of current market conditions, the level of participation in the DRP and ICH's current and projected capital needs. Except with respect to the Waiver Discount, ICH will provide participants with written notice of a change in the applicable discount rate at least thirty days prior to the relevant record date. In addition, participants will be responsible for their pro rata share of brokerage commissions incurred in connection with the purchase of shares on the open market. However, the Board of Directors may in the future determine that ICH will pay such brokerage commissions on behalf of participants. Subject to the availability of shares of Common Stock registered for issuance under the DRP, there will be no total maximum number of shares that can be issued pursuant to the reinvestment of dividends and no pre-established maximum limit applies to optional cash payments that may be made pursuant to Requests for Waiver. BankBoston, N.A., the Company's transfer agent, will act as the trustee and administrator of the DRP (the "Plan Administrator"). All dividends and cash distributions paid with respect to the Common Stock owned by participants in the DRP will be paid directly to the Plan Administrator. If the dividend paid to any common stockholder is not sufficient to purchase one whole share of Common Stock, such common stockholder will be credited with fractional shares, computed to three decimal places. DRP participants will generally be treated as having received a dividend distribution in an amount equal to the fair market value of the Common Stock purchased with the reinvested dividends generally on the date the Plan Administrator credits such Common Stock to the DRP participant's account, plus brokerage commissions and fees, if any, subtracted from the participant's distribution. Participants electing to invest optional cash payments in additional shares of Common Stock will be subject to a minimum per month purchase limit of $50 and a maximum per month purchase limit of $10,000 (subject to a waiver). Optional cash payments in excess of $10,000 may be made only upon acceptance by the Company of a completed Request for Waiver form from a participant. Each month, at least three business days prior to each record date, the Company will establish the Waiver Discount applicable to optional cash payments that exceed $10,000. The Waiver Discount, which may vary each month, will be established in the Company's sole discretion after a review of current market conditions, the level of participation in the DRP and the Company's current and projected capital needs. Optional cash payments that do not exceed $10,000 and the reinvestment of dividends in additional shares of Common Stock will not be subject to the Waiver Discount. Optional cash payments of less than $50 and that portion of any optional cash payment which exceeds the maximum monthly purchase limit of $10,000, unless such limit has been waived, will be subject to return to the participant without interest. Participants may request that any or all shares held in the DRP be sold by the Plan Administrator on behalf of such Participants. Common stockholders will not be automatically enrolled in the DRP. Each common stockholder desiring to participate must complete and deliver to the Plan Administrator an enrollment form, which will be sent to each eligible common stockholder by the Plan Administrator. Participation in the DRP will commence with all dividends and distributions payable after receipt of a participant's authorization, provided that the authorization must be received by the Plan Administrator prior to the record date for any dividends in order for any common stockholder to be eligible for reinvestment of such dividends. A participant may terminate participation in the DRP at any time upon delivery of a written notice to that effect to the Plan Administrator, provided that the termination notice must be received by the Plan Administrator prior to the record date for any dividends in order for the termination to be effective with respect to such dividends. Upon termination, the Plan Administrator will send to the participant certificates evidencing the whole shares in the participant's account and a check for any fractional shares based on the current market value of the Common Stock on the date of termination. Participants will be sent detailed statements showing the amount of dividend or distribution received, the number and price of shares of the Common Stock purchased for their accounts and the total number of shares held by the Plan Administrator for their accounts. Tax information for each calendar year of the DRP will be sent to participants by the Plan Administrator. ICH may suspend, terminate, or amend the DRP at any time. Notice will be sent to the participants of any suspension or termination, or of any amendment that alters the DRP terms and conditions, as soon as practicable after such action by ICH. 42 DILUTION The pro forma net tangible book value of the Company as of March 31, 1997 was approximately $(15.3) million or approximately $(9.03) per share. After giving effect to the sale by the Company of the Minimum Offering Amount and the Maximum Offering Amount (assuming a subscription price of $15.00 per share) and the application of the estimated net proceeds therefrom, as set forth in "Use of Proceeds," the as adjusted pro forma net tangible book value of the Company as of March 31, 1997 would have been approximately $51.6 million and $158.4 (excluding $41,000 of intangible assets) respectively, or approximately $12.01 and $13.50 per share, respectively. This represents an immediate increase in pro forma net tangible book value of $2.98 and $4.47 per share, respectively, to existing stockholders and an immediate dilution of $2.99 and $1.50 per share, respectively, or 19.9% and 10.0%, respectively, to new investors purchasing shares in this Offering. The following tables illustrate the dilution on a per share basis: ASSUMING MINIMUM OFFERING AMOUNT Assumed Subscription Price(1)...................................... $15.00 Pro forma net tangible book value before this Offering(2)........ 9.03 Increase attributable to the sale of shares to new investors..... 2.98 ---- Pro forma net tangible book value after this Offering(3)........... 12.01 ------ Dilution in pro forma net tangible book value of Common Stock to new investors(3).................................................. $ 2.99 ======
ASSUMING MAXIMUM OFFERING AMOUNT Assumed Subscription Price(1)...................................... $15.00 Pro forma net tangible book value before this Offering(2)........ 9.03 Increase attributable to the sale of shares to new investors..... 4.47 ---- Pro forma net tangible book value after this Offering(3)........... 13.50 ------ Dilution in pro forma net tangible book value of Common Stock to new investors(3).................................................. $ 1.50 ======
- -------- (1) Before deduction of underwriting discounts and commissions and estimated offering expenses payable by the Company. (2) Pro forma net tangible book value per share is determined by dividing the pro forma net tangible book value of the Company (tangible assets less liabilities) by the pro forma number of shares of Common Stock (including ICH Class A Stock) outstanding. (3) After deduction of underwriting discounts and commissions and estimated offering expenses payable by the Company. The following tables set forth on a pro forma basis (i) the number of shares of Common Stock (including ICH Class A Stock) purchased from the Company, (ii) the total consideration and the average price per share contributed by the existing stockholders based on the Company's book value at March 31, 1997, and (iii) the total consideration and the average price per share paid by new investors, assuming the Minimum Offering Amount and the Maximum Offering Amount. ASSUMING MINIMUM OFFERING AMOUNT
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ----------------- ------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- --------- Existing Stockholders........... 1,694,000 39.4% $16,285,990 29.5% $ 9.61 New Investors................... 2,600,000 60.6 39,000,000 70.5 $15.00 --------- ----- ----------- ----- Total......................... 4,294,000 100.0% $55,285,990 100.0% ========= ===== =========== =====
ASSUMING MAXIMUM OFFERING AMOUNT
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------ -------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- --------- Existing Stockholders......... 1,694,000 14.4% $ 16,285,990 9.8% $ 9.61 New Investors................. 10,039,908 85.6 150,598,620 90.2 $15.00 ---------- ----- ------------ ----- Total....................... 11,733,908 100.0% $166,884,610 100.0% ========== ===== ============ =====
43 CAPITALIZATION The following table sets forth the capitalization of the Company (i) at March 31, 1997, (ii) pro forma to reflect the Contribution and the exchange by IMH in April 1997 of 299,000 shares of ICH Common Stock held by it for an equivalent number of shares of ICH Class A Stock and (iii) as adjusted assuming the Minimum Offering Amount and Maximum Offering Amount are purchased in full at the Subscription Price of $15.00 per Share and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
AS ADJUSTED(1)(2)(3) --------------------- PRO ACTUAL FORMA MINIMUM(4) MAXIMUM(5) ------- ------- ---------- ---------- (IN THOUSANDS) Borrowings under warehouse facilities.. $16,563 $16,563 $16,563 $ 16,563 Stockholders' equity: Preferred Stock, $.01 par value per share; 6,000,000 shares authorized; no shares issued and outstanding actual and pro forma; Class A Preferred Stock, $.01 par value per share; 4,000,000 shares authorized; 3,000,000 shares issued and outstanding actual and pro forma; no shares issued and outstanding as adjusted minimum and maximum, respectively........................ 30 30 -- -- Common Stock, $.01 par value per share; 46,000,000 shares authorized; 599,000 shares issued and outstanding actual; 300,000 shares issued and outstanding pro forma; and 3,215,078 and 11,463,313 issued and outstanding as adjusted minimum and as adjusted maximum, respectively........................ 6 3 32 115 Class A Common Stock, $.01 par value per share; 4,000,000 shares authorized; no shares issued and outstanding actual; 394,000 shares issued and outstanding pro forma, and 1,078,922 and 270,595 issued and outstanding as adjusted minimum and as adjusted maximum, respectively(6)..................... -- 4 11 3 Additional paid-in capital........... 14,970 14,970 51,257 158,037 Contributed capital(7)............... 957 1,279 1,279 1,279 Accumulated deficit.................. (946) (946) (946) (946) ------- ------- ------- -------- Total stockholders' equity......... 15,017 15,340 51,633 158,488 ------- ------- ------- -------- Total capitalization............... $31,580 $31,903 $68,196 $175,051 ======= ======= ======= ========
- ------- (1) After deducting estimated solicitation and Dealer Manager fees, and estimated offering expenses of $1,050,000 payable by the Company, and (i) giving effect to the conversion of 945,234 shares (minimum) and 3,000,000 shares (maximum) of ICH Preferred Stock held by IMH into 315,078 shares (minimum) and 1,000,000 shares (maximum) of ICH Common Stock, and (ii) giving effect to the conversion of 123,405 shares (maximum) of ICH Class A Stock to ICH Common Stock upon the closing of this Offering. See "Distribution Arrangements." (2) Does not include 700,000 shares of Common Stock reserved for issuance pursuant to the Company's Stock Option and Awards Plan. Options to acquire 200,000 shares of Common Stock will be granted to the executive officers, employees and Directors of the Company upon the closing of this Offering at the Subscription Price. The shares reserved for issuance pursuant to the Company's Stock Option and Awards Plan will be increased or decreased to an amount equal to 10% of the Shares sold in this Offering, subject to a minimum of 400,000 shares. See "Imperial Credit Commercial Holdings, Inc.--Stock Options and Awards Plan." (3) All ICH Preferred Stock is automatically convertible upon the closing of this Offering into shares of ICH Common Stock determined by multiplying the number of shares of ICH Preferred Stock to be converted by a fraction, the numerator of which is $5.00 and the denominator of which is the Subscription Price. Notwithstanding the foregoing, consistent with IMH's classification as a REIT, IMH shall not be entitled to have converted into ICH Common Stock more than that number of shares of ICH Preferred Stock whereby IMH would own, immediately after such conversion, greater than 9.8% of ICH's outstanding Common Stock. Any shares of ICH Preferred Stock not converted into ICH Common Stock upon the closing of this Offering shall on such date automatically convert into shares of ICH Class A Stock at the same rate as the ICH Preferred Stock converted into Common Stock on said date. Shares of ICH Class A Stock convert into shares of the ICH Common Stock on a one-for-one basis. Upon any subsequent issuances of ICH Common Stock, shares of ICH Class A Stock shall automatically continue to convert into additional shares of the ICH Common Stock, subject to said 9.8% limitation. Upon the closing of this Offering, IMH would hold 315,078 shares of ICH Common Stock and 1,078,922 shares of ICH Class A Stock assuming the Minimum Offering Amount is sold and 1,123,405 shares of ICH Common Stock and 270,595 shares of ICH Class A Stock assuming the Maximum Offering Amount is sold. (4) Assumes the Minimum Offering Amount is sold. (5) Assumes the Maximum Offering Amount is sold. (6) Gives effect to 95,000 shares of ICH Class A Stock to be issued in connection with the Contribution. (7) The pro forma balance sheet effect of the Contribution if it had occurred on March 31, 1997 would be an increase to ICH's Investment in ICCC of $323,000 and a corresponding increase to Class A Common Stock and contributed capital, representing the 95% economic interest in ICCC's net book value at March 31, 1997. 44 SELECTED FINANCIAL DATA The following selected financial data as of March 31, 1997, and for the period from January 15, 1997 (commencement of operations) through March 31, 1997, was derived from the Company's financial statements audited by KPMG Peat Marwick LLP ("KPMG"), independent auditors, whose reports with respect thereto appear elsewhere herein. Such selected financial data should be read in conjunction with the financial statements and the notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" also included elsewhere herein. IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Cash and cash equivalents......................................... $ 4,400 Commercial Mortgages held for investment, net..................... 17,522 Residual interest in securitization............................... 10,025 Total assets...................................................... 32,250 Borrowings from IWLG.............................................. 16,563 Preferred stock................................................... 30 Common stock...................................................... 6 Additional paid in capital........................................ 14,970 Contributed capital............................................... 957 Total stockholders' equity........................................ 15,017 STATEMENT OF OPERATIONS DATA: Interest income................................................... $ 366 Interest expense.................................................. 279 Stock compensation expense(1)..................................... 957 Net income (loss)................................................. (946) Pro forma net (loss) per share (unaudited)........................ (0.66)
- -------- (1) Stock compensation expense of $957,000 represents the difference between the price at which ICH issued 300,000 shares of its Common Stock on February 3, 1997 ($.01 per share) and the estimated fair value of such shares as determined by the Company's management based on an independent valuation, as of February 3, 1997 ($3.20 per share). IMPERIAL COMMERCIAL CAPITAL CORPORATION (IN THOUSANDS) BALANCE SHEET AND STATEMENT OF OPERATIONS DATA: Total assets........................................................... $667 Total shareholders' equity............................................. 340 Stock compensation expense(1).......................................... 25 Net income (loss)...................................................... (186)
- -------- (1) Stock compensation expense of $25,000 represents the difference between the price at which ICCC issued 500 shares of its common stock on February 10, 1997 ($1.00 per share) and the net book value which the Company's management believes approximated the fair value of the 5% economic interest in ICCC represented by such common stock. 45 PRO FORMA FINANCIAL DATA (UNAUDITED) The unaudited pro forma financial data gives effect to the Contribution as if it occurred on March 31, 1997 for the pro forma condensed balance sheet data and on January 15, 1997 (commencement of operations) for the pro forma condensed statement of operations data. Such pro forma financial information should be read in conjunction with the Company's financial statement and notes relating hereto included elsewhere herein. PRO FORMA CONDENSED BALANCE SHEET (UNAUDITED)
AT MARCH 31, 1997 ------------------------------------ HISTORICAL ADJUSTMENTS PRO FORMA ASSETS ---------- ----------- --------- (IN THOUSANDS) Cash and cash equivalents.................. $ 4,400 $-- $ 4,400 Commercial Mortgages held for investment, net....................................... 17,522 -- 17,522 Residual interest in securitization........ 10,025 -- 10,025 Investment in ICCC......................... -- 323(a) 323 Other assets............................... 303 -- 303 ------- ---- ------- $32,250 $323 $32,573 ======= ==== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Borrowings from IWLG....................... $16,563 -- $16,563 Other affiliated borrowings................ 520 -- 520 Accrued interest expense................... 150 -- 150 ------- ---- ------- Total liabilities........................ 17,233 -- 17,233 Stockholders' equity: Preferred Stock, $.01 par value; 10,000,000 shares authorized; 3,000,000 shares issued and outstanding historical and pro forma (liquidation preference of $15,000,000)............................ 30 -- 30 Common Stock, $.01 par value; 46,000,000 shares authorized; 599,000 shares issued and outstanding historical and 300,000 shares issued and outstanding pro forma................... 6 (3)(b) 3 Class A Common Stock $.01 par value; 4,000,000 shares authorized, no shares issued and outstanding historical and 394,000 shares issued and outstanding pro forma............................... -- 4(a),(b) 4 Additional paid-in capital................ 14,970 -- 14,970 Contributed capital....................... 957 322(a) 1,279 Accumulated deficit....................... (946) -- (946) ------- ---- ------- Total stockholders' equity............... 15,017 323 15,340 ------- ---- ------- $32,250 $323 $32,573 ======= ==== =======
46 PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 --------------------------------------------- HISTORICAL ADJUSTMENTS PRO FORMA ----------- ------------ ------------ (IN THOUSANDS) Interest income: Commercial Mortgages held for investment............. $ 219 -- $ 219 Other....................... 147 -- 147 ---------- ---------- ------------ Total interest income...... 366 -- 366 Interest expense: Borrowings for IWLG......... 150 -- 150 Other affiliated borrowings. 129 -- 129 ---------- ---------- ------------ Total interest expense..... 279 -- 279 ---------- ---------- ------------ Net interest income before provision for Commercial Mortgage losses........... 87 -- 87 Provision for Commercial Mortgage losses............. 13 -- 13 ---------- ---------- ------------ Net interest income........ 74 -- 74 Stock compensation expense... 957 -- 957 Equity in net loss of ICCC... -- 177 (c) 177 Other expenses............... 63 -- 63 ---------- ---------- ------------ 1,020 177 1,197 ---------- ---------- ------------ Net income (loss):......... $ (946) $ (177) $ (1,123) ========== ========== ============ Pro forma net income (loss) per share................... $ (0.66)(d) ============
NOTES TO FINANCIAL DATA (UNAUDITED) (a) Reflects ICH's 95% economic interest in ICCC's net book value at March 31, 1997 contributed pursuant to the Contribution for 95,000 shares of ICH Class A Stock. (b) Reflects the exchange by IMH of 299,000 shares of ICH's Common Stock for an equivalent number of shares of ICH Class A Stock as if it had occurred on March 31, 1997. (c) Reflects ICH's 95% economic interest in ICCC's results of operations for the period from January 15, 1997 (commencement of operations) through March 31, 1997. (d) Pro forma net loss per share has been computed by dividing pro forma net loss by the pro forma weighted average number of shares outstanding (1,694,000 shares). 47 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Prospectus contains forward-looking statements that inherently involve risks and uncertainties. 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 section, in "Risk Factors" and elsewhere in this Prospectus. The following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. RESULTS OF OPERATIONS; IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. The following discussion relates to the Long-Term Investment Operations prior to the Contribution and excludes the Company's equity interest in ICCC which the Company would obtain pursuant to the Contribution. Historical financial information presented herein should be regarded solely as background information and is not indicative of future results which may vary substantially from those shown herein. For the period from January 15, 1997 (commencement of operations) through March 31, 1997 Revenues were $366,000. Such revenues were comprised primarily of $219,000 of interest income earned on Commercial Mortgages held for investment and $131,000 of interest income from a CMBS held by the Long-Term Investment Operations. Giving effect to the Contribution, the Company's equity interest in the net loss of ICCC for the period from January 15, 1997 (commencement of operations) through March 31, 1997 would have been $177,000. Net loss, excluding the equity interest in the net loss of ICCC was $946,000, primarily due to $957,000 in stock compensation expense relating to the issuance of 300,000 shares of ICH Common Stock. Expenses, excluding stock compensation expense, were $355,000, comprised primarily of $279,000 of interest expense related to borrowings from Imperial Warehouse Lending Group, Inc., a subsidiary of IMH ("IWLG"), and borrowings from other affiliates and professional expenses of $60,000. The Company anticipates that expenses will increase in the future as the Company builds its infrastructure, increases its borrowings under warehouse lines of credit and reverse repurchase facilities and relies more heavily on the Manager for its day-to-day operations. RESULTS OF OPERATIONS; IMPERIAL COMMERCIAL CAPITAL CORPORATION The following discussion relates to the operations of ICCC prior to the Contribution. Historical financial information presented herein should be regarded solely as background information and is not indicative of future results which may vary substantially from those shown herein. For the period from January 15, 1997 (commencement of operations) through March 31, 1997 Revenues were $11,000 comprised of $6,000 of interest income, $3,000 gain on sale of loans, and $2,000 of loan servicing income. ICCC incurred a net loss of $186,000. Total expenses were $197,000 comprised primarily of $25,000 of stock compensation expense relating to the issuance of 500 shares of ICCC common stock, $63,000 of professional services, $57,000 of personnel expenses and $19,000 of general and administrative and other expense. Total expenses will increase in the future as ICCC expands its infrastructure and servicing portfolio. LIQUIDITY AND CAPITAL RESOURCES The Company's principal liquidity requirements result from the need to fund the origination or purchase of Commercial Mortgages held for sale by ICCC, and the investment in Commercial Mortgages and CMBSs by ICH. Prior to the Contribution, ICCC was funded by intercompany borrowings and $500,000 from the issuance of capital stock and ICH was funded by $15.0 million in investments by IMH, $900,000 in borrowings from IMH and a $200.0 million warehouse line agreement as described below. After the Contribution, the Long-Term Investment Operations and the Conduit Operations will be funded by warehouse lines of credit, reverse repurchase agreements, the issuance of CMOs and CMBSs, and the proceeds from the issuance of capital stock. 48 For the period from January 15, 1997 (commencement of operations) through March 31, 1997, net cash provided by operating activities was $5,000 and was affected by $957,000 in stock compensation expense related to the issuance of 300,000 shares of the Common Stock by ICH in February 1997. For the period from January 15, 1997 (commencement of operations) through March 31, 1997, net cash used in investing activities was $27.6 million, affected by the purchase by ICH of $17.5 million in Commercial Mortgages and a $10.1 million CMBS. For the period from January 15, 1997 (commencement of operations) through March 31, 1997 net cash provided by financing activities was $32.0 million affected by the issuance by ICH of a $15.0 million promissory note to IMH in March 1997 (which was converted into 3,000,000 shares of ICH Preferred Stock in March 1997) and borrowings by ICH of $16.6 million from IWLG in connection with the purchase by the Company of $17.5 million of Commercial Mortgages loans from ICIFC in February 1997. In April 1997, the Company entered into a warehouse line agreement to provide up to $200.0 million to finance the Company's businesses. Terms of the warehouse line of credit require that the Commercial Mortgages be held by an independent third party custodian, which gives the Company the ability to borrow against the collateral as a percentage of the fair market value of the Commercial Mortgages. The borrowing rates are expressed in basis points over one-month LIBOR, depending on the type of collateral provided by the Company. The margins on the warehouse line agreement are based on the type of mortgage collateral used and generally range from 85% to 88% of the fair market value of the collateral. The warehouse line agreement is guaranteed by IMH until the Company reaches $50.0 million in stockholders' equity, which will occur upon the closing of this Offering. The Company anticipates that approximately 70% and 25% of the net proceeds of this Offering will be used to provide funding for the Company's Long-Term Investment Operations and its Conduit Operations, respectively. The Company believes that cash flow from operations and the aforementioned financing arrangement will be sufficient to meet the current liquidity needs of the two businesses. INFLATION The Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased costs of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company's operations are monetary in nature. As a result, interest rates have a greater impact on the Company's operations' performance than do the effects of general levels of inflation. Inflation affects the Company's operations primarily through its effect on interest rates, since interest rates normally increase during periods of high inflation and decrease during periods of low inflation. During periods of increasing interest rates, demand for mortgage loans and a borrower's ability to qualify for mortgage financing in a purchase transaction may be adversely affected. ACCOUNTING FOR SERVICING RIGHTS When ICCC purchases Commercial Mortgages that include the associated servicing rights, the allocated price paid for the servicing rights, net of amortization based on assumed prepayment rates, is reflected on its financial statements as CMSRs. In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," which supersedes SFAS 122. SFAS No. 125 requires that a portion of the cost of purchasing or originating a mortgage loan be allocated to the mortgage loan servicing rights based on its fair value relative to the loan as a whole. To determine the fair 49 value of the servicing rights created, ICCC 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, ICCC 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. ICCC determines servicing value impairment by desegregating the conduit operations' servicing portfolio into its predominant risk characteristics. ICCC determines those risk characteristics to be Commercial Mortgage program type and interest rate. These segments of the portfolio are then evaluated, using market prices under comparable servicing sale contracts, when available, or alternatively using the same model as was used to originally determine the fair value at acquisition, using current assumptions at the end of the quarter. The calculated value is then compared to the capitalized recorded value of each Commercial Mortgage type and interest rate segment to determine if a valuation allowance is required. At March 31, 1997, ICCC had capitalized $113,000 of CMSRs. CMSRs are subject to some degree of volatility in the event of unanticipated prepayments or defaults. Prepayments in excess of those anticipated at the time CMSRs are recorded could result in a decline in the fair value of the CMSRs below their carrying value requiring a provision to increase the CMSRs' valuation allowance. The rate of prepayment of Commercial Mortgages 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 Commercial Mortgage prepayment rates may vary depending on the particular type of Commercial Mortgage. 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 ICCC's Commercial Mortgages, and other considerations. There can be no assurance of the accuracy of management's prepayments estimates. If actual prepayments with respect to Commercial Mortgages serviced occur more quickly than were projected at the time such Commercial Mortgages were sold, the carrying value of the CMSRs may have to be reduced through a provision recorded to increase the CMSRs' valuation allowance in the period the fair value declined below the CMSRs' carrying value. If actual prepayments with respect to Commercial Mortgages occur more slowly than estimated, the carrying value of CMSRs would not increase, although total income would exceed previously estimated amounts and the related valuation allowances, if any, could be unnecessary. 50 BUSINESS The following Business section contains forward-looking statements which involve risks and uncertainties. The Company's actual result could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY'S OPERATIONS The Company currently operates the Long-Term Investment Operations, which invests primarily in Commercial Mortgages and CMBSs and, as of the closing of this Offering, will engage in the Conduit Operations, which originates, purchases and sells or securitizes Commercial Mortgages. ICH has secured a $200.0 million warehouse line agreement to finance the origination and purchase of Commercial Mortgages. The Conduit Operations will operate through three divisions: the Condominium Division, the Retail Division, and the Correspondent and Bulk Purchase Division. LONG-TERM INVESTMENT OPERATIONS The Long-Term Investment Operations invests primarily in adjustable rate Commercial Mortgages and CMBSs backed by such Commercial Mortgages for long- term investment. Income is earned principally from the net interest income received by the Company on the Commercial Mortgages and CMBSs acquired and held in its portfolio. At March 31, 1997, the Company's investment portfolio consisted of $17.5 million in Commercial Mortgages and a $10.0 million CMBS. CONDUIT OPERATIONS The Company's Conduit Operations will operate through three divisions: the Condominium Division, the Retail Division, and the Correspondent and Bulk Purchase Division. Condominium Division. This Division will offer on a retail basis adjustable rate financing to developers and project owners who have completed the development of a condominium complex or the conversion of an apartment complex to a condominium complex on property with a typical loan amount of $3.0 million to $10.0 million. All originations, underwriting, processing and funding will be performed at ICCC's executive offices. The Company anticipates that the Condominium Division's Commercial Mortgages will be offered on a nationwide basis and that Commercial Mortgages originated through the Condominium Division will be financed through the utilization of CMO borrowings by the Long-Term Investment Operations. Retail Division. This Division, which is expected to become operational shortly, will originate Commercial Mortgages for properties including general purpose apartment complexes, general retail property such as shopping centers, super markets and department stores, light industrial property, and office buildings. The Retail Division will offer smaller balance ($500,000 to $1.5 million) fixed and adjustable rate Commercial Mortgages to developers and project owners for smaller properties and projects than those funded by the Correspondent and Bulk Purchase Division. Although processing and funding operations relating to these loans will be performed centrally at ICCC's executive offices, the Company has targeted major metropolitan areas for the opening of satellite offices for regional originations. A portion of the adjustable rate Commercial Mortgages that will be originated by the Retail Division may be held in portfolio by the Long-Term Investment Operations, while the balance thereof and a substantial portion of the fixed rate product originated will be resold by the Conduit Operations through REMIC securitizations. Correspondent and Bulk Purchase Division. This Division will both originate Commercial Mortgages on a retail basis and purchase Commercial Mortgages on a bulk and flow basis. This Division will offer larger principal balance ($1.5 million to $10.0 million) Commercial Mortgages for commercial projects than those funded by the Retail Division. The Correspondent and Bulk Purchase Division will offer adjustable rate and fixed rate Commercial Mortgages offered through specified correspondents who may in the future be provided with 51 Company-sponsored warehouse facilities. In addition, the Division will purchase Commercial Mortgages in bulk and flow from selected financial institutions and mortgage bankers. A portion of the adjustable rate Commercial Mortgages originated or purchased by the Correspondent Division may be held in portfolio by the Long-Term Investment Operations, while the balance thereof and a substantial portion of the fixed rate Commercial Mortgages originated or purchased will be resold by the Conduit Operations through REMIC securitizations. LONG-TERM INVESTMENT OPERATIONS GENERAL ICH purchases Commercial Mortgages and CMBSs, principally adjustable-rate Commercial Mortgages and securities backed by such loans, for long-term investment. Income is earned principally from the net interest income received by the Company on the Commercial Mortgages and CMBSs purchased and held in its portfolio. Such purchases will be financed with a portion of the Company's capital, as well as long-term financing through CMOs and borrowings under warehouse line agreements and reverse repurchase agreements. ICCC will support the investment objectives of ICH by selling all Commercial Mortgages and CMBSs to ICH at costs which the Company believes will be comparable to those available through investment bankers and other third parties. COMMERCIAL MORTGAGES HELD IN THE PORTFOLIO The Company will originate, and invest a substantial portion of its assets in Commercial Mortgages. The Company will also purchase Commercial Mortgages from third parties for long-term investment and for resale. INVESTMENTS IN COMMERCIAL MORTGAGE-BACKED SECURITIES General. The Company may also acquire CMBSs generated through its own securitization efforts as well as those generated by third parties. In connection with the issuance of CMBSs by the Company in the form of REMICs, ICH may retain the senior or subordinated securities as regular interests of a REMIC on a short-term or long-term basis. Any such retained CMBS may include "principal only," "interest only" or residual interest securities or other interest rate or prepayment sensitive securities or investments. Any such retained securities or investments may subject the Company to credit, interest rate and/or prepayment risks. DESCRIPTION OF CMBSS CMBSs are securities that represent an interest in, or are secured by, Commercial Mortgages. The CMBS market is newer and in terms of total outstanding principal amount of issues is relatively small compared to the total size of the market for residential mortgage-backed securities. CMBSs have been issued in public and private transactions by a variety of agency and private-label issuers. CMBSs have been issued using a variety of structures, some of which were developed in the residential mortgage context, including multi-class structures featuring senior and subordinated classes. Because of the great diversity in characteristics of the Commercial Mortgages that secure CMBSs, however, such securities have unique features and characteristics. CMBSs may pay fixed or floating rates of interest. CMBSs generally have been structured as mortgage pass-through securities or as mortgage pay-through securities, although other structures are possible. With a typical mortgage pass-through security, payment of principal and interest on the underlying mortgages, following deduction of servicing expenses, is passed through directly to holders of the securities. Mortgage pay-through securities represent an obligation of the issuer, secured by a pool of mortgage loans pledged as collateral for payments of principal and interest on the debt instrument. The issuer's obligation to pay principal and interest under a mortgage pay-through security is limited to the pledged collateral. CMBSs generally are structured with some form of credit enhancement to protect against potential losses on the underlying Commercial Mortgages. Credit support increases the likelihood of timely and full payment of 52 principal and interest to the more senior class of CMBSs. Because of the particular risks that accompany CMBSs, the amount of such credit support may be substantial. Credit supports used in the CMBSs market has included issuer guarantees, reserve funds, subordinated securities (which bear the risks of default before more senior classes of securities of the same issuer), cross- collateralization and over-collateralization. In addition to credit support, CMBSs may be structured with liquidity protections intended to provide assurance of timely payment of principal and interest. Such protections may include surety bonds, letters of credit and payment advance agreements. FINANCING The Long-Term Investment Operations will be principally financed through the issuance of CMOs and borrowings under warehouse line agreements and reverse repurchase agreements. Collateralized Mortgage Obligations. As Commercial Mortgages are accumulated, the Company intends to issue CMOs secured by such loans as a means of financing its Long-Term Investment Operations. The decision to issue CMOs will be based on the Company's current and future investment needs, market conditions and other factors. For accounting and tax purposes, the Commercial Mortgages financed through the issuance of CMOs will be treated as assets of the Company, and the CMOs will be treated as debt of the Company. Each issuance of CMOs is expected to be fully payable from the principal and interest payments on the underlying Commercial Mortgages collateralizing such debt, any cash or other collateral required to be pledged as a condition to receiving the desired rating on the debt, and any investment income on such collateral. Long-Term Investment Operations will earn the net interest spread between the interest income on the Commercial Mortgages and the interest and other expenses associated with the CMO financing. The net interest spread may be directly impacted by the levels of prepayment of the underlying Commercial Mortgages and to the extent CMO classes have variable rates of interest, may be affected by changes in short-term interest rates. The Company believes that under prevailing market conditions, an issuance of CMOs receiving other than an investment grade rating would require payment of a yield to investors which will reduce net interest spread earned as a result of such CMO issuance. No assurance can be given that the Company will achieve the ratings it plans to seek for such CMOs. Warehouse Line Agreements. ICH has obtained a $200.0 million warehouse line agreement with a third-party lender and is currently negotiating with another lender, at interest rates that are consistent with the financing objectives discussed herein. A warehouse line agreement acts as a financing under which the Company pledges certain Commercial Mortgages as collateral to secure a short-term loan. Generally, the lender makes a loan in an amount equal to 85% to 88% of the fair market value of the pledged collateral. The Company's warehouse line agreement requires the Company to pledge the collateral to be held by a third-party custodian. ICH's warehouse line agreement calls for the Company to pledge cash, additional Commercial Mortgages or additional securities in the event the market value of the existing collateral declines. The term of ICH's warehouse line agreement is for 12 months from the initial start date and stipulates that no Commercial Mortgage may be on the warehouse line agreement for more than 364 days. The interest rate is based upon one month LIBOR and is repriced daily. In an event of default under ICH's warehouse line agreement, the lender may force the liquidation of the pledged collateral subject to any bankruptcy proceedings rights and remedies available to a creditor. See "Management's Discussion and Analysis of Financial Condition and Results of Operation--Liquidity and Capital Resources." Reverse Repurchase Agreements. The Company may also obtain reverse repurchase agreements with third-party lenders, at interest rates that are consistent with its financing objectives described herein. A reverse repurchase agreement, although structured as a sale and repurchase obligation, acts as a financing vehicle under which the Company pledges certain Commercial Mortgages and CMBSs as collateral to secure a short-term loan. Generally, the other party to the agreement makes the loan in an amount equal to a percentage of the market value of the pledged collateral. At the maturity of the reverse repurchase agreement, the Company is required to repay the loan in exchange for the return of its collateral. Under a reverse repurchase agreement, the Company 53 retains the incidents of beneficial ownership, including the right to distributions on the collateral and the right to vote on matters as to which certificate holders vote. Upon a payment default under such agreements, the lending party may liquidate the collateral. The borrowing agreements may require the Company to pledge cash, additional Commercial Mortgages or CMBSs in the event the market value of existing collateral declines. To the extent that cash reserves are insufficient to cover such deficiencies in collateral, the Company may be required to sell assets to reduce its borrowings. In the event of the insolvency or 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 creditor under such agreements to avoid the automatic stay provisions of the Bankruptcy Code and to foreclose on the collateral agreements without delay. In the event of the insolvency or bankruptcy of a lender during the term of a reverse repurchase agreement, the lender may be permitted, under the Bankruptcy Code, to repudiate the contract, and the Company's claim against the lender for damages therefrom may be treated simply as one of the unsecured creditors. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, the Company's ability to exercise its rights to recover its securities under a reverse repurchase agreement or to be compensated for any damages resulting from the lender's insolvency may be further limited by such statute. If the lender is an insured depository institution subject to the Federal Deposit Insurance Act, the Company's ability to exercise its rights to recover its securities under a reverse repurchase agreement or to be compensated for damages resulting form the lender's insolvency may be limited by such statute rather than the Bankruptcy Code. The effect of these various statutes is, among other things, that a bankrupt lender, or its conservator or receiver, may be permitted to repudiate or disaffirm its reverse repurchase agreements, and the Company's claims against the bankrupt lender for damages resulting therefrom may 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. To reduce its exposure to the potential credit risk of reverse repurchase agreement lenders, the Company may enter into such agreements with different parties and follow its own credit exposure procedures. The Company would monitor the financial condition of its reverse repurchase agreement lenders on a regular basis, including the percentage of mortgage loans that are the subject of reverse repurchase agreements with any single lender. Notwithstanding these measures, no assurance can be given that the Company will be able to avoid such third party risks. Currently, the Company is not party to any reverse repurchase agreements. Other CMBSs. As an additional alternative for the financing of its Long-Term Investment Operations, the Company may issue other CMBSs, if, in the determination of the Company, the issuance of such other securities is advantageous. In particular, mortgage pass-through certificates representing an undivided interest in pools of Commercial Mortgages formed by the Company may prove to be an attractive vehicle for raising funds. The holders of CMBSs receive their pro rata share of the principal payments made on a pool of Commercial Mortgages and interest at a pass-through interest rate that is fixed at the time of offering. The Company may retain up to a 100% undivided interest in a significant number of the pools of Commercial Mortgages underlying such pass-through certificates. The retained interest, if any, may also be subordinated so that, in the event of a loss, payments to certificate holders will be made before the Company receives its payments. Unlike the issuance of CMOs, the issuance of CMBSs will not create an obligation of the Company to securityholders in the event of a borrower default in a short-fall principal or interest payment on CMBSs. However, as in the case of CMOs, the Company may be required to obtain various forms of credit enhancements in order to obtain an investment grade rating for issues of mortgage pass-through certificates by a nationally-recognized rating agency. CONDUIT OPERATIONS GENERAL ICCC began its mortgage conduit operations in January 1997. The Company's Conduit Operations will consist of the origination or purchase and sale of Commercial Mortgages primarily secured by first liens on commercial properties that are originated in accordance with ICCC's underwriting guidelines. As the Conduit 54 Operations of the Company, ICCC will also act as a bulk and flow purchaser of Commercial Mortgages. All Commercial Mortgages originated or purchased by ICCC will be made available for sale to ICH at the same price at which the loans were originated or purchased by ICCC or fair market value at the date of sale and subsequent transfer to ICH. The Company's Conduit Operations will primarily operate through three divisions: the Condominium Division, the Retail Division and the Correspondent and Bulk Purchase Division. The Condominium Division is currently being operated by ICCC. CONDOMINIUM DIVISION Through its Condominium Division, ICCC markets Commercial Mortgages directly to developers and project owners who have completed a condominium complex or the conversion of an apartment complex to a condominium complex, allowing developers and project owners to structure flexible financing on qualified condominium projects. Typical uses of the program are where existing financing precludes release provisions on individual units, to replace existing matured loans or for acquisition financing. Commercial Mortgages offered by the Condominium Division are typically adjustable rate mortgages with an interest rate equal to a spread over the 6 month LIBOR, with an initial interest rate for the first 12 to 24 months, and are fully amortizing over a 30 year term. The typical Commercial Mortgage is between $3.0 million and $10.0 million and the current maximum loan-to-value ratios ("LTV") limits for such loans are (i) 65% of the combined retail market value of the sum of individual units and (ii) 80% of the value derived from an income approach as an apartment complex. The Company believes an opportunity has developed for previously constructed condominium complexes within certain geographic regions. Increases in the prices of single-family detached homes have decreased the ability of many potential first time home buyers to purchase such properties. In addition, the Company believes that rents for high quality apartments have substantially increased and vacancies for such apartments have substantially decreased. The Company believes that previously constructed condominium complexes have become an important alternative for such first time buyers in certain geographic regions. In many cases tenants or third party buyers can purchase a condominium unit with a total debt service at or near their existing level of rent. These results combined with tax benefits and potential future appreciation provide a significant incentive for the first-time buyer who may be unable to afford a detached single family residence. The Company believes that these conditions provide a substantial financing opportunity for the Company. The Commercial Mortgages offered by the Condominium Division are designed for complete or partial condominium complexes that will be marketed to the home buying community in accordance with market demand. The final loan amount is based on both the retail value of the individual condominium unit and the current multi-family value. Each project must have a verified operating history that will provide adequate net income to cover the debt service. The Condominium Division offers Commercial Mortgages which require master loan agreements that include provisions for cross-collaterization and cross- default of units within a complex. In addition, Commercial Mortgages offered by the Condominium Division are generally with full recourse to the sponsor/developer. The units may be released at par or on an accelerated basis depending on sales absorption, DSCRs and integrity of sales values. DSCRs of similar income producing properties will be compared with those of the property to be financed at time of origination of the Commercial Mortgage. The Condominium Division originates, underwrites, processes and funds Commercial Mortgages on a retail basis from ICCC's executive offices. For the three months ended March 31, 1997, no Commercial Mortgages had been originated by ICCC. RETAIL DIVISION ICCC has formed a Retail Division which is expected to be operational by the closing of the Offering. The Retail Division will market Commercial Mortgages directly to property owners who seek Commercial Mortgages to purchase a building or refinance an existing mortgage. The Retail Division will offer smaller balance adjustable rate Commercial Mortgages to project owners or developers for smaller properties and projects than those offered by the Correspondent and Bulk Purchase Division. The Retail Division's standard program will be 55 adjustable rate Commercial Mortgages with principal balances ranging from $500,000 to $1.5 million. Such adjustable rate Commercial Mortgages bear interest based on LIBOR, 1-Year CMT or Prime Rate Index plus, in each case, a spread with amortization schedules ranging from 15 to 30 years and maturities of 5 to 15 years with a substantial balloon payment due at maturity and with a maximum LTV generally not to exceed 75%. ICCC will utilize short-term prepayment lock-outs and prepayment penalties to reduce its exposure to prepayments. The Retail Division will also offer fixed rate Commercial Mortgages with a principal amount between $500,000 and $1.5 million. The amortization schedules range from 15 to 30 years with maturities of 5, 7, 10 or 15 years with a substantial balloon payment due at maturities and with a maximum LTV generally not to exceed 75%. The Division will utilize prepayment lock-out and prepayment penalties with these Commercial Mortgages as well. The Commercial Mortgages offered by the Retail Division will generally utilize non-negotiable loan documents and limited scope third party reports which will provide more efficient underwriting and closing. Although processing and funding relating to these Commercial Mortgages will be performed centrally at ICCC's executive offices, the Company has targeted major metropolitan areas for the opening of satellite offices for regional originations. The Retail Division's marketing strategy will be to solicit Commercial Mortgage originations through direct mailings to selected builders and commercial and multi-family real estate brokers, and through advertising in various forms of mass media. The Company believes this centralized approach to processing and closing will allow the Retail Division to originate Commercial Mortgages at a competitive cost. CORRESPONDENT AND BULK PURCHASE DIVISION The Company's Correspondent and Bulk Purchase Division will originate Commercial Mortgages on a retail basis and purchases such loan on a bulk or flow basis. Correspondent Origination. The Company's Correspondent and Bulk Purchase Division will offer larger principal balance ($1.5 million to $10.0 million) Commercial Mortgages through specified correspondents such as savings and loan associations, banks, mortgage bankers and other mortgage brokers. The terms of such Commercial Mortgages will be similar to those offered by the Retail Division except for the size of the principal balance. These Commercial Mortgages will generally be for projects more substantial than those funded by the Retail Division. The Correspondent and Bulk Purchase Division's strategic focus will be to be a low cost national originator through a national correspondent network of Commercial Mortgages to be held for investment or sold in the secondary market as whole loans or securitized as CMBSs. A key feature of this approach is the use of a national network of correspondent originators, which will enable the Company to shift the high fixed costs of interfacing with the property owner to such correspondents. The marketing strategy for the Correspondent and Bulk Purchase Division is designed to accomplish three objectives: (1) attract a geographically diverse group of correspondent loan originators, (2) establish relationships with such correspondents and facilitate their ability to offer a variety of Commercial Mortgage products designed by the Correspondent and Bulk Purchase Division and (3) purchase the Commercial Mortgage and securitize or sell them into the secondary market or to ICH. To facilitate its relationship with its correspondents, reduce the Company's reliance on the California market and nationally expand the Company's Commercial Mortgage origination capability, the Company has targeted major metropolitan areas in the United States for correspondent originations. Correspondents will be required to meet certain financial, insurance and performance requirements established by ICCC before they are eligible to participate in its correspondent program, and must submit to periodic reviews by ICCC to ensure continued compliance with these requirements. In addition, correspondents will be required to have comprehensive loan origination quality control procedures. In connection with its qualification, each correspondent enters into an agreement that generally provides for recourse by ICCC against the seller in the event of a breach of representations or warranties made by the correspondent with respect to Commercial Mortgages sold to ICCC, any fraud or misrepresentation during the mortgage loan origination process. All Commercial Mortgages originated through correspondents will be underwritten by ICCC. 56 Bulk Purchases. In addition to originating Commercial Mortgages on a correspondent basis, the Division will purchase Commercial Mortgages in bulk packages and on a flow basis. Bulk loan purchases will be in the form of complete loan packages that have been originated and underwritten by financial institutions or Commercial Mortgage brokers. All Commercial Mortgages purchased on a bulk basis will be reviewed by ICCC's underwriting staff to determine that the loan packages are complete and materially comply with to the Company's underwriting guidelines. Depending on the size of the pool of Commercial Mortgages purchased, the Company will engage a third-party underwriter to underwrite the Commercial Mortgages, determine credit grade, verify the quality of the appraisal, verify the operations of the property, including the DSCRs, and on Commercial Mortgages with smaller balances, verify the borrower's employment status. The Company intends to establish relationships with Commercial Mortgage brokers who will be reviewed by the Company to ensure the quality and type of Commercial Mortgages originated. The Company will also analyze the financial conditions of the Commercial Mortgage brokers, including a review of the Commercial Mortgage brokers' licenses and financial statements. Upon approval, the Company expects to require each Commercial Mortgage broker to enter into a purchase and sale agreement with customary representations and warranties regarding the loans such Commercial Mortgage broker will sell to the Company. PRODUCT FOCUS ICCC's focus on the origination and purchase of Commercial Mortgages may affect the Company's financial performance. For example, the purchase market for Commercial Mortgages has typically provided for higher interest rates in order to compensate for the lower liquidity of such loans, thereby potentially enhancing the interest income earned by the Company during the accumulation phase for Commercial Mortgages held for sale and during the holding period for Commercial Mortgages held for investment. Due to the lower level of liquidity in the Commercial Mortgage market, the Company may be required from time to time to hold such Commercial Mortgages or CMBSs. In addition, by retaining for investment either the Commercial Mortgages or CMBSs, the Company assumes the potential risk of any increased delinquency rates and/or credit losses as well as interest rate risk. 57 A summary of the Company's Commercial Mortgage purchases by type of Commercial Mortgage is shown below:
PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 -------------- (DOLLARS IN MILLIONS, EXCEPT FOR AVERAGE LOAN SIZE) Variable Rate Loans: Volume of Loans............................................ $ 17.5(*) Percent of total volume.................................... 100.0% Fixed Rate Loans: Volume of Loans............................................ $ -- Percent of total volume.................................... -- % -------- $ 17.5 ======== Average Loan Size............................................ $101,971
- -------- * Represents two bulk purchases by ICH of $7.3 million and $10.2 million in February 1997 from ICIFC, the conduit operations of IMH. The $7.3 million bulk purchase consisted of Commercial Mortgages originated by a company with which William D. Endresen was an affiliate. The credit quality of the loans originated or purchased by ICCC will vary depending upon the specific program under which such loans are purchased. The following table sets forth the geographic distribution of the Company's Commercial Mortgage purchases:
PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 ----------------------------------- AGGREGATE % OF AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE ----------------- ----------------- (DOLLARS IN MILLIONS) Arizona................................ $10.2 58.4% California............................. 7.3 41.6 ----- ----- Total................................ $17.5 100.0% ===== =====
For the three months ended March 31, 1997, 58% and 42% of the Commercial Mortgages purchased by the Company were secured by property located in Arizona and California, respectively. ICCC's Commercial Mortgage origination and purchase activities are expected to focus on those regions of the country where higher volumes of Commercial Mortgages are originated, including Arizona, California, Colorado, Florida, Illinois, Maryland, New Jersey, New York, Oregon, Texas and Washington. The highest concentration of Commercial Mortgages originated or purchased by ICCC are expected to relate to properties located in California because of the generally higher property values and mortgage loan balances prevalent there. ICCC will generally purchase Commercial Mortgages on a "servicing-released" basis rather than on a "servicing-retained" basis due to its belief that control over the servicing and collection functions with respect to such Commercial Mortgages is important to the realization of a satisfactory return thereon. In connection therewith, the Company has contracted with Westco and Wendover Funding for the performance of such 58 servicing functions. As part of this process, the Company may in the future form a separate collection group to assist sub-servicers in the servicing of these Commercial Mortgages. See "--Servicing." PRICING ICCC sets purchase prices at least once every business day for Commercial Mortgages it originates through its Conduit Operations based on prevailing market conditions. Different prices are established for the various types of Commercial Mortgages and rate-lock periods. ICCC's standard pricing is based on factors such as the anticipated price it would receive upon sale or securitization of such Commercial Mortgages, the anticipated interest spread realized during the accumulation period, the targeted profit margin and the anticipated issuance, credit enhancement and ongoing administrative costs associated with such sale or securitization. The credit enhancement cost component of ICCC's pricing is established for individual Commercial Mortgages or pools of Commercial Mortgages based upon the characteristics of such loans or loan pools. As the characteristics of the Commercial Mortgages or pools of Commercial Mortgages vary, this cost component is correspondingly adjusted upward or downward to reflect such variation. ICCC's adjustments are reviewed periodically by management to reflect changes in the cost of credit enhancements. "--Securitization and Sale Process." Following the issuance of a rate-lock, ICCC is subject to the risk of interest rate fluctuations and enters into hedging transactions to diminish such risk. Hedging transactions may include mandatory or optional forward sales of Commercial Mortgages or CMBSs, interest rate caps, floors and swaps, mandatory forward sales, mandatory or optional sales of futures and other financial futures transactions including U.S. Treasury obligations. The nature and quantity of hedging transactions are determined by the Company based on various factors, including market conditions and the expected volume of Commercial Mortgage purchases. Gains and losses on hedging transactions are recorded as incurred. UNDERWRITING AND QUALITY CONTROL Origination and Purchase Guidelines. ICCC has developed comprehensive purchase guidelines for the origination or purchase of Commercial Mortgages by the Conduit Operations. Subject to certain exceptions, each Commercial Mortgage originated or purchased must conform to program guidelines with respect to, among other things, loan amount, type of property, loan-to-value ratio, type and amount of insurance, credit history of the borrower, DSCRs, sources of funds, appraisals and loan documentation. ICCC also performs a legal documentation review prior to the origination or purchase of any Commercial Mortgage. Additionally, for Commercial Mortgages that are underwritten by contract underwriters, ICCC does not perform a full underwriting review prior to origination or purchase, but instead relies on the credit review and analysis performed by the contract underwriter, as well as its own pre-purchase eligibility process to ensure that the loan meets the program acceptance guidelines and a post-purchase quality control review. Underwriting Methods. Commercial Mortgages have maximum loan amounts and LTV's and minimum DSCRs which are determined from time to time by the executive committee of ICCC. The DSCR for any Commercial Mortgage is the ratio of net operating income produced by the related mortgaged property to the monthly payment due from the borrower on such property, in most cases as underwritten by the related originator and verified by the appraiser, to the amounts of principal and interest due under such Commercial Mortgages. Generally, net operating income for a mortgaged property equals the operating revenues for such mortgaged property minus its operating expenses and replacement reserves, but without giving effect to debt service, depreciation, non-recurring capital expenditures, tenant improvements, leasing commissions and similar items. Appraisals and field inspections (performed by outside and certified inspectors) and title insurance are required for each Commercial Mortgage. ICCC's underwriting standards under its Commercial Mortgage lending programs are primarily intended to assess the economic value of the mortgaged property and the financial capabilities, credit standing and managerial ability of the borrower. In determining whether a loan should be made, ICCC will consider, among other things, the borrower's management experience, DSCRs, the borrower's overall financial position and the 59 adequacy of such property as collateral for the Commercial Mortgage, and ICCC may also consider the creditworthiness of the borrower, the borrower's income, and liquid assets and liabilities. While the primary consideration in underwriting a Commercial Mortgage is the property securing the Commercial Mortgage, sufficient documentation on the borrower is required to establish the financial strength and ability of the borrower to successfully operate the property and meet its obligations under the note and deed of trust. Generally, Commercial Mortgages from the Condominium Division require recourse against the related borrower in the form of a guarantee. The Commercial Mortgage lending programs require that the property and records relating to the property are inspected to determine the number of units that can be rebuilt under current zoning requirements, the number of buildings on the property, the type of construction materials used, the proximity of the property to natural hazards, flood zones and fire stations, whether there are any environmental factors and whether a tract map has been recorded. The property must front on publicly dedicated and maintained streets with provisions for an adequate and safe ingress and egress. Properties that share an ingress and egress through an easement or private road must have a recorded non-exclusive easement. Recreational facilities and amenities, if any, must be located on site and be under the exclusive control of the owner of the premises. If available, engineering reports concerning the condition of the major building components of the property are reviewed as is a ground lease analysis if the property is on leased ground. Also, the title is reviewed to determine if there are any covenants, conditions and restrictions, easements or reservations of mineral interests in the property. The properties are appraised by independent appraisers approved by ICCC. In addition to the considerations set forth above, with respect to Commercial Mortgages secured by commercial properties, ICCC's underwriting policies typically require that the usage is permitted under local zoning and use ordinances and the utilization of the commercial space is compatible with the property and neighborhood. If the property is an office building, the office building must have a stable occupancy history, must be located in a good office market area and in a conforming neighborhood, must have adequate parking and must be fire sprinkler equipped. Industrial properties must be located in a conforming industrial marketplace and may not be used for the production, storage or treatment of toxic waste. Retail properties must be highly visible and located on a heavily traveled thoroughfare and typically have tenants on term leases. ICCC does not generally make loans secured by a property that has any of the following characteristics; inadequate maintenance or repairs as determined by ICCC, the property is subject to covenants, the property is not to code or the cost of restoring the property to code is prohibitive or existence of or potential for contamination by hazardous toxic materials. ICCC analyzes the financial statements of the borrower to determine the borrower's equity in the mortgaged property and overall capitalization, particularly as it relates to real estate mortgage demands on equity. If the borrower's holdings are heavily encumbered so that the debt service requirements consume a high percentage of the rental income from the mortgaged property, or consist substantially of unimproved or underimproved properties having little or no gross income, ICCC analyzes whether the borrower will be able to meet all of the mortgaged property's loan obligations (expenses, debt service and equity return). In addition to DSCRs, the borrower's income and expense ratios may be calculated. In addition to the income from the mortgaged property, ICCC also evaluates the borrower's income as a possible secondary source of repayment for the Commercial Mortgage. In analyzing such income, ICCC considers, among other factors, employment or business history of borrower and the stability and seasonality of the borrower's current employment or business. If the borrower derives income from rental property, ICCC evaluates the experience of the manager of the rental property, type of tenancy and the cash flow generated by the borrower's real estate portfolio. ICCC also reviews the borrower's credit history to determine the borrower's ability and willingness to repay debts. In general, ICCC will not grant a Commercial Mortgage to a borrower who has a history of slow payments or delinquencies, bankruptcies, collection actions, foreclosures or judgments against the borrower without adequate explanations for each exception. 60 SECURITIZATION AND SALE PROCESS General. The Conduit Operations will utilize warehouse line agreements with ICH to finance the origination and purchase of Commercial Mortgages. For a description of the terms of the Company's existing warehouse line agreement, see "Management's Discussion and Analysis of Financial Conditions and Results of Operations--Liquidity and Capital Resources." When a sufficient volume of Commercial Mortgages with similar characteristics has been accumulated, generally $100 million to $200 million, ICCC will securitize them through the issuance of a CMBS in the form of a REMIC or resell them in bulk whole loan sales. It is anticipated that the period between the time ICCC commits to purchase a Commercial Mortgage and the time it sells or securitizes Commercial Mortgages will generally range from 90 to 180 days, depending on certain factors, including the length of the purchase commitment period, the loan volume by product type and the securitization process. Any decision to form a REMIC or to sell Commercial Mortgages in bulk by ICCC is influenced by a variety of factors. REMIC transactions are generally accounted for as sales of the Commercial Mortgages and can eliminate or minimize any long-term residual investment in such loans. REMIC securities consist of one or more classes of "regular interests" and a single class of "residual interest." The regular interests are tailored to the needs of investors and may be issued in multiple classes with varying maturities, average lives and interest rates. These regular interests are predominantly senior securities but, in conjunction with providing credit enhancement, may be subordinated to the rights of other regular interests. The residual interest represents the remainder of the cash flows from the Commercial Mortgages (including, in some instances, reinvestment income) over the amounts required to be distributed to the regular interests. In some cases, the regular interests may be structured so that there is no significant residual cash flow, thereby allowing ICCC to sell its entire interest in the Commercial Mortgages. As a result, in some cases, all of the capital originally invested in the Commercial Mortgages by the Company is redeployed in the Conduit Operations. As part of its operations, the Company may retain regular and residual interests on a short-term or long-term basis. Credit Enhancement. Any REMICs or CMOs created by the Conduit Operations or the Long-Term Investment Operations are expected to be structured so that one or more of the classes of such securities are rated investment grade by at least one nationally recognized rating agency. In contrast to Agency Certificates in which the principal and interest payments are guaranteed by the U.S. government or an agency thereof, securities created by Conduit Operations or the Long-Term Investment Operations do not benefit from any such guarantee. The ratings for the Conduit Operations' CMBSs or the Long-Term Investment Operations' CMOs are based upon the perceived credit risk by the applicable rating agency of the underlying Commercial Mortgages, the structure of the securities, and the associated level of credit enhancement. Credit enhancement is designed to provide protection to the security holders in the event of borrower defaults and other losses including those associated with fraud or reductions in the principal balances or interest rates on Commercial Mortgages as required by law or a bankruptcy court. The Conduit Operations or the Long-Term Investment Operations may utilize multiple forms of credit enhancement, including special hazard insurance, letters of credit, surety bonds, over-collateralization and subordination or any combination thereof. In determining whether to provide credit enhancement through subordination or other credit enhancement methods, the Conduit Operations and the Long-Term Investment Operations take into consideration the costs associated with each method. Each series of CMBSs is typically fully payable from the mortgage assets underlying such series, and the recourse of investors is limited to such assets and any associated credit enhancement features, such as senior/subordinated structures. To the extent the Company holds subordinated securities, a form of credit enhancement, the Company generally bears all losses prior to the related senior security holders. Generally, any losses in excess of the credit enhancement obtained are borne by the security holders. Except in the case of a breach of the standard representations and warranties made by the Company when Commercial Mortgages are securitized, such securities are non-recourse to the Company. Typically, the Company has recourse to the 61 correspondents of Commercial Mortgages for any such breaches, but there are no assurances of the correspondent's abilities to honor their respective obligations. Ratings of CMBSs are based primarily upon the characteristics of the pool of underlying Commercial Mortgages and associated credit enhancements. A decline in the credit quality of such pools (including delinquencies and/or credit losses above initial expectations), or of any third-party credit enhancer, or adverse developments in general economic trends affecting real estate values or the mortgage industry, could result in downgrades of such ratings. HEDGING The Company will conduct certain hedging activities in connection with both its Long-Term Investment Operations, only with respect to its liabilities, and its Conduit Operations. Long-term Investment Operations. To the extent consistent with ICH's election to qualify as a REIT, the Company follows a hedging program intended to protect against interest rate changes and to enable the Company to earn net interest income in periods of generally rising, as well as declining or static, interest rates. Specifically, the Company's hedging program is formulated with the intent to offset the potential adverse effects resulting from (1) interest rate adjustment limitations on its Commercial Mortgages and CMBSs and (2) the differences between the interest rate adjustment indices and interest rate adjustment periods of its adjustable rate Commercial Mortgages secured by such loans and related borrowings. As part of its hedging program, the Company also monitors on an ongoing basis the prepayment risks that arise in fluctuating interest rate environments. The Company's hedging program encompasses a number of procedures. The Company will structure its borrowing agreements to have a range of different maturities (although substantially all will have maturities of less than one year). As a result, the Company adjusts the average maturity of its borrowings on an ongoing basis by changing the mix of maturities as borrowings come due and are renewed. In this way, the Company minimizes any differences between interest rate adjustment periods of Commercial Mortgages and related borrowings that may occur due to prepayments of Commercial Mortgages or other factors. The Company may occasionally purchase interest rate caps to limit or partially offset adverse changes in interest rates associated with its borrowings. In a typical interest rate cap agreement, the cap purchaser makes an initial lump sum cash payment to the cap seller in exchange for the seller's promise to make cash payments to the purchaser on fixed dates during the contract term if prevailing interest rates exceed the rate specified in the contract. In this way, the Company generally hedges as much of the interest rate risk arising from lifetime rate caps on Commercial Mortgages and from periodic rate and/or payment caps as the Company determines is in the best interests of the Company, given the cost of such hedging transactions and the need to maintain ICH's status as a REIT. Such periodic caps on the Company's Commercial Mortgages may also be hedged by the purchase of mortgage derivative securities. Mortgage derivative securities can be effective hedging instruments in certain situations as the value and yields of some of these instruments tend to increase as interest rates rise and tend to decrease in value and yields as interest rates decline, while the experience for others is the converse. The Company intends to limit its purchases of mortgage derivative securities to investments that qualify as Qualified REIT Assets or Qualified Hedges so that income from such investments will constitute qualifying income for purposes of the 95% and 75% gross income tests. To a lesser extent, the Company, through its Conduit Operations, may enter into interest rate swap agreements, buy and sell financial futures contracts and options on financial futures contracts and trade forward contracts as a hedge against future interest rate changes; however, the Company will not invest in these instruments unless the Company and the Manager are exempt from the registration requirements of the Commodity Exchange Act or otherwise comply with the provisions of that Act. The REIT provisions of the Code may restrict the Company's ability to purchase certain instruments and may severely restrict the Company's ability to employ other strategies. See "Federal Income Tax Considerations." In all its hedging transactions, the Company deals only with counterparties that the Company believes are sound credit risks. 62 Conduit Operations. In conducting its Conduit Operations, ICCC will be subject to the risk of rising mortgage interest rates between the time it commits to purchase Commercial Mortgages at a fixed price and the time it sells or securitizes those Commercial Mortgages. To mitigate this risk, ICCC will enter into transactions designed to hedge interest rate risks, which may include mandatory and optional forward selling of Commercial Mortgages or CMBSs' interest rate caps, floors and swaps, and buying and selling of futures and options on futures and U.S. Treasury obligations. The nature and quantity of these hedging transactions will be determined by the management of ICCC or RAI based on various factors, including market conditions and the expected volume of Commercial Mortgage purchases. Costs and Limitations. The Company has implemented a hedging program designed to provide a level of protection against interest rate risks. However, an effective hedging strategy is complex, and no hedging strategy can completely insulate the Company from interest rate risks. Moreover, as noted above, certain of the federal income tax requirements that ICH must satisfy to qualify as a REIT limit the Company's ability to fully hedge its interest rate risks. The Company monitors carefully, and may have to limit, its hedging strategies to assure that it does not realize excessive hedging income or hold hedging assets having excess value in relation to total assets, which would result in ICH's disqualification as a REIT or, in the case of excess hedging income, the payment of a penalty tax for failure to satisfy certain REIT income tests under the Code, provided such failure was for reasonable cause. See "Federal Income Tax Considerations." In addition, hedging involves transaction and other costs, and such costs increase dramatically as the period covered by the hedging protection increases and also increase in periods of rising and fluctuating interest rates. Therefore, the Company may be prevented from effectively hedging its interest rate risks, without significantly reducing the Company's return on equity. SERVICING The Company currently purchases all of its Commercial Mortgages on a "servicing released" basis and thereby acquires the servicing rights. Commercial Mortgages purchased on a servicing released basis are unencumbered by any obligation on the part of the party purchasing the mortgages to pay a fee to a third party to service the Commercial Mortgages. The rights of any party to service Commercial Mortgages for a fee are commonly referred to as "commercial mortgage servicing rights" or "CMSRs." The Company has established guidelines for the servicing of Commercial Mortgages and for monitoring the performance of other loan servicers which service Commercial Mortgages for the Company. Servicing includes collecting and remitting loan payments, making required advances, accounting for principal and interest, holding escrow or impound funds for payment of taxes and insurance, if applicable, making required inspections of the mortgaged property, contacting delinquent borrowers and supervising foreclosures and property dispositions in the event of unremedied defaults in accordance with the Company's guidelines. The Company subcontracts all of its servicing obligations under Commercial Mortgages purchased on a "servicing released basis" or originated pursuant to sub-servicing agreements (the "Sub-Servicing Agreements") with terms that are in accordance with ICCC's guidelines, the Commercial Mortgage documents, customary and usual standards for servicers of Commercial Mortgages and applicable laws. Commercial Mortgage servicing fees paid to these sub- servicers generally range from 0.08% to 0.30% per annum on the declining principal balances of the loans sub-serviced. Each sub-servicer is required to pay all expenses related to the performance of its duties under the Sub- Servicing Agreement. Each Sub-Servicing Agreement is cancelable by either party upon giving notice. The Company believes that the terms of the Sub- Servicing Agreements are comparable to industry standards. The Company may terminate a Sub-Servicing Agreement with any sub-servicer upon the happening of one or more of the events specified in the Sub-Servicing Agreement. Such events generally relate to the sub-servicer's proper and timely performance of its duties and obligations under the Sub-Servicing Agreement and the sub-servicer's financial stability. In addition, the Company will have the right to terminate any Sub-Servicing Agreement with respect to any or all of the Commercial Mortgages subserviced thereunder, without cause upon 63 30 to 90 days' notice and may require a termination fee that is competitive with that which is obtainable generally in the industry. If required, the termination fee will be based on the aggregate outstanding principal amount of the Commercial Mortgages then serviced under the Sub-Servicing Agreement. Each Sub-Servicing Agreement will provide that the subservicer may not assign any of its rights or obligations with respect to the Commercial Mortgages serviced for the Company without the Company's consent. With respect to Commercial Mortgages that support CMOs or CMBSs, the Company may not be able to terminate a sub-servicer without the approval of the trustee or bond insurer for such securities. In the future, ICCC may offer its correspondents of Commercial Mortgages the opportunity to retain commercial mortgage servicing rights to the Commercial Mortgages sold by them to the Company but only to the extent that it is consistent with ICH's classification as a REIT. Each servicer will enter into an agreement with the Company to service the Commercial Mortgages for ICCC in accordance with ICCC's guidelines, the Commercial Mortgage documents, customary and usual standards for servicers of Commercial Mortgages and applicable laws (the "Servicing Agreements"). The Company believes that the terms of these Servicing Agreements will be comparable to industry standards. Commercial mortgage servicing fees payable to the servicers under the Servicing Agreements will generally range from 0.125% to 0.375% per annum on the declining principal balances of the Commercial Mortgages serviced. As additional compensation, each servicer will retain any late payment charges collected from borrowers and assumption and other ancillary fees collected from borrowers in connection with the servicing of the Commercial Mortgages. Additionally, each servicer may retain any benefit derived from the interest earned on principal and interest payments held between the date of receipt and the date of remittance to the Company and from interest earned on tax and insurance impound funds to the extent not payable to the borrowers. Each servicer will be required to pay all of its expenses related to the performance of its duties under the Servicing Agreement. The servicer will be required to make advances of principal and interest, taxes and required insurance premiums that are not collected from borrowers with respect to any Commercial Mortgage, only if the servicer determines that such advances are recoverable from the mortgagor, insurance proceeds or other sources with respect to such Commercial Mortgage. If such advances are made, the servicer generally will be reimbursed prior to the Company receiving the remaining proceeds. The servicer also will be entitled to reimbursement by the Company for expenses incurred by it in connection with the liquidation of defaulted Commercial Mortgages and in connection with the restoration of mortgaged property. If claims are not made or paid under applicable insurance policies or if coverage thereunder has ceased, the Company suffers a loss to the extent that the proceeds from liquidation of the mortgaged property, after reimbursement of the servicer's expenses in the sale, are less than the principal balance of the related Commercial Mortgage. The servicer will be responsible to the Company for any loss suffered as a result of the servicer's failure to make and pursue timely claims or as a result of actions taken or omissions by the servicer which cause the policies to be canceled by the insurer. Each servicer will be required to represent and warrant that the Commercial Mortgages it services comply with any loan servicing guidelines promulgated by the Company and agree to repurchase, at the request of the Company, any Commercial Mortgage it services in the event that the servicer fails to make such representations or warranties or any such representation or warranty is untrue. At March 31, 1997, there were no delinquencies on those Commercial Mortgages comprising the Company's servicing portfolio. 64 During periods of declining interest rates, prepayments on Commercial Mortgages increase as borrowers look to refinance at lower rates, resulting in a decrease in the value of the Commercial Mortgage servicing portfolio. Commercial Mortgages with higher interest rates are more likely to result in prepayments. For a discussion regarding how prepayments may affect the Company's operations, see "Risk Factors--Risks Related to Operations--Risk of Decrease in Net Interest Income Due to Interest Rate Fluctuations; Prepayment Risks of Commercial Mortgages." The following table sets forth certain information regarding the number of and aggregate principal balance of the Commercial Mortgages serviced by the Company, including both fixed and adjustable rate Commercial Mortgages, at various mortgage interest rates.
PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 ------------------------------------------- NUMBER AGGREGATE WEIGHTED AVERAGE OF LOANS PRINCIPAL BALANCE INTEREST RATE -------- ----------------- ---------------- (DOLLARS IN MILLIONS) Less than 5%........................ -- -- -- 5.00-5.49........................... -- -- -- 5.50-5.99........................... -- -- -- 6.00-6.49........................... -- -- -- 6.50-6.99........................... -- -- -- 7.00-7.49........................... -- -- -- 7.50-7.99........................... -- -- -- 8.00-8.49........................... -- -- -- 8.50-8.99........................... 152 $10.2 8.63% 9.00-9.49........................... 20 7.3 9.00% 9.50-9.99........................... -- -- -- 10.00-10.49......................... -- -- -- 10.50-10.99......................... -- -- -- 11.00-11.49......................... -- -- -- 11.50 +............................. -- -- -- --- ----- Total........................... 172 $17.5 8.78% === =====
The following table sets forth the geographic distribution of the Company's servicing portfolio.
PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 -------------------------------------------- NUMBER AGGREGATE % OF AGGREGATE OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE -------- ----------------- ----------------- (DOLLARS IN MILLIONS) Arizona............................ 152 $10.2 58.4% California......................... 20 7.3 41.6 --- ----- ----- Total.......................... 172 $17.5 100.0% === ===== =====
The Commercial Mortgages purchased by the Company since its inception have not been outstanding for any periods commencing earlier than January 1997. Consequently, the Company's delinquency and foreclosure experience to date may not be indicative of future results. In the future, the Company expects to issue CMBSs or CMOs backed by the Commercial Mortgages it originates or purchases through its Conduit Operations. When CMBSs or CMOs are issued, a trust is created, and Commercial Mortgages are deposited into the trust for the benefit of the holders of the securities. When the trust is created, the loan servicing function for the Commercial Mortgages deposited into the trust are commonly divided into two areas of responsibility: master servicing and special servicing. The trustee and the depositor of the Commercial Mortgages enter into an agreement, typically called a pooling and servicing agreement, with one or more parties who will assume the responsibilities for master servicing and special servicing. Master 65 servicing generally includes all of the servicing activities associated with non-defaulted Commercial Mortgages which typically includes collecting and remitting loan payments, making required advances, accounting for principal and interest, holding escrow impound or reserve funds for payment of taxes and insurance, if applicable, making inspections or improvements of the mortgaged property, and remitting funds and reporting to the trustee. Special servicing generally includes managing all loan default matters and other more complicated issues associated with the servicing of the loans. Special servicing generally includes contacting delinquent borrowers and supervising foreclosures and property dispositions in the event of borrower defaults which are not remedied. Special servicing also includes overseeing condemnation issues, insurance claims for casualty losses on collateral property and other matters of this nature. ICCC will contract with qualified Commercial Mortgage master servicers to assume the master servicing role in these securitizations and ICCC expects to act as special servicer. The Company believes that acting as special servicer will allow it to monitor and manage those matters of significant risk associated with the Commercial Mortgages. In this manner, the Company believes it will be best positioned to protect any beneficial interest it may retain in the trusts it creates. However, the Company reserves the right to act as either the master servicer, the special servicer, both or neither in the future. In addition, ICCC acts as the servicer for all loans purchased by the Long-Term Investment Operations. With respect to its function as a servicer for the Long-Term Investment Operations, ICCC and ICH entered into a Servicing Agreement effective in February 1997 having terms substantially similar to those described above. When ICCC purchases Commercial Mortgages that include the associated servicing rights or originates Commercial Mortgages, the allocated cost of the servicing rights will be reflected on its financial statements as CMSRs. CMSRs will be amortized in proportion to, and over the period of, expected future net servicing income. SFAS No. 125 requires that a portion of the cost of originating or purchasing a mortgage loan be allocated to the mortgage loan servicing rights based on its fair value relative to the loan as a whole. To determine the fair value of the servicing rights created, ICCC 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, ICCC incorporates assumptions that it believes market participants would use in estimating future net servicing income which include estimates of the cost of servicing or subservicing, an inflation rate, ancillary income per Commercial Mortgage, a prepayment rate, loss severity, a default rate and a discount rate commensurate with the risks involved. CMSRs are subject to some degree of volatility in the event of unanticipated prepayments or defaults. Prepayments in excess of those anticipated at the time CMSRs are recorded could result in a decline in the fair value of the CMSRs below their carrying value requiring a provision to increase the CMSRs' valuation allowance. The rate of prepayment of Commercial Mortgages 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 Commercial Mortgage prepayment rates may vary depending on the particular type of Commercial Mortgage. 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 ICCC's Commercial Mortgages, and other considerations. There can be no assurance of the accuracy of the Company's prepayments estimates. If actual prepayments with respect to Commercial Mortgages serviced occur more quickly than were projected at the time such Commercial Mortgages were sold, the carrying value of the CMSRs may have to be reduced through a provision recorded to increase the CMSRs' valuation allowance in the period the fair value declined below the CMSRs' carrying value. If actual prepayments with respect to Commercial Mortgages occur more slowly than estimated, the carrying value of CMSRs would not increase, although total income would exceed previously estimated amounts and the related valuation allowances, if any, could be unnecessary. REGULATION The rules and regulations applicable to the Conduit Operations, among other things, prohibit discrimination and establish underwriting guidelines that include provisions for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts. Commercial Mortgage origination and purchase activities are subject to, among other laws, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act and 66 the Real Estate Settlement Procedures Act and the regulations promulgated thereunder that prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. Additionally, there are various state and local laws and regulations affecting Conduit Operations. ICCC is licensed in those states requiring such a license. Mortgage operations also may be subject to applicable state usury statutes. The Company is presently in material compliance with all material rules and regulations to which it is subject. COMPETITION In originating Commercial Mortgages and issuing CMBSs, the Company will compete 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. CMBSs issued by the Conduit Operations and the Long-Term Investment Operations will face competition from other investment opportunities available to prospective investors. The Company will face competition in its Conduit Operations from other financial institutions, including but not limited to banks and investment banks. Many of the institutions with which the Company will compete in its Conduit Operations have significantly greater financial resources than the Company. 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 the Company's Commercial Mortgages compete with the mortgaged properties of such types to attract residents, retail correspondents, tenants and customers. The leasing of real estate is highly competitive. The principal means of competition are price, location and the nature and condition of the facility to be leased. A borrower under a Commercial Mortgages competes with all lessors and developers of comparable types of real estate in the area in which the mortgaged property is located. Such lessors or developers could have lower rentals, lower operating costs, more favorable locations or better facilities. While a borrower under a Commercial Mortgage may renovate, refurbish or expand the mortgaged property to maintain it and remain competitive, such renovation, refurbishment or expansion may itself entail significant risk. Increased competition could adversely affect income from 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. EMPLOYEES As of March 31, 1997, ICCC employed nine persons. The Company believes that relations with its employees are good. The Company is not a party to any collective bargaining agreement. FACILITIES Pursuant to the Management Agreement, RAI will contract with IMH to provide space for the Company's executive offices and administrative facilities at IMH's executive offices in Santa Ana Heights, California. ICCC's executive offices and administrative facilities occupy approximately 3,500 square feet of space in Irvine, California at an aggregate monthly rental of approximately $7,000. Management believes that as the Company grows, it may require additional space and that alternate space at comparable rental rates is available, if necessary. 67 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. DIRECTORS AND EXECUTIVE OFFICERS The Company was incorporated in the State of Maryland on February 3, 1997. The following table sets forth certain information with respect to the directors and executive officers of ICH and ICCC:
NAME AGE POSITION ---- --- -------- Joseph R. Tomkinson (S)... 49 Chairman of the Board and Chief Executive Officer of ICH and Chairman of the Board and Chief Executive Officer of ICCC William S. Ashmore........ 47 President and Chief Operating Officer of ICH, Executive Vice President and Director of ICCC Richard J. Johnson........ 35 Senior Vice President, Chief Financial Officer, Treasurer and Secretary of ICH and ICCC and Director of ICCC William D. Endresen....... 42 Senior Vice President of ICH and President and Director of ICCC Mary C. Glass-Schannault.. 43 Senior Vice President of ICH and Senior Vice President of ICCC H. Wayne Snavely.......... 55 Director of ICH James Walsh............... 46 Director of ICH Frank P. Filipps 0........ 49 Director of ICH Stephan R. Peers 0........ 44 Director of ICH Thomas J. Poletti+, (S)... 39 Director of ICH Timothy R. Busch+, 0, (S). 42 Director of ICH
- -------- + Unaffiliated Director 0 Member of Audit Committee (S)Member of Compensation Committee JOSEPH R. TOMKINSON has been Chairman of the Board and Chief Executive Officer of ICH and Chairman of the Board and Chief Executive Officer of ICCC since their formation. Mr. Tomkinson has been the Vice Chairman of the Board and Chief Executive Officer of IMH and Chairman of the Board of ICIFC and IWLG since August 1995. Mr. Tomkinson served as President of Imperial Credit Industries, Inc. (Nasdaq-ICII) ("ICII") from January 1992 to February 1996 and, from 1986 to January 1992, he was President of Imperial Bank Mortgage, a subsidiary of Imperial Bank, one of the companies that combined to become ICII in 1992. Mr. Tomkinson has been a Director of ICII since December 1991. From 1984 to 1986, he was employed as Executive Vice President of Loan Production for American Mortgage Network, a privately owned mortgage banker. Mr. Tomkinson brings 22 years of combined experience in real estate, real estate financing and mortgage banking to the Company. WILLIAM S. ASHMORE has been President and Chief Operating Officer of ICH and Executive Vice President and a Director of ICCC since their formation. Mr. Ashmore has been President and Chief Operating Officer of IMH, Executive Vice President and a Director of ICIFC and President and a Director of IWLG since August 1995. In March 1997, Mr. Ashmore became President of ICIFC. From August 1993 to February 1996, he was Executive Vice President and a Director of Secondary Marketing at ICII, having been its Senior Vice President of Secondary Marketing since January 1988. From 1985 to 1987, he was Chief Executive Officer and Vice Chairman of the Board of Century National Mortgage Corporation, a wholesale mortgage banking company. From 1978 to 1985, Mr. Ashmore was President and co-owner of Independent Homes Real Estate Company, which evolved in 1980 into a mortgage banking firm that was sold to Century National Bank in 1985. Mr. Ashmore has over 20 years of combined experience in real estate, real estate financing and mortgage banking. RICHARD J. JOHNSON has been Senior Vice President, Chief Financial Officer, Treasurer and Secretary of ICH and ICCC and a Director of ICCC since their formation. Mr. Johnson has been Senior Vice President, Chief Financial Officer, Treasurer and Secretary of IMH and ICIFC since August 1995, and a Director of ICIFC since March 1996. From September 1992 to March 1995, Mr. Johnson was Senior Vice President and Chief Financial Officer of ICII. From November 1989 to September 1992, Mr. Johnson was Vice President and Controller of 68 ICII. From February 1988 to October 1989, he was Vice President and Chief Financial Officer of Bayhill Service Corporation, a mortgage banking company, and Vice President of Capital Savings and Loan, the parent of Bayhill Service Corporation. From January 1987 to February 1988, Mr. Johnson was Vice President of Finance for Merrill Lynch Huntoon Paige, Inc., a mortgage banking subsidiary of Merrill Lynch Capital Markets. Mr. Johnson is a Certified Public Accountant. WILLIAM D. ENDRESEN has been Senior Vice President of ICH and President and Director of ICCC since their formation. From 1995 through February 1997, Mr. Endresen was the Chairman and a Director of American Capital Resource, Inc., a commercial mortgage banking company which originated and closed bulk condominium and multi-family transactions in the Western United States. Mr. Endresen was President of Butterfield Mortgage Corporation from May 1993 through 1995 and developed, originated and closed numerous bulk condominium and multi-family transactions. From 1987 to 1992, Mr. Endresen was Director of Acquisitions and Project Finance for Monnig Development, Inc., a Southern California based real estate development company. Mr. Endresen has more than 24 years of combined experience in real estate, real estate financing and commercial mortgage banking. MARY C. GLASS-SCHANNAULT has been Senior Vice President of each of ICH and ICCC since their formation. Ms. Glass-Schannault has been Vice President of IMH and Senior Vice President, Operations of ICIFC and IWLG since August 1995. From April 1995 through November 1996, Ms. Glass-Schannault was the Senior Vice President and Managing Director of Imperial Capital Markets Group, a division of ICII, and from February 1993 to April 1995, she was Senior Vice President of ICIFC, a division of ICII. From 1991 through 1993, Ms. Glass- Schannault acted as a mortgage banking consultant. From 1990 through 1991, she was an Executive Vice President at PriMerit Mortgage Corporation. From 1988 to 1990, Ms. Glass-Schannault was President of SCS Mortgage. From September 1984 through September 1988, Ms. Glass-Schannault was Senior Vice President of Concor Financial Services. H. WAYNE SNAVELY has been a Director of ICH since its formation. He has been Chairman of the Board and Chief Executive Officer of ICII since December 1991. Mr. Snavely is also Chairman of the Board of Southern Pacific Funding Corporation, an affiliate of ICII, and IMH. He has been a Director of Imperial Bancorp and Imperial Bank since 1993, and was also a Director of Imperial Bank from 1975 to 1983. From 1983 to February 1991, Mr. Snavely served as Executive Vice President of Imperial Bancorp and Imperial Bank with direct management responsibility for the following bank subsidiaries and divisions: Imperial Bank Mortgage, Southern Pacific Thrift and Loan Association, Imperial Trust Company, Wm. Mason & Company, Imperial Ventures, Inc. and The Lewis Horwitz Organization. From 1983 through 1986, Mr. Snavely was employed as Chief Financial Officer of Imperial Bancorp and Imperial Bank. JAMES WALSH has been a Director of ICH since February 1997 and a Director of IMH since August 1995. Mr. Walsh is an Executive Vice President of Walsh Securities, Inc. where he directs mortgage loan production, sales and securitization. Mr. Walsh was an executive of Donaldson, Lufkin and Jenrette Securities Corporation from January 1989 through March 1996 where he oversaw residential mortgage securitization, servicing brokerage and mortgage banking services. From February 1987 to December 1988, Mr. Walsh was an executive in the mortgage banking department at Bear Stearns & Company. From December 1985 to February 1987, Mr. Walsh was a senior banking officer at Carteret Savings Bank. FRANK P. FILIPPS has been a Director of ICH since February 1997 and a Director of IMH since August 1995. Mr. Filipps was elected President of CMAC Investment Corporation and Chairman, President and Chief Executive Officer of Commonwealth Mortgage Assurance Company ("CMAC") in January 1995. Mr. Filipps joined CMAC in 1992 as Senior Vice President and Chief Financial Officer, where he was responsible for the company's financial, investment and data processing operations, as well as the legal and human resources functions. In 1994, Mr. Filipps was promoted to Executive Vice President and Chief Operating Officer for both CMAC Investment Corporation and CMAC, where his additional responsibilities included the company's sales, marketing, underwriting and risk management. In 1975, Mr. Filipps joined American International Group and, from 1989 to 1992, he was Vice President and Treasurer. Prior to that, he was a Second Vice President for Chase Manhattan Bank, N.A., in New York. 69 STEPHAN R. PEERS has been a Director of ICH since February 1997 and a Director of IMH since October 1995. Since April 1993, Mr. Peers has been an Executive Vice President of International Strategic Finance Corporation, Ltd., where he performs corporate finance services for overseas issuers. From April 1989 to April 1993, Mr. Peers was a Vice President in corporate finance at Montgomery Securities where he specialized in financial services institutions. From March 1987 to March 1989, Mr. Peers was a Vice President at The First Boston Corporation in mortgage finance specializing in mortgage related products. Mr. Peers has served as a Managing Director of Resource Bancshares Corporation since August 1995. THOMAS J. POLETTI has been a Director of ICH since March 1997. Mr. Poletti has been with the law firm of Freshman, Marantz, Orlanski, Cooper & Klein since 1983 and a partner of the firm since 1989. Freshman, Marantz, Orlanski, Cooper & Klein acts as counsel to the Company and IMH. See "Certain Transactions" and "Legal Matters." TIMOTHY R. BUSCH has been a director of ICH since March 1997. Since November 1978, Mr. Busch has been an attorney in private practice. Since October 1984, Mr. Busch has been the President and Chief Executive Officer of T. R. Busch Realty Corporation, a licensed real estate corporation, which filed a voluntary petition pursuant to Chapter 11 of the Bankruptcy Code on February 22, 1994; this corporation has been operating outside of bankruptcy since February 20, 1995. Mr. Busch is also President and Chief Executive Officer of TRB Management, Inc., a California corporation, which is the sole general partner of Mercado del Sol Investors Limited Partners, an Arizona limited partnership. Mercado del Sol Investors Limited Partnership filed a voluntary petition pursuant to Chapter 11 of the Bankruptcy Code on August 12, 1993. All directors are elected at each annual meeting of the Company's stockholders to serve until the next annual meeting of stockholders and until their successors are elected and qualify. Replacements for vacancies occurring among the Unaffiliated Directors will be elected by a majority vote of the remaining Directors, including a majority of the Unaffiliated Directors. All officers are elected and may be removed by the Board of Directors. The Company pays an annual director's fee to each Unaffiliated Director equal to $20,000 and reimburses such Directors' costs and expenses for attending Board meetings. LIMITATION OF LIABILITY AND INDEMNIFICATION 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 the MGCL. 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, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, real estate investment trust, 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 status as a present or former director or officer 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, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, real estate investment trust, 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 70 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 or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) 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 for expenses. In addition, the MGCL requires the Company, as a condition to advancing expenses, to obtain (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 Company and (b) a written undertaking by him or on his behalf to repay the amount paid or reimbursed by the Company if it shall ultimately be determined that the standard of conduct was not met. Insofar as indemnification by the Company for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to indemnity agreements or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. EXECUTIVE COMPENSATION On the closing of this Offering, William D. Endresen will enter into a five- year employment agreement at an annual salary of $120,000, subject to adjustment for inflation. Mr. Endresen owns 12,000 shares of ICH Common Stock and on the closing of this Offering will be granted stock options to purchase an additional 50,000 shares of ICH Common Stock with a per share exercise price equal to the Subscription Price. See "--Stock Option and Awards Plan," "Certain Transactions" and "Principal Stockholders." Joseph R. Tomkinson, William S. Ashmore, Richard J. Johnson and Mary C. Glass-Schannault, who are executive officers of ICH are also officers of IMH and ICIFC and will become officers of RAI upon the closing of the Offering. These officers have modified their employment agreements with ICIFC to also become officers of the Manager (and of ICH and ICCC) upon the closing of this Offering. The Manager will agree to cause each of its officers to devote as much of his or her time to the operations of the Company as is reasonably necessary. ICIFC will reimburse the Manager which will reimburse ICIFC on a dollar for dollar basis (includes the service charge referenced below), for the actual cost of providing the services of these officers to the Company based upon the compensation payable to them by ICIFC, plus a 15% service charge. The following is the amount of compensation payable by ICIFC to Mssers. Tomkinson, Ashmore, and Johnson and Ms. Glass-Schannault for the year ending December 31, 1997.
NAME OF INDIVIDUAL CASH COMPENSATION ------------------ --------------------- Joseph R. Tomkinson.... $300,000 (1)(2)(3)(4) William S. Ashmore..... $225,000 (1)(2)(3)(4) Richard J. Johnson..... $112,500 (1)(3)(4) Mary C. Glass- Schannault............ $ 92,930 (1)(3)
71 - -------- (1) Each of the persons in the above table is entitled to be paid a quarterly bonus equal to the aggregate dividend such person would have received from the Company on all shares of Common Stock underlying unexercised stock options held by such person which were outstanding as of the date of IMH's initial public offering and on the date of payment of said bonus, provided however that quarterly bonuses will be paid for the next four calendar quarters thereafter only if the dividend that would be payable by the Company on shares of its Common Stock for the subject quarter after payment of all such quarterly bonuses equals or exceeds fifteen percent (15%) (on an annualized basis) of $13.00. Such persons will not be required to refund any portion of such bonuses previously earned regardless of the level of dividends in subsequent quarters. For the year ended December 31, 1996 Messrs. Tomkinson, Ashmore and Johnson and Ms. Glass-Schannault received bonuses of $221,350, $116,500, $58,250 and $58,250, respectively. (2) Messrs. Tomkinson and Ashmore are each entitled to performance and profitability bonuses, in no event to exceed their respective base salaries. For the year ended December 31, 1996, Messrs. Tomkinson and Ashmore received bonuses of $249,847 and $121,378, respectively. (3) Messrs. Tomkinson, Ashmore, and Johnson and Ms. Glass-Schannault own 76,800, 76,800, 62,400 and 12,000 shares of ICH Common Stock, respectively, and on the closing of this Offering each of them will be granted stock options to acquire 10,000 shares of ICH Common Stock at a per share exercise price equal to the Subscription Price. See "--Stock Option and Awards Plan," "Certain Transactions" and "Principal Stockholders." (4) RAI is owned 30% by each of Messrs. Tomkinson, Ashmore, and Johnson and 10% by Mr. Snavely. STOCK OPTION AND AWARDS PLAN In April 1997, the Company adopted a 1997 Stock Option and Awards Plan (the "Stock Option and Awards Plan") which provides for the grant of qualified incentive stock options ("ISOs") which meet the requirements of section 422 of the Code, stock options not so qualified ("NQSOs"), deferred stock, restricted stock, performance shares, stock appreciation and limited stock appreciation rights awards ("Awards") and dividend equivalent rights ("DERs"). The purpose of the Stock Option and Awards Plan is to provide a means of performance-based compensation in order to attract and retain qualified personnel and to provide an incentive to others whose job performance affects the Company. The Stock Option and Awards Plan is administered by the Board of Directors or a Committee, appointed by the Board of Directors (the "Administrator"). ISOs may be granted to the officers and key employees of the Company. NQSOs and Awards may be granted to the directors, officers, key employees and agents and consultants of the Company, any of its subsidiaries or parent corporation, of RAI, and to the directors, officers and key employees of ICCC. The Stock Option and Awards Plan provides for granting of DERs in tandem with all options granted under the Stock Option and Awards Plan. Such DERs accrue for the account of the optionee shares of Common Stock upon the payment of cash dividends on outstanding shares of Common Stock. The number of shares accrued is determined by a formula and such shares are currently transferred to the optionee only upon exercise of the related option. The Stock Option and Awards Plan permits DERs to be granted under the Stock Option and Awards Plan with certain characteristics. First, DERs can be issued in "current-pay" form so that payments can be made to the optionee at the same time as dividends are paid to holders of outstanding Common Stock. Second, DERs can be made eligible to participate not only in cash distributions but also distributions of stock or other property made to holders of outstanding Common Stock. Shares of Common Stock accrued for the account of the optionee pursuant to a DER grant may also be made eligible to receive dividends and distributions. Finally, DERs can be made "performance based" by conditioning the right of the holder of the DER to receive any dividend equivalent payment or accrual upon the satisfaction of specified performance objectives. 72 Subject to anti-dilution provisions for stock splits, stock dividends and similar events, the Stock Option and Awards Plan currently authorizes the grant of options to purchase, and Awards of, an aggregate of an estimated 700,000 shares. The shares reserved for issuance pursuant to the Company's Stock Option and Awards Plan will be increased or decreased to an amount equal to 10% of the shares sold in the Offering, subject to a minimum of 400,000 shares. If an option granted under the Stock Option and Awards Plan expires or terminates, or an Award is forfeited, the shares subject to any unexercised portion of such option or Award will again become available for the issuance of further options or Awards under the Stock Option and Awards Plan. Unless previously terminated by the Board of Directors, the Stock Option and Awards Plan will terminate in April 2007, and no options or Awards may be granted under the Stock Option and Awards Plan thereafter. Options granted under the Stock Option and Awards Plan will become exercisable in accordance with the terms of the grant made by the Administrator. Awards will be subject to the terms and restrictions of the Award made by the Administrator. The Administrator has discretionary authority to select participants from among eligible persons and to determine at the time an option or Award is granted when and in what increments shares covered by the option may be purchased and, in the case of options, whether it is intended to be an ISO or a NQSO provided, however, that certain restrictions applicable to ISOs are mandatory, including a requirement that ISOs not be issued for less than 100% of the then fair market value of the Common Stock (110% in the case of a grantee who holds more than 10% of the outstanding Common Stock) and a maximum term of ten years (five years in the case of a grantee who holds more than 10% of the outstanding Common Stock). Under current law, ISOs may not be granted to any director of the Company who is not also an employee, or to directors, officers and other employees of entities unrelated to the Company. No options or Awards may be granted under the Stock Option and Awards Plan to any person who, assuming exercise of all options held by such person, would own or be deemed to own more than 9.8% of the outstanding shares of equity stock of the Company. Each option must terminate no more than 10 years from the date it is granted (or five years in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the combined voting power of the Company's outstanding equity stock). Options may be granted on terms providing for exercise either in whole or in part at any time or times during their respective terms, or only in specified percentages at stated time periods or intervals during the term of the option. The exercise price of any option granted under the Stock Option and Awards Plan is payable in full in cash, or its equivalent as determined by the Administrator. The Company may make loans available to option holders to exercise options evidenced by a promissory note executed by the optionholder and secured by a pledge of Common Stock with fair market value at least equal to the principal of the promissory note unless otherwise determined by the Administrator. The Board of Directors may from time to time revise or amend the Stock Option and Awards Plan, and may suspend or discontinue it at any time. However, no such revision or amendment may impair the rights of any participant under any outstanding Award without his consent or may, without stockholder approval, increase the number of shares subject to the Stock Option and Awards Plan or decrease the exercise price of a stock option to less than 100% of fair market value on the date of grant (with the exception of adjustments resulting from changes in capitalization), materially modify the class of participants eligible to receive options or Awards under the Stock Option and Awards Plan, materially increase the benefits accruing to participants under the Stock Option and Awards Plan or extend the maximum option term under the Stock Option and Awards Plan. 73 The following table sets forth the stock options to be granted to the Company's current executive officers under the Stock Option and Awards Plan upon the effective date of this Offering:
INDIVIDUAL GRANTS ---------------------------------------------------------- NUMBER OF SHARES PERCENTAGE UNDERLYING OF OPTIONS EXERCISE OPTIONS GRANTED TO PRICE EXPIRATION GRANT DATE NAME GRANTED(#)(1) EMPLOYEES(%) ($SH)(2) DATE(3) VALUE($)(4) - ---- ------------- ------------ -------- ---------- ----------- William D. Endresen..... 50,000 25.0 15.00 June 2007 411,941 Joseph R. Tomkinson..... 10,000 5.0 15.00 June 2007 82,388 William S. Ashmore...... 10,000 5.0 15.00 June 2007 82,388 Richard J. Johnson...... 10,000 5.0 15.00 June 2007 82,388 Mary C. Glass- Schannault.............. 10,000 5.0 15.00 June 2007 82,388
- -------- (1) Such stock options vest 33.33% per year on each anniversary of the date of grant and have been granted with related DERs. (2) The exercise price for all options equals the Subscription Price. (3) Such stock options expire ten years from the date of grant or earlier upon termination of employment. (4) The fair value of the options to be granted was derived using the Black- Scholes option pricing model with the following assumptions: risk-free interest rate of 7.05%, expected lives of ten years and expected volatility of 23%. Upon the effective date of this Offering, the Company will grant to each of Messrs. Snavely, Walsh, Filipps, Peers, Poletti and Busch options to purchase 10,000 shares of Common Stock at a per share exercise price equal to the Subscription Price, vesting 50% on the first anniversary of the date of grant and 50% on the second anniversary date and an aggregate of 50,000 additional options at a per share price equal to the Subscription Price to employees and consultants vesting one-third per year beginning on the first anniversary of the date of grant. 401(K) PLAN On the effective date of this Offering, the Company will commence participation in the Imperial Credit Industries, Inc. contributory retirement plan ("401(k) Plan") for all full time employees with at least six months of service, which is designed to be tax deferred in accordance with the provisions of Section 401(k) of the Code. The 401(k) Plan provides that each participant may contribute from 2% to 14% of his or her salary, and the Company will contribute to the participant's plan account at the end of each plan year 50% of the first 4% of salary contributed by a participant. Under the 401(k) Plan, employees may elect to enroll on the first day of any month, provided that they have been employed for at least six months. Subject to the rules for maintaining the tax status of the 401(k) Plan, an additional Company contribution may be made at the discretion of the Company, as determined by the Unaffiliated Directors. Should a discretionary contribution be made, the contribution would first be allocated to those employees deferring salaries in excess of 4%. The matching contribution would be 50% of any deferral in excess of 4% up to a maximum deferral of 8%. Should discretionary contribution funds remain following the allocation outlined above, any remaining Company matching funds would be allocated as a 50% match of employee contributions, on the first 4% of the employee's deferrals. Company matching contributions will be made as of December 31st each year in the form of Company Common Stock. No contributions were made for any period presented herein. 74 REIT ADVISORS, INC. THE MANAGER The Manager, RAI, will commence operations as of the closing of the Offering. Each of the persons who will become executive officers of the Manager upon the closing of this Offering has significant experience in purchasing, financing, servicing, securitizing and investing in mortgage loans and mortgage securities and all of such persons are officers of IMH and ICIFC; however, they have not previously managed a Commercial Mortgage REIT. RAI is a recently formed entity with no significant assets and no prior history of operations. RAI is owned 30% by each of Messrs. Tomkinson, Ashmore, and Johnson and 10% by Mr. Snavely. IMH owns all of the outstanding shares of non- voting preferred stock of ICIFC, its conduit operations, representing 99% of the economic interest in ICIFC, and Mssrs. Tomkinson, Johnson, Ashmore and Snavely own all of the outstanding shares of Common Stock of ICIFC, representing 1% of the economic interest. The officers of RAI have modified their employment agreements with ICIFC to allow them to become officers of the Manager (and of ICH and ICCC) upon the closing of this Offering. The Manager will agree to cause each of its officers to devote as much of his or her time to the operations of the Company as is reasonably necessary. ICH will reimburse the Manager, who will reimburse ICIFC on a dollar for dollar basis (including the service charge referenced below), for the actual cost of providing the services of these officers to the Company based upon the compensation payable to them by ICIFC, plus a 15% service charge. ICH will reimburse the Manager for expenses incurred by the Manager, plus a service charge of 15% on all expenses owed by the Manager to ICIFC for costs and expenses owed by the Manager to ICIFC for costs and services under any submanagement agreement between ICIFC and the Manager. The Manager will pay all such third parties on a dollar for dollar basis for the aforementioned amounts received by it from the Company; no such 15% service charge will be paid to third party service providers other than ICIFC. For the first three years of the Management Agreement there will be a minimum amount of $500,000 per annum (including the 15% service charge) payable by ICH in connection with services provided and expenses incurred by the Manager and payable by RAI to ICIFC. After the third year, ICH will only be responsible for reimbursing expenses and services provided, with the 15% service charge for amounts due to ICIFC. See "--Management Agreement--Expenses." The Company has selected an outside advisor in order to coordinate, assist and manage the duties and responsibilities of the Company. The Company believes that RAI will be more adequately suited to provide the following services relating to the operations of the Company due to the expertise of RAI's senior officers: securitization oversight, contract negotiation, market information, implementation of cost controls, asset/liability modeling and management and servicing systems. In order to utilize the IMH infrastructure, RAI intends to enter into a submanagement agreement with ICIFC, the conduit operations of IMH, upon the closing of this Offering to provide substantially all of the administrative services required by the Company including facilities and costs associated therewith, technology, human resources, management information systems, general ledger accounts, check processing and accounts payable as RAI deems necessary. The address of the Manager is 20371 Irvine Avenue, Santa Ana Heights, California 92707, telephone (714) 556-0122. DIRECTORS AND EXECUTIVE OFFICERS The persons who will become directors and executive officers of the Manager upon the closing of this Offering are as follows:
NAME POSITION ---- -------- Joseph R. Tomkinson* Chairman of the Board and Chief Executive Officer William S. Ashmore* President and Director Richard J. Johnson* Executive Vice President, Chief Financial Officer and Director Mary C. Glass- Schannault* Senior Vice President H. Wayne Snavely* Director
- -------- *Each of these persons also serve as directors or executive officers of the Company. For biographical information on these persons, see "Imperial Credit Commercial Holdings, Inc.--Directors and Executive Officers." 75 MANAGEMENT AGREEMENT The Company will enter into a Management Agreement with the Manager to become effective upon the closing of this Offering, for an initial term expiring on December 31, 2002. Successive extensions, each for a period not to exceed one year, may be made by agreement between the Company and the Manager. The Management Agreement may be terminated by the Company without cause at any time upon 60 days' written notice. Any such termination or failure to extend by the Company without cause shall result in the payment of a termination or non-renewal fee to the Manager determined by an independent appraisal. In addition, the Company and the Manager will have the right to terminate the Management Agreement upon the occurrence of a breach by the other party of any provision contained in the Management Agreement which remains uncured for 30 days. In addition, the Company may renew or terminate the Management Agreement by a majority vote of its Unaffiliated Directors or by a vote of the holders of a majority of the outstanding shares of Common Stock. The terms of the Management Agreement, including the management fees, were determined by what management of both RAI and ICH believe are comparable with other advisory relationships and have been approved by the Board of Directors of RAI and the Unaffiliated Directors of ICH. ICH's Bylaws provide that the Unaffiliated Directors shall determine at least annually that the compensation paid to the Manager is reasonable in relation to the nature and quality of the services performed by the Manager. The Manager is at all times subject to the supervision of the Company's Board of Directors and provides advisory services to the Company in accordance with the terms of the Management Agreement. The Manager is involved in three primary activities: (1) capital management--primarily the oversight of the Company's structuring, analysis, capital raising and investor relations activities; (2) asset management--primarily the analysis and oversight of the acquisition, management, securitization and disposition of Company assets; and (3) operations management--primarily the oversight of ICH's operating subsidiaries. Specifically, the Manager performs such services and activities relating to the assets and operations of the Company as may be appropriate, including: (1) serving as the Company's consultant with respect to formulation of investment criteria and interest rate risk management by its Board of Directors; (2) advising as to the issuance of commitments on behalf of the Company to purchase Commercial Mortgages or purchasing Commercial Mortgages and CMBSs meeting the investment criteria set from time to time by the Company's Board of Directors; (3) advising, negotiating, and overseeing the securitization of the Company's Commercial Mortgages in REMIC or CMOs and negotiating terms with rating agencies and coordinate with investment bankers as to structure and pricing of the securities formed by the Company; (4) advising the Company in connection with and assisting in its Long- Term Investment Operations; (5) furnishing reports and statistical and economic research to the Company regarding the Company's activities and the services performed for the Company by the Manager; (6) monitoring and providing to the Board of Directors on an on-going basis price information and other data, obtained from certain nationally- recognized dealers who maintain markets in Commercial Mortgages identified by the Board of Directors from time to time, and providing data and advice to the Board of Directors in connection with the identification of such dealers; (7) providing the executive and administrative personnel, office space and services required in rendering services to the Company, which includes contracting with appropriate third parties, which may include IMH and its affiliates, to provide various services including facilities and costs related therewith, technology, management information systems, human resource administration, general ledger accounts, check processing, accounts payable and other similar operational or administrative services; (8) overseeing the day-to-day operations of ICH and supervising the performance of such other administrative functions necessary in the management of ICH as directed by the Board of Directors of ICH; 76 (9) advising and negotiating of agreements on behalf of the Company with banking institutions and other lenders to provide for the short-term borrowing of funds by the Company; (10) communicating on behalf of the Company with the holders of the equity and debt securities of the Company as required to satisfy the reporting and other requirements of any governmental bodies or agencies and to maintain effective relations with such holders; (11) subject to an agreement executed by the Company, advising as to the designation of a servicer for those loans sold by ICCC whereby ICCC elected not to service such loans; (12) counseling the Company in connection with policy decisions to be made by its Board of Directors; and (13) upon request by and in accordance with the direction of the Board of Directors of the Company, investing or reinvesting any money of the Company. In order to utilize the IMH infrastructure, RAI intends to enter into a submanagement agreement with ICIFC, the conduit operations of IMH, upon the closing of this Offering to provide substantially all of the administrative services required by the Company including facilities and costs associated therewith, technology, human resources, management information systems, general ledger accounts, check processing and accounts payable as RAI deems necessary. The Manager may also enter into additional contracts with other parties, which may include IMH or its affiliates, to provide any such services for the Manager, which third party shall be approved by the Company's Board of Directors. See "--Expenses." Upon the closing of this Offering, RAI will have a total of four officers and four directors who will participate in the oversight of the Company's operations. MANAGEMENT FEES The Manager will be entitled to receive for each fiscal quarter, an amount equal to 25% of the Net Income of the Company, before deduction of such compensation, in excess of the amount that would produce an annualized Return on Equity equal to the daily average Ten Year U.S. Treasury Rate plus 2% (the "25% Payment"). The term "Return on Equity" is calculated for any quarter by dividing the Company's Net Income for the quarter by its Average Net Worth for the quarter. For such calculations, the "Net Income" of the Company means the net income of the Company determined in accordance with the Code before the Manager's compensation, the deduction for dividends paid and any net operating loss deductions arising from losses in prior periods. A deduction for all of the Company's interest expenses for borrowed money is also taken in calculating Net Income. "Average Net Worth" for any period means the arithmetic average of the sum of the gross proceeds from any offering of its equity securities by the Company, before deducting any underwriting discounts and commissions and other expenses and costs relating to the offering, plus the Company's retained earnings less dividends declared (without taking into account any losses incurred in prior periods) computed by taking the daily average of such values during such period. The 25% Payment to the Manager will be calculated quarterly in arrears before any income distributions are made to stockholders for the corresponding period. The Manager's fees will be calculated by the Manager within 60 days after the end of each calendar quarter, with the exception of the fourth quarter for which compensation will be computed within 30 days, and such calculation shall be promptly delivered to the Company. The Company will be obligated to pay the fee within 90 days after the end of each calendar quarter. EXPENSES Pursuant to the Management Agreement, ICH will also pay all operating expenses incurred by the Manager under the Management Agreement. The operating expenses generally required to be incurred by the Manager and reimbursed by ICH include out-of-pocket costs, equipment and other personnel required for the Company's operations, including amounts payable by RAI pursuant to submanagement agreements with outside third parties, which will include IMH and its affiliates, to provide various services to the Company including facilities and costs related therewith, technology, management information systems, human resource administration, general ledger accounts, check processing, accounts payable and other similar operational services ("Reimbursable Expenses"). Reimbursable Expenses also include issuance and transaction costs associated with the purchase, 77 disposition and financing of investments, regular legal and auditing fees and expenses of the Company, the fees and expenses of the Company's Directors, premiums for directors' and officers' liability insurance, premiums for fidelity and errors and omissions insurance, servicing and sub-servicing expenses, the costs of printing and mailing proxies and reports to stockholders, and the fees and expenses of the Company's custodian and transfer agent, if any. The Company will reimburse the Manager for all Reimbursable Expenses, plus a service charge of 15% on all Reimbursable Expenses owed by RAI to ICIFC, the conduit operations of IMH, for costs and services under any subcontract between RAI and ICIFC. RAI will pay all such third parties on a dollar-for- dollar basis the aforementioned amounts received by it from the Company; no such 15% service charge will be paid to third party service providers other than ICIFC. All of the persons designated to become officers of the Manager upon the closing of this Offering are officers of IMH, ICIFC, ICH and ICCC. IMH owns all of the outstanding shares of non-voting preferred stock of ICIFC, its conduit operations, representing 99% of the economic interest in ICIFC, and Messrs. Tomkinson, Johnson, Ashmore and Snavely all of the outstanding shares of common stock of ICIFC, representing 1% of the economic interest. Each of these officers have modified their employment agreements with ICIFC to allow them to become officers of the Manager (and of ICH and ICCC) upon the closing of this Offering. The Manager will agree to cause each of its officers to devote as much of his or her time to the operations of the Company as is reasonably necessary. The Company will reimburse the Manager, who will reimburse ICIFC on a dollar for dollar basis, for the actual cost (the "Reimbursable Executive Amounts") of providing the services of these officers to the Company based upon compensation payable to them by ICIFC, plus a 15% service charge. For the first three years of the Management Agreement, there will be a minimum amount of $500,000 per annum (which includes the 15% service charge) payable by ICH to RAI for Reimbursable Expenses and Reimbursable Executive Amounts and payable by RAI to ICIFC. After the third year, ICH will only be responsible for paying RAI the actual amount of Reimbursable Expenses and Reimbursable Executive Amounts, with the 15% service charge for amounts due to ICIFC. The Company does not believe that its operations will be adversely affected as a result of these relationships. Payments of Reimbursable Expenses and Reimbursable Executive Amounts by the Company to RAI will be made monthly. STOCK OPTION AND AWARDS PLAN The Company has adopted the Stock Option and Awards Plan and the directors, officers and employees of the Manager will be granted certain options or rights under the Stock Option and Awards Plan upon the closing of this Offering, and may in the future be granted additional options or rights under the Stock Option and Awards Plan. See "Imperial Credit Commercial Holdings, Inc.--Stock Options and Awards Plan." LIMITS OF RESPONSIBILITY Pursuant to the Management Agreement, the Manager will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of the Company's Board of Directors in following or declining to follow its advice or recommendations. The Manager, its directors, officers, equityholders and employees will not be liable to the Company, any mortgage security issuer, any subsidiary of the Company, the Unaffiliated Directors, the Company's stockholders or any subsidiary's shareholders for acts performed in accordance with and pursuant to the Management Agreement, except by reason of acts or omissions constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under the Management Agreement. The Manager is a recently formed entity and does not have significant assets. Consequently, there can be no assurance that the Company would be able to recover any damages for claims it may have against the Manager. The Company has agreed to indemnify the Manager, and its directors, officers, equityholders and employees with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from any acts or omissions of the Manager made in good faith in the performance of its duties under the Management Agreement. See "Risk Factors--General--Conflicts of Interest; Executive Officers and Directors to Receive Extensive Benefits." 78 RELATIONSHIPS WITH AFFILIATES IMH is a publicly traded company whose shares of common stock are listed on the AMEX. RAI, an entity owned by persons all of whom are officers of ICH and IMH and who will become officers of RAI upon the closing of this Offering, is the Manager and will provide advisory services to ICH in accordance with the terms of the Management Agreement. As previously described, ICH will utilize the mortgage banking experience, management expertise and resources of RAI in conducting its business. Upon the closing of this Offering, IMH will own in the aggregate 315,078 or 1,123,405 shares of the Common Stock of ICH (assuming the Minimum Offering Amount and the Maximum Offering Amount, respectively) representing 9.8% of the outstanding Common Stock, and 1,078,922 or 270,595 shares of ICH Class A Stock, respectively, excluding the ICH Class A Stock to be issued in connection with the Contribution, convertible into an equivalent number of shares of ICH Common Stock. In addition, a number of Directors and officers of ICH and ICCC also serve as Directors and/or officers of IMH. In order to utilize the IMH infrastructure, RAI intends to enter into a submanagement agreement with ICIFC, the conduit operations of IMH, upon the closing of this Offering to provide substantially all of the administrative services required by the Company including facilities and costs associated therewith, technology, human resources, management information systems, general ledger accounts, check processing and accounts payable as RAI deems necessary. With a view toward protecting the interests of ICH's stockholders, the Bylaws of ICH provide that a majority of the Board of Directors (and at least a majority of each committee of the Board of Directors) must not be "Affiliates" of RAI, as that term is defined in the Bylaws, and that the investment policies of ICH must be reviewed annually by the Unaffiliated Directors. Such policies and restrictions thereon may be established from time to time by the Board of Directors, including a majority of the Unaffiliated Directors. In addition, any transaction between ICH and any Affiliated Person requires the affirmative vote of a majority of the Unaffiliated Directors. Moreover, approval, renewal or termination of the Management Agreement requires the affirmative vote of a majority of the Unaffiliated Directors. The Management Agreement may be terminated by ICH upon 60 days' notice. Any such termination or failure to extend by ICH without cause shall result in the payment of a termination or non-renewal fee to the Manager determined by an independent appraisal. CERTAIN TRANSACTIONS THE ORGANIZATIONAL TRANSACTIONS The following is a summary of transactions entered into in connection with the organization of the Company: . In January and February 1997, ICCC and ICH were incorporated, respectively. . In February 1997, Joseph R. Tomkinson, ICH's Chairman of the Board and Chief Executive Officer, William S. Ashmore, ICH's President and Chief Operating Officer, Richard J. Johnson, ICH's Senior Vice President, Chief Financial Officer, Treasurer and Secretary, William D. Endresen, ICH's Senior Vice President, Mary C. Glass-Schannault, ICH's Senior Vice President, and each of H. Wayne Snavely, James Walsh, Frank P. Filipps, Stephan R. Peers and Thomas J. Poletti, Directors of ICH, purchased 76,800, 76,800, 62,400, 12,000 and 12,000 shares of the Common Stock of ICH, respectively, at a per share price of $.01. In addition, IMH purchased 299,000 shares of the Common Stock of ICH, at a per share price of $.01. . In February 1997, IMH purchased all of the non-voting preferred stock of ICCC, which represent 95% of the economic interest in ICCC, for $500,000, and each of Messrs. Tomkinson, Ashmore, Johnson and Endresen purchased all of the outstanding shares of common stock of ICCC (125 shares each at a per share price of $1.00), which represent 5% of the economic interest in ICCC. . In February 1997, ICCC brokered ICH's purchase of $7.3 million and $10.2 million of condominium conversion loans which were financed with $16.6 million in borrowings under a warehouse lending facility provided by a subsidiary of IMH and $900,000 in borrowings from IMH. All of condominium 79 conversion loans were purchased from ICIFC and $7.3 million of such mortgage loans were originated by a company with which William D. Endresen was an affiliate. IMH owns all of the outstanding non-voting preferred stock of ICIFC, which represents 99% of the economic interest in ICIFC, and Mssrs. Tomkinson, Johnson, Ashmore and Snavely own 100% of the Common Stock of ICIFC representing 1% of the economic interest. . In March 1997, IMH lent ICH $15.0 million evidenced by a promissory note convertible into ICH Preferred Stock at the Conversion Rate. . In March 1997, IMH converted the aforementioned $15.0 million principal amount promissory note into an aggregate of 3,000,000 shares of ICH Preferred Stock. All ICH Preferred Stock is automatically convertible upon the closing of this Offering into shares of ICH Common Stock determined by multiplying the number of shares of ICH Preferred Stock to be converted by a fraction, the numerator of which is $5.00 and the denominator of which is the Subscription Price. Notwithstanding the foregoing, consistent with IMH's classification as a REIT, IMH shall not be entitled to have converted into ICH Common Stock more than that number of shares of ICH Preferred Stock whereby IMH would own, immediately after such conversion, greater than 9.8% of ICH's outstanding Common Stock. Any shares of ICH Preferred Stock not converted into ICH Common Stock upon the closing of this Offering shall on such date automatically convert into shares of ICH Class A Stock at the same rate as the ICH Preferred Stock converted into Common Stock on said date. Shares of ICH Class A Stock convert into shares of the Common Stock on a one-for-one basis and each such class of Common Stock is entitled to cash dividends on a pro rata basis. Upon any subsequent issuances of Common Stock by ICH or sales of ICH Common Stock held by IMH, shares of ICH Class A Stock shall automatically continue to convert into additional shares of the Common Stock of ICH, subject to said 9.8% limitation. . In March 1997, ICH purchased a $10.1 million CMBS from ICIFC which was financed with a promissory note. In March 1997, the promissory note was repaid with cash from IMH's above-referenced $15.0 million investment. Concurrently therewith, ICH repaid the $900,000 owed to IMH in connection with its purchase of condominium conversion loans. . In April 1997, IMH exchanged the 299,000 shares of ICH Common Stock held by it for an equivalent number of shares of ICH Class A Stock. . On the closing of this Offering, IMH will effectuate the Contribution to ICH of 100% of the outstanding shares of non-voting preferred stock of ICCC for 95,000 shares of ICH Class A Stock. Upon the closing of this Offering, IMH will own 315,078 shares of ICH Common Stock and 1,078,922 shares of ICH Class A Stock, assuming the Minimum Offering Amount is sold, and 1,123,405 shares of ICH Common Stock, and 270,595 shares of ICH Class A Stock, assuming the Maximum Offering Amount is sold. Prior to the Contribution, ICCC was allocated expenses of various administrative services provided by IMH. The costs of such services were not directly attributable to a specific division or subsidiary and primarily included general corporate overhead, such as accounting and cash management services, human resources and other administrative functions. These expenses were calculated as a pro rata share of certain administrative costs based on head count or relative assets and liabilities of the division or subsidiary, which management believed was a reasonable method of allocation. NON-COMPETE AGREEMENT AND RIGHT OF FIRST REFUSAL AGREEMENT The Company's operations may be affected by the activities of IMH and ICIFC. Pursuant to a non-compete agreement (the "Non-Compete Agreement") between IMH, ICIFC, ICH and ICCC which will become effective upon the closing of this Offering, for a period of the earlier of nine months from the closing of this Offering or the date upon which the Company accumulates (for investment or sale) $300.0 million of Commercial Mortgages and/or CMBSs, neither IMH nor ICIFC will originate or acquire any Commercial Mortgages; however, this Agreement shall not preclude IMH (either directly or through ICIFC) from purchasing any Commercial Mortgages or CMBSs under the Right of First Refusal Agreement discussed below. After the termination of the 80 Non-Compete Agreement, and subject to the Right of First Refusal Agreement, as defined below, IMH, as a mortgage REIT, and ICIFC, as its conduit operations, may compete with the operations of the Company. 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, IMH, 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. Upon the closing of this Offering, RAI, ICH, ICCC, IMH and ICIFC will enter 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 (other than IMH) will actually become parties to the Right of First Refusal Agreement. Pursuant to this Agreement, RAI will agree that any mortgage loan or mortgage-backed security investment opportunity (an "Investment Opportunity") which is offered to it on behalf of either the Company, IMH 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 closely aligns with such Investment Opportunity. In addition, both IMH and ICIFC on the one hand and ICH and ICCC on the other will agree that any Investment Opportunity offered to either of them which falls outside the scope of its Initial Primary Business should 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 REITs 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 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 IMH, ICIFC 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. MANAGEMENT, SUBMANAGEMENT AND SERVICING AGREEMENTS RAI will act as the Manager pursuant to the Management Agreement which will become effective upon the closing of this Offering. RAI is owned 30% by each of Messrs. Tomkinson, Ashmore and Johnson and 10% by Mr. Snavely. In order to utilize the IMH infrastructure, RAI intends to enter into a submanagement agreement with ICIFC, the conduit operations of IMH, upon the closing of this Offering to provide substantially all of the administrative services required by the Company including facilities and costs associated therewith, technology, human resources management information systems, general ledger accounts, check processing and accounts payable as RAI deems necessary. For a general description of the persons who will become officers of the Manager upon the closing of this Offering and the terms of the Management Agreement, see "REIT Advisors, Inc." ICCC acts as a servicer of Commercial Mortgages acquired on a "servicing- released" basis by the Company in its Long-Term Investment Operations pursuant to the terms of a Servicing Agreement which became effective in February 1997. For a general description of the terms of such a Servicing Agreement, see "Business--Servicing." ICCC subcontracts all of its servicing obligations under such loans to independent third parties pursuant to sub-servicing agreements. OTHER TRANSACTIONS Thomas J. Poletti, a Director of ICH, is a partner in the law firm Freshman, Marantz, Orkinski, Cooper & Klein, which is counsel to the Company and IMH. Mr. Poletti owns 12,000 shares of the Company's Common Stock. See--Directors and Executive Officers," "--The Organizational Transactions" and "Legal Matters." 81 SHARES ELIGIBLE FOR FUTURE SALE Upon the closing of this Offering, assuming the Minimum Offering Amount and the Maximum Offering Amount is sold, the Company will have outstanding 3,215,078 or 11,463,313 shares of Common Stock, respectively, of which 615,078 or 1,423,405 shares, respectively, will be "restricted securities" as that term is defined in Rule 144. Of such shares, 300,000 shares eligible for will become eligible for future sale under Rule 144 commencing February 1998, and the balance thereof will become eligible for sale in March 1998, at the earliest. In addition, upon the closing of this Offering, IMH would also hold 1,078,922 or 270,595 shares of ICH Class A Stock, assuming the Minimum Offering Amount and Maximum Offering Amount, respectively, is sold. The number of shares of ICH Common Stock and ICH Class A Stock held by IMH, and the eligibility of such shares for future sales, will be affected by future issuances of ICH Common Stock by the Company and dispositions of shares of ICH Common Stock by IMH. As described below, Rule 144, permits resales of restricted securities subject to certain restrictions. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who beneficially owned shares for at least one year, including any person who may be deemed an "affiliate" of the Company, would be entitled to sell within any three-month period a number of such shares that does not exceed the greater of 1% of the shares of the Company's Common Stock then outstanding shares upon the closing of this Offering (3,215,078 shares or 11,463,313 shares assuming the Minimum Offering Amount and the Maximum Offering Amount, respectively, is sold) or the average weekly trading volume in the Company's Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. A person who is not deemed to have been an "affiliate" of the Company at any time during the three months immediately preceding a sale and who has beneficially owned shares for at least two years would be entitled to sell such shares under Rule 144, without regard to the volume limitation described above. The Company and its stockholders including IMH, have agreed with the Dealer Managers that, for a period of 120 days following the commencement of this Offering, they will not sell, contract to sell or otherwise dispose of any of shares of Common Stock or rights to acquire such shares (other than pursuant to employee plans) without the prior written consent of the Dealer Managers. Additionally, upon the closing of this Offering, there will be outstanding stock options for 200,000 shares of Common Stock which will be granted at the Subscription Price, to executive officers and Directors of the Company or of the Manager, none of which, except in the event of a change of control of the Company, will be exercisable until June 1998. 82 PRINCIPAL STOCKHOLDERS The following table sets forth certain information known to the Company with respect to beneficial ownership of the Company's Common Stock at March 31, 1997, after giving effect to the conversion of ICH Preferred Stock held by IMH into 9.8% of ICH's Common Stock upon the closing of this Offering, and as adjusted assuming the Maximum Offering Amount is sold, by (1) each person known to the Company to beneficially own more than five percent of the Company's Common Stock, (2) each Director, (3) the Company's executive officers and (4) all Directors and executive officers as a group. Unless otherwise indicated in the footnotes to the table, the beneficial owners named have, to the knowledge of the Company, sole voting and investment power with respect to the shares beneficially owned, subject to community property laws where applicable.
PERCENTAGE OF SHARES NUMBER OF BENEFICIALLY OWNED (1) SHARES ----------------------- BENEFICIALLY BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED OFFERING(2) OFFERING(3) - ------------------------ ------------ ----------- ----------- Imperial Credit Mortgage Holdings, Inc. (3)(4).................................... 1,123,405 78.9% 9.8% Joseph R. Tomkinson....................... 76,800 5.4% * William S. Ashmore........................ 76,800 5.4% * Richard J. Johnson........................ 62,400 4.4% * William D. Endresen....................... 12,000 * * Mary C. Glass-Schannault.................. 12,000 * * H. Wayne Snavely.......................... 12,000 * * James Walsh............................... 12,000 * * Frank P. Filipps.......................... 12,000 * * Stephan R. Peers.......................... 12,000 * * Thomas J. Poletti......................... 12,000 * * All directors and executive officers as a group (10 persons)........................ 300,000 21.1% 2.6%
- ------- * less than 1% (1) Assumes persons listed below do not exercise Subscription Rights offered to them as IMH Holders. (2) Assumes 1,423,405 shares outstanding. Excludes 270,595 shares of ICH Class A Stock owned by IMH. If the Minimum Offering Amount is sold, IMH would own 1,078,922 shares of ICH Class A Stock and 315,078 shares of ICH Common Stock due to the 9.8% limitation described in footnote 3 below. In the event of the Minimum Offering Amount, IMH, each of Messrs. Tomkinson and Ashmore, Mr. Johnson, each of Mr. Endresen, Ms. Glass-Schannault, Messrs. Snavely, Walsh, Filipps, Peers and Poletti, all directors and executive officers as a group would own 51.2%, 12.5%, 10.1%, 2.0%, and 48.8% of the shares of the Company's Common Stock, respectively, before the Offering. Also, all directors and executive officers as a group would own 9.3% of the shares of the Company's Common Stock after the Offering assuming the Minimum Offering Amount is sold. (3) Assumes 11,463,313 shares outstanding. Gives effect to the conversion of 3,000,000 shares of ICH Preferred Stock and 123,405 shares of ICH Class A Stock into 1,123,405 shares of ICH's Common Stock upon the closing of this Offering, assuming the Maximum Offering Amount is sold. All shares of ICH Preferred Stock are automatically convertible upon the closing of this Offering into shares of ICH Common Stock determined by multiplying the number of shares of Preferred Stock to be converted by a fraction, the numerator of which is $5.00 and the denominator of which is the Subscription Price. Notwithstanding the foregoing, consistent with IMH's classification as a REIT, IMH shall not be entitled to have converted into ICH Common Stock more than that number of shares of ICH Preferred Stock whereby IMH would own, immediately after such conversion, greater than 9.8% of the Company's outstanding Common Stock (after giving effect to said conversion). Any shares of ICH Preferred Stock not converted into ICH Common Stock upon the closing of this Offering shall on such date automatically convert into shares of ICH Class A Stock at the same rate as the ICH Preferred Stock converted into ICH Common Stock. Shares of ICH Class A Stock convert into shares of the Common Stock of ICH on a one-for- one basis. Upon any subsequent issuances of Common Stock by ICH or sales of ICH Common Stock held by IMH, shares of ICH Class A Common Stock shall automatically convert into additional shares of the Common Stock of ICH, subject to said 9.8% limitation. In April 1997, IMH converted 299,000 shares of ICH Common Stock into an equal number of shares of ICH Class A Stock. Upon the closing of this Offering, IMH will own 315,078 shares of ICH Common Stock and 1,078,922 shares of ICH Class A Stock assuming the Minimum Offering Amount is sold and 1,123,405 shares of ICH Common Stock, and 270,595 shares of ICH Class A Stock, assuming the Maximum Offering Amount is sold; shares beneficially owned by IMH after this Offering exclude said shares of ICH Class A Stock and the shares of ICH Common Stock issuable upon their conversion. (4) IMH's address is 20371 Irvine Avenue, Santa Ana Heights, California, 92707. 83 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized stock of ICH consists of 46,000,000 shares of Common Stock, $0.01 par value per share, 4,000,000 shares of Class A Non-Voting Common Stock, $0.01 par value per share, 6,000,000 shares of Preferred Stock, $0.01 par value per share, and 4,000,000 shares of Class A Convertible Preferred Stock, $0.01 par value per share. It is expected that meetings of the stockholders of ICH 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 a majority of all the votes entitled to be cast at the meeting. The Charter reserves to ICH the right to amend any provision thereof 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. 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 ICH 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 ICH upon issuance. Shares of Common Stock have no preference, conversion, exchange, preemptive or cumulative voting rights. The authorized stock of ICH 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. Class A Non-Voting Common Stock Designation and Amount. Of the 50,000,000 shares of Common Stock which were previously authorized, 4,000,000 shares were reclassified and designated as Class A Non-Voting Common Stock (the "ICH Class A Stock"). Rights, Preferences and Privileges and Voting Rights. The ICH Class A Stock has the identical preferences, conversion or other rights, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption as the Common Stock except that the holders of shares of ICH Class A Stock are not entitled to any voting rights. If ICH issues additional shares of its Common Stock as a dividend on its outstanding Common Stock, ICH shall simultaneously issue as a dividend on its outstanding ICH Class A Stock, pro rata among the holders thereof, that number of shares of Class A Common Stock equal to the number of shares of ICH Common Stock issued as a dividend multiplied by a fraction, the numerator of which is the number of shares of ICH Class A Stock outstanding immediately before the record date for the payment of the ICH Class A Stock dividend and the denominator of which is the number of shares of ICH Common Stock outstanding immediately before the record date for the payment of the ICH Common Stock dividend. Conversion Rights. On any date on which shares of Common Stock are issued by ICH increasing the number of shares of Common Stock issued and outstanding (the "Conversion Date"), the shares of ICH Class A Stock held by each person will automatically convert into that number of shares of Common Stock as calculated below, except that those shares of ICH Class A Stock (collectively, "Excess Shares") which would cause the holder thereof to own shares of ICH Common Stock (i) in excess of the Limit or (ii) in violation of any stock ownership limitation set forth in the ICH's Charter shall not be converted and shall remain outstanding shares of ICH Class A Stock. "Limit" shall mean not greater than 9.8% (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of Common Stock of ICH. The number and value of outstanding shares of Common Stock shall be determined by the Board of Directors of ICH in good faith, which determination shall be conclusive for all purposes hereof. If, subsequent to the Conversion Date, the conversion of Excess Shares into shares of ICH Common Stock would no longer cause the holder thereof to own shares of ICH Common Stock (i) in excess of the Limit or 84 (ii) in violation of any stock ownership limitation set forth in the Charter, such shares shall automatically convert into that number of shares of ICH Common Stock as calculated below, except that those Excess Shares which, if converted pursuant to this provision, would cause the holder thereof to own shares of ICH Common Stock (i) in excess of the Limit or (ii) in violation of any stock ownership limitation set forth in the Charter shall not be converted and shall remain outstanding shares of ICH Class A Stock. The shares of ICH Class A Stock are convertible at the principal office of ICH, and at such other office or offices, if any, as the Board of Directors may designate, into fully paid and non-assessable shares of Common Stock of ICH (calculated as to each conversion to the nearest whole share). The number of shares of Common Stock to be issued upon conversion will be determined by multiplying the number of shares of ICH Class A Stock to be converted by one, subject to certain adjustments. No fractional shares of Common Stock will be issued upon conversion of shares of ICH Class A Stock, and the number of shares of Common Stock to be issued will be rounded to the nearest whole share. PREFERRED STOCK The Charter authorizes the Board of Directors to issue shares of Preferred Stock and to classify any unissued shares of Preferred Stock and reclassify any previously classified but unissued shares of Preferred Stock from time to time into one or more 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 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, ICH and for general corporate purposes without further stockholder authorization. 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 ICH by means of a merger, tender offer, proxy contest or other transaction that might involve a premium price for the holders of Common Stock or otherwise be in their best interest. The Preferred Stock, if issued, may have a preference on dividend payments which could reduce the assets available to ICH to make distributions to the common stockholders. Class A Convertible Preferred Stock. Designation and Amount. Of the 10,000,000 shares of Preferred Stock which were previously authorized, 4,000,000 shares were reclassified and designated Class A Convertible Preferred Stock (the "ICH Preferred Stock"). In March 1997, IMH converted $15.0 million principal amount of promissory notes into an aggregate of 3,000,000 shares of ICH Preferred Stock. Dividends. Commencing on December 31, 1997, each holder of ICH Preferred Stock will be entitled to receive, out of any funds legally available therefor, when and if declared, dividends at the quarterly rate of $.10 per share and no more, and thereafter quarterly on the last day of March, June, September and December of each year that any ICH Preferred Stock is outstanding. Such dividends will not be cumulative, and no rights will accrue to holders of ICH Preferred Stock by reason of the fact that dividends on such shares are not declared or paid in any prior quarter. In determining whether a distribution (other than upon liquidation), by dividend, redemption or other acquisition of shares or otherwise, is permitted under Maryland law, amounts that would be needed, if the Company were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of holders of shares of any class or series of stock whose preferential rights upon dissolution are superior to those receiving the distribution will not be added to the Company's total liabilities. Distributions Upon Liquidation, Dissolution or Winding Up. Subject to conversion as set forth below, upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, subject to the prior preferences and other rights of any class or series of stock ranking senior to the ICH Preferred Stock as to 85 the distribution of assets upon liquidation, dissolution or winding up of the affairs of the Company, but before any distribution or payment will be made to the holders of any class or series of stock ranking junior to the ICH Preferred Stock as to the distribution of assets upon any liquidation, dissolution or winding up of the affairs of the Company, the holders of ICH Preferred Stock will be entitled to receive out of the assets of the Company legally available for distribution to its stockholders liquidating distributions in cash or property at its fair market value as determined by the Board of Directors of the Company in the amount per share equal to the liquidation preference, which is $5.00 per share. After payment of the full amount of the liquidating distributions to which they are entitled, the holders of ICH Preferred Stock will have no right or claim to any of the remaining assets of the Company and will not be entitled to any other distribution in the event of liquidation, dissolution or winding up of the affairs of the Company. In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the legally available assets of the Company are insufficient to pay the amount of the liquidation preference per share plus the corresponding amounts payable on each class or series of other stock ranking on a parity with the ICH Preferred Stock as to the distribution of assets upon liquidation, dissolution or winding up of the affairs of the Company, then the holders of the ICH Preferred Stock and all such other stock will share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they otherwise would be respectively entitled. Neither the consolidation or merger of the Company into or with another corporation or corporations or trust or trusts nor the sale, lease, transfer or conveyance of all or substantially all of the assets of the Company to another corporation or any other entity shall be deemed a liquidation, dissolution or winding up of affairs of the Company. Voting Rights. The holders of shares of ICH Preferred Stock are not entitled to any voting rights. Conversion Rights. Upon any "Initial Public Offering," the shares of ICH Preferred Stock held by each person will automatically convert into that number of shares of Common Stock as calculated below, except that those shares of ICH Preferred Stock which, if converted pursuant to this provision, would cause the holder thereof to own shares of Common Stock (i) in excess of the Limit or (ii) in violation of any stock ownership limitation set forth in the Charter shall not be converted into shares of Common Stock. Any shares of ICH Preferred Stock not converted into shares of Common Stock as a result of the foregoing limitations shall on such date automatically convert into shares of ICH Class A Stock at the same rate as shares of ICH Preferred Stock convert into shares of Common Stock. If the aforementioned event does not occur, the shares of ICH Preferred Stock shall remain outstanding. All ICH Preferred Stock is automatically convertible upon the closing of this Offering into shares of ICH Common Stock determined by multiplying the number of shares of ICH Preferred Stock to be converted by a fraction, the numerator of which is $5.00 and the denominator of which is the Subscription Price. "Initial Public Offering" means the sale of Common Stock pursuant to the Company's first effective registration statement covering the sale of such shares filed under the 1933 Act provided such offering meets the following requirements: (i) said offering raises gross proceeds of at least $10.0 million to the Company at a per share offering price of no less than $5.00 per share and (ii) said offering is completed on or before December 31, 1998. The shares of ICH Preferred Stock also will be convertible at the principal office of the Company, and at such other office or offices, if any, as the Board of Directors may designate, into fully paid and non-assessable shares of Common Stock or ICH Class A Stock, as the case may be, of the Company. The number of shares of Common Stock or ICH Class A Stock, as the case may be, to be issued upon conversion will be determined by multiplying the number of shares of ICH Preferred Stock to be converted by the Conversion Rate. "Conversion Rate" is determined by a fraction, the numerator of which will be the liquidation preference and the denominator of which will be the IPO Share Price. "IPO Share Price" means the gross per share price of the Company's Initial Public Offering. No fractional shares of Common Stock or ICH Class A Stock, as the case may be, will be issued upon conversion of shares of ICH Preferred Stock and the number of shares of Common Stock or ICH Class A Stock, as the case may be, to be issued will be rounded to the nearest whole share. 86 REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER For ICH 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) 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 ICH expects to continue to qualify as a REIT, the Charter contains restrictions on the transfer of Common Stock which are intended to assist ICH in complying with these requirements. The Ownership Limit set forth in the Charter prohibits any person, subject to certain specified exceptions discussed below, from owning, actually or constructively, shares of Common Stock in excess of 9.8% (in value or in number, whichever is more restrictive) of the outstanding shares of Common Stock. The constructive ownership rules are complex, and may cause shares of Common 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 9.8% of the 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 in excess of 9.8% of the outstanding shares of Common Stock and thus violate the 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 if it determines that such person's ownership of shares of Common Stock will not jeopardize ICH's status as a REIT. As a condition of such waiver, the Board of Directors may require a ruling from the Internal Revenue Service or opinions of counsel satisfactory to it and/or undertakings or representations from the applicant with respect to ICH's status as a REIT. ICH's Charter further prohibits (a) any person from actually or constructively owning shares of Common Stock that would result in ICH being "closely held" under Section 856(h) of the Code or otherwise cause ICH 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 ICH that will or may violate any of the foregoing restrictions on transferability and ownership is required to give written notice immediately to ICH and provide ICH 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 ICH to attempt to qualify, or to continue to qualify, as a REIT. The Board of Directors may from time to time increase or, subject to certain limitations, decrease the 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 Common Stock in excess of the Ownership Limit or in ICH being "closely held" as described above or otherwise failing to qualify as a REIT, then that number of shares of Common Stock the actual or constructive ownership of which otherwise would cause such person to violate such restrictions (rounded up to a whole 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 Common 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 ICH that shares of Common 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 87 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 ICH 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 ICH that shares of Common 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 transferee 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 Common Stock held in Trust will be deemed to have been offered for sale to ICH, 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 in the Charter) at the time of such devise or gift) and (ii) the Market Price on the date ICH, or its designee, accepts such offer. ICH will have the right to accept such offer until the Trustee has sold the shares held in the Trust. Upon such a sale to ICH, 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 ICH'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 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- counter 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 Common Stock would cause ICH to be beneficially owned by 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. Under the Charter, every owner of a specified percentage (or more) of the outstanding shares of Common Stock must file a completed questionnaire with the Company containing the information regarding their ownership of such shares, as set forth in the Treasury Regulations. Under current Treasury Regulations, the percentage will be set between 0.5% and 5.0%, depending upon the number of record holders of the Company's 88 shares. In addition, each stockholder shall upon demand be required to disclose to the Company in writing such information as the Company may request in order to determine the effect, if any, of such stockholder's actual and constructive ownership of Common Stock on the Company's status as a REIT and to ensure such compliance with the Ownership Limit or such other limit as otherwise prescribed by the Board of Directors. The Charter provides that "disqualified organizations" within the meaning of Section 860E(e)(5) of the Code, which generally include governmental entities and other tax-exempt persons not subject to tax on unrelated business taxable income, are ineligible to hold the Company's shares. Accordingly, the shares offered hereby should not be purchased or held by such disqualified organizations. See "Federal Income Tax Considerations." TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Company's Common Stock is BankBoston, N.A., parent corporation to Boston EquiServe, L.P. 89 DISTRIBUTION ARRANGEMENTS THE SUBSCRIPTION OFFER PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York and Stifel, Nicolaus & Company, Incorporated, 500 North Broadway, St. Louis, Missouri, each of whom is a broker-dealer and member of the National Association of Securities Dealers, Inc., will act as Dealer Managers for the Subscription Offer. Under the terms and subject to the conditions contained in the Dealer Manager Agreement dated the date hereof (the "Dealer Manager Agreement"), the Dealer Managers will provide financial advisory and marketing services in connection with the Offer and will solicit the exercise of Subscription Rights and participation in the Over-Subscription Privilege by Record Date IMH Holders. The Company has agreed to pay the Dealer Managers a fee for financial advisory, marketing and soliciting services equal to 4.25% of the aggregate Subscription Price for ICH Shares issued pursuant to exercise of Subscription Rights and pursuant to the Over-Subscription Privilege. The Dealer Managers will reallow to certain broker-dealers fees for solicitation efforts (the "Solicitation Fees") of 2.50% of the Subscription Price per ICH Share for each ICH Share issued pursuant to the exercise of the Subscription Rights and pursuant to the Over-Subscription Privilege as a result of their solicitation efforts. Solicitation Fees will be paid to the broker-dealer designated on the applicable portion of the Subscription Notification Certificate or, in the absence of such designation, to the Dealer Managers. In addition, the Company has agreed to reimburse the Dealer Managers up to an aggregate of $200,000 for their reasonable expenses incurred in connection with the Subscription Offer. The Company and RAI have each agreed to indemnify the Dealer Managers or contribute to losses arising out of certain liabilities including liabilities under the Securities Act of 1933, as amended. The Dealer Manager Agreement also provides that the Dealer Managers will not be subject to any liability to the Company in rendering the services contemplated by such Agreement except for any act of bad faith, willful misconduct or gross negligence of the Dealer Managers or reckless disregard by the Dealer Managers of their obligations and duties under such Agreement. THE STANDBY OFFER Pursuant to the Standby Offer, the Company is offering to institutions that may or may not be IMH Holders as of the Record Date, pursuant to Standby Purchase Agreements, at least 998,326 shares of Common Stock (the "Minimum Standby Offer Amount") but not more than 3,039,908 shares of Common Stock (the "Maximum Standby Offer Amount"). The purchase price per Standby Share is equal to the Subscription Price of $15.00. The number of Standby Shares subscribed for will be included for purposes of achieving the Minimum Offering Amount of 2,600,000 Shares. It is anticipated that Standby Purchase Agreements may be subject to an individual Minimum and Maximum Standby Purchase Amount. In addition, the obligation of the Standby Purchasers will be subject to the achievement of the Minimum Offering Amount in connection with the Offering. The Company has agreed to pay the Dealer Managers a fee for their financial advisory, marketing and soliciting services equal to 4.25% of the aggregate Subscription Price for Standby Shares issued and sold to Standby Purchasers pursuant to the Standby Purchase Agreements. OTHER MATTERS The Company has agreed not to offer or sell, or enter into any agreement to sell, any equity or equity related securities of the Company or securities convertible into such securities for a period of 180 days after the closing of the Offering, except for the ICH Shares, the Standby Shares and shares of ICH Common Stock issued in reinvestment of dividends or distributions. The Company has applied the ICH Shares and the Standby Shares listed on the American Stock Exchange, Inc. (the "AMEX") under the symbol "ICH." Prior to the Offering, there has been no market for the ICH Common Stock. The Subscription Price has been determined by the Company and is not necessarily related to the Company's asset value or any other established criterion of value. In connection with their solicitation of 90 exercises of Subscription Rights in the Primary Subscription Privilege and pursuant to the Over-Subscription Privilege, and in acting as agent for the Company in connection with the issuance of Standby Shares pursuant to the Standby Purchase Agreements, the Dealer Managers have agreed to use their best efforts to assure that, at the completion of the Offer, lots of 100 or more ICH Shares will be held by a minimum of 400 beneficial owners in the United States. The Dealer Managers may effect market-making transactions in the ICH Common Stock which may include purchases, sales and short covering transactions, on the AMEX, in the over-the-counter markets or otherwise after the completion of the initial public offering. The Dealer Managers may also impose a penalty bid on certain Soliciting Dealers. This means that if the Dealer Managers purchase shares of ICH Common Stock in the open market to reduce any short position, they may reclaim the amount of Solicitation Fees from the Soliciting Dealers with customers purchasing the ICH Common Stock in the Offering. In general, purchases of a security for the purpose of reducing a short position could cause the price of a security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resale of the security. The Dealer Managers are not obligated to conduct any such market- making activities any may discontinue such activities at any time without notice, at its sole discretion. No assurance can be given as to the liquidity of or the trading market for the ICH Common Stock as a result of any market- making activities undertaken by the Dealer Managers. Neither the Company nor the Dealer Managers make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the shares of ICH Common Stock. 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 ICH 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 ICH, copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part. See "Additional Information." For a description of additional restrictions on transfer of the Common Stock, see "Description of 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 of the shares 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 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. 91 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. The Bylaws of ICH contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of ICH's shares of stock. There can be no assurance that such provision will not be amended or eliminated at any time in the future. AMENDMENT TO THE CHARTER ICH 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. 92 DISSOLUTION OF THE COMPANY The dissolution of ICH 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 ICH'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 ICH'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 ICH'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 removal of directors and the advance notice provisions of the Bylaws could delay, defer or prevent a change in control of ICH 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 material federal income tax considerations regarding the Company and the offering described herein is based on current law, is for general information only and is not tax advice. 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. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND SALE OR OTHER DISPOSITION OF THE SUBSCRIPTION RIGHTS AND THE COMMON STOCK, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP AND SALE OR OTHER DISPOSITION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. THE RIGHTS OFFERING For United States federal income tax purposes, IMH Holders will not recognize taxable income upon the receipt of the Subscription Rights and the basis of the Subscription Rights received by a IMH Holder will be zero. IMH Holders who allow the Subscription Rights received by them on the date of issuance to expire unexercised will not recognize any gain or loss, and no adjustment will be made to the basis of their IMH Common Stock or IMH stock options. IMH Stockholders will not recognize any gain or loss upon their exercise of their Subscription Rights for New ICH Shares. An IMH Holder's basis in the New ICH Shares acquired through exercise of the Subscription Rights will be equal to the Subscription Price paid therefor. 93 TAXATION OF ICH General. ICH intends to elect to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with its taxable year ending December 31, 1997. ICH 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 commencing with such taxable year, and ICH 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. Latham & Watkins has acted as tax counsel to ICH in connection with the Offering. In the opinion of Latham & Watkins, commencing with ICH's taxable year ending December 31, 1997, ICH has been organized in conformity with the requirements for qualification as a REIT, and its proposed method of operation has enabled and will enable it to meet the requirements for qualification and taxation as a REIT under the Code. It must be emphasized that this opinion is based on various factual assumptions relating to the organization and operation of ICH and is conditioned upon certain representations made by ICH as to factual matters. In addition, this opinion is based upon the factual representations of ICH concerning its business and assets as set forth in this Prospectus and assume that the actions described in this Prospectus are completed in a timely fashion. Moreover, such qualification and taxation as a REIT depends upon ICH's ability to meet (through actual annual operating results, distribution levels and diversity of stock ownership) the various qualification tests imposed under the Code discussed below, the results of which have not been and will not be reviewed by Latham & Watkins. Accordingly, no assurance can be given that the actual results of ICH's operation for any particular taxable year have satisfied or will satisfy such requirements. Further, the anticipated income tax treatment described in this Prospectus may be changed, perhaps retroactively, by legislative, administrative or judicial action at any time. See "Risk Factors--Other Considerations--Adverse Consequences of Failure to Maintain REIT Status; ICH Subject to Tax as a Regular Corporation" and "--Failure to Qualify." If ICH 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, ICH will be subject to federal income tax as follows: First, ICH will be taxed at regular corporate rates on any undistributed "REIT taxable income," including undistributed net capital gains. Second, under certain circumstances, ICH may be subject to the "alternative minimum tax" on its items of tax preference. Third, if ICH 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 ICH 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 ICH 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 ICH fails the 75% or 95% test multiplied by (b) a fraction intended to reflect ICH's profitability. Sixth, if ICH 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, ICH would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. Seventh, if ICH has excess inclusion income (attributable to its interest, if any, in a residual interest in a REMIC or if all or a portion of ICH, is treated as a taxable mortgage pool) and a disqualified organization 94 (generally, tax-exempt entities not subject to tax on unrelated business income, including governmental organizations) holds shares of stock in ICH, ICH 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 ICH 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 ICH is determined by reference to the basis of the asset in the hands of the C corporation, if ICH 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 ICH, then, to the extent of the Built-In Gain (i.e., the excess of (a) the fair market value of such asset over (b) ICH'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 ICH will make an election pursuant to IRS Notice 88- 19 and that such treatment is not modified by certain revenue proposals in President Clinton's 1998 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. Conditions (v) and (vi) will not apply until after the first taxable year for which an election is made to be taxed as a REIT. 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). The Company believes that it will issue sufficient shares of Common Stock with sufficient diversity of ownership to allow ICH to satisfy conditions (v) and (vi) on a timely basis. In addition, the Charter provides for restrictions regarding the transfer and ownership of shares, which restrictions are intended to assist ICH 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 ensure that ICH will, in all cases, be able to satisfy the share ownership requirements described above. If ICH fails to satisfy such share ownership requirements, ICH's status as a REIT will terminate. See "--Failure to Qualify." In addition, a corporation may not elect to become a REIT unless its taxable year is the calendar year. ICH has a calendar taxable year. Ownership of Qualified REIT Subsidiaries. ICH may acquire 100% of the stock of one or more qualified REIT subsidiaries (each, a "QRS"). A corporation will qualify as a QRS if 100% of its stock is held by ICH at all times during the period such QRS was in existence. A QRS will not be treated as a separate corporation, and all assets, liabilities, and items of income, deduction, and credit of a QRS will be treated as assets, liabilities and such items (as the case may be) of ICH for all purposes of the Code including the REIT qualification tests. For this reason, references under "Federal Income Tax Considerations" to the income and assets of ICH shall include the income and assets of any QRS. A QRS will not be subject to federal income tax and ICH's ownership of the voting stock of a QRS 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 ICH's total assets, described below under "--Asset Tests." 95 Income Tests. In order to maintain its qualification as a REIT, ICH annually must satisfy three gross income requirements. First, at least 75% of ICH'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 a prohibited transaction; and (ix) qualified temporary investment income. Second, at least 95% of ICH'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, subject to certain exceptions in the year in which ICH is liquidated, 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 ICH's gross income (including gross income from prohibited transactions) for each 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), dividends on stock (including any dividends ICH receives from ICCC, but not including dividends ICH receives from other qualifying REITs or from any 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 ICH 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, 96 including the sale of hedges, will not qualify under the 75% or 95% gross income tests unless such hedges constitute Qualified Hedges, in which case such income will qualify under the 95% gross income test. Furthermore, ICCC receives servicing and processing fees and income from gain on the sale of certain Commercial Mortgages and CMBSs. Such fees do not accrue to ICH, but ICH receives dividends on its nonvoting preferred stock in ICCC. 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, ICH has limited and will continue to limit substantially all of the assets that it acquires to Commercial Mortgages or other securities or obligations that are treated as obligations secured by mortgages on real property or on interests in real property or to other Qualified REIT Assets. As a result, ICH 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 Qualified Hedges. See "Business-- Hedging." In addition, to comply with the 30% gross income test, ICH may have to hold Commercial Mortgages and CMBSs for four or more years and other securities and hedges for one year or more at times when ICH might otherwise have opted for the disposition of such assets for short term gains. In order to comply with the REIT gross income tests, ICH 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. ICH believes that the aggregate amount of any nonqualifying income in any taxable year will not exceed the limit on nonqualifying income under the gross income tests. If ICH fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions will be generally available if ICH's failure to meet such tests was due to reasonable cause and not due to willful neglect, ICH 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 ICH would be entitled to the benefit of these relief provisions. For example, if ICH fails to satisfy the gross income tests because nonqualifying income that ICH intentionally incurs exceeds the limits on such income, the Service could conclude that ICH'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 ICH, ICH will not qualify as a REIT. As discussed above in "Federal Income Tax Considerations--Taxation of ICH-- General," even if these relief provisions apply and ICH 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 ICH failed the 75% or 95% test multiplied by (b) a fraction intended to reflect ICH's profitability. There can be no assurance that ICH 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 ICH fails the 30% gross income test. In such case, ICH would cease to qualify as a REIT. See "--Failure to Qualify." Any gain realized by ICH on the sale of any property (including Commercial Mortgages and CMBSs) held as inventory or other property 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 ICH'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. ICCC securitizes Commercial Mortgages and sells the resulting mortgage securities. See "Business--Securitization and Sale Process." If ICH were to sell such CMBSs 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 will be made only by ICCC. ICCC is not subject to the 100% penalty tax on income from prohibited transactions, which is only applicable to a REIT. 97 Asset Tests. ICH, 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 ICH's total assets must be represented by Qualified REIT Assets, cash, cash items and government securities. Second, not more than 25% of ICH'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 ICH may not exceed 5% of the value of ICH's total assets and ICH may not own more than 10% of any one issuer's outstanding voting securities. ICH believes that substantially all of its assets, other than the nonvoting preferred stock of ICCC, are Qualified REIT Assets. The Company provides short-term lines of credit ("hypothecation loans") to ICCC to finance Commercial Mortgages during the time from the closing of such loans to their sale or other settlement with pre-approved investors. The Company's hypothecation Commercial Mortgages are secured by assignments of first priority perfected security interests in and liens on, among other items of collateral, mortgage 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 the Company's hypothecation Commercial Mortgages were obligations secured by mortgages on real property and interests in mortgages on real property, and therefore that such Commercial Mortgages were Qualified REIT Assets. Based on such Revenue Ruling, the Company believes that its hypothecation Commercial Mortgages are Qualified REIT Assets. However, in the event that the Company's hypothecation Commercial Mortgages are not treated as Qualified REIT Assets, the Company would likely fail the 5% asset test and fail to qualify as a REIT. See "-- Failure to Qualify." As described above, ICH owns 100% of the nonvoting preferred stock of ICCC. ICH does not and will not own any of the voting securities of ICCC, and therefore ICH will not be considered to own more than 10% of the voting securities of ICCC. In addition, ICH believes that the aggregate value of its securities of ICCC has not at any time exceeded 5% of the total value of ICH's assets, and will not exceed such amount in the future. Latham & Watkins, in rendering its opinion as to the qualification of ICH as a REIT, is relying on the representation of ICH to such effect. No independent appraisals have been obtained to support this conclusion. There can be no assurance that the Service will not contend that the value of the securities of ICCC held by ICH exceeds the 5% value limitation. The 5% asset test requires that ICH revalue its assets at the end of each calendar quarter in which ICH acquires additional securities in ICCC for the purpose of applying such test. Although ICH 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 ICH's overall interest in ICCC. ICH 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 ICH's total assets as of the end of each calendar quarter. In particular, as of the end of each calendar quarter, ICH has limited and diversified and will continue to limit and diversify its ownership of securities of ICCC and other securities that do not constitute Qualified REIT Assets as necessary to satisfy the REIT asset tests described above. When purchasing CMBSs, ICH 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 may have an adverse impact on ICH'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 98 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. ICH intends to acquire only REMIC interests which fully qualify for purposes of the REIT gross income and asset tests. ICH has acquired a residual interest in a REMIC (the "Acquired REMIC"), which interest ICH believes is a Qualified REIT Asset. Such belief is based on (i) an opinion of counsel to the Acquired REMIC which is described in the prospectus supplement pursuant to which such interest was offered, which opinion was dated as of September 28, 1995; and (ii) a certification (on form 1066, Schedule Q) from the Acquired REMIC that at least 95% of the assets of the Acquired REMIC were Qualified REIT Assets for the quarter ended March 31, 1997. The Acquired REMIC is required to provide such certifications quarterly and ICH will monitor such certifications. In the event that the Acquired REMIC has failed or fails to qualify as a REMIC for federal income tax purposes, or if less than 95% of the Acquired REMIC's assets are Qualified REIT Assets, all or a portion of ICH's interest in the Acquired REMIC would not be treated as a Qualified REIT Asset. If the value of such nonqualifying portion of ICH's interest in the Acquired REMIC exceeded 5% in value of ICH's assets or otherwise caused ICH to violate an asset test or an income test, ICH would fail to qualify as a REIT. See "--Failure to Qualify." Latham & Watkins, in rendering its opinion as to the qualification of ICH as a REIT, has assumed that the Acquired REMIC qualifies as a REMIC under the Code and that at least 95% of the assets of the Acquired REMIC are Qualified REIT Assets. However, Latham & Watkins has undertaken no independent review of such assumptions. If ICH 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 ICH for purposes of the REIT gross income and asset tests. After initially meeting the asset tests at the close of any quarter, ICH 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 by the disposition of sufficient nonqualifying assets within 30 days after the close of that quarter. ICH 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 ICH fails to cure noncompliance with the asset tests within such time period, ICH would cease to qualify as a REIT. Annual Distribution Requirements. ICH, in order to qualify 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 ICH's "REIT taxable income" (generally, net income of ICH 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 noncash income over 5% of "REIT taxable income." In addition, if ICH disposes of any Built-In Gain Asset during its Recognition Period, ICH 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 ICH 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 ICH 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 ICH'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 ICH 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 ICH 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 99 undistributed taxable income from prior periods, ICH would be subject to a 4% excise tax on the excess of such required distributions over the amounts actually distributed. ICH intends to make timely distributions sufficient to satisfy these annual distribution requirements. ICH 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 ICH, 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 ICH. For instance, ICH may realize income without a corresponding cash payment, as in the case of original issue discount or accrued interest on defaulted Commercial Mortgages. In the event that such timing differences occur, in order to meet the distribution requirements, ICH 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. The terms of ICH's DRP are expected to comply with this ruling. See "Dividend Reinvestment Plan." Under certain circumstances, ICH 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 ICH's deduction for dividends paid for the earlier year. Thus, ICH may be able to avoid being taxed on amounts distributed as deficiency dividends; however, ICH will be required to pay interest based upon the amount of any deduction taken for deficiency dividends. RECORDKEEPING REQUIREMENTS A REIT is required to maintain certain records, including records regarding the actual and constructive ownership of its shares, and within 30 days after the end of its taxable year, to demand statements from persons owning above a specified level of the REIT's shares (e.g., if ICH has 2,000 or more stockholders of record, from persons holding 5% or more of ICH's outstanding shares of Common Stock; if ICH has over 200 but fewer than 2,000 stockholders of record, from persons holding 1% or more of ICH's outstanding shares of Common Stock; and if ICH has 200 or fewer shareholders of record, from persons holding 1/2% or more of ICH's outstanding shares of Common Stock) regarding their ownership of shares. In addition, ICH must maintain, as part of its records, a list of those persons failing or refusing to comply with this demand. Shareholders who fail or refuse to comply with the demand must submit a statement with their tax returns setting forth their actual stock ownership and other information. ICH will maintain the records and demand statements as required by Treasury Regulations. FAILURE TO QUALIFY If ICH fails to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, ICH 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 ICH fails to qualify will not be deductible by ICH nor will they be required to be made. As a result, ICH's failure to qualify as a REIT would substantially reduce the cash available for distribution by ICH to its stockholders. In addition, if ICH fails to qualify as a REIT, all distributions to stockholders will be taxable as ordinary income, to the extent of ICH's current or 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, ICH 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 ICH would be entitled to such statutory relief. Failure to qualify for even one year could result in the ICH's incurring substantial indebtedness (to the extent borrowings are feasible) or liquidating substantial investments in order to pay the resulting taxes. 100 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, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States fiduciaries have the authority to control all substantial decisions of the trust. As long as ICH qualifies as a REIT, distributions made by ICH 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 ICH that are properly designated by ICH as capital gain dividends will be taxable to taxable U.S. Stockholders as long- term capital gains (to the extent that they do not exceed ICH's actual net capital gain for the taxable year) without regard to the period for which a U.S. Stockholder has held his shares of Common Stock. 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 ICH 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 long-term capital gains (or short-term capital gains if the shares have been held for one year or less), provided that the shares have been held as a capital asset. ICH will notify stockholders at the end of each year as to the portions of the distributions which constitute ordinary income, net capital gain or return of capital. Dividends declared by ICH 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 ICH and received by the stockholder on December 31 of such year, provided that the dividend is actually paid by ICH 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 ICH. Distributions made by ICH 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 ICH (to the extent they do not constitute a return of capital) generally will be treated as investment income for purposes of computing the investment income limitation. Gain arising from the sale or other disposition of Common Stock, 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 28% 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 will be long-term gain or loss if such shares have been held for more than one year. 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 ICH which were required to be treated as long-term capital gains. 101 WITHHOLDING ICH 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 ICH with his correct taxpayer identification number may also be subject to penalties imposed by the Service. Any amount paid as backup withholding will be creditable against the stockholder's income tax liability. In addition, ICH may be required to withhold a portion of capital gain distributions to any stockholders who fail to certify their non-foreign status to ICH. 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 pension, profit- sharing or stock bonus plan which is "qualified" under the Code, that holds Common Stock as an investment will not be subject to tax on dividends paid by ICH. 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 "qualified" plans but not including IRAs) that own more than 10% (by value) of ICH'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 (see "Description of Capital Stock-- Repurchase of Shares and Restrictions on Transfer"), however, should prevent this result. Tax-exempt investors may also be subject to tax on distributions from ICH to the extent ICH has excess inclusion income. See "--Special Considerations." 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 ICH 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 ICH in order to claim such treatment. In addition, non-U.S. Stockholders are subject to special treatment with respect to distributions from ICH to the extent ICH has excess inclusion income. See "--Special Considerations". Non- U.S. Stockholders should consult their own tax advisors concerning the federal income tax consequences to them of a purchase of shares of ICH's Common Stock including the federal income tax treatment of dispositions of interests in, and the receipt of distributions from, ICH. SPECIAL CONSIDERATIONS The Company may invest in or otherwise acquire residual interests in REMICs. In general, a REMIC is a fixed pool of mortgage instruments in which investors hold multiple classes of interests and for which a REMIC election has been made. Part or all of any income derived by the Company from a REMIC residual interest may be excess inclusion income. Excess inclusion income is generally taxable income with respect to a residual interest in excess of a specified return on investment in the residual interest. In some cases, substantially all taxable income with respect to a residual interest may be considered excess inclusion income. Pursuant to regulations not yet published, if the Company pays any dividends to its stockholders that are attributable to such excess inclusion income, the stockholders who receive such dividends would be subject to certain special rules including (i) the characterization of excess inclusion income as UBTI for tax-exempt stockholders (including 102 employee benefit plans and individual retirement accounts), (ii) the application of federal income tax withholding at the maximum rate (without reduction for any otherwise applicable income tax treaty) on any excess inclusion income allocable to foreign stockholders, (iii) the inability of a stockholder generally to offset excess inclusion income with net operating losses, and (iv) the taxation (at the highest corporate tax rate) of a REIT, rather than its stockholders, on the amount of excess inclusion income for the taxable year allocable to shares of stock held by disqualified organizations (generally, tax-exempt entities not subject to tax on unrelated business taxable income, including governmental organizations). Until regulations or other guidance are issued, the Company will use methods it believes are appropriate for calculating the amount of any excess inclusion income it recognizes from REMICs, and allocating any excess inclusion income to its stockholders. The Company 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 the Company's mortgage assets), CMOs or other secured lending transactions. If the Service were to successfully take the position that such transactions result in the Company having issued debt instruments (i.e., reverse repurchase agreements, CMOs or other secured loans) with differing maturity dates secured by a pool of Commercial Mortgages, the Company could be treated, in whole or in part, as a taxable mortgage pool. In this case, a portion of the Company's income could be characterized as excess inclusion income which would subject stockholders (or the Company, to the extent Common Stock is held by disqualified organizations) to the tax treatment described above with respect to residual interests in REMICs. The Company intends to take the position that its existing financing arrangements do not create a taxable mortgage pool or excess inclusion income. However, the Company may enter into arrangements creating such excess inclusion income in the future. In the absence of any definitive authority on this issue, there can be no assurance regarding whether the Company's reverse repurchase agreements, CMOs or other secured loans will cause the Company to realize excess inclusion income. OTHER TAX CONSEQUENCES ICCC will 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, ICCC is able to distribute only its net after-tax earnings to its shareholders, including ICH, as dividend distributions, thereby reducing the cash available for distribution by ICH to its stockholders. ICH 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 ICH 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 ICH. 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. 103 LEGAL MATTERS The validity of the shares of Common Stock and Subscription Rights offered hereby will be passed on for the Company by Freshman, Marantz, Orlanski, Cooper & Klein, 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, Baltimore, Maryland. Certain legal matters will be passed on for the Dealer Managers by Skadden, Arps, Slate, Meagher & Flom (Illinois). Thomas J. Poletti, a Director of ICH, is a partner in the law firm Freshman, Marantz, Orlanski, Cooper & Klein, counsel to the Company and IMH. See "Certain Transactions--The Organizational Transactions" and "--Other Transactions." EXPERTS The financial statements of Imperial Credit Commercial Holdings, Inc. and Imperial Commercial Capital Corporation as of March 31, 1997, and for the period from January 15, 1997 (commencement of operations) through March 31, 1997, have been included herein in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 104 GLOSSARY As used in this Prospectus, the capitalized and other terms listed below have the meanings indicated. "Affiliated Person" means of any entity: (1) any person directly or indirectly owning, controlling, or holding with the power to vote, five percent (5%) or more of the outstanding voting securities of such entity; (2) any person five percent (5%) or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such entity; (3) any person directly or indirectly controlling, controlled by, or under common control with, such entity or (4) any officer, director or employee of such entity or any person set forth in (1), (2) or (3) above. Any person who owns beneficially, either directly or through one or more controlled companies, more than twenty-five percent (25%) of the voting securities of any entity shall be presumed to control such entity. Any person who does not so own more than twenty-five percent (25%) of the voting securities of any entity shall be presumed not to control such entity. A natural person shall be presumed not to be a controlled entity. "Affiliated REIT" means a REIT which may have been or will be an Affiliated Person with respect to the Company, IMH, or their respective conduit operations. "Agency Certificates" means Pass-Through Certificates guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation or the Government National Mortgage Association. "AMEX" means American Stock Exchange, Inc. "ARM" means a mortgage loan or any mortgage loan underlying a Mortgage Security that features adjustments of the underlying interest rate at predetermined times based on an agreed margin to an established index. An ARM is usually subject to periodic interest rate and/or payment caps and a lifetime interest rate cap. "Average Net Worth" means the arithmetic average of the sum of the gross proceeds from any sale of equity securities by the Company, before deducting any underwriting discounts and commissions and other expenses and costs relating to the offering, plus the Company's retained earnings less dividends declared (without taking into account any losses incurred in prior periods) computed by taking the daily average of such values during such period. "Bankruptcy Code" means Title 11, United States Code, as amended. "Charter" means the Articles of Incorporation of ICH and amendments thereto. "CMO" means an adjustable or fixed-rate debt obligation (bond) that is collateralized by mortgage loans or mortgage certificates and issued by private institutions. "CMSRs" means Commercial Mortgage Servicing Rights. "CMT Index" means the one year constant maturity Treasury index. "Code" means the Internal Revenue Code of 1986, as amended. "CMBSs" means (1) pass-through certificates and (2) REMICs. "Commercial Mortgages" mean commercial mortgage assets including condo- conversion, multi-family property and cooperative apartment mortgage loans on commercial real property such as industrial and warehouse properties, office buildings, retail space and shopping malls, hotels and motels, nursing homes, hospitals, congregate care facilities and senior living centers. "Commission" means the Securities and Exchange Commission. "Company" means ICH and ICCC, as a combined entity unless the context requires otherwise. "Conduit Operations" means ICCC. 105 "Contribution" means the contribution by IMH to ICH of 100% of the outstanding shares of the non-voting preferred stock of ICCC in exchange for 95,000 shares of ICH Class A Stock. "Conversion Rate" means the rate in which the $15.0 million promissory note to ICH from IMH converts into one share of ICH Preferred Stock for each $5.00 principal amount of said note. "Designated Persons" means the person or persons who are the owners, co- owners and beneficiaries of the account in which IMH Shares are held. "DSCRs" means Debt Service Coverage Ratios. "11th District Cost of Funds" means the index made available monthly by the Federal Home Loan Bank Board of the cost of funds to members of the Federal Home Loan Bank 11th District. "ERISA" means the Employee Retirement Income Security Act of 1974. "ERISA Plan" or "Plan" means a pension, profit-sharing, retirement or other employee benefit plan which is subject to ERISA. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Expiration Date" means July , 1997. "Foreign Record Date IMH Holders" means Record Date IMH Holders whose record addresses are outside the United States. "GAAP" means generally accepted accounting principles. "ICCC" means Imperial Commercial Capital Corporation, a California corporation that conducts the Conduit Operations. "ICH" means Imperial Credit Commercial Holdings, Inc., a Maryland corporation, the entity from which IMH will be contributed the preferred stock of ICCC. "ICH Class A Stock" means the non-voting Class A Common Stock, $.01 par value per share, of ICH. "ICH Preferred Stock" means the non-voting Class A Convertible Preferred Stock, $.01 par value per share, of ICH. "ICH Shares" means up to 7,000,000 shares of Common Stock offered pursuant to Subscription Rights. "ICIFC" means ICI Funding Corporation, a California corporation and the conduit operations of IMH. "IMH" means Imperial Credit Mortgage Holdings, Inc., a Maryland corporation. "IMH Holders" means holders of shares of common stock and/or stock options of IMH. "IMH Shares" means the shares of common stock and options to purchase shares of common stock of IMH held by IMH Holders. "Information Agent" means Shareholder Communications Corp. "Initial Confirmation Date" means that date which is on or within one business day after the Settlement Date. 106 "Initial Closing Date" means that day which is three business days following the Initial Confirmation Date. "Initial Primary Business" means the primary business as described in the Principal Party's initial public offering documentation. "Investment Company Act" means the Investment Company Act of 1940, as amended. "Investment Opportunity" means any mortgage loan or mortgage-backed security investment opportunity offered to RAI , IMH, ICH or an Affiliated REIT, as the case may be. "ISOs" means qualified incentive stock options granted under the Stock Option Plan, which meet the requirements of Section 422 of the Code. "IWLG" means Imperial Warehouse Lending Group, Inc., a subsidiary of IMH. "Keogh Plans" means H.R. 10 Plans. "LIBOR" means the London interbank offered rate. "Long-Term Investment Operations" means ICH. "LTV" or "loan-to-value ratio" means the percentage obtained by dividing the principal amount of a loan by the lower of the sales price or appraised value of the mortgaged property when the loan is originated. "Manager" means REIT Advisors, Inc. "Master Commitments" means commitments issued by the Company which will obligate the Company to purchase Mortgage Assets from the holders of the commitment for a specified period of time, in a specified aggregate principal amount and at a specified price. "MGCL" means the Maryland General Corporation Law, as amended from time to time. "Maximum Offering Amount" The Maximum Subscription Offer Amount and the Maximum Standby Offer Amount, collectively. "Maximum Standby Offer Amount" means the 3,039,908 maximum number of Standby Shares being offered in Standby Offer. "Maximum Subscription Offer Amount" means the 7,000,000 maximum number of ICH Shares being offered in Subscription Offer. "Minimum Offering Amount" means 2,600,000 minimum number of Shares to be issued in the Offering (including Standby Shares that may be issued pursuant to Standby Purchase Agreements). "Minimum Subscription Offer Amount" means the 2,600,000 minimum number of ICH Shares being offered in the Subscription Offer. "Minimum Standby Offer Amount" means the 998,326 minimum number of Standby Shares being offered in the Standby Offer. "MSRs" means mortgage servicing rights. "NASD" means the National Association of Securities Dealers, Inc. "Net Income" means the net income of the Company as determined by the Code before the Manager's compensation, the deduction for dividends paid, and any net operating loss deductions arising from losses in prior periods. The Company's interest expenses for borrowed money shall be deducted in calculating Net Income. 107 "Offering" means the Subscription Offer and the Standby Offer, collectively. "Over-Subscription Privilege" means the right of IMH Holders to request additional ICH Shares in event of full exercise of their primary Subscription Privilege. "Ownership Limit" means 9.8% (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of Common Stock, as may be increased or, subject to limitations, reduced by the Board of Directors of ICH. "Pass-Through Certificates" means securities (or interests therein) which are Qualified REIT Assets evidencing undivided ownership interests in a pool of mortgage loans, the holders of which receive a "pass-through" of the principal and interest paid in connection with the underlying mortgage loans in accordance with the holders' respective, undivided interests in the pool. Pass-Through Certificates evidence interests in loans secured by multi-family or commercial real estate properties. "Primary Subscription Privilege" means an IMH Holder's right to acquire during the Subscription Period at the Subscription Price one ICH Share for each IMH Share held. "Principal Party" means the entity whose Initial Primary Business most closely aligns with an Investment Opportunity and the entity which will first be offered an Investment Opportunity pursuant to the Right of First Refusal Agreement. "Privately-Issued Certificates" means privately-issued Pass-Through Certificates issued by the Company or an affiliate of the Company or other non-Agency third party issuer. "Qualified Hedge" means a bona fide interest rate swap or cap agreement entered into by ICH to hedge variable rate indebtedness only, that ICH incurred or expects to incur to acquire or carry Qualified REIT Assets. "QRS" means a qualified REIT subsidiary that is a corporation whose stock is entirely owned by the REIT at all times during such corporation's existence. "Qualified REIT Assets" means (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 ICH (other than amounts received pursuant to a dividend reinvestment plan) or (b) a public offering of debt obligations of ICH which have maturities of at least 5 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). "Qualifying Interests" means "mortgages and other liens on and interests in real estate," as defined in Section 3(c)(5)(C) under the Investment Company Act. "RAI" means REIT Advisors, Inc., the Manager of the Company. "Real Estate Asset" means interests in real property, interests in mortgages on real property, and regular interests in REMICS. "Record Date" means June , 1997. "REIT" means a real estate investment trust as defined under Section 856 of the Code. "REMIC" means serially maturing debt securities secured by a pool of mortgage loans, the payments on which bear a relationship to the debt securities and the issuer of which qualifies as a Real Estate Mortgage Investment Conduit as defined under Section 860D of the Code. 108 "Return on Equity" means return calculated for any quarter by dividing the Company's Net Income for the quarter by its Average Net Worth for the quarter. "Reverse Repurchase Agreement" means a borrowing device by an agreement to sell securities or other assets to a third party and a simultaneous agreement to repurchase them at a specified future date and price, the price difference constituting the interest on the borrowing. "Securities Act" means the Securities Act of 1933, as amended. "Service" means the United States Internal Revenue Service. "Servicing Agreements" means agreements entered into with correspondents in which the correspondents retain the right to service the Commercial Mortgages. "Settlement Date" means the day that is within three business days after the Expiration Date. "Shares" means the ICH Shares and the Standby Shares. "Standby Offer" means an offer to institutions that may or may not be IMH Holders as of Record Date. "Standby Purchasers" means certain persons that may or may not be IMH Holders that may purchase ICH Shares pursuant to Standby Purchase Agreements. "Standby Purchase Agreements" means commitments pursuant to which the Standby Offer will be accomplished. "Standby Shares" means Shares offered pursuant to the Standby Offer. "Subscription Agent" means BankBoston, N.A., parent corporation to Boston EquiServe LP, and also Transfer Agent and Registrar for ICH. "Subscription Offer" means an offer to IMH Holders as of the Record Date. "Subscription Rights Period" means the period commencing on June , 1997 and ending at 5:00 p.m., New York City time, on July , 1997. "Subscription Rights" includes the Primary Subscription Privilege and the Over-Subscription Privilege. "Supplemental Closing Date" means that day which is within 30 calendar days of the Initial Closing Date. "Tax-Exempt Entity" means a qualified pension, profit-sharing or other employee retirement benefit plan, Keogh Plan, bank commingled trust fund for such plans, an IRA or other similar entity intended to be exempt from federal income taxation. "Ten Year U.S. Treasury Rate" means the average of the weekly average yield to maturity for U.S. Treasury securities (adjusted to a constant maturity of 10 years) as published weekly by the Federal Reserve Board during a quarter. "25% entity" means any entity of which IMH owns 25% or more of the voting securities. "25% Payment" means incentive compensation for each fiscal quarter, in an amount equal to 25% of the Net Income of the Company, before deduction of such incentive compensation, in excess of the amount that would produce an annualized Return on Equity equal to the Ten Year U.S. Treasury Rate plus 2%. "UBTI" means "unrelated trade or business taxable income" as defined in Section 512 of the Code. "Unaffiliated Director" means a Director who is independent of the Company, except for being a Director of the Company, any manager of the Company (including RAI) and IMH and its Affiliated Persons. 109 INDEX TO FINANCIAL STATEMENTS IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
PAGE ---- Independent Auditors' Report............................................... F-2 Balance Sheet ............................................................. F-3 Statement of Operations.................................................... F-4 Statement of Changes in Stockholders' Equity............................... F-5 Statement of Cash Flows.................................................... F-6 Notes to Financial Statements.............................................. F-7
IMPERIAL COMMERCIAL CAPITAL CORPORATION Independent Auditors' Report............................................... F-23 Balance Sheet ............................................................. F-24 Statement of Operations.................................................... F-25 Statement of Changes in Shareholders' Equity............................... F-26 Statement of Cash Flows.................................................... F-27 Notes to Financial Statements.............................................. F-28
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors Imperial Credit Commercial Holdings, Inc.: We have audited the accompanying balance sheet of Imperial Credit Commercial Holdings, Inc. as of March 31, 1997, and the related statement of operations, changes in stockholders' equity and cash flows for the period from January 15, 1997 (commencement of operations) through March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Imperial Credit Commercial Holdings, Inc. as of March 31, 1997, and the results of its operations and its cash flows for the period from January 15, 1997 (commencement of operations) through March 31, 1997 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Orange County, California April 16, 1997 F-2 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. BALANCE SHEET (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS ------ PRO FORMA MARCH 31, 1997 MARCH 31, (NOTE 11) 1997 ----------- --------- (UNAUDITED) Cash and cash equivalents................................ $ 4,400 $ 4,400 Commercial Mortgages held for investment, net............ 17,522 17,522 Residual interest in securitization...................... 10,025 10,025 Investment in ICCC....................................... 323 -- Accrued interest receivable.............................. 128 128 Due from affiliates...................................... 134 134 Prepaid and other assets................................. 41 41 ------- ------- $32,573 $32,250 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Borrowings from IWLG..................................... $16,563 $16,563 Other affiliated borrowings.............................. 520 520 Accrued interest expense................................. 150 150 ------- ------- Total liabilities.................................... 17,233 17,233 ------- ------- Stockholders' equity: Preferred stock, $.01 par value; 10,000,000 shares authorized; 3,000,000 shares issued and outstanding pro forma (unaudited) and at March 31, 1997 (liquidation preference of $15,000).............. 30 30 Common stock, $.01 par value; 46,000,000 shares authorized; 300,000 shares issued and outstanding pro forma (unaudited) and 599,000 shares issued and outstanding at March 31, 1997.............. 3 6 Class A Common Stock, $.01 par value; 4,000,000 shares authorized; 394,000 shares issued and outstanding pro forma (unaudited)..................... 4 -- Additional paid-in capital.............................. 14,970 14,970 Contributed capital..................................... 1,279 957 Accumulated deficit..................................... (946) (946) ------- ------- Total stockholders' equity........................... 15,340 15,017 ------- ------- Commitments and contingencies $32,573 $32,250 ======= =======
See accompanying notes to financial statements. F-3 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA FOR THE PERIOD FROM JANUARY 15, 1997 FOR THE PERIOD (COMMENCEMENT OF FROM JANUARY 15, 1997 OPERATIONS) THROUGH (COMMENCEMENT OF MARCH 31, 1997 OPERATIONS) THROUGH (NOTE 11) MARCH 31, 1997 --------------------- --------------------- (UNAUDITED) Interest income: Commercial Mortgages held for investment...................... $ 219 $ 219 Residual interest in securitization.................. 131 131 Other............................ 16 16 --------- ------ Total interest income.......... 366 366 --------- ------ Interest expense: Borrowings from IWLG............. 150 150 Other affiliated borrowings...... 129 129 --------- ------ Total interest expense......... 279 279 --------- ------ Net interest income before provision for Commercial Mortgage losses............... 87 87 Provision for Commercial Mortgage losses............................ 13 13 --------- ------ Net interest income............ 74 74 --------- ------ Stock compensation expense......... 957 957 Equity in net loss of ICCC......... 177 -- Professional expense............... 60 60 Data processing.................... 3 3 --------- ------ 1,197 1,020 --------- ------ Net income (loss).............. $ (1,123) $ (946) ========= ====== Pro forma net income (loss) per share............................. $ (0.66) ========= Pro forma weighted average number of shares outstanding............. 1,694,000 =========
See accompanying notes to financial statements. F-4 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 (IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL ------------- ------------- PAID-IN CONTRIBUTED ACCUMULATED STOCKHOLDERS' NUMBER AMOUNT NUMBER AMOUNT CAPITAL CAPITAL DEFICIT EQUITY ------ ------ ------ ------ ---------- ----------- ----------- ------------- Balance, January 15, 1997 (commencement of operations)............ -- $-- -- $-- $ -- $-- $ -- $ -- Sale of common stock.... -- -- 599 6 -- 957 -- 963 Sale of preferred stock. 3,000 30 -- -- 14,970 -- -- 15,000 Net income (loss) from January 15, 1997 (commencement of operations) through March 31, 1997......... -- -- -- -- -- -- (946) (946) ----- --- --- --- ------- ---- ----- ------- Balance, March 31, 1997. 3,000 $30 599 $ 6 $14,970 $957 $(946) $15,017 ===== === === === ======= ==== ===== =======
See accompanying notes to financial statements. F-5 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 (IN THOUSANDS) Cash flows from operating activities: Net income (loss)................................................... $ (946) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for Commercial Mortgage losses........................... 13 Stock compensation expense......................................... 957 Net change in accrued interest receivable.......................... (128) Net change in prepaids and other assets............................ (41) Net change in accrued interest expense............................. 150 -------- Net cash provided by operating activities........................ 5 -------- Cash flows from investing activities: Purchase of Commercial Mortgages held for investment................ (17,539) Principal paydowns on Commercial Mortgages held for investment...... 4 Purchase of residual interest in securitization..................... (10,098) Paydowns on residual interest in securitization..................... 73 -------- Net cash used in investing activities............................ (27,560) -------- Cash flows provided by financing activities: Issuance of common stock............................................ 6 Issuance of promissory note to IMH.................................. 15,000 Net borrowings from IWLG............................................ 16,563 Net change in other affiliated borrowings........................... 386 -------- Net cash provided by financing activities........................ 31,955 -------- Net increase in cash and cash at end of the period............... $ 4,400 ======== Non-cash transactions: Conversion of promissory note held by IMH to preferred stock....... $ 15,000
See accompanying notes to financial statements. F-6 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 1. THE COMPANY THE COMPANY'S ORGANIZATION Imperial Credit Commercial Holdings, Inc. (the "Company" or "ICH"), a newly formed Maryland corporation, commenced operations in January 1997 as a separate division of Imperial Credit Mortgage Holdings, Inc. ("IMH"). The Company operates as a specialty commercial property finance company which will elect to be taxed as a real estate investment trust ("REIT") for Federal income tax purposes, which generally will allow the Company to pass through income to stockholders without payment of corporate level Federal income tax. The Company and Imperial Commercial Credit Corporation ("ICCC"), the Company's unconsolidated conduit operations vehicle, were formed for the purpose of originating, purchasing and securitizing or selling commercial mortgages and investing in commercial mortgages and commercial mortgage-backed securities ("CMBSs"). Commercial mortgage assets include mortgage loans on condo-conversions, multi-family and cooperative apartment properties and mortgage loans on commercial property, such as industrial and warehouse properties, office buildings, retail space and shopping malls, hotels and motels, nursing homes, hospitals, congregate care facilities and senior living centers (collectively, "Commercial Mortgages"). The following is a summary of transactions entered into or to be entered into in connection with the organization of the Company ("Organizational Transaction"): . On February 3, 1997, the officers and directors of the Company as a group and IMH purchased 300,000 and 299,000 shares of the common stock of ICH ("ICH Common Stock"), respectively. . In February 1997, IMH purchased all of the non-voting preferred stock of ICCC, which has a coupon which represents 95% of the GAAP based economic interest in ICCC entitling the holder to receive 95% of any dividend or distribution made by ICCC, for $500,000 and certain of the Company's officers purchased all of the outstanding shares of common stock of ICCC, which represents 5% of the GAAP based economic interest in ICCC entitling the holder to receive 5% of any dividend or distribution of ICCC. . In February 1997, ICCC brokered the Company's purchase of $7.3 million and $10.2 million of condominium conversion loans which were financed with $16.6 million in borrowings from Imperial Warehouse Lending Group ("IWLG") (IMH's warehouse lending operations) and $900,000 in other borrowings from IMH. All of such condominium conversion loans were purchased from ICI Funding Corporation ("ICIFC"), the conduit operations of IMH, and $7.3 million of such mortgage loans were originated by a company with which William D. Endresen, an officer of the Company and ICCC, was an affiliate. . In March 1997, IMH lent ICH $15.0 million evidenced by a promissory note bearing interest at the rate of 8% per annum which was convertible into shares of the non-voting convertible preferred stock of ICH (the "ICH Preferred Stock") at the rate of one share of ICH Preferred Stock for each $5.00 principal amount of said note (the "Conversion Rate"). . In March 1997, IMH converted the aforementioned $15.0 million principal amount promissory note into an aggregate of 3,000,000 shares of ICH Preferred Stock. All ICH Preferred Stock is automatically convertible upon the closing of ICH's initial public offering ("the Offering") into shares of ICH Common Stock determined by multiplying the number of shares of ICH Preferred Stock to be converted by a fraction, the numerator of which is $5.00 and the denominator of which is the price of the shares to be issued pursuant to the Offering (the "Subscription Price"). Notwithstanding the foregoing, consistent with IMH's classification as a REIT, IMH shall not be entitled to have converted into ICH Common Stock more than that number of shares of ICH Preferred Stock whereby IMH would own, immediately after such conversion, greater than 9.8% of the outstanding ICH Common Stock. Any shares of ICH F-7 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 Preferred Stock not converted into ICH Common Stock upon the closing of the Offering shall on such date automatically convert into shares of ICH non- voting Class A Common Stock (the "ICH Class A Stock") at the same rate as the ICH Preferred Stock converted into ICH Common Stock on said date. Shares of ICH Class A Stock convert into shares of ICH Common Stock on a one-for- one basis and each such class of ICH Common Stock is entitled to cash dividends on a pro rata basis. Upon any subsequent issuances of ICH Common Stock, shares of ICH Class A Stock shall automatically convert into additional shares of ICH Common Stock, subject to said 9.8% limitation. . In March 1997, the Company purchased a $10.1 million residual interest in securitization from ICIFC which was financed by a promissory note. In March 1997 the promissory note was repaid with cash from IMH's above- referenced $15.0 million investment. Concurrently therewith, the Company repaid the $900,000 owed to IMH in connection with its purchase of condominium conversion loans. . In April 1997, IMH exchanged 299,000 shares of ICH Common Stock held by it for an equal number of shares of ICH Class A Stock. . On the closing of this Offering (unaudited), IMH will contribute to ICH (the "Contribution") 100% of the non-voting preferred stock of ICCC for 95,000 shares of ICH Class A Stock. Upon the closing of this Offering (unaudited), IMH will own 315,078 shares of ICH Common Stock and 1,078,922 shares of ICH Class A Stock, assuming the Minimum Offering Amount is sold, and 1,123,405 shares of ICH Common Stock and 270,595 shares of ICH Class A Stock, assuming the Maximum Offering Amount is sold. BASIS OF PRESENTATION OF THE COMPANY'S OPERATIONS The operations of ICH, currently a subsidiary of IMH, subject to the completion of the Contribution, have been presented in the financial statements as a stand-alone Company. Interest has been charged on all affiliated borrowings at the rate of 8% per annum unless at a rate otherwise noted. Also, costs and expenses of IMH have been allocated to ICH in proportion to the services provided, plus a 15% service charge. See note 4 to notes to the financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. THE COMPANY'S OPERATIONS The Company currently operates the Long-Term Investment Operations which invests primarily in Commercial Mortgages and CMBSs and, as of the effective date of the Offering, will engage in the Conduit Operations, which will originate, purchase and sell or securitize Commercial Mortgages. The Conduit Operations will operate through three divisions: the Condominium Division, the Retail Division and the Correspondent and Bulk Purchase Division. Long-Term Investment Operations The Long-Term Investment Operations invests primarily in adjustable rate Commercial Mortgages and CMBSs for long-term investment. Income is earned principally from the net interest income received by the Company on the Commercial Mortgages and CMBSs purchased and held in its portfolio. Conduit Operations The Conduit Operations will operate through three divisions: the Condominium Division, the Retail Division, the Correspondent and Bulk Purchase Division. F-8 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 Condominium Division. This division will offer on a retail basis adjustable rate financing to developers and project owners who have completed the development of a condominium complex or the conversion of an apartment complex to a condominium complex on property with a typical loan amount of $3.0 million to $10 million. All originations, underwriting, processing and funding will be performed at ICCC's executive offices. The Company anticipates that the Condominium Division's Commercial Mortgages will be offered on a nationwide basis and that Commercial Mortgages originated through the Condominium Division will be financed through the utilization of collateralized mortgage obligation ("CMO") borrowings by the Long-Term Investment Operations. Retail Division. This division, which is expected to become operational by the closing of the Offering, will originate Commercial Mortgages for properties including general purpose apartment complexes, general retail property such as shopping centers, super markets and department stores, light industrial property, and office buildings. The Retail Division will offer smaller balance ($500,000 to $1.5 million) fixed and adjustable rate Commercial Mortgage products to developers and project owners for smaller properties and projects than those funded by the Correspondent and Bulk Purchase Division. Although processing and funding operations relating to these Commercial Mortgage will be performed centrally at ICCC's executive offices, the Company has targeted major metropolitan areas for the opening of satellite offices for regional originations. A portion of the adjustable rate Commercial Mortgages that will be originated by the Retail Division may be held in portfolio by the Long-Term Investment Operations, while the balance thereof and a substantial portion of the fixed rate Commercial Mortgages originated will be resold by the Conduit Operations through REMIC securitizations. Correspondent and Bulk Purchase Division. This division will both originate Commercial Mortgages on a retail basis and purchases Commercial Mortgages on a bulk and flow basis. The Correspondent and Bulk Purchase Division will offer larger principal balance ($1.5 million to $10.0 million) Commercial Mortgages for commercial projects than those funded by the Retail Division. The Correspondent and Bulk Purchase Division will offer adjustable rate and fixed rate programs offered through specified correspondents who may be provided with Company-sponsored warehouse facilities. In addition, the Correspondent and Bulk Purchase Division will purchase Commercial Mortgages in bulk and on a flow basis from selected financial institutions and mortgage bankers. A portion of the adjustable rate Commercial Mortgages originated or purchased by this Division may be held in portfolio by the Long-Term Investment Operations, while the balance thereof and a substantial portion of the fixed rate Commercial Mortgages originated or purchased will be resold through REMIC securitizations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, cash and cash equivalents consist of cash and money market mutual funds. The Company considers investments with maturities of three months or less at date of purchase to be cash equivalents. INVESTMENT IN IMPERIAL COMMERCIAL CREDIT CORPORATION The Company will record its preferred stock investment in ICCC on the equity method at 95%, which is the economic interest the Company is entitled to as owner of 100% of the non-voting preferred stock of ICCC. See note 1 to notes to financial statements. COMMERCIAL MORTGAGES HELD FOR INVESTMENT The Company purchases Commercial Mortgages to be held as long-term investments. Commercial Mortgages held for investment are recorded at cost at the date of purchase. Commercial Mortgages held for F-9 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 investment include adjustable-rate loans to developers secured by first liens on converted condominium complexes. All of the Commercial Mortgages held for investment at March 31, 1997 were collateralized by properties located in California and Arizona. Premiums and discounts related to these Commercial Mortgages are amortized over their estimated lives using the interest method. Commercial Mortgages are continually evaluated for collectibility and, if appropriate, the Commercial Mortgages may be placed on nonaccrual status, generally 90 days past due, and previously accrued interest reversed from income. Other than temporary impairment in the carrying value of Commercial Mortgages held for investment, if any, will be recognized as a reduction to current earnings. The Company maintains an allowance for losses on Commercial Mortgages held for investment at an amount which it believes is sufficient to provide adequate protection against future losses in the Commercial Mortgages portfolio. The allowance for losses is determined primarily on the basis of management's judgment of net loss potential, including specific allowances for known impaired Commercial Mortgages and other factors such as changes in the nature and volume of the portfolio, value of the collateral and current economic conditions that may affect the borrowers ability to pay. A provision is recorded for all Commercial Mortgages or portions thereof deemed to be uncollectible thereby increasing the allowance for Commercial Mortgages losses. RESIDUAL INTEREST IN SECURITIZATION The accompanying 1997 balance sheet includes one residual interest in securitization ("residual") of real estate mortgage investment conduits ("REMICs") which was recorded as a result of a 1995 securitization by Imperial Credit Industries, Inc. of commercial loans through a special purpose trust vehicle. ICCH purchased the residual in March 1997 from ICIFC for $10.1 million. ICIFC and ICCH have estimated future cash flows from the residual utilizing assumptions that they believe are commensurate with the risk inherent in the investment and consistent with those that they believe would be utilized by an unaffiliated third-party purchaser and discounted at a rate commensurate with the risk involved. The Company has classified this residual as an available-for-sale security. Unrealized gains and losses net of related income taxes will be included as a separate component of stockholders' equity. Other than temporary declines in the fair value of the residual, if any, will be recognized as a reduction to current earnings. To the Company's knowledge, there is currently no active market for the purchase or sale of this residual. The fair value of the residual is determined by computing the present value of the excess of the weighted-average coupon on the Commercial Mortgages sold (10.6%) over the sum of: (1) the coupon on the senior interest (5.9%), (2) a base servicing fee paid to servicer of the Commercial Mortgages (0.50%) and other fees, (3) expected estimated losses (0.40%) to be incurred on the portfolio of Commercial Mortgages sold over the estimated lives of the Commercial Mortgages and using an estimated future prepayment assumption (10%). The prepayment assumptions used in estimating the cash flows is based on recent evaluations of the actual prepayments of the related portfolio and on market prepayment rates on new portfolios of similar Commercial Mortgages, taking into consideration the current interest rate environment and its expected impact on the estimated future prepayment rate. The estimated cash flows expected to be received by the Company are discounted at an interest rate that the Company believes an unaffiliated third-party purchaser would require as a rate of return commensurate with the risk of holding such a financial instrument. The rate used to discount the cash flows was approximately 24%. To the extent that actual future excess cash flows are different from estimated excess cash flows, the fair value of the Company's residual could decline. Under the terms of the securitization, the residual is required to build overcollateralization to specified levels using the excess cash flows described above until set percentages of the securitized portfolio are attained. Future cash flows to the residual holder are all held by the REMIC trust until a specific percentage of either the original F-10 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 or current certificate balance is attained which percentage can be raised if certain charge-offs and delinquency ratios are exceeded. The certificate holders' recourse for credit losses is limited to the amount of overcollateralization held by the residual in the REMIC trust. Upon maturity of the certificates or upon exercise of an option ("clean up call") to repurchase all the remaining Commercial Mortgages once the balance of the Commercial Mortgages in the trust are reduced to 10% of a specified balance of the original Commercial Mortgages in the trust, any remaining amounts in the trust are distributed. The current amount of any overcollateralization balance held by the trust are recorded as part of the residual. INCOME TAXES In any year in which the Company qualifies as a REIT, it generally will not be subject to Federal income tax on that portion of its taxable income or net capital gain which is distributed to its stockholders. The Company will, however, be subject to tax at normal corporate rates upon any net income or net capital gain not distributed. The Company intends to distribute substantially all of its taxable income to its stockholders on a pro rata basis in each year. 3. COMMERCIAL MORTGAGES HELD FOR INVESTMENT, NET Commercial Mortgages held for investment consisted of the following:
MARCH 31, 1997 -------------- (IN THOUSANDS) Commercial Mortgages held for investment................... $ 17,535 Allowance for Commercial Mortgage losses................... (13) -------- $ 17,522 ========
As of March 31, 1997, the weighted-average interest rate on the Commercial Mortgages held for investment is 8.7% and the weighted-average contractual maturity is 359 months. All of the Commercial Mortgages purchased by ICH are adjustable-rate Commercial Mortgages to developers secured by first liens on converted condominium complexes. Because of the concentration of the Company's Commercial Mortgages located in California and Arizona, a significant decline in regional economic conditions, or some other regional catastrophe, could result in a decline in interest income and fee income. Moreover, such an event or events could affect the ability of borrowers to payoff their Commercial Mortgages with the Company. Activity in the allowance for Commercial Mortgage losses for the period from January 15, 1997 (commencement of operations) through March 31, 1997 was as follows (in thousands): Balance, beginning of period........................................ $-- Provision for Commercial Mortgage losses............................ 13 Charge-offs......................................................... -- Recoveries.......................................................... -- ---- Balance, end of period.............................................. $ 13 ====
As of March 31, 1997, the Company had no Commercial Mortgages considered impaired and no Commercial Mortgages over 30 days past due. F-11 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 4. RELATED PARTY TRANSACTIONS FINANCING OF COMMERCIAL MORTGAGES HELD FOR INVESTMENT AND OTHER AFFILIATED BORROWINGS The $17.5 million in Commercial Mortgages held for investment were purchased in February 1997 through ICCC from ICIFC at the unpaid principal balance of the Commercial Mortgages, with the servicing rights retained by ICCC. The Company financed the purchase of the $17.5 million of Commercial Mortgages with $16.6 million in borrowings from IWLG and $900,000 in other borrowings from IMH. The Company has recorded interest expense on the amounts borrowed from IWLG and the other borrowings from IMH at 6.3% and 8% per annum, respectively, which totaled $150,000 and $25,000, respectively, for the period from January 15, 1997 (commencement of operations) through March 31, 1997. In March 1997, the Company repaid the $900,000 in other borrowings from IMH. In April 1997, the Company secured its own warehouse lending facility from an unaffiliated third party for $200 million guaranteed by IMH, which guarantee expires at such time as the Company has $50 million in stockholders' equity. The new warehouse line of credit is uncommited and accrues interest at a spread over LIBOR. All other borrowings between ICH, and IMH and its affiliates, and ICCC have been allocated interest at the rate of 8% per annum, except for borrowings from ICIFC related to the purchase of the residual interest in securitization prior to ICH receiving its $15 million preferred stock investment, which was allocated at 12% and totaled $44,000. RELATED PARTY EXPENSE ALLOCATIONS The Company was charged various expenses from IMH for certain services which primarily include human resources, data processing and professional services. These expenses were primarily charged based on a pro rata allocation of certain IMH employees time spent working on ICH related business, which management believes is reasonable, and included a 15% service charge which will be included in the terms of the management agreement effective with the Offering. See note 6 to notes to the financial statements. The related party allocations for the period January 15, 1997 (commencement of operations) through March 31, 1997 totaled $63,000. Management believes the related party expenses allocated to ICH and included in its results of operations for the period from January 15, 1997 (commencement of operations) through March 31, 1997 approximate what the expenses would have been if ICH had operated as an unaffiliated entity of IMH and its affiliates. STOCK COMPENSATION EXPENSE Stock compensation expense of $957,000 represents the difference between the price at which the Company issued 300,000 shares of common stock on February 3, 1997 ($.01 per share) and the estimated fair value of such shares as determined by the Company's management based on an independent valuation, as of February 3, 1997 ($3.20 per share). 5. STOCKHOLDERS' EQUITY COMMON STOCK The Company has authorized 50,000,000 shares of $.01 par value Common Stock ("ICH Common Stock") of which 4,000,000 shares were reclassified and designated as Class A non-voting Common Stock ("ICH Class A Stock"). On February 3, 1997 the Company issued 300,000 shares of ICH Common Stock to certain officers and directors of the Company and 299,000 shares of ICH Common Stock to IMH. F-12 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 Each share of ICH 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 ICH upon liquidation. Each share of ICH Common Stock is entitled to one vote, subject to the provisions of its Articles of Incorporation and amendments thereto ("Charter") regarding restrictions on transfer of stock, and will be fully paid and nonassessable by ICH upon issuance. Shares of ICH Common Stock have no preference, conversion, exchange, preemptive or cumulative voting rights. The authorized stock of ICH 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 ICH Common Stock in one or more classes or series of stock. CLASS A NON-VOTING COMMON STOCK Designation and Amount. Of the 50,000,000 shares of ICH Common Stock, which were previously authorized, 4,000,000 shares were reclassified and designated as ICH Class A Stock. Rights, Preferences and Privileges and Voting Rights. The ICH Class A Stock has the identical preferences, conversion or other rights, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption as the ICH Common Stock except that the holders of shares of ICH Class A Stock are not entitled to any voting rights. If ICH issues additional shares of its Common Stock as a dividend on its outstanding Common Stock, ICH shall simultaneously issue as a dividend on its outstanding ICH Class A Stock, pro rata among the holders thereof, that number of shares of Class A Common Stock equal to the number of shares of ICH Common Stock issued as a dividend multiplied by a fraction, the numerator of which is the number of shares of ICH Class A Stock outstanding immediately before the record date for the payment of the ICH Class A Stock dividend and the denominator of which is the number of shares of ICH Common Stock outstanding immediately before the record date for the payment of the ICH Common Stock dividend. Conversion rights. On any date on which shares of ICH Common Stock are issued by ICH increasing the number of shares of ICH Common Stock issued and outstanding (the "Conversion Date"), the shares of ICH Class A Stock held by each person will automatically convert into that number of shares of ICH Common Stock as calculated below, except that those shares of ICH Class A Stock (collectively, "Excess Shares") which would cause the holder thereof to own shares of ICH Common Stock (i) in excess of the Limit or (ii) in violation of any stock ownership limitation set forth in the ICH's Charter shall not be converted and shall remain outstanding shares of ICH Class A Stock. "Limit" shall mean not greater than 9.8% (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of Common Stock of ICH. The number and value of outstanding shares of Common Stock shall be determined by the Board of Directors of ICH in good faith, which determination shall be conclusive for all purposes hereof. If, subsequent to the Conversion Date, the conversion of Excess Shares into shares of ICH Common Stock would no longer cause the holder thereof to own shares of ICH Common Stock (i) in excess of the Limit or (ii) in violation of any stock ownership limitation set forth in the Charter, such shares shall automatically convert into that number of shares of ICH Common Stock as calculated below, except that those Excess Shares which, if converted pursuant to this provision, would cause the holder thereof to own shares of ICH Common Stock (i) in excess of the Limit or (ii) in violation of any stock ownership limitation set forth in the Charter shall not be converted and shall remain outstanding shares of ICH Class A Stock. The shares of ICH Class A Stock are convertible at the principal office of ICH, and at such other office or offices, if any, as the Board of Directors may designate, into fully paid and non-assessable shares of ICH Common Stock, calculated as to each conversion to the nearest whole share. The number of shares of ICH Common Stock to be issued upon conversion will be determined by multiplying the number shares of ICH F-13 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 Class A Stock to be converted by one, subject to certain adjustments. No fractional shares of ICH Common Stock will be issued upon conversion of shares of ICH Class A Stock, and the number of shares of ICH Common Stock to be issued will be rounded to the nearest whole share. PREFERRED STOCK The Company had authorized 10,000,000 shares of $.01 par value Preferred Stock ("Preferred Stock"), of which 4,000,000 shares were reclassified and designated Class A Convertible Preferred Stock ("ICH Preferred Stock"). The Company's 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. 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 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, ICH and for general corporate purposes without further stockholder authorization. The Preferred Stock, if issued, may have a preference on dividend payments which could reduce the assets available to ICH to make distributions to the common stockholders. CLASS A CONVERTIBLE PREFERRED STOCK. Designation and Amount. Of the 10,000,000 shares of Preferred Stock authorized, 4,000,000 shares are reclassified and designated ICH Preferred Stock. In March 1997, IMH converted $15.0 million principal amount of promissory notes into an aggregate of 3,000,000 shares of ICH Preferred Stock. Dividends. Commencing on December 31, 1997, each holder of ICH Preferred Stock will be entitled to receive, out of any funds legally available therefor, when and if declared, dividends at the quarterly rate of $.10 per share and no more, and thereafter quarterly on the last day of March, June, September and December of each year that any ICH Preferred Stock is outstanding. Such dividends will not be cumulative, and no rights will accrue to holders of ICH Preferred Stock by reason of the fact that dividends on such shares are not declared or paid in any prior quarter. In determining whether a distribution (other than upon liquidation), by dividend, redemption or other acquisition of shares or otherwise, is permitted under Maryland law, amounts that would be needed, if the Company were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of holders of shares of any class or series of stock whose preferential rights upon dissolution are superior to those receiving the distribution will not be added to the Company's total liabilities. Distributions Upon Liquidation, Dissolution or Winding Up. Subject to conversion as set forth below, upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, subject to the prior preferences and other rights of any class or series of stock ranking senior to the ICH Preferred Stock as to the distribution of assets upon liquidation, dissolution or winding up of the affairs of the Company, but before any distribution or payment will be made to the holders of any class or series of stock ranking junior to the ICH Preferred Stock as to the distribution of assets upon any liquidation, dissolution or winding up of the affairs of the Company, the holders of ICH Preferred Stock will be entitled to receive out of the assets of the Company legally available for distribution to its stockholders liquidating distributions in cash or property at its fair market value as determined by the Board of Directors of the Company in the amount per share equal to the Liquidation F-14 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 Preference, which is $5.00 per share. After payment of the full amount of the liquidating distributions to which they are entitled, the holders of ICH Preferred Stock will have no right or claim to any of the remaining assets of the Company and will not be entitled to any other distribution in the event of liquidation, dissolution or winding up of the affairs of the Company. In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the legally available assets of the Company are insufficient to pay the amount of the Liquidation Preference per share plus the corresponding amounts payable on each class or series of other stock ranking on a parity with the ICH Preferred Stock as to the distribution of assets upon liquidation, dissolution or winding up of the affairs of the Company, then the holders of the ICH Preferred Stock and all such other stock will share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they otherwise would be respectively entitled. Neither the consolidation or merger of the Company into or with another corporation or corporations or trust or trusts nor the sale, lease, transfer or conveyance of all or substantially all of the assets of the Company to another corporation or any other entity shall be deemed a liquidation, dissolution or winding up of affairs of the Company. Voting Rights. The holders of shares of ICH Preferred Stock are not entitled to any voting rights. Conversion Rights. Upon any "Initial Public Offering", the shares of ICH Preferred Stock held by each person will automatically convert into that number of shares of Common Stock as calculated below, except that those shares of ICH Preferred Stock which, if converted pursuant to this provision, would cause the holder thereof to own shares of Common Stock (i) in excess of the Limit or (ii) in violation of any stock ownership limitation set forth in the Charter shall not be converted into shares of Common Stock. Any shares of ICH Preferred Stock not converted into shares of Common Stock as a result of the foregoing limitations shall on such date automatically convert into shares of ICH Class A Stock at the same rate as shares of ICH Preferred Stock convert into shares of Common Stock. If the aforementioned event does not occur, the shares of ICH Preferred Stock shall remain outstanding. All ICH Preferred Stock is automatically convertible upon the closing of this Offering into shares of ICH Common Stock determined by multiplying the number of shares of ICH Preferred Stock to be converted by a fraction, the numerator of which is $5.00 and the denominator of which is the Subscription Price. "Initial Public Offering" means the sale of Common Stock pursuant to the Company's first effective registration statement covering the sale of such shares filed under the 1933 Act provided such offering meets the following requirements: (i) said offering raises gross proceeds of at least $10.0 million to the Company at a per share offering price of no less than $5.00 per share and (ii) said offering is completed on or before December 31, 1998. The shares of ICH Preferred Stock also will be convertible at the principal office of the Company, and at such other office or offices, if any, as the Board of Directors may designate, into fully paid and non-assessable shares of ICH Common Stock or ICH Class A Stock, as the case may be, of the Company. The number of shares of ICH Common Stock or ICH Class A Stock, as the case may be, to be issued upon conversion will be determined by multiplying the number of shares of ICH Preferred Stock to be converted by the Conversion Rate. "Conversion Rate" is determined by a fraction, the numerator of which will be the liquidation preference and the denominator of which will be the IPO Share Price. "IPO Share Price" means the gross per share price of the Company's Offering. No fractional shares of ICH Common Stock or ICH Class A Stock, as the case may be, will be issued upon conversion of shares of ICH Preferred Stock and the number of shares of ICH Common Stock or ICH Class A Stock, as the case may be, to be issued will be rounded to the nearest whole share. F-15 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 6. AFFILIATED AGREEMENTS MANAGEMENT AGREEMENT REIT Advisors, Inc. ("RAI" or the "Manager") will oversee the day-to-day operations of the Company, subject to the supervision of the Company's Board of Directors, pursuant to a management agreement (the "Management Agreement") which will become effective on the closing of the Offering. The Company has selected an outside advisor in order to efficiently and economically coordinate, assist and manage the duties and responsibilities of the Company. The Company believes that RAI will be more adequately suited to provide the following services relating to the operations of the Company due to the expertise of RAI's senior officers: securitization oversight, contract negotiation, market information, implementation of cost controls, asset/liability modeling and management, and servicing systems. In order to utilize the IMH infrastructure, RAI intends to enter into a submanagement agreement with ICIFC, the conduit operations of IMH, upon the closing of this Offering to provide substantially all of the administrative services required by the Company including facilities and costs associated therewith, technology, human resources, management information systems, general ledger accounts, check processing and accounts payable as RAI deems necessary. In addition, RAI intends to enter into a submanagement agreement with Imperial Credit Industries, Inc. to perform such human resource services for the Company as RAI deems necessary. IMH owns all of the outstanding shares of non- voting preferred stock of ICIFC, representing 99% of the economic interest in ICIFC, and all of the directors of RAI own all of the outstanding shares of Common Stock of ICIFC, representing 1% of the economic interest. The Manager will be involved in three primary activities: (1) capital management--primarily the oversight of the Company's structuring, analysis, capital raising and investor relations activities; (2) asset management-- primarily the analysis and oversight of the acquisition, management, securitization and disposition of Company assets; and (3) operations management--primarily the oversight of ICH's operating subsidiaries. The Management Agreement will have an initial term of five years, renewable annually by agreement between the Company and the Manager, subject to the approval of a majority of the unaffiliated directors of the Company. The Management Agreement may be terminated by the Company at any time upon 60 days' written notice. In the event that the Management Agreement is terminated or not renewed by the Company without cause, the Company will be obligated to pay the Manager a termination or non-renewal fee determined by an independent appraisal. RAI is owned by those persons who will become executive officers and directors of RAI upon the closing of this Offering. Each of the RAI executive officers and directors also serve as executive officers or directors of ICH and ICCC. All of the persons designated to become executive officers of the Manager upon the closing of the Offering are also officers of IMH and ICIFC. Each of these officers have modified their employment agreements with ICIFC to become officers of the Manager and of ICH and ICCC upon the closing of this Offering. The Manager will agree to cause each of its officers to devote as much of his or her time to the operations of the Company as is reasonably necessary. ICH and ICCC will reimburse the Manager, who will reimburse ICIFC on a dollar for dollar basis (including the service charge referenced below), for the actual cost of providing the services of its officers to the Company based upon the compensation payable to them by ICIFC, plus a 15% service charge. ICH will reimburse the Manager for expenses incurred by the Manager, plus a service charge of 15% on all expenses owed by the Manager to ICIFC for costs and services under any submanagement agreement between ICIFC and the Manager. The Manager will pay all such third parties on a dollar for dollar basis for the aformentioned amounts received by it from the Company; no such 15% service charge will be paid to third party F-16 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 service providers other than ICIFC. For the first three years of the Management Agreement, there will be a minimum annual amount of $500,000 (including the 15% service charge) payable by the Company in connection with services provided and expenses incurred by the Manager and payable by RAI to ICIFC. After the third year, the Company will only be responsible for reimbursing expenses and services provided, without the 15% service charge for amounts due to ICIFC. In addition, the Company will pay the Manager, as compensation for each fiscal quarter, an amount equal to 25% of the taxable net income of the Company, before the deduction of such compensation, the deduction of dividends paid and any net operating loss deductions, from losses in prior period, in excess of the amount that would produce an annualized Return on Equity equal to the daily average Ten Year U.S. Treasury Rate plus 2% (the "25% Payment"). "Return on Equity" is computed on Average Net Worth and has no necessary correlation with the actual distributions received by stockholders. The 25% Payment to the Manager will be calculated quarterly in arrears before any income distributions are made to stockholders for the corresponding period. NON-COMPETE AGREEMENT AND RIGHT OF FIRST REFUSAL AGREEMENT The Company's operations may be affected by the activities of IMH and ICIFC. Pursuant to a non-compete agreement (the "Non-Compete Agreement") between IMH, ICIFC, ICH and ICCC which will become effective upon the closing of the Offering, for a period of the earlier of nine months from the closing of this Offering or the date upon which the Company accumulates (for investment or sale) $300.0 million of Commercial Mortgages and/or CMBSs, neither IMH nor ICIFC will originate or acquire any Commercial Mortgages; however, this Agreement shall not preclude IMH (either directly or through ICIFC) from purchasing any Commercial Mortgages or CMBSs under the Right of First Refusal Agreement discussed below. After the termination of the Non-Compete Agreement and subject to the Right of First Refusal Agreement, as defined below, IMH, as a mortgage REIT, may compete with the operations of the Company. 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 or IMH, and 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. Upon the closing of the Offering, RAI, ICH, ICCC, IMH and ICIFC will enter 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 (other than IMH) will actually become parties to the Right of First Refusal Agreement. Pursuant to this Agreement, RAI will agree that any mortgage loan or mortgage-backed security investment opportunity (an "Investment Opportunity") which is offered to it on behalf of either the Company, IMH 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 closely aligns with such Investment Opportunity. In addition, both IMH and ICIFC on the one hand, and ICH and ICCC on the other, will agree that any Investment Opportunity offered to either of them which falls outside the scope of its Initial Primary Business should 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 Affiliated REIT's business is more greatly enhanced by such Investment Opportunity. Should the Principal Party decline to take advantage of an Investment Opportunity offered to an Affiliated REIT which is a party to the Right of First Refusal Agreement, such REIT shall then be free to pursue the Investment Opportunity. Should all of said Affiliated REITs decline such Investment Opportunity, RAI may offer the Investment Opportunity to any third party. 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 F-17 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 competitive activity of IMH, ICIFC 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. 7. STOCK OPTION PLAN In April 1997, the Company adopted a 1997 Stock Option and Awards Plan (the "Stock Option and Awards Plan") which provides for the grant of qualified incentive stock options ("ISOs") which meet the requirements of Section 422 of the Code, stock options not so qualified ("NQSOs"), deferred stock, restricted stock, performance shares, stock appreciation and limited stock appreciation rights awards ("Awards") and dividend equivalent rights ("DERs"). No shares have been granted as of March 31, 1997. The purpose of the Stock Option and Awards Plan is to provide a means of performance-based compensation in order to attract and retain qualified personnel and to provide an incentive to others whose job performance affects the Company. The Stock Option and Awards Plan is administered by the Board of Directors or a Committee, appointed by the Board of Directors (the "Administrator"). ISOs may be granted to the officers and key employees of the Company. NQSOs and Awards may be granted to the directors, officers, key employees and agents and consultants of the Company, any of its subsidiaries of RAI or to RAI itself, and to the directors, officers and key employees of ICCC. The Stock Option and Awards Plan provides for granting of DERs in tandem with all options granted under the Stock Option and Awards Plan. Such DERs accrue for the account of the optionee shares of common stock upon the payment of cash dividends on outstanding shares of common stock. The number of shares accrued is determined by a formula and such shares are currently transferred to the optionee only upon exercise of the related option. The Stock Option and Awards Plan permits DERs to be granted under the Stock Option and Awards Plan with certain characteristics. First, DERs can be issued in "current-pay" form so that payments can be made to the optionee at the same time as dividends are paid to holders of outstanding common stock. Second, DERs can be made eligible to participate not only in cash distributions but also distributions of stock or other property made to holders of outstanding common stock. Shares of common stock accrued for the account of the optionee pursuant to a DER grant may also be made eligible to receive dividends and distributions. Finally, DERs can be made "performance based" by conditioning the right of the holder of the DER to receive any dividend equivalent payment or accrual upon the satisfaction of specified performance objectives. Subject to anti-dilution provisions for stock splits, stock dividends and similar events, the Stock Option and Awards Plan currently authorizes the grant of options to purchase, and Awards of, an aggregate of an estimated 700,000 shares. The shares reserved for issuance pursuant to the Company's Stock Option and Awards Plan will be increased or decreased to an amount equal to 10% of the shares sold in the Offering, subject to a minimum of 400,000 shares. If an option granted under the Stock Option and Awards Plan expires or terminates, or an Award is forfeited, the shares subject to any unexercised portion of such option or Award will again become available for the issuance of further options or Awards under the Stock Option and Awards Plan. Unless previously terminated by the Board of Directors, the Stock Option and Awards Plan will terminate in April 2007, and no options or Awards may be granted under the Stock Option and Awards Plan thereafter. Options granted under the Stock Option and Awards Plan will become exercisable in accordance with the terms of the grant made by the Administrator. Awards will be subject to the terms and restrictions of the Award made by the Administrator. The Administrator has discretionary authority to select participants from among eligible persons and to determine at the time an option or Award is granted when and in what increments shares F-18 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 covered by the option may be purchased and, in the case of options, whether it is intended to be an ISO or a NQSO provided, however, that certain restrictions applicable to ISOs are mandatory, including a requirement that ISOs not be issued for less than 100% of the then fair market value of the common stock (110% in the case of a grantee who holds more than 10% of the outstanding common stock) and a maximum term of ten years (five years in the case of a grantee who holds more than 10% of the outstanding common stock). Under current law, ISOs may not be granted to any director of the Company who is not also an employee, or to directors, officers and other employees of entities unrelated to the Company. No options or Awards may be granted under the Stock Option and Awards Plan to any person who, assuming exercise of all options held by such person, would own or be deemed to own more than 9.8% of the outstanding shares of equity stock of the Company. Each option must terminate no more than ten years from the date it is granted (or five years in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the combined voting power of the Company's outstanding equity stock). Options may be granted on terms providing for exercise either in who or in part at any time or times during their respective terms, or only in specified percentages at stated time periods or intervals during the term of the option. The exercise price of any option granted under the Stock Option and Awards Plan is payable in full in cash or its equivalent as determined by the Administrator. The Company may make loans available to option holders to exercise options evidenced by a promissory note executed by the option holder and secured by a pledge of the common stock with fair market value at least equal to the principal of the promissory note unless otherwise determined by the Administrator. The Board of Directors may from time to time revise or amend the Stock Option and Awards Plan, and may suspend or discontinue it at any time. However, no such revision or amendment may impair the rights of any participant under any outstanding Award without his consent or may, without stockholder approval, increase the number of shares subject to the Stock Option and Awards Plan or decrease the exercise price of a stock option to less than 100% of fair market value on the date of grant (with the exception of adjustments resulting from changes in capitalization), materially modify the class of participants eligible to receive options or Awards under the Stock Option and Awards Plan, materially increase the benefits accruing to participants under the Stock Option and Awards Plan or extend the maximum option term under the Stock Option and Awards Plan. 8. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments as of December 31, 1996 and 1995 is made in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures About Fair Value of Financial Instruments. The estimated fair value amounts have been determined by ICH using available market information and appropriate valuation methodologies; however, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts ICH could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. F-19 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997
MARCH 31, 1997 ------------------ ESTIMATED CARRYING FAIR AMOUNT VALUE -------- --------- (IN THOUSANDS) Assets: Cash and cash equivalents............................... $4,400 $ 4,400 Commercial Mortgages held for investment................ 17,522 17,985 Residual interest in securitization..................... 10,025 10,025 Liabilities--borrowings from IWLG....................... 16,563 16,563
The fair value estimates as of March 31, 1997 are based on pertinent information available to management as of that date. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. The following describes the methods and assumptions used by ICH in estimating fair values. CASH AND CASH EQUIVALENTS The carrying amount for cash and cash equivalents approximates fair value because these instruments are demand deposits and money market mutual funds and do not present unanticipated interest rate or credit concerns. COMMERCIAL MORTGAGES HELD FOR INVESTMENT The fair value of Commercial Mortgages held for investment is determined based upon the Company's estimate of the proceeds which would be realized in a securitized sale of the loans. RESIDUAL INTEREST IN SECURITIZATION The carrying amounts for residual interests in securitizations approximates fair value. The fair value was estimated by discounting future cash flows using rates that the Company believes are commensurate with the risk inherent in these investments and consistent with those that the Company believes would be utilized by an unaffiliated third party for financial instruments with similar terms and remaining maturities. BORROWINGS FROM IWLG Fair values approximate the carrying amounts because of the short-term maturity of the liabilities. 9. EMPLOYEE BENEFIT PLANS The Company does not have its own 401(k) or profit sharing plan. As such, employees of the Company participate in Imperial Credit Industries, Inc.'s (ICII's) 401(k) plan. The Company's matching and discretionary contributions were not significant for any period presented. Under ICII's 401(k) plan, employees of the Company may contribute up to 14% of their salaries. The Company will match 50% of the first 4% of employee contributions. An additional Company contribution may be made at the discretion of the Company. F-20 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 10. IMPERIAL COMMERCIAL CAPITAL CORPORATION The following financial statement data summarizes the financial position and operations of ICCC as of March 31, 1997 and for the period from January 15, 1997 (commencement of operations) through March 31, 1997 (in thousands): BALANCE SHEET
MARCH 31, 1997 --------- ASSETS Due from affiliates................................................... $ 411 Commercial mortgage servicing rights.................................. 113 Premises and equipment, net........................................... 130 Other assets.......................................................... 13 ----- $ 667 ===== LIABILITIES AND SHAREHOLDERS' EQUITY Deferred revenue...................................................... $ 165 Other liabilities..................................................... 101 Due to affiliates..................................................... 61 ----- 327 ----- Shareholders' equity: Preferred stock..................................................... 500 Common stock........................................................ 1 Contributed capital................................................. 25 Accumulated deficit................................................. (186) ----- 340 ----- $ 667 ===== STATEMENT OF OPERATIONS Revenues: Gain on sale of loans............................................... $ 3 Interest income..................................................... 6 Loan servicing income............................................... 2 ----- 11 ----- Expenses: Interest on affiliated borrowings................................... 5 Stock compensation expense.......................................... 25 Personnel expense................................................... 57 Professional services............................................... 63 General and administrative.......................................... 47 ----- 197 ----- Net income (loss)..................................................... $(186) =====
F-21 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 11. UNAUDITED PRO FORMA FINANCIAL INFORMATION The pro forma balance sheet gives effect to the Contribution (note 1) as if it had occurred on March 31, 1997 represented by an increase to ICH's Investment in ICCC of $323,000 and a corresponding increase to contributed capital and ICH Class A Stock, representing the 95% economic interest in ICCC's net book value at March 31, 1997. Additionally, the pro forma balance sheet gives effect to the exchange by IMH of 299,000 shares of ICH Common Stock for an equivalent number of ICH Class A Stock as if it had occurred on March 31, 1997. The pro forma statement of operations gives effect to the Contribution (note 1) as if it had occurred on January 15, 1997 (commencement of operations) represented by an increase in ICH's Equity in net loss of ICCC of $177,000 and a corresponding increase in ICH's total net loss of $177,000, representing the 95% economic interest in ICCC's results of operations for the period form January 15, 1997 (commencement of operations) through March 31, 1997. Pro forma loss per share for the period from January 15, 1997 (commencement of operations) through March 31, 1997 has been computed by dividing pro forma net loss by the pro forma weighted average number of shares outstanding. Historical earnings per share is not presented because it is not indicative of the ongoing entity. F-22 INDEPENDENT AUDITORS' REPORT The Board of Directors Imperial Commercial Capital Corporation: We have audited the accompanying balance sheet of Imperial Commercial Capital Corporation as of March 31, 1997, and the related statement of operations, changes in shareholders' equity and cash flows for the period from January 15, 1997 (commencement of operations) through March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Imperial Commercial Capital Corporation as of March 31, 1997, and the results of its operations and its cash flows for the period from January 15, 1997 (commencement of operations) through March 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Orange County, California April 16, 1997 F-23 IMPERIAL COMMERCIAL CAPITAL CORPORATION BALANCE SHEET MARCH 31, 1997 (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Due from affiliates..................................................... $ 411 Commercial mortgage servicing rights.................................... 113 Premises and equipment, net............................................. 130 Other assets............................................................ 13 ----- $ 667 ===== LIABILITIES AND SHAREHOLDERS' EQUITY Deferred revenue........................................................ $ 165 Other liabilities....................................................... 101 Due to affiliates....................................................... 61 ----- Total liabilities..................................................... 327 ----- Shareholders' equity: Preferred stock, no par value; 50,000 shares authorized; 9,500 shares issued and outstanding (liquidation preference $323)................. 500 Common stock, no par value; 50,000 shares authorized; 500 shares issued and outstanding .............................................. 1 Contributed capital................................................... 25 Accumulated deficit................................................... (186) ----- Total shareholders' equity.......................................... 340 ----- Commitments and contingencies $ 667 =====
See accompanying notes to financial statements. F-24 IMPERIAL COMMERCIAL CAPITAL CORPORATION STATEMENT OF OPERATIONS FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 (IN THOUSANDS) Revenues: Interest income....................................................... $ 6 Gain of sale of loans................................................. 3 Loan servicing income................................................. 2 ----- 11 ----- Expenses: Interest on affiliated borrowings..................................... 5 Stock compensation expense............................................ 25 Personnel expense..................................................... 57 General and administrative and other.................................. 19 Amortization of commercial mortgage servicing rights.................. 3 Professional services................................................. 63 Data processing expense............................................... 10 Occupancy expense..................................................... 15 ----- 197 ----- Net income (loss)....................................................... $(186) =====
See accompanying notes to financial statements. F-25 IMPERIAL COMMERCIAL CAPITAL CORPORATION STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK ------------------- ---------------- TOTAL NUMBER OF PREFERRED NUMBER OF COMMON CONTRIBUTED ACCUMULATED SHAREHOLDERS' SHARES STOCK SHARES STOCK CAPITAL DEFICIT EQUITY --------- --------- --------- ------ ----------- ----------- ------------- Balance, January 15, 1997 (commencement of operations)............ -- $-- -- $-- $-- $ -- $ -- Issuance of common stock.................. -- -- 500 1 25 -- 26 Issuance of preferred stock.................. 9,500 500 -- -- -- -- 500 Net income (loss) for the period from January 15, 1997 (commencement of operations) through March 31, 1997......... -- -- -- -- -- (186) (186) ----- ---- --- ---- ---- ----- ----- Balance, March 31, 1997 ....................... 9,500 $500 500 $ 1 $ 25 $(186) $ 340 ===== ==== === ==== ==== ===== =====
See accompanying notes to financial statements. F-26 IMPERIAL COMMERCIAL CAPITAL CORPORATION STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 Cash flows from operating activities: Net income (loss)..................................................... $(186) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization........................................ 7 Stock compensation expense........................................... 25 Commercial mortgage servicing rights.................................. (116) Net change in other assets and liabilities............................ 88 Net change in due to and due from affiliates.......................... (350) Net change in deferred revenue........................................ 165 ----- Net cash used in operating activities................................. (367) ----- Cash flows from investing activities--purchases of premises and equipment.............................................................. (134) ----- Net cash used in investing activities................................ (134) ----- Cash flows from financing activities: Issuance of common stock.............................................. 1 Issuance of preferred stock........................................... 500 ----- Net cash provided by financing activities............................ 501 ----- Net change in cash and cash at end of period............................ $ -- =====
See accompanying notes to financial statements. F-27 IMPERIAL COMMERCIAL CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 1. THE COMPANY The Company's Organization Imperial Commercial Capital Corporation ("ICCC" or "the Company") is a newly formed California corporation which commenced operations on January 15, 1997 as a separate division of Imperial Credit Mortgage Holdings, Inc. ("IMH"). On February 10, 1997, IMH purchased all of the Company's outstanding non-voting preferred stock, which has a coupon which represents 95% of the GAAP based economic interest in ICCC, entitling the holder to receive 95% of any dividend or distribution made by ICCC, for $500,000 and certain of the Company's officers purchased all of the Company's outstanding common stock, which represents 5% of the GAAP based economic interest in ICCC entitling the holder to receive 5% of any dividend or distribution made by ICCC. At the effective date of Imperial Credit Commercial Holdings, Inc.'s ("ICH's") initial public offering (the Offering), IMH will contribute all of the outstanding non-voting preferred stock of ICCC to ICH in exchange for a number of shares of ICH convertible non-voting common stock to be determined as of the Offering ("the Contribution"). The Company's Operations The Company is a Commercial Mortgage conduit organization which purchases and originates Commercial Mortgages and subsequently intends to securitize or sell such Commercial Mortgages to permanent investors, including ICH. ICCC will continue to service such Commercial Mortgages for the investors. Conduit Operations The Conduit Operations will operate through three divisions: the Condominium Division, the Retail Division, the Correspondent and Bulk Purchase Division. All Long-Term Investment Operations will be operated by ICH. Condominium Division. This division will offer on a retail basis adjustable rate financing to developers and project owners who have completed the development of a condominium complex or the conversion of an apartment complex to a condominium complex on property with a typical loan amount of $3.0 million to $10 million. All originations, underwriting, processing and funding will be performed at ICCC's executive offices. The Company anticipates that the Condominium Division's Commercial Mortgages will be offered on a nationwide basis and that Commercial Mortgages originated through the Condominium Division will be sold to ICH and then financed through the utilization of collateralized mortgage obligation ("CMO") borrowings by the Long-Term Investment Operations. Retail Division. This division, which is expected to become operational by the closing of the Offering, will originate Commercial Mortgages for properties including general purpose apartment complexes, general retail property such as shopping centers, super markets and department stores, light industrial property, and office buildings. The Retail Division will offer smaller balance ($500,000 to $1.5 million) fixed and adjustable rate Commercial Mortgage products to developers and project owners for smaller properties and projects than those funded by the Correspondent and Bulk Purchase Division. Although processing and funding operations relating to these Commercial Mortgage will be performed centrally at ICCC's executive offices, the Company has targeted major metropolitan areas for the opening of satellite offices for regional originations. A portion of the adjustable rate Commercial Mortgages that will be originated by the Retail Division may be held in portfolio by the Long-Term Investment Operations, while the balance thereof and a substantial portion of the fixed rate Commercial Mortgages originated will be resold by the Conduit Operations through REMIC securitizations. Correspondent and Bulk Purchase Division. This division will both originate Commercial Mortgages on a retail basis and purchase Commercial Mortgages on a bulk and flow basis. The Correspondent and Bulk Purchase Division will offer larger principal balance ($1.5 million to $10.0 million) Commercial Mortgages for F-28 IMPERIAL COMMERCIAL CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 commercial projects than those funded by the Retail Division. The Correspondent and Bulk Purchase Division will offer adjustable rate and fixed rate programs offered through specified correspondents who may be provided with Company-sponsored warehouse facilities. In addition, the Correspondent and Bulk Purchase Division will purchase Commercial Mortgages in bulk and on a flow basis from selected financial institutions and mortgage bankers. A portion of the adjustable rate Commercial Mortgages originated or purchased by this Division may be held in portfolio by the Long-Term Investment Operations, while the balance thereof and a substantial portion of the fixed rate Commercial Mortgages originated or purchased will be resold through REMIC securitizations. 2. BASIS OF PRESENTATION The operations of ICCC, currently a subsidiary of IMH, subject to the completion of the Contribution, are presented in the financial statements as a stand-alone company. Interest has been charged on all affiliated borrowings at the rate of 8% per annum. Also, costs and expenses of IMH have been allocated to ICCC in proportion to the services provided. See note 6 to the financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES SERVICING INCOME Servicing income is reported as earned, principally on a cash basis when the majority of the service process is completed. COMMERCIAL MORTGAGE SERVICING RIGHTS Commercial mortgage servicing rights ("CMSRs") represent the allocated cost of acquiring the rights to service mortgage loans. ICCC amortizes CMSRs in proportion to, and over the period of, expected future net servicing income. In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," which supersedes SFAS No. 122. SFAS No. 125 requires that a portion of the commercial mortgage loan's cost be allocated to the commercial mortgage loan servicing right based on its fair value relative to the loan as a whole. To determine the fair value of the servicing rights created, ICCC 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, ICCC incorporates assumptions that market participants would use in estimating future net servicing income which includes estimates of the cost of servicing, a discount rate, an inflation rate, ancillary income per loan, a prepayment rate, a default rate and loss severity. ICCC determines servicing value impairment by disaggregating ICCC's servicing portfolio into its predominant risk characteristics. ICCC determines those risk characteristics to be loan program type and interest rate. These segments of the portfolio are then evaluated, using market prices under comparable servicing sale contracts, when available, or alternatively using a valuation model that calculates the present value of future net servicing revenues using current market assumptions at the end of the quarter. F-29 IMPERIAL COMMERCIAL CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 ICCC will continuously evaluate its CMSRs to determine if fair value is below the carrying values of its CMSRs. If the fair value is less than the carrying amount of any individual mortgage servicing portfolio, the portfolio may have to be reduced through a provision recorded to increase the CMSR valuation allowance in the period the fair value declined below the CMSR's carrying value. In preparing its evaluation, ICCC uses constant prepayment rates relating to interest rates on each portfolio, loan types, and maturity dates to determine the appropriate amount of amortization of the CMSRs. GAIN ON SALE OF LOANS ICCC recognizes gain or loss on the sale of loans when the sales transaction settles and the risks and rewards of ownership are determined to have passed to the purchasing party. Gain or loss on the sale of loans or securities to ICH are deferred and amortized or accreted to gain or loss on sale over the estimated life of the loans or securities using the interest method. COMMERCIAL MORTGAGES HELD FOR SALE Commercial Mortgages held for sale are stated at the lower of cost or market in the aggregate as determined by outstanding commitments from investors or current investor yield requirements. Interest is recognized as revenue when earned according to the terms of the Commercial Mortgages and when, in the opinion of management, it is collectible. Nonrefundable fees and direct costs associated with the origination or purchase of loans are deferred and recognized when the loans are sold as gain or loss on sale of mortgage loans, except related to loans sold to ICH, which nonrefundable fees and costs fees are deferred and recognized over the life of the loans using the interest method. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation or amortization. Depreciation on premises and equipment is recorded using the straight-line method over the estimated useful lives of individual assets (three to seven years). INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. ICCC had no significant deferred tax assets or liabilities as of March 31, 1997 other than the NOL created from its operations since inception, and did not recognize any benefit related to the net loss from operations through March 31, 1997, as management did not believe it was more likely than not that such deferred tax asset would be recognized due to the Company's limited history of operations. F-30 IMPERIAL COMMERCIAL CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 4. COMMERCIAL MORTGAGE SERVICING RIGHTS Changes in CMSRs for the period from January 15, 1997 (commencement of operations) through March 31, 1997 were as follows (in thousands): Beginning Balance...................................................... $ -- Additions.............................................................. 116 Amortization........................................................... (3) ---- Ending balance......................................................... $113 ====
At March 31, 1997, all of the CMSRs relate to $17.5 million of Commercial Mortgages sold, servicing retained by ICCC, to ICH in February 1997. Management estimates the fair value of the CMSRs at March 31, 1997 carrying value. 5. PREMISES AND EQUIPMENT, NET Premises and equipment consisted of the following at March 31, 1997 (in thousands): Premises and equipment................................................. $134 Less accumulated depreciation.......................................... (4) ---- $130 ====
6. RELATED PARTY TRANSACTIONS COMMERCIAL MORTGAGE PURCHASES In February 1997, ICCC brokered for ICH, the purchase of $17.5 million in condominium conversion loans from ICIFC at the unpaid principal balance of the loans. In conjunction with these purchases, ICCC recorded CMSRs of $116,000 and a corresponding deferred gain of $116,000, which are being amortized over the estimated life of the loans. Also, ICCC recorded nonrefundable brokerage fees which have been deferred, net of certain direct costs, and are being amortized over the estimated life of the loans. The net deferred fees at March 31, 1997 included in deferred revenue were $52,000. BORROWINGS All affiliated borrowings between ICCC and IMH and its affiliates and ICH have been allocated interest at the rate of 8% per annum. DUE TO/FROM AFFILIATES As of March 31, 1997 due from affiliates represents cash transferred to and invested by ICH and due to affiliates represents cash due to IMH and its affiliates for certain related party expense allocations. RELATED PARTY EXPENSE ALLOCATIONS The Company was charged various expenses from IMH for certain services which primarily include human resources, data processing and professional services. These expenses were charged based on a pro rata allocation of certain IMH employees time spent working on ICH related business, which management believes is reasonable. The related party allocations for the period January 15, 1997 (commencement of operations) through March 31, 1997 totaled $66,000. Management believes the related party expenses allocated to ICCC and included in its results of operations for the period from January 15, 1997 (commencement of operations) through March 31, 1997 approximate what the expenses would have been if ICCC had operated as an unaffiliated entity of IMH and its affiliates. F-31 IMPERIAL COMMERCIAL CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 STOCK COMPENSATION EXPENSE Stock compensation expense of $25,000 represents the difference between the price at which the Company issued 500 shares of Common Stock on February 10, 1997, and the net book value, which the Company's management believes approximated the fair value of the 5% economic interest in ICCC purchased by the common shareholders. 7. EMPLOYEE BENEFIT PLANS PROFIT SHARING AND 401(K) PLAN ICCC does not have its own 401(k) or profit sharing plan. As such, employees of ICCC participate in ICII's 401(k) plan. There were no significant contributions for the period presented. Under Imperial Credit Industries, Inc. 401(k) plan, employees of the Company may contribute up to 14% of their salaries. The Company will match 50% of the first 4% of employee contributions. An additional Company contribution may be made at the discretion of ICCC. 8. COMMITMENTS AND CONTINGENCIES COMMERCIAL MORTGAGE SERVICING As of March 31, 1997, ICCC was servicing Commercial Mortgages for others totaling approximately $17.5 million. Properties securing the Commercial Mortgages in ICCC's servicing portfolio are located in California and Arizona. Related fiduciary funds are held in trust for investors in non-interest bearing accounts. These funds are segregated in special bank accounts and are not included in the Company's financial statements. ICCC subcontracts all of its servicing obligations under such Commercial Mortgages pursuant to sub-servicing agreements (the "Sub-Servicing Agreements") with terms that are in accordance with ICCC's guidelines, the Commercial Mortgage documents, customary and usual standards for servicers of Commercial Mortgages. Loan servicing fees paid to these servicers generally range from 0.08% to 0.30% per annum on the declining principal balances of the loans serviced. Each servicer is required to pay all expenses related to the performance of its duties under the Sub-Servicing Agreement. Each Sub- Servicing Agreement is cancelable by either party upon giving notice. The Company believes that the terms of the Sub-Servicing Agreements are comparable to industry standards. SALES OF COMMERCIAL MORTGAGES In the ordinary course of business, ICCC will be exposed to liability under representations and warranties made to purchasers and insurers of Commercial Mortgages. Under certain circumstances, ICCC will be required to repurchase Commercial Mortgages if there has been a breach of representations or warranties. In the opinion of management, the potential exposure related to these representations and warranties will not have a material adverse effect on the financial position and results of operations of the Company. COMMERCIAL MORTGAGE COMMITMENTS As of March 31, 1997, ICCC had an outstanding short term rate-lock commitment to originate a $1.7 million Commercial Mortgage. The Company collected $68,000 in fees and deposits related to this commitment which are included in other liabilities at March 31, 1997. There is no exposure to credit loss in this type of commitment until the loan is funded, and interest rate risk associated with the short-term commitments has been mitigated by the use of forward contracts to sell U.S. Treasury obligations which were purchased in April 1997. F-32 IMPERIAL COMMERCIAL CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 LEASE COMMITMENTS Minimum rental commitments under a noncancelable premises operating lease for the years ended December 31st were as follows (in thousands): 1997................................................................. $ 61 1998................................................................. 76 1999................................................................. 78 2000................................................................. 6 ---- Total.............................................................. $221 ====
Rent expense for the period from January 15, 1997 (commencement of operations) through March 31, 1997 was $13,000. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Company disclose estimated fair value for its financial instruments. The following methods and assumptions were used in estimating the Company's fair value disclosures for financial instruments. Loan Commitments: The fair value of commitments is determined in the aggregate based on current investor yield requirements and is estimated to be $0 at March 31, 1997. F-33 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE DEALER MANAGERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY 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 AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION OF AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. --------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 1 Risk Factors.............................................................. 13 The Offering.............................................................. 34 Use of Proceeds........................................................... 41 Dividend Policy and Distributions......................................... 41 Dividend Reinvestment Plan................................................ 41 Dilution.................................................................. 43 Capitalization............................................................ 44 Selected Financial Data................................................... 45 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 48 Business.................................................................. 51 Imperial Credit Commercial Holdings, Inc. ................................ 68 REIT Advisors, Inc. ...................................................... 75 Relationships with Affiliates............................................. 79 Certain Transactions...................................................... 79 Shares Eligible for Future Sale........................................... 82 Principal Stockholders.................................................... 83 Description of Capital Stock.............................................. 84 Distribution Arrangements................................................. 90 Certain Provisions of Maryland Law and of the Company's Charter and Bylaws................................................................... 91 Federal Income Tax Considerations......................................... 93 ERISA Investors........................................................... 103 Legal Matters............................................................. 104 Experts................................................................... 104 Glossary.................................................................. 105 Index to Financial Statements............................................. F-1
--------------- UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MINIMUM OF 2,600,000 AND UP TO A MAXIMUM OF 10,039,908 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF SUBSCRIPTION RIGHTS FOR SUCH SHARES IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. LOGO [LOGO OF IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.] --------------- PROSPECTUS --------------- PAINEWEBBER INCORPORATED STIFEL, NICOLAUS & COMPANY INCORPORATED --------------- , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee.
AMOUNT TO BE PAID ---------- SEC registration fee........................................... $ 36,364 NASD filing fee................................................ 12,500 American Stock Exchange listing fee............................ 17,500 Printing and engraving expenses................................ 200,000 Legal fees and expenses........................................ 300,000 Accounting fees and expenses................................... 150,000 Blue Sky fees and expenses..................................... 50,000 Transfer agent and custodian fees.............................. 20,000 Reimbursement for Dealer Managers.............................. 200,000 Miscellaneous.................................................. 63,636 ---------- Total........................................................ $1,050,000 ==========
ITEM 31. SALES TO RELATED PARTIES . In February 1997, Joseph R. Tomkinson, the Registrant's Chairman of the Board and Chief Executive Officer, William S. Ashmore, the Registrant's President and Chief Operating Officer, Richard J. Johnson, the Registrant's Senior Vice President, Chief Financial Officer, Treasurer and Secretary, William D. Endresen, the Registrant's Senior Vice President, Mary C. Glass-Schannault, the Registrant's Senior Vice President, and each of H. Wayne Snavely, James Walsh, Frank P. Filipps, Stephan R. Peers and Thomas J. Poletti, Directors of the Registrant, purchased 76,800, 76,800, 62,400, 12,000 and 12,000 shares of the Common Stock of ICH, respectively, at a per share price of $.01. In addition, Imperial Credit Mortgage Holdings, Inc. ("IMH") purchased 299,000 shares of the Common Stock of the Registrant, at a per share price of $.01. . In March 1997, IMH lent the Registrant $15.0 million evidenced by a promissory note which was convertible into shares of the non-voting convertible preferred stock of ICH (the "ICH Preferred Stock") at the rate of one share of ICH Preferred Stock for each $5.00 principal amount of said note (the "Conversion Rate"). . In March 1997, IMH converted the aforementioned $15.0 million principal amount promissory note into an aggregate of 3,000,000 shares of ICH Preferred Stock. All ICH Preferred Stock is automatically convertible upon the closing of this Offering into shares of ICH Common Stock determined by multiplying the number of shares of ICH Preferred Stock to be converted by a fraction, the numerator of which is $5.00 and the denominator of which is the Subscription Price. Notwithstanding the foregoing, consistent with IMH's classification as a REIT, IMH shall not be entitled to have converted into ICH Common Stock more than that number of shares of ICH Preferred Stock whereby IMH would own, immediately after such conversion, greater than 9.8% of ICH's outstanding Common Stock. Any shares of ICH Preferred Stock not converted into ICH Common Stock upon the closing of this Offering shall on such date automatically convert into shares of ICH Class A Stock at the same rate as the ICH Preferred Stock converted into Common Stock on said date. Shares of ICH Class A Stock convert into shares of the Common Stock on a one-for-one basis and each such class of Common Stock is entitled to cash dividends on a pro rata basis. Upon any subsequent issuances of Common Stock by ICH or II-1 sales of ICH Common Stock by IMH, shares of ICH Class A Stock shall automatically continue to convert into additional shares of the Common Stock of ICH, subject to said 9.8% limitation. . In April 1997, IMH exchanged 299,000 shares of ICH Common Stock for an equivalent number of shares of ICH Class A Stock. . On the closing of this Offering, IMH will effectuate the Contribution for that number of shares of ICH Class A Stock equal to the product of 95% of the estimated fair value of ICCC on the date of the Contribution divided by the Subscription Price. Assuming the Minimum Offering Amount is sold as a Subscription Price of $15.00 per ICH Share, upon the closing of this Offering, IMH would hold 315,078 shares of the Common Stock of the Registrant representing 9.8% of the outstanding Common Stock, and 1,078,922 shares of ICH Class A Stock, convertible into an equivalent number of Shares of ICH Common Stock. Assuming the Maximum Subscription Offer Amount is sold at a Subscription Price of $15.00 per ICH Share, upon the closing of this Offering, IMH would hold 1,123,405 shares of the Common Stock representing 9.8% of the outstanding Common Stock, and 270,595 shares of ICH Class A Stock, excluding the ICH Class A Stock to be issued in connection with the Contribution, convertible into an equivalent number of shares of ICH Common Stock. The securities issued above were issued in reliance on the exemption from registration contained in Section 4(2) of the Securities Act. ITEM 33. 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 (1) any present or former Director or officer or (2) 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 status as a present or former Director or officer 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 (1) any present or former Director or officer who is made a party to the proceeding by reason of his service in that capacity or (2) 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 II-2 established that (1) the act or 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, (2) the director or officer actually received an improper personal benefit in money, property or services or (3) 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 for expenses. In addition, the MGCL requires the Company, as a condition to advancing expenses, to obtain (1) 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 Company and (2) a written statement by or on his behalf to repay the amount paid or reimbursed by the Company if it shall ultimately be determined that the standard of conduct was not met. In addition, the Registrant has entered into an Indemnity Agreement (Exhibit 10.4 hereto) with its officers and Directors. The Underwriting Agreement (Exhibit 1.1) also provides for indemnification by the Underwriters of the Company, its Directors and officers and persons who control the Company within the meaning of Section 15 of the Securities Act with respect to certain liabilities, including liabilities arising under the Securities Act. ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements included in the Prospectus are: IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. Balance sheet at March 31, 1997 Statement of Operations for the period from January 15, 1997 (commencement of operations) through March 31, 1997 Statement of Changes in Stockholders' Equity for the period from January 15, 1997 (commencement of operations) through March 31, 1997 Statement of Cash Flows for the period from January 15, 1997 (commencement of operations) through March 31, 1997 Notes to financial statements Schedule IV--Mortgage Loans on Real Estate II-3 IMPERIAL COMMERCIAL CAPITAL CORPORATION Balance sheet at March 31, 1997 Statement of Operations for the period from January 15, 1997 (commencement of operations) through March 31, 1997 Statement of Changes in Shareholders' Equity for the period from January 15, 1997 (commencement of operations) through March 31, 1997 Statement of Cash Flows for the period from January 15, 1997 (commencement of operations) through March 31, 1997 Notes to financial statements All other schedules have been omitted because they are either not applicable, not required or the information required has been disclosed in the financial statements and related notes or otherwise in the Prospectus. (b) Exhibits
EXHIBIT NO. ----------- 1.1 Form of Dealer Manager Agreement. 3.1 Charter of the Registrant. 3.2 Bylaws of the Registrant. 4.1* Form of Common Stock Certificate of Registrant. 4.2 Form of Subscription Notification Certificate. 5.1 Opinion of Freshman, Marantz, Orlanski, Cooper & Klein. 5.2 Opinion of Ballard Spahr Andrews & Ingersoll. 8.1* Opinion of Latham & Watkins. 10.1 Form of Management Agreement between the Registrant and REIT Advisors, Inc. 10.2 Form of Submanagement Agreement among REIT Advisors, Inc., Imperial Credit Mortgage Holdings, Inc. and ICI Funding Corporation. 10.3 1997 Stock Option and Awards Plan. 10.4* Assignment of Lease among Imperial Commercial Capital Corporation, ICI Funding Corporation and the Registrant and Lease dated January 23, 1997 between ICI Funding Corporation and The Irvine Company regarding Irvine facility. 10.5 Form of Contribution Agreement between the Registrant, Imperial Mortgage Holdings, Inc., and Imperial Commercial Capital Corporation. 10.6 Form of Non-Competition Agreement among the Registrant, Imperial Credit Mortgage Holdings, Inc., Imperial Commercial Capital Corporation and ICI Funding Corporation. 10.7 Form of Right of First Refusal Agreement between the Registrant, REIT Advisors, Inc., Imperial Credit Mortgage Holdings, Inc., Imperial Commercial Capital Corporation, and ICI Funding Corporation. 10.8 Servicing Agreement between the Registrant and Imperial Commercial Capital Corporation. 11 Statement Regarding Computation of Pro Forma Earnings Per Share. 23.1 Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained in Exhibit 5.1). 23.2 Consent of Ballard Spahr Andrews & Ingersoll (contained in Exhibit 5.2). 23.3* Consent of Latham & Watkins (contained in Exhibit 8.1). 23.4 Consent and Report on Schedule of KPMG Peat Marwick LLP regarding Registrant. 23.5 Consent of KPMG Peat Marwick LLP regarding Imperial Commercial Capital Corporation. 24.1+ Power of Attorney (Included on Signature Page).
- -------- + previously filed * To be filed by amendment. II-4 ITEM 36. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Placement Agent at the closing specified in the Placement Agent certificates in such denominations and registered in such names as required by the Placement Agent to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than 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 hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) That for purposes of determining any liability under the Securities Act, 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. (2) For the purpose of determining any liability under the Securities Act, 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. II-5 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-11 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, State of California, on the 9th day of June, 1997. IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. By: /s/ Richard J. Johnson ______________________________________ Richard J. Johnson Senior Vice President, Chief Financial Officer, Treasurer and Secretary 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 --------- ----- ---- * Chairman of the Board and June 9, 1997 ____________________________________ Chief Executive Officer Joseph R. Tomkinson (Principal Executive Officer) /s/ Richard J. Johnson Chief Financial Officer June 9, 1997 ____________________________________ (Principal Financial and Richard J. Johnson Accounting Officer) * Director June 9, 1997 ____________________________________ H. Wayne Snavely * Director June 9, 1997 ____________________________________ James Walsh * Director June 9, 1997 ____________________________________ Frank P. Filipps * Director June 9, 1997 ____________________________________ Stephan R. Peers * Director June 9, 1997 ____________________________________ Thomas J. Poletti * Director June 9, 1997 ____________________________________ Timothy R. Busch
/s/ Richard J. Johnson By: ___________________________ Richard J. Johnson Attorney-in-fact II-6 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. SCHEDULE IV--MORTGAGE LOANS ON REAL ESTATE
PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 ------------------------------------------------- PRIN. AMT. (NOTE 1) SUBJECT TO NUMBER INTEREST MATURITY CARRYING DELINQUENT DESCRIPTION OF LOANS RATE DATE AMOUNT PRIN. OR INT. ----------- -------- -------- -------- -------- ------------- (DOLLARS IN THOUSANDS) Portfolio of first trust deed conventional mortgages on condominium conversions: Original loan amounts between $300,000-$400,000; properties located in Arizona; principal and interest payable at level amounts over life to maturity with no balloon payments due at maturity.... 20 9.00% 10/1/26 $ 7,295 $-- Original loan amounts under $100,000; properties located in Californina; principal and interest payable at level amounts over life to maturity with no balloon 10,240 payments due at maturity.... 152 8.63% 4/1/27 ------- -- $17,535 Allowance for Commercial 13 Mortgage losses.............. ------- Total Commercial Mortgages $17,522 held for investment, net... =======
NOTE 1 ------ Balance at January 15, 1997 (commencement of operations) $ -- Addition during period: New mortgage loans.......................................... 17,539 Deductions during period: Collections of principal.................................... $ (4) Provision for Commercial Mortgage losses.................... (13) (17) ---- ------- Balance at March 31, 1997..................................... $17,522 =======
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE ------- ----------- ---- 1.1 Form of Dealer Manager Agreement. 3.1 Charter of the Registrant. 3.2 Bylaws of the Registrant. 4.1* Form of Common Stock Certificate of Registrant. 4.2 Form of Subscription Notification Certificate. 5.1 Opinion of Freshman, Marantz, Orlanski, Cooper & Klein. 5.2 Opinion of Ballard Spahr Andrews & Ingersoll. 8.1* Opinion of Latham & Watkins. 10.1 Form of Management Agreement between the Registrant and REIT Advisors, Inc. 10.2 Form of Submanagement Agreement between REIT Advisors, Inc., Imperial Credit Mortgage Holdings, Inc. and ICI Funding Corporation. 10.3 1997 Stock Option and Awards Plan. 10.4* Assignment of Lease among Imperial Commercial Capital Corporation, ICI Funding Corporation and the Registrant and Lease dated January 23, 1997 between ICI Funding Corporation and The Irvine Company regarding Irvine facility. 10.5 Form of Contribution Agreement between the Registrant, Imperial Mortgage Holdings, Inc., and Imperial Commercial Capital Corporation. 10.6 Form of Non-Competition Agreement between the Registrant, Imperial Credit Mortgage Holdings, Inc., Imperial Commercial Capital Corporation and ICI Funding Corporation. 10.7 Form of Right of First Refusal Agreement between the Registrant, REIT Advisors, Inc., Imperial Credit Mortgage Holdings, Inc., Imperial Commercial Capital Corporation and ICI Funding Corporation. 10.8 Servicing Agreement between the Registrant and Imperial Commercial Capital Corporation. 11 Statement Regarding Computation of Pro Forma Earnings Per Share. 23.1 Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained in Exhibit 5.1). 23.2 Consent of Ballard Spahr Andrews & Ingersoll (contained in Exhibit 5.2). 23.3* Consent of Latham & Watkins (contained in Exhibit 8.1). 23.4 Consent and Report on Schedule of KPMG Peat Marwick LLP regarding Registrant. 23.5 Consent of KPMG Peat Marwick LLP regarding Imperial Commercial Capital Corporation. 24.1+ Power of Attorney (Included on Signature Page).
- -------- + previously filed * To be filed by amendment. EX-1.1 2 FORM OF DEALER MANAGER AGREEMENT Exhibit 1.1 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. Up to 7,000,000/1/ Shares of Common Stock Issuable upon Exercise of Subscription Rights for Such Shares DEALER MANAGER AGREEMENT New York, New York June [__], 1997 PAINEWEBBER INCORPORATED STIFEL, NICOLAUS & COMPANY INCORPORATED c/o PaineWebber Incorporated 1285 Avenue of the Americas New York, New York 10019 Ladies and Gentlemen: Each of Imperial Credit Commercial Holdings, Inc., a Maryland corporation (the "Company"), Imperial Credit Mortgage Holdings, Inc., a Maryland corporation ("IMH"), Imperial Commercial Capital Corporation, a [California] corporation ("ICCC"), and REIT Advisors, Inc., a _________ corporation (the "Manager"), confirms its agreement with and appointment of PaineWebber Incorporated and Stifel, Nicolaus & Company Incorporated (the "Dealer Managers") to act as dealer managers in connection with the offer of the Company to holders of record ("IMH Holders") as of the close of business on June [ ], 1997 (the "Record Date") of shares of common stock and options to purchase common stock (collectively, the "IMH Shares") of IMH, of non-transferable rights to subscribe (the "Subscription Rights") for an aggregate of up to 7,000,000 shares (the "ICH Shares") of the Company's common stock, par value $.01 per share (the "Common Stock"), at the Subscription Price (as hereinafter defined). - ----------------------------- /1/ Subject to increase in connection with the Minimum Standby Offer Amount (as defined herein) in the event that the Maximum Sub- scription Offer Amount is achieved. The Subscription Rights entitle the IMH Holders to subscribe for ICH Shares at the rate of one ICH Share for each IMH Share held on the Record Date (the "Subscription Offer"). An IMH Holder's right to acquire at the Subscription Price (as hereinafter defined) one ICH Share for every IMH Share held is referred to as the "Primary Subscription Privilege." Holders of IMH Shares who fully exercise all their Subscription Rights may be entitled to subscribe for additional ICH Shares of the Company, subject to allotment, proration and reduction (the "Over-Subscription Privilege") as provided for herein. The opportunity for IMH Holders to subscribe for ICH Shares pursuant to the Subscription Rights expires at 5:00 p.m., New York City time, on July [__], 1997 (the "Expiration Date"). The offer of Subscription Rights to the IMH Holders will commence on June [__], 1997 (the "Commencement Date"). ICH Shares issued to IMH Holders pursuant to exercise of Subscription Rights, including pursuant to requests for additional ICH Shares pursuant to the Over-Subscription Privilege, duly received on or prior to the Expiration Date will be at the subscription price (the "Subscription Price") of $15.00 per Share. The trade date for the acceptance of exercises of Subscription Rights for the ICH Shares shall be July [__], 1997 (the "Trade Date"), and the initial settlement date for the issuance of all or a portion of such ICH Shares shall be July [__], 1997 (the "Initial Settlement Date"). A portion of the ICH Shares requested pursuant to Primary Subscription Privilege and the Over-Subscription Privilege may be issued on a date after the Initial Settlement Date (the "Supplemental Settlement Date") to be determined by the Company and the Dealer Managers, subject to proration, reduction or cancellation by the Company, subject to the consent of the Dealer Managers, if the Company believes, following the Expiration Date, that the issuance of such additional ICH Shares will have an adverse effect upon the operations of the Company or the market for the Company's Common Stock (the Initial Settlement Date and the Supplemental Settlement Date are each referred to as a "Settlement Date"). The Board of Directors has determined to limit the amount of ICH Shares that may be subscribed for pursuant to the Subscription Offer to 7,000,000 (the "Maximum Subscription Offer Amount"). 2 In addition to the Subscription Offer, the Company is offering (the "Standby Offer" and, together with the Subscription Offer, the "Offering") to certain persons that may or may not be IMH Holders as of the Record Date ("Standby Purchasers"), pursuant to Standby Purchase Agreements (as defined herein), at least _____ shares of Common Stock (the "Minimum Standby Offer Amount") but no more than [1,000,000] shares of Common Stock, subject to increase to the extent that the Maximum Subscription Offer Amount is not achieved (the "Maximum Standby Offer Amount") at a price per share equal to the Subscription Price (the shares of Common Stock being offered pursuant to the Standby Offer are hereinafter referred to as the "Standby Shares"; the Standby Shares and the ICH Shares are hereinafter collectively referred to as the "Shares"). The Board of Directors of the Company has determined not to proceed with the Offering unless an aggregate amount of at least [2,500,000] Shares (the "Minimum Offering Amount") are subscribed for (inclusive of Standby Shares that may be subscribed for pursuant to the Standby Purchase Agreements). In connection with the organization of the Company and of ICCC, the following organizational transactions (the "Contribution Transactions") took place in connection with a Contribution Agreement dated as of ________, 1997 among the Company, IMH and ICCC (the "Contribution Agreement"): (i) in February 1997, IMH purchased, for $500,000, all of the non-voting preferred stock of ICCC (the "ICCC Preferred Stock"), which represents 95% of the economic interest in ICCC, and certain of the Company's officers purchased all of the outstanding common stock of ICCC, which represents 5% of the economic interest in ICCC; (ii) in February 1997, the officers and directors of the Company, as a group, purchased 300,000 shares of the Company's Common Stock and IMH purchased 299,000 shares of the Company's Common Stock (collectively, the "Company's Restricted Shares"); (iii) in March 1997, IMH lent the Company $15.0 million evidenced by a promissory note convertible into shares of the non-voting convertible preferred stock of the Company (the "ICH Preferred Stock") at the rate of one share of ICH Preferred Stock for each $5.00 principal amount of said note (the "Conversion Rate"); (iv) in March 1997, IMH converted the aforementioned $15.0 million principal amount promissory note into an aggregate of 3,000,000 3 shares of ICH Preferred Stock; all ICH Preferred Stock is automatically convertible upon the closing of the Offering into shares of the Company's Common Stock determined by multiplying the number of shares of ICH Preferred Stock to be converted by a fraction, the numerator of which is $5.00 and the denominator of which is the Subscription Price; notwithstanding the foregoing, consistent with the Company's classification as a REIT, IMH shall not be entitled to have converted into the Company's Common Stock more than that number of shares of ICH Preferred Stock whereby IMH would own, immediately after such conversion, greater than 9.8% of the Company's outstanding Common Stock; any shares of ICH Preferred Stock not converted into the Company's Common Stock upon the closing of the Offering shall on such date automatically convert into shares of the Company's non-voting Class A Common Stock (the "ICH Class A Stock") at the same rate as the ICH Preferred Stock converted into Common Stock on said date; and (v) in April 1997, IMH exchanged the 299,000 shares of the Company's Restricted Shares held by it for an equivalent number of shares of ICH Class A Stock. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-11 (File No. 333-_____) including a prospectus relating to the Company for the registration of the Shares under the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations of the Commission under the Securities Act (the "Rules and Regulations"), and has filed such amendments to such registration statement on Form S-11 and such amended prospectuses as may have been required to the date hereof. The term "Registration Statement" means the registration statement declared effective by the Commission on June [__], 1997 (the "Effective Date"), including financial statements and all exhibits and all documents, if any, incorporated therein by reference and including any post-effective amendments that become effective prior to the Expiration Date. The term "Prospectus" means the prospectus of the Company in the form filed with the Commission pursuant to Rule 424 of the Rules and Regulations as from time to time amended or supplemented. The Prospectus, letters to IMH Holders, subscription certifi- cates, brochures, wrappers and other materials preceded or accompanied by the Prospectus, forms used to exercise Subscription Rights, any letters and other informational 4 material sent to securities dealers, commercial banks and other nominees and any newspaper announcements, press releases and other offering materials and information that the Company may use specifically in connection with the solicitation contemplated by this Agreement, approve, prepare or authorize for use in connection with the Offering, are collectively referred to hereinafter as the "Offering Materials." 1. Representations and Warranties. ------------------------------ (a) Each of the Company, ICCC, the Manager and IMH represents and warrants to, and agrees with, the Dealer Managers as of the Commencement Date and on the Settlement Dates (each, a "Representation Date") that: (i) The Company meets the requirements for use of Form S-11 under the Securities Act and the Rules and Regulations. The Registration Statement contains or will contain all statements required to be stated therein in accordance with, and complies or will comply in all material respects with, the requirements of the Securities Act and the Rules and Regulations and does not or will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and the other Offering Materials, together with the Prospectus, do not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. (ii) The only subsidiaries (as defined in the Rules and Regulations) of the Company are ICCC and the other subsidiaries, if any, listed on Exhibit 21.1 to the Registration Statement (the "Subsidiaries"). The Company and each Subsidiary has been duly organized, is validly existing and is in good standing under the laws of the jurisdiction of incorporation; the Company and each Subsidiary has full power and authority to conduct all the respective activities conducted by them, to own or lease the assets owned or leased respectively by them and to conduct their respective business as described in 5 the Registration Statement and the Prospectus; the Company and each Subsidiary and are duly qualified to do business in each jurisdiction wherein they own or lease real property or in which the conduct of their business requires such qualification, except where the failure to be so qualified would not result in a material adverse effect upon the Company or any of its Subsidiaries or their respective business, properties, business prospects, condition (financial or otherwise) or results of operations (a "Material Adverse Effect"). (iii) All of the outstanding shares of the capital stock of the Subsidiaries, including but not limited to the ICCC Preferred Stock, have been duly authorized and validly issued and are fully paid and non- assessable and are owned by the Company to the extent as is described in the Prospectus, free and clear of all liens, encumbrances and claims whatsoever. Except for the stock of the Subsidiaries and as disclosed in the Registration Statement, the Company does not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any firm, partnership, joint venture, association or other entity. Complete and correct copies of the charter and of the by-laws of the Company and its Subsidiaries and all amendments thereto have been filed as Exhibits to the Registration Statement or delivered to the Dealer Managers, and no changes therein will be made subsequent to the date hereof and prior to any Representation Date, except such as the Dealer Managers shall approve and as may be necessary for the Company to qualify as a REIT under the Code as such term is hereinafter defined). (iv) All of the outstanding shares of the capital stock of the Company, including but not limited to the Company's Restricted Shares, the ICH Class A Stock and the ICH Preferred Stock, have been duly authorized, validly issued, fully paid and nonassessable and will not be subject to any preemptive or similar right. The Subscription Rights have been duly authorized by all requisite action on the part of the Company for delivery to the IMH Holders pursuant to the Offering; the Shares have been duly 6 authorized by all requisite action on the part of the Company for issuance and sale pursuant to the terms of the Offering and, when issued and delivered by the Company pursuant to the terms of the Offering against payment of the consideration set forth in the Prospectus, will be validly issued, fully paid and non-assessable; the Shares and the Subscription Rights conform in all material respects to all statements relating thereto contained in the Registration Statement and the Prospectus; and the issuance of the Shares is not subject to any preemptive rights. Except as set forth in the Prospectus, there are no options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts, commitments, plans or arrangements to issue or sell, any shares of capital stock of the Company, any shares of capital stock of any Subsidiary or any such warrants, convertible securities or obligations. The description of the Company's dividend reinvestment plan, stock option and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately presents the information required to be shown with respect to such plans, arrangements, options and rights. (v) The financial statements and schedules included in the Registration Statement or the Prospectus present the consolidated financial condition of the Company as of the respective dates thereof and the consolidated results of operations and cash flows of the Company for the respective periods covered thereby, all in conformity with generally accepted accounting principles applied on a consistent basis throughout the entire period involved, except as otherwise disclosed in the Prospectus. The financial statements and other financial information included in the Registration Statement or the Prospectus (A) present in all material respects the information shown therein, (B) have been prepared in accordance with the Commission's rules and guide lines with respect to pro forma financial statements, and (C) have been properly computed on the basis described therein. No other financial statements or schedules of the Company are required by the Securities Act or the Rules and Regulations to 7 be included in the Registration Statement or the Prospectus. KPMG Peat Marwick (the "Accountants"), who have reported on such financial statements and schedules, are independent accountants with respect to the Company as required by the Securities Act and the Rules and Regulations. The statements included in the Registration Statements with respect to the Accountants pursuant to Item 509 of Regulation S-K of the Rules and Regulations are true and correct in all material respects. The selected financial data set forth in the Prospectus under the captions "Capitalization" and "Selected Financial Data" fairly present the information set forth therein on the basis stated in the Registration Statement. (vi) The Company and each Subsidiary maintains a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with management's general or specific authorization; and (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets. (vii) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and prior to the respective Representation Date, except as set forth in or contemplated by the Registration Statement and the Prospectus, (A) there has not been any change in the capitalization of the Company, or in the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, arising for any reason whatsoever, (B) neither the Company nor any of its Subsidiaries has incurred any material liabilities or obligations, direct or contingent, nor has it entered into any material transactions other than pursuant to this Agreement and the transactions referred to herein and (C) the Company has not paid or declared any dividends or other distributions of any kind on any class of its capital stock. (viii) Neither the Company nor any of its Subsidiaries is, and if operated in the manner described in the Prospectus under the caption "Busi- 8 ness" will not be, an "investment company," an entity "controlled" by an "investment company" or an "affiliated person" of, or "promotor" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"). (ix) Except as set forth in the Registration Statement and the Prospectus, there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective officers in their capacity as such, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding might result in a Material Adverse Effect. (x) The Company and each of its Subsidiaries has (A) all governmental licenses, permits, consents, orders, approvals and other authorizations necessary to carry on its business as contemplated in the Prospectus, (B) complied in all respects with all laws, regulations and orders applicable to it or its business and (C) performed all its obligations required to be performed by it, and is not in default, under any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement, lease, contract or other agreement or instrument (collectively, a "contract or other agreement") to which it is a party or by which its property is bound or affected, the effect of any of which, individually or in the aggregate, might result in a Material Adverse Effect. To the knowledge of the Company and each of its Subsidiaries, no other party under any contract or other agreement to which it is a party is in default in any respect thereunder. Neither the Company nor any of its Subsidiaries is in violation of any provision of its charter or by-laws. (xi) The Company has full corporate power and authority to enter into this Agreement, the Subscription Agency Agreement, dated June __, 1997 (the "Subscription Agency Agreement") between the Company and ____________ (the "Subscription Agent"), 9 the Management Agreement, dated June __, 1997 (the "Management Agreement"), between the Company and the Manager, the Servicing Agreement, dated June __, 1997 (the "Servicing Agreement"), between the Company and ICCC, the Tax Agreement, dated June __, 1997 (the "Tax Agreement"), between the Company and IMH, the Non-Competition Agreement dated June __, 1997 (the "Non-Competition Agreement") between the Company and IMH, the Right of First Refusal Agreement, dated June __, 1997 (the "Right of First Refusal Agreement") between the Company, the Manager and IMH and the Contribution Agreement. The Subscription Agency Agreement, the Management Agreement, the Servicing Agreement, the Tax Agreement, the Contribution Agreement, the Right of First Refusal Agreement and the Non-Competition Agreement are collectively referred to as the "Company Agreements." Each of this Agreement and the Company Agreements has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company and is enforceable against the Company in accordance with its terms, except as the enforceability hereof and thereof may be limited by applicable bankruptcy, insolvency, reorganization and similar laws affecting creditors' rights generally and moratorium laws in effect from time to time and by equitable principles restricting the availability of equitable remedies. The execution and delivery by the Company of, and the performance by the Company of its obligations under, each of this Agreement and the Company Agreements, the consummation of the transactions contemplated hereby and thereby and the application of the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under the caption "Use of Proceeds" will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of the Company or any of its Subsidiaries pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, the charter or by-laws of the Company or any of its Subsidiaries, any contract or other agreement to which the Company or any of its Subsidiaries is a 10 party or by which the Company or any of its Subsidiaries or any of its properties is bound or affected, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of the Company or any of its Subsidiaries the effect of any of which, individually or in the aggregate, would be to have a Material Adverse Effect. (xii) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the authorization, issuance, transfer, sale or delivery of the Shares by the Company, in connection with the execution, delivery and performance of this Agreement or the Company Agreements by the Company or in connection with the taking by the Company of any other action contem- plated hereby or thereby, except such as have been obtained under the Securities Act or the Rules and Regulations and such as may be required under state securities or Blue Sky laws or the by-laws and rules of the National Association of Securities Dealers, Inc. (the "NASD"). (xiii) The Company and each of its Subsidiaries has good and marketable title to all properties and assets described in the Prospectus as owned by it (including the assets contributed, sold or transferred to the Company pursuant to the terms of the Contribution Agreement), free and clear of all liens, charges, encumbrances, mortgages, security interests, claims or restrictions, except such as are described in, or contemplated by, the Prospectus. The Company and each of its Subsidiaries has valid, subsisting and enforceable leases for the properties described in the Prospectus as leased by it, with such exceptions as are not material and do not materially interfere with the use made and proposed to be made of such properties by the Company and the Subsidiaries. (xiv) There is no document or contract of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is 11 not described or filed as required. All such contracts to which the Company or any Subsidiary is a party have been duly authorized, executed and delivered by the Company or such Subsidiary, constitute valid and binding agreements of the Company or such Subsidiaries and are enforceable against the Company or such Subsidiary in accordance with the terms thereof. (xv) No statement, representation, warranty or covenant made by the Company in this Agreement or made in any certificate or document required by this Agreement to be delivered to the Dealer Manager was or will be, when made, inaccurate, untrue or incorrect. (xvi) Neither the Company nor any of its directors, officers or controlling persons has taken, directly or indirectly, any action intended, or which might reasonably be expected, to cause or result, under the Securities Act or otherwise, in, or which has constituted, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (xvii) No holder of securities of the Company has rights to the registration of any securities of the Company because of the filing of the Registration Statement. (xviii) The Shares have been duly authorized for listing by the American Stock Exchange upon official notice of issuance. (xix) Neither the Company nor any of its Subsidiaries is involved in any material labor dispute nor, to the knowledge of the Company, is any such dispute threatened. (xx) The Company and its Subsidiaries own, or are licensed or otherwise have the full exclusive right to use, all material trademarks and trade names which are used in or necessary for the conduct of their respective businesses as described in the Prospectus. No claims have been asserted by any person to the use of any such trademarks or trade names or challenging or questioning the validity or 12 effectiveness of any such trademark or trade name. The use, in connection with the business and operations of the Company and its Subsidiaries of such trademarks and trade names does not, to the Company's knowledge, infringe on the rights of any person. (xxi) Neither the Company nor to the knowledge of the Company any officers, directors, employees or agents acting on behalf of the Company has at any time (A) made any contributions to any candidate for political office in violation of law, or failed to disclose fully any contributions to any candidate for political office in accordance with any applicable statute, rule, regulation or ordinance requiring such disclosure, (B) made any payment to any local, state, Federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or allowed under applicable law, (C) made any payment outside the ordinary course of business to any purchasing or selling agent or person charged with similar duties of any entity to which the Company sells or from which the Company buys products for the purpose of influencing such agent or person to buy products from or sell products to the Company, or (D) except as described in the Prospectus, engaged in any transaction, maintained any bank account or used any corporate funds except for transactions, bank accounts and funds which have been and are reflected in the normally maintained books and records of the Company. (xxii) As of the Expiration Date, the Company and its Subsidiaries will be insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the business in which it proposes to engage as described in the Prospectus; the Company has not been refused any insurance coverage sought or applied for; and the Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its proposed business at a cost that would not result in a Material Adverse Effect. 13 (xxiii) The Company has conducted its operations in a manner so as to enable it to elect to be qualified as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and intends to operate in a manner so as to continue to remain to be able to be so qualified. (xxiv) The Company has complied with all of the provisions of (including, without limitation, filing all forms required by) Section 517.075 of the Florida Securities and Investor Protection Act and Regulation 3E900.001 issued thereunder with respect to the offering and sale of the Shares. (xxv) Neither the Company nor any of its Subsidiaries is, and if operated in the manner described in the Prospectus under the caption "Business" will not be, a "broker" within the meaning of Section 3(a)(4) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or a "dealer" within the meaning of Section 3(a)(5) of the Exchange Act or required to be registered pursuant to Section 15(a) of the Exchange Act. (b) Each of the Company, ICCC, the Manager and IMH represents and warrants to, and agrees with, the Dealer Managers as of each Representation Date that: (i) ICCC has full corporate power and authority to enter into this Agreement, the Servicing Agreement, the Lease Agreement dated as of _____, 1997 between ICCC and ______ (the "Lease Agreement") and the Contribution Agreement. The Servicing Agreement, the Lease Agreement, the Contribution Agreement, and any other Company Agreements to which ICCC is a party are collectively referred to as the "ICCC Agreements." Each of this Agreement and the ICCC Agreements has been duly authorized, executed and delivered by ICCC and constitutes a valid and binding agreement of ICCC and is enforceable against ICCC in accordance with its terms, except as the enforceability hereof and thereof may be limited by applicable bankruptcy, insolvency, reorganization and similar laws affecting creditors' rights generally and moratorium laws in effect from time to time 14 and by equitable principles restricting the availability of equitable remedies. The execution and delivery by ICCC of, and the performance by ICCC of its obligations under, each of this Agreement and the ICCC Agreements, the consummation of the transactions contemplated hereby and thereby and the application of the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under the caption "Use of Proceeds" will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of ICCC pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, the charter or by-laws of ICCC, any contract or other agreement to which ICCC is a party or by which ICCC or any of its properties is bound or affected, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of ICCC the effect of any of which, individually or in the aggregate, would be to have a Material Adverse Effect. (ii) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the execution, delivery and performance of this Agreement or the ICCC Agreements by ICCC or in connection with the taking by ICCC of any other action contemplated hereby or thereby, except such as have been obtained. (iii) Except as set forth in the Registration Statement and the Prospectus, there are no actions, suits or proceedings pending or, to the knowledge of ICCC, threatened against or affecting ICCC or any of its officers in their capacity as such, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding might result in a Material Adverse Effect. 15 (iv) No statement, representation, warranty or covenant made by ICCC in this Agreement or made in any certificate or document required by this Agreement to be delivered to the Dealer Manager was or will be, when made, inaccurate, untrue or incorrect. (v) Neither ICCC nor any of its directors, officers or controlling persons has taken, directly or indirectly, any action intended, or which might reasonably be expected, to cause or result, under the Securities Act or otherwise, in, or which has constituted, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (vi) No holder of securities of ICCC has rights to the registration of any securities of the Company or ICCC because of the filing of the Registration Statement. (vii) Neither ICCC nor to the knowledge of ICCC any officers, directors, employees or agents acting on behalf of ICCC has at any time (A) made any contributions to any candidate for political office in violation of law, or failed to disclose fully any contributions to any candidate for political office in accordance with any applicable statute, rule, regulation or ordinance requiring such disclosure, (B) made any payment to any local, state, Federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or allowed under applicable law, (C) made any payment outside the ordinary course of business to any purchasing or selling agent or person charged with similar duties of any entity to which ICCC sells or from which ICCC buys products for the purpose of influencing such agent or person to buy products from or sell products to ICCC, or (D) except as described in the Prospectus, engaged in any transaction, maintained any bank account or used any corporate funds except for transactions, bank accounts and funds which have been and are reflected in the normally maintained books and records of ICCC. 16 (c) The Manager represents and warrants to, and agrees with, the Dealer Managers as of each Representation Date that: (i) The Manager has been duly organized, is validly existing and is in good standing under the laws of the jurisdiction of incorporation, has full power and authority to conduct all the activities conducted by it, to own or lease the assets owned or leased by it and to conduct its business as described in the Registration Statement and the Prospectus and is duly qualified to do business in each jurisdiction wherein it own, or leases real property or in which the conduct of its business requires such qualification, except where the failure to be so qualified would not result in a Material Adverse Effect. (ii) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and prior to the respective Representation Date, except as set forth in or contemplated by the Registration Statement and the Prospectus, (A) there has not been any change in the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Manager, arising for any reason whatsoever and (B) the Manager has not incurred any material liabilities or obligations, direct or contingent, nor has it entered into any material transactions other than pursuant to this Agreement and the transactions referred to herein. (iii) The Manager, if operated in the manner described in the Prospectus under the caption "Business" and "REIT Advisors, Inc." will not be an "investment adviser," as such term is defined in the Investment Advisers Act of 1940. (iv) Except as set forth in the Registration Statement and the Prospectus, there are no actions, suits or proceedings pending or, to the knowledge of the Manager, threatened against or affecting the Manager or any of its officers in their capacity as such, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, 17 wherein an unfavorable ruling, decision or finding might result in a Material Adverse Effect. (v) The Manager has (A) all governmental licenses, permits, consents, orders, approvals and other authorizations necessary to carry on its business as contemplated in the Prospectus, (B) complied in all respects with all laws, regulations and orders applicable to it or its business and (C) performed all its obligations required to be performed by it, and is not in default, under any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement, lease, contract or other agreement or instrument (collectively, a "contract or other agreement") to which it is a party or by which its property is bound or affected, the effect of any of which, individually or in the aggregate, might result in a Material Adverse Effect. To the knowledge of the Manager, no other party under any contract or other agreement to which it is a party is in default in any respect thereunder. The Manager is not in violation of any provision of its charter or by-laws. (vi) The Manager has full corporate power and authority to enter into this Agreement, the Right of First Refusal Agreement, the Submanagement Agreement dated as of June ___, 1997 between the Manager and ICH and the Submanagement Agreement dated as of June ___, 1997 between the Manager and Imperial Credit Industries, Inc. (collectively the "Submanagement Agreements"). The Management Agreement, the Right of First Refusal Agreement, the Submanagement Agreements and each other Company Agreement to which the Manager is a party are collectively referred to as the "Manager Agreements." Each of this Agreement and the Manager Agreements has been duly authorized, executed and delivered by the Manager and constitutes a valid and binding agreement of the Manager and is enforceable against the Manager in accordance with its terms, except as the enforceability hereof and thereof may be limited by applicable bankruptcy, insolvency, reorganization and similar laws affecting creditors' rights generally and moratorium laws in effect from time to time and by equitable principles restricting the availability of equitable 18 remedies. The execution and delivery by the Manager of, and the performance by the Manager of its obligations under, each of this Agreement and the Manager Agreements, the consummation of the transactions contemplated hereby and thereby and the application of the net proceeds from the offering and sale of the Shares to be sold by the Manager in the manner set forth in the Prospectus under the caption "Use of Proceeds" will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of the Manager pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, the charter or by-laws of the Manager, any contract or other agreement to which the Manager is a party or by which the Manager or any of its properties is bound or affected, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of the Manager the effect of any of which, individually or in the aggregate, would be to have a Material Adverse Effect. (vii) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the execution, delivery and performance of this Agreement or the Manager Agreements by the Manager or in connection with the taking by the Manager of any other action contemplated hereby or thereby, except such as have been obtained. (viii) No statement, representation, warranty or covenant made by the Manager in this Agreement or made in any certificate or document required by this Agreement to be delivered to the Dealer Manager was or will be, when made, inaccurate, untrue or incorrect. (ix) Neither the Manager nor any of its directors, officers or controlling persons has taken, directly or indirectly, any action intended, or which might reasonably be expected, to cause or 19 result, under the Securities Act or otherwise, in, or which has constituted, stabilization or manipulation of the price of any security of the Manager to facilitate the sale or resale of the Shares. (d) IMH represents and warrants to, and agrees with, the Dealer Managers as of each Representation Date that: (i) IMH has been duly organized, is validly existing and is in good standing under the laws of the jurisdiction of incorporation, has full power and authority to conduct all the activities conducted by it, to own or lease the assets owned or leased by it and to conduct its business as described in the Registration Statement and the Prospectus, and is duly qualified to do business in each jurisdiction wherein it owns or leases real property or in which the conduct of its business requires such qualification, except where the failure to be so qualified would not result in a Material Adverse Effect. (ii) IMH has full corporate power and authority to enter into this Agreement, the Tax Agreement, Non-Competition Agreement, the Right of First Refusal Agreement, the Contribution Agreement and the Submanagement Agreement with the Manager. The Tax Agreement, the Contribution Agreement, the Right of First Refusal Agreement, the Non-Competition Agreement, the Submanagement Agreement and any other Company Agreements to which IMH is a party are collectively referred to as the "IMH Agreements." Each of this Agreement and the IMH Agreements has been duly authorized, executed and delivered by IMH and constitutes a valid and binding agreement of IMH and is enforceable against IMH in accordance with its terms, except as the enforceability hereof and thereof may be limited by applicable bankruptcy, insolvency, reorganization and similar laws affecting creditors' rights generally and moratorium laws in effect from time to time and by equitable principles restricting the availability of equitable remedies. The execution and delivery by IMH of, and the performance by IMH of its obligations under, each of this Agreement and IMH Agreements, the consummation of the transactions contemplated hereby 20 and thereby and the application of the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under the caption "Use of Proceeds" will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of IMH pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, the charter or by-laws of IMH, any contract or other agreement to which IMH is a party or by which IMH or any of its properties is bound or affected, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of IMH the effect of any of which, individually or in the aggregate, would be to have a Material Adverse Effect. (iii) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the execution, delivery and performance of this Agreement or the IMH Agreements by or in connection with the taking by IMH of any other action contemplated hereby or thereby, except such as have been obtained. (iv) No statement, representation, warranty or covenant made by IMH in this Agreement or made in any certificate or document required by this Agreement to be delivered to the Dealer Manager was or will be, when made, inaccurate, untrue or incorrect. (v) Neither IMH nor any of its directors, officers or controlling persons has taken, directly or indirectly, any action intended, or which might reasonably be expected, to cause or result, under the Securities Act or otherwise, in, or which has constituted, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. 21 (e) Any certificate required by this Agreement that is signed by any officer of the Company, ICCC, the Manager of IMH and delivered to the Dealer Managers or counsel for the Dealer Managers shall be deemed a representation and warranty by the Company, ICCC, the Manager or IMH, as the case may be, to the Dealer Managers, as to the matters covered thereby. 2. Agreement to Act as Dealer Managers. ----------------------------------- (a) On the basis of the representations and warranties contained herein, and subject to the terms and conditions of the Offer: (i) The Company hereby appoints the Dealer Managers and other soliciting dealers entering into a Soliciting Dealer Agreement, in the form attached hereto as Exhibit A, with the Dealer Managers (the "Soliciting Dealers"), to solicit, in accordance with the Securities Act and the Exchange Act, and their customary practice, the exercise of the Subscription Rights, subject to the terms and conditions of this Agreement, the procedures described in the Registration Statement, the Prospectus and, where applicable, the terms and conditions of the Soliciting Dealer Agreement; and (ii) IMH agrees to furnish, or cause to be furnished, to the Dealer Managers lists showing the names and addresses of IMH Holders as of the Record Date and the Dealer Managers agree to use such information only in connection with the Offering, and not to furnish the information to any other person except for securities brokers and dealers that have been requested by the Dealer Managers to solicit exercises of Subscription Rights. (b) The Dealer Managers agree to provide to the Company, in addition to the services described in paragraph (a) of this Section 2, financial advisory and marketing services in connection with the Offering. (c) The Company and the Dealer Managers agree that the Dealer Managers are independent contractors with respect to the solicitation of the exercise of Subscription Rights, and the performance of financial advisory 22 and marketing services for the Company contemplated by this Agreement. (d) In rendering the services contemplated by this Agreement, the Dealer Managers will not be subject to any liability to the Company, ICCC, the Manager, IMH or any of their affiliates, for any act or omission on the part of any soliciting broker or dealer (except with respect to the Dealer Managers acting in such capacity) or any other person, and the Dealer Managers will not be liable for acts or omissions in performing its obligations under this Agreement, except, on a several basis and not a joint basis, for any losses, claims, damages, liabilities and expenses that are finally judicially determined to have resulted primarily from the bad faith, willful misconduct or gross negligence of a respective Dealer Manager or by reason of the reckless disregard of the obligations and duties of such respective Dealer Manager under this Agreement. (e) Each of the Dealer Managers (and each Soliciting Dealer who executes a Soliciting Dealer Agreement) severally acknowledges that the Board of Directors of IMH has authorized and directed that the Prospectus be delivered to each beneficial owner of IMH Shares, and each of the Dealer Managers (and each Soliciting Dealer who executes a Soliciting Dealer Agreement) severally agrees to deliver or cause to be delivered the Prospectus to each beneficial owner of IMH Shares for which such Dealer Manager (or such Soliciting Dealer) holds such shares of record or as nominee, consistent with the applicable provisions of the Exchange Act and the rules of the American Stock Exchange. 3. Dealer Manager and Solicitation Fees. In full payment for the ------------------------------------ financial advisory, marketing and soliciting services rendered and to be rendered hereunder by the Dealer Managers, the Company agrees to pay the Dealer Managers an aggregate fee (the "Transaction Fee") of 4.25% of the aggregate Subscription Price for all Shares sold in the Offering. From the Transaction Fee, the Dealer Managers will pay, or direct the Company to pay, each Soliciting Dealer, in full payment for their soliciting efforts, 2.50% of the aggregate Subscription Price ("Solicitation Fees") of all ICH Shares sold in connection with an exercise of Subscription Rights solicited by the respective Soliciting Dealer during the 23 Subscription Offer. The Dealer Managers shall retain that portion of the Transaction Fee representing Solicitation Fee attributable to ICH Shares sold in connection with an exercise of Subscription Rights solicited by the respective Dealer Manager and shall retain that portion of the Transaction Fee attributable to the Standby Shares sold pursuant to the Standby Offer. Solicitation Fees with respect to ICH Shares sold in connection with an exercise of Subscription Rights shall be payable to the broker-dealer designated on the applicable portion of the form used by the IMH Holder to exercise Subscription Rights, and if no broker-dealer is so designated or a broker-dealer is otherwise not entitled to receive compensation pursuant to the terms of the Soliciting Dealer Agreement, then to the Dealer Managers. Payment of the Transaction Fee to the Dealer Manager by the Company shall be made on each date on which the Company issues Shares in the form of a wire transfer of same day funds to an account or accounts identified by the Dealer Managers. Payment to each Soliciting Dealer will be made by, or as directed by, the Dealer Managers by check, wire or other means as may be agreed to by the Company and such Soliciting Dealer to an address identified by such Soliciting Dealer. 4. Other Agreements. ---------------- (a) The Company covenants with the Dealer Managers as follows: (i) The Company will use its best efforts to maintain the effectiveness of the Registration Statement under the Securities Act from the Commencement Date through the Supplemental Settlement Date, and will advise the Dealer Managers promptly as to the time at which any amendments to the Registration Statement become effective. The Company will comply with all the provisions of any undertakings contained in the Registration Statement. (ii) The Company will notify the Dealer Managers immediately, and confirm the notice in writing, (A) of the filing of any amendments to the Registration Statement or any amendment or supplement to the Prospectus from the Commencement Date through the Supplemental Settlement Date and the effectiveness of any amendment to the Registration Statement, (B) 24 of the receipt of any comments from the Commission with respect to the Registration Statement or the Prospectus, (C) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose and (E) of the suspension of the qualification of the Shares or the Subscription Rights for offering or sale in any jurisdiction. The Company will make every reasonable effort to prevent the issuance of any stop order described in subsection (D) hereunder and, if any such stop order is issued, to obtain the lifting thereof at the earliest possible moment. (iii) The Company will give the Dealer Managers notice of its intention to file any amendment to the Registration Statement or any amendment or supplement to the Prospectus from the Commencement Date through the Supplemental Settlement Date, and will furnish the Dealer Managers with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement to which the Dealer Managers or counsel for the Dealer Managers shall reasonably object. (iv) The Company will, without charge, deliver to the Dealer Managers, as soon as practicable, the number of copies of the Registration Statement in effect as of the Commencement Date and of each amendment thereto as it may reasonably request through the Supplemental Settlement Date, in each case with the exhibits filed therewith. (v) The Company will, without charge, furnish to the Dealer Managers, from time to time during the period when the Prospectus is required to be delivered in connection with the Offering under the Securities Act, such number of copies of the Prospectus (as amended or supplemented) as the Dealer Managers may reasonably request for the purposes contemplated by the Securities Act or the Rules and Regulations. (vi) If any event shall occur as a result of which it is necessary, in the reasonable opinion of 25 counsel for the Dealer Managers, to amend or supplement the Registration Statement or the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to an IMH Holder or a Standby Purchaser, the Company will forthwith amend or supplement the Prospectus by preparing and filing with the Commission (and furnishing to the Dealer Managers a reasonable number of copies of) an amendment or amendments of the Registration Statement or an amendment or amendments of or a supplement or supplements to, the Prospectus (in form and substance reasonably satisfactory to counsel for the Dealer Managers), at the Company's expense, which will amend or supplement the Registration Statement or the Prospectus so that the Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to an IMH Holder or Standby Purchaser, not misleading. (vii) The Company will endeavor, in cooperation with the Dealer Managers and their counsel, to assist such counsel to qualify the Shares for offering and sale under the applicable securities laws of such states and other jurisdictions of the United States as the Dealer Managers may designate and maintain such qualifications in effect for the duration of the Offering; provided, however, that the Company will not be obligated to file -------- ------- any general consent to service of process, or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not now so qualified. The Company will file such statements and reports as may be required by the laws of each jurisdiction in which the Subscription Rights and the Shares have been qualified as above provided. (viii) The Company will make generally available to holders of its securities as soon as may be practicable but in no event later than the last day of the fifteenth full calendar month following the calendar quarter in which the Commencement Date falls, an earnings statement (which need not be audited but shall be in reasonable detail) for a 26 period of 12 months ended commencing after the Commencement Date, and satisfying the provisions of Section 11(a) of the Securities Act (including Rule 158 of the Rules and Regulations). (ix) During the period of five years commencing on the Effective Date, the Company will furnish to the Dealer Managers copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock, and will furnish to the Dealer Managers a copy of each annual or other report it shall be required to file with the Commission. (x) For a period of 180 days from the Supplemental Settlement Date, the Company will not, without the prior consent of the Dealer Managers, offer or sell, or enter into any agreement to sell, any equity or equity related securities of the Company, other than the Shares pursuant to the Subscription Rights and Shares issued in reinvestment of dividends or distributions. (xi) The Company will use the net proceeds from the Offering as set forth under "Use of Proceeds" in the Prospectus and shall file such reports with the Commission with respect to the sale of the Shares and the application on the proceeds therefrom as may be required in accordance with Rule 463 under the Securities Act. (xii) The Company will use its best efforts to cause the Shares to be duly authorized for listing by the American Stock Exchange prior to the time the Shares are issued. (xiii) The Company will use its best efforts to qualify as a REIT under the Code. (xiv) The Company will advise or cause the Subscription Agent to advise the Dealer Managers from day to day during the period of the Subscription Offer and promptly after the termination of the Subscription Offer, as to the names and addresses of all IMH Holders exercising Subscription Rights, the total number of Subscription Rights exercised and 27 the number of Shares related thereto by each IMH Holder during the immediately preceding day, indicating the total number of Subscription Rights verified to be in proper form for exercise, rejected for exercise and being processed and, for the Dealer Managers and each Soliciting Dealer, the number of Subscription Rights exercised and the number of Shares related thereto on subscription certificates indicating the Dealer Managers or such Soliciting Dealer, as the case may be, as the broker-dealer with respect thereto, and as to such other information as the Dealer Managers may reasonably request; and will notify the Dealer Managers and each Soliciting Dealer, not later than 5:00 P.M., New York City time, on the [third] business day following the Expiration Date of the total number of Subscription Rights exercised during the respective subscription period and the number of Shares related thereto, the total number of Subscription Rights verified to be in proper form for exercise, rejected for exercise and being processed and, for the Dealer Managers and each Soliciting Dealer, the number of Subscription Rights exercised and the number of Shares, including Shares requested pursuant to the Over-Subscription Privilege, related thereto on subscription certificates indicating the Dealer Managers or such Soliciting Dealer, as the case may be, as the broker-dealer with respect thereto, and as to such other information as the Dealer Managers may reasonably request. (xv) In the event that the Minimum Offering Amount is achieved, the Company and the Dealer Managers shall determine the number of Shares to be issued on the Initial Settlement Date and the number of Shares, if any, to be issued on the Supplemental Settlement Date. (xvi) The Company will not use the proceeds of the sale of the Shares in such a manner as to require the Company to be registered under the Investment Company Act. (xvii) The Company will not at any time, directly or indirectly, take any action intended, or which might reasonably be expected, to cause or result in, or which shall constitute, stabilization 28 of the price of the shares of Common Stock to facilitate the sale or resale of any of the Shares. (xviii) During the period of 180 days commencing at the latest Settlement Date, the Company will not, without the prior written consent of PaineWebber Incorporated, grant options to purchase shares of Common Stock at a price less than the market price of the Common Stock at the time such options are granted. (xix) The Company will not, and the Company will cause each beneficial owner of more than 5% of the outstanding shares of Common Stock to enter into agreements with Dealer Managers in the form set forth in Exhibit B to the effect that they will not, for a period of 180 days commencing at the latest Settlement Date, without prior written consent of PaineWebber Incorporated, sell, contract to sell, grant any option to sell or otherwise dispose of, or require the Company to file with the Commission a registration statement under the Securities Act to register, any shares of Common Stock or securities convertible into or exchangeable for Common Stock or warrants or other rights to acquire shares of Common Stock of which they are, or may in the future become, the "beneficial owner" (within the meaning of Rule 13d-3 under the Exchange Act), other than pursuant to stock option plans or in connection with other employee incentive compensation arrangements or the Company's dividend reinvestment plan. (xx) The Company will not invest in future contracts, options on future contracts or options on commodities unless the Company and the Manager are exempt from the registration requirements of the Commodity Exchange Act, as amended (the "Commodity Act"), or otherwise comply with the Commodity Act. Neither the Company nor the Manager will engage in any activities bearing on the Commodity Act, unless such activities are exempt from the Commodity Act or otherwise comply with the Commodity Act. (xxi) Any servicing agreements entered into by the Company after the Effective Date will contain terms consistent with those described for "Servicing Agreements" (as such term is defined in the Prospec- 29 tus under the caption "Business -- Servicing and Master Servicing"). (b) The Company, ICCC, the Manager and IMH, as the case may be, covenants with the Dealer Managers as follows: (i) The Company, ICCC, the Manager and IMH will not take, directly or indirectly, any action designed to cause or to result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares; provided, that any action in connection with the Company's dividend reinvestment plan will not be deemed to be within the meaning of this Section 4(b). (ii) Each of ICCC, the Manager and IMH shall notify the Dealer Manager and the Company of the occurrence of any material events respecting (A) any of the operations or assets subject to the Contribution Transactions or (B) the Manager, ICCC or IMH, as the case may be, and, if as the result of any such event it is necessary, in the reasonable opinion of counsel, to amend or supplement the Prospectus in order to make the Prospectus not misleading in light of the circumstances existing at the time it is delivered to a purchaser, ICCC, the Manager or IMH, as the case may be, will forthwith supply such information to the Company as shall be necessary for the Company to prepare an amendment or supplement to the Prospectus so that, as so amended or supplemented, the Prospectus will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time it is delivered to a purchaser, not misleading. (iii) IMH will not, for a period of 180 days commencing at the latest Settlement Date, without the prior written consent of PaineWebber Incorporated, sell, contract to sell, grant any option to sell, or otherwise dispose of, or require the Company to file with the Commission a registration statement under the Securities Act to register, any 30 shares of Common Stock or securities convertible into or exchangeable for Common Stock or warrants or other rights to acquire shares of Common Stock of which they are, or may in the future become, the "beneficial owner" (within the meaning of Rule 13d-3 under the Exchange Act), other than pursuant to employee stock option plans or in connection with other employee incentive compensation arrangements. (iv) The Manager will not engage in any activity which would require the Manager to register as an investment adviser under the Investment Advisers Act of 1940 or to register as a commodity trading advisor under the Commodity Act. 5. Payment of Expenses. ------------------- (a) The Company will pay all expenses incident to the performance of its obligations under this Agreement, including, but not limited to, expenses relating to (i) the printing and filing of the Registration Statement as originally filed and of each amendment thereto, (ii) the preparation, issuance and delivery of the certificates for the Shares and subscription certificates relating to the Subscription Rights, (iii) the fees and disbursements of the Company's counsel (including the fees and disbursements of local counsel, if any) and accountants, (iv) the qualification of the Shares under securities laws in accordance with the provisions of Section 4(a)(vii) of this Agreement, including filing fees and the fees relating to the preparation of the Blue Sky Survey by counsel to the Dealer Managers, (v) the printing or other production and delivery to the Dealer Managers of copies of the Registration Statement as in effect on the Commencement Date and of each amendment thereto and of the Prospectus and any amendments or supplements thereto, (vi) the printing and other production and delivery of copies of the Blue Sky Survey, (vii) the fees and expenses incurred with respect to filing with the National Association of Securities Dealers, Inc., (viii) the fees and expenses incurred in connection with the listing of the Shares on the American Stock Exchange, (ix) the printing or other production, mailing and delivery expenses incurred in connection with Offering Materials and (x) the fees and expenses incurred with respect to the Subscription Agent. 31 (b) In addition to any fees that may be payable to the Dealer Managers under this Agreement, the Company agrees to reimburse the Dealer Managers upon request made from time to time for its reasonable expenses incurred in connection with their activities under this Agreement, including the reasonable fees and disbursements of their legal counsel (excluding Blue Sky fees and expenses which are paid directly by the Company), in an amount up to $250,000. (c) If this Agreement is terminated by the Dealer Managers in accordance with the provisions of Section 6, the Company agrees to reimburse the Dealer Managers for their reasonable out-of-pocket expenses incurred in connection with its performance hereunder, including the reasonable fees and disbursements of counsel for the Dealer Managers. In the event the transactions contemplated hereunder are not consummated, the Company agrees to pay all of the costs and expenses set forth in paragraphs (a) and (b) of this Section 5 which the Company would have paid if such transactions had been consummated. 6. Conditions of the Dealer Managers' Obligations. The ---------------------------------------------- obligations of the Dealer Managers hereunder are subject to the accuracy of the respective representations and warranties of the Company, ICCC, the Manager and IMH contained herein, to the performance by such parties of their respective obligations hereunder, and to the following further conditions: (a) Notification that the Registration Statement has become effective shall be received by the Dealer Managers not later than 5:00 p.m., New York City time, on the date of this Agreement or at such later date and time as shall be consented to in writing by the Dealer Managers and all filings required by Rule 424 of the Rules and Regulations shall have been made. (b)(i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall be pending or threatened by the Commission; (ii) no order suspending the effectiveness of the Registration Statement or the qualification or registration of the Shares under the securities or Blue Sky laws of any jurisdiction shall be in effect and no 32 proceeding for such purpose shall be pending before or threatened or contemplated by the Commission or the authorities of any such jurisdiction, (iii) any request for additional information on the part of the staff of the Commission or any such authorities shall have been complied with to the satisfaction of the staff of the Commission or such authorities and (iv) after the date hereof no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to the Dealer Managers and the Dealer Managers did not object thereto in good faith, and the Dealer Managers shall have received certificates, dated the respective Representation Date, and signed by the Chief Executive Officer or the Chairman of the Board of Directors of the Company and the Chief Financial Officer of the Company (who may, as to proceedings threatened, rely upon the best of their information and belief, to the effect of clauses (i), (ii) and (iii)). (c) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) there shall not have been a material adverse change in the general affairs, capital stock, indebtedness, business, business prospects, properties, management, condition (financial or otherwise) or results of operations of the Company, and its Subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, in each case other than as set forth in or contemplated by the Registration Statement and the Prospectus and (ii) none of the Company or any of its Subsidiaries shall have sustained any material loss or interference with its business or properties from fire, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree, which is not set forth in the Registration Statement and the Prospectus, if in the judgment of the Dealer Managers any such development makes it impracticable or inadvisable to consummate the sale and delivery of the Shares pursuant to the Offering. (d) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall have been no litigation or other proceeding instituted against IMH, the Manager or 33 the Company or any of the Subsidiaries or any of their respective officers or directors in their capacities as such, before or by any Federal, state or local court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, in which litigation or proceeding, an unfavorable ruling, decision or finding could materially and adversely affect the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company and its subsidiaries, taken as a whole, or the ability of the (i) Company, ICCC and IMH to consummate the transactions contemplated by the Contribution Agreement, (ii) the Company to fulfill its obligation under the Company Agreements, (iii) ICCC to fulfill its obligations under the ICCC Agreements, (iv) the Manager to fulfill its obligations under the Manager Agreements, or (v) IMH to fulfill its obligations under the IMH Agreements. (e) Each of the representations and warranties of the Company, ICCC, the Manager and IMH contained herein shall be true and correct in all material respects on each Representation Date, as if made at such Representation Date and all covenants and agreements herein contained to be performed on the part of the Company, ICCC, the Manager or IMH and all conditions herein contained to be fulfilled or complied with by the Company, ICCC, the Manager or IMH at or prior to such Representation Date, shall have been duly performed, fulfilled or complied with. (f) On each Representation Date, the Dealer Managers shall have received an opinion, dated the respective Representation Date, and satisfactory in form and substance to counsel for the Dealer Managers, from Freshman, Marantz, Orlanski, Cooper & Klien, counsel to the Company, ICCC, the Manager and IMH, to the effect set forth in Exhibit B. (g) On each Representation Date, the Dealer Managers shall have received an opinion, dated the respective Representation Date, from Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel to the Dealer Managers, with respect to the Registration Statement, the Prospectus and this Agreement, which opinion shall be satisfactory in all respects to the Dealer Managers. 34 (h) On the date of the Prospectus, the Accountants shall have furnished to the Dealer Managers a letter, dated the date of its delivery, addressed to the Dealer Managers and in form and substance satisfactory to the Dealer Managers, confirming that they are independent accountants with respect to the Company as required by the Securities Act and the Rules and Regulations and with respect to the financial and other statistical and numerical information contained in the Registration Statement. On each Representation Date, the Accountants shall have furnished to the Dealer Managers a letter, dated the respective Representation Date, which shall confirm, on the basis of a review in accordance with the procedures set forth in the letter from the Accountants, that nothing has come to their attention during the period from the date of the letter referred to in the prior sentence to a date (specified in the letter) not more than five days prior to the respective Representation Date, which would require any change in their letter dated the date of the Prospectus. (i) On each Representation Date, there shall be furnished to the Dealer Managers an accurate certificate, dated the date of its delivery, signed by each of the Chief Executive Officer and the Chief Financial Officer of the Company, in form and substance satisfactory to the Dealer Managers, to the effect that: (i) Each signer of such certificate has carefully examined the Registration Statement and the Prospectus and (A) as of the date of such certificate, such documents are true and correct in all material respects and do not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not untrue or misleading and (B) in the case of the certificates delivered at the Initial Settlement Date, the Supplemental Settlement Date, since the Effective Date no event has occurred as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein not untrue or misleading in any material respect. (ii) Each of the representations and warranties of the Company contained in this Agreement were, when originally made, and are, at the time 35 such certificate is delivered, true and correct in all material respects. (iii) Each of the covenants required herein to be performed by the Company on or prior to the delivery of such certificate has been duly, timely and fully performed and each condition herein required to be complied with by the Company on or prior to the date of such certificate has been duly, timely and fully complied with. (j) On each Representation Date, there shall be furnished to the Dealer Managers an accurate certificate, dated the date of its delivery, signed by each of the Chief Executive Officer and Chief Financial Officer of ICCC, in form and substance satisfactory to the Dealer Managers to the effect that: (i) Each signer of such certificate has carefully examined the Registration Statement and the Prospectus and (1) as of the date of such certificate, such documents are true and correct in all material respects insofar as they relate to ICCC, and do not omit to state a material fact relating to ICCC required to be stated therein or necessary in order to make the statements therein relating to ICCC not untrue or misleading and (2) in the case of the certificate delivered at the Initial Settlement Date and the Supplemental Settlement Date, since the Effective Date no event has occurred as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein relating to ICCC not untrue or misleading in any material respect. (ii) Each of the representations and warranties of ICCC contained in this Agreement were, when originally made, and are, at the time such certificate is delivered, true and correct in all material respects. (iii) Each of the covenants required herein to be performed by ICCC on or prior to the delivery of such certificate has been duly, timely and fully performed and each condition herein required to be complied with by ICCC on or prior to the date of 36 such certificate has been duly, timely and fully complied with. (k) On each Representation Date there shall be furnished to the Dealer Managers an accurate certificate, dated the date of its delivery, signed by each of the Chief Executive Officer and the Chief Financial Officer of the Manager, in form and substance satisfactory to the Representatives, to the effect that: (i) Each signer of such certificate has carefully examined the Registration Statement and the Prospectus and (A) as of the date of such certificate, such documents are true and correct in all material respects insofar as they relate to the Manager and do not omit to state a material fact relating to the Manager required to be stated therein or necessary in order to make the statements therein relating to the Manager not untrue or misleading and (B) in the case of the certificate delivered at the Initial Settlement Date and the Supplemental Settlement Date, since the Effective Date no event has occurred as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein relating to the Manager not untrue or misleading in any material respect. (ii) Each of the representations and warranties of the Manager contained in this Agreement were, when originally made, and are, at the time such certificate is delivered, true and correct in all material respects. (iii) Each of the covenants required herein to be performed by the Manager on or prior to the delivery of such certificate has been duly, timely and fully performed and each condition herein required to be complied with by ICCC on or prior to the date of such certificate has been duly, timely and fully complied with. (l) On each Representation Date, there shall be furnished to the Dealer Managers an accurate certificate, dated the date of its delivery, signed by each of the Chief Executive Officer and the Chief Financial 37 Officer of IMH, in form and substance satisfactory to the Representatives, to the effect that: (i) Each signer of such certificate has carefully examined the Registration Statement and the Prospectus and (A) as of the date of such certificate, such documents are true and correct in all material respects insofar as they relate to IMH and do not omit to state a material fact relating to IMH required to be stated therein relating to IMH not untrue or misleading and (B) in the case of the certificate delivered at the Initial Settlement Date and, as to any Option Shares, the Supplemental Settlement Date, since the Effective Date no event has occurred as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein relating to IMH not untrue or misleading on any material respect. (ii) Each of the representations and warranties of IMH contained in this Agreement were, when originally made, and are, at the time such certificate is delivered, true and correct in all material respects. (iii) Each of the covenants required herein to be performed by IMH on or prior to the delivery of such certificate has been duly, timely and fully performed and each condition herein required to be complied with by III on or prior to the date of such certificate has been duly, timely and fully complied with. (m) The Shares shall be qualified for sale in such states as the Dealer Managers may reasonably request, each such qualification shall be in effect and not subject to any stop order or other proceeding on the Initial Settlement Date or the Supplemental Settlement Date. (n) Prior to the Commencement Date, the Shares shall have been duly authorized for listing by the American Stock Exchange upon official notice of issuance. (o) The Company, ICCC, the Manager and IMH shall have executed and delivered to each other party thereto the Company Agreements, the ICCC Agreements, the 38 Manager Agreements and the IMH Agreements, as the case may be. (p) The Company, ICCC, the Manager and IMH shall have furnished to the Dealer Managers such certificates, in addition to those specifically mentioned herein, as the Dealer Managers may have reasonably requested as to the accuracy and completeness at a Representation Date of any statement in the Registration Statement or the Prospectus, as to the accuracy at such Representation Date, of the representations and warranties of the Company, ICCC, the Manager and IMH herein, as to the performance by the Company, ICCC, the Manager and IMH of their respective obligations hereunder, or as to the fulfillment of the conditions concurrent and precedent to its obligations hereunder of the Dealer Managers. 7. Indemnification and Contribution. -------------------------------- (a) Each of the Company and the Manager, jointly and severally, will indemnify and hold harmless each Dealer Manager, the directors, officers, employees and agents of each Dealer Manager and each person, if any, who controls each Dealer Manager within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, liabilities, expenses and damages (including, but not limited to, any and all investigative, legal and other expenses reasonably incurred in connection with, and any and all amounts paid in settlement of, any action, suit or proceeding between any of the indemnified parties and any indemnifying parties or between any indemnified party and any third party, or otherwise, or any claim asserted), as and when incurred, to which any Dealer Manager, or any such person, may become subject under the Securities Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, liabilities, expenses or damages arise out of or are based on (i) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement, the Prospectus or the Offering Materials or any amendment or supplement to the Registration Statement, the Prospectus or the offering Materials or in any documents filed under the Exchange Act and deemed to be incorporated by reference into the Prospectus, or in any application or other document executed by or on behalf of 39 the Company or based on written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Shares under the securities laws thereof or filed with the Commission, (ii) the omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading or (iii) any act or failure to act or any alleged act or failure to act by any Dealer Manager in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, liability, expense or damage arising out of or based upon matters covered by clause (i) or (ii) above (provided that neither the Company nor the Manager shall be liable under this clause (iii) to the extent it is finally judicially determined by a court of competent jurisdiction that such loss, claim, liability, expense or damage resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Dealer Manager through its gross negligence or willful misconduct); provided that the Company will not be liable to the extent that such loss, claim, liability, expense or damage arises from the sale of the Shares in the public offering to any person by a Dealer Manager and is based on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to any Dealer Manager furnished in writing to the Company by the Dealer Managers expressly for inclusion in the Registration Statement, any preliminary prospectus or the Prospectus. This indemnity agreement will be in addition to any liability that the Company and the Manager might otherwise have. (b) Each Dealer Manager will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, each director of the Company and each officer of the Company who signs the Registration Statement to the same extent as the foregoing indemnity from the Company to each Dealer Manager, but only insofar as losses, claims, liabilities, expenses or damages arise out of or are based on any untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to any Dealer Manager furnished in writing to the Company by the Dealer Managers expressly for use in the Registration Statement, 40 any preliminary prospectus or the Prospectus. This indemnity will be in addition to any liability that each Dealer Manager might otherwise have; provided, however, that in no case shall any Dealer Manager be liable or responsible for any amount in excess of the underwriting discounts and commissions received by such Dealer Manager. (c) Any party that proposes to assert the right to be indemnified under this Section 7 will, promptly after receipt of notice of commencement of any action against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section 7, notify each such indemnifying party of the commencement of such action, enclosing a copy of all papers served, but the omission so to notify such indemnifying party will not relieve it from any liability that it may have to any indemnified party under the foregoing provisions of this Section 7 unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. If any such action is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in and, to the extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action from the indemnified party, jointly with any other indemnifying party similarly notified, to assume the defense of the action, with counsel satisfactory to the indemnified party, and after notice from the indemnifying party to the indemnified party of its election to assume the defense, the indemnifying party will not be liable to the indemnified party for any legal or other expenses except as provided below and except for the reasonable costs of investigation subsequently incurred by the indemnified party in connection with the defense. The indemnified party will have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel will be at the expense of such indemnified party unless (1) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (2) the indemnified party has reasonably concluded (based on advice of counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, 41 (3) a conflict or potential conflict exists (based on advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (4) the indemnifying party has not in fact employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm admitted to practice in such jurisdiction at any one time for all such indemnified party or parties. All such fees, disbursements and other charges will be reimbursed by the indemnifying party promptly as they are incurred. An indemnifying party will not be liable for any settlement of any action or claim effected without its written consent (which consent will not be unreasonably withheld). No indemnifying party shall, without the prior written consent of each indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding relating to the matters contemplated by this Section 7 (whether or not any indemnified party is a party thereto), unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising or that may arise out of such claim, action or proceeding. Notwithstanding any other provision of this Section 7(c), if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. 42 (d) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in the foregoing paragraphs of this Section 7 is applicable in accordance with its terms but for any reason is held to be unavailable from the Company and the Manager or the Dealer Managers, the Company and the Manager and the Dealer Managers will contribute to the total losses, claims, liabilities, expenses and damages (including any investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, but after deducting any contribution received by the Company and the Manager from persons other than the Dealer Managers, such as persons who control the Company or the Managers within the meaning of the Securities Act, officers of the Company who signed the Registration Statement and directors of the Company, who also may be liable for contribution) to which the Company and the Manager and any one or more of the Dealer Managers may be subject in such proportion as shall be appropriate to reflect the relative benefits received by the Company and the Manager on the one hand and the Dealer Managers on the other. The relative benefits received by the Company and the Manager (treated jointly for this purpose as one person) on the one hand and the Dealer Managers on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total fees received by the Dealer Managers in each case as set forth in the table on the cover page of the Prospectus. If, but only if, the allocation provided by the foregoing sentence is not permitted by applicable law, the allocation of contribution shall be made in such proportion as is appropriate to reflect not only the relative benefits referred to in the foregoing sentence but also the relative fault of the Company and the Manager (treated jointly for this purpose as one person), on the one hand, and the Dealer Managers, on the other, with respect to the statements or omissions which resulted in such loss, claim, liability, expense or damage, or action in respect thereof, as well as any other relevant equitable considerations with respect to such offering. Such relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Manager or the Dealer 43 Managers, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Dealer Managers agree that it would not be just and equitable if contributions pursuant to this Section 7(d) were to be determined by pro rata allocation (even if the Dealer Managers were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, liability, expense or damage, or action in respect there of, referred to above in this Section 7(d) shall be deemed to include, for purpose of this Section 7(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7(d), no Dealer Manager shall be required to contribute any amount in excess of the fees received by it and no person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Dealer Managers' obligations to contribute as provided in this Section 7(d) are several and not joint. For purposes of this Section 7(d), any person who controls a party to this Agreement within the meaning of the Securities Act will have the same rights to contribution as that party, and each officer of the Company who signed the Registration Statement will have the same rights to contribution as the Company, subject in each case to the provisions hereof. Any party entitled to contribution, promptly after receipt of notice of commencement of any action against such party in respect of which a claim for contribution may be made under this Section 7(d), will notify any such party or parties from whom contribution may be sought, but the omission so to notify will not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have under this Section 7(d). Except for a settlement entered into pursuant to the last sentence of Section 7(d) hereof, no party will be liable for contribution with respect to any action or claim settled with out its written consent (which consent will not be unreasonably withheld). 44 (e) The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of the Dealer Managers, (ii) acceptance of the Shares and payment therefore or (iii) any termination of this Agreement. (f) The Company and the Manager acknowledge that the statements under the caption "Distribution Arrangements" in the Prospectus constitute the only information furnished in writing to the Company by the Dealer Managers expressly for use in such document, and the Dealer Managers confirm that such statements are true and correct in all material respects. 8. Representations, Warranties and Agreements to Survive Delivery. -------------------------------------------------------------- The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers, of ICCC, of the Manager, of IMH and of the Dealer Managers set forth in or made pursuant to this Agreement shall survive the Initial Settlement Date and the Supplemental Settlement Date and will remain in full force and effect, regardless of any investigation made by or on behalf of Dealer Managers or the Company or any of the officers, directors or controlling persons referred to in Section 7 hereof, and will survive delivery of and payment for the Shares pursuant to the Offer. The provisions of Sections 5 and 7 hereof shall survive the termination or cancellation of this Agreement. 9. Termination of Agreement. (a) This Agreement shall be subject to ------------------------ termination in the absolute discretion of the Dealer Managers, by notice given to the Company prior to the expiration of the Offering, if prior to such time (i) financial, political, economic, currency, banking or social conditions in the United States shall have undergone any material change the effect of which on the financial markets makes it, in the judgment of the Dealer Managers, impracticable or inadvisable to proceed with the Offering, (ii) there has occurred any outbreak or material escalation of hostilities or other calamity or crisis the effect of which on the financial markets of the United States is such as to make it, in the judgment of the Dealer Managers, impracticable or 45 inadvisable to proceed with the Offering, (iii) trading in securities generally on the New York Stock Exchange or American Stock Exchange or American Stock Exchange shall have been suspended or limited, (iv) a banking moratorium shall have been declared either by Federal or New York State authorities, or (v) trading in any of the Equity Securities of the Company shall have been suspended by the Commission, by an Exchange that lists the Shares or by the National Association of Securities Dealers Automated Quotation National Market System. (b) If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 5. 10. Notices. All communications hereunder will be in writing and ------- effective only on receipt, and, if sent to the Dealer Managers, will be mailed, delivered or telegraphed and confirmed to PaineWebber Incorporated, Attn: Halle Benett, 1285 Avenue of the Americas, New York, New York 10019; or if sent to the Company or ICCC will be mailed, delivered or telegraphed and confirmed to them at: Imperial Credit Commercial Holdings, 1 Park Plaza, Suite 430, Irvine, California 92614, Attn: Joseph R. Tomkinson, Chief Executive Officer; or if sent to the Manager, will be mailed, delivered or telegraphed and confirmed in writing to: REIT Advisors, Inc., 20371 Irvine Avenue, Santa Ana Heights, California 92707, Attn: Joseph R. Tomkinson, Chief Executive Officer, or if sent to IMH, will be mailed, delivered or telegraphed and confirmed in writing to: Imperial Credit Mortgage Holdings, 20371 Irvine Avenue, Santa Ana Heights, California 92707, Attn: Joseph R. Tomkinson, Chief Executive Officer. 11. Successors. This Agreement will inure to the benefit of and be ---------- binding upon the parties hereto and their respective successors and will inure to the benefit of the officers, trustees, directors and controlling persons referred to in Section 7 hereof, and no other person will have any right or obligation hereunder. 12. Applicable Law. This Agreement will be governed by and construed -------------- in accordance with the laws of the State of New York without reference to conflict of law principles thereof. 46 13. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 47 If the foregoing is in accordance with your understanding of our agreement, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company, ICCC, the Manager and IMH and the Dealer Managers. Very truly yours, IMPERIAL CREDIT COMMERCIAL IMPERIAL COMMERCIAL HOLDINGS, INC. CAPITAL CORPORATION, INC. By: By: --------------------------- --------------------------- Name: Name: Title: Title: REIT ADVISORS, INC. IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. By: By: --------------------------- --------------------------- Name: Name: Title: Title: The foregoing Agreement is hereby confirmed and accepted, on behalf of the Dealer Managers, as of the date first above written. PAINEWEBBER INCORPORATED STIFEL, NICOLAUS & COMPANY INCORPORATED By: By: --------------------------- --------------------------- Name: Name: Title: Title: EXHIBIT A IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. Up to 7,000,000 Shares of Common Stock Issuable upon Exercise of Subscription Rights for such Shares SOLICITING DEALER AGREEMENT To Securities Dealers and Brokers: Imperial Credit Commercial Holdings, Inc. (the "Company") is offering to holders of record ("IMH Holders") as of the close of business on June [ ], 1997 (the "Record Date") of shares of common stock and options to purchase common stock (collectively, the "IMH Shares") of Imperial Credit Mortgage Holdings, Inc. ("IMH"), of non-transferable rights to subscribe (the "Subscription Rights") for an aggregate of up to 7,000,000 shares (the "ICH Shares") of the Company's common stock, par value $.01 per share (the "Common Stock"), at the Subscription Price (as hereinafter defined). The Subscription Rights entitle the IMH Holders to subscribe for ICH Shares at the rate of one ICH Share for each IMH Share held on the Record Date (the "Subscription Offer"). An IMH Holder's right to acquire at the Subscription Price (as hereinafter defined) one ICH Share for every IMH Share held is referred to as the "Primary Subscription Privilege." Holders of IMH Shares who fully exercise all their Subscription Rights may be entitled to subscribe for additional ICH Shares of the Company, subject to allotment, proration and reduction (the "Over-Subscription Privilege") as provided for in the Company's Prospectus dated June [__], 1997 (the "Prospectus"). The opportunity for IMH Holders to subscribe for ICH Shares pursuant to the Subscription Rights - -------------------- Subject to increase in connection with the Minimum Standby Offer Amount (as defined herein) in the event that the Maximum Subscription Offer Amount is achieved. A-1 expires at 5:00 p.m., New York City time, on July [__], 1997 (the "Expiration Date"). The offer of Subscription Rights to the IMH Holders will commence on June [__], 1997 (the "Commencement Date"). ICH Shares issued to IMH Holders pursuant to exercise of Subscription Rights, including pursuant to requests for additional ICH Shares pursuant to the Over-Subscription Privilege, duly received on or prior to the Expiration Date will be at the subscription price (the "Subscription Price") of $15.00 per Share. The trade date for the acceptance of exercises of Subscription Rights for the ICH Shares shall be July [__], 1997 (the "Trade Date"), and the initial settlement date for the issuance of all or a portion of such ICH Shares shall be July [__], 1997 (the "Initial Settlement Date"). A portion of the ICH Shares requested pursuant to Primary Subscription Privilege and the Over-Subscription Privilege may be issued on a date after the Initial Settlement Date (the "Supplemental Settlement Date") to be determined by the Company and the Dealer Managers, subject to proration, reduction or cancellation by the Company, subject to the consent of the Dealer Managers, if the Company believes, following the Expiration Date, that the issuance of such additional ICH Shares will have an adverse effect upon the operations of the Company or the market for the Company's Common Stock (the Initial Settlement Date and the Supplemental Settlement Date are each referred to as a "Settlement Date"). The Board of Directors has determined to limit the amount of ICH Shares that may be subscribed for pursuant to the Subscription Offer to 7,000,000 (the "Maximum Subscription Offer Amount"). In addition to the Subscription Offer, the Company is offering (the "Standby Offer" and, together with the Subscription Offer, the "Offering") to certain persons that may or may not be IMH Holders as of the Record Date ("Standby Purchasers"), pursuant to Standby Purchase Agreements (as defined herein), at least _____ shares of Common Stock (the "Minimum Standby Offer Amount") but no more than [1,000,000] shares of Common Stock, subject to increase to the extent that the Maximum Subscription Offer Amount is not achieved (the "Maximum Standby Offer Amount") at a price per share equal to the Subscription Price (the shares of Common Stock being offered pursuant to the Standby Offer are hereinafter referred to as the "Standby Shares"; the Standby Shares A-2 and the ICH Shares are hereinafter collectively referred to as the "Shares"). The Board of Directors of the Company has determined not to proceed with the Offering unless an aggregate amount of at least [2,500,000] Shares (the "Minimum Offering Amount") are subscribed for (inclusive of Standby Shares that may be subscribed for pursuant to the Standby Purchase Agreements). For the duration of the Offer, the Company has agreed to pay Solicitation Fees to any qualified broker or dealer executing a Soliciting Dealer Agreement who solicits the exercise of Subscription Rights (which exercise includes exercises pursuant to the Over-Subscription Privilege) in connection with the Subscription Offer and who complies with the procedures described below (a "Soliciting Dealer"). Upon timely delivery to the subscription agent (discussed below) for the Subscription Offer, of payment for Shares purchased pursuant to the exercise of Subscription Rights and of properly completed and executed documentation as set forth in this Soliciting Dealer Agreement, a Soliciting Dealer will be entitled to receive Solicitation Fees equal to 2.50% of the Subscription Price per Share so purchased; provided, however, that no payment shall be due with respect to the issuance of any Shares until payment therefor is actually received. A qualified broker or dealer is a broker or dealer which is a member of a registered national securities exchange in the United States or the National Association of Securities Dealers, Inc. ("NASD") or any foreign broker or dealer not eligible for membership who agrees to conform to the Rules of Fair Practice of the NASD, including Sections 2720, 2730, 2740 and 2750 thereof, in making solicitations in the United States to the same extent as if it were a member thereof. The Company has agreed to pay the Solicitation Fees payable to the undersigned Soliciting Dealer on the terms set forth in the Dealer Managers Agreement, dated as of June [__], 1997, among PaineWebber Incorporated and Stifel, Nicolaus & Company Incorporated (the "Dealer Managers"), the Company, IMH and others (the "Dealer Managers Agreement"). Solicitation and other activities by Soliciting Dealers may be undertaken only in accordance with the applicable rules and regulations of the Securities and Exchange Commission and only in those states and other jurisdictions where such solicitations and other activities may lawfully be undertaken and in A-3 accordance with the laws thereof. Compensation will not be paid for solicitations in any state or other jurisdiction in which the opinion of counsel to the Company or the Dealer Managers, such compensation may not lawfully be paid. No Soliciting Dealer shall be paid Solicitation Fees with respect to Shares purchased pursuant to an exercise of Subscription Rights and the Over-Subscription Privilege for its own account or for the account of any affiliate of the Soliciting Dealer, except that the Dealer Managers shall receive the Solicitation Fees with respect to Shares purchased pursuant to an exercise of Subscription Rights and the Over-Subscription Privilege for its own account provided that such Shares are offered and sold by the Dealer Managers to its clients. No Soliciting Dealer or any other person is authorized by the Company or the Dealer Managers to give any information or make any representations in connection with the Offer other than those contained in the Prospectus and other authorized solicitation material furnished by the Company through the Dealer Managers. No Solicit ing Dealer is authorized to act as agent of the Company or the Dealer Managers in any connection or transaction. In addition, nothing herein contained shall create a partnership among the Soliciting Dealers and the Dealer Managers or with one another, or agents of the Dealer Managers or the Company, or create any association between such parties, or shall render the Dealer Managers or the Company liable for the obligations of any Soliciting Dealer. The Dealer Managers shall be under no liability to make any payment to any Soliciting Dealer, and shall be subject to no other liabilities to any Soliciting Dealer, and no obligations of any sort shall be implied. [_______________] is the subscription agent for the exercise of Subscription Rights by IMH Holders (the "Subscription Agent"). In order for a Soliciting Dealer to receive Solicitation Fees for the exercise of Subscription Rights by IMH Holders, the manner and timing of the exercise of the Subscription Rights must conform with the procedures set forth in the Prospectus. In order for a Soliciting Dealer to receive Solicitation Fees, the Subscription Agent must have received from such Soliciting Dealer no later than 5:00 p.m., New York time, on the Expiration Date, either (i) a properly completed and duly executed Subscription Certificate with respect to Shares purchased pursuant to the exercise of Subscription Rights and full payment for such Shares; or (ii) a Notice of A-4 Guaranteed Delivery guaranteeing delivery to the Subscription Agent by the close of business on the fifth business day after the Expiration Date, of (a) full payment for such Shares and (b) a properly completed and duly executed Subscription Certificate with respect to Shares purchased pursuant to the exercise of Subscription Rights. Solicitation Fees will only be paid after receipt by the Subscription Agent of a properly completed and duly executed copy (or a facsimile thereof) of this Soliciting Dealer Agreement. In the case of a Notice of Guaranteed Delivery, Solicitation Fees will only be paid after delivery in accordance with such Notice of Guaranteed Delivery has been effected. Solicitation Fees will be paid by the Company to the Soliciting Dealer to an account or address designated by the Soliciting Dealer below by the tenth business day after final payment for Shares is due. All questions as to the form, validity and eligibility (including time of receipt) of this Soliciting Dealer Agreement will be determined by the Company, in its sole discretion, which determination shall be final and binding. Unless waived, any irregularities in connection with a Soliciting Dealer Agreement or delivery thereof must be cured within such time as the Company shall determine. None of the Company, the Dealer Managers, Subscription Agent or any other person will be under any duty to give notification of any defects or irregularities in any Soliciting Dealer Agreement or incur any liability for failure to give such notification. The acceptance of Solicitation Fees from the Company by the undersigned Soliciting Dealer shall constitute a representation by such Soliciting Dealer to the Company that: (i) it has received and reviewed the Prospectus; (ii) in soliciting purchases of Shares pursuant to the exercise of the Subscription Rights it has complied with the applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the applicable rules and regulations thereunder, any applicable securities laws of any state or jurisdiction where such solicitations may lawfully be made, and the applicable rules and regulations of any self-regulatory organization or registered national securities exchange; (iii) in soliciting purchases of Shares pursuant to the exercise of the Subscription Rights and in filling orders for such Shares, it has complied with the terms of the A-5 Subscription Offer as set forth in the Prospectus; (iv) in soliciting purchases of Shares pursuant to the exercise of the Subscription Rights it has not published, circulated or used any soliciting materials other than the Prospectus and any other authorized solicitation material furnished by the Company through the Dealer Managers; (v) it has not purported to act as agent of the Company or the Dealer Managers in any connection or transaction relating to the Subscription Offer; (vi) the information contained in this Soliciting Dealer Agreement is, to its best knowledge, true and complete; (vii) it is not affiliated with the Company; (viii) it will not accept Solicitation Fees paid by the Company pursuant to the terms hereof with respect to Shares purchased by the Soliciting Dealer pursuant to an exercise of Subscription Rights for its own account; (ix) it will not remit, directly or indirectly, any part of Solicitation Fees paid by the Company pursuant to the terms hereof to any beneficial owner of Shares purchased pursuant to the Subscription Offer; (x) it acknowledges that the board of directors of IMH has authorized and directed that the Prospectus be delivered to each beneficial owner of Shares, and it agrees to deliver or cause to be delivered the Prospectus to each beneficial owner for which it holds such shares of record or as nominee, consistent with the applicable provisions of the Exchange Act and the rules of the New York Stock Exchange and American Stock Exchange, as the case may be; and (xi) it has agreed to the amount of the Solicitation Fees and the terms and conditions set forth herein with respect to receiving such Solicitation Fees. By returning a Soliciting Dealer Agreement and accepting Solicitation Fees, a Soliciting Dealer will be deemed to have agreed to indemnify the Company and the Dealer Managers against losses, claims, damages and liabilities to which the Company may become subject as a result of the breach of such Soliciting Dealer's representations made herein and described above. Solicitation Fees due to eligible Soliciting Dealers will be paid promptly after consummation of the Subscription Offer. Upon expiration of the Subscription Offer, no Solicitation Fees will be payable to Soliciting Dealers with respect to Shares purchased thereafter. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Dealer Manager Agreement or, if not defined therein, in the Prospectus. A-6 This Soliciting Dealer Agreement will be governed by the laws of the State of New York without reference to the conflict of law principles thereof. Please execute this Soliciting Dealer Agreement below accepting the terms and conditions hereof and confirming that you are a member firm of a registered national securities exchange or of the NASD or a foreign broker or dealer not eligible for membership who has conformed to the Rules of Fair Practice of the NASD, including Sections 2720, 2730, 2740 and 2750 thereof, in making solicitations of the type being undertaken pursuant to the Subscription Offer in the United States to the same extent as if you were a member thereof, and certify ing that you have solicited the purchase of the Shares pursuant to exercise of the Subscription Rights and the Over-Subscription Privilege, all as described above, in accordance with the terms and conditions set forth in this Soliciting Dealer Agreement. Soliciting Dealers may not participate in the Subscription Offer without executing and returning this Soliciting Dealer Agreement. Please forward two copies of the confirmation page (Page A-8) of this Soliciting Dealer Agreement to the Company at 1 Park Plaza, Suite 430, Irvine, California 92614, Attention: Richard Johnson (tel. number (___) ___.____; fax number (___) ___.____). A signed copy of this Soliciting Dealer Agreement will be promptly returned to the Soliciting Dealer at the address set forth below. Very truly yours, Imperial Credit Commercial Holdings, Inc. By: --------------------------- Name: Title: A-7 ================================================================================ PLEASE COMPLETE THE INFORMATION BELOW: ACCEPTED AND CONFIRMED BY SOLICITING DEALER Contact at Firm: ---------------------------------------------------------------- - -------------------------------------- ---------------------------------------- Printed Firm Name Address - -------------------------------------- ---------------------------------------- Authorized Signature Area Code and Telephone Number - -------------------------------------- -------------------------------------- Name and Title Fax Number Dated: -------------------------------- Payment of the Solicitation Fee shall be mailed by check or by wire to the following address or account: - --------------------------------- - --------------------------------- - --------------------------------- ABA # ---------------------------- Routing # ------------------------ Account # to be credited: --------------------- Attn: ------------------------ Telephone for Wire Instructions: - --------------------------------- A-8 EXHIBIT B OPINION OF FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN 1. The Company meets the requirements for use of Form S-11 under the Securities Act and the Rules and Regulations. 2. The Company and each Subsidiary (including ICCC) has been duly organized, is validly existing and is in good standing under the laws of the jurisdiction of incorporation; the Company and each Subsidiary (including ICCC) has full power and authority to conduct all the respective activities conducted by them, to own or lease the assets owned or leased respectively by them and to conduct their respective business as described in the Registration Statement and the Prospectus; the Company and each Subsidiary (including ICCC) and are duly qualified to do business in each jurisdiction wherein they own or lease real property or in which the conduct of their business requires such qualification, except where the failure to be so qualified would not result in a Material Adverse Effect upon the Company or any of its Subsidiaries. 3. All of the outstanding shares of the capital stock of the Subsidiaries, including but not limited to the ICCC Preferred Stock, have been duly authorized and validly issued and are fully paid and non-assessable. Except for the stock of the Subsidiaries and as disclosed in the Registration Statement, to our best knowledge after due inquiry, the Company does not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any firm, partnership, joint venture, association or other entity. 4. All of the outstanding shares of the capital stock of the Company, including but not limited to the Company's Restricted Shares, the ICH Class A Stock and the ICH Preferred Stock, have been duly authorized, validly issued, fully paid and nonassessable and are not subject to any preemptive or similar right. The Subscription Rights have been duly authorized by all requisite action on the part of the Company for delivery to the IMH Holders pursuant to the Offering; the Shares have been duly authorized by all requisite action on the part of the Company for issuance and sale pursuant to the terms of the Offering and, when issued and delivered by the Company pursuant to the terms of the Offering against payment of the consideration set forth in the Prospectus, will be validly issued, fully paid and non-assessable; the Shares and the Subscription Rights conform in all material re- B-2 spects to all statements relating thereto contained in the Registration Statement and the Prospectus; and the issuance of the Shares is not subject to any preemptive rights. Except as set forth in the Prospectus, to our best knowledge after due inquiry, there are no options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts, commitments, plans or arrangements to issue or sell, any shares of capital stock of the Company, any shares of capital stock of any Subsidiary or any such warrants, convertible securities or obligations. The description of the Company's dividend reinvestment plan, stock option and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately presents the information required to be shown with respect to such plans, arrangements, options and rights. 5. Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and prior to the respective Representation Date, to our best knowledge after due inquiry (A) there has not been any change in the capitalization of the Company, or in the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, arising for any reason whatsoever, (B) neither the Company nor any of its Subsidiaries has incurred any material liabilities or obligations, direct or contingent, nor has it entered into any material transactions other than pursuant to the Dealer Manager Agreement and the transactions referred to herein and (C) the Company has not paid or declared any dividends or other distributions of any kind on any class of its capital stock. 6. Neither the Company nor any of its Subsidiaries is, and if operated in the manner described in the Prospectus under the caption "Business" will not be, an "investment company," an entity "controlled" by an "investment company" or an "affiliated person" of, or "promotor" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act. 7. Except as set forth in the Registration Statement and the Prospectus, there are no actions, suits or proceedings pending or, to our knowledge after due inquiry, threatened against or affecting the Company or any of its Subsidiaries or any of their respective officers in their capacity as such, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding might result in a Material Adverse Effect. B-3 8. The Company and each of its Subsidiaries has (A) all governmental licenses, permits, consents, orders, approvals and other authorizations necessary to carry on its business as contemplated in the Prospectus, (B) complied in all respects with all laws, regulations and orders applicable to it or its business and (C) performed all its obligations required to be performed by it, and is not in default, under any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement, lease, contract or other agreement or instrument (collectively, a "contract or other agreement") to which it is a party or by which its property is bound or affected, the effect of any of which, individually or in the aggregate, might result in a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is in violation of any provision of its charter or by-laws. 9. The Company has full corporate power and authority to enter into the Dealer Manager Agreement, the Subscription Agency Agreement, dated June __, 1997 (the "Subscription Agency Agreement") between the Company and ____________ (the "Subscription Agent"), the Management Agreement, dated June __, 1997 (the "Management Agreement"), between the Company and the Manager, the Servicing Agreement, dated June __, 1997 (the "Servicing Agreement"), between the Company and ICCC, the Tax Agreement, dated June __, 1997 (the "Tax Agreement"), between the Company and IMH, the Non-Competition Agreement dated June __, 1997 (the "Non-Competition Agreement") between the Company and IMH, the Right of First Refusal Agreement, dated June __, 1997 (the "Right of First Refusal Agreement") between the Company, the Manager and IMH and the Contribution Agreement. The Subscription Agency Agreement, the Management Agreement, the Servicing Agreement, the Tax Agreement, the Contribution Agreement, the Right of First Refusal Agreement and the Non-Competition Agreement are collectively referred to as the "Company Agreements." Each of the Dealer Manager Agreement and the Company Agreements has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company and is enforceable against the Company in accordance with its terms, except as the enforceability hereof and thereof may be limited by applicable bankruptcy, insolvency, reorganization and similar laws affecting creditors' rights generally and moratorium laws in effect from time to time and by equitable principles restricting the availability of equitable remedies. The execution and delivery by the Company of, and the performance by the Company of its obligations under, each of the Dealer Manager Agreement and the Company Agreements, the consummation of the transactions contemplated hereby and thereby and the application of the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under the caption "Use of Proceeds" will not result in the creation B-4 or imposition of any lien, charge or encumbrance upon any of the assets of the Company or any of its Subsidiaries pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, the charter or by-laws of the Company or any of its Subsidiaries, any contract or other agreement to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of its properties is bound or affected, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of the Company or any of its Subsidiaries the effect of any of which, individually or in the aggregate, would be to have a Material Adverse Effect. 10. No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the authorization, issuance, transfer, sale or delivery of the Shares by the Company, in connection with the execution, delivery and performance of the Dealer Manager Agreement or the Company Agreements by the Company or in connection with the taking by the Company of any other action contemplated hereby or thereby, except such as have been obtained under the Securities Act or the Rules and Regulations and such as may be required under state securities or Blue Sky laws or the by-laws and rules of the NASD. 11. The Company and each of its Subsidiaries has good and marketable title to all properties and assets described in the Prospectus as owned by it (including the assets contributed, sold or transferred to the Company pursuant to the terms of the Contribution Agreement), free and clear of all liens, charges, encumbrances, mortgages, security interests, claims or restrictions, except such as are described in, or contemplated by, the Prospectus. The Company and each of its Subsidiaries has valid, subsisting and enforceable leases for the properties described in the Prospectus as leased by it, with such exceptions as are not material and do not materially interfere with the use made and proposed to be made of such properties by the Company and the Subsidiaries. 12. There is no document or contract of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required. All such contracts to which the Company or any Subsidiary is a party have been duly authorized, executed and delivered by the Company or such Subsidiary, con- B-5 stitute valid and binding agreements of the Company or such Subsidiaries and are enforceable against the Company or such Subsidiary in accordance with the terms thereof. 13. The Shares have been duly authorized for listing by the American Stock Exchange upon official notice of issuance. 14. To our knowledge after due inquiry, no claims have been asserted by any person to the use of any such trademarks or trade names or challenging or questioning the validity or effectiveness of any such trademark or trade name; and the use, in connection with the business and operations of the Company and its Subsidiaries of such trademarks and trade names does not, to the Company's knowledge, infringe on the rights of any person. [15. Based upon our knowledge of the operations of the Company, the Company has conducted its operations in a manner so as to enable it to elect to be qualified as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code").] 16. The Company has complied with all of the provisions of (including, without limitation, filing all forms required by) Section 517.075 of the Florida Securities and Investor Protection Act and Regulation 3E900.001 issued thereunder with respect to the offering and sale of the Shares. 17. Neither the Company nor any of its Subsidiaries, if operated in the manner described in the Prospectus under the caption "Business," will be a "broker" within the meaning of Section 3(a)(4) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or a "dealer" within the meaning of Section 3(a)(5) of the Exchange Act or required to be registered pursuant to Section 15(a) of the Exchange Act. 18. ICCC has full corporate power and authority to enter into the Dealer Manager Agreement, the Servicing Agreement, the Lease Agreement dated as of _____, 1997 between ICCC and ______ (the "Lease Agreement") and the Contribution Agreement. The Servicing Agreement, the Lease Agreement, the Contribution Agreement, and any other Company Agreements to which ICCC is a party are collectively referred to as the "ICCC Agreements." Each of the Dealer Manager Agreement and the ICCC Agreements has been duly authorized, executed and delivered by ICCC and constitutes a valid and binding agreement of ICCC and is enforceable against ICCC in accordance with its terms, except as the enforceability hereof and thereof may be limited by applicable bankruptcy, insolvency, reorganization and similar laws affecting creditors' rights gener- B-6 ally and moratorium laws in effect from time to time and by equitable principles restricting the availability of equitable remedies. The execution and delivery by ICCC of, and the performance by ICCC of its obligations under, each of the Dealer Manager Agreement and the ICCC Agreements, the consummation of the transactions contemplated hereby and thereby and the application of the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under the caption "Use of Proceeds" will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of ICCC pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, the charter or by-laws of ICCC, any contract or other agreement to which ICCC is a party or by which ICCC or any of its properties is bound or affected, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of ICCC the effect of any of which, individually or in the aggregate, would be to have a Material Adverse Effect. 19. No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the execution, delivery and performance of the Dealer Manager Agreement or the ICCC Agreements by ICCC or in connection with the taking by ICCC of any other action contemplated hereby or thereby, except such as have been obtained. 20. Except as set forth in the Registration Statement and the Prospectus, there are no actions, suits or proceedings pending or, to our best knowledge after due inquiry, threatened against or affecting ICCC or any of its officers in their capacity as such, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding might result in a Material Adverse Effect. 21. The Manager has been duly organized, is validly existing and is in good standing under the laws of the jurisdiction of incorporation, has full power and authority to conduct all the activities conducted by it, to own or lease the assets owned or leased by it and to conduct its business as described in the Registration Statement and the Prospectus and is duly qualified to do business in each jurisdiction wherein it own, or leases real property or in which the conduct of its business requires such qualification, except where the failure to be so qualified would not result in a Material Adverse Effect. B-7 22. Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and prior to the respective Representation Date, to our knowledge after due inquiry, (A) there has not been any change in the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Manager, arising for any reason whatsoever and (B) the Manager has not incurred any material liabilities or obligations, direct or contingent, nor has it entered into any material transactions other than pursuant to the Dealer Manager Agreement and the transactions referred to herein. 23. The Manager, if operated in the manner described in the Prospectus under the caption "Business" and "REIT Advisors, Inc." will not be an "investment adviser," as such term is defined in the Investment Advisers Act of 1940. 24. Except as set forth in the Registration Statement and the Prospectus, there are no actions, suits or proceedings pending or, to our knowledge after due inquiry, threatened against or affecting the Manager or any of its officers in their capacity as such, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding might result in a Material Adverse Effect. 25. The Manager has (A) all governmental licenses, permits, consents, orders, approvals and other authorizations necessary to carry on its business as contemplated in the Prospectus, (B) complied in all respects with all laws, regulations and orders applicable to it or its business and (C) performed all its obligations required to be performed by it, and is not in default, under any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement, lease, contract or other agreement or instrument (collectively, a "contract or other agreement") to which it is a party or by which its property is bound or affected, the effect of any of which, individually or in the aggregate, might result in a Material Adverse Effect. The Manager is not in violation of any provision of its charter or by-laws. 25. The Manager has full corporate power and authority to enter into the Dealer Manager Agreement, the Right of First Refusal Agreement, the Submanagement Agreement dated as of June ___, 1997 between the Manager and ICH and the Submanagement Agreement dated as of June ___, 1997 between the Manager and Imperial Credit Industries, Inc. (collectively the "Submanagement Agreements"). The Management Agreement, the Right of First Refusal Agree- B-8 ment, the Submanagement Agreements and each other Company Agreement to which the Manager is a party are collectively referred to as the "Manager Agreements." Each of the Dealer Manager Agreement and the Manager Agreements has been duly authorized, executed and delivered by the Manager and constitutes a valid and binding agreement of the Manager and is enforceable against the Manager in accordance with its terms, except as the enforceability hereof and thereof may be limited by applicable bankruptcy, insolvency, reorganization and similar laws affecting creditors' rights generally and moratorium laws in effect from time to time and by equitable principles restricting the availability of equitable remedies. The execution and delivery by the Manager of, and the performance by the Manager of its obligations under, each of the Dealer Manager Agreement and the Manager Agreements, the consummation of the transactions contemplated hereby and thereby and the application of the net proceeds from the offering and sale of the Shares to be sold by the Manager in the manner set forth in the Prospectus under the caption "Use of Proceeds" will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of the Manager pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, the charter or by-laws of the Manager, any contract or other agreement to which the Manager is a party or by which the Manager or any of its properties is bound or affected, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of the Manager the effect of any of which, individually or in the aggregate, would be to have a Material Adverse Effect. 26. No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the execution, delivery and performance of the Dealer Manager Agreement or the Manager Agreements by the Manager or in connection with the taking by the Manager of any other action contemplated hereby or thereby, except such as have been obtained. 27. IMH has been duly organized, is validly existing and is in good standing under the laws of the jurisdiction of incorporation, has full power and authority to conduct all the activities conducted by it, to own or lease the assets owned or leased by it and to conduct its business as described in the Registration Statement and the Prospectus, and is duly qualified to do business in each jurisdiction wherein it owns or leases real property or B-9 in which the conduct of its business requires such qualification, except where the failure to be so qualified would not result in a Material Adverse Effect. 28. IMH has full corporate power and authority to enter into the Dealer Manager Agreement, the Tax Agreement, Non-Competition Agreement, the Right of First Refusal Agreement, the Contribution Agreement and the Submanagement Agreement with the Manager. The Tax Agreement, the Contribution Agreement, the Right of First Refusal Agreement, the Non-Competition Agreement, the Submanagement Agreement and any other Company Agreements to which IMH is a party are collectively referred to as the "IMH Agreements." Each of the Dealer Manager Agreement and the IMH Agreements has been duly authorized, executed and delivered by IMH and constitutes a valid and binding agreement of IMH and is enforceable against IMH in accordance with its terms, except as the enforceability hereof and thereof may be limited by applicable bankruptcy, insolvency, reorganization and similar laws affecting creditors' rights generally and moratorium laws in effect from time to time and by equitable principles restricting the availability of equitable remedies. The execution and delivery by IMH of, and the performance by IMH of its obligations under, each of the Dealer Manager Agreement and IMH Agreements, the consummation of the transactions contemplated hereby and thereby and the application of the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under the caption "Use of Proceeds" will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of IMH pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, the charter or by-laws of IMH, any contract or other agreement to which IMH is a party or by which IMH or any of its properties is bound or affected, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of IMH the effect of any of which, individually or in the aggregate, would be to have a Material Adverse Effect. 29. No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the execution, delivery and performance of this Agreement or the IMH Agreements by or in connection with the taking by IMH of any other action contemplated hereby or thereby, except such as have been obtained. B-10 In addition, while we have not ourselves checked the accuracy and completeness of or otherwise verified, and are not passing upon and assume no responsibility for the accuracy or completeness of, the statements contained in the Registration Statement or the Prospectus, in the course of our review and discussion of the contents of the Registration Statement and the Prospectus with certain officers and employees of the Company, ICCC, the Manager and IMH and their independent accountants, no facts have come to our attention which cause us to believe that the Registration Statement, on the respective Representation Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements contained therein not misleading or that the Prospectus, as of its date and on the respective Representation Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. B-11 EX-3.1 3 CHARTER OF THE REGISTRANT EXHIBIT 3.1 STATE OF MARYLAND 536308 STATE DEPARTMENT OF ASSESSMENTS AND TAXATION 301 West Preston Street Baltimore, Maryland 21201 DATE: JUNE 03, 1997 THIS IS TO ADVISE YOU THAT THE ARTICLES OF AMENDMENT AND RESTATEMENT FOR IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC, WERE RECEIVED AND APPROVED FOR RECORD ON JUNE 3, 1997 AT 1:45 PM. FEE PAID: 121.00 [SEAL HERE] JOYCE THOMPSON LEGAL OFFICER IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. ARTICLES OF AMENDMENT AND RESTATEMENT FIRST: Imperial Credit Commercial Holdings, Inc., a Maryland ----- corporation (the "Corporation"), desires to amend and restate its charter as currently in effect and as hereinafter amended. SECOND: The following provisions are all the provisions of the ------ charter currently in effect and as hereinafter amended: ARTICLE I INCORPORATOR The undersigned, James J. Hanks, Jr., whose address is c/o Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street, Baltimore, Maryland 21202, being at least 18 years of age, does hereby form a corporation under the general laws of the State of Maryland. ARTICLE II NAME The name of the corporation (the "Corporation") is: Imperial Credit Commercial Holdings, Inc. ARTICLE III PURPOSE The purposes for which the Corporation is formed are to engage in any lawful act or activity (including, without limitation or obligation, engaging in business as a real estate investment trust under the Internal Revenue Code of 1986, as amended, or any successor statute (the "Code")) for which corporations may be organized under the general laws of the State of Maryland as now or hereafter in force. For purposes of these Articles, "REIT" means a real estate investment trust under Sections 856 through 860 of the Code. ARTICLE IV PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT The address of the principal office of the Corporation in the State of Maryland is c/o Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street, Baltimore, Maryland 21202, Attention: James J. Hanks, Jr. The name of the resident agent of the Corporation in the State of Maryland is James J. Hanks, Jr., whose post address is c/o Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street, Baltimore, Maryland 21202. The resident agent is a citizen of and resides in the State of Maryland. ARTICLE V PROVISIONS FOR DEFINING, LIMITING AND REGULATING CERTAIN POWERS OF THE CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS Section 5.1 Number of Directors. The business and affairs of the ------------------- Corporation shall be managed under the direction of the Board of Directors. The number of directors of the Corporation initially shall be seven, which number may be increased or decreased pursuant to the Bylaws, but shall never be less than the minimum number required by the Maryland General Corporation Law. The names of the directors who shall serve until the first annual meeting of stockholders and until their successors are duly elected and qualify are H. Wayne Snavely, Joseph R. Tomkinson, Frank P. Filipps, James Walsh, Stephan R. Peers, Thomas J. Poletti and Timothy R. Busch. These directors may increase the number of directors and may fill any vacancy, whether 2 resulting from an increase in the number of directors or otherwise, on the Board of Directors occurring before the first annual meeting of stockholders in the manner provided in the Bylaws. Section 5.2 Extraordinary Actions. Except as specifically provided --------------------- in Section 5.8, notwithstanding any provision of law permitting or requiring any action to be taken or authorized by the affirmative vote of the holders of a greater number of votes, any such action shall be effective and valid if taken or authorized by the affirmative vote of holders of shares entitled to cast a majority of all the votes entitled to be cast on the matter. Section 5.3 Authorization by Board of Stock Issuance. The Board of ---------------------------------------- Directors may authorize the issuance from time to time of shares of stock of the Corporation of any class or series, whether now or hereafter authorized, or securities or rights convertible into shares of its stock of any class or series, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable (or without consideration in the case of a stock split or stock dividend), subject to such restrictions or limitations, if any, as may be set forth in the charter or the Bylaws. Section 5.4 Preemptive Rights. Except as may be provided by the ----------------- Board of Directors in setting the terms of classified or reclassified shares of stock pursuant to Section 6.6, no holder of shares of stock of the Corporation shall, as such holder, have any preemptive right to purchase or subscribe for any additional shares of stock of the Corporation or any other security of the Corporation which it may issue or sell. Section 5.5 Indemnification. The Corporation shall have the power, --------------- to the maximum extent permitted by Maryland law in effect from time to time, to obligate itself to indemnify, and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to, (a) any 3 individual who is a present or former director or officer of the Corporation or (b) any individual who, while a director of the Corporation and at the request of the Corporation, serves or has served as a director, officer, partner or trustee of another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any 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 status as a present or former director or officer of the Corporation. The Corporation shall have the power, with the approval of the Board of Directors, to provide such indemnification and advancement of expenses to a person who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation. Section 5.6 Determinations by Board. The determination as to any of ----------------------- the following matters, made in good faith by or pursuant to the direction of the Board of Directors consistent with the charter and in the absence of actual receipt of an improper benefit in money, property or services or active and deliberate dishonesty established by a court, shall be final and conclusive and shall be binding upon the Corporation and every holder of shares of its stock: the amount of the net income of the Corporation for any period and the amount of assets at any time legally available for the payment of dividends, redemption of its stock or the payment of other distributions on its stock; the amount of paid-in surplus, net assets, other surplus, annual or other net profit, net assets in excess of capital, undivided profits or excess of profits over losses on sales of assets; the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall 4 have been created shall have been paid or discharged); the fair value, or any sale, bid or asked price to be applied in determining the fair value, of any asset owned or held by the Corporation; and any matters relating to the acquisition, holding and disposition of any assets by the Corporation. Section 5.7 REIT Qualification. If the Corporation elects to qualify ------------------ for federal income tax treatment as a REIT, the Board of Directors shall use its reasonable best efforts to take such actions as are necessary or appropriate to preserve the status of the Corporation as a REIT; however, if the Board of Directors determines that it is no longer in the best interests of the Corporation to continue to be qualified as a REIT, the Board of Directors may revoke or otherwise terminate the Corporation's REIT election pursuant to Section 856(g) of the Code. The Board of Directors also may determine that compliance with any restriction or limitation on stock ownership and transfers set forth in Article VII is no longer required for REIT qualification. Section 5.8 Removal of Directors. Any director, or the entire -------------------- Board of Directors, 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. Any amendment to or repeal of this Section 5.8 must be approved by the affirmative vote of the holders of at least two thirds of the votes entitled to be cast in the election of the directors. Section 5.9 Advisor Agreements. Subject to such approval of ------------------ stockholders and other conditions, if any, as may be required by any applicable statute, rule or regulation, the Board of Directors may authorize the execution and performance by the Corporation of one or more agreements with any person, corporation, association, company, limited liability company, trust, partnership (limited or general) or other organization whereby, subject to the supervision and control 5 of the Board of Directors, any such other person, corporation, association, company, limited liability company, trust, partnership (limited or general) or other organization shall render or make available to the Corporation managerial, investment, advisory and/or related services, office space and other services and facilities (including, if deemed advisable by the Board of Directors, the management or supervision of the investments of the Corporation) upon such terms and conditions as may be provided in such agreement or agreements (including, if deemed fair and equitable by the Board of Directors, the compensation payable thereunder by the Corporation). ARTICLE VI STOCK Section 6.1 Authorized Shares. The Corporation has authority to ----------------- issue Forty Six Million (46,000,000) shares of Common Stock, $.01 par value per share ("Common Stock"), Four Million (4,000,000) shares of Class A Non-Voting Common Stock, $.01 par value per share ("Class A Common Stock"), Six Million (6,000,000) shares of Preferred Stock, $.01 par value per share ("Preferred Stock"), and Four Million (4,000,000) shares of Class A Convertible Preferred Stock, $.01 par value per share ("Class A Preferred Stock"). The aggregate par value of all authorized shares of stock having par value is $600,000. Section 6.2 Common Stock. Subject to the provisions of Article VII, ------------ each share of Common Stock shall entitle the holder thereof to one vote. The Board of Directors may reclassify any unissued shares of Common Stock from time to time in one or more classes or series of stock. 6 Section 6.3 Class A Common Stock. -------------------- Section 6.3.1 Certain Definitions. Unless the context ------------------- otherwise requires, the terms defined in this Section 6.3 shall have, for all purposes of the provisions of the charter in respect of the Class A Common Stock, the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). All other capitalized terms used in this Section 6.3 shall have, unless defined herein, the respective meanings set forth elsewhere in this Charter. Conversion Rate. The term "Conversion Rate" shall initially be --------------- equal to one. Section 6.3.2 Rights, Preferences and Privileges. ---------------------------------- (a) The Class A Common Stock shall have the identical preferences, conversion or other rights, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption as the Common Stock except for the following provisions. (b) Voting Rights. The holders of shares of Class A ------------- Common Stock shall not be entitled to any voting rights. (c) Stock Dividends. If the Corporation issues --------------- additional shares of Common Stock as a dividend on outstanding Common Stock, the Corporation shall simultaneously issue as a dividend on outstanding Class A Common Stock, pro rata among the holders thereof, that number of shares of Class A Common Stock equal to the number of shares of Common Stock issued as a dividend multiplied by a fraction, the numerator of which is the number of shares of Class A Common Stock outstanding immediately before the record date for the payment of the Class A 7 Common Stock dividend and the denominator of which is the number of shares of Common Stock outstanding immediately before the record date for the payment of the Common Stock dividend. (d) Conversion Rights. ----------------- (i) On any date on which shares of Common Stock are issued by the Corporation increasing the number of shares of Common Stock issued and outstanding (the "Conversion Date"), shares of Class A Common Stock held by each Person shall automatically convert into that number of shares of Common Stock as calculated pursuant to Subsection (d)(ii) below, except that those shares of Class A Common Stock (for purposes of this Subsection (d)(i) only, "Excess Shares") which, if converted pursuant to this Section, would cause the holder thereof to own shares of Common Stock (i) in excess of the Common Stock Ownership Limit as hereinafter defined or (ii) in violation of any stock ownership limitation set forth in the charter shall not be converted and shall remain outstanding shares of Class A Common Stock. If, subsequent to the Conversion Date, the conversion of Excess Shares into shares of Common Stock would no longer cause the holder thereof to own shares of Common Stock (i) in excess of the Common Stock Ownership Limit or (ii) in violation of any stock ownership limitation set forth in the Charter, such shares shall automatically convert into that number of shares of Common Stock as calculated pursuant to Subsection (d)(ii) except that those Excess Shares which, if converted pursuant to this Section, would cause the holder thereof to own shares of Common Stock (i) in excess of the Common Stock Ownership Limit or (ii) in violation of any stock ownership limitation set forth in the charter shall not be converted and shall remain outstanding shares of Class A Common Stock. 8 If there are no issuances of shares of Common Stock by the Corporation, all shares of Class A Common Stock shall remain outstanding. (ii) The shares of Class A Common Stock shall be convertible at the principal office of the Corporation, and at such other office or offices, if any, as the Board of Directors may designate, into fully paid and non-assessable shares of Common Stock of the Corporation (calculated as to each conversion to the nearest whole share as provided in Section 6.3.2(d)(iv) below). The number of shares of Common Stock to be issued upon conversion shall be determined, subject to the limits referenced in Section 6.3.2(d)(i) above, by multiplying the number of shares of Class A Common Stock to be converted by the Conversion Rate. (iii) In order to receive certificates representing shares of Common Stock upon conversion of shares of Class A Common Stock into shares of Common Stock, the holder thereof shall surrender at the office or offices hereinabove mentioned the certificate or certificates representing shares of Class A Common Stock, duly endorsed or assigned to the Corporation or in blank. Shares of Class A Common Stock shall be deemed to have been converted immediately prior to the close of business on the day of the Conversion Date and the Person or Persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock at such time. As promptly as practicable on or after the Conversion Date, the Corporation shall issue and shall deliver at such office a certificate or certificates representing the number of full shares of Common Stock issuable upon such conversion. 9 (iv) No fractional shares of Common Stock shall be issued upon conversion of shares of Class A Common Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Section 6.3.3 Status. Upon any conversion of shares of Class A ------ Common Stock, the shares of Class A Common Stock which are converted will be reclassified as authorized and unissued shares of Common Stock, and the number of shares of Class A Common Stock which the Corporation has the authority to issue will be decreased by the number of shares of Class A Common Stock so converted, so that the shares of Class A Common Stock which were converted may not be reissued as shares of Class A Common Stock. Section 6.3.4 Exclusion of Other Rights. Except as may otherwise ------------------------- be required by law, the shares of Class A Common Stock shall not have any preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications or terms or conditions of redemption other than those specifically set forth in the Charter. The shares of Class A Common Stock shall have no preemptive or subscription rights. The shares of Class A Common Stock shall, as a class, be subject to a 9.8 percent ownership limit and other transfer restrictions which are identical to, and applied in the same manner as, such restrictions which apply to shares of Common Stock and are set forth in the Charter. Section 6.4 Preferred Stock. The Board of Directors may classify --------------- any unissued shares of Preferred Stock and reclassify any previously classified but unissued shares of Preferred Stock of any series from time to time, in one or more series of stock. 10 Section 6.5 Class A Preferred Stock. ----------------------- Section 6.5.1 Certain Definitions. Unless the context ------------------- otherwise requires, the terms defined in this Section 6.5 shall have, for all purposes of the provisions of the charter in respect of the Class A Preferred Stock, the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). All other capitalized terms used in this Section 6.5 shall have, unless defined herein, the respective meanings set forth elsewhere in this Charter. Conversion Date. The term "Conversion Date" shall mean --------------- the date on which the shares of Class A Preferred Stock are converted in accordance with Section 6.5.5 hereof. Conversion Rate. The term "Conversion Rate" shall be a --------------- fraction, the numerator of which shall be the Liquidation Preference and the denominator of which shall be the IPO Share Price. Holders. The term "Holders" shall mean the holders of ------- Common Stock. Initial Public Offering. The term "Initial Public ----------------------- Offering" shall mean the sale of Common Stock pursuant to the Corporation's first effective registration statement covering the sale of such shares filed under the Securities Act of 1933, as amended, provided such offering meets the following requirements: (i) said offering raises gross proceeds of at least $10.0 million to the Corporation at a per share offering price of no less than $5.00 per share and (ii) said offering is completed on or before December 31, 1998. IPO Share Price. The term "IPO Share Price" shall mean --------------- the gross per share price of the Corporation's Initial Public Offering. 11 Liquidation Preference. The term "Liquidation Preference" shall ---------------------- mean $5.00 per share. Section 6.5.2 Dividends. --------- (a) Commencing on December 31, 1997, each holder of Class A Preferred Stock shall be entitled to receive, out of any funds legally available therefor, when and if declared, dividends at the quarterly rate of $.10 per share and no more, and thereafter quarterly on the last day of March, June, September and December of each year that any Class A Preferred Stock shall be outstanding. Such dividends shall not be cumulative, and no rights shall accrue to holders of Class A Preferred Stock by reason of the fact that dividends on such shares are not declared or paid in any prior quarter. (b) In determining whether a distribution (other than upon liquidation), by dividend, redemption or other acquisition of shares or otherwise, is permitted under Maryland law, amounts that would be needed, if the Corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of holders of shares of any class or series of stock whose preferential rights upon dissolution are superior to those receiving the distribution shall not be added to the Corporation's total liabilities. Section 6.5.3 Distributions Upon Liquidation, Dissolution ------------------------------------------- or Winding Up. - ------------- (a) Subject to Section 6.5.5 hereof, upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, subject to the prior preferences and other rights of any class or series of stock ranking senior to the Class A 12 Preferred Stock as to the distribution of assets upon liquidation, dissolution or winding up of the affairs of the Corporation, but before any distribution or payment shall be made to the holders of any class or series of stock ranking junior to the Class A Preferred Stock as to the distribution of assets upon any liquidation, dissolution or winding up of the affairs of the Corporation, the holders of Class A Preferred Stock shall be entitled to receive out of the assets of the Corporation legally available for distribution to its stockholders liquidating distributions in cash or property at its fair market value as determined by the Board of Directors of the Corporation in the amount per share equal to the Liquidation Preference. After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Class A Preferred Stock shall have no right or claim to any of the remaining assets of the Corporation and shall not be entitled to any other distribution in the event of liquidation, dissolution or winding up of the affairs of the Corporation. (b) In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the legally available assets of the Corporation are insufficient to pay the amount of the Liquidation Preference per share plus the corresponding amounts payable on each class or series of other stock ranking on a parity with the Class A Preferred Stock as to the distribution of assets upon liquidation, dissolution or winding up of the affairs of the Corporation, then the holders of the Class A Preferred Stock and all such other stock shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they otherwise would be respectively entitled. Neither the consolidation or merger of the Corporation into or with another corporation or corporations or trust or trusts nor the sale, lease, transfer or conveyance of all or substantially all of the assets of the Corporation to another corporation or any other entity shall be 13 deemed a liquidation, dissolution or winding up of affairs of the Corporation within the meaning of this Section 6.5.3. Section 6.5.4 Voting Rights. The holders of shares of Class A ------------- Preferred Stock shall not be entitled to any voting rights. Section 6.5.5 Conversion Rights. ----------------- (a) Upon any Initial Public Offering, the shares of Class A Preferred Stock held by each Person shall automatically convert into that number of shares of Common Stock as calculated pursuant to Section 6.5.5(b) below, except that those shares of Class A Preferred Stock which, if converted pursuant to this Section, would cause the holder thereof to own shares of Common Stock (i) in excess of the Common Stock Ownership Limit (as hereinafter defined) or (ii) in violation of any stock ownership limitation set forth in the charter shall not be converted into shares of Common Stock. Any shares of Class A Preferred Stock not converted into shares of Common Stock as a result of the foregoing limitations shall on such date automatically convert into shares of Class A Common Stock at the same rate as shares of Class A Preferred Stock convert into shares of Common Stock. In the event the Corporation does not consummate an Initial Public Offering, the shares of Class A Preferred Stock shall remain outstanding. (b) The shares of Class A Preferred Stock shall be convertible at the principal office of the Corporation, and at such other office or offices, if any, as the Board of Directors may designate, into fully paid and non-assessable shares of Common Stock or Class A Common Stock, as the case may be (calculated as to each conversion to the nearest whole share as provided in Section 6.5.5(d) below). The number of shares of Common Stock or Class A Common 14 Stock, as the case may be, to be issued upon conversion shall be determined by multiplying the number of shares of Class A Preferred Stock to be converted by the Conversion Rate. (c) In order to receive certificates representing shares of Common Stock or Class A Common Stock, as the case may be, upon conversion of shares of Class A Preferred Stock into shares of Common Stock or Class A Common Stock, as the case may be, the holder thereof shall surrender at the office or offices hereinabove mentioned the certificate or certificates therefor, duly endorsed or assigned to the Corporation or in blank, and give written notice to the Corporation at said office or offices that such holder elects to receive such Common Stock or Class A Common Stock certificates. Shares of Class A Preferred Stock shall be deemed to have been converted immediately prior to the close of business on the day of the Conversion Date and the Person or Persons entitled to receive shares of Common Stock or Class A Common Stock, as the case may be, issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock or Class A Common Stock, as the case may be, at such time. As promptly as practicable on or after the Conversion Date, the Corporation shall issue and deliver at such office a certificate or certificates representing the number of whole shares of Common Stock or Class A Common Stock, as the case may be, issuable upon such conversion, together with payment in lieu of any fraction of a share, as hereinabove provided, to the Person or Persons entitled to receive the same. (d) No fractional shares of Common Stock or Class A Common Stock, as the case may be, shall be issued upon conversion of shares of Class A Preferred Stock, and 15 the number of shares of Common Stock or Class A Common Stock, as the case may be, to be issued shall be rounded to the nearest whole share. Section 6.5.6 Status. Upon any conversion of shares of Class A ------ Preferred Stock, the shares of Class A Preferred Stock which are converted will be reclassified as authorized and unissued shares of Preferred Stock, and the number of shares of Class A Preferred Stock which the Corporation has the authority to issue will be decreased by the conversion of shares of Class A Preferred Stock, so that the shares of Class A Preferred Stock which were converted may not be reissued as Class A Preferred Stock. Section 6.5.7 Exclusion of Other Rights. Except as may otherwise be ------------------------- required by law, the shares of Class A Preferred Stock shall not have any preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications or terms or conditions of redemption other than those specifically set forth in the charter. The shares of Class A Preferred Stock shall have no preemptive or subscription rights. Notwithstanding the foregoing, if the shares of Class A Preferred Stock do not automatically convert into shares of Common Stock or Class A Common Stock, as the case may be, by December 31, 1997, then the holders of such shares shall be required to take all action necessary to allow share transfer restrictions to be imposed on the shares of Class A Preferred Stock reasonably necessary to preserve the Corporation's tax status as a REIT. Section 6.6 Classified or Reclassified Shares. Prior to issuance of --------------------------------- classified or reclassified shares of any class or series, the Board of Directors by resolution shall: (a) designate that class or series to distinguish it from all other classes and series of stock of the Corporation; (b) specify 16 the number of shares to be included in the class or series; (c) set or change, subject to the provisions of Article VII and subject to the express terms of any class or series of stock of the Corporation outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series; and (d) cause the Corporation to file articles supplementary with the State Department of Assessments and Taxation of Maryland ("SDAT"). Any of the terms of any class or series of stock set or changed pursuant to clause (c) of this Section 6.6 may be made dependent upon facts or events ascertainable outside the charter (including determinations by the Board of Directors or other facts or events within the control of the Corporation) and may vary among holders thereof, provided that the manner in which such facts, events or variations shall operate upon the terms of such class or series of stock is clearly and expressly set forth in the articles supplementary filed with the SDAT. Section 6.7 Severability of Provisions. If any preferences, -------------------------- conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of the Common Stock, Class A Common Stock or Class A Preferred Stock set forth in the charter are invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of Common Stock, Class A Common Stock or Class A Preferred Stock set forth in the charter which can be given effect without the invalid, unlawful or unenforceable provision thereof shall, nevertheless, remain in full force and effect, and no preferences, conversion or other rights, 17 voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of Common Stock, Class A Common Stock or Class A Preferred Stock herein set forth shall be deemed dependent upon any other provision hereof unless so expressed therein. Section 6.8 Charter and Bylaws. All persons who shall acquire stock ------------------ in the Corporation shall acquire the same subject to the provisions of the charter and the Bylaws. ARTICLE VII RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES Section 7.1 Definitions. For the purpose of this Article VII, the ----------- following terms shall have the following meanings: Aggregate Stock Ownership Limit. The term "Aggregate Stock Ownership ------------------------------- Limit" shall mean not more than 9.8 percent in value of the aggregate of the outstanding shares of Capital Stock. The value of the outstanding shares of Capital Stock shall be determined by the Board of Directors of the Corporation in good faith, which determination shall be conclusive for all purposes hereof. Beneficial Ownership. The term "Beneficial Ownership" shall mean -------------------- ownership of Capital Stock by a Person, whether the interest in the shares of Capital Stock is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have the correlative meanings. 18 Business Day. The term "Business Day" shall mean any day, other than ------------ a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close. Capital Stock. The term "Capital Stock" shall mean all classes or ------------- series of stock of the Corporation, including, without limitation, Common Stock, Class A Common Stock, Preferred Stock and Class A Preferred Stock. Charitable Beneficiary. The term "Charitable Beneficiary" shall mean ---------------------- one or more beneficiaries of the Trust as determined pursuant to Section 7.3.6, provided that each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code. Charter. The term "Charter" shall mean the charter of the ------- Corporation, as that term is defined in the MGCL. Class A Common Stock Ownership Limit. The term "Class A Common Stock ------------------------------------ Ownership Limit" shall mean not more than 9.8 percent (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of Class A Common Stock of the Corporation. The number and value of outstanding shares of Class A Common Stock of the Corporation shall be determined by the Board of Directors of the Corporation in good faith, which determination shall be conclusive for all purposes hereof. Class A Preferred Stock Ownership Limit. The term "Class A Preferred --------------------------------------- Stock Ownership Limit" shall mean not more than 9.8 percent (in value or in number of shares, whichever 19 is more restrictive) of the aggregate of the outstanding shares of Class A Preferred Stock of the Corporation. The number and value of outstanding shares of Class A Preferred Stock of the Corporation shall be determined by the Board of Directors of the Corporation in good faith, which determination shall be conclusive for all purposes hereof. Code. The term "Code" shall mean the Internal Revenue Code of 1986, ---- as amended from time to time. Common Stock Ownership Limit. The term "Common Stock Ownership Limit" ---------------------------- shall mean not more than 9.8 percent (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of Common Stock of the Corporation. The number and value of outstanding shares of Common Stock of the Corporation shall be determined by the Board of Directors of the Corporation in good faith, which determination shall be conclusive for all purposes hereof. Constructive Ownership. The term "Constructive Ownership" shall mean ---------------------- ownership of Capital Stock by a Person, whether the interest in the shares of Capital Stock is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner," "Constructively Owns" and "Constructively Owned" shall have the correlative meanings. Excepted Holder. The term "Excepted Holder" shall mean a stockholder --------------- of the Corporation for whom an Excepted Holder Limit is created by these Articles or by the Board of Directors pursuant to Section 7.2.7. 20 Excepted Holder Limit. The term "Excepted Holder Limit" shall mean, --------------------- provided that the affected Excepted Holder agrees to comply with the requirements established by the Board of Directors pursuant to Section 7.2.7, and subject to adjustment pursuant to Section 7.2.8, the percentage limit established by the Board of Directors pursuant to Section 7.2.7. Initial Date. The term "Initial Date" shall mean the date upon which ------------ the Articles of Amendment and Restatement containing this Article VII are filed with the SDAT. Market Price. The term "Market Price" on any date shall mean, with ------------ respect to any class or series of outstanding shares of Capital Stock, the Closing Price for such Capital Stock on such date. The "Closing Price" on any date shall mean the last sale price for such Capital Stock, 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 Capital Stock, 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 Capital Stock is 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 Capital Stock is listed or admitted to trading or, if such Capital Stock is 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- counter 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 Capital Stock is 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 Capital Stock 21 selected by the Board of Directors of the Corporation or, in the event that no trading price is available for such Capital Stock, the fair market value of the Capital Stock, as determined in good faith by the Board of Directors of the Corporation. MGCL. The term "MGCL" shall mean the Maryland General Corporation ---- Law, as amended from time to time. NYSE. The term "NYSE" shall mean the New York Stock Exchange. ---- Person. The term "Person" shall mean an individual, corporation, ------ partnership, estate, limited liability company, trust (including a trust qualified under Sections 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity. Prohibited Owner. The term "Prohibited Owner" shall mean, with ---------------- respect to any purported Transfer, any Person who, but for the provisions of Section 7.2.1, would Beneficially Own or Constructively Own shares of Capital Stock. Purported Record Transferee. The term "Purported Record Transferee" --------------------------- shall mean, with respect to any purported Transfer which results in a transfer to a Trust, as provided in Section 7.2.1(b), the record holder of the shares of Capital Stock if such Transfer had been valid under Section 7.2.1. REIT. The term "REIT" shall mean a real estate investment trust ---- within the meaning of Section 856 of the Code. 22 Restriction Termination Date. The term "Restriction Termination Date" ---------------------------- shall mean the first day after the Initial Date on which the Corporation determines pursuant to Section 5.7 of the Charter that it is no longer in the best interests of the Corporation to attempt to, or continue to, qualify as a REIT or that compliance with the restrictions and limitations on Beneficial Ownership, Constructive Ownership and Transfers of shares of Capital Stock set forth herein is no longer required in order for the Corporation to qualify as a REIT. Transfer. The term "Transfer" shall mean any issuance, sale, -------- transfer, gift, assignment, devise or other disposition, as well as any other event that causes any Person to acquire Beneficial Ownership or Constructive Ownership, or any agreement to take any such actions or cause any such events, of Capital Stock or the right to vote or receive dividends on Capital Stock, including (a) the granting or exercise of any option (or any disposition of any option), (b) any disposition of any securities or rights convertible into or exchangeable for Capital Stock or any interest in Capital Stock or any exercise of any such conversion or exchange right and (c) Transfers of interests in other entities that result in changes in Beneficial or Constructive Ownership of Capital Stock; in each case, whether voluntary or involuntary, whether owned of record, Constructively Owned or Beneficially Owned and whether by operation of law or otherwise. The terms "Transferring" and "Transferred" shall have the correlative meanings. Trust. The term "Trust" shall mean any trust provided for in Section ----- 7.3.1. Trustee. The term "Trustee" shall mean the Person unaffiliated with ------- the Corporation, a Prohibited Owner and a Purported Record Transferee, that is appointed by the Corporation to serve as trustee of the Trust. 23 Section 7.2 Capital Stock. ------------- Section 7.2.1 Ownership Limitations. During the period --------------------- commencing on the Initial Date and prior to the Restriction Termination Date: (a) Basic Restrictions. ------------------ (i) (1) No Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own shares of Capital Stock in excess of the Aggregate Stock Ownership Limit, (2) no Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own shares of Common Stock in excess of the Common Stock Ownership Limit, (3) no Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own shares of Class A Common Stock in excess of the Class A Common Stock Ownership Limit, (4) no Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own shares of Class A Preferred Stock in excess of the Class A Preferred Stock Ownership Limit, and (5) no Excepted Holder shall Beneficially Own or Constructively Own shares of Capital Stock in excess of the Excepted Holder Limit for such Excepted Holder. (ii) No Person shall Beneficially or Constructively Own shares of Capital Stock to the extent that such Beneficial or Constructive Ownership of Capital Stock would result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise failing to qualify as a REIT (including, but not limited to, Constructive Ownership that would result in the Corporation owning (actually or Constructively) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by the Corporation from such 24 tenant would cause the Corporation to fail to satisfy any of the gross income requirements of Section 856(c) of the Code). (iii) Notwithstanding any other provisions contained herein, any Transfer of shares of Capital Stock (whether or not such Transfer is the result of a transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system) that, if effective, would result in the Capital Stock being beneficially owned by less than 100 Persons (determined under the principles of Section 856(a)(5) of the Code) shall be void ab initio, and the intended transferee --------- shall acquire no rights in such shares of Capital Stock. (b) Transfer in Trust. If any Transfer of shares of ----------------- Capital Stock (whether or not such Transfer is the result of a transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system) occurs which, if effective, would result in any Person Beneficially Owning or Constructively Owning shares of Capital Stock in violation of Section 7.2.1(a)(i) or (ii), (i) then that number of shares of the Capital Stock the Beneficial or Constructive Ownership of which otherwise would cause such Person to violate Section 7.2.1(a)(i) or (ii)(rounded up to the nearest whole share) shall be automatically transferred to a Trust for the benefit of a Charitable Beneficiary, as described in Section 7.3, effective as of the close of business on the Business Day prior to the date of such Transfer, and such Person shall acquire no rights in such shares; or 25 (ii) if the transfer to the Trust described in clause (i) of this sentence would not be effective for any reason to prevent the violation of Section 7.2.1(a)(i) or (ii), then the Transfer of that number of shares of Capital Stock that otherwise would cause any Person to violate Section 7.2.1(a)(i) or (ii) shall be void ab initio, and the intended transferee shall --------- acquire no rights in such shares of Capital Stock. Section 7.2.2 Remedies for Breach. If the Board of Directors of the ------------------- Corporation or any duly authorized committee thereof shall at any time determine in good faith that a Transfer or other event has taken place that results in a violation of Section 7.2.1 or that a Person intends to acquire or has attempted to acquire Beneficial or Constructive Ownership of any shares of Capital Stock in violation of Section 7.2.1 (whether or not such violation is intended), the Board of Directors or a committee thereof shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or other event, including, without limitation, causing the Corporation to redeem shares, refusing to give effect to such Transfer on the books of the Corporation or instituting proceedings to enjoin such Transfer or other event; provided, -------- however, that any Transfers or attempted Transfers or other events in violation - ------- of Section 7.2.1 shall automatically result in the transfer to the Trust described in Section 7.2.1(b) and, where applicable, such Transfer (or other event) shall be void ab initio as provided above irrespective of any action (or -- ------ non-action) by the Board of Directors or a committee thereof. Section 7.2.3 Notice of Restricted Transfer. Any Person who acquires ----------------------------- or attempts or intends to acquire Beneficial Ownership or Constructive Ownership of shares of Capital Stock that will or may violate Section 7.2.1(a), or any Person who would have owned shares of 26 Capital Stock that resulted in a transfer to the Trust pursuant to the provisions of Section 7.2.1(b) shall immediately give written notice to the Corporation of such event, or in the case of such a proposed or attempted transaction, give at least 15 days prior written notice, and shall provide to the Corporation such other information as the Corporation may request in order to determine the effect, if any, of such Transfer on the Corporation's status as a REIT. Section 7.2.4 Owners Required To Provide Information. From the -------------------------------------- Initial Date and prior to the Restriction Termination Date: (a) every owner of more than five percent (or such lower percentage as required by the Code or the Treasury Regulations promulgated thereunder) of the outstanding shares of Capital Stock, within 30 days after the end of each taxable year, shall give written notice to the Corporation stating the name and address of such owner, the number of shares of Capital Stock and other shares of the Capital Stock Beneficially Owned and a description of the manner in which such shares are held. Each such owner shall provide to the Corporation such additional information as the Corporation may request in order to determine the effect, if any, of such Beneficial Ownership on the Corporation's status as a REIT and to ensure compliance with the Aggregate Stock Ownership Limit. (b) each Person who is a Beneficial or Constructive Owner of Capital Stock and each Person (including the stockholder of record) who is holding Capital Stock for a Beneficial or Constructive Owner shall provide to the Corporation such information as the Corporation may request, in good faith, in order to determine the Corporation's status as a REIT and 27 to comply with requirements of any taxing authority or governmental authority or to determine such compliance. Section 7.2.5 Remedies Not Limited. Subject to Section 5.7 of the -------------------- Charter, nothing contained in this Section 7.2 shall limit the authority of the Board of Directors of the Corporation to take such other action as it deems necessary or advisable to protect the Corporation and the interests of its stockholders in preserving the Corporation's status as a REIT. Section 7.2.6 Ambiguity. In the case of an ambiguity in the --------- application of any of the provisions of this Section 7.2, Section 7.3, or any definition contained in Section 7.1, the Board of Directors of the Corporation shall have the power to determine the application of the provisions of this Section 7.2 or Section 7.3 with respect to any situation based on the facts known to it. In the event Section 7.2 or 7.3 requires an action by the Board of Directors and the Charter fails to provide specific guidance with respect to such action, the Board of Directors shall have the power to determine the action to be taken so long as such action is not contrary to the provisions of Sections 7.1, 7.2 or 7.3. Absent a decision to the contrary by the Board of Directors (which the Board may make in its sole and absolute discretion), if a Person would have (but for the remedies set forth in Section 7.2.1(b)) acquired Beneficial or Constructive Ownership of Capital Stock in violation of Section 7.2.1(a), such remedies (as applicable) shall apply first to the Capital Stock which, but for such remedies, would have been actually owned by such Person, and second to Capital Stock which, but for such remedies, would have been Beneficially Owned or Constructively Owned (but not actually owned) by such Person, pro rata among the Persons who actually own such Capital Stock based upon the relative number of the shares of Capital Stock held by each such Person. 28 Section 7.2.7 Exceptions. ---------- (a) Subject to Section 7.2.1(a)(ii), the Board of Directors of the Corporation, in its sole discretion, may exempt a Person from the Aggregate Stock Ownership Limit, the Common Stock Ownership Limit, the Class A Common Stock Ownership Limit, and the Class A Preferred Stock Ownership Limit, as the case may be, and may establish or increase an Excepted Holder Limit for such Person if: (i) the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain that no individual's Beneficial Ownership of such shares of Capital Stock will violate Section 7.2.1(a)(ii); (ii) such Person does not and represents that it will not own, actually or Constructively, an interest in a tenant of the Corporation (or a tenant of any entity owned in whole or in part by the Corporation) that would cause the Corporation to own, actually or Constructively, more than a 9.8% interest (as set forth in Section 856(d)(2)(B) of the Code) in such tenant and the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain this fact (for this purpose, a tenant from whom the Corporation (or an entity owned in whole or in part by the Corporation) derives (and is expected to continue to derive) a sufficiently small amount of revenue such that, in the opinion of the Board of Directors of the Corporation, rent from such tenant would not adversely affect the Corporation's ability to qualify as a REIT, shall not be treated as a tenant of the Corporation); and (iii) such Person agrees that any violation or attempted violation of such representations or undertakings (or other action which is contrary to the restrictions contained 29 in Sections 7.2.1 through 7.2.6) will result in such shares of Capital Stock being automatically transferred to a Trust in accordance with Sections 7.2.1(b) and 7.3. (b) Prior to granting any exception pursuant to Section 7.2.7(a), the Board of Directors of the Corporation may require a ruling from the Internal Revenue Service, or an opinion of counsel, in either case in form and substance satisfactory to the Board of Directors in its sole discretion, as it may deem necessary or advisable in order to determine or ensure the Corporation's status as a REIT. Notwithstanding the receipt of any ruling or opinion, the Board of Directors may impose such conditions or restrictions as it deems appropriate in connection with granting such exception. (c) Subject to Section 7.2.1(a)(ii), an underwriter which participates in a public offering or a private placement of Capital Stock (or securities convertible into or exchangeable for Capital Stock) may Beneficially Own or Constructively Own shares of Capital Stock (or securities convertible into or exchangeable for Capital Stock) in excess of the Aggregate Stock Ownership Limit, the Common Stock Ownership Limit, the Class A Common Stock Ownership Limit or the Class A Preferred Stock Ownership Limit, or all of such limits, but only to the extent necessary to facilitate such public offering or private placement. (d) The Board of Directors may only reduce the Excepted Holder Limit for an Excepted Holder: (1) with the written consent of such Excepted Holder at any time, or (2) pursuant to the terms and conditions of the agreements and undertakings entered into with such Excepted Holder in connection with the establishment of the Excepted Holder Limit for that Excepted Holder. No Excepted Holder Limit shall be reduced to a percentage that is less than the Common Stock Ownership Limit, the Class A Common 30 Stock ownership Limit or the Class A Preferred Stock Ownership Limit, as the case may be. Section 7.2.8 Increase in Aggregate Stock Ownership, Common Stock --------------------------------------------------- Ownership, Class A Common Stock Ownership and Class A Preferred Stock Ownership - ------------------------------------------------------------------------------- Limits. The Board of Directors may from time to time increase the Common Stock - ------ Ownership Limit, the Class A Common Stock Ownership Limit, the Class A Preferred Stock Ownership Limit and the Aggregate Stock Ownership Limit. Section 7.2.9 Legend. Each certificate for shares of Capital ------ Stock shall bear substantially the following legend: The shares represented by this certificate are subject to restrictions on Beneficial and Constructive Ownership and Transfer for the purpose of the Corporation's maintenance of its status as a Real Estate Investment Trust under the Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain further restrictions and except as expressly provided in the Corporation's Charter, (i) no Person may Beneficially or Constructively Own shares of the Corporation's Common Stock in excess of 9.8 percent (in value or number of shares, whichever is more restrictive) of the outstanding shares of Common Stock of the Corporation unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (ii) no Person may Beneficially or Constructively Own shares of the Corporation's Class A Common Stock in excess of 9.8 percent (in value or number of shares, whichever is more restrictive) of the outstanding shares of Class A Common Stock of the Corporation unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (iii) no Person may Beneficially or Constructively Own shares of the Corporation's Class A Preferred Stock in excess of 9.8 percent (in value or number of shares, whichever is more restrictive) of the outstanding shares of Class A Preferred Stock of the Corporation unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (iv) no Person may Beneficially or Constructively Own shares of Capital Stock of the Corporation in excess of 9.8 percent of the value of the total outstanding shares of Capital Stock of the Corporation, unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (v) no Person may 31 Beneficially Own Capital Stock that would result in the Corporation being "closely held" under Section 856(h) of the Code or otherwise cause the Corporation to fail to qualify as a REIT; and (vi) no Person may Transfer shares of Capital Stock if such Transfer would result in the Capital Stock of the Corporation being owned by fewer than 100 Persons. Any Person who Beneficially or Constructively Owns or attempts to Beneficially or Constructively Own shares of Capital Stock which causes or will cause a Person to Beneficially or Constructively Own shares of Capital Stock in excess or in violation of the above limitations must immediately notify the Corporation. If any of the restrictions on transfer or ownership are violated, the shares of Capital Stock represented hereby will be automatically transferred to a Trustee of a Trust for the benefit of one or more Charitable Beneficiaries. In addition, upon the occurrence of certain events, attempted Transfers in violation of the restrictions described above may be void ab initio. All capitalized terms in this legend have the -- ------ meanings defined in the Charter of the Corporation, as the same may be amended from time to time, a copy of which, including the restrictions on transfer and ownership, will be furnished to each holder of Capital Stock of the Corporation on request and without charge. Instead of the foregoing legend, the certificate may state that the Corporation will furnish a full statement about certain restrictions on transferability to a stockholder on request and without charge. Section 7.3 Transfer of Capital Stock in Trust. ---------------------------------- Section 7.3.1 Ownership in Trust. Upon any purported Transfer or other event described in Section 7.2.1(b) that would result in a transfer of shares of Capital Stock to a Trust, such shares of Capital Stock shall be deemed to have been transferred to the Trustee as trustee of a Trust for the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to the Trustee shall be deemed to be effective as of the close of business on the Business Day prior to the purported Transfer or other event that results in the transfer to the Trust pursuant to Section 7.2.1(b). The Trustee shall be appointed by the Corporation and shall be a Person unaffiliated with the 32 Corporation, any Prohibited Owner and any Purported Record Transferee. Each Charitable Beneficiary shall be designated by the Corporation as provided in Section 7.3.6. Section 7.3.2 Status of Shares Held by the Trustee. Shares of ------------------------------------ Capital Stock held by the Trustee shall be issued and outstanding shares of Capital Stock of the Corporation. The Prohibited Owner or Purported Record Transferee shall have no rights in the shares held by the Trustee. The Prohibited Owner or Purported Record Transferee shall not benefit economically from ownership of any shares held in trust by the Trustee, shall have no rights to dividends and shall not possess any rights to vote or other rights attributable to the shares held in the Trust. Section 7.3.3 Dividend and Voting Rights. The Trustee shall have all -------------------------- voting rights and rights to dividends or other distributions with respect to shares of Capital Stock held in the Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or other distribution paid prior to the discovery by the Corporation that the shares of Capital Stock have been transferred to the Trustee shall be paid by the recipient of such dividend or distribution to the Trustee upon demand and any dividend or other distribution authorized but unpaid shall be paid when due to the Trustee. Any dividend or distribution so paid to the Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner or Purported Record Transferee shall have no voting rights with respect to shares held in the Trust and, subject to Maryland law, effective as of the date that the shares of Capital Stock have been transferred to the Trustee, the Trustee shall have the authority (at the Trustee's sole discretion) (i) to rescind as void any vote cast by a Prohibited Owner or Purported Record Transferee prior to the discovery by the Corporation that the shares of Capital Stock have been transferred to the Trustee and (ii) to recast such vote in 33 accordance with the desires of the Trustee acting for the benefit of the Charitable Beneficiary; provided, however, that if the Corporation has already taken irreversible corporate action, then the Trustee shall not have the authority to rescind and recast such vote. Notwithstanding the provisions of this Article VII, until the Corporation has received notification that shares of Capital Stock have been transferred into a Trust, the Corporation shall be entitled to rely on its share transfer and other stockholder records for purposes of preparing lists of stockholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes of stockholders. Section 7.3.4 Sale of Shares by Trustee. Within 20 days of receiving ------------------------- notice from the Corporation that shares of Capital Stock have been transferred to the Trust, the Trustee of the Trust shall sell the shares held in the Trust to a person, designated by the Trustee, whose ownership of the shares will not violate the ownership limitations set forth in Section 7.2.1(a). Upon such sale, 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 Purported Record Transferee and to the Charitable Beneficiary as provided in this Section 7.3.4. The Purported Record Transferee shall receive the lesser of (1) the price paid by the Purported Record Transferee for the shares or, if the Purported Record Transferee 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 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 Purported Record Transferee shall be immediately paid to the Charitable Beneficiary. If, prior to the discovery by the Corporation that 34 shares of Capital Stock have been transferred to the Trustee, such shares are sold by a Purported Record Transferee then (i) such shares shall be deemed to have been sold on behalf of the Trust and (ii) to the extent that the Purported Record Transferee received an amount for such shares that exceeds the amount that such Purported Record Transferee was entitled to receive pursuant to this Section 7.3.4, such excess shall be paid to the Trustee upon demand. Section 7.3.5 Purchase Right in Stock Transferred to the Trustee. -------------------------------------------------- Shares of Capital Stock transferred to the Trustee shall be deemed to have been offered for sale to the Corporation, 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 at the time of such devise or gift) and (ii) the Market Price on the date the Corporation, or its designee, accepts such offer. The Corporation shall have the right to accept such offer until the Trustee has sold the shares held in the Trust pursuant to Section 7.3.4. Upon such a sale to the Corporation, 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 Prohibited Owner. Section 7.3.6 Designation of Charitable Beneficiaries. By written --------------------------------------- notice to the Trustee, the Corporation shall designate one or more nonprofit organizations to be the Charitable Beneficiary of the interest in the Trust such that (i) the shares of Capital Stock held in the Trust would not violate the restrictions set forth in Section 7.2.1(a) in the hands of such Charitable Beneficiary and (ii) each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code. 35 Section 7.4 NYSE Transactions. Nothing in this Article VII shall ----------------- preclude the settlement of any transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system. The fact that the settlement of any transaction is so permitted shall not negate the effect of any other provision of this Article VII and any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this Article VII. Section 7.5 Enforcement. The Corporation is authorized ----------- specifically to seek equitable relief, including injunctive relief, to enforce the provisions of this Article VII. Section 7.6 Non-Waiver. No delay or failure on the part of the ---------- Corporation or the Board of Directors in exercising any right hereunder shall operate as a waiver of any right of the Corporation or the Board of Directors, as the case may be, except to the extent specifically waived in writing. Section 7.7 Severability. If any provision of this Article VII or ------------ any application of any such provision is determined to be invalid by any Federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. Section 7.8 Headings of Subdivisions. The headings of the various ------------------------ subdivisions hereof are for convenience of reference only and shall not affect the interpretation of the provision hereof. 36 ARTICLE VIII ACQUISITION OF SHARES BY CERTAIN ORGANIZATIONS Section 8.1 Action by the Board of Directors. -------------------------------- Section 8.1.1 Whenever it is deemed by the Board of Directors to be prudent to avoid (a) the direct or indirect imposition of a penalty tax on the Corporation (including the imposition of an entity-level tax on one or more real estate mortgage investment conduits ("REMICs") or one or more taxable mortgage pools in which the Corporation has acquired or plans to acquire an interest), or (b) the endangerment of the tax status of one or more REMICs in which the Corporation has acquired or plans to acquire an interest, then, the Board of Directors or the Corporation may take any or all of the following actions: (i) the Board of Directors may require to be filed with the Corporation a statement or affidavit from any holder or proposed transferee of Capital Stock (as defined in Article VII) stating whether the holder or proposed transferee is (A) the United States, any state or political subdivision thereof, any possession of the United States, any foreign government, any international organization, or any agency or instrumentality of the foregoing, or any other organization that is exempt from federal income taxation (including taxation under the unrelated business taxable income provisions of the Code (as defined in Article VII)) (a "Disqualified Organization"), or 37 (B) a partnership, trust, real estate investment trust, regulated investment company, or other pass-through entity in which a Disqualified Organization holds or is permitted to hold a direct or indirect beneficial interest (a "Pass-Through Entity"); (ii) the Corporation may redeem shares of Capital Stock; (iii) the Board of Directors shall have the right, but shall not be required, to refuse to transfer any shares of Capital Stock purportedly transferred, if either (A) a statement or affidavit requested pursuant to this Section 8.1 has not been received, or (B) the proposed transferee is a Disqualified Organization or Pass-Through Entity. Section 8.1.2 Notwithstanding the foregoing, any acquisition of shares of Capital Stock that could or would (a) result in the direct or indirect imposition of a penalty tax on the Corporation (including the imposition of an entity-level tax on one or more REMICs or one or more taxable mortgage pools in which the Corporation has acquired or plans to acquire an interest), or (b) endanger the tax status of one or more REMICs in which the Corporation has acquired or plans to acquire an interest, shall be void ab initio to the fullest extent permitted under applicable law and -- ------ the intended transferee of the subject shares shall be deemed never to have had an interest therein. If the foregoing provision is determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the transferee of those shares shall be deemed, at the 38 option of the Corporation, to have acted as agent on behalf of the Corporation in acquiring those shares and to hold those shares on behalf of the Corporation. (c) Nothing contained in this Article or in any other provision hereof shall limit the authority of the Board of Directors to take any and all other action as it in its sole discretion deems necessary or advisable to protect the Corporation or the interests of its stockholders by avoiding the events set forth in paragraphs 8.1.1(a) and (b) above. Section 8.2 Severability. If any provisions of this Article VIII or ------------ any application of any such provision is determined to be invalid by any federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other applications of such provisions shall be affected only to the extent necessary to comply with the determination of such court. ARTICLE IX AMENDMENTS The Corporation reserves the right from time to time to make any amendment to its charter, now or hereafter authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in this charter, of any shares of outstanding stock. All rights and powers conferred by the charter on stockholders, directors and officers are granted subject to this reservation. ARTICLE X LIMITATION OF LIABILITY To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of directors and officers of a corporation, no director or officer of the 39 Corporation shall be liable to the Corporation or its stockholders for money damages. Neither the amendment nor repeal of this Article X, nor the adoption or amendment of any other provision of the charter or Bylaws inconsistent with this Article X, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. THIRD: The amendment to and restatement of the charter as hereinabove ----- set forth have been duly advised by the Board of Directors and approved by the stockholders of the Corporation as required by law. FOURTH: The current address of the principal office of the ------ Corporation is as set forth in Article IV of the foregoing amendment and restatement of the charter. FIFTH: The name and address of the Corporation's current resident ----- agent is as set forth in Article IV of the foregoing amendment and restatement of the charter. SIXTH: The number of directors of the Corporation and the names of ----- those currently in office are as set forth in Article V of the foregoing amendment and restatement of the charter. SEVENTH: The total number of shares of stock which the Corporation ------- had authority to issue immediately prior to this amendment and restatement was Sixty Million (60,000,000) consisting of Fifty Million (50,000,000) shares of Common Stock, $.01 par value per share and Ten Million shares of Preferred Stock, $.01 par value per share. The aggregate par value of all shares of stock having par value was $600,000. 40 EIGHTH: The total number of shares of stock which the Corporation has ------ authority to issue pursuant to the foregoing amendment and restatement of the charter is Sixty Million (60,000,000) consisting of Fifty Million (50,000,000) shares of Common Stock, $.01 par value per share, and Ten Million (10,000,000) shares of Preferred Stock, $.01 par value per share. The aggregate par value of all authorized shares of stock having par value is $600,000. NINTH: The undersigned President acknowledges these Articles of ----- Amendment and Restatement to be the corporate act of the Corporation and as to all matters or facts required to be verified under oath, the undersigned President acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury. 41 IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment and Restatement to be signed in its name and on its behalf by its President and attested to by its Secretary on this 3rd day of June 1997. ATTEST: IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. /s/ Richard J. Johnson By: /s/ William S. Ashmore _____________________________ __________________________ (SEAL) Richard J. Johnson, Secretary William S. Ashmore, President 42 EX-3.2 4 BYLAWS OF THE REGISTRANT EXHIBIT 3.2 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. BYLAWS ARTICLE I OFFICES Section 1. PRINCIPAL OFFICE. The principal office of the Corporation ---------------- shall be located at such place or places as the Board of Directors may designate. Section 2. ADDITIONAL OFFICES. The Corporation may have additional ------------------ offices at such places as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. PLACE. All meetings of stockholders shall be held at the ----- principal office of the Corporation or at such other place within the United States as shall be stated in the notice of the meeting. Section 2. ANNUAL MEETING. An annual meeting of the stockholders for -------------- the election of directors and the transaction of any business within the powers of the Corporation shall be held on a date and at the time set by the Board of Directors during the month of July in each year. Section 3. SPECIAL MEETINGS. The president, chief executive officer ---------------- or Board of Directors may call special meetings of the stockholders. Special meetings of stockholders shall also be called by the secretary of the Corporation upon the written request of the holders of shares entitled to cast not less than a majority of all the votes entitled to be cast at such meeting. Such request shall state the purpose of such meeting and the matters proposed to be acted on at such meeting. The secretary shall inform such stockholders of the reasonably estimated cost of preparing and mailing notice of the meeting and, upon payment to the Corporation by such stockholders of such costs, the secretary shall give notice to each stockholder entitled to notice of the meeting. Section 4. NOTICE. Not less than ten nor more than 90 days before ------ each meeting of stockholders, the secretary shall give to each stockholder entitled to vote at such meeting and to each stockholder not entitled to vote who is entitled to notice of the meeting written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by any statute, the purpose for which the meeting is called, either by mail or by presenting it to such stockholder personally or by leaving it at his residence or usual place of business. If mailed, such notice -1- shall be deemed to be given when deposited in the United States mail addressed to the stockholder at his post office address as it appears on the records of the Corporation, with postage thereon prepaid. Section 5. SCOPE OF NOTICE. Any business of the Corporation may be --------------- transacted at an annual meeting of stockholders without being specifically designated in the notice, except such business as is required by any statute to be stated in such notice. No business shall be transacted at a special meeting of stockholders except as specifically designated in the notice. Section 6. ORGANIZATION. At every meeting of stockholders, the ------------ chairman of the board, if there be one, shall conduct the meeting or, in the case of vacancy in office or absence of the chairman of the board, one of the following officers present shall conduct the meeting in the order stated: the vice chairman of the board, if there be one, the president, the vice presidents in their order of rank and seniority, or a chairman chosen by the stockholders entitled to cast a majority of the votes which all stockholders present in person or by proxy are entitled to cast, shall act as chairman, and the secretary, or, in his absence, an assistant secretary, or in the absence of both the secretary and assistant secretaries, a person appointed by the chairman shall act as secretary. Section 7. QUORUM. At any meeting of stockholders, the presence in ------ person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at such meeting shall constitute a quorum; but this section shall not affect any requirement under any statute or the charter of the Corporation for the vote necessary for the adoption of any measure. If, however, such quorum shall not be present at any meeting of stockholders, the stockholders entitled to vote at such meeting, present in person or by proxy, shall have the power to adjourn the meeting from time to time to a date not more than 120 days after the original record date without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Section 8. VOTING. A plurality of all the votes cast at a meeting of ------ stockholders duly called and at which a quorum is present shall be sufficient to elect a director. Each share may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. A majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required by statute or by the charter of the Corporation. Unless otherwise provided in the charter, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. Section 9. PROXIES. A stockholder may cast the votes entitled to ------- be cast by the shares of the stock owned of record by him either in person or by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. Such proxy shall be filed with the secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. -2- Section 10. VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the ---------------------------------- Corporation registered in the name of a corporation, partnership, trust or other entity, if entitled to be voted, may be voted by the president or a vice president, a general partner or trustee thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such stock pursuant to a bylaw or a resolution of the governing body of such corporation or other entity or agreement of the partners of a partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such stock. Any director or other fiduciary may vote stock registered in his name as such fiduciary, either in person or by proxy. Shares of stock of the Corporation directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time. The Board of Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board of Directors considers necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the stockholder of record of the specified stock in place of the stockholder who makes the certification. Notwithstanding any other provision of the charter of the Corporation or these Bylaws, Title 3, Subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute) shall not apply to any acquisition by any person of shares of stock of the Corporation. This section may be repealed, in whole or in part, at any time, whether before or after an acquisition of control shares and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any prior or subsequent control share acquisition. Section 11. INSPECTORS. At any meeting of stockholders, the chairman ---------- of the meeting may appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting based upon their determination of the validity and effect of proxies, count all votes, report the results and perform such other acts as are proper to conduct the election and voting with impartiality and fairness to all the stockholders. Each report of an inspector shall be in writing and signed by him or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof. ----- ----- -3- Section 12. NOMINATIONS AND PROPOSALS BY STOCKHOLDERS. ----------------------------------------- (a) Annual Meetings of Stockholders. (1) Nominations of persons for ------------------------------- election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record both at the time of giving of notice provided for in this Section 12(a) and at the time of the annual meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 12(a). (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 12, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation and such other business must otherwise be a proper matter for action by stockholders. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the Corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date or if the Corporation has not previously held an annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of a postponement or adjournment of an annual meeting to a later date or time commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (y) the number of shares of each class of stock of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this Section 12 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 70 days prior to the first -4- anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 12(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (b) Special Meetings of Stockholders. Only such business shall be -------------------------------- conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by any stockholder of the Corporation who is a stockholder of record both at the time of giving of notice provided for in this Section 12(b) and at the time of the special meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 12(b). In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be) for election to such position as specified in the Corporation's notice of meeting, if the stockholder's notice containing the information required by paragraph (a)(2) of this Section 12 shall be delivered to the secretary at the principal executive offices of the Corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of a postponement or adjournment of a special meeting to a later date or time commence a new time period for the giving of a stockholder's notice as described above. (c) General. (1) Only such persons who are nominated in accordance ------- with the procedures set forth in this Section 12 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 12. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 12 and, if any proposed nomination or business is not in compliance with this Section 12, to declare that such nomination or proposal shall be disregarded. (2) For purposes of this Section 12, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 12, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and -5- the rules and regulations thereunder with respect to the matters set forth in this Section 12. Nothing in this Section 12 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 13. VOTING BY BALLOT. Voting on any question or in any ---------------- election may be viva voce unless the presiding officer shall order or any --------- stockholder shall demand that voting be by ballot. ARTICLE III DIRECTORS Section 1. GENERAL POWERS. The business and affairs of the -------------- Corporation shall be managed under the direction of its Board of Directors, which may exercise all of the powers of the Corporation, except such as are by law or by the charter of the Corporation or by these Bylaws conferred upon or reserved to the stockholders. Section 2. AFFILIATIONS OF BOARD MEMBERS. A majority of the ----------------------------- members of the Board of Directors shall at all times be persons who are not Affiliates of an individual or corporate management company to whom the Board has delegated management duties as permitted in Section 17 of this Article III and by Section 5.9 of the charter of the Corporation (a "Management Company"), (such directors being referred to as "Unaffiliated Directors"). An Unaffiliated Director must be independent from the Corporation, except for being a Director of the Corporation, and from Imperial Credit Mortgage Holdings, Inc. and its Affiliates. As used in these Bylaws, the term "Affiliate" of any entity means (i) any person directly or indirectly owning, controlling, or holding with power to vote, five percent (5%) or more of the outstanding voting securities of such entity; (ii) any person five percent (5%) or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such entity; (iii) any person directly or indirectly controlling, controlled by, or under common control with, such entity; or (iv) any officer, director or employee of such entity or any person set forth in (i) - (iii) above. Any person who owns beneficially, either directly or through one or more controlled companies, more than twenty-five percent (25%) of the voting securities of any entity shall be presumed to control such entity. Any person who does not so own more than twenty-five percent (25%) of the voting securities of any entity shall be presumed not to control such entity. A natural person shall be presumed not to be a controlled entity. Section 3. NUMBER, TENURE AND QUALIFICATIONS. At any regular --------------------------------- meeting or at any special meeting called for that purpose, a majority of the entire Board of Directors may establish, increase or decrease the number of directors, provided that the number thereof shall never be less than the minimum number required by the Maryland General Corporation Law, nor more than 15, and further provided that the tenure of office of a director shall not be affected by any decrease in the number of directors. -6- Section 4. ANNUAL AND REGULAR MEETINGS. An annual meeting of the --------------------------- Board of Directors shall be held immediately after and at the same place as the annual meeting of stockholders, no notice other than this Bylaw being necessary. The Board of Directors may provide, by resolution, the time and place, either within or without the State of Maryland, for the holding of regular meetings of the Board of Directors without other notice than such resolution. Section 5. SPECIAL MEETINGS. Special meetings of the Board of ---------------- Directors may be called by or at the request of the chairman of the board, president or by a majority of the directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Maryland, as the place for holding any special meeting of the Board of Directors called by them. Section 6. NOTICE. Notice of any special meeting of the Board of ------ Directors shall be delivered personally or by telephone, facsimile transmission, United States mail or courier to each director at his business or residence address. Notice by personal delivery, by telephone or a facsimile transmission shall be given at least two days prior to the meeting. Notice by mail shall be given at least five days prior to the meeting and shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. Telephone notice shall be deemed to be given when the director is personally given such notice in a telephone call to which he is a party. Facsimile transmission notice shall be deemed to be given upon completion of the transmission of the message to the number given to the Corporation by the director and receipt of a completed answer-back indicating receipt. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be stated in the notice, unless specifically required by statute or these Bylaws. Section 7. QUORUM. A majority of the directors shall constitute a ------ quorum for transaction of business at any meeting of the Board of Directors, provided that, if less than a majority of such directors are present at said meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, and provided further that if, pursuant to the charter of the Corporation or these Bylaws, the vote of a majority of a particular group of directors is required for action, a quorum must also include a majority of such group. The directors present at a meeting which has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum. Section 8. VOTING. The action of the majority of the directors ------ present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable statute. Any action pertaining to a transaction involving the Corporation in which any Management Company, any director or officer of the Corporation or any Affiliate of any of the foregoing persons has an interest shall be approved in specific as to any isolated transaction or in general as to any series of similar transactions by a majority of Unaffiliated Directors who are not Affiliates of such interested party, -7- even if the non-interested Unaffiliated Directors constitute less than a quorum. In approving any such transaction or series of transactions the non-interested directors must determine that (a) the transaction as contemplated is fair as to the Corporation and its stockholders at the time it is authorized, approved or ratified; (b) if an acquisition of property other than mortgage loans is involved, the total consideration is not in excess of the appraised value of such property being acquired; and (c) if the transaction involves compensation to any Management Company or its Affiliates for services rendered in capacities other than contemplated by the management arrangements, to the knowledge of the directors such compensation is not greater than the customary charges for comparable services generally available from other competent unaffiliated persons. Section 9. TELEPHONE MEETINGS. Directors may participate in a ------------------ meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 10. INFORMAL ACTION BY DIRECTORS. Any action required or ---------------------------- permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each director and such written consent is filed with the minutes of proceedings of the Board of Directors. Section 11. VACANCIES. If for any reason any or all the directors --------- cease to be directors, such event shall not terminate the Corporation or affect these Bylaws or the powers of the remaining directors hereunder (even if fewer than three directors remain). Any vacancy on the Board of Directors for any cause other than an increase in the number of directors shall be filled by a majority of the remaining directors, even if such majority is less than a quorum. Any vacancy in the number of directors created by an increase in the number of directors may be filled by a majority vote of the entire Board of Directors. The vacancy for any reason of any directorship previously held by an Unaffiliated Director shall be filled by a majority vote of the remaining members of the Board of Directors including a majority vote of the remaining Unaffiliated Directors. Any individual so elected as director shall hold office until the next annual meeting of stockholders and until his successor is elected and qualifies. Section 12. COMPENSATION. Directors shall not receive any stated ------------ salary for their services as directors but, by resolution of the Board of Directors, may receive compensation per year and/or per meeting and/or per visit to real property or other facilities owned or leased by the Corporation and for any service or activity they performed or engaged in as directors. Directors may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Board of Directors or of any committee thereof and for their expenses, if any, in connection with each property visit and any other service or activity they performed or engaged in as directors; but nothing herein contained shall be -8- construed to preclude any directors from serving the Corporation in any other capacity and receiving compensation therefor. Section 13. LOSS OF DEPOSITS. No director shall be liable for any ---------------- loss which may occur by reason of the failure of the bank, trust company, savings and loan association, or other institution with whom moneys or stock have been deposited. Section 14. SURETY BONDS. Unless required by law, no director shall ------------ be obligated to give any bond or surety or other security for the performance of any of his duties. Section 15. RELIANCE. Each director, officer, employee and agent of -------- the Corporation shall, in the performance of his duties with respect to the Corporation, be fully justified and protected with regard to any act or failure to act in reliance in good faith upon the books of account or other records of the Corporation, upon an opinion of counsel or upon reports made to the Corporation by any of its officers or employees or by the adviser, accountants, appraisers or other experts or consultants selected by the Board of Directors or officers of the Corporation, regardless of whether such counsel or expert may also be a director. Section 16. INVESTMENT POLICIES AND RESTRICTIONS. The investment ------------------------------------ policies of the Corporation and the restrictions thereon shall be established from time to time by the Board of Directors, including a majority of the Unaffiliated Directors; provided, however, that the investment policies of the Corporation and the limitations thereon shall be at all times in compliance with the restrictions applicable to real estate investment trusts pursuant to the Internal Revenue Code of 1986, as it may be amended from time to time. The Unaffiliated Directors shall review the investment policies of the Corporation at least annually to determine that the policies then being followed by the Corporation are in the best interests of its stockholders. Each such determination and the basis therefor shall be set forth in the minutes of the Board of Directors. Section 17. MANAGEMENT AGREEMENTS. The Board may delegate the duty --------------------- of management of the assets and the administration of the Corporations' day-to- day operations to a Management Company pursuant to a written contract or contracts, or any renewal thereof, which have obtained the requisite approvals of the Board of Directors, including a majority of the Unaffiliated Directors, or the stockholders of the Corporation, as provided in the charter of the Corporation. The approval of any agreement with a Management Company shall require the affirmative vote of a majority of the Unaffiliated Directors and the renewal or termination thereof shall require the affirmative vote of a majority of the Unaffiliated Directors or a vote of the holders of a majority of the outstanding shares of common stock of the Corporation. The Board of Directors shall evaluate the performance of the Management Company before entering into or renewing any management arrangement. The minutes of the meetings with respect to such evaluation shall reflect the criteria used by the Board of Directors in making such evaluation. Upon any termination of the initial management arrangement reflected in the initial registration statement of this Corporation's public offering of securities, the Board of Directors shall determine that any successor -9- Management Company possesses sufficient qualifications (a) to perform the management function for the Corporation and (b) to justify the compensation provided for in its contract with the Corporation. Each extension of the contract for the services of a Management Company entered into by the Board of Directors shall have a term of no more than one year, but may be renewed annually at or prior to the expiration of the contract. Each contract shall provide that it is terminable by a majority of the Unaffiliated Directors on sixty (60) days' prior written notice without cause. The Unaffiliated Directors shall determine at least annually that the compensation which the Corporation contracts to pay the Management Company is reasonable in relation to the nature and quality of services performed and shall also supervise performance of the Management Company and the compensation paid to it by the Corporation to determine that the provisions of such contract are being carried out. Each such determination shall be based upon the following factors and all other factors the Unaffiliated Directors may deem relevant and the findings of the Unaffiliated Directors on each of such factors shall be recorded in the minutes of the Board of Directors: (a) The size of management fee in relation to the size, compensation and profitability for the investment portfolio of the Corporation; (b) The success of the Management Company in generating opportunities that meet the investment objectives of the Corporation; (c) The rates charged to other corporations similar to the Corporation and to other investors by advisers performing similar services; (d) Additional revenues realized by the Management Company and its Affiliates through their relationship with the Corporation, including loan administration, underwriting or broker commissions, servicing, engineering, inspection and other fees, whether paid by the Corporation or by others with whom the Corporation does business; (e) The quality and extent of service and advice furnished to the Corporation; (f) The performance of the investment portfolio of the Corporation, including income, conservation or appreciation of capital, frequency of problem investments and competence in dealing with distress situations; and (g) The quality of the investment portfolio of the Corporation in relationship to the investments generated by the Management Company for its own account. -10- ARTICLE IV COMMITTEES Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of --------------------------------- Directors may appoint from among its members an Executive Committee, an Audit Committee, a Compensation Committee and other committees, composed of one or more directors, to serve at the pleasure of the Board of Directors. At least a majority of the members of any such committee shall be composed of Unaffiliated Directors. Section 2. POWERS. The Board of Directors may delegate to ------ committees appointed under Section 1 of this Article any of the powers of the Board of Directors, except as prohibited by law. Section 3. MEETINGS. Notice of committee meetings shall be given -------- in the same manner as notice for special meetings of the Board of Directors. A majority of the members of the committee shall constitute a quorum for the transaction of business at any meeting of the committee. The act of a majority of the committee members present at a meeting shall be the act of such committee. The Board of Directors may designate a chairman of any committee, and such chairman or any two members of any committee may fix the time and place of its meeting unless the Board shall otherwise provide. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint another director to act in the place of such absent member. Each committee shall keep minutes of its proceedings. Section 4. TELEPHONE MEETINGS. Members of a committee of the Board ------------------ of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or ----------------------------- permitted to be taken at any meeting of a committee of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each member of the committee and such written consent is filed with the minutes of proceedings of such committee. Section 6. VACANCIES. Subject to the provisions hereof, the Board --------- of Directors shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member or to dissolve any such committee. ARTICLE V OFFICERS Section 1. GENERAL PROVISIONS. The officers of the Corporation ------------------ shall include a chief executive officer, a president, a secretary and a treasurer and may include a chairman of the board, -11- a vice chairman of the board, one or more vice presidents, a chief operating officer, a chief financial officer, one or more assistant secretaries and one or more assistant treasurers. In addition, the Board of Directors may from time to time appoint such other officers with such powers and duties as they shall deem necessary or desirable. The officers of the Corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of stockholders, except that the chief executive officer may appoint one or more vice presidents, assistant secretaries and assistant treasurers. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his successor is elected and qualifies or until his death, resignation or removal in the manner hereinafter provided. Any two or more offices except president and vice president may be held by the same person. In its discretion, the Board of Directors may leave unfilled any office except that of president, treasurer and secretary. Election of an officer or agent shall not of itself create contract rights between the Corporation and such officer or agent. Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the ----------------------- Corporation may be removed by the Board of Directors if in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer of the Corporation may resign at any time by giving written notice of his resignation to the Board of Directors, the chairman of the board, the president or the secretary. Any resignation shall take effect at any time subsequent to the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. Such resignation shall be without prejudice to the contract rights, if any, of the Corporation. Section 3. VACANCIES. A vacancy in any office may be filled by the --------- Board of Directors for the balance of the term. Section 4. CHIEF EXECUTIVE OFFICER. The Board of Directors may ----------------------- designate a chief executive officer. In the absence of such designation, the chairman of the board shall be the chief executive officer of the Corporation. The chief executive officer shall have general responsibility for implementation of the policies of the Corporation, as determined by the Board of Directors, and for the management of the business and affairs of the Corporation. Section 5. CHIEF OPERATING OFFICER. The Board of Directors may ----------------------- designate a chief operating officer. The chief operating officer shall have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer. Section 6. CHIEF FINANCIAL OFFICER. The Board of Directors may ----------------------- designate a chief financial officer. The chief financial officer shall have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer. Section 7. CHAIRMAN OF THE BOARD. The Board of Directors shall --------------------- designate a chairman of the board. The chairman of the board shall preside over the meetings of the Board of -12- Directors and of the stockholders at which he shall be present. The chairman of the board shall perform such other duties as may be assigned to him or them by the Board of Directors. Section 8. PRESIDENT. The president or chief executive officer, as --------- the case may be, shall in general supervise and control all of the business and affairs of the Corporation. In the absence of a designation of a chief operating officer by the Board of Directors, the president shall be the chief operating officer. He may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Board of Directors from time to time. Section 9. VICE PRESIDENTS. In the absence of the president or in --------------- the event of a vacancy in such office, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president; and shall perform such other duties as from time to time may be assigned to him by the president or by the Board of Directors. The Board of Directors may designate one or more vice presidents as executive vice president or as vice president for particular areas of responsibility. Section 10. SECRETARY. The secretary shall (a) keep the minutes of --------- the proceedings of the stockholders, the Board of Directors and committees of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation; (d) keep a register of the post office address of each stockholder which shall be furnished to the secretary by such stockholder; (e) have general charge of the share transfer books of the Corporation; and (f) in general perform such other duties as from time to time may be assigned to him by the chief executive officer, the president or by the Board of Directors. Section 11. TREASURER. The treasurer shall have the custody of the --------- funds and securities of the Corporation and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. In the absence of a designation of a chief financial officer by the Board of Directors, the treasurer shall be the chief financial officer of the Corporation. The treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and Board of Directors, at the regular meetings of the Board of Directors or whenever it may so require, an account of all his transactions as treasurer and of the financial condition of the Corporation. -13- If required by the Board of Directors, the treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, moneys and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The ---------------------------------------------- assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or treasurer, respectively, or by the president or the Board of Directors. The assistant treasurers shall, if required by the Board of Directors, give bonds for the faithful performance of their duties in such sums and with such surety or sureties as shall be satisfactory to the Board of Directors. Section 13. SALARIES. The salaries and other compensation of the -------- officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary or other compensation by reason of the fact that he is also a director. ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 1. CONTRACTS. The Board of Directors may authorize any --------- officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document executed by one or more of the directors or by an authorized person shall be valid and binding upon the Board of Directors and upon the Corporation when authorized or ratified by action of the Board of Directors. Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders ----------------- for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or agent of the Corporation in such manner as shall from time to time be determined by the Board of Directors. Section 3. DEPOSITS. All funds of the Corporation not otherwise -------- employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may designate. -14- ARTICLE VII STOCK Section 1. CERTIFICATES. Each stockholder shall be entitled to a ------------ certificate or certificates which shall represent and certify the number of shares of each class of stock held by him in the Corporation. Each certificate shall be signed by the chief executive officer, the president or a vice president and countersigned by the secretary or an assistant secretary or the treasurer or an assistant treasurer and may be sealed with the seal, if any, of the Corporation. The signatures may be either manual or facsimile. Certificates shall be consecutively numbered; and if the Corporation shall, from time to time, issue several classes of stock, each class may have its own number series. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. Each certificate representing shares which are restricted as to their transferability or voting powers, which are preferred or limited as to their dividends or as to their allocable portion of the assets upon liquidation or which are redeemable at the option of the Corporation, shall have a statement of such restriction, limitation, preference or redemption provision, or a summary thereof, plainly stated on the certificate. If the Corporation has authority to issue stock of more than one class, the certificate shall contain on the face or back a full statement or summary of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of each class of stock and, if the Corporation is authorized to issue any preferred or special class in series, the differences in the relative rights and preferences between the shares of each series to the extent they have been set and the authority of the Board of Directors to set the relative rights and preferences of subsequent series. In lieu of such statement or summary, the certificate may state that the Corporation will furnish a full statement of such information to any stockholder upon request and without charge. If any class of stock is restricted by the Corporation as to transferability, the certificate shall contain a full statement of the restriction or state that the Corporation will furnish information about the restrictions to the stockholder on request and without charge. Section 2. TRANSFERS. Upon surrender to the Corporation or the --------- transfer agent of the Corporation of a stock certificate duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland. Notwithstanding the foregoing, transfers of shares of any class of stock will be subject in all respects to the charter of the Corporation and all of the terms and conditions contained therein. -15- Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the ----------------------- Board of Directors may direct a new certificate to be issued in place of any certificate previously issued by the Corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing the issuance of a new certificate, an officer designated by the Board of Directors may, in his discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or the owner's legal representative to advertise the same in such manner as he shall require and/or to give bond, with sufficient surety, to the Corporation to indemnify it against any loss or claim which may arise as a result of the issuance of a new certificate. Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The -------------------------------------------------- Board of Directors may set, in advance, a record date for the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or determining stockholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to make a determination of stockholders for any other proper purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than 90 days and, in the case of a meeting of stockholders, not less than ten days, before the date on which the meeting or particular action requiring such determination of stockholders of record is to be held or taken. In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not longer than 20 days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed for at least ten days before the date of such meeting. If no record date is fixed and the stock transfer books are not closed for the determination of stockholders, (a) the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day on which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (b) the record date for the determination of stockholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the directors, declaring the dividend or allotment of rights, is adopted. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof, except when (i) the determination has been made through the closing of the transfer books and the stated period of closing has expired or (ii) the meeting is adjourned to a date more than 120 days after the record date fixed for the original meeting, in either of which case a new record date shall be determined as set forth herein. Section 5. STOCK LEDGER. The Corporation shall maintain at its ------------ principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate share ledger containing the name and address of each stockholder and the number of shares of each class held by such stockholder. -16- Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of ----------------------------------- Directors may issue fractional stock or provide for the issuance of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the charter or these Bylaws, the Board of Directors may issue units consisting of different securities of the Corporation. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Corporation, except that the Board of Directors may provide that for a specified period securities of the Corporation issued in such unit may be transferred on the books of the Corporation only in such unit. ARTICLE VIII ACCOUNTING YEAR The Board of Directors shall have the power, from time to time, to fix the fiscal year of the Corporation by a duly adopted resolution. ARTICLE IX DISTRIBUTIONS Section 1. AUTHORIZATION. Dividends and other distributions upon ------------- the stock of the Corporation may be authorized and declared by the Board of Directors, subject to the provisions of law and the charter of the Corporation. Dividends and other distributions may be paid in cash, property or stock of the Corporation, subject to the provisions of law and the charter. Section 2. CONTINGENCIES. Before payment of any dividends or other ------------- distributions, there may be set aside out of any assets of the Corporation available for dividends or other distributions such sum or sums as the Board of Directors may from time to time, in its absolute discretion, think proper as a reserve fund for contingencies, for equalizing dividends or other distributions, for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors shall determine to be in the best interest of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X INVESTMENT POLICY Subject to the provisions of the charter of the Corporation, the Board of Directors, including a majority of the Unaffiliated Directors, may from time to time adopt, amend, revise or terminate any policy or policies with respect to investments by the Corporation as it shall deem appropriate in its sole discretion. -17- ARTICLE XI SEAL Section 1. SEAL. The Board of Directors may authorize the adoption ---- of a seal by the Corporation. The seal shall contain the name of the Corporation and the year of its incorporation and the words "Incorporated Maryland." The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or ------------- required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Corporation. ARTICLE XII INDEMNIFICATION AND ADVANCE OF EXPENSES To the maximum extent permitted by Maryland law in effect from time to time, the Corporation shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, shall pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any individual who is a present or former director or officer of the Corporation and 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 Corporation and at the request of the Corporation, serves or has served another corporation, real estate investment trust, partnership, joint venture, limited liability company, trust, employee benefit plan or any other enterprise as a director, officer, partner, member or trustee of such corporation, real estate investment trust, partnership, joint venture, limited liability company, 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 Corporation may, with the approval of its Board of Directors, provide such indemnification and advance for expenses to a person who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation. Neither the amendment nor repeal of this Article XII, nor the adoption or amendment of any other provision of the Bylaws or charter of the Corporation inconsistent with this Article XII, shall apply to or affect in any respect the applicability of the preceding paragraph with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. -18- ARTICLE XIII WAIVER OF NOTICE Whenever any notice is required to be given pursuant to the charter of the Corporation or these Bylaws or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE XIV AMENDMENT OF BYLAWS The Board of Directors shall have the exclusive power to adopt, alter or repeal any provision of these Bylaws and to make new Bylaws. -19- CERTIFICATE OF SECRETARY OF IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. I, the undersigned, do hereby certify: 1. That I am the duly elected and acting Secretary of Imperial Credit Commercial Holdings, Inc. 2. That the foregoing Bylaws constitute the Bylaws of said corporation as adopted by the Board of Directors of said corporation by Unanimous Written Consent dated February 3, 1997. IN WITNESS WHEREOF, I have hereunto subscribed my name this 3rd day of February, 1997. /s/ Richard J. Johnson ----------------------------------------------- Richard Johnson -20- EX-4.2 5 FORM OF SUBSCRIPTION NOTIFICATION CERTIFICATE EXHIBIT 4.2 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. SUBSCRIPTION RIGHTS OFFERING NOTICE OF GUARANTEED DELIVERY TIME SENSITIVE--THIS OFFER EXPIRES ON JULY __, 1997 As set forth in the Prospectus under "THE OFFERING--Method of Exercise of Subscription Rights" and "--Payment for ICH Shares," this form or one substantially equivalent hereto may be used by a New York Stock Exchange member or a bank or trust company with an office or correspondent in the United States as a means of effecting a subscription on behalf of an IMH Holder pursuant to the subscription rights offering (the "Offer") of shares of Common Stock (the "ICH Shares") of the Imperial Credit Commercial Holdings, Inc. (the "Company"). Such form must be delivered by hand, sent by facsimile transmission, overnight courier or first-class mailed to the Subscription Agent prior to 5:00 P.M., New York City time, on July __, 1997 (the "Expiration Date"). However, if sent by facsimile, the original executed form must be sent promptly thereafter by hand or mail delivery. The Subscription Agent for the Offer Is: BankBoston, N.A. By Mail: Facsimile Transmission: By Overnight Courier Boston EquiServe LP (for Eligible Institutions Only) BankBoston, N.A. Attn: Corporation Reorganization (617) 794-6333 Attn: Corporate Reorganization P.O. Box 9061 For Facsimile Confirmation Telephone: c/o Boston EquiServe LP Boston, Massachusetts 02205-8686 (617) 794-6388 70 Campenelli Drive Braintree, Massachusetts 02184
For information on this Offer call Shareholder Communications Corp., toll free at (800) ___-____. DELIVERY OF THIS NOTICE TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY TO THE DEPOSITARY. This notice specifies the number of ICH Shares subscribed for under both the Primary Subscription Privilege and Over-Subscription Privilege, and guarantees ICH delivery of confirmed exercise instructions electronically or by a form of the enclosed Beneficial Owner Certificate, no later than the close of business on July __, 1997. Failure to deliver such exercise instructions will result in an IMH Holder's forfeiture of the Subscription Rights. In the event that the ICH Shares are prorated pursuant to the Over-Subscription Privilege or in connection with the Maximum Offer Amount, a portion of the payment of the Subscription Price will be refunded to IMH Holders by the Subscription Agent. If any IMH Holder exercises his or her right to acquire ICH Shares pursuant to the Over-Subscription Privilege, any such excess payment which would otherwise be refunded to such IMH Holder will be applied by the Company toward payment for additional ICH Shares acquired pursuant to exercise of the Over-Subscription Privilege. Broker Assigned Control #_______________ IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. GUARANTEE The undersigned, a member of the New York Stock Exchange or a bank or trust company having an office or correspondent in the United States, guarantees to the Subscription Agent delivery of confirmed exercise instructions by the close of business on July __, 1997 in connection with the exercise of Subscription Rights to acquire ICH Shares at the Subscription Price of $15,00 per ICH Share. Payment of the aggregate Subscription Price, determined as set forth below, is due by the close of business on July __, 1997 (the "Expiration Date").
Payment amount based on the Subscription Price of $15.00 per ICH Share ----------------------------- 1. Primary Subscription Privilege: Number of Subscription Number of Primary Subscription Rights to be exercised: ICH Shares subscribed for: _______ _______ ICH Shares x $15.00 = $ __________ 2. Over-Subscription Privilege: Number of Over-Subscription ICH Shares subscribed for: _______ ICH Shares x $15.00 = $ __________ 3. Total: Total number of ICH Shares subscribed for: Total payment amount: _______ ICH Shares x $15.00 = $ __________
- -------------- How will you exercise the Subscription Rights on behalf of the beneficial owners? (circle one) A. Through DTC or another depository OR B. By delivery of a Subscription Notification Certificate directly to the Subscription Agent. Indicate the Subscription Notification Certificate Number for Each Applicable IMH Holder: - ------------------------------------ - ------------------------------------ - ------------------------------------ - ------------------------------------ - ------------------------------------ ------------------------------------- Name of Firm Authorized Signature - ------------------------------------ ------------------------------------- DTC Participant Number Title - ------------------------------------ ------------------------------------- Address Name (Please Type or Print) - ------------------------------------ ------------------------------------- City State Zip Code Phone Number - ------------------------------------ ------------------------------------- Contact Name Date IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. SUBSCRIPTION RIGHTS OFFERING SHAREHOLDER SUBSCRIPTION NOTIFICATION CERTIFICATE AND EXERCISE FORM VOID IF NOT RECEIVED BY THE SUBSCRIPTION AGENT BEFORE 5:00 P.M., NEW YORK CITY TIME ON JULY __, 1997 As the registered owner of this Subscription Notification Certificate, you have been granted Subscription Rights, based on the number of IMH Shares you owned on June __, 1997 (the "Record Date"), to subscribe for the number of ICH Shares of the Company shown on the reverse of this Certificate. Under the Primary Subscription Privilege, you may subscribe for one ICH Share for every IMH Share held on the Record Date. The Subscription Price per ICH Share will be $15.00 per ICH Share. Pursuant to the Over-Subscription Privilege, you may subscribe for any number of additional ICH Shares (to the extent available), provided you have exercised all the Subscription Rights. METHOD OF EXERCISE OF RIGHTS To exercise your Subscription Rights, subscribe for ICH Shares and calculate the payment for such ICH Shares, you must either (i) complete Sections 1 and 2 (and, if applicable, Section 3) of the Exercise Form on the reverse of this Subscription Notification Certificate, and deliver the Subscription Notification Certificate and payment for the ICH Shares to the Subscription Agent by one of the methods described below or (ii) deliver payment for the ICH Shares and a properly completed Notice of Guaranteed Delivery to the Subscription Agent by one of the methods described below, in either case prior to 5:00 P.M., New York City time, on the Expiration Date. See the Prospectus for more details. The Subscription Agent for this Offer Is: BankBoston, N.A. By Mail: Facsimile Transmission: By Overnight Courier Boston EquiServe LP (for Eligible Institutions Only) BankBoston, N.A. Attn: Corporate Reorganization (617) 794-6333 Attn: Corporate Reorganization P.O. Box 9061 For Facsimile Confirmation Telephone: c/o Boston EquiServe LP Boston, Massachusetts 02205-8686 (617) 794-6388 70 Campenelli Drive Braintree, Massachusetts 02184
For information on this Offer call Shareholder Communications Corp., toll free at (800) ___-____. DELIVERY OF THIS CERTIFICATE TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY TO THE SUBSCRIPTION AGENT. Initial confirmation notices will be sent to IMH Holders by July __, 1997 (the "Initial Confirmation Date"). SUBSCRIPTION RIGHTS TO PURCHASE ICH SHARES ARE NON-TRANSFERABLE Any questions regarding the Offer may be directed to the Information Agent, Shareholder Communications Corp., toll free at (800) ___-____. TAX ID NUMBER --------------------- Subscription Notification Certificate No. --------------------- Account No. --------------------- Subscription Rights Represented by this Certificate --------------------- Primary Subscription ICH Shares Available --------------------- SECTION 1: DETAILS OF SUBSCRIPTION-PLEASE PRINT ALL INFORMATION CLEARLY AND LEGIBLY - -------------------------------------------------------------------------------- IF YOU WISH TO SUBSCRIBE FOR ALL OF THE ICH SHARES YOU ARE ENTITLED TO PURCHASE: A. I wish to subscribe for all of the ____________ x $15.00 = $___________ ICH Shares I am entitled to (Total number Payment Amount purchase under the Primary of ICH Shares Subscription Privilege entitled to be purchased) B. I wish to subscribe for additional + __________ x $15.00 = $___________ ICH Shares, if available, pursuant (Number of Payment Amount to the Over-Subscription Privilege. over-subscription ICH Shares to be purchased) TOTAL AMOUNT = $___________ ENCLOSED + You may only purchase additional ICH Shares pursuant to the Over-Subscription Privilege if you have fully exercised the Subscription Rights under the Primary Subscription Privilege. - -------------------------------------------------------------------------------- IF YOU DO NOT WISH TO SUBSCRIBE FOR ALL OF THE ICH SHARES YOU ARE ENTITLED TO PURCHASE: C. I wish to subscribe only for the ____________ x $15.00 = $___________ following number of ICH Shares (Number of Payment Amount under the Primary Subscription ICH Shares to Privilege. be purchased) TOTAL AMOUNT = $___________ ENCLOSED SECTION 2: CERTIFICATION - -------------------------------------------------------------------------------- I acknowledge that I have received the Prospectus, for this Offer, and I hereby irrevocably subscribe for the number of ICH Shares indicated above on the terms and conditions set forth in the Prospectus. I hereby agree that if I fail to pay the full Subscription Price for the ICH Shares I have subscribed for, the Company may exercise any of its remedies, as noted in the Prospectus. --------------------------------- Name and Signature of IMH Holder(s) --------------------------------- Please provide your telephone number --------------------------------- --------------------------------- If you wish to have your ICH Shares and refund check (if any) delivered to an address other than the address of record listed on the top of this card, you must have your signature guaranteed by a member of the New York Stock Exchange or by a bank or trust company with an office or correspondent in the United States and provide the delivery address below. Please check below if your address of record should be changed to this address permanently: Delivery Address: Change my address of record to such ----------------------------------- delivery address [_] ----------------------------------- ----------------------------------- - ------------------------------------------------------------------------------- SECTION 3: DESIGNATION OF BROKER/DEALER - -------------------------------------------------------------------------------- The following broker/dealer is hereby designated as having been instrumental in my exercise of Subscription Rights pursuant to this Offer: FIRM:___________________________________________________________________________ BROKER/DEALER NAME:_____________________________________________________________ BROKER/DEALER NUMBER:___________________________________________________________ - -------------------------------------------------------------------------------- NOMINEE HOLDER OVER-SUBSCRIPTION FORM IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. SUBSCRIPTION RIGHTS DTC PARTICIPANT OVER-SUBSCRIPTION FORM NOMINEE HOLDER OVER-SUBSCRIPTION FORM PLEASE COMPLETE ALL APPLICABLE INFORMATION The Subscription Agent for the Offer Is: BankBoston, N.A. By Mail: Facsimile Transmission: By Overnight Courier Boston EquiServe LP (for Eligible Institutions Only) BankBoston, N.A. Attn: Corporate Reorganization (617) 794-6333 Attn: Corporate Reorganization P.O. Box 9061 For Facsimile Confirmation Telephone: c/o Boston EquiServe LP Boston, Massachusetts 02205-8686 (617) 794-6388 70 Campenelli Drive Braintree, Massachusetts 02184
For information on this Offer call Shareholder Communications, Corp., toll free at (800) ___-____. DELIVERY OF THIS FORM TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY TO THE DEPOSITARY. THIS FORM IS TO BE USED ONLY BY NOMINEE HOLDERS TO EXERCISE THE OVER-SUBSCRIPTION PRIVILEGE IN RESPECT OF SUBSCRIPTION RIGHTS WITH RESPECT TO WHICH THE OVER-SUBSCRIPTION PRIVILEGE WAS EXERCISED AND DELIVERED THROUGH THE FACILITIES OF A COMMON DEPOSITORY. ALL OTHER EXERCISES OF OVER-SUBSCRIPTION PRIVILEGES MUST BE EFFECTED BY DELIVERY OF THE SUBSCRIPTION NOTIFICATION CERTIFICATE. -------------------- THE TERMS AND CONDITIONS OF THE OFFERING OF ICH SHARES ARE SET FORTH IN THE COMPANY'S PROSPECTUS DATED JUNE __, 1997 (THE "PROSPECTUS") AND ARE INCORPORATED HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM THE INFORMATION AGENT. -------------------- VOID, UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL BY 5:00 P.M., NEW YORK CITY TIME, ON JULY __, 1997 (THE "EXPIRATION DATE"). -------------------- 1. The undersigned hereby certifies to the Subscription Agent that it is a participant in (the "Depository") and that it has either (i) exercised the Over-Subscription Privilege in respect of Subscription Rights and delivered such exercised Subscription Rights to the Subscription Agent by means of transfer to the Depositary Account of the Fund or (ii) delivered to the Subscription Agent a Notice of Guaranteed Delivery in respect of the exercise of the Over- Subscription Privilege and will deliver the Subscription Rights called for in such Notice of Guaranteed Delivery to the Subscription Agent by means of transfer to such Depository Account of the Fund. 2. The undersigned hereby exercised the Over-Subscription Privilege to purchase, to the extent available, ICH Shares and certifies to the Subscription Agent that such Over-Subscription Privilege is being exercised for the account or accounts of persons (which may include the undersigned) on whose behalf all Primary Subscription Privileges have been exercised.* 3. The undersigned understands that payment of the Subscription Price per Share for each ICH Share subscribed for pursuant to the Over- Subscription Privilege must be received by the Subscription Agent at or before 5:00 P.M. New York City time on the Expiration Date and represents that such payment, in the aggregate amount of $ , either (check appropriate box): [_] is being delivered to the Subscription Agent herewith, or has been delivered separately to the Subscription Agent; [_] and is or was delivered in the manner set forth below (check appropriate box and complete information relating thereto): [_] uncertified check [_] certified check [_] bank draft - ------------------------------------- ------------------------------------- Over-Subscription Confirmation Number Name of Nominee Holder - ------------------------------------- ------------------------------------- Depository Participant Number Address Contact Name: ------------------------ ------------------------------------- City State Zip Code Phone Number: By: ------------------------ ---------------------------------- Dated: , 1996 Name: ------------------------- -------------------------------- Title: ------------------------------- - -------------------- * PLEASE ATTACH A BENEFICIAL OWNER CERTIFICATION CONTAINING THE RECORD DATE IMH SHARE POSITION, THE NUMBER OF PRIMARY SUBSCRIPTION ICH SHARES SUBSCRIBED FOR AND THE NUMBER OF ICH SHARES REQUESTED IN THE OVER- SUBSCRIPTION PRIVILEGE, BY EACH SUCH OWNER. IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. BENEFICIAL OWNER CERTIFICATION The undersigned, a bank, broker or other nominee holder of Subscription Rights to purchase ICH Shares of Imperial Credit Commercial Holdings, Inc. (the "Company") pursuant of the rights offering (the "Offer") described and provided for in the Company's Prospectus dated June __, 1997, (the "Prospectus"), hereby certifies to the Company and to BankBoston, N.A., as Subscription Agent for such Offer, that for each numbered line filled in below the undersigned has exercised, on behalf of the beneficial owner thereof (which may be the undersigned), the number of Subscription Rights specified on such line pursuant to the Primary Subscription Privilege (as defined in the Prospectus) and such beneficial owner wishes to subscribe for the purchase of additional ICH Shares pursuant to the Over-Subscription Privilege (as defined in the Prospectus), in the amount set forth in the third column of such line:
Number of Shares Number of Subscription Privileges Requested Exercised Pursuant to Pursuant to Primary Over-Subscription Record Date Shares Subscription Privilege Privilege ------------------ ---------------------- --------- (1) ------------------------------------ ------------------------------------ ------------------------------------ (2) ------------------------------------ ------------------------------------ ------------------------------------ (3) ------------------------------------ ------------------------------------ ------------------------------------ (4) ------------------------------------ ------------------------------------ ------------------------------------ (5) ------------------------------------ ------------------------------------ ------------------------------------ (6) ------------------------------------ ------------------------------------ ------------------------------------ (7) ------------------------------------ ------------------------------------ ------------------------------------ (8) ------------------------------------ ------------------------------------ ------------------------------------ (9) ------------------------------------ ------------------------------------ ------------------------------------ (10) ------------------------------------ ------------------------------------ ------------------------------------
- ------------------------------------ Name of Nominee Holder By: --------------------------------- Name: Title: Provide the following information if applicable: Name of Broker: - ------------------------------------ --------------------- Depository Trust Corporation ("DTC") Participant Number Address: - ------------------------------------ ---------------------------- DTC Primary Subscription Confirmation Number(s) EX-5.1 6 OPINION OF FRESHMAN MARANTZ EXHIBIT 5.1 [LETTERHEAD OF FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN] June 10, 1997 Imperial Credit Commercial Holdings, Inc. 20371 Irvine Avenue Santa Ana Heights, CA 92707 Re: Imperial Credit Commercial Holdings, Inc. Registration Statement on Form S-11 SEC File No. 333-25423 Dear Sir/Madam: At your request, we have examined the Registration Statement on Form S-11 (File No. 333-25423) of Imperial Credit Commercial Holdings, Inc., a Maryland corporation (the "Company"), filed on April 18, 1997 and all Amendments thereto, (the "Registration Statement"), exhibits filed or to be filed in connection therewith and the form of prospectus contained therein, which you have filed with the Securities and Exchange Commission ("SEC") in connection with the registration of 10,039,908 shares of Common Stock, $.01 par value per share (the "Common Stock"), (the "Shares"). The Shares are to be sold to PaineWebber Incorporated and Stifel, Nicolaus & Company Incorporated as the dealer managers (the "Dealer Managers") pursuant to a Dealer Manager Agreement to be entered into by and among the Company and the Dealer Managers (the "Dealer Manager Agreement"). This opinion is delivered in accordance with the requirements of Item 601(b) (5) of Regulation S-K under the Securities Act of 1933, as amended. For purposes of this opinion, we have examined such matters of law and originals, or copies, certified or otherwise, identified to our satisfaction, of such documents, corporate records and other instruments as we have deemed necessary. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted to us as certified, photostatic or conformed copies, and the authenticity of the originals of all such latter documents. We have also assumed the due execution and delivery of all documents where due execution and delivery are prerequisites to the effectiveness thereof. We have relied upon certificates of public officials and certificates of officers of the Company for the accuracy of material, factual matters contained therein which were not independently established. Imperial Credit Corporation Holdings, Inc. June 10, 1997 Page 2 Based upon the foregoing and all other instruments, documents and matters examined for the rendering of this opinion, it is our opinion that: (1) subject to effectiveness of the Registration Statement with the SEC (such Registration Statement as amended and finally declared effective, and the form of Prospectus contained therein or subsequently filed pursuant to Rule 430A or 424 under the Securities Act of 1933, as amended, being hereinafter referred to as the "Registration Statement" and the "Prospectus", respectively) and to registration or qualification under the securities laws of the states in which the securities may be sold, upon the sale and issuance of the Shares in the manner referred to in the Registration Statement and in accordance with the terms of the Dealer Manager Agreement, and upon payment therefor, the Shares will be legally issued, fully paid and nonassessable shares of the Common Stock of the Company. With respect to the opinion set forth above, we have relied upon the opinion of Ballard Spahr Andrews & Ingersoll, dated the date hereof, a copy of which has been delivered to you, as to matters of Maryland law. We express no opinion as to the applicability or effect of any laws, orders or judgments of any state or jurisdiction other than federal securities laws and the substantive laws of the State of California. Further, our opinion is based solely upon existing laws, rules and regulations, and we undertake no obligation to advise you of any changes that may be brought to our attention after the date hereof. We consent to the use of our name under the caption "Legal Matters", in the Prospectus, constituting part of the Registration Statement, and to the filing of this opinion as an exhibit to the Registration Statement. By giving you this opinion and consent, we do not admit that we are experts with respect to any part of the Registration Statement or Prospectus within the meaning of the term "expert" as used in Section 11 of the Securities Act of 1933, as amended, or the rules and regulations promulgated Imperial Credit Corporation Holdings, Inc. June 10, 1997 Page 3 thereunder by the SEC, nor do we admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended. Very truly yours, /s/ Freshman, Marantz, Orlanski, Cooper & Klein ----------------------------------------------- Freshman, Marantz, Orlanski, Cooper & Klein EX-5.2 7 OPINION OF BALLARD SPAHR EXHIBIT 5.2 [LETTERHEAD OF BALLARD SPAHR ANDREWS & INGERSOLL] FILE NUMBER 846533 June 10, 1997 Imperial Credit Commercial Holdings, Inc. 20371 Irvine Avenue Santa Ana Heights, California 92707 Re: Registration Statement on Form S-11 Registration No. 333-25423 ----------------------------------- Ladies and Gentlemen: We have served as Maryland counsel to Imperial Credit Commercial Holdings, Inc., a Maryland corporation (the "Company"), in connection with certain matters of Maryland law arising out of the registration of up to 10,039,908 shares (the "Shares") of Common Stock, $.01 par value per share, of the Company ("Common Stock"), covered by the above-referenced Registration Statement, and all amendments thereto (the "Registration Statement"), filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "1933 Act"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned to them in the Registration Statement. In connection with our representation of the Company, and as a basis for the opinion hereinafter set foth, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following documents (collectively, the "Documents"): 1. The Registration Statement and the related form of prospectus inlcuded therein in the form in which it was transmitted to the Commission under the 1933 Act: Imperial Credit Commercial Holdings, Inc. June 10, 1997 Page 2 2. The charter of the Company (the "Charter"), certified as of a recent date by the State Department of Assessments and Taxation of Maryland (the "SDAT"): 3. The Bylaws of the Company, certified as of a recent date by its Secretary; 4. Resolutions adopted by the Board of Directors of the Company (the "Board") relating to the sale, issuance and registration of the Shares, certified as of a recent date by the Secretary of the Company (the "Resolutions"); 5. The form of certificate representing a share of Common Stock, certified as of a recent date by the Secretary of the Company; 6. A certificate of the SDAT, dated June 10, 1997, as to the good standing of the Company; 7. A certificate executed by Richard J. Johnson, Secretary of the Company, dated June 10, 1997, and 8. Such other documents and matters as we have deemed necessary or appropriate to express the opinion set forth in this letter, subject to the assumptions, limitations and qualifications stated herein. In expressing the opinion set forth below, we have assumed, and so far as is known to us there are no facts inconsistent with, the following: 1. Each individual executing any of the Documents, whether on behalf of such individual or another person, is legally competent to do so. 2. Each individual executing any of the Documents on behalf of a party (other than the Company) is duly authorized to do so. 3. Each of the parties (other than the Company) executing any of the Documents has duly and validly executed and delivered each of the Documents to which such party is a signatory, and such party's obligations set forth therein are legal, valid and binding. Imperial Credit Commercial Holdings, Inc. June 10, 1997 Page 3 4. All Documents submitted to us as originals are authentic. All Documents submitted to us as certified or photostatic copies conform to the original documents. All signatures on all such Documents are genuine. All public records reviewed or relied upon by us or on our behalf are true and complete. All statements and information contained in the Documents are true and complete. There are no oral or written modifications or amendments to the Documents, and there has been no waiver of any of the provisions of the Documents, by action or omission the parties or otherwise. 5. The outstanding shares of stock of the Company have not been and will not be transferred in violation of any restriction or limitation contained in the Charter. The Shares will not be transferred in violation of any restriction or limitation contained in the Charter. 6. In accordance with the Resolutions, the issuance and certain terms of the Shares will be approved by the Board or a duly authorized committee thereof in accordance with the Maryland General Corporation Law (the "Corporate Proceedings"). The phrase "known to us" is limited to the actual knowledge, without independent inquiry, of the lawyers at our firm who have performed legal services in connection with the issuance of this opinion. Based upon the foregoing, and subject to the assumptions, limitations and qualifications stated herein, it is our opinion that: 1. The Company is a corporation duly incorporated and existing under and by virtue of the laws of the State of Maryland and is in good standing with the SDAT. 2. Upon the completion of all Corporate Proceedings relating to the Shares and the due execution, countersignature and delivery of certificates representing the Shares and assuming that the sum of (a) all shares of Common Stock issued as of the date hereof, (b) any shares of Common Stock issued between the date hereof and the date on which any of the Shares are actually issued (not including any of the Shares), and (c) the Shares will not exceed the total number of shares of Common Stock that the Company is authorized to issue, the Shares are duly authorized and, when and if delivered against payment therefor in accordance Imperial Credit Commercial Holdings, Inc. June 10, 1997 Page 4 with the Resolutions and all resolutions adopted in connection with the Corporate Proceedings, will be validly issued, fully paid and nonassessable. The foregoing opinion is limited to the laws of the State of Maryland and we do not express any opinion herein concerning any other law. The opinion expressed herein is subject to the effect of judicial decisions which may permit the introduction of parol evidence to modify the terms or the interpretation of agreements. We express no opinion as to compliance with the securities (or "blue sky") laws of the State of Maryland. We assume no obligation to supplement this opinion if any applicable law changes after the date hereof or if we become aware of any fact that might change the opinion expressed herein after the date hereof. This opinion is being furnished to you solely for submission to the Commission as an exhibit to the Registration Statement and, accordingly, may not be relied upon by, quoted in any manner to, or delivered to any other person or entity without, in each instance, our prior written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of the name of our firm therein. In giving this consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the 1933 Act. Very truly yours, Ballard Spahr Andrews & Ingersoll EX-10.1 8 FORM OF MANAGEMENT AGREEMENT EXHIBIT 10.1 MANAGEMENT AGREEMENT THIS AGREEMENT, entered into and made effective as of July __, 1997, the closing date of the rights offering of Common Stock on a Registration Statement Form S-11 of IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC., a Maryland corporation (the "Company"), is by and between the Company, and REIT ADVISORS, INC. (the "Manager"); WITNESSETH: WHEREAS, the Company is a recently-formed corporation that intends to be taxed as a real estate investment trust; WHEREAS, the Company operates the Long-Term Investment Operations, which invests primarily in Commercial Mortgages and CMBSs, and the Conduit Operations, conducted by Imperial Commercial Capital Corporation ("ICCC"), which originates, purchases and sells or securitizes Commercial Mortgages; WHEREAS, the Manager's personnel have substantial experience in the purchase, financing, servicing and administration of mortgage loans and mortgage securities, and the Company would like to benefit from such experience in conducting its operations; WHEREAS, in order to obtain the benefit of the Manager's experience and to enhance the success of its operations, the Company desires to retain the Manager, at competitive rates and fees, primarily to perform capital, asset and operations management services in the manner and on the terms hereinafter set forth. NOW, THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto agree as follows: 1. Definitions. Whenever used in this Agreement, the following ----------- terms, unless the context otherwise requires, shall have the following meanings: (a) "Affiliate" of any entity means (i) any person directly or indirectly owning, controlling or holding with power to vote, five percent (5%) or more of the outstanding voting securities of such entity; (ii) any person five percent (5%) or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such entity; (iii) any person directly or indirectly controlling, controlled by, or under common control with, such entity; or (iv) any officer, director, partner or employee of such entity or any person set forth in (i) - (iii) above. Any person who owns beneficially, either directly or through one or more controlled companies, more than twenty-five percent (25%) of the voting securities of any entity shall be presumed to control such entity. Any person who does not so own more than twenty-five percent (25%) of the voting securities of any entity shall be presumed not to control such entity. A natural person shall be presumed not to be a controlled entity. 1 (b) "Affiliated REIT" means any other REIT that may have been or will be affiliated with the Company or IMH and for which the Manager will provide services pursuant to a management agreement that is similar to this Agreement. (c) "Agreement" means this Management Agreement. (d) "Average Net Worth" for any period means the arithmetic average of the sum of the gross proceeds from any sale of the Company's equity securities, before deducting any underwriting discounts and commissions and other expenses and costs relative to the offering, plus the Company's retained earnings less dividends declared (without taking into account any losses incurred in prior periods) computed by taking the daily average of such values during such period. (e) "Board of Directors" means the Board of Directors of the Company. (f) "CMBSs" means (1) Pass-Through Certificates and (2) REMICs. (g) "CMO" means an adjustable or fixed-rate debt obligation (bond) that is collateralized by Commercial Mortgages or mortgage certificates and issued by private institutions. (h) "Code" means the Internal Revenue Code of 1986, as amended. (i) "Commercial Mortgages" mean commercial mortgage assets including condo-conversion, multi-family property and cooperative apartment mortgage loans on commercial real property such as industrial and warehouse properties, office buildings, retail space and shopping malls, hotels and motels, nursing homes, hospitals, congregate care facilities and senior living centers. (j) "Commitment" means the document containing the terms pursuant to which the Company purchases on a forward basis Mortgage Loans from various originators, including Affiliates of the Manager. (k) "Company" means Imperial Credit Commercial Holdings, Inc., a Maryland corporation. (l) "GAAP" means generally accepted accounting principles. (m) "Governing Instruments" means the articles of incorporation or charter, as the case may be, and bylaws of the Company or its subsidiary. (n) "ICCC" means Imperial Commercial Capital Corporation, a California corporation that conducts the Conduit Operations. 2 (o) "ICIFC" means ICI Funding Corporation, a California corporation. (p) "ICII" means Imperial Credit Industries, Inc., a California corporation. (q) "IMH" means Imperial Credit Mortgage Holdings, Inc., a Maryland corporation. (r) "Manager" means REIT Advisors, Inc., a California _________. (s) "Net Income" means the net income of the Company as determined by the Code before the Manager's incentive compensation, the deduction for dividends paid and any net operating loss deductions arising from losses in prior periods. The Company's interest expenses for borrowed money shall be deducted in calculating Net Income. (t) "Offering" means the rights offering on a Registration Statement Form S-11 of Common Stock of the Company to holders of record of IMH. (u) "Pass-Through Certificates" means securities (or interests therein) which are Qualified REIT Assets evidencing undivided ownership interests in a pool of mortgage loans, the holders of which receive a "pass- through" of the principal and interest paid in connection with the underlying mortgage loans in accordance with the holders' respective, undivided interests in the pool. Pass-Through Certificates evidence interests in loans secured by single family, but not multifamily or commercial, real estate properties. (v) "Qualified REIT Assets" means (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 ICH (other than amounts received pursuant to a dividend reinvestment plan) or (b) a public offering of debt obligations of the Company which have maturities of at least 5 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). (w) "REIT" means Real Estate Investment Trust as defined under Section 856 of the Code. (x) "REMICs" means serially maturing debt securities secured by a pool of mortgage loans, the payments on which bear a relationship to the debt securities, and the issuer of which qualifies as a Real Estate Mortgage Investment Conduit under Section 860D of the Code. (y) "Reimbursable Expenses" shall have the meaning set forth in Section 7 hereof. 3 (z) "Reimbursable Executive Amounts" means that amount which the Company will reimburse the Manager, on a dollar for dollar basis, for the actual costs of the services provided by the officers of the Company to the Manager based upon the compensation payable to them by ICIFC pursuant to employment agreements. (aa) "Return on Equity" means return calculated for any quarter by dividing the Company's Net Income for such quarter by the Company's Average Net Worth for such quarter. (bb) "Stockholders" shall mean the owners of the stock of the Company. (cc) "Ten Year U.S. Treasury Rate" for a quarterly period shall mean the arithmetic average of the weekly per annum Ten Year Average Yields published by the Federal Reserve Board during such quarter. In the event that the Federal Reserve Board does not publish a weekly per annum Ten Year Average Yield during any week in a quarter, then the Ten Year U.S. Treasury Rate for such week shall be the weekly per annum Ten Year Average Yields published by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Company for such week. In the event that the Company determines in good faith that for any reason the Company cannot determine the Ten Year U.S. Treasury Rate for any quarter as provided above, then the Ten Year U.S. Treasury Rate for such quarter shall be the arithmetic average of the per annum average yields to maturity based upon the daily closing bids during such quarter for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than securities which can, at the option of the holder, be surrendered at face value in payment of any federal estate tax) with a final maturity date not less than eight nor more than twelve years from the date of each such quotation, as chosen and for each business day (or less frequently if daily quotations shall not be generally available) in each such quarterly period in New York City to the Company by at least three recognized dealers in U.S. Government securities selected by the Company. (dd) "Unaffiliated Director" means a Director who is independent of the Company, any manager of the Company (including the Manager) and IMH and its Affiliates. 2. General Duties of the Manager. Subject to the supervision of the ----------------------------- Board of Directors, the Manager shall provide services to the Company, and to the extent directed by the Board of Directors, shall provide similar services to any subsidiary or Affiliate of the Company, which includes ICCC and may also include Affiliated REITs, as follows: (a) serve as the Company's consultant with respect to formulation of investment criteria by the Board of Directors; (b) advise as to the issuance of Commitments on behalf of the Company to purchase Commercial Mortgages or purchasing Commercial Mortgages and CMBSs meeting the investment criteria set from time to time by the Board of Directors; 4 (c) advise, negotiate and oversee the securitization of the Company's Commercial Mortgages in REMICs or CMOs and negotiate terms with rating agencies and coordinate with investment-bankers as to structure and pricing of the securities formed by the Company; (d) advise the Company in connection with and assist in its Long-Term Investment Operations; (e) furnish reports and statistical and economic research to the Company regarding the Company's activities and the services performed for the Company by the Manager; (f) monitor and provide to the Board of Directors on an on-going basis price information and other data, obtained from certain nationally- recognized dealers who maintain markets in Commercial Mortgages identified by the Board of Directors from time to time, and provide data and advice to the Board of Directors in connection with the selection and identification of such dealers. (g) provide the executive and administrative personnel, office space and services required in rendering services to the Company, which includes contracting with appropriate third parties, which may include IMH and its Affiliates, or any Affiliated REIT, to provide various services including facilities and costs related therewith, technology, management information systems, human resource administration, general ledger accounts, check processing, accounts payable and other similar operational or administrative services; (h) oversee the day-to-day operations of the Company and supervise the performance of such other administrative functions necessary in the management of the Company as directed by the Board of Directors; (i) advise and negotiate agreements on behalf of the Company with banking institutions and other lenders to provide for the short-term borrowing of funds by the Company; (j) communicate on behalf of the Company with the holders of the equity and debt securities of the Company as required to satisfy the reporting and other requirements of any governmental bodies or agencies and maintain effective relations with such holders of the Company's securities; (k) subject to an agreement executed by the Company, advise as to the designation of a servicer for those loans sold by ICCC whereby ICCC has elected not to service such loans; (l) counsel the Company in connection with policy decision to be made by the Board of Directors; 5 (m) upon request by and in accordance with the direction of the Board of Directors, invest or reinvest any money of the Company; and (n) as approved and directed by the Board of Directors, perform such other services as may be required for management and other activities relating to the assets of the Company as the Manager shall deem appropriate under the particular circumstances. 3. Additional Activities of Manager. Subject to the Non-Competition -------------------------------- Agreement by and between the Company, ICCC, IMH and ICIFC, and the Right of First Refusal Agreement by and among the Company, ICCC, the Manager, IMH and ICIFC, nothing herein shall prevent the Manager or its Affiliates from engaging in other businesses or from rendering services of any kind to any other person or entity, including investment in or advisory service to others investing in any type of real estate investment, including investments which meet the principal investment objectives of the Company, ICCC or their Affiliates. Directors, officers, employees and agents of the Manager or Affiliates of the Manager may serve as directors, officers, employees, agents, nominees or signatories for the Company, any subsidiary or Affiliate of the Company or any Affiliated REIT, to the extent permitted by its Governing Instruments, as from time to time amended, or by any resolutions duly adopted by the Board of Directors pursuant to its Governing Instruments. When executing documents or otherwise acting in such capacities for the Company, such persons shall use their respective titles in the Company. 4. Records; Confidentiality. The Manager shall maintain appropriate ------------------------ books of account and records relating to services performed hereunder, which books of account and records shall be accessible for inspection by officers of the Company or officers of any subsidiary of the Company at any time during normal business hours. The Manager agrees to keep confidential any and all information it obtains from time to time in connection with the services it renders hereunder and shall not disclose any portion thereof to non-affiliated third parties except with the prior written consent of the Company, any subsidiary of the Company and any entity of which the Company owns an economic interest. In addition, to the extent executive officers of the Manager provide services to the Company and its Affiliates through this Agreement, the Manager will cause such executive officers to enter into non-competition and confidentiality agreements so that they will not, directly or indirectly, compete with the business of the Company and its Affiliates, including ICCC; provided, however, that the executive officers may provide services to IMH, any Affiliated REIT, the Manager, and the executive officers may perform the duties set forth in their respective employment agreements with ICIFC. 5. Obligations of Manager. Anything else in this Agreement to the ---------------------- contrary notwithstanding, the Manager shall refrain from any action which in its sole judgment made in good faith (i) would adversely affect the status of the Company and any subsidiary of the Company as a real estate investment trust as defined and limited in sections 856 through 860 of the Code, (ii) which in its sole judgment made in good faith would violate any law, rule or regulation of any 6 governmental body or agency having jurisdiction over the Company and such subsidiary, or (iii) which would otherwise not be permitted by the Company's or its subsidiary's Governing Instruments, except if any of such actions shall be ordered by the Board of Directors, in which event the Manager shall promptly notify the Board of Directors of the Manager's judgment that such action would adversely affect such status or violate any such law, rule or regulation or the Governing Instruments and shall refrain from taking such action pending further clarification or instructions from the Board of Directors. If the Board of Directors thereafter instructs the Manager, despite the Manager's notification as provided herein, to take any such action and the Manager so acts upon the instructions given, the Manager shall not be responsible for any loss of the Company's or its subsidiary's status as a REIT or violation of any law, rule or regulation or the Governing Instruments caused thereby. 6. Compensation. ------------ (a) If the Company's annualized Return on Equity during any fiscal quarter (computed by multiplying the Return on Equity for such fiscal quarter by four) is in excess of the Ten Year U.S. Treasury Rate plus 2%, the Company will pay the Manager, for such quarter, an amount equal to 25% of such excess, but in no event shall any payment of compensation under this subsection reduce the Company's annualized Return on Equity for such quarter to less than the Ten Year U.S. Treasury Rate plus 2%. (b) The Manager shall compute the compensation payable under Subsection (a) within 60 days after the end of each calendar quarter, with the exception of the fourth quarter for which compensation shall be computed within 30 days. In any event, the compensation payable under Subsection (a) shall be calculated before any income distributions are made to stockholders for the corresponding period. A copy of the computations made by the Manager to calculate its compensation shall thereafter be promptly delivered to any executive officer of the Company and, upon such delivery, payment of the compensation earned under Subsection (a) shown therein shall be due and payable within 90 days after the end of such calendar quarter. The compensation due and payable to the Manager under Subsection (a) shall be paid to the Manager in the subsequent quarter in which the incentive compensation was earned. The aggregate amount of the Manager's compensation for each fiscal year shall be adjusted within 120 days after the end of such fiscal year so as to provide compensation for such year in the annual amounts stated in Subsection (a) and any excess owed to, or shortfall owed by, the Manager with respect to such compensation, collectively, shall be promptly remitted by, or paid to, the Company. In the event that the time in which the compensation is paid by the Company to the Manager violates the Company's status to be taxed as a REIT, both parties shall mutually agree to modify the time set forth in this Section in which the Manager will be paid the compensation earned under Subsection (a). 7. Reimbursable Expenses of the Manager. Without regard to the ------------------------------------ compensation received hereunder by the Manager, the Company or any subsidiary of the Company shall reimburse the Manager of its expenses, as set forth in Section 8, and without limiting the generality of the foregoing, it is specifically agreed that the following expenses of the Company or any subsidiary of the 7 Company (including ICCC) shall not be paid by the Manager (collectively, "Reimbursable Expenses"): (a) The pro rata employment expenses of the personnel and executive officers (who are governed by employment agreements with ICIFC, and thus, deemed "Reimbursable Executive Amounts") employed by the Manager, including, but not limited to, salaries, wages, payroll taxes, and the cost of employee benefit plans; (b) Travel and other expenses of directors, officers and employees of the Manager and of directors, officers, or employees of the Company or any subsidiary of the Company who are also directors, officers or employees of the Manager, except expenses of such persons who are directors of the Company or any subsidiary of the Company incurred in connection with attending meetings of the Board of Directors or meetings of holders of the securities of the Company or any subsidiary of the Company or expenses of persons who are directors, officers, or employees of the Company or any subsidiary of the Company incurred in connection with attending meetings, conferences or conventions which relate solely to the business affairs of the Company or any subsidiary of the Company; (c) Rent, telephone, utilities, office furniture, equipment and machinery (including computers, to the extent utilized) and other office expenses (such as asset/liability software, modeling software and other software and hardware) of the Manager needed in order to perform its duties as set forth in Section 2 herein; (d) Bookkeeping fees and expenses of the Company and the Manager including any costs of computer services in connection with this function; (e) amounts payable by the Manager pursuant to submanagement agreements with outside third parties to provide various services to the Company including facilities and costs related therewith, technology, management information systems, human resource administration, general ledger accounts, check processing, accounts payable and other similar operational services ; (f) Miscellaneous administrative expenses incurred in supervising and monitoring the Company's investments or any subsidiary's investments of relating to performance by the Manager of its functions hereunder; (g) The cost of borrowed money of the Company; (h) All taxes applicable to the Company or any subsidiary of the Company including interest and penalties thereon; (i) Legal audit, accounting, underwriting, brokerage, listing, rating agency, registration and other fees, printing, engraving and other expenses and taxes incurred in con- 8 nection with the issuance, distribution, transfer, registration and stock exchange listing of the Company's or any subsidiary's equity securities or debt securities; (j) Fees and expenses paid to independent contractors, consultants, managers, and other agents employed directly by the Company or any subsidiary of the Company or by the Manager at the Company's or such subsidiary's request for the account of the Company or any subsidiary of the Company (other than the Manager); (k) Expenses connected with the acquisition, disposition and ownership of the Company's or any subsidiary's investment assets (including without limitation commitment fees, brokerage fees, guaranty fees and hedging fees), including but not limited to ad valorem taxes, costs of foreclosure, maintenance, repair and improvement of property and premiums for insurance on property owned by the Company or any subsidiary of the Company; and with regard to brokerage fees, it is understood that neither the Manager nor any of its Affiliates shall charge a brokerage commission or similar fee to the Company or any subsidiary of the Company in connection with the acquisition, disposition or ownership of the Company's or any subsidiary's investment assets; (l) The expenses of organizing, modifying or dissolving the Company or any subsidiary of the Company; (m) All insurance costs incurred in connection with the Company or any subsidiary of the Company; (n) Expenses connected with payments of dividends or interest or distributions in each or any other form made or caused to be made by the Board of Directors to holders of the securities of the Company or any subsidiary of the Company; (o) Expenses connected with the structuring of the issuance of CMBSs by the Company or any subsidiary of the Company, including but not limited to trustee's fees, insurance premiums, and costs of required credit enhancements; (p) All expenses by third parties connected with communications to holders of equity securities or debt securities of the Company or any subsidiary of the Company and the other bookkeeping and clerical work necessary in maintaining relations with holders of such securities and in complying with the continuous reporting and other requirements of governmental bodies or agencies, including any costs of computer services in connection with this function, the cost of printing and mailing certificates for such securities and proxy solicitation materials and reports to holders of the Company's or any subsidiary's securities and reports to third parties required under any indenture to which the Company or any subsidiary of the Company is a party; (q) Transfer agent's and registrar's fees and charges; 9 (r) Fees and expenses paid to directors of the Company or any subsidiary of the Company, the cost of director and officer liability insurance and premiums for fidelity and errors and omissions insurance; (s) Legal, accounting and auditing fees and expenses relating to the Company's or any subsidiary's operations; (t) Any judgment rendered against the Company or any subsidiary of the Company, or against any director of the Company or any subsidiary of the Company in his capacity as such for which the Company or any subsidiary of the Company is required to indemnify such director, by any court or governmental agency; (u) Expenses relating to any office or office facilities maintained by the Company or any subsidiary of the Company separate from the office of the Manager; (v) Expenses related to the servicing and subservicing of Commercial Mortgages; (w) All offering expenses (including accounting, legal, printing, clerical, personnel, filing and other expenses) incurred by the Company, the Manager or its Affiliates on behalf of the Company in connection with the Offering; and (x) Other miscellaneous expenses of the Company or any subsidiary of the Company. 8. Computation of Reimbursable Expenses. ------------------------------------ (a) The Company shall reimburse the Manager for all Reimbursable Expenses and Reimbursable Executive Amounts on a dollar for dollar basis. Furthermore, with respect to Reimbursable Expenses and Reimbursable Executive Amounts owed by the Manager to IMH for costs and services rendered under any submanagement agreement with the Manager, the Company shall pay an additional service charge of 15% on such amounts. Pursuant to submanagement agreements, the Manager shall pay all third party service providers, on a dollar-for-dollar basis, the aforementioned amounts received by the Manager from the Company, provided, however, that no such 15% service charge will be paid to third party service providers other than ICIFC. (b) For the first three years of this Agreement, there will be a minimum amount of $500,000 per annum (which includes the 15% service charge) payable by the Company to the Manager for Reimbursable Expenses and Reimbursable Executive Amounts. Thereafter, the Company shall only be responsible for the Reimbursable Expenses and Reimbursable Executive Amounts incurred, plus the additional 15% service charge amount due to the Manager in connection with services rendered by ICIFC under any submanagement agreement. 10 (c) The Manager shall compute the Reimbursable Expenses and Reimbursable Executive Amounts payable under Subsections (a) and (b) within 10 days after the end of each month. A copy of the computations made by the Manager to calculate its compensation shall thereafter be promptly delivered to any executive officer of the Company and, upon such delivery, payment of the compensation earned under Subsection (a) and (b) shown therein shall be due and payable within 15 days after the end of such month. The Reimbursable Expenses and Reimbursable Executive Amounts due and payable to the Manager under Subsections (a) and (b) shall be paid to the Manager in the subsequent month in which the Reimbursable Expenses and the Reimbursable Executive Amounts were incurred. 9. Limits of Manager Responsibility. (a) The Manager assumes no -------------------------------- responsibility under this Agreement other than to render the services called for hereunder in good faith and shall not be responsible for any action of the Board of Directors in following or declining to follow any advice or recommendations of the Manager, including as set forth in Section 5 above. The Manager, its directors, officers, shareholders and employees will not be liable to the Company, any subsidiary of the Company (including ICCC), the Unaffiliated Directors or the Company's or its subsidiary's stockholders for any acts performed by the Manager, its directors, officers, shareholders and employees in accordance with this Agreement, except by reason of acts or omissions constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties. The Company or its subsidiaries (including ICCC) shall reimburse, indemnify and hold harmless the Manager, its shareholders, directors, officers and employees of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever in respect of or arising from any acts or omissions of the Manager, its shareholders, directors, officers and employees made in good faith in the performance of the Manager's duties under this Agreement and not constituting bad faith, willful misconduct, gross negligence or reckless disregard of its duties. (b) The Manager shall reimburse, indemnify and hold harmless the Company, any subsidiaries (including ICCC), or any of their stockholders, directors, officers and employees of and from any and all expenses, losses, damages, liabilities, demands, charges and claims (including, without limitation, reasonable attorneys fees) arising out of any willful and intentional misstatements of fact made by the Manager in connection with this Agreement and the services to be rendered hereunder. 10. No Joint Venture. The Company and the Manager are not partners ---------------- or joint venturers with each other and nothing herein shall be construed to make them such partners or joint venturers or impose any liabilities as such on either of them. 11. Term. This Agreement shall continue in force until December 31, ---- 2002 and thereafter it may be extended with the consent of the Manager and by the affirmative vote of a majority of the Unaffiliated Directors or by a vote of the holders of a majority of the outstanding shares of Common Stock of the Company. Each extension shall be executed in writing by all parties hereto before the expiration of this Agreement or of any extension thereof. Each such extension 11 shall be effective for a period corresponding to the fiscal year of the Company, but in no case exceeding twelve months. 12. Termination for Cause. This Agreement, or any extension hereof, --------------------- may be terminated by either party for cause immediately upon written notice, (i) by a majority vote of the Unaffiliated Directors or by a vote of a majority of the holders of the Company's Common Stock, in the case of termination by the Company, or, (ii) in the case of termination by the Manager, by a majority vote of the directors of the Manager. Grounds for termination for cause will occur with respect to a party if: (a) Such party shall have violated any provision of this Agreement and, after notice of such violation, shall not cure such default within 30 days; or (b) There is entered an order for relief or similar decree or order with respect to such party by a court having jurisdiction in the premises in an involuntary case under the federal bankruptcy laws as now or hereafter constituted or under any applicable federal or state bankruptcy, insolvency or other similar laws; or such party (A) ceases or admits in writing its inability to pay its debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, creditors; (B) applies for, or consents (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee, assignee, custodian, liquidator or sequestrator (or other similar official) of such party or of any substantial part of its properties or assets, or authorizes such an application or consent, or proceedings seeking such appointment are commenced without such authorization, consent or application against such party and continue undismissed for 30 days; (C) authorizes or files a voluntary petition in bankruptcy, or applies for or consents (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorizes such application or consent, or proceedings to such end are instituted against such party without such authorization, application or consent and are approved as properly instituted and remain undismissed for 30 days or results in adjudication of bankruptcy or insolvency; or (D) permits or suffer all or any substantial part of its properties or assets to be sequestered or attached by court order and the order remains undismissed for 30 days. (c) Each party agrees that if any of the events specified in this Section 12 shall occur, it will give prompt written notice thereof to the other party's Board of Directors after the happening of such event. If this Agreement is terminated pursuant to this Section, such termination shall be without any further liability or obligation of either party to the other, except as provided in Section 15. 13. Termination Without Cause. The Company may terminate this ------------------------- Agreement without cause upon 60 days prior written notice, by a majority vote of the Unaffiliated Directors or 12 by a vote of the holders of a majority of the outstanding shares of the Company's Common Stock. In the event this Agreement is terminated by the Company without cause, or in the event this Agreement is not renewed by the Company without cause, the Company, in addition to its obligations under Section 15, shall pay the Manager a termination or non-renewal fee determined by an independent appraisal. Such appraisal shall be conducted by a nationally- recognized appraisal firm mutually agreed upon by the parties and the costs of such appraisal shall be borne equally by the parties. If the parties are unable to agree upon such appraisal firm within 30 days following notice of termination or, in the event of non-renewal, the termination date, then each party shall as soon as reasonably practicable, but in no event more than 45 days following notice of termination or, in the event of non-renewal, the termination date, choose a nationally-recognized independent appraisal firm to conduct an appraisal. In such event, (i) the termination fee shall be deemed to be the average of the appraisals as conducted by each party's chosen appraiser and (ii) each party shall pay the costs of its appraiser so chosen. Any appraisal conducted hereunder shall be performed no later than 45 days following selection of the appraiser or appraisers. 14. Assignment; Subcontract. (a) This Agreement shall terminate ----------------------- automatically in the event of its assignment, in whole or in part, by the Manager unless such assignment is consented to in writing by the Company with the consent of a majority of the Unaffiliated Directors. Such an assignment shall bind the assignee hereunder in the same manner as the Manager is bound hereunder and, to further evidence its obligations hereunder, the assignee shall execute and deliver to the Company a counterpart of this Agreement. This Agreement shall not be assignable by the Company without the consent of the Manager, except in the case of assignment by the Company to a real estate investment trust or other organization which is a successor (by merger, consolidation or purchase of assets) to the Company, in which case such successor organization shall be bound hereunder and by the terms of said assignment in the same manner as the Company is bound hereunder. (b) Notwithstanding the foregoing, the Company and the Manager agree that the Manager may enter into a subcontract with any third party, including IMH, which third party shall be approved by the Company's Board of Directors, pursuant to which such third party will provide such of the management services required hereunder as the Manager deems necessary, and the Company hereby consents to the entering into and performance of such subcontract; provided, however, that no such arrangement between the Manager and IMH or any third party shall relieve the Manager of any of its duties or obligations hereunder. 15. Action Upon Termination. From and after the effective date of ----------------------- termination of this Agreement, pursuant to Sections 12, 13 and 14 hereof, the Manager shall not be entitled to compensation for further services hereunder, but shall be paid all compensation accruing to the date of termination, subject to adjustments on an annualized basis in accordance with Section 6(b) and subject to the minimum amount of $500,000 per annum for the first three years. The Manager shall forthwith upon such termination deliver to the Board of Directors all property and documents, corporate records, reports and software of the Company or any subsidiary of the Company then in the custody of the Manager. 13 16. Representations and Warranties. ------------------------------ (a) The Company hereby represents and warrants to the Manager as follows: (i) Corporate Existence. The Company is duly organized, ------------------- validly existing and in good standing under the laws of Maryland, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of such jurisdictions where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, taken as a whole. (ii) Corporate Power; Authorization; Enforceable ------------------------------------------- Obligations. The Company has the corporate power, authority and legal right to execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary corporate action to authorize this Agreement on the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required hereunder. No consent of any other person including, without limitation, stockholders and creditors of the Company, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Company in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This Agreement has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of the Company, and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, moratorium or similar laws now or hereafter in effect relating to the rights and remedies of creditors generally, and general principles of equity. (iii) No Legal Bar to This Agreement. The execution, ------------------------------ delivery and performance of this Agreement and the documents or instruments required hereunder, will not violate any provision of any existing law or regulation binding on the Company, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Company, or the charter or Bylaws of, or any securities issued by the Company or any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Company is a party or by which the Company or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. 14 (b) The Manager hereby represents and warrants to the Company as follows: (i) Corporate Existence. The Manager is duly organized, ------------------- validly existing and in good standing under the laws of California, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Manager and its subsidiaries, taken as a whole. The Manager does not do business under any fictitious business name. (ii) Corporate Power; Authorization; Enforceable ------------------------------------------- Obligations. The Manager has the corporate power, authority and legal right to - ----------- execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary corporate action to authorize this Agreement on the terms and conditions hereof and its execution, delivery and performance of this Agreement and all obligations required hereunder. No consent of any other person including, without limitations, shareholders and creditors of the Manager, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Manager in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This Agreement has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of the Manager, and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the Manager enforceable against the Manager in accordance with its terms. (iii) No Legal Bar to This Agreement. The execution, ------------------------------ delivery and performance of this Agreement and the documents or instruments required hereunder, will not violate any provision of any existing law or regulation binding on the Manager, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Manager, or the certificate of incorporation or by-laws of, or any securities issued by the Manager or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Manager is a party or by which the Manager or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Manager and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provision of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. 17. Arbitration. ------------ (a) Each controversy, dispute or claim between the parties arising out of or relating to this Agreement, which controversy, dispute or claim is not settled in writing within thirty 15 (30) days after the "Claim Date" (defined as the date on which a party subject to this Agreement gives written notice to the other that a controversy, dispute or claim exists), will be settled by binding arbitration in Orange County, California in accordance with the provisions of the Judicial Arbitration and Mediation Services, which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim, and the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court of Orange County (THE "COURT"). Any decision rendered by the arbitrator and such arbitration will be final, binding and conclusive and judgment shall be entered pursuant to the California Code of Civil Procedure Section 644 in any court in the State of California having jurisdiction. (b) Except as expressly set forth in this Agreement, the arbitrator shall determine the manner in which the proceeding is conducted, including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the proceeding. All proceedings and hearings conducted before the arbitrator, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the arbitrator. The party making such a request shall have the obligation to arrange for any pay for the court reporter. The costs of the court reporter shall be borne equally by the parties. (c) The arbitrator shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the state of California will be applicable to the reference proceeding. The arbitrator shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The arbitrator shall issue a single judgment at the close of the proceeding which shall dispose of all of the claims of the parties that are the subject of the proceeding. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the arbitrator. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a proceeding governed under this provision. 18. Notices. All notices, requests, demands and other communications ------- provided for hereunder shall be in writing (including telegraphic or facsimile communications) and shall be in mailed (return receipt requested), telegraphed, sent by facsimile, overnight courier or hand delivered to each party at the address set forth as follows, or at such other address as either party may designate by notice to the others, and any such notice, request, demand or other communication shall be effective upon receipt: 16 The Company: Imperial Credit Commercial Holdings, Inc. 20371 Irvine Avenue Santa Ana Heights, California 92707 Telephone: (714) 556-0122 Facsimile: (714) 433-2122 Attention: Joseph R. Tomkinson, Chief Executive Officer The Manager: REIT Advisors, Inc. 20371 Irvine Avenue Santa Ana Heights, California 92707 Telephone: (714) 556-0122 Facsimile: (714) 438-2150 Attention: William S. Ashmore President Either party may at any time give notice in writing to the other party of a change of its address for the purpose of this Section 18. 19. Amendments. This Agreement shall not be amended, changed, ---------- modified, terminated or discharged in whole or in part except by an instrument in writing signed by all parties hereto, or their respective successors or assigns, or otherwise as provided herein. The parties hereto agree that in no event shall an oral modification of this Agreement be enforceable or valid. 20. Successors and Assigns. This Agreement shall become effective ---------------------- when it is executed by all parties and thereafter shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. 21. Attorneys' Fees. In the event that any party shall bring an --------------- action or proceeding in connection with the performance, breach or interpretation hereof, then the prevailing party in such action as determined by the court or other body having jurisdiction shall be entitled to recover from the losing party in such action, as determined by the court or other body having jurisdiction, all reasonable costs and expense of litigation or arbitration, including reasonable attorney's fees, court costs, costs of investigation and other costs reasonably related to such proceeding. 22. Governing Law. This Agreement shall be governed, construed and ------------- interpreted in accordance with the laws of the State of California. 23. Headings and Cross References. The section headings hereof have ----------------------------- been inserted for convenience of reference only and shall not be construed to affect the meaning, 17 construction or effect of this Agreement. Any reference in this Agreement to a "Section" or "Subsection" shall be construed, respectively, as referring to a section of this Agreement or a subsection of a section of this Agreement. 24. Severability. The invalidity or unenforceability of any ------------ provision of this Agreement shall not affect the validity of any other provision, and all other provisions shall remain in full force and effect. 25. Entire Agreement. This Agreement contains the entire agreement of ---------------- the parties relating to the subject matter hereof, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement that are not set forth otherwise herein. This Agreement supersedes any and all prior agreements, written or oral, between the parties hereto. 26. Waiver. Any forbearance by a party to this Agreement in ------ exercising any right or remedy under this Agreement or otherwise afforded by applicable law shall not by a waiver of or preclude the exercise of that or any other right or remedy. 27. Execution in Counterparts. This Agreement may be executed in one ------------------------- or more counterparts, any of which shall constitute an original as against any party whose signature appears on it, and all of which shall together constitute a single instrument. This Agreement shall become binding when one or more counterpart, individually or taken together, bear the signatures of both parties. [The remainder of this page intentionally left blank.] 18 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers thereunto duly authorized as of the day and year first above written. IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. By:_____________________________________ Name: Joseph R. Tomkinson Title: Chief Executive Officer REIT ADVISORS, INC. By:_____________________________________ Name: Richard J. Johnson Title: Chief Financial Officer 19 EX-10.2 9 FORM OF SUBMANAGEMENT AGREEMENT EXHIBIT 10.2 SUBMANAGEMENT AGREEMENT THIS AGREEMENT (THE "AGREEMENT") entered into and made effective as of June __, 1997, the closing date of the rights offering of Common Stock, $.01 par value per share, on Registration Statement Form S-11 of Imperial Credit Commercial Holdings, Inc. (THE "COMPANY") is by and between REIT ADVISORS, INC., (THE "MANAGER"), IMPERIAL CREDIT MORTGAGE HOLDINGS, INC., a Maryland corporation ("IMH") and ICI FUNDING CORPORATION, a California corporation ("ICIFC"). BACKGROUND A. The Manager and the Company have entered into an agreement as of the date hereof (THE "MANAGEMENT AGREEMENT") pursuant to which the Manager will provide certain management services to IMH and any subsidiary or Affiliate (as defined therein) of the Company, including its conduit operations Imperial Commercial Capital Corporation, a California corporation ("ICCC") (THE "MANAGEMENT SERVICES") for which the Manager will be paid certain compensation as described therein; and B. The Manager desires to retain ICIFC to assist it in the performance of its duties and obligations under the Management Agreement in the manner and on the terms hereinafter set forth. C. ICIFC has agreed that it will take no action to modify this agreement without the prior written consent of IMH. NOW THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto agree as follows: 1. Duties and Obligations of ICIFC. ICIFC shall provide any and all ------------------------------- administrative services required by the Company including facilities and costs associated therewith, technology, management information systems, general ledger accounts, human resources and payroll, check processing and accounts payable and other services as the Manager may reasonably request from time to time in order to assist the Manager in discharging its obligation to provide the Management Services. 2. Additional Activities of IMH. Except to the extent limited by ---------------------------- the Management Agreement or that certain Non-Competition Agreement dated the date hereof and entered into by and between IMH, ICIFC, the Company and ICCC (THE "NON-COMPETITION AGREEMENT"), nothing herein shall prevent IMH, ICIFC or their respective Affiliates (as defined in the Management Agreement) from engaging in any business or from rendering services of any kind to any other person or entity, including investment in or advisory service to others investing in any type of real estate investment including investments which meet the principal investment objectives of the Company. Directors, officers, employees and agents of IMH, ICIFC or their respective Affiliates may serve as directors, officers, employees, agents, nominees or signatories 1 for the Manager. When executing documents or otherwise acting in such capacities for the Manager, such persons shall use their respective titles in the Manager. 3. Records; Confidentiality. ICIFC shall maintain appropriate books ------------------------ of account and records relating to services performed hereunder, which books of account and records shall be accessible for inspection and copying by the Manager at any time during normal business hours. ICIFC agrees to keep confidential any and all information it obtains from time to time in connection with the services it renders hereunder and shall not disclose any portion thereof to non-affiliated third parties except with the prior written consent of the Manager. 4. Obligations of ICIFC. Anything else in this Agreement to the -------------------- contrary notwithstanding, ICIFC shall refrain from any action which it reasonably believes would adversely affect the status of the Company or any subsidiary of the Company as a real estate investment trust as defined in and limited by Sections 856 to 860 of the Internal Revenue Code of 1986, as amended, or which in its sole judgment made in good faith would violate any law, rule or regulation of any government body or agency having jurisdiction over the Company and such subsidiary or which would otherwise not be permitted by the Company's or such subsidiary's Governing Instruments (as defined in the Management Agreement), except if such action shall be ordered by the Manager, in which event ICIFC shall promptly notify the Manager of ICIFC's judgment that such action would adversely affect such status or violate any such law, rule or regulation or the Company's or such subsidiary's Governing Instruments, and shall refrain from taking such action pending further clarification or instructions from the Manager. If the Manager thereafter instructs ICIFC despite ICIFC's notification as provided herein, to take any such action and ICIFC so acts upon the instructions given, ICIFC shall not be responsible or have any liability for any loss of the Company's or such subsidiary's status as a real estate investment trust or violation of any law, rule or regulation or the Governing Instruments caused thereby. 5. Compensation. ICIFC shall be paid for services rendered by it ------------ under this Agreement commensurate with the services rendered by the Manager on a dollar for dollar basis plus a service charge of 15% to the extent such services are rendered under the Management Agreement. ICIFC shall also be paid on a dollar for dollar basis plus a service charge of 15% for the actual cost of the services provided by the executive officers of the Company based upon the compensation payable to them by ICIFC pursuant to certain employment agreements. For the first three years of the Submanagement Agreement, there will be a minimum amount of $500,000 per annum (which includes the 15% service charge) payable by the Manager to ICIFC. Such fee or any incremental part thereof shall be payable within 30 days of the receipt of any such compensation or any part thereof by the Manager. ICIFC agrees that the Manager shall not be obligated to make any payment to it under this Agreement if to do so would cause the Manager's liabilities to exceed its assets or would cause the Manager to be unable to meet its debts as they become due and payable. 6. Limits of ICIFC Responsibility. ICIFC assumes no responsibility ------------------------------ under this Agreement other than to render the services called for hereunder in good faith and shall not be responsible for any action of the Manager in following or declining to follow any advice or recommendations of ICIFC, including, without limitation, actions described in Section 4 above. ICIFC, its directors, officers, shareholders and employees and its Affiliates will not be liable to 2 the Manager or the Manager's shareholders for any acts performed by ICIFC, its directors, officers, shareholders and employees in accordance with this Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties. The Manager shall reimburse, indemnify and hold harmless ICIFC, and its Affiliates, shareholders, directors, officers and employees of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever in respect of or arising from any acts or omissions of ICIFC, its Affiliates, shareholders, directors, officers and employees made in good faith in the performance of IMH's duties under this Agreement and not constituting bad faith, willful misconduct, gross negligence and reckless disregard of its duties. 7. No Joint Venture. The Manager and ICIFC are not partners or ---------------- joint venturers with each other and nothing herein shall be construed to make them such partners or joint venturers or impose any liability as such on either of them. 8. Term; Termination. ----------------- (a) This Agreement shall continue in force until December 31, 2002, and thereafter it may be extended only with the affirmative vote of a majority of the Unaffiliated Directors of IMH and by the affirmative vote of a majority of the directors of the Manager. "Unaffiliated Directors" means a Director who is independent of the Company, the Manager and IMH and its Affiliates. (b) Each extension shall be executed in writing by all parties hereto before the expiration of this Agreement or of any extension thereof. Each such extension shall be effective for a period corresponding to the fiscal year of the Manager, but in no case exceeding 12 months, excluding the first year. (c) Notwithstanding any other provision herein to the contrary, this Agreement, or any extension hereof, shall terminate automatically upon the termination of the Management Agreement and may be terminated without cause by the Manager upon 60 days' prior written notice, by a majority vote of the directors of the Manager. 9. Assignment. This Agreement shall terminate automatically in the ---------- event of its assignment, in whole or in part, by ICIFC, unless such assignment is to a corporation, association, trust or other organization which shall acquire the property and carry on the business of ICIFC, if at the time of such assignment a majority of the voting stock of such assignee organization shall be owned, directly or indirectly, by ICIFC or unless such assignment is consented to in writing by the Manager, which consent may be unreasonably withheld in the Manager's sole discretion. Such an assignment shall bind the assignee hereunder in the same manner as ICIFC is bound hereunder, and, to further evidence its obligations hereunder, the assignee shall execute and deliver a counterpart of this Agreement. This Agreement shall not be assignable by the Manager without the consent of ICIFC, except in the case of assignment by the Manager to a corporation or other organization which is a successor (by merger, consolidation or purchase of assets) to the Manager, in which case such successor organization shall be bound hereunder by the terms of said assignment in the same manner as the Manager is bound hereunder. 3 10. Default, Bankruptcy or Insolvency of ICIFC. At the option solely ------------------------------------------ of the Manager, this Agreement may be and become terminated immediately upon written notice of termination from the Manager to ICIFC if any of the following events shall occur: (a) If ICIFC shall violate any provision of this Agreement and, after notice of such violation, has not cured such default within 30 days; or (b) There is entered an order for relief or similar decree or order with respect to IMH or ICIFC by a court having jurisdiction in the premises in an involuntary case under the federal bankruptcy laws as now or hereafter constituted or under any applicable federal or state bankruptcy, insolvency or other similar laws; or IMH (i) ceases or admits in writing its inability to pay its debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, creditors; (ii) applies for, or consents (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee, assignee, custodian, liquidator or sequestrator (or other similar official) of either IMH or ICIFC or of any substantial part of their properties or assets, or authorizes such an application or consent, or proceeding seeking such appointment are commenced without such authorization, consent or application against IMH or ICIFC and continue undismissed for 30 days; (iii) authorizes or files a voluntary petition in bankruptcy, or applies for or consents (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorizes such application or consent, or proceedings to such and are instituted against IMH without such authorization, application or consent and are approved as properly instituted and remain undismissed for 30 days or result in adjudication or bankruptcy or insolvency; or (iv) permits or suffers all or any substantial part of its properties or assets to be sequestered or attached by court order and the order remains undismissed for 30 days. (c) Each of IMH and ICIFC agrees that if any of the events specified in paragraph (b) of this Section 10, shall occur, it will give prompt written notice thereof to the board of directors of the Manager after the happening of such event. 11. Action Upon Termination. From and after the effective date of ----------------------- termination pursuant to Sections 8, 9 or 10 hereof, ICIFC shall not be entitled to compensation for further services hereunder, but shall be paid all compensation accruing to the date of termination subject to adjustments on an annualized basis; provided, however, that if this Agreement is terminated within three years of its effective date, then ICIFC shall be entitled to receive from the Manager the remaining minimum amount of $500,000 per annum which would have been paid for such year of termination. ICIFC shall forthwith upon such termination: (a) Pay over to the Manager all money collected and held for the account of the Manager pursuant to this Agreement, after deducting any accrued compensation and reimbursement for its expenses to which it is then entitled; 4 (b) Deliver to the Manager a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Manager; and (c) Deliver to the Manager all property and documents of the Manager then in custody of IMH or ICIFC. 12. Arbitration. ------------ (a) Each controversy, dispute or claim between the parties arising out of or relating to this Agreement, which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to this Agreement gives written notice to the other that a controversy, dispute or claim exists), will be settled by binding arbitration in Orange County, California in accordance with the provisions of the Judicial Arbitration and Mediation Services, which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim, and the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court of Orange County (THE "COURT"). Any decision rendered by the arbitrator and such arbitration will be final, binding and conclusive and judgment shall be entered pursuant to the California Code of Civil Procedure Section 644 in any court in the State of California having jurisdiction. (b) Except as expressly set forth in this Agreement, the arbitrator shall determine the manner in which the proceeding is conducted, including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the proceeding. All proceedings and hearings conducted before the arbitrator, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the arbitrator. The party making such a request shall have the obligation to arrange for any pay for the court reporter. The costs of the court reporter shall be borne equally by the parties. (c) The arbitrator shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the state of California will be applicable to the reference proceeding. The arbitrator shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The arbitrator shall issue a single judgment at the close of the proceeding which shall dispose of all of the claims of the parties that are the subject of the proceeding. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the arbitrator. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a proceeding governed under this provision. 13. Notices. All notices, requests, demands and other communications ------- provided for hereunder shall be in writing (including telegraphic or facsimile communications) 5 and shall be in mailed (return receipt requested), telegraphed, sent by facsimile, overnight courier or hand delivered to each party at the address set forth as follows, or at such other address as either party may designate by notice to the others, and any such notice, request, demand or other communication shall be effective upon receipt: The Manager: REIT Advisors, Inc. 20371 Irvine Avenue Santa Ana Heights, CA 92707 Telephone: (714) 556-0122 Facsimile: (714) 438-2150 Attention: William S. Ashmore President IMH: Imperial Credit Mortgage Holdings, Inc. 20371 Irvine Avenue Santa Ana Heights, CA 92707 Telephone: (714) 556-0122 Facsimile: (714) 433-2122 Attention: Joseph R. Tomkinson Chief Executive Officer ICIFC: ICI Funding Corporation Telephone: (714) 556-0122 Facsimile: (714) 433-2122 Attention: Joseph R. Tomkinson Chief Executive Officer Either party may at any time give notice in writing to the other party of a change of its address for the purpose of this Section 12. 14. Amendments. This Agreement shall not be amended, changed, ---------- modified, terminated or discharged in whole or in part, and the performance of any obligation hereunder may not be waived, except by an instrument in writing signed by both parties hereto, or their respective successors or permitted assigns, or otherwise as provided herein; provided, however, that ICIFC agrees to take no action further to this Section 14 without the prior written consent of IMH evidenced by a mojority vote of the directors of IMH who are not directors of ICCC and that any action taken by ICIFC further to this Section 14 in contravention of said provision shall be null and void. The parties hereto agree that in no event shall an oral modification of this Agreement be enforceable or valid.7 15. Successors and Assigns. This Agreement shall bind any successors ---------------------- or permitted assigns of the parties hereto as herein provided. 16. Severability. The invalidity or unenforceability of any ------------ provision of this Agreement shall not affect the validity of any other provision, and all other provisions shall remain in full force and effect. 6 17. Entire Agreement. This Agreement contains the entire agreement of ---------------- the parties relating to the subject matter hereof, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement that are not set forth otherwise herein. This Agreement supersedes any and all prior agreements, written or oral, between the parties hereto. 18. Waiver. Any forbearance by a party to this Agreement in ------ exercising any right or remedy under this Agreement or otherwise afforded by applicable laws shall not be a waiver of or preclude the exercise of that or any other right or remedy. 19. Governing Law. The provisions of this Agreement shall be ------------- governed by, construed under and interpreted in accordance with the laws of the State of California as at the time in effect. 20. Headings and Cross References. The section headings hereof have ----------------------------- been inserted for convenience of reference only and shall not be construed to affect the meaning, construction or effect of this Agreement. Any reference in this Agreement to a "Section" or "Subsection" shall be construed, respectively, as referring to a section of this Agreement or a subsection of a section of this Agreement. 21. Attorneys' Fees. In the event that any party shall bring an --------------- action or proceeding in connection with the performance, breach or interpretation hereof, then the prevailing party in such action as determined by the court or other body having jurisdiction shall be entitled to recover from the losing party in such action, as determined by the court or other body having jurisdiction, all reasonable costs and expense of litigation or arbitration, including reasonable attorney's fees, court costs, costs of investigation and other costs reasonably related to such proceeding. 22. Execution in Counterparts. This Agreement may be executed in one ------------------------- or more counterparts, any of which shall constitute an original as against any party whose signature appears on it, and all of which shall together constitute a single instrument. This Agreement shall become binding when one or more counterparts, individually or taken together, bear the signatures of both parties. [The remainder of this page is intentionally left blank.] 7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers thereunto duly authorized as of the day and year written above. REIT ADVISORS, INC. By:________________________________ Name: William S. Ashmore Title: President ICI FUNDING CORPORATION By:________________________________ Name: Joseph R. Tomkinson Title: Chief Executive Officer IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. By:________________________________ Name: Joseph R. Tomkinson Title: Chief Executive Officer 8 EX-10.3 10 1997 STOCK OPTION AND AWARDS PLAN EXHIBIT 10.3 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. 1997 STOCK OPTION AND AWARDS PLAN SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS. (a) This plan is intended to implement and govern the 1997 Stock Option and Awards Plan (the "Plan") of Imperial Credit Commercial Holdings, Inc., a Maryland corporation (the "Company"). The Plan was adopted by the Board as of April 14, 1997, subject to the approval of the Company's stockholders. The purpose of the Plan is to enable the Company and its Subsidiaries to obtain and retain competent personnel who will contribute to the Company's success by their ability, ingenuity and industry and to provide incentives to the directors, officers and other key employees, and agents and consultants that are linked directly to increases in stockholder value and will therefore inure to the benefit of all stockholders of the Company. (b) Definitions. ----------- For purposes of the Plan, the following terms shall be defined as set forth below: (1) "Accrued DERs" means DERs with the accrual rights described in Section ------------ 5(k). (2) "Administrator" means the Board, or if the Board does not administer ------------- the Plan, the Committee in accordance with Section 2. (3) "Affiliated Companies" means ICCC and RAI. -------------------- (4) "Board" means the Board of Directors of the Company. ----- (5) "Code" means the Internal Revenue Code of 1986, as amended from time ---- to time, or any successor thereto. (6) "Committee" means the Compensation Committee of the Board, which shall --------- be composed entirely of two or more individuals who meet the qualifications to be a "Non-Employee Director" as defined in Rule 16b-3 ("Rule 16b-3") as promulgated by the Securities and Exchange Commission (the "Commission") under the 1 Securities Exchange Act of 1934 (the "Act"), and as such Rule may be amended from time to time, or any successor definition adopted by the Commission, or any other Committee the Board may subsequently appoint to administer the Plan. If at any time the Board shall not administer the Plan, then the functions of the Board specified in the Plan shall be exercised by the Committee. (7) "Company" means Imperial Credit Commercial Holdings, Inc., a ------- corporation organized under the laws of the State of Maryland (or any successor corporation). (8) "Current-pay DERs" means DERs with the current-pay rights described in ---------------- Section 5(k). (9) "DERs" shall mean Accrued DERs and Current-pay DERs. ---- (10) "Deferred Stock" means an award granted pursuant to Section 7 of the -------------- right to receive Stock at the end of a specified deferral period. (11) "Disability" means permanent and total disability as determined under ---------- the Company's disability program or policy. (12) "Effective Date" shall mean the date provided pursuant to Section 14. -------------- (13) "Eligible Employee" means an employee of the Company, any Subsidiary, ----------------- a Parent Corporation or the Affiliated Companies eligible to participate in the Plan pursuant to Section 4. (14) "Fair Market Value" means, as of any given date, with respect to any ----------------- awards granted hereunder, at the discretion of the Administrator and subject to such limitations as the Administrator may impose, (A) the closing sale price of the Stock on such date as reported in the Western Edition of the Wall Street Journal Composite Tape, or (B) the average of the closing price of the Stock on each day on which the Stock was traded over a period of up to twenty trading days immediately prior to such date, or (C) if the Stock is not publicly traded, the fair market value of the Stock as otherwise determined by the Administrator in the good faith exercise of its discretion. The Fair Market Value on the effective date of the Company's IPO shall be the price at which the Company's Stock is issued in connection therewith. 2 (15) "ICCC" means Imperial Commercial Capital Corporation, a California ---- corporation. (16) "Incentive Stock Option" means any Stock Option intended to be ---------------------- designated as an "incentive stock option" within the meaning of Section 422 of the Code. (17) "IPO" means the Company's initial public offering of its Stock on a --- Form S-11 Registration Statement. (18) "Limited Stock Appreciation Right" means a Stock Appreciation Right -------------------------------- that can be exercised only in the event of a "Change of Control" (as defined in Section 10 below). (19) "Non-Qualified Stock Option" means any Stock Option that is not an -------------------------- Incentive Stock Option, including any Stock Option that provides (as of the time such option is granted) that it will not be treated as an Incentive Stock Option. (20) "Parent Corporation" means any corporation (other than the Company) in ------------------ an unbroken chain of corporations ending with the Company, if each of the corporations in the chain (other than the Company) owns stock possessing 50% or more of the combined voting power of all classes of stock in one of the other corporations in the chain. (21) "Participant" means any Eligible Employee of the Company, any ----------- Subsidiary or a Parent Corporation, or any consultant or agent of the Company (including, but not limited to, third party service providers which provide services pursuant to submanagement agreements) selected by the Committee, pursuant to the Administrator's authority in Section 2, to receive grants of Stock Options, DERs, Stock Appreciation Rights, Limited Stock Appreciation Rights, Restricted Stock awards, Deferred Stock awards, Performance Shares or any combination of the foregoing. (22) "RAI" means REIT Advisors, Inc. --- (23) "Restricted Period" means the period set by the Administrator as it ----------------- pertains to Deferred Stock or Restricted Stock awards pursuant to Section 7. 3 (24) "Performance Share" means an award of shares of Stock granted pursuant ----------------- to Section 7 that is subject to restrictions based upon the attainment of specified performance objectives. (25) "Restricted Stock" means an award granted pursuant to Section 7 of ---------------- shares of Stock subject to restrictions that will lapse with the passage of time. (26) "Stock" means the common stock, $0.01 par value per share, of the ----- Company. (27) "Stock Appreciation Right" means the right pursuant to an award ------------------------ granted under Section 6 to receive an amount equal to the difference between (A) the Fair Market Value, as of the date such Stock Appreciation Right or portion thereof is surrendered, of the shares of Stock covered by such right or such portion thereof, and (B) the aggregate exercise price of such right or such portion thereof. (28) "Stock Option" means an option to purchase shares of Stock granted ------------ pursuant to Section 5. (29) "Subsidiary" means any corporation (other than the Company) in an ---------- unbroken chain of corporations beginning with the Company, if each of the corporations (other than the last corporation) in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 2. ADMINISTRATION. (a) The Plan shall be administered by the Board or by a Committee appointed by the Board, which shall serve at the pleasure of the Board; provided, however, that if the Committee does not consist solely of Non-Employee Directors, as referenced in the definition of Committee in Section 1 hereof, then the Plan shall be administered, and each grant shall be approved, by the Board. (b) The Administrator shall have the power and authority to grant to Eligible Employees and consultants or agents of the Company, any Subsidiary or Parent Corporation, or any employee of the Affiliated Companies, pursuant to the terms of the Plan: (A)Stock Options (with or without DERs), (B) Stock Appreciation 4 Rights or Limited Stock Appreciation Rights, (C) Restricted Stock, (D) Deferred Stock, (E) Performance Shares or (F) any combination of the foregoing. In particular, the Administrator shall have the authority: (1) to select those employees of the Company, any Subsidiary, a Parent Corporation or the Affiliated Companies who shall be Eligible Employees; (2) to determine whether and to what extent Stock Options (with or without DERs), Stock Appreciation Rights, Limited Stock Appreciation Rights, Restricted Stock, Deferred Stock, Performance Shares or a combination of the foregoing, are to be granted to Eligible Employees or any consultant or agent of the Company or any Subsidiary hereunder; (3) to determine the number of shares to be covered by each such award granted hereunder; (4) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder including, but not limited to, (x) the restricted period applicable to Restricted or Deferred Stock awards and the date or dates on which restrictions applicable to such Restricted or Deferred Stock shall lapse during such period, and (y) the performance goals and periods applicable to the award of Performance Shares; and (5) to determine the terms and conditions, not inconsistent with the terms of the Plan, which shall govern all written instruments evidencing the Stock Options, DERs, Stock Appreciation Rights, Limited Stock Appreciation Rights, Restricted Stock, Deferred Stock, Performance Shares or any combination of the foregoing. (c) The Administrator shall have the authority, in its discretion, to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall from time to time deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. 5 (d) All decisions made by the Administrator pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company, any Subsidiaries, a Parent Corporation, the Affiliated Companies and the Participants. SECTION 3. STOCK SUBJECT TO PLAN. (a) The total number of shares of Stock reserved and available for issuance under the Plan shall be an amount equal to 10% of the aggregate amount of shares issued in the IPO, rounded to the nearest whole share, subject to a minimum of 400,000 shares. At all times, the number of shares reserved and available for issuance hereunder as so determined from time to time shall be decreased by virtue of awards granted and outstanding or exercised hereunder. (b) To the extent that (i) a Stock Option or DER expires or is otherwise terminated without being exercised, or (ii) any shares of Stock subject to any Restricted Stock, Deferred Stock or Performance Share award granted hereunder are forfeited, such shares shall again be available for issuance in connection with future awards under the Plan. If any shares of Stock have been pledged as collateral for indebtedness incurred by a Participant in connection with the exercise of a Stock Option and such shares are returned to the Company in satisfaction of such indebtedness, such shares shall again be available for issuance in connection with future awards under the Plan. (c) In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the Stock, a substitution or adjustment may be made in (i) the aggregate number of shares reserved for issuance under the Plan, and (ii) the kind, number and option price of shares subject to outstanding Stock Options and DERs granted under the Plan as may be determined by the Administrator, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. Such other substitutions or adjustments shall be made as may be determined by the Administrator, in its sole discretion; provided, however, that with respect to Incentive Stock Options, such adjustment shall be made in accordance with Section 424 of the Code. An adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right or Limited Stock Appreciation Right associated with any Stock Option. 6 SECTION 4. ELIGIBILITY. (a) Officers and other key employees of the Company, any Subsidiaries, a Parent Corporation or the Affiliated Companies who are responsible for or contribute to the management, growth and/or profitability of the business of the Company or its Subsidiaries and directors of the Company, any Subsidiary, a Parent Corporation and the Affiliated Companies, and consultants and agents of the Company, its Subsidiaries or Parent Corporation, shall be eligible to be granted Non-Qualified Stock Options, DERs, Stock Appreciation Rights, Limited Stock Appreciation Rights, Restricted Stock awards, Deferred Stock awards or Performance Shares hereunder. Officers and other key employees of the Company, its Subsidiaries or Parent Corporation shall also be eligible to be granted Incentive Stock Options hereunder. The Participants under the Plan shall be selected from time to time by the Administrator, in its sole discretion, from among the Eligible Employees and consultants and agents recommended by the senior management of the Company, and the Administrator shall determine, in its sole discretion, the number of shares covered by each award. (b) Notwithstanding the foregoing, a Participant shall not be eligible to be granted an Award under this Plan if he/she is deemed to own more than 9.8% (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of Common Stock of the Company. For this purpose, the term "ownership" is defined in accordance with the Real Estate Investment Trust provisions of the Code, the constructive ownership provisions of section 544 of the Code, as modified by Section 856(1)(b) of the Code, and Rule 13d-3 promulgated by the Securities and Exchange Commission under the Exchange Act of 1934, as amended. SECTION 5. STOCK OPTIONS. (a) Stock Options may be granted alone or in addition to other awards granted under the Plan, including DERs as described in Section 5(k). Any Stock Option granted under the Plan shall be in such form as the Administrator may from time to time approve, and the provisions of Stock Option awards need not be the same with respect to each optionee. Recipients of Stock Options shall enter into a stock option agreement with the Company, in such form as the Administrator shall determine, which agreement shall set forth, among other things, the exercise price of the option, the term of 7 the option and provisions regarding exercisability of the option granted thereunder. The Stock Options granted under the Plan may be of two types: (i)Incentive Stock Options and (ii) Non-Qualified Stock Options. (b) The Administrator shall have the authority under this Section 5 to grant any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without DERs, Stock Appreciation Rights or Limited Stock Appreciation Rights), provided, however, that Incentive Stock Options may not be granted to any individual who is not an employee of the Company, its Subsidiaries or Parent Corporation. To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. More than one option may be granted to the same optionee and be outstanding concurrently hereunder. (c) Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Administrator shall deem desirable: (i) Option Price. The option price per share of Stock purchasable under a ------------ Stock Option shall be determined by the Administrator in its sole discretion at the time of grant but shall not, in the case of Incentive Stock Options, be less than 100% of the Fair Market Value of the Stock on such date, and shall not, in any event, be less than the par value of the Stock. The option price per share of Stock purchasable under a Non-Qualified Stock Option may be less than 100% of such Fair Market Value. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the option price of such Incentive Stock Option (to the extent required by the Code at the time of grant) shall be no less than 110% of the Fair Market Value of the Stock on the date such Incentive Stock Option is granted. (ii) Option Term. The term of each Stock Option shall be fixed by the ----------- Administrator, but no Stock Option shall be exercisable more than ten years after the date such Stock Option is granted; 8 provided, however, that if an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or a Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the term of such Incentive Stock Option (to the extent required by the Code at the time of grant) shall be no more than five years from the date of grant. (iii) Exercisability. Stock Options shall be exercisable at such time or -------------- times and subject to such terms and conditions as shall be determined by the Administrator at or after grant; provided, however, that, except as provided herein or unless otherwise determined by the Administrator at or after grant, Stock Options shall be exercisable one year following the date of grant of the option, but in no case, less than six (6) months following the date of grant of the option. To the extent not exercised, installments shall accumulate and be exercisable in whole or in part at any time after becoming exercisable but not later than the date the Stock Option expires. The Administrator may provide, in its discretion, that any Stock Option shall be exercisable only in installments, and the Administrator may waive such installment exercise provisions at any time in whole or in part based on such factors as the Administrator may determine, in its sole discretion. (iv) Method of Exercise. Subject to Section 5(c), Stock Options may be ------------------ exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price in cash or its equivalent as determined by the Administrator. As determined by the Administrator, in its sole discretion, payment in whole or in part may also be made (i) by cancellation of any indebtedness owed by the Company to the optionee, (ii) by a full recourse promissory note executed by the optionee, (iii) in the form of unrestricted Stock already owned by the optionee, or, in the case of the exercise of a Non-Qualified Stock Option, Restricted Stock or Performance Shares subject to an award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the option is exercised); provided, however, that in the case of an Incentive Stock Option, the right to make payment in the form of already owned shares may be authorized only at the time of grant, or (iv) by any combination of the foregoing. Any payment in the form of 9 stock already owned by the optionee may be effected by use of an attestation form approved by the Administrator. If payment of the option exercise price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock or Performance Shares, the shares received upon the exercise of such Stock Option (to the extent of the number of shares of Restricted Stock or Performance Shares surrendered upon exercise of such Stock Option) shall be restricted in accordance with the original terms of the Restricted Stock or Performance Share award in question, except that the Administrator may direct that such restrictions shall apply only to that number of shares equal to the number of shares surrendered upon the exercise of such option. An optionee shall generally have the rights to dividends and other rights of a stockholder with respect to shares subject to the option only after the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in paragraph (a) of Section 11. (d) The Administrator may require the voluntary surrender of all or a portion of any Stock Option granted under the Plan as a condition precedent to a grant of a new Stock Option. Subject to the provisions of the Plan, such new Stock Option shall be exercisable at the price, during such period and on such other terms and conditions as are specified by the Administrator at the time the new Stock Option is granted; provided, however, that should the Administrator so require, the number of shares subject to such new Stock Option shall not be greater than the number of shares subject to the surrendered Stock Option. Upon their surrender, Stock Options shall be canceled and the shares previously subject to such canceled Stock Options shall again be available for grants of Stock Options and other awards hereunder. (e) Loans. The Company may make loans available to Stock Option holders in ----- connection with the exercise of outstanding options granted under the Plan, as the Administrator, in its discretion, may determine. Such loans shall (i) be evidenced by promissory notes entered into by the Stock Option holders in favor of the Company, (ii) be subject to the terms and conditions set forth in this Section 5(e) and such other terms and conditions, not inconsistent with the Plan, as the Administrator shall determine, (iii) bear interest, if any, at such rate as the Administrator shall determine and (iv) be subject to Board approval. In no event may the principal amount of any such loan exceed the sum of (x) the 10 exercise price less the par value of the shares of Stock covered by the option, or portion thereof, exercised by the holder, and (y) any federal, state, and local income tax attributable to such exercise. The initial term of the loan, the schedule of payments of principal and interest under the loan, the extent to which the loan is to be with or without recourse against the holder with respect to principal or interest and the conditions upon which the loan will become payable in the event of the holder's termination of employment shall be determined by the Administrator; provided, however, that the term of the loan, including extensions, shall not exceed seven years. Unless the Administrator determines otherwise, when a loan is made, shares of Stock having a Fair Market Value at least equal to the principal amount of the loan shall be pledged by the holder to the Company as security for payment of the unpaid balance of the loan, and such pledge shall be evidenced by a pledge agreement, the terms of which shall be determined by the Administrator, in its discretion; provided, however, that each loan shall comply with all applicable laws, regulations and rules of the Board of Governors of the Federal Reserve System and any other governmental agency having jurisdiction. (f) Limits on Transferability of Options. ------------------------------------ (i) Subject to Section 5(f)(ii), no Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution or, with respect to Non-Qualified Stock Options, pursuant to a "qualified domestic relations order," as such term is defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Incentive Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee or, with respect to Non-Qualified Stock Options, in accordance with the terms of a qualified domestic relations order. (ii) The Administrator may, in its discretion, authorize all or a portion of the options (other than Incentive Stock Options) to be granted to an optionee to be on terms which permit transfer by such optionee to (A) the spouse, qualified domestic partner, children or grandchildren of the optionee and any other persons related to the optionee as may be approved by the Administrator ("Immediate Family Members"), (B) a trust or trusts for the exclusive benefit of such Immediate Family Members, (C) a partnership or partnerships in which such Immediate Family Members are the only partners, or (D) any other persons or entities as may 11 be approved by the Administrator, provided that (x) there may be no consideration for any transfer unless approved by the Administrator, (y) the stock option agreement pursuant to which such options are granted must be approved by the Administrator, and must expressly provide for transferability in a manner consistent with this Section 5(f)(ii), and (z) subsequent transfers of transferred options shall be prohibited except those in accordance with Section 5(f)(i) or expressly approved by the Administrator. Following transfer, any such options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that, except for purposes of Sections 5(g), (h) and (i) and 11(c) hereof, the terms "optionee," Stock Option holder" and "Participant" shall be deemed to refer to the transferee. The events of termination of employment under Sections 5(g), (h) and (i) hereof shall continue to be applied with respect to the original optionee, following which the options shall be exercisable by the transferee only to the extent, and for the periods specified under such sections unless the option agreement governing such options otherwise provides. Notwithstanding the transfer, the original optionee will continue to be subject to the provisions of Section 11(c) regarding payment of taxes, including the provisions entitling the Company to deduct such taxes from amounts otherwise due to such optionee. Any transfer of a Stock Option that was originally granted with DERs related thereto shall automatically include the transfer of such DERs, any attempt to transfer such Stock Option separately from such DERs shall be void, and such DERs shall continue in effect according to their terms. "Qualified domestic partner" for the purpose of this Section 5(f)(ii) shall mean a domestic partner living in the same household as the optionee and registered with, certified by or otherwise acknowledged by the county or other applicable governmental body as a domestic partner or otherwise establishing such status in any manner satisfactory to the Administrator. (g) Termination by Death. If an optionee's employment with the Company or any -------------------- Subsidiary terminates by reason of death, the Stock Option may thereafter be immediately exercised, to the extent then exercisable (or on such accelerated basis as the Administrator shall determine at or after grant), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of twelve months (or such shorter period as the Administrator shall specify at grant) from the date of such death or until the expiration of the stated term of such Stock 12 Option, whichever period is shorter. (h) Termination by Reason of Disability. If an optionee's employment with the ----------------------------------- Company, any Subsidiary or any Affiliated Company terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of such termination (or on such accelerated basis as the Administrator shall determine at the time of grant), for a period of twelve months (or such shorter period as the Administrator shall specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is shorter; provided, however, that, if the optionee dies within such twelve-month period (or such shorter period as the Administrator shall specify at grant) and prior to the expiration of the stated term of such Stock Option, any unexercised Stock Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of termination for a period of twelve months (or such shorter period as the Administrator shall specify at grant) from the time of death or until the expiration of the stated term of such Stock Option, whichever period is shorter. In the event of a termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the applicable exercise periods under Section 422 of the Code, such Stock Option shall thereafter be treated as a Non-Qualified Stock Option. (i) Other Termination. Except as otherwise determined by the Administrator, if ----------------- an optionee's employment with the Company, any Subsidiary or any Affiliated Company terminates for any reason other than death or Disability, the Stock Option may be exercised until the earlier to occur of (i) three months from the date of such termination, or (ii) the expiration of the stated term of such Stock Option. (j) Annual Limit on Incentive Stock Options. To the extent that the aggregate --------------------------------------- Fair Market Value (determined as of the date the Incentive Stock Option is granted) of shares of Stock with respect to which Incentive Stock Options granted to an Optionee under this Plan and all other option plans of the Company, its Parent Corporation or any Subsidiary become exercisable for the first time by the Optionee during any calendar year exceeds $100,000, such Stock Options shall be treated as Non-Qualified Stock Options. 13 (k) DERs. The Administrator shall have the discretion to grant DERs in ---- conjunction with grants of Stock Options pursuant to this Section 5. DERs may be granted in either of two forms, "Current-pay DERs" and "Accrued DERs" and the Administrator may condition the payment or accrual of amounts in respect thereof subject to satisfaction of such performance objectives as the Administrator may specify at the time of grant. Assuming satisfaction of any applicable conditions, Current-pay DERs shall be paid concurrently with any dividends or distributions paid on the Stock during the time the related Stock Options are outstanding in an amount equal to the cash dividend (or Stock or other property hereby distributed) per share being paid on the Stock times the number of shares subject to the related Stock Options. Current-pay DERs are payable in cash, Stock or such other property as may be distributed to stockholders. Accrued DERs may be accrued in respect of cash dividends only or cash dividends and the value of any Stock or other property distributed to stockholders, as the Administrator shall determine at the time of grant. Assuming satisfaction of any applicable conditions, Accrued DERs shall be accrued with respect to the related Stock Options outstanding as of the date dividends are declared on the Company's Stock in accordance with the following formula: (A x B) / C under which "A" equals the number of shares subject to such Stock Options, "B" equals the cash dividend per share or the value per share of the Stock or other property being distributed, as the case may be, and "C" equals the Fair Market Value per share of Stock on the dividend payment date. The Accrued DERs shall represent shares of Stock which shall be issuable to the holder of the related Stock Option proportionately as the holder exercises the Stock Option to which the Accrued DERs relate, rounded down to the nearest whole number of shares. DERs shall expire upon the expiration of the Stock Options to which they relate. The Administrator shall specify at the time of grant whether dividends shall be payable or credited on Accrued DERs. Notwithstanding anything to the contrary herein, Accrued DERs granted with respect to Stock Options shall be accrued only to the extent of the number of shares of stock then reserved and available for issuance under the Plan in excess of the number of shares subject to issuance pursuant to outstanding Stock Option, Accrued DER, Stock Appreciation Right, Limited Stock Appreciation Right, Deferred Stock or Performance Share awards. 14 SECTION 6. STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS. (a) Grant and Exercise. Stock Appreciation Rights and Limited Stock ------------------ Appreciation Rights may be granted either alone ("Free Standing Rights") or in conjunction with all or part of any Stock Option granted under the Plan ("Related Rights"). In the case of a Non-Qualified Stock Option, Related Rights may be granted either at or after the time of the grant of such Stock Option. In the case of an Incentive Stock Option, Related Rights may be granted only at the time of the grant of the Incentive Stock Option. A Related Right or applicable portion thereof granted in conjunction with a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, except that, unless otherwise provided by the Administrator at the time of grant, a Related Right granted with respect to less than the full number of shares covered by a related Stock Option shall only be reduced if and to the extent that the number of shares covered by the exercise or termination of the related Stock Option exceeds the number of shares not covered by the Stock Appreciation Right. A Related Right may be exercised by an optionee, in accordance with paragraph (b) of this Section 6, by surrendering the applicable portion of the related Stock Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in paragraph (b) of this Section 6. Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the Related Rights have been so exercised. (b) Terms and Conditions. Stock Appreciation Rights shall be subject to such -------------------- terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Administrator, including the following: (i) Stock Appreciation Rights that are Related Rights ("Related Stock Appreciation Rights") shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 6; provided, however, that 15 no Related Stock Appreciation Right shall be exercisable during the first six months of its term, except that this additional limitation shall not apply in the event of death or Disability of the optionee prior to the expiration of such six-month period. (ii) Upon the exercise of a Related Stock Appreciation Right, an optionee shall be entitled to receive up to, but not more than, an amount in cash or that number of shares of Stock (or in some combination of cash and shares of Stock) equal in value to the excess of the Fair Market Value of one share of Stock as of the date of exercise over the option price per share specified in the related Stock Option multiplied by the number of shares of Stock in respect of which the Related Stock Appreciation Right is being exercised, with the Administrator having the right to determine the form of payment. (iii)Related Stock Appreciation Rights shall be transferable or exercisable only when and to the extent that the underlying Stock Option would be transferable or exercisable under paragraph (f) of Section 5. (iv) Upon the exercise of a Related Stock Appreciation Right, the Stock Option or part thereof to which such Related Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 on the number of shares of Stock to be issued under the Plan. (v) A Related Stock Appreciation Right granted in connection with an Incentive Stock Option may be exercised only if and when the Fair Market Value of the Stock subject to the Incentive Stock Option exceeds the exercise price of such Stock Option. (vi) Stock Appreciation Rights that are Free Standing Rights ("Free Standing Stock Appreciation Rights") shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Administrator at or after grant; provided, however, that no Free Standing Stock Appreciation Right shall be exercisable during the first six months of its term, except that this limitation shall not apply in the event of death or Disability of the recipient of the Free Standing Stock Appreciation Right prior to the expiration of such six-month period. 16 (vii) The term of each Free Standing Stock Appreciation Right shall be fixed by the Administrator, but no Free Standing Stock Appreciation Right shall be exercisable more than ten years after the date such right is granted. (viii)Upon the exercise of a Free Standing Stock Appreciation Right, a recipient shall be entitled to receive up to, but not more than, an amount in cash or that number of shares of Stock (or any combination of cash or shares of Stock) equal in value to the excess of the Fair Market Value of one share of Stock as of the date of exercise over the price per share specified in the Free Standing Stock Appreciation Right (which price shall be no less than 100% of the Fair Market Value of the Stock on the date of grant) multiplied by the number of shares of Stock with respect to which the right is being exercised, with the Administrator having the right to determine the form of payment. (ix) Free Standing Stock Appreciation Rights shall be transferable or exercisable subject to the provisions governing the transferability and exercisability of Stock Options set forth in paragraphs (c) and (f) of Section 5. (x) In the event of the termination of an employee who has been granted one or more Free Standing Stock Appreciation Rights, such rights shall be exercisable to the same extent that a Stock Option would have been exercisable in the event of the termination of the optionee. (xi) Limited Stock Appreciation Rights may only be exercised within the 30- day period following a "Change of Control" (as defined in Section 10 below), and, with respect to Limited Stock Appreciation Rights that are Related Rights ("Related Limited Stock Appreciation Rights"), only to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 6; provided, however, that no Related Limited Stock Appreciation Right shall be exercisable during the first six months of its term, except that this additional limitation shall not apply in the event of death or Disability of the optionee prior to the expiration of such six-month period. (xii) Upon the exercise of a Limited Stock Appreciation Right, the recipient shall be entitled to receive an amount in cash 17 equal in value to the excess of the "Change of Control Price" (as defined in Section 10) of one share of Stock as of the date of exercise over (A) the option price per share specified in the related Stock Option, or (B) in the case of a Limited Stock Appreciation Right which is a Free Standing Stock Appreciation Right, the price per share specified in the Free Standing Stock Appreciation Right, such excess to be multiplied by the number of shares in respect of which the Limited Stock Appreciation Right shall have been exercised. (xiii) For the purpose of the limitation set forth in Section 3 on the number of shares to be issued under the Plan, the grant or exercise of Free Standing Stock Appreciation Rights shall be deemed to constitute the grant or exercise, respectively, of Stock Options with respect to the number of shares of Stock with respect to which such Free Standing Stock Appreciation Rights were so granted or exercised. SECTION 7. RESTRICTED STOCK, DEFERRED STOCK AND PERFORMANCE SHARES. (a) General. Restricted Stock, Deferred Stock or Performance Share awards may ------- be issued either alone or in addition to other awards granted under the Plan. The Administrator shall determine the Eligible Employees to whom, and the time or times at which, grants of Restricted Stock, Deferred Stock or Performance Share awards shall be made; the number of shares to be awarded; the price, if any, to be paid by the recipient of Restricted Stock, Deferred Stock or Performance Share awards; the Restricted Period (as defined in Section 7(c)) applicable to Restricted Stock or Deferred Stock awards; the performance objectives applicable to Performance Share or Deferred Stock awards; the date or dates on which restrictions applicable to such Restricted Stock or Deferred Stock awards shall lapse during such Restricted Period; and all other conditions of the Restricted Stock, Deferred Stock and Performance Share awards. The Administrator may also condition the grant of Restricted Stock, Deferred Stock awards or Performance Shares upon the exercise of Stock Options, or upon such other criteria as the Administrator may determine, in its sole discretion. The provisions of Restricted Stock, Deferred Stock or Performance Share awards need not be the same with respect to each recipient. 18 (b) Awards and Certificates. The prospective recipient of a Restricted Stock, ----------------------- Deferred Stock or Performance Share award shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award (a "Restricted Stock Award Agreement," "Deferred Stock Award Agreement," or "Performance Share Award Agreement," as appropriate) and delivered a fully executed copy thereof to the Company, within a period of sixty days (or such other period as the Administrator may specify) after the award date. Except as otherwise provided below in this Section 7(b), (i) each Participant who is awarded Restricted Stock or Performance Shares shall be issued a stock certificate in respect of such shares of Restricted Stock or Performance Shares; and (ii) such certificate shall be registered in the name of the Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Imperial Credit Commercial Holdings, Inc., 1997 Stock Option and Awards Plan and a Restricted Stock Award Agreement or Performance Share Award Agreement entered into between the registered owner and Imperial Credit Commercial Holdings, Inc. Copies of such Plan and Agreement are on file in the offices of Imperial Credit Commercial Holdings, Inc." The Company shall require that the stock certificates evidencing such shares be held in the custody of the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award or Performance Share award, the Participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. With respect to Deferred Stock awards, at the expiration of the Restricted Period, stock certificates in respect of such shares of Deferred Stock shall be delivered to the Participant, or his legal representative, in a number equal to the shares of Stock covered by the Deferred Stock award. 19 (c) Restrictions and Conditions. The Restricted Stock, Deferred Stock and --------------------------- Performance Share awards granted pursuant to this Section 7 shall be subject to the following restrictions and conditions: (i) Subject to the provisions of the Plan and the Restricted Stock, Deferred Stock or Performance Share award agreement, during such period as may be set by the Administrator commencing on the grant date (the "Restricted Period"), the Participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock, Performance Shares or Deferred Stock awarded under the Plan; provided, however, that the Administrator may, in its sole discretion, provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part based on such factors and such circumstances as the Administrator may determine, in its sole discretion, including, but not limited to, the attainment of certain performance related goals, the Participant's termination, death or Disability or the occurrence of a "Change of Control" as defined in Section 10. (ii) Except as provided in paragraph (c)(i) of this Section 7, the Participant shall have, with respect to the shares of Restricted Stock or Performance Shares, all of the rights of a stockholder of the Company, including the right to vote the shares, and the right to receive any dividends thereon during the Restricted Period. With respect to Deferred Stock awards, the Participant shall generally not have the rights of a stockholder of the Company, including the right to vote the shares during the Restricted Period; provided, however, that dividends declared during the Restricted Period with respect to the number of shares covered by a Deferred Stock award shall be paid to the Participant. Certificates for shares of unrestricted Stock shall be delivered to the Participant promptly after, and only after, the Restricted Period shall expire without forfeiture in respect of such shares covered by the award of Restricted Stock, Performance Shares or Deferred Stock, except as the Administrator, in its sole discretion, shall otherwise determine. (iii) Subject to the provisions of the Restricted Stock, Deferred Stock or Performance Share award agreement and this Section 7, upon termination of employment for any reason during the Restricted Period, all shares subject to any restriction as of the date of such termination shall be forfeited by the Participant, and the Participant shall only receive the amount, if any, paid by the 20 Participant for such Restricted Stock or Performance Shares, plus simple interest on such amount at the rate of 8% per year. SECTION 8. AMENDMENT AND TERMINATION. (a) The Board may amend, alter or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made that would impair the rights of a Participant under any award theretofore granted without such Participant's consent, or that without the approval of the stockholders (as described below) would: (i) except as provided in Section 3, increase the total number of shares of Stock reserved for the purpose of the Plan; (ii) change the employees or class of employees eligible to participate in the Plan; or (iii) extend the maximum option period under paragraph (b)of Section 5 of the Plan. (b) Notwithstanding the foregoing, stockholder approval under this Section 8 shall only be required at such time and under such circumstances as stockholder approval would be required under Rule 16b-3 of the Act with respect to any material amendment to any employee benefit plan of the Company. (c) The Administrator may amend the terms of any award theretofore granted, prospectively or retroactively, but, subject to Section 3, no such amendment shall impair the rights of any holder without his or her consent. SECTION 9. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments not yet made to a Participant or optionee by the Company, nothing contained herein shall give any such Participant or optionee any rights that are greater than those of a general creditor of the Company. 21 SECTION 10. CHANGE OF CONTROL. The following acceleration and valuation provisions shall apply in the event of a "Change of Control" as defined in paragraph (b) of this Section 10: (a) In the event of a "Change of Control," unless otherwise determined by the Administrator or the Board in writing at or after grant (including under any individual agreement), but prior to the occurrence of such Change of Control: (i) any Stock Appreciation Rights outstanding for at least six months and any Stock Options, awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested; (ii) the restrictions applicable to any Restricted Stock, Deferred Stock or Performance Share awards under the Plan shall lapse, and such shares and awards shall be deemed fully vested; (iii) any indebtedness incurred pursuant to Section 5(e) shall be forgiven and the collateral pledged in connection with any such loan shall be released; and (iv) the value of all outstanding Stock Options, DERs, Stock Appreciation Rights, Limited Stock Appreciation Rights, and Restricted Stock, Deferred Stock and Performance Share awards shall, to the extent determined by the Administrator at or after grant, be cashed out by a payment in cash or other property, as the Administrator may determine, on the basis of the "Change of Control Price" (as defined in paragraph (c) of this Section 10) as of the date the Change of Control occurs or such other date as the Administrator may determine prior to the Change of Control. (b) For purposes of paragraph (a) of this Section 10, a "Change of Control" shall be deemed to have occurred if: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Act (other than the Company; any trustee or other fiduciary holding securities under an employee benefit plan of the Company; or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Stock of the Company) is or becomes after the 22 Effective Date the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company or its affiliates) representing 30% or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of two consecutive years (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this Section 10(b)) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 75% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (c) For purposes of this Section 10, "Change of Control Price" means the higher of (i) the highest price per share paid or offered 23 in any transaction related to a Change of Control of the Company or (ii) the highest price per share paid in any transaction reported on the exchange or national market system on which the Stock is listed, at any time during the preceding sixty day period as determined by the Administrator, except that, in the case of Incentive Stock Options and Stock Appreciation Rights or Limited Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the Administrator decides to cash out such options. SECTION 11. GENERAL PROVISIONS. (a) The Administrator may require each person purchasing shares pursuant to a Stock Option to represent to and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Administrator deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations, and other requirements of the Commission, any stock exchange upon which the Stock is then listed, and any applicable federal or state securities law, and the Administrator may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. (b) Nothing contained in the Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee of the Company or any Subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. (c) Each Participant shall, no later than the date as of which the value of an award first becomes includable in the gross income of the Participant for federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Administrator 24 regarding payment of, any federal, state, or local taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on the making of such payments or arrangements, and the Company (and, where applicable, its Subsidiaries) shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant. (d) No member of the Board or the Administrator, nor any officer or employee of the Company acting on behalf of the Board or the Administrator, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Administrator and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation. (e) No Enlargement of Employee Rights. This Plan is purely voluntary on the part of the Company, and while the Company hopes to continue it indefinitely, the continuance of the Plan shall not be deemed to constitute a contract between the Company and any employee, or to be consideration for or a condition of the employment of any employee. Nothing contained in the Plan shall be deemed to give any employee the right to be retained in the employ of the Company, its Subsidiaries, its Parent Corporation or Affiliated Companies, or to interfere with the right of the Company, it Subsidiaries or Affiliated Companies to discharge or retire any employee thereof at any time. No employee shall have any right to or interest in Stock Options (with or without DERs), Stock Appreciation Rights or Limited Stock Appreciation Rights, Restricted Stock, Deferred Stock, or Performance Shares authorized hereunder prior to the grant of such a Stock Option or other award described herein to such employee, and upon such grant he or she shall have only such rights and interests as are expressly provided herein, subject, however, to all applicable provisions of the Company's Charter, as the same may be amended from time to time. SECTION 12. INVALID PROVISION. In the event that any provision of this Plan is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering 25 any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as thought the invalid unenforceable provision was not contained herein. SECTION 13. SUCCESSORS AND ASSIGNS. This Plan shall be binding on the inure to the benefit of the Company and the employees to whom an Option is granted hereunder, and such employees' heirs, executors, administrators, legatees, personal representatives, assignees and transferees. SECTION 14. EFFECTIVE DATE OF PLAN. The Plan became effective (the "Effective Date") on April 14, 1997. SECTION 15. TERM OF PLAN. No Stock Option, Stock Appreciation Right, Limited Stock Appreciation Right, Restricted Stock, Deferred Stock or Performance Share award shall be granted pursuant to the Plan on or after the tenth anniversary of the Effective Date, but awards theretofore granted may extend beyond that date. 26 EX-10.5 11 FORM OF CONTRIBUTION AGREEMENT EXHIBIT 10.5 CONTRIBUTION AGREEMENT This CONTRIBUTION AGREEMENT (THIS "AGREEMENT") entered into and made effective as of July ___, 1997, the closing date (THE "CLOSING DATE") of the rights offering of Common Stock, &.01 par value per share, (THE "OFFERING") on a Form S-11 Registration Statement (THE "REGISTRATION STATEMENT") of IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC., a Maryland corporation (THE "COMPANY"), is by and between the Company and IMPERIAL CREDIT MORTGAGE HOLDINGS, INC., a Maryland corporation ("IMH"). BACKGROUND A. In January 1997, Imperial Commercial Capital Corporation was incorporated under the laws of the state of California ("ICCC"). B. In February 1997, IMH purchased all of the non-voting Preferred Stock (THE "PREFERRED STOCK") of ICCC, which represents 95% of the economic interest in ICCC, for $500,000. C. ICCC, through three divisions, operates as the conduit operations of the Company by originating, purchasing, and selling or securitizing Commercial Mortgages, as defined in the Registration Statement. D. In furtherance of the foregoing, on the Closing Date, IMH will contribute to the Company, and the Company will accept, 100% of the Preferred Stock presently owned by IMH in exchange for that number of shares of the Company's Class A Common Stock (THE "CLASS A STOCK") equal to the product of 95% of the estimated fair value of ICCC on the Closing Date divided by the Subscription Price (as defined in the Registration Statement) of the Company's Common Stock issued in the Offering. E. This Agreement is intended to accomplish and memorialize the above contribution, to provide certain agreements applicable to the relationship between the Company and IMH, and thereby effectuate the intent of the parties hereto. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in consideration of the mutual covenants and conditions hereof, the parties agree as follows: 1. Contribution. Subject to and upon the terms and conditions hereof, on ------------ the date hereof, (a) IMH shall contribute (THE "CONTRIBUTION") to the Company, and the Company agrees to accept from IMH, free and clear of all liens, claims and encumbrances thereon, all of the Preferred Stock of ICCC presently owned by IMH and (b) in consideration therefor, the Company hereby covenants that on the date hereof, the Company shall issue or cause to be issued to IMH, _________ validly issued, fully paid and nonassessable shares of its Class A Stock, which number is equal to the 1 product of 95% of the estimated fair value of ICCC on the date hereof divided by the Subscription Price of the Company's Common Stock issued in the Offering. 2. Transfer of Stock. ----------------- (a) On the Closing Date, IMH conveys, assigns, transfers and delivers to the Company and the Company hereby acquires from IMH all of its rights, title and interest in and to the Preferred Stock. (b) The Contribution in Subsection (a) above, shall only be effective upon the issuance by the Company to IMH of _______ shares of its Class A Stock, as determined in Section 1 on the Closing Date. (c) Following the Contribution, IMH shall take all necessary steps to register the transfer of the Preferred Stock in the shareholder ledger of ICCC. Any stock transfer or other taxes payable in connection with the Contribution pursuant to this Agreement shall be paid by IMH. IMH shall also provide the Company with such further documents as the Company may reasonably request to effectuate the Contribution. From time to time, at the request of the Company whether at or after the Closing Date, IMH shall execute and deliver such instruments of conveyance of the Preferred Stock as the Company may need in order to more effectively convey the Preferred Stock to the Company. 3. Indemnification. --------------- (a) The Company shall indemnify and hold harmless IMH against and in respect of any and all damages, claims, losses, liabilities and expenses incurred by IMH which arise out of or relate to (i) any breach or violation of this Agreement by the Company, (ii) any breach of any of the representations or warranties made in this Agreement by the Company, and (iii) the ownership of the Preferred Stock on or after the Closing Date. (b) IMH shall indemnify and hold harmless the Company against and in respect of any and all damages, claims, losses, liabilities and expenses incurred by the Company which arise out of or relate to (i) any breach or violation of this Agreement by IMH, (ii) any breach of any of the representations or warranties made in this Agreement by IMH, and (iii) the ownership of the Class A Stock on or after the Closing Date. 4. Representations and Warranties. ------------------------------ a. IMH hereby represents and warrants to the Company as follows: (1) Corporate Existence. IMH is duly organized, validly ------------------- existing and in good standing under the laws of Maryland, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in 2 good standing under the laws of such jurisdictions where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of IMH and its subsidiaries, taken as a whole. (2) Corporate Power; Authorization; Enforceable Obligations. IMH has ------------------------------------------------------- the power, authority and legal right to execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary corporate action to authorize this Agreement on the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required hereunder. No consent of any other person including, without limitation, stockholders and creditors of IMH, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by IMH in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This Agreement has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of IMH and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of IMH enforceable against IMH in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, moratorium or similar laws now or hereafter in effect relating to the rights and remedies of creditors generally, and general principles of equity. (3) No Legal Bar to This Agreement. The execution, delivery and ------------------------------ performance of this Agreement and the documents or instruments required hereunder, will not violate any provision of any existing law or regulation binding on IMH, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding IMH, or the charter or bylaws of, or any securities issued by IMH, or of any mortgage, indenture, lease, contract, or other agreement, instrument, undertaking or other arrangement of any character or nature whatsoever to which IMH is a party or by which it or its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of IMH and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. (4) Marketable Title. Upon consummation of the transaction ---------------- contemplated by this Agreement, the Company will have good and marketable title in and to the Preferred Stock, free and clear of all liens, charges, claims, pledges, options, security interests, encumbrances and restrictions of every kind. (5) Issued and Outstanding Preferred Stock. The issued and -------------------------------------- outstanding Preferred Stock of ICCC consists of 9,500 shares, of which, prior to the Closing Date, IMH is the sole lawful record and beneficial owner. The Preferred Stock has been duly authorized 3 and validly issued and is free of any pre-emptive rights and is entitled to the rights, privileges and preferences set forth in ICCC's Articles of Incorporation attached as Exhibit "A" hereto. b. The Company hereby represents and warrants to IMH as follows: (1) Corporate Existence. The Company is duly organized, validly existing and in good standing under the laws of Maryland, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, taken as a whole. (2) Corporate Power; Authorization; Enforceable Obligations. ------------------------------------------------------- The Company has the corporate power, authority and legal right to execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary corporate action to authorize this Agreement on the terms and conditions hereof and its execution, delivery and performance of this Agreement and all obligations required hereunder. No consent of any other person including, without limitation, stockholders and creditors of the Company, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Company in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This Agreement has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of the Company, and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the Company enforceable against the Company in accordance with its terms. (3) No Legal Bar to This Agreement. The execution, delivery ------------------------------ and performance of this Agreement and the documents or instruments required hereunder, will not violate any provision of any existing law or regulation binding on the Company, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Company, or the charter or bylaws of, or any securities issued by the Company, or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Company is a party or by which the Company or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provision of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. (4) Validly Issued. The Class A Stock has been duly -------------- authorized, validly issued and, upon consummation of the transaction contemplated by this Agreement, fully paid and non-assessable. 4 5. Arbitration. ----------- (a) Each controversy, dispute or claim between the parties arising out of or relating to this Agreement, which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to this Agreement gives written notice to the other that a controversy, dispute or claim exists), will be settled by binding arbitration in Orange County, California in accordance with the provisions of the Judicial Arbitration and Mediation Services, which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim, and the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court of Orange County (THE "COURT"). Any decision rendered by the arbitrator and such arbitration will be final, binding and conclusive and judgment shall be entered pursuant to the California Code of Civil Procedure Section 644 in any court in the State of California having jurisdiction. (b) Except as expressly set forth in this Agreement, the arbitrator shall determine the manner in which the proceeding is conducted, including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the proceeding. All proceedings and hearings conducted before the arbitrator, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the arbitrator. The party making such a request shall have the obligation to arrange for any pay for the court reporter. The costs of the court reporter shall be borne equally by the parties. (c) The arbitrator shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the state of California will be applicable to the proceeding. The arbitrator shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The arbitrator shall issue a single judgment at the close of the proceeding which shall dispose of all of the claims of the parties that are the subject of the proceeding. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the arbitrator. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a proceeding governed under this provision. 6. Notices. All notices, requests, demands and other communications ------- provided for hereunder shall be in writing (including telegraphic or facsimile communications) and shall be in mailed (return receipt requested), telegraphed, sent by facsimile, overnight courier or hand delivered to each party at the address set forth as follows, or at such other address as either party may designate by notice to the others, and any such notice, request, demand or other communication shall be effective upon receipt: 5 The Company: Imperial Credit Commercial Holdings, Inc. 20371 Irvine Avenue Santa Ana Heights, CA 92707 Telephone: (714) 556-0122 Facsimile: (714) 433-2122 Attention: Joseph R. Tomkinson Chief Executive Officer IMH: Imperial Credit Mortgage Holdings, Inc. 20371 Irvine Avenue Santa Ana Heights, CA 92707 Telephone: (714) 556-0122 Facsimile: (714) 438-2150 Attention: William S. Ashmore President 7. Amendments. This Agreement shall not be amended, changed, modified, ---------- terminated or discharged in whole or in part except by an instrument in writing signed by all parties hereto, or their respective successors or assigns, or otherwise as provided herein. The parties hereto agree that in no event shall an oral modification of this Agreement be enforceable or valid. 8. Attorneys' Fees. In the event that any party shall bring an action or --------------- proceeding in connection with the performance, breach or interpretation hereof, then the prevailing party in such action as determined by the court or other body having jurisdiction shall be entitled to recover from the losing party in such action, as determined by the court or other body having jurisdiction, all reasonable costs and expense of litigation or arbitration, including reasonable attorney's fees, court costs, costs of investigation and other costs reasonably related to such proceeding. 9. Successors and Assigns. This Agreement shall become effective when it ---------------------- is executed by all parties and thereafter shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. 10. Entire Agreement. This Agreement contains the entire agreement of the ---------------- parties relating to the subject matter hereof, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement that are not set forth otherwise herein. This Agreement supersedes any and all prior agreements, written or oral, between the parties hereto. 11. Waiver. Any forbearance by a party to this Agreement in exercising ------ any right or remedy under this Agreement or otherwise afforded by applicable law shall not be a waiver of or preclude the exercise of that or any other right or remedy. 6 12. Headings and Cross References. The section headings hereof have been ----------------------------- inserted for convenience of reference only and shall not be construed to affect the meaning, construction or effect of this Agreement. Any reference in this Agreement to a "Section" or "Subsection" shall be construed, respectively, as referring to a section of this Agreement or a subsection of a section of this Agreement. 13. Severability. The invalidity or unenforceability of any provision of ------------ this Agreement shall not affect the validity of any other provision, and all other provisions shall remain in full force and effect. 14. Choice of Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of California applicable to contracts made and performed in said State, without regard to conflicts of laws principals. 15. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which when so executed shall be deemed an original, and which taken together shall constitute one and the same instrument. [The remainder of this page intentionally left blank.] 7 IN WITNESS WHEREOF, this Agreement is executed on behalf of the parties by duly authorized representatives as of the date first above written. IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. By:_______________________________ Name: Joseph R. Tomkinson Title: Chief Executive Officer IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. By:_______________________________ Name: William S. Ashmore Title: President 8 EXHIBIT A IMPERIAL COMMERCIAL CAPITAL CORPORATION --------------------------------------- ARTICLES OF INCORPORATION ------------------------- EX-10.6 12 FORM OF NON-COMPETITION AGREEMENT EXHIBIT 10.6 NON-COMPETITION AGREEMENT This NON-COMPETITION AGREEMENT (THIS "AGREEMENT"), entered into and made effective as of July ___, 1997, the closing date (THE "CLOSING DATE") of the public offering of Common Stock on a Form S-11 Registration Statement (THE "REGISTRATION STATEMENT") of IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC., a Maryland corporation (THE "COMPANY"), is by and between IMPERIAL CREDIT MORTGAGE HOLDINGS, INC., a Maryland corporation ("IMH"), ICI Funding Corporation, a California corporation ("ICIFC"), the Company, and Imperial Commercial Capital Corporation, a California corporation ("ICCC") with reference to the following facts: BACKGROUND A. The Company has filed a Registration Statement on Form S-11 pursuant to the Securities Act of 1933 (THE "OFFERING"). B. Pursuant to that certain Contribution Agreement, effective as of the Closing Date, between the Company and IMH, in exchange for the transfer by IMH to the Company of 100% of the non-voting Preferred Stock of ICCC presently owned by IMH, the Company has agreed to issue to IMH 95,000 shares of ICH Class A Common Stock (THE "SHARES") The transactions described in this paragraph are referred to herein as the "CONTRIBUTION TRANSACTION." C. The Company was formed for the purpose of originating, purchasing, securitizing and selling Commercial Mortgages (as defined in the Registration Statement) and investing in Commercial Mortgages and commercial mortgage-backed securities ("CMBSS"). D. ICCC is the conduit operations of ICH; ICH owns 100% of the non- voting Preferred Stock of ICCC which represents 95% of the economic interest. ICIFC is the conduit operations of IMH; IMH owns 100% of the non-voting Preferred Stock of ICIFC which represents 99% of the economic interest. E. IMH and ICIFC has agreed not to compete with the Company and ICCC in the certain businesses that are more particularly described herein, in the geographical locations and for the term described herein. F. IMH's trade secrets in those businesses in which it has agreed not to compete include certain non-public, confidential information concerning product and service marketing plans and strategy, customer needs and peculiarities, customer lists and other detailed information (THE "TRADE SECRETS"). G. The Company would not enter into the Contribution Agreement unless it was assured that IMH and ICIFC would execute this Agreement. 1 NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained, and for other good and valuable consideration, it is hereby agreed by and between the parties hereto as follows: 1. Non-Competition. --------------- (a) Except as set forth below, for a period of the earlier of nine (9) months from the Closing Date of the Company's Offering or the date on which the Company accumulates (for investment or sale) $300,000,000 of Commercial Mortgages and/or CMBSs, neither IMH nor any of its affiliate companies, including ICIFC, shall originate, purchase or otherwise acquire or sell any Commercial Mortgages and/or CMBSs. Notwithstanding the foregoing, this Agreement shall not preclude IMH or ICIFC from purchasing any Commercial Mortgages or CMBSs as permitted under that certain Right of First Refusal Agreement by and among IMH, ICIFC, the Company, ICCC and REIT Advisors, Inc., of even date herewith, a copy of which is attached hereto as Exhibit "A." This covenant not to compete shall be limited to those states and those counties and cities set forth on Exhibit "B" attached hereto. The aforementioned businesses in which IMH has agreed not to compete shall be referred to herein as the "BUSINESSES." (b) The parties intend that the covenant contained in this Section 1 shall be construed as a series of separate covenants, one for each county specified in Exhibit "B" hereto. Except for geographic coverage, each such separate covenant shall be deemed identical in terms to the covenant contained in this Section 1. If, in any judicial proceedings, a court shall refuse to enforce any of the separate covenants deemed included in this paragraph, then such unenforceable covenant shall be deemed eliminated from these provisions for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants to be enforced. (c) Nothing contained in this Agreement shall be deemed to preclude IMH or ICIFC from purchasing or owning, directly or beneficially, as a passive investment, five percent (5%) or less of any class of a publicly traded securities of any entity if it does not actively participate in or control, directly or indirectly, any investment or other decisions with respect to such entity. 2. Trade Secrets. ------------- Each of IMH and ICIFC recognizes and acknowledges that the Trade Secrets are valuable, special and unique assets of the Businesses. Each of IMH and ICIFC shall keep all Trade Secrets confidential and not disclose such Trade Secrets or any part thereof to any person, firm, corporation, association or other entity for any reason or purpose whatsoever. 3. Acknowledgment. -------------- Each of IMH and ICIFC acknowledges and agrees that the covenants referred to in Sections 1 and 2 hereof are given in consideration of the issuance by the Company of the Shares to IMH pursuant to the Contribution Agreement. 2 4. Injunctive Relief. ----------------- Each of IMH and ICIFC hereby acknowledges and agrees that it would be difficult to fully compensate the Company for damages resulting from the breach or threatened breach of Sections 1 and 2, herein and, accordingly, that the Company shall be entitled to temporary and injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, to enforce such Sections without the necessity of proving actual damages therewith. This provision with respect to injunctive relief shall not, however, diminish the Company's right to claim and recover damages or enforce any other of its legal and/or equit able rights or defenses. 5. Severable Provisions. -------------------- The provisions of this Agreement are severable and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions, and any partially unenforceable provisions to the extent enforceable, shall nevertheless be binding and enforceable. 6. Reference Provision. ------------------- (a) Each controversy, dispute or claim between the parties arising out of or relating to this Agreement, which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to this Agreement gives written notice to the other that a controversy, dispute or claim exists), will be settled by binding arbitration in Orange County, California in accordance with the provisions of the Judicial Arbitration and Mediation Services, which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim, and the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court of Orange County (THE "COURT"). Any decision rendered by the arbitrator and such arbitration will be final, binding and conclusive and judgment shall be entered pursuant to the California Code of Civil Procedure Section 644 in any court in the State of California having jurisdiction. (b) Except as expressly set forth in this Agreement, the arbitrator shall determine the manner in which the proceeding is conducted, including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the proceeding. All proceedings and hearings conducted before the arbitrator, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the arbitrator. The party making such a request shall have the obligation to arrange for any pay for the court reporter. The costs of the court reporter shall be borne equally by the parties. (c) The arbitrator shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the state of California will be applicable to the reference proceeding. The arbitrator shall be empowered to enter equitable as well as legal relief, 3 to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The arbitrator shall issue a single judgment at the close of the proceeding which shall dispose of all of the claims of the parties that are the subject of the proceeding. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the arbitrator. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a proceeding governed under this provision. 7. Binding Agreement. This Agreement shall inure to the benefit of ----------------- and shall be binding upon the parties hereto and their successors and assigns. 8. Captions. The Section captions are inserted only as a matter of -------- convenience and reference and in no way define, limit or describe the scope of this Agreement or the intent of any provisions hereof. 9. Entire Agreement. This Agreement contains the entire agreement ---------------- of the parties relating to the subject matter hereof, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement that are not set forth otherwise herein. This Agreement supersedes any and all prior agreements, written or oral, between the parties hereto. 10. Amendments. This Agreement shall not be amended, changed, ---------- modified, terminated or discharged in whole or in part except by an instrument in writing signed by all parties hereto, or their respective successors or assigns, or otherwise as provided herein. The parties hereto agree that in no event shall an oral modification of this Agreement be enforceable or valid. 11. Governing Law. This Agreement shall be governed and construed in ------------- accordance with the laws of the State of California applicable to contracts made and performed in said state, without regard to conflicts of laws principals. 12. Notices. All notices and other communications under this ------- Agreement shall be in writing (including, without limitation, telegraphic, telex, telecopy or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered by hand or by a nationally recognized courier service guaranteeing overnight delivery to a party at the following address (or to such other address as such party may have specified by notice given to the other party pursuant to this provision): 4 If to the Company or ICCC, to: c/o Imperial Credit Commercial Holdings, Inc. 20371 Irvine Avenue Santa Ana Heights, California 92707 Telephone: (714) 556-0122 Facsimile: (714) 438-2699 Attention: Joseph R. Tomkinson Chief Executive Officer If to IMH or ICIFC, to: c/o Imperial Credit Mortgage Holdings, Inc. 20371 Irvine Avenue Santa Ana Heights, California 92702 Telephone: (714) 556-0122 Facsimile: (714) 438-2150 Attention: William S. Ashmore President All such notices and communications shall, when mailed, telegraphed, telexed, telecopied, cabled or delivered, be effective three days after deposit in the mails, delivered to the telegraph company, confirmed by telex answerback, telecopied with confirmation of receipt, delivered to the cable company, delivered by hand to the addressee or one day after delivery to the courier service. 13. Waiver. Any forbearance by a party to this Agreement in ------ exercising any right or remedy under this Agreement or otherwise afforded by applicable law shall not be a waiver of or preclude the exercise of that or any other right or remedy. 14. Severability. The invalidity or unenforceability of any ------------ provision of this Agreement shall not affect the validity of any other provision, and all other provisions shall remain in full force and effect. 15. Attorney's Fees. In the event that any party shall bring an --------------- action or proceeding in connection with the performance, breach or interpretation hereof, then the prevailing party in such action as determined by the court or other body having jurisdiction shall be entitled to recover from the losing party in such action, as determined by the court or other body having jurisdiction, all reasonable costs and expense of litigation or arbitration, including reasonable attorney's fees, court costs, costs of investigation and other costs reasonably related to such proceeding. 16. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which when so executed shall be deemed to be an original, and which taken together shall constitute one and the same instrument. 5 IN WITNESS WHEREOF, this Agreement is made as of the day and year first above written. IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. a Maryland corporation By:_______________________________ Name: William S. Ashmore Title: President ICI FUNDING CORPORATION a California corporation By:_______________________________ Name: William S. Ashmore Title: President IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. a Maryland corporation By:_______________________________ Name: Joseph R. Tomkinson Title: Chief Executive Officer IMPERIAL COMMERCIAL CAPITAL CORPORATION a California corporation By:_______________________________ Name: Joseph R. Tomkinson Title: Chief Executive Officer 6 EXHIBIT "A" ----------- RIGHT OF FIRST REFUSAL AGREEMENT 7 EXHIBIT "B" ----------- The geographic areas to which the non-competition provisions of Section 1 apply are as follows: 8 EX-10.7 13 FORM OF RIGHT OF FIRST REFUSAL AGREEMENT EXHIBIT 10.7 RIGHT OF FIRST REFUSAL AGREEMENT This RIGHT OF FIRST REFUSAL AGREEMENT (THIS "AGREEMENT"), entered into and made effective as of July ___, 1997, the closing date (THE "CLOSING DATE") of the public offering of Common Stock, $.01 par value per share, on a Form S-11 Registration Statement (THE "REGISTRATION STATEMENT") of IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC., a Maryland corporation ("ICH"), by and among ICH, ICI FUNDING CORPORATION, a California corporation ("ICIFC") IMPERIAL CREDIT MORTGAGE HOLDINGS, INC., a Maryland corporation ("IMH"), IMPERIAL COMMERCIAL CAPITAL CORPORATION, a California corporation ("ICCC") and REIT ADVISORS, INC., ("RAI"). BACKGROUND A. Pursuant to that certain Contribution Agreement, effective as of the Closing Date, between ICH and IMH, in exchange for (i) the transfer by IMH to the Company of 100% of the non-voting Preferred Stock of Imperial Commercial Capital Corporation ("ICCC") presently owned by IMH, and (ii) the execution of that certain Non-Competition Agreement, effective as of the Closing Date, between ICH and IMH, and this Agreement, the Company has agreed to issue to IMH that number of shares of ICH Class A Common Stock equal to the product of 95% of the estimated fair value of ICCC on the Closing Date divided by the Subscription Price (as defined in the Registration Statement). B. ICH is involved primarily in originating, purchasing, securitizing and selling commercial mortgages and investing in Commercial Mortgages and CMBSs (as defined below). ICCC is the conduit operations of ICH; ICH owns all of the outstanding non-voting preferred stock of ICCC which represents 95% of the economic interest in ICH. IMH's primary business is purchasing, selling, securitizing and investing in residential mortgage loans 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") ("NON-CONFORMING MORTGAGE LOANS") and such mortgage loans and securities backed by Non-Conforming Mortgage Loans. ICIFC is the conduit operations of IMH; IMH owns all of the outstanding non-voting preferred stock of ICIFC which represents 99% of the economic interest in ICIFC. On the date of this Agreement, RAI will be involved primarily in overseeing the day-to-day operations of ICH, subject to supervision of ICH's board of directors, including (i) asset-liability management - primarily the analysis and oversight of the purchasing, financing and disposition of ICH assets, (ii) capital management-the oversight of ICH's structuring, analysis, capital raising and investor relations activities, and (iii) operations management-primarily the oversight of ICH's operating subsidiaries, including ICCC. C. Due to the nature of the specialty finance business and the parties' past experience, it is likely that RAI will have opportunities to act as the manager of other REITs, some of which may have been or will be affiliated with ICH, ICIFC, IMH or ICCC (such REIT utilizing 1 RAI as its manager and is a party to this Agreement, AN "AFFILIATED REIT"), and will have opportunities to acquire and will acquire Commercial Mortgages and CMBSs on behalf of said parties. D. To enhance the business opportunities of each of ICH, IMH and any Affiliated REIT, the parties have agreed it would be in their respective best interests to utilize one another as sources to purchase Mortgage Loans (as defined below). In that regard, RAI has agreed that any mortgage loan or mortgage-backed security investment opportunity (AN "INVESTMENT OPPORTUNITY") which is offered to it on behalf of either ICH, IMH or any Affiliated REIT (A "REIT ENTITY") either directly for such REIT Entity or for such REIT Entity through any of its operating subsidiaries, including its conduit operations or that C corporation through which it conducts certain of its operations (each an "OPERATING SUBSIDIARY"), will first be offered to that REIT Entity (THE "PRINCIPAL PARTY") for exploitation either directly by such REIT Entity or through any of its Operating Subsidiaries, whose initial primary business as described in said Principal Party's initial public offering documentation (THE "INITIAL PRIMARY BUSINESS") most closely aligns with such Investment Opportunity. NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter contained, the parties hereto agree as follows: 1. Definitions. ----------- "AGENCY CERTIFICATES" means Pass-Through Certificates guaranteed by the FNMA, FHLMC or the Government National Mortgage Association ("GNMA"). "BUSINESS DAY" means any day, other than Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law, regulation or executive order to close. "CMBSS" means (1) Pass-Through Certificates and (2) REMICs. "CMO" means an adjustable or fixed-rate debt obligation (bond) that is collateralized by mortgage loans or mortgage certificates and issued by private institutions. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMERCIAL MORTGAGES" means commercial mortgage assets including condo-conversion, multi-family property and cooperative apartment mortgage loans on commercial real property such as industrial and warehouse properties, office buildings, retail space and shopping malls, hotels and motels, nursing homes, hospitals, congregate care facilities and senior living centers. 2 "CONFORMING MORTGAGE LOANS" mean mortgage loans that qualify for purchase by FNMA and FHLMC. "MORTGAGE LOANS" means Conforming Mortgage Loans, Non-Conforming Mortgage Loans, Commercial Mortgages and any financing offered by any Affiliated REIT. "NOTICE OF FIRST REFUSAL" means a written notice to be delivered by or for RAI to ICH, IMH or any Affiliated REIT or by or for ICH, IMH or any Affiliated REIT to RAI, as applicable, setting forth the option to enter into an Investment Opportunity, provided in Section 2 hereof, which notice shall specify in reasonable detail the price, terms and conditions of the Investment Opportunity. "PARTICIPANT" means any of ICH, IMH or any Affiliated REIT which is not a Principal Party with respect to an Investment Opportunity. "PASS-THROUGH CERTIFICATES" means securities (or interests therein) which are Qualified REIT Assets evidencing undivided ownership interests in a pool of Mortgage Loans, the holders of which receive a "pass-through" of the principal and interest paid in connection with the underlying mortgage loans in accordance with the holders' respective, undivided interests in the pool. Pass- Through Certificates evidence interests in loans secured by multi-family or commercial real estate properties. "PURCHASE PRICE" means the price to be paid for loans specified in a Notice of First Refusal. "QUALIFIED REIT ASSETS" means Pass-Through Certificates, Mortgage Loans, Agency Certificates and other assets of the type described in Code Section 856(c)(6)(B). "REMICS" means serially maturing debt securities secured by a pool of Mortgage Loans, the payments on which bear a relationship to the debt securities, and the issuer of which qualifies as a Real Estate Mortgage Investment Conduit under Section 860D of the Code. "RESPONSE" means a written letter of acceptance or rejection of a Notice of First Refusal by either ICH, IMH or any Affiliated REIT, as applicable, as set forth in Section 2.2 hereof. "THIRD PARTY" means any individual, corporation, partnership, association, limited liability company, trust or any unincorporated organization other than ICH, IMH, RAI or any Affiliated REIT or their Operating Subsidiaries. 2. RAI Offer of Investment Opportunities to ICH, IMH and any --------------------------------------------------------- Affiliated REITs. - ---------------- 3 2.1 If RAI is offered an Investment Opportunity on behalf of any of ICH, IMH or an Affiliated REIT, for exploitation either directly by such REIT Entity or by such REIT Entity through any of its Operating Subsidiaries, RAI agrees to first offer such Investment Opportunity to the Principal Party, for exploitation either directly by the Principal Party or through any of its Operating Subsidiaries whose Initial Primary Business most closely aligns with such Investment Opportunity on terms and conditions no less favorable than as first presented to RAI and deliver to the Principal Party a Notice of First Refusal within [2] days of its receipt of the Investment Opportunity. 2.2 Upon receipt of a Notice of First Refusal from RAI, ICH, IMH or any Affiliated REIT, as the case may be, shall have five (5) Business Days to either accept or reject the Notice of First Refusal by delivering a Response to RAI. Upon acceptance by ICH, IMH or any Affiliated REIT, as the case may be, through a Response, the Notice of First Refusal shall constitute the binding agreement of RAI to pursue with commercially reasonable efforts such Investment Opportunity on the terms and subject to the conditions set forth therein, either directly by such party or through any of its Operating Subsidiaries. Each applicable, Operating Subsidiary agrees to take all action necessary to effectuate all action necessary to effectuate the pursuit of such Investment Opportunity. If RAI does not receive a Response from ICH, IMH or any Affiliated REIT, as the case may be, or the Principal Party declines the Investment Opportunity within five (5) Business Days, RAI will make an independent evaluation of which Participant's business is more greatly enhanced by such opportunity. A similar Notice of First Refusal shall be forwarded by RAI to such Participant and said Participant shall have five (5) Business Days in which to respond to its Notice of First Refusal. Should such Participant decline to pursue the Investment Opportunity, RAI, in its discretion, shall (a) make another independent evaluation of which remaining Participant's business is more greatly enhanced by such opportunity and (b) deliver a Notice of First Refusal to such Participant. Such Participant shall have five (5) Business Days to accept or reject the Notice of First Refusal by delivering a Response to RAI. Should all Participants decline to pursue the Investment Opportunity, then RAI shall have the right to present such Investment Opportunity to a Third Party. The five (5) Business Day periods specified in this Subsection 2.2 may be extended upon mutual written agreement of the parties. 2.3 RAI may only present an Investment Opportunity contained in a Notice of First Refusal to IMH, ICH, any Affiliated REIT or Third Party on terms no less favorable than as first presented to RAI and then as set forth to ICH, IMH or any Affiliated REIT, as the case may be, in said Notice of First Refusal. 3. IMH, ICH and Any Affiliated REIT Right of First Refusal. ------------------------------------------------------- 3.1 Should either of IMH, ICH or any Affiliated REIT, or any of their Operating Subsidiaries, be offered an Investment Opportunity which falls outside the scope of the Initial Primary Business of IMH, ICH or any Affiliated REIT or the Initial Primary Business of the REIT Entity associated with the applicable Operating Subsidiary, as the case may be, it will first be offered 4 to the Principal Party whose Initial Primary Business most closely aligns with such Investment Opportunity on terms and conditions no less favorable as first presented to IMH, ICH or any Affiliated REIT or any of their Operating Subsidiaries, as the case may be, and a Notice of First Refusal shall be delivered to the Principal Party with [2] days of the receipt of such Investment Opportunity. 3.2 Upon receipt of a Notice of First Refusal from either of IMH, ICH or any Affiliated REIT, as the case may be, the Principal Party shall have five (5) Business Days to either accept or reject the Notice of First Refusal by delivering a Response to IMH, ICH or any Affiliated REIT, as the case may be. Upon acceptance by the Principal Party through a Response, the Notice of First Refusal shall constitute the binding agreement of IMH, ICH or any Affiliated REIT as the case may be, to pursue with commercially responsible efforts such Investment Opportunity in the terms and conditions set forth therein either directly by such party or through any of its Operating Subsidiaries. Each applicable Operating Subsidiary agrees to take all action necessary to effectuate the pursuit of such Investment Opportunity. If IMH, ICH or any Affiliated REIT does not receive a Response from the Principal Party, within five (5) Business Days, or such Principal Party declines such Notice of First Refusal, IMH, ICH or any Affiliated REIT, as the case may be shall have the right to pursue such Investment Opportunity, either directly or through any of their respective Operating Subsidiaries. The five (5) Business Day period specified in this subsection 3.2 may be extended upon mutual written agreement of the parties. 3.3 IMH, ICH or any Affiliated REIT may only pursue an Investment Opportunity contained in a Notice of First Refusal to the Principal Party on terms no less favorable than as presented to IMH, ICH or any Affiliated REIT, or any of their Operating Subsidiaries, and then as set forth to the Principal Party on said Notice of First Refusal. 4. Term. The term of this Agreement shall be ten (10) years from ---- the date hereof. 5. Affiliated REITs to be Parties. The parties hereto agree to use ------------------------------ all reasonable efforts to cause each Affiliated REIT, if any, to become parties to this Agreement. 6. Injunctive Relief. Each of RAI, ICH, IMH and any Affiliated ----------------- REIT hereby acknowledges and agrees that it would be difficult to fully compensate each other for damages resulting from the breach or threatened breach of Sections 2 and 3, as they apply to each party herein and, accordingly, that each of RAI, ICH, IMH and any Affiliated REIT shall be entitled to temporary and injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, to enforce such Sections without the necessity of proving actual damages therewith. This provision with respect to injunctive relief shall not, however, diminish each of RAI's, ICH's, IMH's and any Affiliated REIT's right to claim and recover damages or enforce any other of its legal and/or equitable rights or defenses. 5 7. Severable Provisions. The provisions of this Agreement are -------------------- severable and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions, and any partially unenforceable provisions to the extent enforceable, shall nevertheless be binding and enforceable. 8. Binding Agreement. This Agreement shall inure to the benefit of ----------------- and shall be binding upon the parties hereto and their successors and assigns. 9. Captions. The Section captions are inserted only as a matter of -------- convenience and reference and in no way define, limit or describe the scope of this Agreement or the intent of any provisions hereof. 10. Entire Agreement. This Agreement contains the entire agreement ---------------- of the parties relating to the subject matter hereof, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement that are not set forth otherwise herein. This Agreement supersedes any and all prior agreements, written or oral, between the parties hereto. 11. Amendments. This Agreement shall not be amended, changed, ---------- modified, terminated or discharged in whole or in part except by an instrument in writing signed by all parties hereto, or their respective successors or assigns, or otherwise as provided herein. The parties hereto agree that in no event shall an oral modification of this Agreement be enforceable or valid. 12. Governing Law. This Agreement shall be governed and construed in ------------- accordance with the laws of the State of California applicable to contracts made and performed in said state, without regard to conflicts of laws principles. 13. Notices. ------- 13.1 All notices and other communications under this Agreement, other than Notices of First Refusal and Responses (which shall be governed by subsection 13.2 below), shall be in writing (including, without limitation, telegraphic, telex, telecopy or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered by hand or by a nationally recognized courier service guaranteeing overnight delivery to a party at the following address (or to such other address as such party may have specified by notice given to the other party pursuant to this provision): If to ICH or ICCC, to: c/o Imperial Credit Commercial Holdings, Inc. 20371 Irvine Avenue Santa Ana Heights, California 92702 6 Telephone: (714) 556-0122 Facsimile: (714) 438-2150 Attention: Joseph R. Tomkinson Chief Executive Officer If to IMH or ICIFC, to: c/o Imperial Credit Mortgage Holdings, Inc. 20371 Irvine Avenue Santa Ana Heights, California 92702 Telephone: (714) 556-0122 Facsimile: (714) 438-2150 Attention: William S. Ashmore President If to RAI, to: REIT Advisors, Inc. 20371 Irvine Avenue Santa Ana Heights, California 92702 Telephone: (714) 556-0122 Facsimile: (714) 438-2150 Attention: Richard J. Johnson Chief Financial Officer All such notices and communications shall, when mailed, telegraphed, telexed, telecopied, cabled or delivered, be effective three days after deposit in the mails, delivered to the telegraph company, confirmed by telex answerback, telecopied with confirmation of receipt, delivered to the cable company, delivered by hand to the addressee or one day after delivery to the courier service. 13.2 Each Notice of First Refusal and Response under this Agreement shall be in writing and telecopied or delivered by hand during normal business hours (i.e., 9:00 a.m. - 5:00 p.m. California time) to an officer of the party to whom it is addressed at the address specified in subsection 13.1 above (or to such other address as such party may have specified by notice given to the other party pursuant to subsection 13.1), or in the case of any Affiliated REIT, to an address specified by such Affiliated REIT. Each such Notice of First Refusal and Response shall be effective immediately when telecopied with confirmation of receipt or delivered by hand to the addressee. 14. Arbitration. ----------- (a) Each controversy, dispute or claim between the parties arising out of or relating to this Agreement, which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to this Agreement gives written notice to the other that a controversy, dispute or claim exists), will be 7 settled by binding arbitration in Orange County, California in accordance with the provisions of the Judicial Arbitration and Mediation Services, which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim, and the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court of Orange County (THE "COURT"). Any decision rendered by the arbitrator and such arbitration will be final, binding and conclusive and judgment shall be entered pursuant to the California Code of Civil Procedure Section 644 in any court in the State of California having jurisdiction. (b) Except as expressly set forth in this Agreement, the arbitrator shall determine the manner in which the proceeding is conducted, including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the proceeding. All proceedings and hearings conducted before the arbitrator, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the arbitrator. The party making such a request shall have the obligation to arrange for any pay for the court reporter. The costs of the court reporter shall be borne equally by the parties. (c) The arbitrator shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the state of California will be applicable to the proceeding. The arbitrator shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The arbitrator shall issue a single judgment at the close of the proceeding which shall dispose of all of the claims of the parties that are the subject of the proceeding. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the arbitrator. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a proceeding governed under this provision. 15. Attorneys' Fees. In the event that any party shall bring an --------------- action or proceeding in connection with the performance, breach or interpretation hereof, then the prevailing party in such action as determined by the court or other body having jurisdiction shall be entitled to recover from the losing party in such action, as determined by the court or other body having jurisdiction, all reasonable costs and expense of litigation or arbitration, including reasonable attorneys', fees, court costs, costs of investigation and other costs reasonably related to such proceeding. 16. Waiver. Any forbearance by a party to this Agreement in ------ exercising any right or remedy under this Agreement or otherwise afforded by applicable law shall not be a waiver of or preclude the exercise of that or any other right or remedy. 8 17. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which when so executed shall be deemed to be an original, and all of which when taken together shall constitute one and the same agreement. [The remainder of this page intentionally left blank.] 9 IN WITNESS WHEREOF, this Agreement is made as of the day and year first above written. IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC., a Maryland corporation By:_______________________________ Name: Joseph R. Tomkinson Title: Chief Executive Officer IMPERIAL COMMERCIAL CAPITAL CORPORATION a California corporation By:_______________________________ Name: Joseph R. Tomkinson Title: Chief Executive Officer IMPERIAL CREDIT MORTGAGE HOLDINGS, INC., a Maryland corporation By:_______________________________ Name: William S. Ashmore Title: President ICI FUNDING CORPORATION, a California corporation By:_______________________________ Name: William S. Ashmore Title: President REIT ADVISORS, INC., a California company By:_______________________________ Name: Richard J. Johnson Title: Chief Financial Officer 10 EX-10.8 14 SERVICING AGREEMENT EXHIBIT 10.8 - -------------------------------------------------------------------------------- SERVICING AGREEMENT IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. AND IMPERIAL COMMERCIAL CAPITAL CORPORATION DATED AS OF FEBRUARY 5, 1997 - -------------------------------------------------------------------------------- SERVICING AGREEMENT This SERVICING AGREEMENT (THE "AGREEMENT"), dated as of February 5, 1997, is by and between IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC., a Maryland corporation (THE "COMPANY"), and IMPERIAL COMMERCIAL CAPITAL CORPORATION, a California corporation (THE "SERVICER"). R E C I T A L S : A. The Company's Long-Term Investment Operation's purchases Commercial Mortgages. B. The Company and the Servicer desire that the Servicer service certain of the Commercial Mortgages owned by the Company C. The Company and the Servicer desire to execute this Agreement to define the rights, duties and obligations of the Servicer to the Company. NOW, THEREFORE, in consideration of the premises and mutual agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Servicer agree as follows: ARTICLE I Section 1.01 Definitions. For purposes of this Agreement the ----------- following capitalized terms shall have the respective meanings set forth below. (a) "AVAILABLE DISTRIBUTION AMOUNT" has the meaning set forth in Section 6.01(b) hereof. (b) "BUSINESS DAY" means any day other than a Saturday or Sunday, or a day on which banking and savings and loan institutions in the state of California is authorized or obligated by law or executive order to remain closed. (c) "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 46 U.S.C. Section 9601 et. seq., as amended. (d) "COLLECTION PERIOD" means with respect to any Remittance Date, the period commencing on the first day of the calendar month preceding the calendar month in which such Remittance Date occurs and ending on the last day of the preceding calendar month in which such Remittance Date occurs. 1 (e) "COMMERCIAL MORTGAGES" means commercial mortgage assets including condo-conversion, multi-family property and cooperative apartment mortgage loans on commercial real property such as industrial and warehouse properties, office buildings, retail space and shopping malls, hotels and motels, nursing homes, hospitals, congregate care facilities and senior living centers. (f) "CONDEMNATION PROCEEDS" means with respect to any Commercial Mortgage, cash amounts (other than Insurance Proceeds and REO Revenues) received in connection with the taking of all or part of a Mortgaged Property by exercise of the power of eminent domain or condemnation. (g) "DESIGNATED SUCCESSOR" has the meaning set forth in Section 9.03. (h) "DETERMINATION DATE" means with respect to each Remittance Date, the close of business on the immediately preceding Business Day. (i) "ELIGIBLE ACCOUNT" means (i) an account or accounts maintained with a depository institution the short-term debt obligations of which are rated A-1 or better by S&P, or (ii) an account or accounts maintained with a depository institution approved as such by the Federal National Mortgage Association the deposits in which are insured by the Federal Deposit Insurance Corporation, or (iii) a trust account or accounts maintained with a federal or state chartered depository institution or trust company acting in its fiduciary capacity. (j) "ESCROW ACCOUNT" means the separate trust account or accounts created and maintained pursuant to Section 5.04 which shall be entitled "Servicer as servicer, in trust for The Company under Servicing Agreement, dated as of February 5, 1997 between Imperial Credit Commercial Holdings, Inc. and Imperial Commercial Capital Corporation." (k) "ESCROW FUNDS" has the meaning set forth in Section 5.04(a). (l) "ESCROW PAYMENTS" means the amounts required to be escrowed by the Mortgagor with the Mortgagee pursuant to the terms of any Mortgage Note or Mortgage or any other Mortgage document. (m) "INSURANCE POLICY" means with respect to any Commercial Mortgage, any hazard insurance policy, flood insurance policy, title policy or other insurance policy that is maintained from time to time in respect of such Commercial Mortgage or the related Mortgaged Property. (n) "INSURANCE PROCEEDS" means proceeds paid under any Insurance Policy, to the extent such proceeds are not (i) applied to, or deposited into the Escrow Account for future application in respect of, the restoration of the related Mortgaged Property, or (ii) released to the related Mortgagor, in each case in accordance with the Servicing Standards. 2 (o) "LIQUIDATION EVENT" means with respect to any Commercial Mortgage, any of the following events: (a) such Commercial Mortgage is paid in full, (b) a final recovery determination is made with respect to such Commercial Mortgage. With respect to any REO Property, the occurrence of an REO disposition. (p) "LIQUIDATION PROCEEDS" means cash amounts (other than Insurance Proceeds) received or paid by Servicer in connection with (a) the liquidation of a Mortgaged Property or other collateral constituting security for a defaulted Commercial Mortgage, through trustee's sale, foreclosure sale, REO disposition or otherwise or (b) the sale of a defaulted Commercial Mortgage. (q) "MONTHLY SERVICING REPORT" has the meaning set forth in Section 5.11(c). (r) "MORTGAGE" means with respect to each Commercial Mortgage, the mortgage(s), deed(s) of trust or other instrument(s) securing a Mortgage Note and creating a lien on the related Mortgaged Property. (s) "MORTGAGE FILE" means copies of all documents executed in connection with and related to a Commercial Mortgage. (t) "MORTGAGE INTEREST RATE" means with respect to each Commercial Mortgage, the annual rate at which interest accrues thereon during the term thereof in accordance with the provisions of the related Mortgage Note. (u) "MORTGAGE NOTE" means the original executed note(s) or other evidence of the Commercial Mortgage indebtedness of a Mortgagor. (v) "MORTGAGED PROPERTY" means with respect to each Commercial Mortgage, all property described in the related Mortgage, including the real property, all improvements, fixtures, equipment and articles of personal property located on such real property and all rents, issues, profits and income derived from the operation of the real property, securing the related Mortgage Note. (w) "MORTGAGEE" means the mortgagee or beneficiary named in the Mortgage and the successors and assigns of such mortgagee or beneficiary. (x) "MORTGAGOR" means the obligor or obligors on a Mortgage Note. (y) "NONRECOVERABLE SERVICING ADVANCE" means any Servicing Advance previously made or proposed to be made in respect of a Commercial Mortgage which, in the reasonable, prudent business judgment of the Servicer and in accordance with the Servicing Standards will not ultimately be recoverable from late payments, Insurance Proceeds, Liquidation Proceeds, Condemnation Proceeds, REO Revenues or any other recovery on or in respect of such Commercial Mortgage. 3 (z) "OFFICER'S CERTIFICATE" means a certificate signed by the Chairman of the Board, the Vice Chairman of the Board, the President or a Vice President and by the Treasurer, the General Counsel or the Secretary of the Servicer, and delivered as required by this Agreement. (aa) "PERSON" means an individual, corporation, partnership, joint venture, limited liability company or partnership, association, joint-stock company, trust, unincorporated organization or government or any agency or policy subdivision thereof. (bb) "PREPAYMENT PREMIUM" means any premium, consideration or fee paid or payable, as the context requires, by a Mortgagor in connection with a Principal Prepayment. (cc) "PRINCIPAL PREPAYMENT" means any payment of principal made by the Mortgagor on a Commercial Mortgage which is received in advance of its scheduled due date. (dd) "REMITTANCE DATE" means the 12th day of each month (or if such day is not a Business Day, the next succeeding Business Day). (ee) "REO PROPERTY" means a Mortgaged Property acquired by Servicer in the name of the Company's designee through foreclosure, acceptance of a deed in lieu of foreclosure or otherwise. (ff) "REO REVENUES" means all income, rents and profits derived from the ownership, operation or leasing of any REO Property. (gg) "RESERVE PAYMENTS" means as to any Commercial Mortgage, any payments made by the related mortgagor to mortgagee or Servicer pursuant to an agreement between mortgagee and the related mortgagor for the purpose of providing reserves for the costs associated with repairs to and replacement of capital items, environmental costs and lease rollover on the related mortgaged property. (hh) "SERVICING ADVANCES" means all customary, reasonable and necessary "out-of-pocket" costs and expenses incurred in connection with a default, delinquency or other unanticipated event by Servicer in the performance of its respective servicing obligations, including, but not limited to, the cost of (a) preservation, restoration and repair of a Mortgaged Property, (b) obtaining Insurance Proceeds, Condemnation Proceeds, or any Liquidation Proceeds, (c) any enforcement or judicial proceedings with respect to any Commercial Mortgage, including any foreclosure actions and (d) the management and liquidation of any REO Property; provided, however, that the term shall be exclusive of any costs incurred pursuant to Section 5.07(b) and (c); provided, -------- further, that Servicer shall advise the Company promptly if Servicer wishes to cease making Servicing Advances because it has determined in its reasonable business judgment and in accordance with the Servicing Standards that such Servicing Standards are not likely to be recoverable from a sale or disposition of the Mortgaged Property or REO Property. 4 (ii) "SERVICING FEE" has the meaning set forth in Section 3.01. (jj) "SERVICING STANDARDS" has the meaning set forth in Section 5.01. (kk) "SERVICING TRANSFER" has the meaning set forth in Section 9.03. (ll) "SUBSERVICER" has the meaning set forth in Section 5.02(a). (mm) "SUBSERVICING AGREEMENT" has the meaning set forth in Section 5.02(a). ARTICLE II Section 2.01. Possession and Safekeeping of Servicing Files. --------------------------------------------- (a) The mortgage documents relating to each Commercial Mortgage shall be retained by Servicer and shall be appropriately identified in Servicer's computer system to clearly reflect the ownership of such Commercial Mortgage by the Company. Servicer shall exercise due diligence and care in the safekeeping of all of the Commercial Mortgage documents in accordance with the Servicing Standards. Servicer shall not release from its custody any Commercial Mortgage documents and any other related documents and servicing files except upon written or approval of the Company or except that where such release is required as incidental to the Servicer's servicing of the Commercial Mortgages. Upon termination of this Agreement or of Servicer as servicer hereunder or if a Commercial Mortgage ceases to be subject to this Agreement, Servicer shall promptly deliver all Commercial Mortgage documents, servicing files and any other related documents to the Company or the Company's designee. (b) The contents of each Commercial Mortgage file delivered to the Servicer are and shall be held by the Servicer for the benefit of the Company as the owner thereof for the sole purpose of servicing the related Mortgage Loan, and such retention by the Servicer is in a custodial capacity only. The ownership of each Mortgage Note, the Mortgage and the other contents of the related Commericial Mortgage file is vested in the Company and the ownership of all records and documents with respect to the related Commercial Mortgage prepared by or which come into the possession of the Servicer shall immediately vest in the Company and shall be retained and maintained by the Servicer at the will of the Company in such custodial capacity only. In addition, the Servicer shall destroy or redeliver to the Company all documents comprising each Commercial Mortgage file, whether in microfilm form or otherwise, as directed by the Company. (c) Books and Records. Record title in the name of the Servicer to each Mortgage and the related Mortgage Note shall be retained by the Servicer for the sole purpose of facilitating the servicing of the Commercial Mortgages. All rights arising out of the Commercial Mortgages 5 including, but not limited to, all funds received on or in connection with a Commercial Mortgage shall be received and held by the Servicer for the benefit of the Company as the owner of the Commercial Mortgages. ARTICLE III Section 3.01. Compensation. ------------ (a) Servicer's compensation for servicing the Commercial Mortgage shall be 0.0125% per annum, payable monthly, of the declining outstanding principal loan balance of each Commercial Mortgage as of the payment date of each Commercial Mortgage in accordance with the amortization schedule of each Commercial Mortgage serviced hereunder (THE "SERVICING FEE"). Servicer shall be entitled to the monthly Servicing Fee from collection of each mortgage interest payment from the Mortgagor as long as the Commercial Mortgage remains subject to this Agreement and all sums due and payable thereunder are collected by Servicer and remitted in accordance with the terms of this Agreement, subject, however, to clause (b) below. In the event there is a Subservicer, any subservicer fee shall be paid by Servicer in accordance with Section 5.02. Servicer acknowledges and agrees that the Company shall have no obligation to pay such subservicing fee. (b) In the event Servicer manages or employs management and protects Mortgaged Property pursuant to Section 5.08(a)(ii), Servicer, as full compensation for such management, shall retain from rent payments collected a fee equal to five percent (5%) of the amount of such rent payments. Notwithstanding clause (a) above, during any period when a Mortgaged Property or REO Property is being managed by Servicer, it shall not be entitled to the monthly Servicing Fee. Section 3.02. Servicer's Financial Statements. ------------------------------- Servicer shall deliver or cause to be delivered to the Company, or soon as available, and in any event within 120 days after the close of each fiscal year of Servicer, a detailed certified copy of the report of its independent auditors report complete with detailed balance statements (audited), profit and loss statements, and supporting schedules. ARTICLE IV Section 4.01. Representations, Warranties and Covenants of Servicer. ----------------------------------------------------- (a) Servicer represents, warrants and covenants to the Company as of the date hereof or as of such date specifically provided herein, as follows: 6 (i) Servicer is a corporation duly organized, validly existing and in good standing under the laws of the state of California, and Servicer is and will remain in compliance with the laws of each state in which each Mortgaged Property is located to the extent necessary to enforce the related Commercial Mortgages and otherwise to perform its obligations under this Agreement. (ii) Servicer has the full power and authority to execute and deliver this Agreement and consummate all applicable transactions contemplated by this Agreement. Servicer has duly authorized the execution, delivery and performance of this Agreement and has duly executed and delivered this Agreement. This Agreement, assuming due authorization, execution and delivery by the Company, constitutes a legal, valid and binding obligation of Servicer, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights in general and by general principles of equity, regardless of whether such enforcement is considered in a proceeding in equity or at law. (iii) The execution and delivery of this Agreement by Servicer and its performance of and compliance with the terms of this Agreement will not violate Servicer's articles of incorporation or by-laws or constitute a default (or an event that, with notice or lapse of time or both, would constitute a default) under or result in a breach of, any material agreement or other instrument to which Servicer is a party or which may be applicable to Servicer or its assets. (iv) Servicer is not in violation of, and its execution and delivery of this Agreement and its performance and compliance with the terms of this Agreement will not constitute a violation of, any law, any order or decree of any court, or any order or regulation of any federal, state or municipal governmental agency having jurisdiction over Servicer or its assets, which violation could materially and adversely affect the condition (financial or otherwise) or the operation of Servicer or its assets or could materially and adversely affect its ability to perform its obligations and duties hereunder. (v) Servicer is qualified to transact business in each jurisdiction in which a Mortgaged Property is located where such qualification is required under applicable law. (vi) No litigation is pending, or to the best of Servicer's knowledge, threatened against Servicer that could prohibit it from entering into this Agreement or could materially and adversely affect either the ability of Servicer to perform its obligations under this Agreement or its financial condition. (vii) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance by Servicer of, or compliance by Servicer with, this Agreement or the consummation of the transactions contemplated by this Agreement, except for such consents, approvals, authorizations or 7 orders, if any, that have been obtained; provided, however, that in the -------- ------- event of a breach of this clause (vii), the Servicer shall, within twenty (20) days after the earlier of the discovery of such breach or receipt of notice thereof, obtain such consent or approval or employ a Subservicer who has obtained such consent or approval. (b) The Company represents, warrants and covenants to the Servicer as of the date hereof or as of such date specifically provided herein, as follows: (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the state of Maryland. (ii) The Company has the full power and authority to execute and deliver this Agreement and consummate all applicable transactions contemplated by this Agreement. The Company has duly authorized the execution, delivery and performance of this Agreement and has duly executed and delivered this Agreement. This Agreement, assuming due authorization, execution and delivery by Servicer, constitutes a legal, valid and binding obligation of the Company, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights in general and by general principles of equity, regardless of whether such enforcement is considered in a proceeding in equity or at law. (iii) The execution and delivery of this Agreement by the Company and its performance of and compliance with the terms of this Agreement will not violate the Company's charter or by-laws or constitute a default (or an event that, with notice or lapse of time or both, would constitute a default) under or result in a breach of, any material agreement or other instrument to which the Company is a party or which may be applicable to the Company or its assets. (iv) The Company is not in violation of, and its execution and delivery of this Agreement and its performance and compliance with the terms of this Agreement will not constitute a violation of, any law, any order or decree of any court, or any order or regulation of any federal, state or municipal governmental agency having jurisdiction over the Company or its assets, which violation could materially and adversely affect the condition (financial or otherwise) or the operation of the Company or its assets or could materially and adversely affect its ability to perform its obligations and duties hereunder. (v) No litigation is pending, or to the best of the Company's knowledge, threatened against the Company that could prohibit it from entering into this Agreement or could materially and adversely affect either the ability of the Company to perform its obligations under this Agreement or its financial condition. (vi) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance by the Company of, 8 or compliance by the Company with, this Agreement or the consummation of the transactions contemplated by this Agreement, except for such consents, approvals, authorizations or orders, if any, that have been obtained; provided, however, that in the event of a breach of this clause (vii), the -------- ------- Company shall, within twenty (20) days after the earlier of the discovery of such breach or receipt of notice thereof, obtain such consent or approval. Section 4.02. Remedies for Breach of Representations and Warranties. ----------------------------------------------------- (i) Upon discovery by either Servicer or the Company of a breach of any of the foregoing representations and warranties in Section 4.01 that materially and adversely affects the value of the Commercial Mortgages or the interest of the Company in the Commercial Mortgages (each, a "Breach"), the party discovering such Breach shall give prompt written notice to the other. (ii) Within 30 days of the earlier of either discovery by or notice to Servicer of any such Breach of a representation or warranty, Servicer shall use its best efforts promptly to cure such Breach in all material respects and, if such breach cannot be cured within the applicable cure period, Servicer shall promptly give written notice to the Company. (iii) In addition to such cure obligation, Servicer shall indemnify the Company and hold it harmless against any losses, damages, penalties, fines, forfeitures, reasonable and necessary legal fees and related judgments, and any other costs and expenses resulting from a breach by Servicer of the representations and warranties contained in this Article IV. ARTICLE V Section 5.01. Servicer to Act as Servicer; Administration of the -------------------------------------------------- Commercial Mortgages. - -------------------- (a) Servicer shall act as loan servicer for the Company for the Commercial Mortgages purchased by the Company or others acceptable to the Company and Servicer when requested by the Company. Servicer shall diligently service and administer the Commercial Mortgages in accordance with the terms hereof, the applicable laws, the terms and provisions of the mortgage loan documents, and the customary and usual standards of practice of prudent institutional mortgage loan servicers utilized with respect to Commercial Mortgages comparable to the Commercial Mortgages (THE "SERVICING STANDARDS"). Subject to the above-described Servicing Standards, the further provisions of this Agreement, and the terms of the respective Commercial Mortgages, Servicer shall have full power and authority, to do or cause to be done any and all things in connection with such servicing and administration that it may deem necessary or desirable in connection with the servicing and administration of the Commercial Mortgages. Without limiting the generality of the foregoing, Servicer, in its own name, is hereby authorized and empowered by the Company, to execute and deliver, on behalf of the Company, any and all financing statements, continuation statements and other 9 documents or instruments necessary to maintain the lien on the related Mortgaged Property and related collateral created by any Mortgage or other security document in the related Mortgage File and, subject to clause (b) below, any and all modifications, waivers, amendments or consents to or with respect to any documents contained in the related Mortgage File, any and all instruments of satisfaction or cancellation, or of partial or full release or discharge, and all other comparable instruments, with respect to the Commercial Mortgages and the Mortgaged Properties. The Company shall furnish to Servicer any powers of attorney and other documents necessary or appropriate to enable Servicer to carry out its respective servicing and administrative duties hereunder. (b) Without limiting the generality of clause (a) above, unless it has obtained the prior written direction and consent of the Company, Servicer shall not (i) increase, decrease or otherwise alter or modify the Mortgage Interest Rate, the monthly payment, any prepayment premium or the term of any Commercial Mortgage, (ii) agree to the forgiveness of any debt related to a Commercial Mortgage or release or discharges of any Mortgage or lien, (iii) release, or agree to the substitution or exchange of any collateral for, any portion of any Mortgaged Property or related collateral, (iv) release from liability any Person liable for the repayment of any Commercial Mortgage, (v) consent (to the extent that the Mortgagee is entitled under the Mortgage or other agreement to withhold such consent) to the transfer (direct or indirect) or encumbrance of any Mortgaged Property, (vi) with respect to any commercial lease, consent (to the extent that the Mortgagee is entitled under the Mortgage or other agreement to withhold such consent) to the execution, assignment, termination or modification of such lease, (vii) grant non-disturbance to any tenant under any lease, (viii) apply insurance proceeds or proceeds of a partial condemnation received with respect to a Commercial Mortgage to the restoration or repair of the related Mortgaged Property unless required to do so pursuant to the related Mortgage or applicable law, (ix) waive any prepayment premium or otherwise waive, amend or modify any term or provision of any Commercial Mortgage, (x) accelerate the maturity of any Commercial Mortgage, (xi) take possession of or acquire title to any Mortgaged Property, (xii) sell any Commercial Mortgage or (xiii) enter into any workout agreement or arrangement with the Mortgagor or other party. With respect to any action that Servicer proposes or has been requested to take that would require the consent of the Company, Servicer shall, by written notice to the Company, described such proposal or request and recommend a course of action to the Company that is consistent with the Servicing Standards. Unless the Company shall notify Servicer, within 30 days following Servicer's giving of notice hereunder, that the Company objects to such recommended course of action, consent shall be deemed given and Servicer may take the action recommended to the Company at the expiration of such 30-day period. If the Company shall give Servicer written objection to Servicer's recommended course of action, Servicer shall take such action as is directed by the Company. (c) The Servicer shall make Servicing Advances with respect to the Commercial Mortgages and, if any, REO Properties, in accordance with the terms of this Agreement, prudent business judgment and the Servicing Standards. 10 Section 5.02. Delegation of Servicing Duties. ------------------------------ (a) The Servicer, in the ordinary course of its business, may at any time, delegate any of its servicing duties hereunder with respect to servicing the Commercial Mortgages to a subservicer, (who may be in geographic territories outside of southern California) ("SUBSERVICER"); provided that (x) such -------- Subservicer and Servicer enter into a subservicing agreement ("SUBSERVICING AGREEMENT") in form and substance acceptable to the Company, (y) such Subservicer agrees to conduct such servicing duties in accordance with this Agreement, and (z) prior to such delegation Servicer shall have obtained the Company's prior written consent thereof. (b) Each Subservicer shall (i) satisfy the requirements of Section 5.07(d) with respect to fidelity bonds and errors and omissions policies and (ii) be qualified to service Commercial Mortgages in accordance with this Agreement and the Servicing Standards. The Servicer shall be obligated to pay all fees and expenses of any Subservicer out of its Servicing Fee and amounts paid to the Service by the Company in payment or reimbursement of expenses as provided hereunder and each Subservicer shall waive any right to seek compensation from the Company in the related Subservicing Agreement. (c) Notwithstanding any Subservicing Agreement, the Servicer shall remain obligated and liable to the Company for the servicing and administering of the Commercial Mortgages in accordance with the provisions hereof without diminution of such obligation or liability by virtue of such Subservicing Agreement or arrangements or by virtue of indemnification from a Subservicer and to the same extent and under the same terms and conditions as if the Servicer alone were servicing and administering the Commercial Mortgages. No delegation of such servicing duties shall relieve the Servicer of its liability and responsibility with respect to any such servicing duties or shall constitute a resignation by the Servicer. (d) Any Subservicing Agreement may contain a provision entitling the Servicer to terminate such Subservicing Agreement, without any termination fee, and the rights and obligations of any Subservicer pursuant thereto. In the event of termination of any Subservicer, all servicing obligations of such Subservicer shall automatically be assumed simultaneously by the Servicer without any act or deed on the part of such Subservicer or the Servicer, and the Servicer either shall service directly the Commercial Mortgages or shall enter into a Subservicing Agreement with a successor Subservicer that qualifies under this Agreement and Servicing Standards and is approved by the Company. Any Subservicing Agreement shall also include the provision that such agreement may be (at the Company's option and for whatever reason) immediately terminated by the Company without payment of any fee or penalty in the event that the current Servicer shall, for any reason, no longer be the Servicer hereunder. (e) Any Subservicing Agreement that may be entered into involving a Subservicer in its capacity as such shall be deemed to be between the Subservicer and the Service alone, and the 11 Company (x) shall not be deemed a party thereto, (y) shall not be deemed to have assumed any obligation to such Servicer and (z) shall not have any obligations, duties or liabilities with respect to such Subservicer; provided that the -------- Company shall be deemed to be a third-party beneficiary of such Subservicing Agreement. Section 5.03. Collection of Commercial Mortgage Payments. ------------------------------------------ (a) The Servicer shall proceed diligently to collect all payments called for under the terms and provisions of the Commercial Mortgages it is obligated to service hereunder and shall follow such collection procedures as are consistent with this Agreement, including without limitation, the Servicing Standards. All amounts collected and received on any Commercial Mortgage in the form of payments from Mortgagors, Insurance Proceeds, Liquidation Proceeds or Condemnation Proceeds shall be applied to amounts due and owing under the related Mortgage Note and Mortgage (including without limitation, for unpaid principal and accrued interest) in accordance with the express provisions of the related Mortgage Note and Mortgage and, in the absence of such express provisions, in accordance with the Servicing Standards. (b) Servicer shall maintain and keep a complete and accurate account and record, in form reasonably satisfactory to the Company, of all sums collected under clause (a) above and shall promptly submit such records to the Company upon written request by the Company. Section 5.04. Escrow Account: Collection of Taxes, Assessments and ----------------------------------------------------- Similar Items. - ------------- (a) Servicer shall establish and maintain one or more accounts (THE "ESCROW ACCOUNTS") into which Escrow Account all proceeds paid under any Insurance Policy, all Escrow Payments and any Reserve Payments shall be deposited (COLLECTIVELY, THE "ESCROW FUNDS"), Escrow Accounts shall be Eligible Accounts. The Company shall be entitled to, and the Servicer shall remit to the Company on each Remittance Date, any interest or income paid on funds deposited in the Escrow Account by the depository institution other than interest on Escrowed Funds required by law to be paid to the Mortgagor and, to the extent required by law, Servicer shall pay interest on Escrowed Funds to the Mortgagor notwithstanding that the Escrow Account is non-interest bearing or that interest paid thereon is insufficient for such purposes. (b) Withdrawals of amounts so collected from an Escrow Account may be made only to: (i) effect payment of taxes, assessments and comparable items from related Escrow Payments; (ii) refund to Mortgagors any sums as may be determined to be overages or release or apply any Reserve Payment pursuant to the agreements pertaining thereto; (iii) apply any amounts on deposit in the Escrow Account that were recovered under any insurance policy to costs and expenses incurred in connection with the restoration of the related Mortgaged Property, or to release any such amounts to the related Mortgagor, in each case subject to applicable law and to the terms and conditions of the related Mortgage Note and Mortgage; (iv) pay interest, if required and as described below, to Mortgagors on balances in the Escrow Account; (vi) withdraw any amount not required to be deposited therein; (viii) remit to the Company interest or income paid on the Escrow 12 Funds in accordance with paragraph (c) below; or (ix) clear and terminate the Escrow Account upon the transfer of the servicing of the related Commercial Mortgage to a successor servicer as directed by the Company or at the termination of this Agreement. Notwithstanding the immediately preceding sentence, amounts on deposit in the Escrow Account representing amounts recovered under any Insurance Policy, Escrow Payments, or Reserve Payments received and maintained in respect of a Commercial Mortgage may be withdrawn or used pursuant to any of the preceding clauses (i), (ii) or (iii) only to make payments described therein in respect of such Commercial Mortgage and shall not be withdrawn or used to make such payments in respect of any other Commercial Mortgage. As part of its servicing duties, Servicer shall pay or cause to be paid to the Mortgagors interest on funds in Escrow Accounts, but only if and to the extent required by law or the terms of the related Commercial Mortgage. (c) Servicer shall remit to the Company on each Remittance Date any interest or income paid on the Escrow Funds by the depository institution other than interest on such Escrow Funds required by law to be paid to the Mortgagor. (d) The Servicer shall maintain accurate records with respect to each related Mortgaged Property reflecting the status of taxes, assessments and other similar items that are or may become a lien thereon and the status of insurance premiums payable in respect thereof. The Servicer, shall obtain, from time to time, all bills for the payment of such items (including renewal premiums) and shall effect payment thereof prior to the applicable penalty or termination date, employing for such purpose Escrow Payments as allowed under the terms of the related Commercial Mortgage. Servicer shall deliver to the Company satisfactory evidence of such payments. (e) In accordance with the Servicing Standards, the Servicer shall advance, with respect to each Mortgaged Property, all such funds as are necessary for the purpose of effecting the payment of (i) real property taxes, assessments and other similar items that are or may become a lien thereon and (ii) premiums on Insurance Policies, in each instance if and to the extent Escrow Payments collected from the related Mortgagor are insufficient to pay such item when due and the related Mortgagor has failed to pay such item on a timely basis; provided, however, that the Servicer shall not be obligated to -------- ------- make any such advance, which would, if made, constitute a Nonrecoverable Servicing Advance. All such advances shall be reimbursable in the first instance from related collections from the Mortgagors, from the Escrow Account and further as provided in Section 5.06. In the case of unreimbursed Servicing Advances that are outstanding for more than 30 days, Servicer shall be entitled to invoice the Company from time to time for its Servicing Advances describing same in reasonable detail, and the Company shall pay the amount thereof to Servicer within 30 days of receipt of such invoice. Section 5.05. Collection Account. ------------------ (a) Servicer shall establish and maintain one or more accounts (EACH, A "COLLECTION ACCOUNT") held in trust for the benefit of the Company. Each Collection Account shall be an Eligible Account. The Servicer shall be entitled to any benefit derived from the interest earned 13 on principal and interest payments held between the date of receipt and the Remittance Date and from interest earned on tax and insurance impound funds to the extent not payable to the Mortgagor. Servicer shall deposit or cause to be deposited in the related Collection Account, when received (in the case of payments by Mortgagors or other collections on the Commercial Mortgages) or as otherwise required hereunder or by the Company, the following payments and collections (i) all payments on account of principal, including Principal Prepayments, on the Commercial Mortgages; (ii) all payments on account of interest (net of the Servicing Fee) on the Commercial Mortgages and all payments on account of Prepayment Premiums; (iii) all Insurance Proceeds, Liquidation Proceeds, Condemnation Proceeds and REO Revenues received in respect of any Commercial Mortgage; (iv) all penalty charges received in respect of any Commercial Mortgage; (v) any other amounts collected from Mortgagors or under the Commercial Mortgages except for the amounts collected and deposited into the Escrow Account pursuant to Section 5.04; and (vi) any amounts required to be deposited pursuant to Section 5.07(b). Section 5.06 Permitted Withdrawals From the Collection Account. ------------------------------------------------- (a) Servicer shall remit any Principal Prepayments in accordance with Section 6.01(a). (b) Subject to clause (a) above and Subsection 3.01(b), Servicer shall, on each Remittance Date and as directed by the Company, make withdrawals from the related Collection Account for any of the following purposes in the following order of priority: (i) to refund to any Mortgagor any funds determined to be in excess of the amounts required under the terms of the related Commercial Mortgage, and to withdraw any other amounts deposited in error; (ii) to reimburse itself for unpaid Servicing Fees, Servicer's right to reimburse itself pursuant to this clause (ii) with respect to any Commercial Mortgage being limited to related Liquidation Proceeds, Insurance Proceeds, Condemnation Proceeds and REO Revenues; (iii) to reimburse Servicer for any Servicing Advances made by Servicer, the Servicer's right to reimbursement under this clause with respect to any Commercial Mortgage 14 being limited to related Liquidation Proceeds, Insurance Proceeds, Condemnation Proceeds and REO Revenues. (iv) to pay Servicer for costs and expenses incurred pursuant to Section 5.07(b) or (c), the Servicer's right to reimbursement under this clause with respect to any Commercial Mortgage being limited to related Liquidation Proceeds, Insurance Proceeds, Condemnation Proceeds and REO Revenues; (v) to reimburse Servicer for Nonrecoverable Servicing Advances, provided that Servicer submits to The Company at least two (2) Business Days prior to the Remittance Date on Officer's Certificate of Servicer certifying the amount of such Nonrecoverable Servicing Advances and the reasons why such Advances are deemed nonrecoverable; (vi) to pay Servicer 50% of any late charges collected on a Commercial Mortgage; (vii) to pay the Company the Available Distribution Amount pursuant to Section 6.01(b); and (viii) if applicable, to transfer the amounts related to a Commercial Mortgage to a successor servicer or to clear and terminate the Collection Account at the termination of this Agreement. If Servicer shall deposit in the related Collection Account any amount not required to be deposited therein, it may, at any time, withdraw such amount from such Collection Account, any provision herein to the contrary notwithstanding. (c) Servicer shall keep and maintain separate accounting records, on a Commercial Mortgage by Commercial Mortgage basis, for the purpose of justifying any withdrawal from the related Collector Account. If Servicer shall deposit in the Collection Account any amount not required to be deposited therein, it may at any time withdraw such amount from such Collection Account, any provision herein to the contrary notwithstanding. Section 5.07. Maintenance of Insurance Policies; Errors and Omissions ------------------------------------------------------- and Fidelity Coverage. --------------------- (a) Servicer shall cause to be maintained, in accordance with the Servicing Standards and as may be customary in the area where the Mortgaged Property is located, on each Mortgage Property all insurance coverage for such Mortgage Property's full insurable value on a replacement cost basis, against loss or damage, or as may be required under the related Mortgage; provided that -------- if any Mortgage permits the holders thereof to dictate to the Mortgagor the insurance coverage to be maintained on such Mortgaged Property, Servicer shall impose such requirements as it shall determine in accordance with the Servicing Standard; provided, further, that Servicer shall require the related Mortgagor -------- to obtain required coverage from qualified insurers. All such insurance 15 policies shall contain a "standard" mortgagee clause naming the Company as mortgagee or loss payable clause naming the Company as loss payee, and shall be named by an insurer satisfactory to the Company and authorized under applicable law to issue such insurance. Any amounts collected by Servicer under any such policies (other than amounts to be applied on the restoration or repair of the related Mortgaged Property or amounts to be released or the related Mortgagor), shall be deposited in the Collection Account. (b) In lieu of maintaining the individual insurance policies referred to in Section 5.07(a), Servicer may, in its sole discretion, obtain and maintain, at its own expense without reimbursement thereof, a blanket policy, mortgage impairment policy or equivalent form of coverage (A "BLANKET POLICY") insuring against hazard losses on each individual Commercial Mortgage, providing protection at least equivalent to the individual policies required under Section 5.07(a). Such policy may contain a deductible clause (not in excess of a customary amount), in which case Servicer shall, if there shall have been one or more losses that are not covered by the individual policies required under Section 5.07(a), deposit into the Collection Account from its own funds the amounts not otherwise payable under the Blanket Policy because of such deductible clause. In connection with its activities as Servicer, Servicer agrees to prepare and present on behalf of the Company, claims under any such Blanket Policy in a timely fashion in accordance with the terms of such policy. (c) Servicer agrees to notify the Company immediately upon learning of any loss or damage by fire or other cause to any Mortgaged Property secured by a Mortgage and to cooperate and assist the Company in the adjustment and settlement of all claims in respect thereto. Whenever the Company shall agree to the restoration of any such damaged Mortgaged Property, Servicer agrees to verify that such Mortgaged Property has been restored to the Company's satisfaction. (d) (i) Servicer shall at all times during the term of this Agreement maintain and keep in force a fidelity bond in the amounts and having the other terms described below with broad coverage from an incorporated surety company satisfactory to the Company. The fidelity bond may be in the form of either individual bonds or a blanket bond. The amount of fidelity bond coverage shall be not less than $1,000,000.00 per occurrence. The coverage of the fidelity bond must explicitly insure the Servicer, its successors and assigns, against any losses resulting from dishonest, fraudulent or criminal acts on the part of its officers, employees or other persons acting on behalf of the Servicer. The Servicer must maintain in effect the fidelity bond at all times and the fidelity bond may not be cancelled, permitted to lapse or otherwise terminated without thirty Business Day's prior written notice by registered mail to the Company. Further, the fidelity bond must provide that, or the insurer must state in writing to the Company that, the fidelity bond shall not be cancelable without the giving of notice as provided for in the prior sentence. (ii) In addition, Servicer at all times during the term of this Agreement keep in force a policy or policies of insurance covering loss occasioned by the errors and omissions of Servicer's officers, employees and agents in connection with its obligation to service the Commercial Mortgages hereunder, which policy or policies shall be obtained from an insurer satisfactory to the 16 Company and be in an amount of not less than $5,000,000. Servicer must maintain in effect the related errors and omissions policy at all times and such errors and omissions policy may not be cancelled, permitted to lapse or otherwise terminated without thirty Business Days' prior written notice by registered mail to the Company. Further, each such errors and omissions policy must provide that, or the insurer must state in writing to the owner that, such errors and omissions policy shall nor be cancelable without the giving of notice as provided for in the prior sentence. 5.08. Realization Upon Defaulted Commercial Mortgages. ----------------------------------------------- (a) (i) If any payment due under any Commercial Mortgage and not deferred with the consent of the Company is not paid when the same becomes due and payable, or if the Mortgagor fails to perform any other material covenant or obligation under any Commercial Mortgage, and in either case such delinquency or failure continues beyond any applicable grace period, Servicer shall immediately notify the Company in writing of such event. Servicer shall, when so directed by the Company and subject to clauses (b) and (c) of this Section 5.08. institute foreclosure proceedings for the benefit of the Company, proceed to acquire for the Company title to the Mortgaged Property by deed in lieu of foreclosure, or exercise such other remedies, including, but not limited to, obtaining the appointment of a receiver to collect revenues, as the Company may direct in writing. If the Company, for its own account, institutes foreclosure proceedings or exercises any other remedies with respect to a defaulted Commercial Mortgage, Servicer shall cooperate with and assist the Company with respect to such proceedings or other exercise. In conducting any foreclosure on behalf of the Company, Servicer shall follow such practices and procedures as it shall deem necessary or advisable, in accordance with the Servicing Standard and with written direction received from the Company. To the extent permitted by applicable law and consistent with the Servicing Standard set Servicer shall make reasonable efforts to preserve and protect the Mortgaged Property that constitutes security for any defaulted Commercial Mortgage. (ii) Whenever such proceedings have been instituted, Servicer shall, if requested in writing by the Company, manage or employ management and protect the Mortgaged Property or REO Property and perform such other duties and servicing as are customary in the proper management of Mortgaged Property or REO Property in the locality involved. These duties shall include, but are not necessarily limited to, the collection of rentals in respect of such premises, or, if vacant, the renting thereof and maintaining all appropriate insurance thereon. (b) If directed by the Company in anticipation of the foreclosure of a Commercial Mortgage or the acquisition of title to or possession of a Mortgaged Property, Servicer shall obtain an environmental site assessment report prepared by a Person who is qualified to make such environmental site assessments and is approved by the Company and, notwithstanding the foregoing paragraph, Servicer shall not, on behalf of the Company, initiate foreclosure proceedings, obtain title to a Mortgaged Property in lieu of foreclosure or otherwise, have a receiver of rents appointed with respect to any Mortgaged Property, or take any other action with respect to any Mortgaged Property, if, as a result of any action, the Company would be considered to hold title to, to be a "mortgagee-in-possession" of, or to be an "owner" or "operator" of such Mortgaged Property within the meaning 17 of CERCLA or any comparable environmental law, unless Servicer has determined, based on such environmental site assessment report, that: (i) the Mortgaged Property is in compliance with applicable environmental laws and regulations; and (ii) there are no circumstances present at such Mortgaged Property relating to the use, management or disposal of any chemicals, pollutants, petroleum-based materials or other toxic or hazardous substances, materials or wastes for which investigation, testing, monitoring, containment, clean- up or remediation could be required under any federal, state or local law or regulation. The environmental site assessment shall be a "Phase I assessment". If any such "Phase I assessment" so warrants, and the Company directs Servicer to do so, Servicer shall cause to be performed such additional environmental testing as directed by the Company. The cost of any "Phase I assessment" and any such additional environmental testing shall be paid by the Company. (c) If the environmental testing contemplated by subsection (b) above reveals an unsatisfactory environmental and the Company determines to proceed against such Mortgaged Property and, if title thereto is acquired, to take such remedial, corrective or other action with respect to the unsatisfied condition or conditions, then Servicer shall, at the direction of the Company, proceed against such Mortgaged Property and arrange for the undertaking of such remedial corrective or other actions as the Company shall direct and at the cost and expense of the Company. (d) Servicer shall report to the Internal Revenue Service and the related Mortgagor, in the manner required by applicable law, the information required to be reported regarding any Mortgaged Property which is abandonment or foreclosed. Servicer shall promptly deliver a copy of any such report to the Company. Section 5.09. Inspections: Collection of Budgets, Rent Rolls and --------------------------------------------------- Financial Statements. -------------------- (a) Servicer shall inspect, or cause to be inspected, each Mortgaged Property at such times and in such manner as are consistent with the Servicing Standards; provided that (i) each Mortgaged Property shall be inspected at least -------- once each calendar year. Servicer shall perform a physical inspection of a Mortgaged Property as soon as practicable after a related Commercial Mortgage becomes a defaulted Commercial Mortgage. In the course of each such inspection, Servicer shall use its best efforts to determine the existence of any material vacancy in the Mortgaged Property, of any sale, transfer or abandonment of the Mortgaged Property, of any material change in the condition or value of the Mortgaged Property, of any waste committed on the Mortgaged Property, of any material failure on the part of the related Mortgagor to keep the Mortgaged Property in good condition and repair, of any permanent or substantial injury to the Mortgaged Property through unreasonable use, abuse or neglect or of any other matter which would materially and 18 adversely affect or result in diminution of the security provided by the related Mortgage. Servicer shall make a written report of each such inspection and shall deliver a copy thereof to the Company within ninety (90) days of its preparation. (b) With respect to each Commercial Mortgage, as directed by the Company, Servicer, shall promptly use commercially reasonable efforts to collect from the related Mortgagor the periodic operating statements, budgets and rent rolls and any other documents that the Company may reasonably request from time to time of the related Mortgaged Property and the financial statements of the related Mortgagor. Servicer shall promptly forward such documents to the Company upon its receipt thereof. Section 5.10. Title to REO Property; Management of REO Property. ------------------------------------------------- (a) If title to an REO Property is acquired through foreclosure or deed in lieu of foreclosure, the deed or certificate of sale shall be issued to the Company's designee. (b) Servicer shall manage, maintain and dispose of any REO Property in accordance with the written instructions of the Company and the Servicing Standards. Servicer shall keep and maintain separate records with respect to any matters relating to REO Properties in form and substance satisfactory to the Company. Section 5.11. Access to Documentation; Special Reports. ---------------------------------------- (a) The Servicer shall provide to the Company or its duly authorized representative access to any books, records or other documentation that pertains to the Commercial Mortgages, this Agreement or the ability of Servicer to perform its obligations hereunder that is in its possession or under its control. Such access shall be afforded without charge but only upon reasonable prior written request and during normal business hours at the offices of Servicer. (b) Servicer shall promptly notify the Company of (i) the failure of any Mortgagor to make any Monthly Payment or Escrow Payment beyond any applicable grace period, (ii) any unpaid ground rents, real estate taxes, water charges, special assessments or other charges which may become a lien on the Mortgaged Property, and (iii) any event of which Servicer has knowledge that would (with or without the passage of time or the giving of notice) permit the maturity of a Commercial Mortgage to be accelerated, including, without limitation, (A) the vacating or any change in the occupancy of any Mortgaged Property that would result in income from the Mortgaged Property being insufficient to make debt service payments on the Commercial Mortgage, (B) the sale or transfer of any Mortgaged Property, (C) the insolvency or bankruptcy of any Mortgagor, (D) any actual or threatened loss of or damage to any Mortgaged Property (in which event, Servicer shall also notify the appropriate insurer or insurers) and (E) any lack of repair or other deterioration or waste committed or suffered with respect to any Mortgaged Property. Servicer shall promptly provide a written report with respect to such matters to the Company. In addition, Servicer shall promptly furnish to the Company (1) copies of all material correspondence between Servicer and any 19 Mortgagor and (2) such periodic, special or other reports, information or documentation, whether or not provided for herein, as shall be reasonably requested by the Company. (c) Monthly Servicing Report. Notwithstanding anything to the ------------------------ contrary in Section 5.03(b), at least two (2) Business Days prior to each Remittance Date, the Servicer shall provide to the Company a Monthly Servicing Report with respect to the immediately preceding Collection Period setting forth the information specified in Exhibit A hereto and such other information as the Company may from time to time request. Section 5.12. Further Assurances. ------------------ Servicer agrees to do such further acts and things and to provide to the Company any information or documents reasonably required or requested by the Company to carry into effect the servicing of the Commercial Mortgages. Section 5.13. Confidentiality. --------------- Except as otherwise provided herein, Servicer agrees to keep confidential all records of any Mortgagor and agrees not to disclose such records to any of its respective Affiliates or any Person other than the Company or the Company's designee. Section 5.14. Contribution of Commercial Mortgages or Undivided ------------------------------------------------- Interests Therein. - ----------------- (a) Collateralized Mortgage Obligations. The Servicer acknowledges ----------------------------------- that the Commercial Mortgages may be used to secure the issuance of collateralized mortgage obligations or other mortgage collateralized bonds which may require the retained servicing of such Commercial Mortgages to be performed in a manner and on terms other than as set forth in this Agreement. In such event, the Servicer agrees to enter into new servicing arrangements with the Company and/or a trustee acting on behalf of the holders of the collateralized mortgage obligations or mortgage colla teralized bonds so long as the compensation to the Servicer is at least equivalent to the Servicing Fee payable to it hereunder with respect to such Commercial Mortgages. Upon the execution of any such new servicing agreement, this Agreement shall terminate as to the Commercial Mortgages subject thereto. (b) Sales to a Trustee. The Servicer acknowledges that the Company ------------------ may sell undivided interests in Commercial Mortgages for the issuance of pass- through mortgage certificates which may require the servicing of such Commercial Mortgages to be performed in a manner and on terms other than as set forth in this Agreement. In such event, the Servicer agrees to enter into servicing arrangements with the Company or a trustee acting on behalf of the holders of the pass-through certificates so long as the compensation to the Servicer is at least equivalent to the Servicing Fee payable to it hereunder with respect to such Commercial Mortgages. Upon the execution of any such new servicing agreement, this Agreement shall terminate as to the Commercial Mortgages 20 subject thereto. (c) Partial Assignments. The Company and the Servicer acknowledge and ------------------- agree that the Company may make partial assignments of this Agreement at any time and from time to time in connection with the pooling of mortgage loans being serviced hereunder and the assignment of undivided interests therein to a third party, or in connection with the enforcement of this Agreement. In the event that, pursuant to the terms and conditions of any applicable pooling and administration agreement, a portion of this Agreement so assigned is terminated, such termination shall not cause a termination of the remaining portion(s) of this Agreement not assigned or assigned and subject to a different pooling and administration agreement. ARTICLE VI Section 6.01. Remittances. ----------- (a) Within two (2) Business Days of receipt, Servicer shall remit to the Company all Principal Prepayments (together with related interest and any Prepayment Premium) received by it, by wire transfer of immediately available funds to the account designated by the Company. (b) On each Remittance Date, Servicer shall remit the amounts in the Collection Account net of the amounts to be paid pursuant to clause (a) of Section 5.06 and clause (b)(i) through and including (vi) of Section 5.06 ("AVAILABLE DISTRIBUTION AMOUNT") to the Company, by wire transfer of immediately available funds to the account designated by the Company. ARTICLE VII Section 7.01. Indemnification by Servicer. --------------------------- Servicer shall indemnify the Company and hold it harmless against any and all claims, losses, damages, penalties, fines, forfeitures, reasonable and necessary legal fees and related costs, judgments, and any other costs, fees and expenses that the Company may sustain in any way related to the failure of Servicer or any Subservicer to perform its obligations under this Agreement or Subservicing Agreement, as the case may be. Section 7.02. Merger or Consolidation of Servicer. ----------------------------------- Servicer each shall keep in full effect its existence, rights and franchise as a corporation under the laws of the state of its incorporation except as permitted herein, and will obtain and preserve its qualification to do business as a foreign corporation in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Agreement, or any of the Commercial Mortgages, and to perform its duties under this Agreement. Any Person into which Servicer may be merged or consolidated, or any corporation resulting from 21 any merger, conversion or consolidation to which Servicer shall be a party, or any Person succeeding to the business of Servicer, shall be the successor of Servicer hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding; provided, however, that the successor or surviving Person is -------- ------- acceptable to the Company. Section 7.03. Servicer Resignation. -------------------- It is understood and agreed that either the Company or Servicer, on not less than thirty (30) days written notice without being required to state a cause, or immediately in the event the other party has breached this Agreement, may terminate this Agreement in its entirety, or may terminate all of Servicer's responsibilities as servicer with respect to any Commercial Mortgage. Upon such termination or discontinuance, the rights and duties of Servicer and its right to compensation shall immediately terminate. Servicer shall forthwith deliver to the Company or to any party the Company designates in writing; (i) all documents relating to the Mortgage(s), including but not limited to ledger cards, tax bill and accrual records; and (ii) a statement showing the monthly payments collected and statement of all monies held in trust for the payment of maintenance and other charges in respect of the Mortgage(s) and shall immediately pay over to the Company all monies so held. Servicer shall, on forms approved by the Company, release or assign to whomsoever the Company may designate all Servicer's rights and interest in any management contracts, rental assignments, agreements relating to the Mortgage(s). Servicer further agrees to forthwith resign any trusteeship under any deed of trust or to procure for the Company, the resignation of any individual who may be named as trustee under any such deed of trust. Section 7.04. Transfers of Servicing. ---------------------- Except as provided in Section 5.02, Servicer shall not assign this Agreement or the servicing hereunder or delegate its rights or duties hereunder or any portion thereof, without the prior written approval of the Company. ARTICLE VII Section 8.01. Events of Default. ----------------- "Event of Default," whenever used herein, means any once of the following events: (a) any failure by Servicer to remit to the Company or its designee any payment required to be made under the terms of this Agreement that is unremedied as of the close of business on the Business Day immediately succeeding the date on which written notice of such failure, requiring the same to be remedied, shall be given to Servicer; (b) any failure on the part of Servicer duly to observe or perform in any material respect any other of the covenants or agreements on the part of Servicer set forth in this 22 Agreement that continues unremedied for a period of 10 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to Servicer by the Company; (c) a decree or order of a court or agency or supervisory authority having jurisdiction for the appointment of a conservator or receiver or liquidator in any insolvency, bankruptcy, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, shall have been entered against Servicer and such decree or order shall have remained in force undischarged and unstayed for a period of sixty (60) days; (d) Servicer shall consent to the appointment of a conservator or receiver or liquidator in any insolvency, bankruptcy, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to Servicer or of or relating to all or substantially all of its property; (e) Servicer shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of any applicable bankruptcy, insolvency or reorganization statute, make an assignment for the benefit of its creditors, or voluntarily suspend payment of its obligations; or (f) Servicer shall be in default under, or an event has occurred that, with notice or lapse of time or both, would constitute a default by Servicer under, any of its contacts with third parties, which default or occurrence could materially and adversely affect its ability to perform its obligations and duties under this Agreement. In each and every such case, so long as an Event of Default shall not have been remedied, the Company, by notice in writing to Servicer may terminate all the rights and obligations of Servicer to act as servicer under this Agreement. Such right shall be in addition to whatever rights the Company may have at law or equity to damages, including injunctive relief and specific performance. On or after the receipt by Servicer, of such written notice, all authority and power of Servicer to service the Commercial Mortgages under this Agreement shall on the date set forth in such notice pass to and be vested in a successor appointed by the Company. ARTICLE IX Section 9.01. Termination. ----------- This Agreement shall terminate upon the written mutual consent of Servicer and the Company at any time. Section 9.02. Termination Without Cause. ------------------------- 23 (a) The Company may, without cause, upon thirty (30) days prior written notice, terminate all of the rights and obligations of Servicer to act as servicer under this Agreement with respect to any or all of the Commercial Mortgages being serviced by it hereunder. On the 31st day following the date of such notice or any later date set forth therein, all authority and power of Servicer to service the Commercial Mortgages described in such notice shall pass to and be vested in a successor appointed by the Company. Section 9.03. Successor to Servicer. --------------------- If the Company terminates the rights of Servicer to service any or all of the Commercial Mortgages pursuant to Section 8.01, Section 9.01 or Section 9.02: (a) Servicer shall deliver the related servicing file and servicing records to the Company or, at the Company's option, to a third party designated by the Company (THE "DESIGNATED SUCCESSOR"), within two Business Days following the Company's request; (b) Servicer shall transfer to the Company or the Designated Successor all amounts held in the Collection Account, the Escrow Account any other amounts related to the Commercial Mortgages on the date of the transfer of servicing (THE "SERVICING TRANSFER"); (c) Servicer shall provide to the Company or the Designated Successor the following information as of the date of the Servicing Transfer: (i) a ledger accounting, dated as of the date of the Servicing Transfer, which itemizes for the period during which Servicer serviced such Commercial Mortgage hereunder the dates and amounts of all payments made, received, or applied by Servicer with regard to such Commercial Mortgage, itemizing principal and interest payments, tax payments, special assessments, hazard insurance, and other payments and (ii) a current trail balance; (d) Servicer shall notify the related Mortgagor of the Servicing Transfer and the new address to which payments on such Commercial Mortgage should be sent after the date of the Servicing Transfer; (e) Servicer shall promptly forward to the Company or the Designated Successor all Mortgagor correspondence, insurance notices, tax bills or any other correspondence or documentation related to such Commercial Mortgage which is received by Servicer after the date of the Servicing Transfer; and (f) Servicer, shall take any and all further actions and execute and deliver such further documents and agreements as may be necessary or advisable to effectuate the Servicing Transfer, as reasonably determined by the Company. 9.04 The Servicer's Excused Performance. Notwithstanding any provision in ---------------------------------- this Agreement to the contrary, there shall be no termination of, and no liability under, this Agreement with respect to the Servicer for its failure to duly observe or perform in any material respect any covenant, condition or practice of the Servicing Standards or this Agreement and required thereby or hereby to be observed or performed by the Servicer hereunder if such failure on the part of the Servicer is directly caused by the failure of the Company to duly observe or perform in any material respect any covenant, condition or practice of the Servicing Standards or this Agreement and required thereby or hereby to be observed or performed by the Company hereunder. ARTICLE X Section 10.01. Notices. ------- 24 All demands, notices and communications hereunder shall be in writing and shall be deemed to have been duly given if mailed, by registered or certified mail, return receipt requested, or, if by other means, when received by the other party at the address as follows: IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. 20371 IRVINE AVENUE SANTA ANA HEIGHTS, CA 90707 Attention: Richard J. Johnson Telephone: (714) 556-0122 Telecopy: (714) 438-2150 IMPERIAL COMMERCIAL CAPITAL CORPORATION 1 PARK PLAZA, SUITE 430 IRVINE, CALIFORNIA 92614 Attention: William D. Endresen Telephone: (714) 477-9100 Telecopy: (714) 477-9400 or such other address as may hereafter be furnished to the other party by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee (as evidenced, in the case of registered or certified mail, by the date noted on the return receipt). Section 10.02. Severability Clause. ------------------- Any part, provision, representation or warranty of this Agreement which is prohibited or which is held to be void or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Section 10.03. Counterparts. ------------ This Agreement may be executed simultaneously in any number of counterparts. Each counterpart shall be deemed to be an original, and all such counterparts shall constitute one and the same instrument. Section 10.04. Governing Law. ------------- The Agreement shall be governed by, and construed in accordance with, the laws of the state of California and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with the laws of the state of California without regard to conflicts of law principles. Section 10.05. Successors and Assigns. ---------------------- 25 This Agreement shall bind and inure to the benefit of and be enforceable by Servicer and the Company and the respective successors and assigns of Servicer and the Company. Servicer may not assign this Agreement without the prior written consent of the Company. Section 10.06. Waivers. ------- No term or provision of this Agreement may be waived or modified unless such waiver or modification is in writing and signed by the party against whom such waiver or modification is sought to be enforced. Section 10.07. No Partnership or Agency. ------------------------ Nothing herein contained shall be deemed or construed to create a partnership or joint venture between the parties hereto, nor shall Servicer be deemed an agent of the Company. Section 10.08 Headings. -------- The relationships of the Company to Servicer under this Agreement are intended by the parties to be that of an independent contractor and not that of a joint venturer, partner or agent. Servicer or any of its employees, officers, or directors shall not own or acquire any interest in any property that secures a Commercial Mortgage held by the Company without the prior written consent of the Company. Section 10.09. Further Agreements. ------------------ Servicer and the Company each agree to execute and deliver to the other such reasonable and appropriate additional documents, instruments or agreements as may be necessary or appropriate to effectuate the purposes of this Agreement. Section 10.10. WAIVER OF JURY TRIAL. -------------------- THE PARTIES, INCLUDING ANY ASSIGNEES, HEREBY WAIVE THEIR RIGHT TO TRIAL BY JURY OF DISPUTES, CLAIMS OR CONTROVERSIES BETWEEN THEMSELVES ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY AGREEMENTS, INSTRUMENTS OR TRANSACTIONS RELATING TO THIS AGREEMENT, WHETHER ARISING IN CONTRACT, TORT OR OTHERWISE. 26 IN WITNESS WHEREOF; the Company and Servicer have caused their names to be signed hereto by their respective officers thereunto duly authorized on the date first above written. IMPERIAL COMMERCIAL CAPITAL CORPORATION By: /s/ William D. Endresen ------------------------------------ Name: William D. Endresen Title: President IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. By: /s/ Richard J. Johnson ------------------------------------ Name: Richard J. Johnson Title: Chief Financial Officer 27 EXHIBIT A --------- MONTHLY SERVICING REPORT ------------------------ With respect to the Commercial Mortgages serviced by Servicer pursuant to the Interim Mortgage Servicing Agreement: 1) The aggregate of payments received on the Commercial Mortgages during the preceding Collection Period allocable to principal. 2) The aggregate of payments received on the Commercial Mortgages during the preceding Collection Period allocable to interest. 3) The aggregate of payments received on the Commercial Mortgages during the preceding Collection Period allocable to Escrow Funds. 4) The aggregate outstanding principal balance of such Commercial Mortgages as the close of business on the last day of the preceding Collection Period. 5) The number of Commercial Mortgages, and the outstanding principal balance of such Commercial Mortgages, that were (i) 1 to 30 days past due, (ii) 31 to 60 days past due, (iii) 61 to 90 days past due, and (iv) 91 or more days past due as of the end of the preceding Collection Period. 6) Gross charge-offs, recoveries and net losses for the preceding Collection Period. 7) The number and aggregate principal balance of all Commercial Mortgages in respect of which the related Mortgaged Property has been repossessed or foreclosed upon during the preceding Collection Period. 8) The number and aggregate principal balance of all Commercial Mortgages that were liquidated (otherwise than pursuant to voluntary prepayment) during such Collection Period). 9) First payment defaults for the preceding Collection Period. 10) Obligor bankruptcy filings for the preceding Collection Period. 11) Repossession and liquidation expenses for the preceding Collection Period. 12) Servicing Advances and unreimbursed Servicing Advances for the preceding Collection Period. 13) Servicing Fees collected for the preceding Collection Period. 14) Interest or income paid on funds in the Escrow Account and the Collection Account. 15) The aggregate of payments received allocable to REO Revenues. EX-11 15 COMPUTATION OF PRO FORMA EARNINGS EXHIBIT 11 IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC. STATEMENT REGARDING COMPUTATION OF PRO FORMA EARNINGS PER SHARE FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1997 (UNAUDITED) Pro forma income (loss) per share: Pro forma net income (loss)..................................... $(1,123,000) =========== Average number of shares outstanding............................ 599,000 Net effect of dilutive convertible preferred stock.............. 1,095,000 ----------- Total average shares.......................................... 1,694,000 =========== Pro forma net income (loss) per share......................... $ (0.66) ===========
EX-23.4 16 CONSENT OF KPMG RE: REGISTRANT EXHIBIT 23.4 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE The Board of Directors Imperial Credit Commercial Holdings, Inc.: The audit referred to in our report dated April 16, 1997, included the related financial statement schedule as of March 31, 1997, and for the period from January 15, 1997 (commencement of operations) through March 31, 1997, included in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the reference to our firm under the headings "Selected Financial Data" and "Experts" in the Prospectus. /s/ KPMG PEAT MARWICK LLP Orange County, California June 10, 1997 EX-23.5 17 CONSENT OF KPMG RE: ICCC EXHIBIT 23.5 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Imperial Commercial Capital Corporation: We consent to the use of our report included herein and to the reference to our firm under the headings "Selected Financial Data" and "Experts" in the Prospectus. /s/ KPMG PEAT MARWICK LLP Orange County, California June 10, 1997 -----END PRIVACY-ENHANCED MESSAGE-----