FILED PURSUANT TO RULE 424(b)(5)
REGISTRATION STATEMENT NO. 333-34137
AND REGISTRATION STATEMENT NO. 333-63456
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+The information contained in this preliminary prospectus supplement is not +
+complete and may be changed. This preliminary prospectus supplement and the +
+accompanying prospectuses are not an offer to sell these securities, and we +
+are not soliciting offers to buy these securities, in any jurisdiction where +
+the offer or sale is not permitted. +
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PRELIMINARY PROSPECTUS SUPPLEMENT
(to prospectuses dated May 8, 1998
and August 30, 2001) Subject to completion October 10, 2001
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6,000,000 Shares
[LOGO IMPAC]
Impac Mortgage Holdings, Inc.
Common Stock
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We are a mortgage real estate investment trust that is a leading nationwide
acquirer and originator of non-conforming Alt-A mortgage loans. We also provide
warehouse and repurchase financing to originators of mortgage loans.
Our company, Impac Mortgage Holdings, Inc., is offering 5,000,000 shares of its
common stock, par value $0.01 per share. We will receive the net proceeds from
the sale of these shares. Impac Funding Corporation, the selling stockholder,
is offering an additional 1,000,000 shares to be sold in this offering and will
receive the net proceeds from that sale.
Our common stock is listed on the American Stock Exchange under the symbol
"IMH." The last reported sale price of our common stock on that exchange on
October 8, 2001 was $7.26 per share.
Before buying any of these shares of common stock, you should carefully
consider the risk factors described in "Risk Factors" beginning on page S-8 of
this prospectus supplement and on pages 7 and 1 of the accompanying
prospectuses.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus supplement or the accompanying
prospectuses. Any representation to the contrary is a criminal offense.
Per share Total
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Public offering price $ $
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Underwriting discounts and commissions $ $
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Proceeds, before expenses, to Impac Mortgage Holdings, Inc. $ $
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Proceeds, before expenses, to selling stockholder $ $
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Our company, Impac Mortgage Holdings, Inc., has granted the underwriters a 30-
day option to purchase up to an additional 900,000 shares of its common stock
to cover over-allotments at the public offering price per share, less the
underwriting discounts and commissions.
The underwriters are offering the shares of common stock as described in
"Underwriting." Delivery of the shares will be made on or about October ,
2001.
UBS Warburg CIBC World Markets
Tucker Anthony Sutro Capital Markets Jolson Merchant Partners
You should rely only on the information contained in or incorporated by
reference into this prospectus supplement and the accompanying prospectuses. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. The information in this
prospectus supplement and the accompanying prospectuses is accurate only as of
the date such information is presented. Our business, financial condition,
results of operations and prospects may have changed since such dates.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Forward-looking information................................................ i
The company................................................................ S-1
Risk factors............................................................... S-8
Use of proceeds............................................................ S-18
Price range of common stock................................................ S-18
Distributions.............................................................. S-19
Capitalization............................................................. S-20
Selected consolidated financial data....................................... S-21
Management................................................................. S-25
Selling stockholder........................................................ S-27
Material federal income tax consequences................................... S-28
Certain changes to Maryland law............................................ S-36
Underwriting............................................................... S-36
Legal matters.............................................................. S-38
Experts.................................................................... S-38
PROSPECTUS Dated May 8, 1998
Available information..................................................... 2
Incorporation of certain documents by reference........................... 3
The company............................................................... 4
Risk factors.............................................................. 7
Description of securities................................................. 27
Certain provisions of Maryland law and of the company's charter and
bylaws................................................................... 36
Plan of distribution...................................................... 39
Federal income tax considerations......................................... 41
Legal matters............................................................. 50
Experts................................................................... 50
PROSPECTUS Dated August 30, 2001
Summary..................................................................... i
Risk factors................................................................ 1
Use of proceeds............................................................. 14
Selling security holders and plan of distribution........................... 14
Description of capital stock................................................ 16
Material federal income tax consequences.................................... 18
Legal matters............................................................... 25
Experts..................................................................... 25
Where you can find more information......................................... 26
FORWARD-LOOKING INFORMATION
This prospectus supplement and the accompanying prospectuses contain or
incorporate by reference certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements, some of which are based on
various assumptions and events that are beyond our control, may be identified
by reference to a future period or periods or by the use of forward-looking
terminology, such as may, will, believe, expect, anticipate, continue, or
similar terms or variations on those terms or the negative of those terms.
Actual results could differ materially from those set forth in forward-looking
statements due to a variety of factors, including, but not limited to, adverse
economic conditions, changes in interest rates, changes in yield curves,
changes in prepayment rates, the availability of financing and, if available,
the terms of any financing. For a discussion of the risks and uncertainties
that could cause actual results to differ from those contained in the forward-
looking statements, see "Risk factors" in this prospectus supplement and the
accompanying prospectuses. We do not undertake, and specifically disclaim any
obligation, to publicly release the results of any revisions that may be made
to any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
The following information may not contain all of the information that is
important to you. We encourage you to read this prospectus supplement and the
accompanying prospectuses, as well as the information that is incorporated by
reference in this prospectus supplement and the accompanying prospectuses, in
their entireties. You should carefully consider the factors set forth under
"Risk factors" on page S-8 in this prospectus supplement, and on pages 7 and 1
in the accompanying prospectuses, dated May 8, 1998 and August 30, 2001,
respectively, before making an investment decision to purchase shares of our
common stock. Unless the context otherwise requires, references to we, us or
the company in this prospectus supplement mean Impac Mortgage Holdings, Inc.,
and its subsidiaries, IMH Assets Corp. and Impac Warehouse Lending Group, Inc.
and its affiliate, Impac Funding Corporation (together with its wholly-owned
subsidiaries Impac Secured Assets Corporation and Novelle Financial Services,
Inc.).
i
The following information may not contain all of the information that is
important to you in determining whether to purchase the common stock offered
hereby. You should also read the more detailed information set forth in this
prospectus supplement, the accompanying prospectuses and the documents
incorporated by reference, including the "Risk factors" sections of this
prospectus supplement and the accompanying prospectuses, before making an
investment decision. Unless otherwise indicated, the information in this
prospectus supplement does not give effect to the exercise of the underwriters'
over-allotment option.
THE COMPANY
Business
Our company, Impac Mortgage Holdings, Inc., is a mortgage real estate
investment trust, or "REIT." Together with our subsidiaries and Impac Funding
Corporation, we are a leading nationwide acquirer and originator of non-
conforming Alt-A mortgage loans. "Alt-A" mortgage loans consist primarily of
mortgage loans that are first lien mortgage loans made to borrowers whose
credit is generally within typical Fannie Mae or Freddie Mac guidelines, but
that have loan characteristics that make them non-conforming under those
guidelines. For instance, the loans may have higher loan-to-value, or "LTV,"
ratios than usual or may have excluded certain documentation or verifications.
Therefore, in making our credit decisions, we are more reliant upon the
borrower's Fair Issac Credit Score, or "FICO," and the adequacy of the
underlying collateral. We also provide warehouse and repurchase financing to
originators of mortgage loans. Our goal is to generate consistent reliable
income for distribution to our stockholders, primarily from the earnings of our
core businesses.
We operate three core businesses: our long-term investment operations, our
mortgage operations, and our warehouse lending operations. Our businesses
actively work together to deliver comprehensive mortgage investment and lending
services.
Our principal strategy is to expand our market position as a leading low-
cost nationwide acquirer and originator of non-conforming Alt-A mortgage loans,
while continuing to emphasize an efficient centralized operating structure. To
help accomplish this, we have developed a web-based automated underwriting
system called "IDASL," which stands for Impac Direct Access System for Lending.
IDASL substantially increases efficiencies for our customers and our mortgage
operations by significantly decreasing the processing time for a mortgage loan,
while improving employee productivity and maintaining superior customer
service. We seek to increase acquisitions and originations by providing
innovative products, competitive pricing and superior customer service. We
focus on expansion opportunities to attract correspondent originators and
wholesale brokers to our nationwide network to increase mortgage loan
acquisitions and originations in a controlled manner. We believe that non-
conforming Alt-A mortgage loans provide an attractive net earnings profile, by
producing higher yields without commensurately higher credit losses than other
types of mortgage loans. As of June 30, 2001, 95% of the mortgage loans that we
owned were A or A- credit quality loans. As defined by us, "A" credit quality
loans generally have a FICO score of 640 or better and "A-" credit quality
loans generally have a FICO score of between 600 and 640. For the six months
ended June 30, 2001, our average loan balance on all mortgage loans held for
investment, which includes first and, to a lesser extent, second trust deeds,
was $145,000, with a weighted average FICO score of 676 and a weighted average
LTV ratio of 85%.
We have developed non-conforming Alt-A mortgage loan products that meet the
needs of originators of mortgage loans and borrowers, as well as those of
capital market investors. We are a leading issuer of Alt-A mortgage-backed
securities, having issued nearly 38% of total non-agency Alt-A issuances for
the year 2000, according to a leading investment bank. According to a weekly
industry newsletter, during the first half of 2001, nearly $17.0 billion of
Alt-A loans were securitized, which represents a 25% increase over the total
Alt-A securitizations completed during 2000. According to the same newsletter,
Alt-A mortgage-backed securitizations represented approximately 29% of the
private-label mortgage-backed securities issued during the first half of 2001.
S-1
As a REIT, we are able to pass through income to our stockholders generally
without paying federal income tax at the corporate level. We are required to
distribute at least 90% of our taxable income to our stockholders.
Impac Mortgage Holdings, Inc. was incorporated under the laws of the state
of Maryland in 1995. Our principal executive offices are located at 1401 Dove
Street, Newport Beach, California 92660 and our telephone number is (949) 475-
3600.
Operations
Our long-term investment operations invests primarily in non-conforming Alt-
A mortgage loans. This business generates income based on the excess of the
interest it earns on its investment portfolio and the expense associated with
its borrowings against its investment portfolio. We believe that by improving
the overall credit quality of our investment portfolio we can more consistently
generate a higher level of future cash flow and earnings. We acquire for
investment our non-conforming Alt-A mortgage loans from our mortgage
operations, which acquires or originates these loans from our national network
of correspondents and mortgage brokers. We believe these loans tend to perform
better than those which we may otherwise purchase for long-term investment from
third parties. Beginning with 1999, we have acquired for long-term investment
almost exclusively non-conforming Alt-A mortgage loans in the form of "A" or
"A-" credit quality adjustable rate mortgages, of which approximately 48% of
the loans provide for a form of prepayment protection through prepayment
penalties. As a result, during 1999, 2000 and for the first six months of 2001,
we experienced a higher level of cash flow, significantly fewer prepayments and
reduced overall losses in our mortgage loan investment portfolio as compared to
pre-1998 levels. Our investment in non-conforming Alt-A mortgage loans and, to
a lesser extent, mortgage-backed securities, is financed with collateralized
mortgage obligations, or "CMO," borrowings and proceeds from the sale of
capital stock.
Our mortgage operations acquires, originates, sells and securitizes
primarily non-conforming Alt-A mortgage loans. Our mortgage operations
generates income by securitizing and selling loans to permanent investors,
including our long-term investment operations. This business also earns
revenues from fees associated with mortgage servicing rights, master servicing
agreements and interest income earned on loans held for sale. Our mortgage
operations supports the investment objectives of our long-term investment
operations by supplying non-conforming Alt-A mortgage loans at prices that are
comparable to those available through investment banks and other third parties.
However, we believe that we have a competitive advantage because of our
historical understanding of the underlying credit of these loans and the
extensive information on the performance and prepayment patterns of these types
of loans. Our mortgage operations primarily uses warehouse lines of credit to
finance the acquisition and origination of mortgage loans.
Our correspondent and wholesale broker networks underwrite loans to our
specifications through the use of IDASL. IDASL automates loan origination,
underwriting and pricing, enabling our customers to pre-qualify borrowers for
various loan programs, receive automated loan approval decisions and obtain
rates and pricing. IDASL not only allows us broader access to markets
nationwide, but also brings us closer to our customers with minimal future
capital investment while maintaining centralization, a key factor in ensuring
quality control and being a low cost acquirer and originator of mortgage loans.
Currently, substantially all of our correspondents are underwriting loans
through IDASL and 100% of all wholesale loans delivered by brokers are directly
underwritten through IDASL.
We seek to securitize and sell almost all of our mortgage loan production as
soon as we have accumulated enough loans to create a marketable pool of such
loans. By reducing the holding period of mortgage loans, we have less exposure
to interest rate risk and price volatility than if we held the loans for longer
accumulation periods. Through securitizations and sales of our mortgage loans
and servicing rights, we also lock in a cash gain-on-sale from our loan sales.
We conduct securitizations through the issuance of mortgage-backed securities
in the form of real estate mortgage investment conduits, or "REMICs," and
borrowings provided from CMOs.
S-2
During the nine months ended September 30, 2001, we securitized $1.3 billion
in six REMIC transactions and issued $758.3 million worth of CMO borrowings in
two transactions. We generally sell the primary servicing rights associated
with our mortgage loans while maintaining master servicing agreements. We do
not retain any subordinate securities associated with our current REMIC
securitizations.
Our warehouse operations provides short-term financing to mortgage loan
originators by funding mortgage loans from their closing date until they are
sold to pre-approved investors, including our long-term investment operations.
Our warehouse lending operations earns fees as well as a spread from the
difference between its cost of borrowings and the interest earned on advances
against the loans prior to their sale. Our customers include approved mortgage
bankers, our mortgage operations and many of our mortgage operations'
customers. Generally, we seek to acquire the non-conforming Alt-A mortgage
loans funded with facilities provided by our warehouse lending operations,
which provides synergies with our long-term investment operations and mortgage
operations.
Recent Developments
On September 25, 2001, we announced that we were returning to regular
dividend payments and announced a third quarter dividend of $0.25 per share.
The third quarter dividend will be paid in two installments: the first
installment of $0.13 per share is payable on October 15, 2001 to stockholders
of record on October 1, 2001 and the second installment of $0.12 per share is
payable on November 15, 2001 to stockholders of record on November 1, 2001. In
November 2000, we announced that we were ceasing paying further dividends until
we utilized our net operating losses, which occurred in 2000. With the
restructuring of our balance sheet and our technology and mortgage initiatives,
we enjoyed a substantial increase in taxable income during the first half of
2001. We also benefited from decreased borrowing costs and wider net interest
margins as interest rates on adjustable CMO borrowings declined due to short-
term interest rate reductions by the Federal Reserve Bank.
2001 Operating Results
Our net earnings during the first half of 2001 were $9.9 million, or $0.37
per diluted common share, as compared to a net loss of $61.2 million, or
$(2.93) per diluted common share, during the first half of 2000. In addition to
a return to profitability, we earned estimated taxable income of $16.7 million,
or $0.62 per diluted common share, during the first half of 2001. The favorable
difference between estimated taxable earnings and net earnings was primarily
due to a $4.3 million transition adjustment as a result of the adoption of
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which does not reduce taxable income.
As a result of increased earnings and cash flows during the first half of
2001, our diluted book value per common share increased to $7.00 at June 30,
2001 from $6.67 at December 31, 2000. We retired $7.7 million of 11% senior
subordinated debt almost three years before its maturity date and we acquired
$555.5 million of loans from our mortgage operations during the first half of
2001 as compared to $156.9 million during the first half of 2000. In addition,
Impac Funding Corporation, the selling stockholder, purchased $10.0 million of
Impac Mortgage Holdings, Inc.'s Series C 10.5% Cumulative Preferred Stock.
During the first half of 2001, our mortgage loan acquisitions and originations
increased 58% to $1.4 billion as compared to $886.0 million during the first
half of 2000 and our master servicing portfolio increased 20% to $4.8 billion
at June 30, 2001 as compared to $4.0 billion at December 31, 2000. Average
outstanding finance receivables to our non-affiliates increased 53% to $183.1
million during the first half of 2001 as compared to $119.3 million during the
first half of 2000. As a result of increased mortgage loan acquisitions by our
long-term investment operations and the expansion of our warehouse lending
operations, total assets increased 16% to $2.2 billion at June 30, 2001 as
compared to $1.9 billion at December 31, 2000.
S-3
Change in Business Strategies
In the fall of 1998, the financial markets experienced a liquidity crisis as
a result of the deterioration in the capital markets and the mortgage-backed
securitization market. We suffered margin calls made on our warehouse and
reverse repurchase facilities. In response, we sold mortgage loans and
mortgage-backed securities at prices that were less than their original
purchase prices, thereby suffering substantial losses.
In response to these events, we have made a number of strategic changes in
our business that we believe have resulted in our improved operating
performance and cash flows, increased the credit quality of our long-term
investment portfolio and reduced our exposure to interest rate risks. These
strategic changes include:
. Mortgage Operations Expansion
During 1999, we began to expand the scope of our mortgage operations to
include wholesale and retail lending. By expanding into these origination
channels, we have positioned ourselves closer to the customer, which increases
the quality of our mortgage loans and decreases the premiums we pay for
originating such loans.
. Introduction of Prepayment Penalties on our Loan Programs
In addition to reducing the premiums paid on our loans, since 1998 we have
introduced prepayment penalties on all of our mortgage loan programs and
implemented a policy of paying only significant premiums for those mortgage
loans that contain prepayment penalties. We have introduced specific pricing
and other terms into our mortgage loan programs that we believe encourage the
inclusion of prepayment penalties in our mortgage loans. For the six months
ended June 30, 2001, more than 60% of all mortgage loans acquired or originated
by our mortgage operations had prepayment penalties.
. Increased Frequency of Securitizations
In order to minimize the risks associated with the accumulation of our
mortgage loans, we seek to securitize our loans more frequently by creating
smaller securitizations of our loans thereby reducing our exposure to interest
rate risk and price volatility during the accumulation period of our loans.
During the nine months ended September 30, 2001, we completed six REMIC
transactions and two CMO transactions. In addition, we currently have in place
a forward commitment for the securitization and sale of our mortgage loans and
the related mortgage servicing rights created from these securities. This gives
us the ability to securitize without substantial reliance on the secondary
market and allows us to realize all cash gains on these transactions.
. Stricter Investment Guidelines for our Long-Term Investment Operations
Since 1998, we have invested only in non-conforming Alt-A mortgage loans
that we have acquired from, or were originated by, our mortgage operations to
better ensure the quality of the investments in our portfolio. We believe that
our investments in these mortgage loans have substantially reduced our exposure
to prepayments, credit losses and write downs of premiums paid for mortgage
loans, and have provided a higher yield.
. Improved Hedging Policies
In order to create a more consistent and reliable earnings stream from our
long-term investment operations' investment portfolio, we have entered into
certain financial instruments to protect against rising interest rates. As a
result of this hedging policy, we have given up some of the potential gain that
could result from further declining interest rates in order to increase the
likelihood that our portfolio generates consistent returns in various rising
interest rate scenarios.
S-4
. Adjustment to Pre-1998 Investment Securities Available for Sale
We believe we have significantly reduced current exposure to further losses
from investment securities available for sale by writing off substantially all
remaining book value of our investment securities acquired prior to 1998. We no
longer acquire or invest in interest-only, principal-only, or subordinate
mortgage-backed securities and we have eliminated any short-term borrowings
against such securities.
Management
Our executive officers are:
Joseph R. Tomkinson, Chief Executive Officer and Chairman of the Board
William S. Ashmore, Chief Operating Officer, President and Director
Richard J. Johnson, Executive Vice President and Chief Financial Officer
Ronald M. Morrison, General Counsel and Secretary
Gretchen D. Verdugo, Executive Vice President of Impac Warehouse Lending
Group, Inc.
Messrs. Tomkinson, Ashmore and Johnson have been with us since our formation
in 1995. Mr. Tomkinson and Mr. Ashmore bring 26 years and 25 years of
experience, respectively, in real estate, real estate financing and mortgage
banking. Mr. Johnson is a Certified Public Accountant with over 17 years of
experience in the mortgage banking industry. Mr. Morrison has been with the
company since 1998 and prior to that he was in private legal practice. Ms.
Verdugo has been with the company since 1997 and brings over 14 years of
experience in the mortgage industry.
Our executive management team has substantial experience in the acquisition,
origination and sale of mortgage loans, and investment in mortgage loans and
securities backed by these loans. Key members of our management team have been
founders and executives of other specialty finance corporations and, in their
current and past service, have successfully established national networks of
mortgage originators and institutional investors and closed billions of dollars
of securitized loan transactions.
S-5
The Offering(1)
Common stock offered by Impac Mortgage Holdings, Inc. .. 5,000,000 shares
Common stock sold by selling stockholder................ 1,000,000 shares
Common stock to be outstanding after this offering...... 31,836,829 shares(2)
American Stock Exchange Symbol.......................... "IMH"
Use of Proceeds......................................... We are raising funds in
this offering primarily
for growing our long-
term investment and
mortgage operations and
for general corporate
purposes. Impac Mortgage
Holdings, Inc. will not
receive any proceeds
from the sale of common
stock by the selling
stockholder, Impac
Funding Corporation, an
affiliate of Impac
Mortgage Holdings, Inc.
Impac Funding
Corporation is selling
1,000,000 shares of
common stock. Impac
Funding Corporation will
use the net proceeds
from this offering for
general working capital.
See "Selling
stockholder" for certain
additional information
regarding Impac Funding
Corporation.
Risk Factors............................................ Investing in our common
stock involves certain
risks, which are
described under "Risk
factors."
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(1) The information provided above excludes up to 900,000 shares of our common
stock that we may issue and sell upon the exercise of the underwriters'
over-allotment option.
(2) Based on 26,836,829 shares outstanding as of October 5, 2001. Excludes
751,654 shares of common stock with a weighted average exercise price of
$4.21 per share that are issuable upon the exercise of options granted
under the Impac Mortgage Holdings, Inc. stock option plans.
S-6
Summary Consolidated Financial Data
The summary consolidated financial data shown below as of and for the five
years ended December 31, 2000 is derived from information contained in our
audited consolidated financial statements. The financial data as of and for the
six months ended June 30, 2001 and 2000 is derived from our unaudited
consolidated financial statements. The results of operations for the six months
ended June 30, 2001 may not be indicative of results to be expected for any
future period. You should read the summary consolidated financial data
presented below together with our consolidated financial statements and related
notes, which are incorporated by reference into this prospectus supplement and
the accompanying prospectuses, and with our historical financial information
included under "Selected consolidated financial data" beginning on page S-21 of
this prospectus supplement. In the opinion of management, our unaudited
consolidated financial statements reflect all adjustments, consisting solely of
normal recurring adjustments, that are necessary to present fairly the results
for the unaudited interim periods.
IMPAC MORTGAGE HOLDINGS, INC.
(dollar amounts in thousands, except per share data)
For the six months
For the year ended December 31, ended June 30,
------------------------------------------------------- ----------------------
1996 1997 1998 1999 2000 2000 2001
--------- ---------- ---------- ---------- ---------- ---------- ----------
Balance sheet data:
Total assets............ $ 972,355 $1,752,812 $1,665,504 $1,675,430 $1,898,838 $1,700,119 $2,177,473
Total liabilities....... 843,165 1,523,782 1,413,898 1,436,586 1,720,398 1,519,460 1,989,638
Statement of operations
data:
Net interest income
(expense) after loan
loss provision......... $ 15,179 $ 26,113 $ 37,602 $ 24,116 $ 4,144 $ (4,735) $ 11,500
Total non-interest
income (loss).......... 1,496 10,326 (13,539) 6,902 2,513 312 6,914
Net earnings (loss)..... 11,879 (16,029) (5,933) 22,317 (54,233) (61,208) 9,925
Net earnings (loss) per
share before management
termination
expense(1)............. $ 1.32 $ 1.74 $ (0.25) $ 0.76 $ (2.70) $ (2.93) $ 0.37
IMPAC FUNDING CORPORATION
(dollar amounts in thousands, except operating data)
For the six months
For the year ended December 31, ended June 30,
------------------------------------------------------- ----------------------
1996 1997 1998 1999 2000 2000 2001
--------- ---------- ---------- ---------- ---------- ---------- ----------
Balance sheet data:
Total assets ........... $ 399,171 $ 656,944 $ 313,872 $ 116,246 $ 317,163 $ 167,379 $ 247,542
Total liabilities ...... 389,175 629,548 301,009 98,698 301,242 150,757 231,407
Statement of operations
data:
Net interest income
(expense).............. $ 1,048 $ 6,392 $ 7,767 $ 272 $ (1,407) $ (622) $ 773
Total non-interest
income (loss).......... 8,997 24,166 (5,683) 33,298 27,118 12,326 22,435
Net earnings (loss)..... 912 8,400 (14,013) 4,332 (1,780) (1,093) 4,847
Operating data (in
millions):
Mortgage loan
acquisitions (volume)
....................... $ 1,542 $ 2,571 $ 2,249 $ 1,672 $ 2,113 $ 886 $ 1,383
Master servicing
portfolio ............. 1,550 3,029 3,714 2,879 4,043 2,983 4,791
--------
(1) In December 1997, our management agreement with Imperial Credit Advisors,
Inc., an affiliate of Imperial Credit Industries, Inc., was terminated. Net
loss per share in 1997 after the effect of expenses related to the
termination was $(0.99).
S-7
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
consider the following factors carefully before deciding to purchase shares of
our common stock. You should also consider the risk factors included in the
accompanying prospectuses and in our Annual Report on Form 10-K for the year
ended December 31, 2000 under the caption "Business--Risk Factors." The
information presented here, to the extent it is inconsistent with the
information in the accompanying prospectuses or our Annual Report on Form 10-K,
supersedes and replaces such information. Additional risks not presently known
to us or that we currently deem immaterial may also impair our business
operations.
A prolonged economic downturn or recession would adversely affect our
operations and financial condition
Although we have not operated during a period of prolonged general economic
downturn or a recession, these events have historically resulted in a reduction
in mortgage origination activity and an increase in the rate of mortgage
defaults. The United States economy is currently undergoing a period of
slowdown, which some observers view as a recession. This economic condition has
been worsened by the September 11th terrorist attacks in New York City and
Washington, D.C. A continued economic downturn or recession would have a
significant adverse impact on our operations and our financial condition. For
example, a reduction in new mortgages will adversely affect our ability to
expand our mortgage portfolio, our principal means of increasing our earnings.
In addition, a decline in new mortgage activity will likely result in reduced
activity for our warehouse lending operations and our long-term investment
portfolio operations. In the case of our mortgage operations, a decline in
mortgage activity may result in fewer loans that meet its criteria for purchase
and securitization, thus resulting in a reduction in interest income and fees
and gain on sale of loans. We may also experience larger than previously
reported credit losses on our portfolio due to a higher level of defaults on
our mortgage loans.
Inability to generate liquidity may adversely affect our operations
If we cannot generate sufficient liquidity, we will be unable to continue
our operations, grow our asset base, maintain our hedging policy and pay
dividends. We have traditionally derived our liquidity from four sources:
. financing facilities provided to us by others to acquire mortgage assets;
. whole loan sales and securitizations of acquired or originated mortgage
loans;
. our issuance of equity and debt securities; and
. earnings from operations.
We cannot assure you that any of these alternatives will be available to us,
or if available, that we will be able to negotiate favorable terms. Our ability
to meet our long-term liquidity requirements is subject to the renewal of our
credit and repurchase facilities and/or obtaining other sources of financing,
including additional debt or equity from time to time. Any decision by our
lenders and/or investors to make additional funds available to us in the future
will depend upon a number of factors, such as our compliance with the terms of
our existing credit arrangements, our financial performance, industry and
market trends in our various businesses, the general availability of, and rates
applicable to, financing and investments, the lenders' and/or investors' own
resources and policies concerning loans and investments, and the relative
attractiveness of alternative investment or lending opportunities. If we cannot
raise cash by selling debt or equity securities, we may be forced to sell our
assets at unfavorable prices or discontinue various business activities. Our
inability to access the capital markets could have a negative impact on our
earnings and ability to pay dividends.
S-8
Margin calls on financing facilities may adversely affect our operations
Prior to the fourth quarter of 1998, we generally had no difficulty in
obtaining favorable financing facilities or in selling acquired mortgage loans.
However, during the fourth quarter of 1998, the mortgage industry experienced
substantial turmoil as a result of a lack of liquidity in the secondary
markets. At that time, investors expressed unwillingness to purchase interests
in securitizations due in part to:
. the lack of financing to acquire these securitization interests;
. the widening of returns expected by institutional investors on
securitization interests over the prevailing Treasury rate; and
. market uncertainty.
As a result, many mortgage loan originators, including our company, were
unable to access the securitization market on favorable terms, which resulted
in some companies declaring bankruptcy. Originators, like our company, were
required to sell loans on a whole loan basis and liquidate holdings of
mortgage-backed securities to repay short-term borrowings. However, the large
amount of loans available for sale on a whole loan basis affected the pricing
offered for these loans, which in turn reduced the value of the collateral
underlying the financing facilities. Therefore, many providers of financing
facilities initiated margin calls. Margin calls resulted when our lenders
evaluated the market value of the collateral securing our financing facilities
and required us to provide them with additional equity or collateral to secure
our borrowings.
Our financing facilities were short-term borrowings and due to the turmoil
in the mortgage industry during the latter part of 1998 many traditional
providers of financing facilities were unwilling to provide facilities on
favorable terms, or at all. Our current financing facilities continue to be
short-term borrowings and we expect this to continue. If we cannot renew or
replace maturing borrowings, we may have to sell, on a whole loan basis, the
loans securing these facilities which, depending upon market conditions, may
result in substantial losses.
Dependence on securitizations for liquidity
We rely significantly upon securitizations to generate cash proceeds to
repay borrowings and to create credit availability. Any reduction in our
ability to complete securitizations may require us to utilize other sources of
financing, which may be on unfavorable terms, if such financing is available at
all. In addition, delays in closing sales of our mortgage loans increase our
risk by increasing the warehousing period for the loans, further exposing our
company to credit risks. Furthermore, gains on sales from our securitizations
represent a significant portion of our earnings.
Several factors could affect our ability to complete securitizations of our
mortgages, including:
. conditions in the securities and secondary markets;
. credit quality of the mortgage loans acquired or originated through our
mortgage operations;
. volume of our mortgage loan purchases and originations;
. our ability to obtain credit enhancements; and
. lack of investors purchasing higher risk components of the securities.
If we are unable to profitably securitize a significant number of our
mortgage loans in a particular financial reporting period, then we could
experience lower income or a loss for that period. As a result of turmoil in
the securitization market during the latter part of 1998, many mortgage
lenders, including our company, were required to sell mortgage loans on a whole
loan basis under adverse market conditions in order to generate liquidity. Many
of these sales were made at prices lower than our carrying value of the
mortgage loans and we experienced substantial losses. We cannot assure you that
we will be able to continue to profitably securitize or sell our loans on a
whole loan basis, or at all.
S-9
The market for first loss risk securities, which are securities that take
the first loss when mortgages are not paid by the borrowers, is generally
limited. In connection with our REMIC securitizations, we endeavor to sell all
securities subjecting us to a first loss risk. If we cannot sell these
securities, we may be required to hold them for an extended period, subjecting
us to a first loss risk.
Our borrowings and substantial leverage may cause losses
Risks of use of collateralized mortgage obligations
To grow our investment portfolio, we borrow a substantial portion of the
market value of substantially all of our investments in mortgage loans and our
remaining mortgage-backed securities portfolio. We currently prefer to use
collateralized mortgage obligations as financing vehicles to increase our
leverage, since mortgage loans held for collateralized mortgage obligation
collateral are retained for investment rather than sold in a secondary market
transaction. Retaining mortgage loans as collateral for collateralized mortgage
obligations exposes our operations to greater credit losses than does the use
of other securitization techniques that are treated as sales. Although our
liability under a collateralized mortgage obligation is limited to the
collateral used to create the collateralized mortgage obligation, we generally
are required to make a cash equity investment to fund collateral in excess of
the amount of the securities issued. If we experience credit losses on the pool
of loans subject to the collateralized mortgage obligation greater than we
expected, the value of our equity investment will decrease and we would have to
increase the allowance for loan losses on our financial statements.
Cost of borrowings may exceed return on assets
The cost of borrowings under our financing facilities corresponds to a
referenced interest rate plus or minus a margin. The margin varies depending on
factors such as the nature and liquidity of the underlying collateral and the
availability of financing in the market. We will experience net interest losses
if the returns on our assets financed with borrowed funds fail to cover the
cost of our borrowings.
Default risks under financing facilities
If we default under our financing facilities, our lenders could force us to
liquidate the collateral. If the value of the collateral is less than the
amount borrowed, we could be required to pay the difference in cash. If we were
to declare bankruptcy, some of our reverse repurchase agreements may obtain
special treatment and our creditors would then be allowed to liquidate the
collateral without any delay. On the other hand, if a lender with whom we have
a reverse repurchase agreement declares bankruptcy, we might experience
difficulty repurchasing our collateral, or enforcing our claim for damages, and
it is possible that our claim could be repudiated and we could be treated as an
unsecured creditor. If this occurs, our claims would be subject to significant
delay and we may receive substantially less than our actual damages or nothing
at all.
Risk of lack of return of investment upon liquidation
We have pledged a substantial portion of our assets to secure the repayment
of collateralized mortgage obligations issued in securitizations, our financing
facilities and our other borrowings. We will also pledge substantially all of
our current and future mortgage loans to secure borrowings pending their
securitization or sale. The cash flows we receive from our investments that
have not yet been distributed, pledged or used to acquire mortgage loans or
other investments may be the only unpledged assets available to our unsecured
creditors and you if our company was liquidated.
Interest rate fluctuations may adversely affect our operating results
Our operations, as a portfolio manager, a mortgage loan acquirer and
originator or a warehouse lender, may be adversely affected by rising and
falling interest rates. Higher interest rates may discourage potential
borrowers from refinancing mortgages, borrowing to purchase homes or seeking
second mortgages. This may
S-10
decrease the amount of mortgages available to be acquired or originated by our
mortgage operations and decrease the demand for warehouse financing provided by
our warehouse lending operations to originators of mortgage loans. If short-
term interest rates exceed long-term interest rates, there is a higher risk of
increased loan prepayments, as borrowers may seek to refinance their fixed and
adjustable rate mortgage loans at lower long-term fixed interest rates.
Increased loan prepayments could lead to a reduction in the number of loans in
our investment portfolio and reduce our net interest income.
We are subject to the risk of rising mortgage interest rates between the
time we commit to purchase mortgages at a fixed price and the time we sell or
securitize those mortgages. An increase in interest rates will generally result
in a decrease in the market value of mortgages that we have committed to
purchase at a fixed price, but have not yet sold or securitized or have not
been properly hedged.
Risks of repricing of assets and liabilities
Our principal source of revenue is net interest income or net interest
spread from our investment portfolio, which is the difference between the
interest we earn on our interest earning assets and the interest we pay on our
interest bearing liabilities. The rates we pay on our borrowings are
independent of the rates we earn on our assets and may be subject to more
frequent periodic rate adjustments. Therefore, we could experience a decrease
in net interest income or a net interest loss because the interest rates on our
borrowings could increase faster than the interest rates on our assets. If our
net interest spread becomes negative, we will be paying more interest on our
borrowings than we will be earning on our assets and we will be exposed to a
risk of loss.
Additionally, the rates paid on our borrowings and the rates received on our
assets may be based upon different indices (i.e., LIBOR, U.S. Treasuries,
etc.). If the index used to determine the rate on our borrowings increases
faster than the index used to determine the rate on our assets, we will
experience a declining net interest spread, which will have a negative impact
on our profitability and may result in losses.
Risks of adjustable rate mortgages
A substantial portion of the mortgage assets held by our long-term
investment operations are fixed for a period of time then become adjustable
rate mortgages or bear interest based upon short-term interest rate indices. We
generally fund these mortgage assets with variable borrowings. To the extent
that there is an increase in the interest rate index used to determine our
adjustable rate borrowings that is not covered by our current hedging policy,
the net interest margin will decrease or become negative.
Interest rate caps
Adjustable rate mortgages typically have interest rate caps, which limit
interest rates charged to the borrower during any given period. Our borrowings
are not subject to similar restrictions. As a result, in a period of rapidly
increasing interest rates, the interest rates we pay on our borrowings could
increase without limitation, while the interest rates we earn on our adjustable
rate mortgage assets would be capped. If this occurs, our net earnings could be
significantly reduced or we could suffer a net interest loss.
Prepayments of adjustable rate mortgage loans may adversely affect our
operations
Mortgage prepayments generally increase on our adjustable rate mortgages
when fixed mortgage interest rates fall below the then-current interest rates
on outstanding adjustable rate mortgage loans. Prepayments on mortgage loans
are also affected by the terms and credit grades of the loans, conditions in
the housing and financial markets and general economic conditions. Most of the
adjustable rate mortgages that we acquire are originated within three months of
the time we purchased the mortgages and generally bear initial interest rates
which are lower than their fully-indexed amount (the applicable index plus the
margin). If we acquire these mortgages at a premium and they are prepaid prior
to or soon after the time of adjustment to a fully-indexed rate without payment
of any prepay penalty, we would not have received interest at the fully-indexed
rate
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during such period and we must expense the unamortized premium that was paid
for the loan at the time of the prepayment. This means we would lose the
opportunity to earn interest at that rate over the expected life of the
mortgage. Also, if prepayments on our adjustable rate mortgage loans increase
when interest rates are declining, our net interest income may decrease if we
cannot reinvest the prepayments in mortgage assets bearing comparable rates.
We generally acquire mortgages on a "servicing released" basis, meaning we
acquire both the mortgages and the rights to service them. This strategy
requires us to pay a higher purchase price or premium for the mortgages. If our
mortgage loans that we acquire at a premium prepay faster than originally
projected, generally accepted accounting principles require us to write down
the remaining capitalized premium amounts at a faster speed than was originally
projected, which would decrease our current net interest income.
Value of our portfolio of mortgage-backed securities may be adversely affected
Prior to 1998, we invested in mortgage-backed securities known as interest-
only, principal-only, residual interest and subordinated securities.
Investments in residual interest and subordinated securities are much riskier
than investments in senior mortgage-backed securities because these
subordinated securities bear all credit losses prior to the related senior
securities. On a percentage basis, the risk associated with holding residual
interest and subordinated securities is greater than holding the underlying
mortgage loans directly due to the concentration of losses in the subordinated
securities.
We estimate future cash flows from these securities and value them utilizing
assumptions based in part on projected discount rates, mortgage loan
prepayments and credit losses. If our actual experience differs from our
assumptions, we would be required to reduce the value of these securities. The
market for our asset-backed securities is extremely limited and we cannot
assure you that we could sell these securities at their reported value, or at
any value or that we could recoup our initial investment.
In addition, we may not obtain our anticipated yield or we may incur losses
if the credit support available within certain mortgage-backed securities is
inadequate due to unanticipated levels of losses, or due to difficulties
experienced by the credit support provider. Delays or difficulties encountered
in servicing mortgage-backed securities may cause greater losses and,
therefore, greater resort to credit support than was originally anticipated,
and may cause a rating agency to downgrade certain classes of our securities.
We undertake additional risks by acquiring and investing in mortgage loans
Risk of failure to obtain credit enhancements
We do not obtain credit enhancements such as mortgage pool or special hazard
insurance for all of our mortgage loans and investments. Generally, we require
mortgage insurance on any loan with a loan-to-value ratio greater than 80%.
During the time we hold mortgage loans for investment, we are subject to risks
of borrower defaults and bankruptcies and special hazard losses that are not
covered by standard hazard insurance. If a borrower defaults on a mortgage loan
that we hold, we bear the risk of loss of principal to the extent there is any
deficiency between the value of the related mortgaged property and the amount
owing on the mortgage loan and any insurance proceeds available to us through
the mortgage insurer. In addition, since defaulted mortgage loans, which under
our financing arrangements are mortgage loans that are generally 30 to 90 days
delinquent in payments, may be considered ineligible collateral under our
borrowing arrangements, we could bear the risk of being required to own these
loans without the use of borrowed funds until they are ultimately liquidated or
sold at a loss.
Greater risks from non-conforming Alt-A mortgage loans
We are an acquirer and originator of non-conforming Alt-A residential
mortgage loans. These are residential mortgages that do not qualify for
purchase by government sponsored agencies such as the
S-12
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation. Our operations may be negatively affected due to our investments
in non-conforming Alt-A mortgage loans. Credit risks associated with non-
conforming Alt-A mortgage loans are greater than conforming mortgage loans. The
interest rates we charge on non-conforming Alt-A loans are often higher than
those charged for conforming loans in order to compensate for the lower
liquidity. However, lower levels of liquidity may cause us to hold loans or
other mortgage-related assets supported by these loans that we otherwise would
not hold. By doing this, we assume the potential risk of increased delinquency
rates and/or credit losses as well as interest rate risk. Additionally, the
combination of different underwriting criteria and higher rates of interest
leads to greater risk, including higher prepayment rates and higher delinquency
rates and/or credit losses.
Risks related to lending to non-conforming Alt-A borrowers
As a lender of non-conforming Alt-A mortgage loans, we market to borrowers
who may be unable to obtain mortgage financing from conventional mortgage
sources. Loans made to such non-conforming Alt-A borrowers generally entail a
higher risk of delinquency and higher losses than loans made to borrowers who
utilize conventional mortgage sources. Delinquency, foreclosures and losses
generally increase during economic slowdowns or recessions. The actual risk of
delinquencies, foreclosures and losses on loans made to non-conforming Alt-A
borrowers could be higher under adverse economic conditions than those
currently experienced in the mortgage lending industry in general. Further, any
material decline in real estate values increase the loan-to-value ratios of
loans previously made by us, thereby weakening collateral coverage and
increasing the possibility of a loss in the event of a borrower default. Any
sustained period of increased delinquencies, foreclosures or losses after the
loans are sold could adversely affect the pricing of our future loan sales and
our ability to sell our loans in the future. In the past, certain of these
factors have caused revenues and net income of many participants in the
mortgage industry, including us, to fluctuate from quarter to quarter.
Second mortgages entail greater risks
Our security interest in the property securing second mortgages is
subordinated to the interest of the first mortgage holder and the second
mortgages have a higher cumulative loan-to-value ratio. If the value of the
property is equal to or less than the amount needed to repay the borrowers
obligation to the first mortgage holder upon foreclosure, all or a portion of
our second mortgage loan will not be repaid.
Geographic concentration of mortgage loans has higher risks
We do not set limitations on the percentage of our mortgage asset portfolio
composed of properties located in any one area (whether by state, zip code or
other geographic measure). Concentration in any one area increases our exposure
to the economic and natural hazard risks associated with that area. We estimate
that a high concentration of the loans included in securitizations in which we
hold residual interests are secured by properties in California and Florida.
Certain parts of California and Florida have experienced an economic downturn
in past years and have suffered in the past the effects of certain natural
hazards.
Potential losses related to recourse obligations
Mortgage-backed securities issued in connection with our securitizations
have been non-recourse to us, except in the case of a breach of standard
representations and warranties made by us when the loans are securitized. While
we have recourse against our customers, the correspondent sellers and mortgage
brokers of mortgage loans, we cannot assure you that they will honor their
obligations. We also engage in bulk whole loan sales pursuant to agreements
that provide for recourse by the purchaser against us. In some cases, the
remedies available to a purchaser of mortgage loans from us are broader than
those available to us against those who sell us these loans. If a purchaser
exercises its rights against us, we may not always be able to enforce whatever
remedies we may have against our customers.
S-13
Risks related to representations and warranties in loan sales and
securitizations
In connection with our securitizations, we transfer loans acquired or
originated by us into a trust in exchange for cash and, in the case of a CMO,
residual certificates issued by the trust. The trustee will have recourse to us
with respect to the breach of the standard representations and warranties made
by us at the time such loans are transferred. While we generally have recourse
to our customers for any such breaches, there can be no assurance of our
customers' abilities to honor their respective obligations. Also, we engage in
bulk whole loan sales pursuant to agreements that generally provide for
recourse by the purchaser against us in the event of a breach of one of our
representations or warranties, any fraud or misrepresentation during the
mortgage loan origination process, or upon early default on such mortgage loan.
We generally limit the potential remedies of such purchasers to the potential
remedies we receive from the people from whom we acquired or originated the
mortgage loans. However, in some cases, the remedies available to a purchaser
of mortgage loans from us may be broader than those available to us against the
sellers of the loans and should a purchaser enforce its remedies against us, we
may not always be able to enforce whatever remedies we have against our
customers.
In the ordinary course of our business, we are subject to claims made
against us by borrowers and trustees in our securitizations arising from, among
other things, losses that are claimed to have been incurred as a result of
alleged breaches of fiduciary obligations, misrepresentations, errors and
omissions of our employees, officers and agents (including our appraisers),
incomplete documentation and our failure to comply with various laws and
regulations applicable to our business. We believe that our liability with
respect to any currently asserted or threatened claims or legal actions are not
likely to be material to our results of operations or financial condition.
However, any claims asserted against us in the future may result in legal
expenses or liabilities that could have a material adverse effect on our
results of operations or financial condition.
We face risks related to our use of IDASL
We utilize the Internet in our business principally for the implementation
of our automated loan origination program, IDASL. IDASL may be interrupted if
the Internet experiences periods of poor performance, if our computer systems
or the systems of our third-party service providers contain defects, or if
customers are reluctant to use or have inadequate connectivity to the Internet.
Increased government regulation of the Internet could also adversely affect our
use of the Internet in unanticipated ways and discourage our customers from
using our services. If our ability to use the Internet in providing our
services is impaired, our ability to originate or acquire loans on an automated
basis could be delayed or reduced. Any substantial delay and reduction in our
mortgage loan acquisitions and originations will reduce our net earnings for
the applicable period.
We are subject to risks of operational failure that are beyond our control
Substantially all of our operations are located in Newport Beach,
California. Our systems and operations are vulnerable to damage and
interruption from fire, flood, telecommunications failure, break-ins,
earthquake and similar events. Our operations may also be interrupted by power
disruptions, including rolling black-outs currently implemented in California
due to the state's continuing acute power shortage. We do not maintain
alternative power sources. Furthermore, our security mechanisms may be
inadequate to prevent security breaches to our computer systems, including from
computer viruses, electronic break-ins and similar disruptions. Such security
breaches or operational failures could expose us to liability, impair our
operations, result in losses, and harm our reputation.
We rely on third-party software for the implementation of IDASL
We have a licensing agreement with a third-party vendor for the use of
hardware and software for IDASL. Substantially all of our correspondents are
submitting loans through IDASL and 100% of all of our wholesale loans delivered
by brokers are directly underwritten through the use of IDASL. The termination
or impairment of this license could result in delays and reductions in the
acquisition and origination of mortgage loans until
S-14
equivalent hardware and software could be licensed and integrated, if at all
possible, which may harm our business. In addition, we would be harmed if the
provider from whom we license software ceases to deliver and support reliable
products, enhance their current products or respond to emerging industry
standards. If the hardware or software provided by our vendor fails for any
reason, and the back-up hardware and software is not implemented in a timely
manner, it may also delay and reduce those mortgage loan acquisitions and
originations done through IDASL. The third-party hardware and software also may
not continue to be available to us on commercially reasonable terms or at all.
Any substantial delay and reduction in our mortgage loan acquisitions and
originations will reduce our net earnings for the applicable period.
Intense competition for mortgage loans may adversely affect our operations
We compete in acquiring and originating non-conforming Alt-A mortgage loans
and issuing mortgage-backed securities with:
. other 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.
Some of our competitors are larger and have greater resources than we do.
Consolidation in the mortgage banking industry may adversely affect us by
reducing the number of current customers of our mortgage operations and our
potential customer base. As a result, we may have to purchase a larger
percentage of mortgage loans from a smaller number of customers, which could
cause us to have to pay higher premiums for loans.
We undertake additional risks in providing warehouse financing
As a warehouse lender, we lend money to mortgage bankers on a secured basis
and we are subject to the risks associated with lending to mortgage banks,
including the risks of fraud, borrower default and bankruptcy, any of which
could result in credit losses for us. Our claims as a secured lender in a
bankruptcy proceeding may be subject to adjustment and delay.
We may not pay dividends to stockholders
REIT provisions of the Internal Revenue Code generally require us to
distribute to our stockholders at least 90% of all of our taxable income. These
provisions restrict our ability to retain earnings and renew capital for our
business activities. We may decide at a future time not to be treated as a
REIT, which would cause us to be taxed at the corporate level and to cease
paying regular dividends. Also, to date, a portion of our taxable income
consists of distributions by our mortgage operations subsidiary to our long-
term investment operations entity. However, our mortgage operations was not,
and is not, required under the REIT provisions to make these distributions.
Since we are trying to retain earnings for future growth, we may not cause our
mortgage operations subsidiary to make these distributions in the future. This
would materially affect the amount of taxable income generated by us and the
amount of dividends required to be paid by us to our stockholders.
S-15
Due to losses incurred in 2000, we did not declare any dividends from
September 2000 until September 25, 2001. To the extent we do not generate any
taxable income, there can be no assurance that we will continue to declare and
pay dividends.
Potential Alternative Minimum Tax Liability
To the extent we have a net operating loss carryover for federal income tax
purposes, we can offset our regular taxable income for the 2001 taxable year
with the net operating loss carryover and thereby eliminate our liability for
regular corporate income tax on the amount of income so offset. In computing
alternative minimum tax, however, we will be allowed to use only 90% of the net
operating loss deduction allowable for purposes of computing the regular income
tax. Thus, to the extent we shelter our income with the net operating loss
carryover deduction, we will be subject to alternative minimum tax at a rate of
20% on 10% of the income offset by the net operating loss for regular tax
purposes. In other words, the effective federal income tax rate on the amount
offset by the net operating loss deduction is 2%.
If we fail to maintain our REIT status, we may be subject to taxation as a
regular corporation
We believe that we have operated and intend to continue to operate in a
manner that enables us to meet the requirements for qualification as a REIT for
federal income tax purposes. We have not requested, and do not plan to request,
a ruling from the Internal Revenue Service that we qualify as a REIT.
Moreover, no assurance can be given that legislation, new regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification. Our continued qualification as a REIT will
depend on our satisfaction of certain asset, income, organizational and
stockholder ownership requirements on a continuing basis.
If we fail to qualify as a REIT, we would not be allowed a deduction for
distributions to stockholders in computing our taxable income and would be
subject to federal income tax at regular corporate rates. We also may be
subject to the federal alternative minimum tax. Unless we are entitled to
relief under specific statutory provisions, we could not elect to be taxed as a
REIT for four taxable years following the year during which we were
disqualified. Therefore, if we lose our REIT status, the funds available for
distribution to you would be reduced substantially for each of the years
involved. Failure to qualify as a REIT could adversely affect the value of our
common stock.
Effect of distribution requirements
As a REIT, we are subject to annual distribution requirements, which limit
the amount of cash we have available for other business purposes, including
amounts to fund our growth.
Other tax liabilities
Even if we qualify as a REIT, we may be subject to certain federal, state,
and local taxes on our income, property and operations that could reduce
operating cash flow.
S-16
Our quarterly operating results may fluctuate
Our results of operations, and more specifically our earnings, may
significantly fluctuate from quarter to quarter based on several factors,
including:
. changes in the amount of mortgage loans we originate;
. differences between our cost of funds on borrowings and the average
interest rates earned on our mortgage loans;
. our inability to complete or decisions not to complete significant bulk
whole loan sales or securitizations in a particular quarter; and
. problems generally affecting the mortgage loan industry.
A delay in closing a particular mortgage loan sale or securitization would
also increase our exposure to interest rate fluctuations by lengthening the
period during which our variable rate borrowings under our warehouse facilities
are outstanding. If we were unable to sell a sufficient number of mortgage
loans at a premium during a particular reporting period, our revenues for that
period would decline, which could have a material adverse affect on our
operations. As a result, our stock price could also fluctuate.
Our share prices have been and may continue to be volatile
Historically, the market price of our common stock has been volatile. During
2000, our stock reached a high of $4.38 per share and a low of $1.83 per share.
For the first nine months of 2001, our common stock reached a high of $8.15 per
share and a low of $2.85 per share. On October 8, 2001, the closing sale price
of our common stock was $7.26 per share. The market price of our common stock
is likely to continue to be highly volatile and could be significantly affected
by factors including:
. the amount of dividends paid;
. availability of liquidity in the securitization market;
. loan sale pricing;
. calls by warehouse lenders or changes in warehouse lending rates;
. unanticipated fluctuations in our operating results;
. prepayments on mortgages;
. valuations of securitization related assets;
. cost of funds; and
. general market conditions.
In addition, significant price and volume fluctuations in the stock market
have particularly affected the market prices for the common stock of mortgage
REIT companies such as ours. These broad market fluctuations have adversely
affected and may continue to adversely affect the market price of our common
stock. If our results of operations fail to meet the expectations of securities
analysts or investors in a future quarter, the market price of our common stock
could also be materially adversely affected.
S-17
USE OF PROCEEDS
Based on a public offering price of $ per share, Impac Mortgage Holdings,
Inc. will receive approximately $ in net proceeds from the sale of the
shares of its common stock in this offering, or approximately $ if the
underwriters' over-allotment option is exercised in full, after payment of its
expenses related to this offering and underwriting discounts and commissions.
We intend to use the net proceeds of this offering for growing our core
business operations in addition to general corporate purposes.
Impac Mortgage Holdings, Inc. will not receive any of the proceeds from the
sale of common stock by the selling stockholder, Impac Funding Corporation.
Based on a public offering price of $ per share, Impac Funding Corporation
will receive approximately $ in net proceeds from the sale of the shares of
common stock in this offering, after payment of its expenses related to this
offering and the underwriting discounts and commissions. Impac Funding
Corporation will use the net proceeds from the offering for general working
capital.
PRICE RANGE OF COMMON STOCK
The common stock of Impac Mortgage Holdings, Inc. is listed on the American
Stock Exchange, or AMEX, under the symbol "IMH." The following table summarizes
the high and low sales prices for the common stock as reported by the AMEX for
the periods indicated through October 8, 2001:
2001 2000 1999
----------- ----------- -----------
High Low High Low High Low
----- ----- ----- ----- ----- -----
First Quarter............................ $4.49 $2.85 $4.25 $3.13 $6.19 $4.00
Second Quarter........................... 7.25 3.89 4.38 3.06 6.13 4.38
Third Quarter............................ 8.15 5.76 4.19 2.38 6.13 3.88
Fourth Quarter........................... 7.50 7.16 3.20 1.83 4.81 3.38
On October 8, 2001, the last reported sale price of the common stock on the
AMEX was $7.26 per share. As of October 5, 2001, there were 576 holders of
record (including holders who are nominees for an undetermined number of
beneficial owners) of the common stock.
S-18
DISTRIBUTIONS
We intend to make annual distributions to our stockholders in an amount
sufficient to maintain our status as a REIT, as defined in the Internal Revenue
Code. REIT taxable income may not necessarily equal net income as calculated in
accordance with generally accepted accounting principles, or GAAP. We intend to
distribute any REIT taxable income remaining after the distribution of the
regular quarterly or other dividends annually on or prior to the date of the
first regular quarterly dividend payment date of the following taxable year.
Our dividend policy is subject to revision at the discretion of our Board of
Directors. All distributions in excess of those required to maintain our REIT
status will be made at the discretion of our Board of Directors and will depend
on our taxable earnings, financial condition, and such other factors as our
Board of Directors deems relevant. The Board of Directors has not established a
minimum distribution level.
Distributions to our stockholders will generally be taxable as ordinary
income, although we may designate a portion of the distributions as capital
gain or as a tax-free return of capital. We annually furnish to each of our
stockholders a statement setting forth distributions paid during the preceding
year and their characterization as ordinary income, capital gains or return of
capital. Of the total dividends paid during 2000 and 1999, approximately $13.7
million and $4.8 million, respectively, represented a tax-free return of
capital. We did not declare a dividend for the quarters ended December 31,
2000, March 31, 2001 or June 30, 2001.
The following table summarizes our dividends paid or declared for the
periods indicated:
Per share
dividend
Period covered Stockholder record date amount
-------------- ----------------------- ---------
Quarter ended March 31, 1999............... April 9, 1999 $0.10
Quarter ended June 30, 1999................ June 30, 1999 0.12
Quarter ended September 30, 1999........... September 30, 1999 0.13
Quarter ended December 31, 1999............ January 3, 2000 0.13
Quarter ended March 31, 2000............... April 10, 2000 0.12
Quarter ended June 30, 2000................ July 6, 2000 0.12
Quarter ended September 30, 2000........... October 11, 2000 0.12
Quarter ended September 30, 2001........... (1) 0.25
--------
(1) Impac Mortgage Holdings, Inc. declared a dividend of $0.25 per share for
the third quarter of 2001, payable in two installments: the first
installment of $0.13 per share is payable on October 15, 2001 to
stockholders of record on October 1, 2001 and the second installment of
$0.12 per share is payable on November 15, 2001 to stockholders of record
on November 1, 2001.
S-19
CAPITALIZATION
The following table sets forth Impac Mortgage Holdings, Inc.'s
capitalization as of June 30, 2001:
. on a historical basis; and
. as adjusted to reflect (i) the issuance of 6,355,932 shares of common
stock as a result of the conversion of the Series C 10.5% Cumulative
Convertible Preferred Stock and (ii) the issuance and sale of 5,000,000
shares of common stock by Impac Mortgage Holdings, Inc. at a public
offering price of $ per share, and the application of the net proceeds
of that sale as described in "Use of proceeds."
The information set forth in the following table should be read in
conjunction with, and is qualified in its entirety by, the financial statements
and the notes thereto included in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2000, our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001 and our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001, which are incorporated by reference into the accompanying
prospectuses.
As of June 30, 2001
--------------------------
As
Historical adjusted(1)(2)
---------- --------------
(dollars in thousands,
except share and per
share data)
Stockholders' equity:
Series C 10.5% Cumulative Convertible Preferred
Stock, $.01 par value, $30,000 liquidation value,
1,200,000 shares authorized; 1,200,000 issued and
outstanding on a historical basis and none
outstanding on an as adjusted basis(3).............. $ 12 $
Common stock, par value $0.01 per share, 50,000,000
authorized; 20,460,666 shares issued and outstanding
on a historical basis and 31,816,598 shares issued
and outstanding on an as adjusted basis(4).......... 205
Additional paid-in capital........................... 325,567
Accumulated other comprehensive gain (loss).......... 531
Accumulated comprehensive loss--SFAS 133............. (244)
Notes receivable from common stock sales............. (930)
Net accumulated deficit.............................. (137,306)
--------- -----
Total stockholders' equity........................... $ 187,835 $
========= =====
Book value per share including the conversion of
Series C 10.5% Cumulative Convertible Preferred
Stock to common equivalents......................... $ 7.00 $
========= =====
--------
(1) After deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us in this offering. Assumes (i) no
exercise of the underwriters' over-allotment option to purchase up to an
additional 900,000 shares of common stock from Impac Mortgage Holdings,
Inc., (ii) net proceeds per share of $ with respect to the 5,000,000
shares offered by Impac Mortgage Holdings, Inc. in this offering and
(iii) approximate aggregate expenses of $300,000 payable by Impac Mortgage
Holdings, Inc.
(2) Excludes the $0.25 per share dividend declared for the third quarter of
2001 payable in two installments. The first installment of $0.13 per share
is payable on October 15, 2001 to stockholders of record on October 1,
2001, and the second installment of $0.12 per share is payable on November
15, 2001 to stockholders of record on November 1, 2001. Taking into account
the dividend of $0.25 per share, book value per share would be $ .
(3) The Series C 10.5% Cumulative Convertible Preferred Stock was converted
into 6,355,932 shares of common stock during the quarter ended September
30, 2001.
(4) Excludes (i) 20,231 shares of common stock issued by October 5, 2001 upon
the exercise of options and (ii) 751,654 shares of common stock with a
weighted average exercise price of $4.21 per share that are issuable upon
the exercise of options granted under the Impac Mortgage Holdings, Inc.
stock option plans.
S-20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below is derived from the
audited consolidated financial statements of Impac Mortgage Holdings, Inc. and
Impac Funding Corporation for the fiscal years ended December 31, 1996, 1997,
1998, 1999 and 2000 and from our unaudited financial statements for the six
months ended June 30, 2000 and 2001. The unaudited interim results of Impac
Mortgage Holdings, Inc. and Impac Funding Corporation, in the opinion of
management, reflect all adjustments, consisting solely of normal recurring
adjustments, which are necessary to present fairly the results for the
unaudited interim periods. The unaudited interim results for the six months
ended June 30, 2001 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2001. The following selected
financial data should be read in conjunction with the more detailed information
contained in the financial statements and notes thereto and "Management's
discussion and analysis of financial condition and results of operations"
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2000 and our Quarterly Report on Form 10-Q for the quarter ended June 30,
2001, which are incorporated by reference into the accompanying prospectuses.
In August 2001, the Derivatives Implementation Group of the Financial
Accounting Standards Board issued Statement 133 Implementation Issue No. G20,
"Cash Flow Hedges: Assessing and Measuring the Effectiveness of a Purchased
Option Used in a Cash Flow Hedge," which permits the assessment of
effectiveness to include the hedging instrument's entire change in fair value,
rather than documenting the assessment of effectiveness based only on the
changes in the hedging instrument's intrinsic value as is the current practice.
The effective date of the guidance is the first day of the first fiscal quarter
after August 10, 2001. Upon adoption, we may record the changes in both the
time value and intrinsic value (entire change in fair value) of options in
other comprehensive income, as opposed to only changes in intrinsic value as is
now the case. The amounts would be recognized in earnings when the forecasted
or hedged transaction is recognized in earnings. It is expected that this will
result in a reduction in earnings volatility as compared to existing practice.
S-21
IMPAC MORTGAGE HOLDINGS, INC.
(dollar amounts in thousands, except per share data)
For the six
months ended
For the year ended December 31, June 30,
--------------------------------------------- -----------------
1996 1997 1998 1999 2000 2000 2001
------- -------- -------- -------- -------- -------- -------
Statement of operations
data:
Net interest income:
Total interest income.. $63,673 $109,533 $163,658 $119,458 $147,079 $ 68,670 $77,065
Total interest
expense............... 44,144 76,577 121,695 89,795 124,096 56,917 57,622
------- -------- -------- -------- -------- -------- -------
Net interest income.... 19,529 32,956 41,963 29,663 22,983 11,753 19,443
Provision for loan
losses............... 4,350 6,843 4,361 5,547 18,839 16,488 7,943
------- -------- -------- -------- -------- -------- -------
Net interest income
(loss) after loan loss
provision............. 15,179 26,113 37,602 24,116 4,144 (4,735) 11,500
Non-interest income:
Equity in net earnings
(loss) of Impac
Funding Corporation... 903 8,316 (13,876) 4,292 (1,762) (1,080) 4,818
Equity in net loss..... -- (239) (998) -- -- -- --
Loss on sale of
mortgage loans........ -- -- (3,111) -- -- -- --
Gain on sale of
securities............ -- 648 427 93 -- -- --
Other income........... 593 1,601 4,019 2,517 4,275 1,392 2,096
------- -------- -------- -------- -------- -------- -------
Total non-interest
income (loss)........ 1,496 10,326 (13,539) 6,902 2,513 312 6,914
------- -------- -------- -------- -------- -------- -------
Non-interest expense:
Write-down on
investment
securities............ -- -- 14,132 2,037 53,576 53,404 107
General and
administrative and
other operating
expense............... 1,449 1,851 6,788 6,664 7,314 3,381 1,618
Mark-to-market loss--
FAS 133 .............. -- -- -- -- -- -- 1,445
Loss on equity
investment of Impac
Commercial
Holdings, Inc. ....... -- -- 9,076 -- -- -- --
Advisory fees.......... 3,347 6,242 -- -- -- -- --
Termination agreement
expense............... -- 44,375 -- -- -- -- --
------- -------- -------- -------- -------- -------- -------
Total non-interest
expense.............. 4,796 52,468 29,996 8,701 60,890 56,785 3,170
------- -------- -------- -------- -------- -------- -------
Earnings (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle.............. 11,879 (16,029) (5,933) 22,317 (54,233) (61,208) 15,244
Extraordinary item..... -- -- -- -- -- -- (1,006)
Cumulative effect of
change in accounting
principle............. -- -- -- -- -- -- (4,313)
------- -------- -------- -------- -------- -------- -------
Net earnings (loss)... $11,879 $(16,029) $ (5,933) $ 22,317 $(54,233) $(61,208) $ 9,925
======= ======== ======== ======== ======== ======== =======
Earnings (loss) per
share before
extraordinary item and
cumulative effect of
change in accounting
principle
Basic.................. $ 1.34 $ (0.99) $ (0.25) $ 0.83 $ (2.70) $ (2.93) $ 0.67
======= ======== ======== ======== ======== ======== =======
Diluted................ $ 1.32 $ (0.99) $ (0.25) $ 0.76 $ (2.70) $ (2.93) $ 0.57
======= ======== ======== ======== ======== ======== =======
Net earnings (loss) per
share
Basic.................. $ 1.34 $ (0.99) $ (0.25) $ 0.83 $ (2.70) $ (2.93) $ 0.41
======= ======== ======== ======== ======== ======== =======
Diluted................ $ 1.32 $ (0.99) $ (0.25) $ 0.76 $ (2.70) $ (2.93) $ 0.37
======= ======== ======== ======== ======== ======== =======
Dividends declared per
share................. $ 1.61 $ 1.68 $ 1.46 $ 0.48 $ 0.36 $ 0.24 $ --
======= ======== ======== ======== ======== ======== =======
Net earnings (loss) per
share before
management termination
expense(1)............ $ 1.32 $ 1.74 $ (0.25) $ 0.76 $ (2.70) $ (2.93) $ 0.37
======= ======== ======== ======== ======== ======== =======
--------
(1) In December 1997, our management agreement with Imperial Credit Advisors,
Inc., an affiliate of Imperial Credit Industries, Inc., was terminated. Net
loss per share in 1997 after the effect of expenses related to the
termination was $(0.99).
S-22
At December 31, At June 30,
---------------------------------------------------- ---------------------
1996 1997 1998 1999 2000 2000 2001
-------- ---------- ---------- ---------- ---------- ---------- ----------
Balance sheet data:
Investment securities
available-for-sale..... $ 63,506 $ 67,011 $ 93,486 $ 93,206 $ 36,921 $ 41,612 $ 31,763
Mortgage loans held-for-
investment and CMO
collateral............. 502,658 1,052,610 1,181,847 1,313,112 1,389,716 1,308,354 1,639,756
Finance receivables..... 362,312 533,101 311,571 197,119 405,438 296,380 429,590
Investment in Impac
Funding Corporation.... 9,896 27,122 13,246 17,372 15,762 16,458 15,978
Investment in Impac
Commercial Holdings,
Inc.................... -- 17,985 -- -- -- -- --
Total assets............ 972,355 1,752,812 1,665,504 1,675,430 1,898,838 1,700,119 2,177,473
CMO borrowings.......... 474,513 741,907 1,072,316 850,817 1,291,284 1,081,738 1,361,972
Reverse repurchase
agreements............. 357,716 755,559 323,625 539,687 398,653 400,100 608,967
Total liabilities....... 843,165 1,523,782 1,413,898 1,436,586 1,720,398 1,519,460 1,989,638
Total stockholders'
equity................. 129,190 229,030 251,606 238,844 178,440 180,659 187,835
Book value per share.... $ 13.74 $ 10.16 $ 10.25 $ 11.16 $ 8.74 $ 8.44 $ 9.18
Book value per fully
diluted common share... $ 13.74 $ 10.16 $ 8.22 $ 8.60 $ 6.67 $ 6.51 $ 7.00
Total assets divided by
equity................. 7.53:1 7.65:1 6.62:1 7.01:1 10.64:1 9.41:1 11.59:1
IMPAC FUNDING CORPORATION
(dollar amounts in thousands, except operating data)
For the six
months ended
For the year ended December 31, June 30,
------------------------------------------ -----------------
1996 1997 1998 1999 2000 2000 2001
------- ------- -------- ------- -------- -------- -------
Statement of operations
data:
Net interest income:
Total interest income.. $32,799 $48,020 $ 48,510 $21,225 $ 28,649 $ 12,052 $12,745
Total interest
expense............... 31,751 41,628 40,743 20,953 30,056 12,674 11,972
------- ------- -------- ------- -------- -------- -------
Net interest income
(expense)............. 1,048 6,392 7,767 272 (1,407) (622) 773
Non-interest income:
Gain (loss) on sale of
loans................. 7,747 19,414 (11,663) 27,098 19,727 9,370 20,523
Loan servicing income.. 1,250 4,109 7,071 5,221 6,286 2,548 1,800
Gain (loss) on sale of
investment
securities............ -- 550 (706) -- 51 -- --
Mark-to-market loss on
investment
securities............ -- -- (805) -- -- -- --
Other income........... -- 93 420 979 1,054 408 112
------- ------- -------- ------- -------- -------- -------
Total non-interest
income (loss)......... 8,997 24,166 (5,683) 33,298 27,118 12,326 22,435
------- ------- -------- ------- -------- -------- -------
Non-interest expense:
General and
administrative and
other operating
expense............... 7,154 10,047 14,385 14,965 19,634 9,488 12,276
Amortization of
mortgage servicing
rights................ 613 2,827 6,361 5,331 5,179 2,457 2,445
Write-down of
securities available-
for-sale.............. -- -- -- 4,252 1,537 1,537 --
Provision for
repurchases........... 687 3,148 367 385 371 71 14
Impairment of mortgage
servicing rights...... -- -- 3,722 1,078 -- -- --
------- ------- -------- ------- -------- -------- -------
Total non-interest
expense............... 8,454 16,022 24,835 26,011 26,721 13,553 14,735
------- ------- -------- ------- -------- -------- -------
Earnings (loss) before
income taxes and
cumulative effect of
change in accounting
principles............ 1,591 14,536 (22,751) 7,559 (1,010) (1,849) 8,473
Income taxes (benefit).. 679 6,136 (8,738) 3,227 770 756 3,609
------- ------- -------- ------- -------- -------- -------
Earnings (loss) before
cumulative effect of
change in accounting
principle............. 912 8,400 (14,013) 4,332 (1,780) (1,093) 4,864
Cumulative effect of
change in accounting
principle............. -- -- -- -- -- -- 17
------- ------- -------- ------- -------- -------- -------
Net earnings (loss).... $ 912 $ 8,400 $(14,013) $ 4,332 $ (1,780) $ (1,093) $ 4,847
======= ======= ======== ======= ======== ======== =======
S-23
At December 31, At June 30,
------------------------------------------- -----------------
1996 1997 1998 1999 2000 2000 2001
-------- -------- -------- ------- -------- -------- --------
Balance sheet data:
Mortgage loans held-for-
sale................... $334,104 $620,549 $252,568 $68,084 $275,570 $121,905 $202,056
Mortgage servicing
rights................. 8,785 15,568 14,062 15,621 10,938 13,916 11,128
Total assets............ 399,171 656,944 313,872 116,246 317,163 167,379 247,542
Borrowings from Impac
Warehouse Lending
Group, Inc. ........... 327,422 454,840 192,900 66,125 266,994 120,020 192,877
Other borrowings........ -- 148,307 67,058 181 -- 81 --
Due to affiliates....... 54,803 6,198 24,382 14,500 14,500 14,500 14,500
Total liabilities....... 389,175 629,548 301,009 98,698 301,242 150,757 231,407
Total shareholders'
equity................. 9,996 27,396 12,863 17,548 15,921 16,622 16,135
Operating data (in
millions):
Mortgage loan
acquisitions(1)
(volume)............... $ 1,542 $ 2,571 $ 2,249 $ 1,672 $ 2,113 $ 886 $ 1,383
Master servicing
portfolio.............. 1,550 3,029 3,714 2,879 4,043 2,983 4,791
Servicing portfolio..... 1,550 3,029 3,714 2,393 2,429 2,457 1,563
--------
(1) Represents acquisitions during the year or six-month period, as applicable.
S-24
MANAGEMENT
The following table provides certain information regarding the officers and
directors of Impac Mortgage Holdings, Inc. and its related companies as of the
date of this prospectus supplement.
Name Age Position
---- --- --------
Joseph R. Tomkinson..... 54 Chief Executive Officer and Chairman of the Board
William S. Ashmore...... 52 Chief Operating Officer, President and Director
Richard J. Johnson...... 39 Executive Vice President and Chief Financial Officer
Ronald M. Morrison...... 50 General Counsel and Secretary
Gretchen D. Verdugo..... 37 Executive Vice President of Impac Warehouse Lending Group, Inc.
James Walsh............. 52 Director
Frank P. Filipps........ 54 Director
Stephan R. Peers........ 49 Director
William E. Rose......... 34 Director
Leigh J. Abrams......... 58 Director
Joseph R. Tomkinson has been Chairman of the Board since April 1998 and
Chief Executive Officer of Impac Mortgage Holdings, Inc. and Chairman of the
Board and Chief Executive Officer of Impac Funding Corporation, our mortgage
operations, and Impac Warehouse Lending Group, Inc., our warehouse lending
operations, since their formation. From August 1995 to April 1998, he was Vice
Chairman of the Board of Impac Mortgage Holdings, Inc. From February 1997 to
May 1999, he was Chairman of the Board and Chief Executive Officer of Impac
Commercial Holdings, Inc., a publicly traded real estate investment trust
investing in commercial mortgage assets, and Impac Commercial Capital
Corporation, the conduit operations of Impac Commercial Holdings, Inc. He
served as President and Chief Operating Officer of Imperial Credit Industries,
Inc. from January 1992 to February 1996 and, from 1986 to January 1992, he was
President of Imperial Bank Mortgage, one of the divisions that later was
combined to become Imperial Credit Industries, Inc. in 1992. He was a Director
of Imperial Credit Industries, Inc. (Nasdaq-ICII) from December 1991 to June
1999. Mr. Tomkinson brings 26 years of combined experience in real estate, real
estate financing and mortgage banking to the company.
William S. Ashmore has been President of Impac Mortgage Holdings, Inc. since
its formation, President of our mortgage operations since March 1997 (after
being promoted from Executive Vice President), a Director of our mortgage
operations since its formation, and President and a Director of our warehouse
lending operations since its formation. In July 1997, he became a Director of
Impac Mortgage Holdings, Inc. From February 1997 to May 1999, he was the
President and Chief Operating Officer of Impac Commercial Holdings, Inc. From
August 1993 to February 1996, he was Executive Vice President and Director of
Secondary Marketing at Imperial Credit Industries, Inc., 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. Mr. Ashmore has
over 25 years of combined experience in real estate, real estate financing and
mortgage banking.
Richard J. Johnson is the Executive Vice President and Chief Financial
Officer of each of Impac Mortgage Holdings, Inc., our mortgage operations and
our warehouse lending operations. He has held these positions at all three
entities since their formation, with the exception of the position of Executive
Vice President of Impac Mortgage Holdings, Inc., which he attained in January
1998. In March 1996, he was appointed as a Director of our warehouse lending
operations. From February 1997 to May 1999, he was the Executive Vice President
and Chief Financial Officer of Impac Commercial Holdings, Inc. and Impac
Commercial Capital Corporation. From September 1992 to March 1995, he was
Senior Vice President and Chief Financial Officer of Imperial Credit
Industries, Inc. From November 1989 to September 1992, he was Vice President
and Controller of Imperial Credit Industries, Inc.
Ronald M. Morrison has been General Counsel of Impac Mortgage Holdings, Inc.
since July 1998. In July 1998, he was also elected Secretary of Impac Mortgage
Holdings, Inc. and in August 1998 he was elected
S-25
Secretary of our mortgage operations and our warehouse lending operations. From
August 1998 to May 1999, he was also General Counsel and Secretary of Impac
Commercial Holdings, Inc. and Impac Commercial Capital Corporation. From 1978
until joining Impac Mortgage Holdings, Inc., Mr. Morrison was a partner at the
law firm of Morrison & Smith.
Gretchen D. Verdugo has been the Executive Vice President of Impac Warehouse
Lending Group, Inc., our warehouse lending operations, since November 2000.
From August 1997 to November 2000, Ms. Verdugo served as the Senior Vice
President and Chief Accounting Officer of our mortgage operations. From
November 1996 to August 1997, Ms. Verdugo was a Senior Manager at KPMG LLP and
from September 1992 to November 1996, Ms. Verdugo served as the Chief Financial
Officer, Vice President and Treasurer of Bay Federal Credit Union.
James Walsh has been a Director of Impac Mortgage Holdings, Inc. since
August 1995. In January 2000, he became Managing Director of Sherwood Trading
and Consulting Corporation. From March 1996 to January 2000, he was an
Executive Vice President of Walsh Securities, Inc. where he directed 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.
Frank P. Filipps has been a Director of Impac Mortgage Holdings, Inc. since
August 1995. In June 1999, he was elected Chairman and Chief Executive Officer
of Radian Group, Inc. (NYSE-RDN) and its principal subsidiary, Radian Guaranty,
Inc., which were formed through a merger of Amerin and CMAC Investment
Corporation. Radian provides private mortgage insurance coverage on residential
mortgage loans. From January 1995 to June 1999, he served as Chairman,
President and Chief Executive Officer of Commonwealth Mortgage Assurance
Company. In 1995, he was elected President and appointed a Director of CMAC
Investment Corporation (NYSE-CMT), and in January 1996, he was elected Chief
Executive Officer of CMAC Investment Corporation. Mr. Filipps originally joined
Commonwealth Mortgage Assurance Company in 1992 as Senior Vice President and
Chief Financial Officer and became Executive Vice President and Chief Operating
Officer in 1994.
Stephan R. Peers has been a Director of Impac Mortgage Holdings, Inc. since
October 1995. In March 2000, he joined Bear, Stearns & Co., Inc. as a Managing
Director. From April 1993 to March 2000, he was an Executive Vice President of
International Strategic Finance Corporation, Ltd., where he performed corporate
finance services for overseas and domestic companies. From January 1998 to June
1998, he was an executive at Aames Financial Corporation, a mortgage loan
company. He served as a Managing Director of Resource Bancshares Corporation
from August 1995 to October 1997. 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.
William E. Rose has been a Director of Impac Mortgage Holdings, Inc. since
August of 2000. Since 1991, Mr. Rose has been associated with HBK Investments
L.P. and is currently a Managing Director. His responsibilities include U.S.
equity derivatives, private investments and trading. Prior to 1991, Mr. Rose
worked for William A.M. Burden & Co., the investment division of the Burden
family of New York, and in the Mergers & Acquisitions group of Drexel Burnham,
Lambert, Inc.
Leigh J. Abrams has been a Director of Impac Mortgage Holdings, Inc. since
April 2001. Since August 1979, Mr. Abrams has been President, Chief Executive
Officer and a Director of Drew Industries Incorporated (AMEX-DW), which
manufactures a wide variety of components for manufactured homes and
recreational vehicles. Since May 1994, Mr. Abrams has also been President,
Chief Executive Officer and a Director of LBP, Inc. (OTC-LBPI). Prior to the
sale of its operating assets in 1998, LBP manufactured a variety of specialty
building products for the remodeling and residential construction industry. Mr.
Abrams, a CPA, has over 30 years of experience in corporate finance, mergers
and acquisitions, and operations.
S-26
SELLING STOCKHOLDER
The following table sets forth certain information regarding the beneficial
ownership of the common stock as of October 5, 2001, and as adjusted to reflect
the offering of 5,000,000 shares by Impac Mortgage Holdings, Inc. and 1,000,000
shares by the selling stockholder, Impac Funding Corporation:
Shares
Shares beneficially beneficially owned
owned prior to Number of after the
the offering shares to be offering(2)
-------------------- sold in ------------------
Selling Stockholder Number Percent(1) the offering Number Percent(3)
------------------- --------- ---------- ------------ ------- ----------
Impac Funding
Corporation............. 1,971,844 7.35% 1,000,000 971,844 3.05%
1401 Dove Street
Newport Beach, CA 92660
--------
(1) Based on 26,836,829 shares outstanding as of October 5, 2001.
(2) Excludes the underwriters' over-allotment option to purchase up to 900,000
additional shares from Impac Mortgage Holdings, Inc. pursuant to the terms
of the underwriting agreement. If this option is exercised in full, Impac
Funding Corporation will beneficially own 971,844 shares or 2.97% of the
common stock
(3) Based on 31,836,829 shares outstanding as of October 5, 2001, as adjusted
for the offering.
Impac Mortgage Holdings, Inc. owns 100% of the non-voting preferred stock
of, and 99% of the economic interest in, Impac Funding Corporation. 100% of the
common stock, or one percent of the economic interest, is owned by Messrs.
Tomkinson, Ashmore and Johnson. Joseph R. Tomkinson, Chairman of the Board and
Chief Executive Officer of Impac Mortgage Holdings, Inc. and Chief Executive
Officer and a Director of Impac Funding Corporation, is an owner of one-third
of the common stock of Impac Funding Corporation. William S. Ashmore,
President, Chief Operating Officer and a Director of Impac Mortgage Holdings,
Inc. and President and a Director of Impac Funding Corporation, is an owner of
one-third of the common stock of Impac Funding Corporation. Richard J. Johnson,
Executive Vice President and Chief Financial Officer of Impac Mortgage
Holdings, Inc. and Impac Funding Corporation and a Director of Impac Funding
Corporation, is an owner of one-third of the common stock of Impac Funding
Corporation.
The preceding information regarding the selling stockholder supersedes the
information under the heading "Selling security holders and plan of
distribution" in the accompanying prospectus, dated August 30, 2001.
S-27
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Based on various factual representations made by us regarding our
operations, in the opinion of McKee Nelson LLP, our tax counsel, commencing
with our taxable year ended December 31, 1995, we have been and will continue
to be organized in conformity with the requirements for qualification as a REIT
under the Code, and our method of operating has enabled us, and our proposed
method of operating in the future will enable us, to meet the requirements for
qualification and taxation as a REIT. Our qualification as a REIT depends upon
our ability to meet the various requirements imposed under the Code through our
actual operations. McKee Nelson LLP will not review our operations, and no
assurance can be given that our actual operations will meet the requirements
imposed under the Code. The opinion of McKee Nelson LLP is not binding on the
IRS or any court. The opinion of McKee Nelson LLP is based upon existing law,
Treasury regulations, currently published administrative positions of the IRS,
and judicial decisions, all of which are subject to change either prospectively
or retroactively.
The provisions of the Code pertaining to REITs are highly technical and
complex. Under the Code, if certain requirements are met in a taxable year, a
REIT generally will not be subject to federal income tax with respect to income
that it distributes to its shareholders. If we fail to qualify during any
taxable year as a REIT, unless certain relief provisions are available, we will
be subject to tax (including any applicable alternative minimum tax) on our
taxable income at regular corporate rates, which could have a material adverse
effect upon our stockholders.
The following discussion summarizes the material United States federal
income tax consequences that relate to our qualification and taxation as a REIT
and that flow from an investment in our stock. It supercedes the discussion of
the United States federal income tax consequences in the accompanying
prospectuses. No assurance can be given that the conclusions set out below, if
challenged by the IRS, would be sustained by a court. This discussion deals
only with stock that is held as a capital asset, which generally means property
that is held for investment. In addition, except to the extent discussed below,
this summary does not address tax consequences applicable to you if you are
subject to special tax rules. For instance, the discussion does not address tax
consequences applicable to the following categories of stockholders:
. dealers or traders in securities;
. financial institutions;
. insurance companies;
. stockholders that hold our stock as a hedge, part of a straddle,
transaction or other arrangement involving more than one position; or
. stockholders whose functional currency is not the United States dollar.
The discussion set out below is intended only as a summary of the material
United States federal income tax consequences of our treatment as a REIT and of
an investment in our stock. Taxpayers and preparers of tax returns (including
returns filed by any partnership or other arrangement) should be aware that
under Treasury regulations a provider of advice on specific issues of law is
not considered an income tax return preparer unless the advice is (i) given
with respect to events that have occurred at the time the advice is rendered
and is not given with respect to the consequences of contemplated actions, and
(ii) is directly relevant to the determination of an entry on a tax return.
Accordingly, we are not income tax return preparers and we urge you to consult
your own tax advisors regarding the tax consequences of an investment in our
stock, including the application to your particular situation of the tax
matters discussed below, as well as the application of state, local or foreign
tax laws. The statements of United States tax law set out below are based on
the laws in force and their interpretation as of the date of this prospectus,
and are subject to changes occurring after that date.
REIT Qualification Requirements
The following is a brief summary of the material technical requirements
imposed by the Code that we must satisfy on an ongoing basis to qualify, and
remain qualified, as a REIT.
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Stock Ownership Requirements
We must meet the following stock ownership requirements:
(1) our capital stock must be transferable;
(2) our capital stock must be held by at least 100 persons during at
least 335 days of a taxable year of 12 months (or during a proportionate
part of a taxable year of less than 12 months); and
(3) no more than 50% of the value of our capital stock may be owned,
directly or indirectly, by five or fewer individuals at any time during the
last half of the taxable year. In applying this test, the Code treats some
entities as individuals. Tax-exempt entities, other than private
foundations and certain unemployment compensation trusts, are generally not
treated as individuals for these purposes.
The requirements of items (2) and (3) above did not apply to the first
taxable year for which we made an election to be taxed as a REIT. However,
these stock ownership requirements must be satisfied in each subsequent
taxable year. Our charter imposes restrictions on the transfer of our shares
to help us meet the stock ownership requirements. In addition, Treasury
regulations require us to demand from the record holders of designated
percentages of our capital stock, annual written statements disclosing actual
and constructive ownership of our stock. The same regulations require us to
maintain permanent records showing the information we have received regarding
actual and constructive stock ownership and a list of those persons failing or
refusing to comply with our demand.
Asset Requirements
We generally must meet the following asset requirements at the close of
each quarter of each taxable year:
(a) at least 75% of the value of our total assets must be "qualified
REIT real estate assets" (described below), government securities, cash and
cash items;
(b) no more than 25% of the value of our total assets may be securities
other than securities in the 75% asset class (for example, government
securities and certain mortgage-backed securities);
(c) no more than 20% of the value of our total assets may be securities
of one or more Taxable REIT subsidiaries (described below); and
(d) except for securities in the 75% asset class, securities in a
Taxable REIT subsidiary or "qualified REIT subsidiary," and certain
partnership interests and debt obligations--
(1) no more than 5% of the value of our total assets may be
securities of any one issuer,
(2) we may not hold securities that possess more than 10% of the
total voting power of the outstanding securities of any one issuer, and
(3) we may not hold securities that have a value of more than 10% of
the total value of the outstanding securities of any one issuer.
"Qualified REIT real estate assets" means assets of the type described in
section 856(c)(5)(B) of the Code, and generally include (among other assets)
interests in mortgages on real property and certain mortgage-backed
securities, and shares in other REITs.
A "Taxable REIT subsidiary" is a corporation that may earn income that
would not be qualifying income if earned directly by the REIT. A REIT may hold
up to 100% of the stock in a Taxable REIT subsidiary. Both the subsidiary and
the REIT must jointly elect to treat the subsidiary as a Taxable REIT
subsidiary by jointly filing a Form 8875 with the IRS. A Taxable REIT
subsidiary will pay tax at the corporate rates on any income it earns.
Moreover, the Code contains rules to ensure contractual arrangements between a
Taxable REIT subsidiary and the parent REIT are at arm's length. We have,
together with IFC, filed an election to have IFC treated as our Taxable REIT
subsidiary as of January 1, 2001.
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If we fail to meet any of the asset tests as of the close of a calendar
quarter due to the acquisition of securities or other assets, the Code allows
us a 30-day period following the close of the calendar quarter to come into
compliance with the asset tests. If we do cure a failure within the 30-day
period, we will be treated as having satisfied the asset tests at the close of
the calendar quarter.
Gross Income Requirements
We generally must meet the following gross income requirements for each
taxable year:
(a) at least 75% of our gross income must be derived from the real
estate sources specified in section 856(c)(3) of the Code, including
interest income on obligations secured by mortgages on real property or on
interests in real property and gain from the disposition of qualified REIT
real estate assets, and "qualified temporary investment income" (generally,
income we earn from investing new capital, provided we received or accrued
that income within one year of acquiring such new capital); and
(b) at least 95% of our gross income for each taxable year must be
derived from sources of income specified in section 856(c)(2) of the Code,
which includes the types of gross income described in (a) above, as well as
dividends, interest, and gains from the sale of stock or other financial
instruments (including interest rate swap and cap agreements, options,
futures contracts, forward rate agreements or similar financial instruments
entered into to reduce interest rate risk with respect to debt incurred or
to be incurred to acquire or carry qualified REIT real estate assets) not
held for sale in the ordinary course of business.
Distribution Requirements
We generally must distribute dividends (other than capital gain dividends)
to our stockholders in an amount at least equal to (1) the sum of (a) 90% of
our REIT taxable income (computed without regard to the dividends paid
deduction and net capital gains) and (b) 90% of the net income (after tax, if
any) from foreclosure property, minus (2) the sum of certain items of non-cash
income. In addition, if we were to recognize "Built in Gain" (as defined below)
on disposition of any assets acquired from a C corporation in a transaction in
which Built in Gain was not recognized (for instance, assets acquired in a
statutory merger), we would be required to distribute at least 90% of the Built
in Gain recognized net of the tax we would pay on such gain. "Built in Gain" is
the excess of (a) the fair market value of an asset (measured at the time of
acquisition) over (b) the basis of the asset (measured at the time of
acquisition). We do not hold any assets having Built in Gain.
We are not required to distribute our net capital gains. Rather than
distribute them, we may elect to retain and pay the federal income tax on them,
in which case our stockholders will (1) include their proportionate share of
the undistributed net capital gains in income, (2) receive a credit for their
share of the federal income tax we pay and (3) increase the bases in their
stock by the difference between their share of the capital gain and their share
of the credit.
Failure to Qualify
If we fail to qualify as a REIT in any taxable year and the relief
provisions provided in the Code do not apply, we will be subject to federal
income tax, including any applicable alternative minimum tax, on our taxable
income in that taxable year and all subsequent taxable years at the regular
corporate income tax rates. We will not be allowed to deduct distributions to
shareholders in these years, nor will the Code require us to make
distributions. Further, unless entitled to the relief provisions of the Code,
we also will be barred from re-electing REIT status for the four taxable years
following the year in which we fail to qualify.
We intend to monitor on an ongoing basis our compliance with the REIT
requirements described above. To maintain our REIT status, we will be required
to limit the types of assets that we might otherwise acquire, or hold some
assets at times when we might otherwise have determined that the sale or other
disposition of these assets would have been more prudent.
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Taxation as a REIT
In any year in which we qualify as a REIT, we generally will not be subject
to federal income tax on that portion of our REIT taxable income or capital
gain that we distribute to our stockholders. We will, however, be subject to
federal income tax at regular corporate income tax rates on any undistributed
taxable income or capital gain.
Notwithstanding our qualification as a REIT, we may also be subject to tax
in the following other circumstances:
. If we fail to satisfy either the 75% or the 95% gross income test, but
nonetheless maintain our qualification as a REIT because we meet other
requirements, we generally will be subject to a 100% tax on the greater
of the amount by which we fail either the 75% or the 95% gross income
test multiplied by a fraction intended to reflect our profitability.
. We will be subject to a tax of 100% on net income derived from any
prohibited transaction which is, in general, a sale or other disposition
of property held primarily for sale to customers in the ordinary course
of business.
. If we have (1) net income from the sale or other disposition of
foreclosure property that is held primarily for sale to customers in the
ordinary course of business or (2) other non-qualifying income from
foreclosure property, it will be subject to federal income tax at the
highest corporate income tax rate.
. If we fail to distribute during each calendar year at least the sum of
(1) 85% of our REIT ordinary income for such year, (2) 95% of our REIT
capital gain net income for such year and (3) any amount of undistributed
ordinary income and capital gain net income from preceding taxable years,
we will be subject to a 4% federal excise tax on the excess of the
required distribution over the amounts actually distributed during the
taxable year.
. If we acquire a Built in Gain asset from a C corporation in a transaction
in which the basis of the asset is determined by reference to the basis
of the asset in the hands of the C corporation and we recognize Built in
Gain upon a disposition of such asset occurring within 10 years of its
acquisition, then we will be subject to federal tax to the extent of any
such Built in Gain at the highest corporate income tax rate.
. We may also be subject to the corporate alternative minimum tax, as well
as other taxes in situations not presently contemplated.
Taxation of U.S. Stockholders
For purposes of this discussion, a "U.S. Stockholder" is a stockholder who
is a "U.S. Person." A U.S. Person is a person who is:
. a citizen or resident of the United States;
. a corporation, partnership, or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof;
. an estate whose income is includible in gross income for United States
federal income tax purposes regardless of its source; or
. a trust, if (1) a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more
U.S. persons have authority to control all substantial decisions of the
trust, or (2) the trust was in existence on August 26, 1996, was treated
as a domestic trust prior to such date, and has made an election to
continue to be treated as a U.S. person.
S-31
Unless you are a tax-exempt entity, distributions that we make to a U.S.
Stockholder, including constructive distributions, generally will be subject to
tax as ordinary income to the extent of our current and accumulated earnings
and profits as determined for federal income tax purposes. If the amount we
distribute to you exceeds your allocable share of current and accumulated
earnings and profits, the excess will be treated as a return of capital to the
extent of your adjusted basis in your stock, which will reduce your basis in
your stock but will not be subject to tax. To the extent the amount we
distribute to you exceeds both your allocable share of current and accumulated
earnings and profits and your adjusted basis, this excess amount will be
treated as a gain from the sale or exchange of a capital asset. Distributions
to our corporate stockholders, whether characterized as ordinary income or as
capital gain, are not eligible for the corporate dividends received deduction.
Distributions that we designate as capital gain dividends generally will be
taxable in your hands as long-term capital gains, to the extent such
distributions do not exceed our actual net capital gain for the taxable year.
In the event that we realize a loss for the taxable year, you will not be
permitted to deduct any share of that loss. Further, if we, or a portion of our
assets, were to be treated as a taxable mortgage pool, any excess inclusion
income that is allocated to you could not be offset by any losses or other
deductions you may have. Future Treasury regulations may require you to take
into account, for purposes of computing your individual alternative minimum tax
liability, some of our tax preference items.
Dividends that we declare during the last quarter of a calendar year and
actually pay to you during January of the following taxable year, generally are
treated as if we had paid, and you had received them on December 31 of the
calendar year and not on the date actually paid. In addition, we may elect to
treat other dividends distributed after the close of the taxable year as having
been paid during the taxable year, so long as they meet the requirements
described in the Code, but you will be treated as having received these
dividends in the taxable year in which the distribution is actually made.
If you sell or otherwise dispose of our stock, you will generally recognize
a capital gain or loss in an amount equal to the difference between the amount
realized and your adjusted basis in our stock, which gain or loss will be long-
term if the stock is held for more than one year. Any loss recognized on the
sale or exchange of stock held for six months or less generally will be treated
as a long-term capital loss to the extent of (1) any long-term capital gain
dividends you receive with respect to our stock and (2) your proportionate
share of any long-term capital gains that we retain (see the discussion under
the caption "Distribution Requirements").
If we fail to qualify as a REIT in any year, distributions we make to you
will be taxable in the same manner discussed above, except that:
. we will not be allowed to designate any distributions as capital gain
dividends;
. distributions (to the extent they are made out of our current and
accumulated earnings and profits) will be eligible for the corporate
dividends received deduction;
. the excess inclusion income rules will not apply to the stockholders; and
. you will not receive any share of our tax preference items; and
. dividends that we declare in the last quarter of the calendar year but
pay to you in January would not be treated as though we had paid them to
you on the immediately preceding December 31.
In this event, however, we could be subject to substantial federal income
tax liability as a C corporation, and the amount of earnings and cash available
for distribution to you and other stockholders could be significantly reduced
or eliminated.
S-32
Information Reporting and Backup Withholding--U.S. Stockholders
For each calendar year, we will report to our U.S. stockholders and to the
IRS the amount of distributions that we pay, and the amount of tax (if any)
that we withhold on these distributions. Under the backup withholding rules,
you may be subject to backup withholding tax with respect to distributions paid
unless you:
. are a corporation or come within another exempt category and demonstrate
this fact when required; or
. provide a taxpayer identification number, certify as to no loss of
exemption from backup withholding tax and otherwise comply with the
applicable requirements of the backup withholding tax rules.
A U.S. stockholder may satisfy this requirement by providing us an
appropriately prepared Form W-9. If you do not provide us with your correct
taxpayer identification number, then you may also be subject to penalties
imposed by the IRS.
Backup withholding tax is not an additional tax. Any amounts withheld under
the backup withholding tax rules will be refunded or credited against your
United States federal income tax liability, provided you furnish the required
information to the IRS.
Taxation of Tax-Exempt Entities
The discussion under this heading only applies to you if you are a tax-
exempt entity.
Subject to the discussion below regarding a pension-held REIT, distributions
received from us or gain realized on the sale of our stock will not be taxable
as unrelated business taxable income (UBTI), provided that:
. you have not incurred indebtedness to purchase or hold our stock;
. you do not otherwise use our stock in a trade or business unrelated to
your exempt purpose; and
. we, consistent with our present intent, do not hold a residual interest
in a REMIC that gives rise to excess inclusion income as defined under
section 860E of the Code.
If all or a portion of our assets were to be treated as a taxable mortgage
pool, however, a substantial portion of the dividends you receive may be
subject to tax as UBTI.
In addition, a substantial portion of the dividends you receive may
constitute UBTI if we are treated as a "pension-held REIT" and you are a
"qualified pension trust" that holds more than 10% by value of our stock at any
time during a taxable year. For these purposes, a "qualified pension trust" is
any pension or other retirement trust that satisfies the requirements imposed
under section 401(a) of the Code. We will be treated as a "pension-held REIT"
if (1) we would not be a REIT if we had to treat stock held in a qualified
pension trust as owned by the trust (instead of as owned by the trust's
multiple beneficiaries) and (2) (a) at least one qualified pension trust holds
more than 25% of our stock by value, or (b) one or more qualified pension
trusts (each owning more than 10% of our stock by value) hold in the aggregate
more than 50% of our stock by value. Assuming compliance with the ownership
limit provisions set forth in our articles of incorporation, it is unlikely
that pension plans will accumulate sufficient stock to cause us to be treated
as a pension-held REIT.
If you qualify for exemption under sections 501(c)(7), (c)(9), (c)(17), and
(c)(20) of the Code, then distributions received by you may also constitute
UBTI. We urge you to consult your tax advisors concerning the applicable set
aside and reserve requirements.
United States Federal Income Tax Considerations Applicable to Foreign
Stockholders
The discussion under this heading only applies to you if you are not a U.S.
person (hereinafter, a "foreign stockholder").
S-33
This discussion is only a brief summary of the United States federal tax
consequences that apply to you, which are highly complex, and does not consider
any specific facts or circumstances that may apply to you and your particular
situation. We urge you to consult your tax advisors regarding the United States
federal tax consequences of acquiring, holding and disposing of our stock, as
well as any tax consequences that may arise under the laws of any foreign,
state, local or other taxing jurisdiction.
Distributions
Except for distributions attributable to gain from the disposition of real
property interests or distributions designated as capital gains dividends,
distributions you receive from us generally will be subject to federal
withholding tax at the rate of 30%, to the extent of our earnings and profits,
unless reduced or eliminated by an applicable tax treaty or unless the
distributions are treated as effectively connected with your United States
trade or business. If you wish to claim the benefits of an applicable tax
treaty, you may need to satisfy certification and other requirements, such as
providing Form W-8BEN. If you wish to claim distributions are effectively
connected with your United States trade or business, you may need to satisfy
certification and other requirements such as providing Form W-8ECI.
Distributions you receive that are in excess of our earnings and profits
will be treated as a tax-free return of capital to the extent of your adjusted
basis in your stock. If the amount of the distribution also exceeds your
adjusted basis, this excess amount will be treated as gain from the sale or
exchange of your stock as described below. If we cannot determine at the time
we make a distribution whether the distribution will exceed our earnings and
profits, the distribution will be subject to withholding at the same rate as
dividends. These withheld amounts, however, will be refundable or creditable
against your United States federal tax liability if it is subsequently
determined that the distribution was, in fact, in excess of our earnings and
profits. If you receive a dividend that is treated as being effectively
connected with your conduct of a trade or business within the United States,
the dividend will be subject to the United States federal income tax on net
income that applies to United States persons generally, and may be subject to
the branch profits tax if you are a corporation.
Distributions that we make to you and designate as capital gains dividends,
other than those attributable to the disposition of a United States real
property interest, generally will not be subject to United States federal
income taxation, unless:
. your investment in our stock is effectively connected with your conduct
of a trade or business within the United States; or
. you are a nonresident alien individual who is present in the United
States for 183 days or more in the taxable year, and other requirements
are met.
Distributions that are attributable to a disposition of United States real
property interests are subject to income and withholding taxes pursuant to the
Foreign Investment in Real Property Act of 1980 (FIRPTA), and may also be
subject to branch profits tax if you are a corporation that is not entitled to
treaty relief or exemption. However, because we do not expect to recognize gain
attributable to the disposition of United States real property interests as
defined by FIRPTA, the FIRPTA provisions should not apply to distributions we
make with respect to our stock.
Gain on Disposition
You generally will not be subject to United States federal income tax on
gain recognized on a sale or other disposition of our stock unless:
. the gain is effectively connected with your conduct of a trade or
business within the United States;
. you are a nonresident alien individual who holds our stock as a capital
asset and are present in the United States for 183 or more days in the
taxable year and other requirements are met; or
. you are subject to tax under the FIRPTA rules discussed below.
S-34
Gain that is effectively connected with your conduct of a trade or business
within the United States will be subject to the United States federal tax on
net income that applies to United States persons generally and may be subject
to the branch profits tax if you are a corporation. However, these effectively
connected gains will generally not be subject to withholding. We urge you to
consult applicable treaties, which may provide for different rules.
Under FIRPTA, you may be subject to tax on gain recognized from a sale or
other disposition of your stock if we were to both (1) hold United States real
property interests and (2) fail to qualify as a domestically controlled REIT. A
REIT qualifies as a domestically-controlled REIT as long as less than 50% in
value of its shares of beneficial interest are held by foreign persons at all
times during the shorter of (1) the previous five years and (2) the period in
which the REIT is in existence. As mentioned above, we do not expect to hold
any United States real property interests. Furthermore, we will likely qualify
as a domestically controlled REIT, although no assurances can be provided
because our shares are publicly traded.
Information Reporting and Backup Withholding Tax
The information reporting and backup withholding tax requirements (discussed
above) will generally not apply to foreign holders in the case of distributions
treated as (1) dividends subject to the 30% (or lower treaty rate) withholding
tax (discussed above), or (2) capital gain dividends. Also, as a general
matter, backup withholding and information reporting will not apply to the
payment of proceeds from shares sold by or through a foreign office of a
foreign broker. However, in some cases (for example, a sale of shares through
the foreign office of a U.S. broker), information reporting is required unless
the foreign holder certifies under penalty of perjury that it is a foreign
holder, or otherwise establishes an exemption. A foreign stockholder may
satisfy this requirement by using an appropriately prepared Form W-8 BEN.
Federal Estate Taxes
In general, if an individual who is not a citizen or resident (as defined in
the Code) of the United States owns (or is treated as owning) our stock at the
date of death, such stock will be included in the individual's estate for
federal estate tax purposes, unless an applicable treaty provides otherwise.
State and Local Taxes
We and our stockholders may be subject to state or local taxation in various
jurisdictions, including those in which we or they transact business or reside.
The state and local tax treatment that applies to us and our stockholders may
not conform to the federal income tax consequences discussed above.
Consequently, we urge you to consult your own tax advisors regarding the effect
of state and local tax laws.
S-35
CERTAIN CHANGES TO MARYLAND LAW
The following discussion supplements the discussion set forth in the
accompanying prospectus, dated May 8, 1998, and should be read in conjunction
with the discussion in such prospectus. The following discussion reflects
material changes in Maryland General Corporation Law that have become effective
since the date of such prospectus. Effective June 1, 2000, the Maryland Control
Share Acquisition Act was amended to reduce the initial threshold for
triggering the definition of "control shares" from one-fifth to one-tenth of
the voting power of a Maryland corporation.
UNDERWRITING
Impac Mortgage Holdings, Inc., the selling stockholder and the underwriters
named below have entered into an underwriting agreement concerning the shares
of common stock being offered. Subject to certain conditions, each underwriter
has severally agreed to purchase the number of shares of common stock indicated
next to its name in the following table. The underwriters are obligated to
purchase all of the shares of common stock, other than those covered by the
over-allotment option described below, if they purchase any of the shares of
common stock.
Number of
Underwriters shares
------------ ---------
UBS Warburg LLC....................................................
CIBC World Markets Corp. ..........................................
Tucker Anthony Incorporated........................................
Jolson Merchant Partners, Inc. ....................................
---------
Total............................................................ 6,000,000
=========
If the underwriters sell more shares of common stock than the total number
set forth in the table above, the underwriters have a 30-day option to buy up
to an additional 900,000 shares of common stock from us, at the public offering
price less the underwriting discounts and commissions, to cover these sales. If
any shares of common stock are purchased under this option, the underwriters
will severally purchase shares of common stock in approximately the same
proportion as set forth in the table above.
The following table provides information regarding the amount of the
discount to be paid to the underwriters by us and the selling stockholder.
Paid by us
-------------------
No Full
exercise exercise
of over- of over-
allotment allotment
option option
--------- ---------
Per share................................................ $ $
Total.................................................. $ $
Paid by selling
stockholder
-------------------
No Full
exercise exercise
of over- of over-
allotment allotment
option option
--------- ---------
Per share................................................ $ $
Total.................................................. $ $
We estimate that the total expenses of this offering payable by Impac
Mortgage Holdings, Inc. and the selling stockholder, excluding underwriting
discounts and commissions, will be approximately $300,000, and $60,000,
respectively.
Shares of common stock sold by the underwriters to the public will initially
be offered at the public offering price set forth on the cover of this
prospectus supplement. Any shares of common stock sold by the
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underwriters to securities dealers may be sold at a discount of up to $
per share from the public offering price. Any of the securities dealers may
resell any shares of common stock purchased from the underwriters to other
brokers or dealers at a discount of up to $ per share from the public
offering price. If all of the shares of common stock are not sold at the public
offering price, the underwriters may change the offering price and the other
selling terms.
Impac Mortgage Holdings, Inc., the selling stockholder, and each of our
officers and directors have agreed that, subject to certain exceptions related
to options granted under existing employee benefit plans, for a period of 90
days from the date of this prospectus supplement, they will not, without the
prior written consent of UBS Warburg LLC, dispose of or hedge any shares of our
common stock or any securities convertible into or exchangeable for our common
stock. UBS Warburg LLC in its sole discretion may release any of the securities
to these lock-up agreements at any time without notice.
In connection with this offering, the underwriters may purchase and sell
shares of our common stock in the open market. These transactions may include
stabilizing transactions, short sales and purchases to cover positions created
by short sales. Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market price of our
common stock while this offering is in progress. Short sales involve the sale
by the underwriters of a greater number of shares of common stock than they are
required to purchase in this offering. Short sales may be either "covered short
sales" or "naked short sales." Covered short sales are sales made in an amount
not greater than the underwriters' over-allotment option to purchase additional
shares in this offering. The underwriters may close out any covered short
position by either exercising their over-allotment option or purchasing shares
of common stock in the open market. In determining the source of shares of
common stock to close out the covered short position, the underwriters will
consider, among other things, the price of shares of common stock available for
purchase in the open market as compared to the price at which they may purchase
shares of common stock through the over-allotment option. Naked short sales are
sales in excess of the over-allotment option. The underwriters must close out
any naked short position by purchasing shares of common stock in the open
market. A naked short position is more likely to be created if the underwriters
are concerned there may be downward pressure on the price of shares in the open
market after pricing that could adversely affect investors who purchase in this
offering.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the other underwriters a portion of the
underwriting discount received by it because the other underwriters have
repurchased shares of common stock sold by, or for the account of, that
underwriter in stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of our common stock. As a result, the price of our
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the American
Stock Exchange or otherwise.
No underwriter is obligated to conduct market-making activities in our
common stock and any such activities may be discontinued at any time without
notice, at the sole discretion of the underwriter. We and the selling
stockholder have agreed to indemnify the several underwriters against some
liabilities, including liabilities under the Securities Act of 1933, as
amended, and to contribute to payments that the underwriters may be required to
make in respect thereof.
The underwriters have from time to time in the past provided, and may from
time to time in the future provide, investment banking and general financing
services to us for which they have in the past received, and may in the future
receive, customary fees. In addition, we have a secured repurchase facility
with UBS Warburg LLC that we use in our warehouse lending operations.
S-37
LEGAL MATTERS
The legality of the shares of our common stock will be passed upon for us by
Kirkpatrick & Lockhart LLP, Los Angeles, California. All matters of Maryland
law will be passed upon for us by McKee Nelson LLP, Washington, D.C. In
addition, McKee Nelson LLP, Washington, D.C., is providing the legal opinions
referred to under "Material federal income tax consequences" in this prospectus
supplement on page S-28 and on page 18 in the accompanying prospectus, dated
August 30, 2001. The validity of the shares of common stock offered hereby will
be passed upon for the underwriters by Sullivan & Cromwell, New York, New York.
With respect to all matters of Maryland law, Sullivan & Cromwell will rely upon
the legal opinion of McKee Nelson LLP, Washington D.C.
EXPERTS
The consolidated financial statements of Impac Mortgage Holdings, Inc. and
of Impac Funding Corporation as of December 31, 2000 and 1999, and for each of
the years in the three-year period ended December 31, 2000, have been
incorporated by reference herein and in the registration statements in reliance
upon the report of KPMG LLP, independent auditors, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
S-38
PROSPECTUS
IMPAC MORTGAGE HOLDINGS, INC.
COMMON STOCK, PREFERRED STOCK, DEBT SECURITIES,
WARRANTS TO PURCHASE COMMON STOCK, PREFERRED STOCK AND
DEBT SECURITIES
----------------
Impac Mortgage Holdings, Inc., a Maryland corporation (the "Company"),
directly or through agents, dealers or underwriters designated from time to
time, may issue and sell from time to time one or more of the following types
of its securities (the "Securities"): (i) shares of its Common Stock, $0.01
par value per share ("Common Stock"); (ii) shares of its Preferred Stock,
$0.01 par value per share, in one or more series ("Preferred Stock"); (iii)
debt securities, in one or more series, any series of which may be either
senior debt securities or subordinated debt securities (collectively, "Debt
Securities" and, as appropriate, "Senior Debt Securities" or "Subordinated
Debt Securities"); (iv) warrants to purchase shares of Common Stock ("Common
Stock Warrants"); Preferred Stock ("Preferred Stock Warrants"); and Debt
Securities ("Debt Warrants" and together with Common Stock Warrants and
Preferred Stock Warrants, collectively, "Securities Warrants"); and (v) any
combination of the foregoing, either individually or as units consisting of
one or more of the foregoing types of Securities. The Securities offered
pursuant to this Prospectus may be issued in one or more series, in amounts,
at prices and on terms to be determined at the time of the offering of each
such series. The Securities offered by the Company pursuant to this Prospectus
will be limited to $200,000,000 aggregate initial public offering price,
including the exercise price of any Securities Warrants. As of the date of
this Prospectus, the Company has issued 3,400,000 shares of Common Stock with
an aggregate initial public offering price of $92,650,000.
SEE "RISK FACTORS" STARTING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES.
The specific terms of each offering of Securities in respect of which this
Prospectus is being delivered are set forth in an accompanying Prospectus
Supplement (each, a "Prospectus Supplement") relating to such offering of
Securities. Such specific terms include, without limitation, to the extent
applicable; (1) in the case of any series of Preferred Stock, the specific
designations, preferences, conversion and other rights, voting powers and
restrictions, limitations as to dividends and other distributions,
qualifications or terms or conditions of redemption of such series of
Preferred Stock; (2) in the case of any series of Debt Securities, the
specific designations, rights and restrictions of such series of Debt
Securities, including without limitation whether the Debt Securities are
Senior Debt Securities or Subordinated Debt Securities, the currency in which
such Debt Securities are denominated and payable, the aggregate principal
amount, stated maturity, method of calculating and dates for payment of
interest and premium, if any, and any conversion, exchange, redemption or
sinking fund provisions; (3) in the case of the Securities Warrants, the Debt
Securities, Preferred Stock or Common Stock, as applicable, for which each
such warrant is exercisable, and the exercise price, duration, detachability
and call provisions of each such warrant; and (4) in the case of any offering
of Securities, to the extent applicable, the initial public offering price or
prices, listing on any securities exchange, certain federal income tax
consequences and the agents, dealers or underwriters, if any, participating in
the offering and sale of the Securities. If so specified in the applicable
Prospectus Supplement, any series of Securities may be issued in whole or in
part in the form of one or more temporary or permanent Global Securities, as
defined herein.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
The Company may sell all or a portion of any offering of its Securities
through agents, to or through underwriters or dealers, or directly to other
purchasers. See "Plan of Distribution." The related Prospectus Supplement for
each offering of Securities sets forth the name of any agents, underwriters or
dealers involved in the sale of such Securities and any applicable fee,
commission, discount or indemnification arrangement with any such party. See
"Use of Proceeds."
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement. The delivery in any jurisdiction of
this Prospectus together with a Prospectus Supplement relating to specific
Securities shall not constitute an offer in such jurisdiction of any other
Securities covered by this Prospectus but not described in such Prospectus
Supplement.
----------------
The date of this Prospectus is May 8, 1998.
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER,
AGENT OR DEALER. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING
PROSPECTUS SUPPLEMENT NOR ANY DISTRIBUTION OF SECURITIES BEING OFFERED PURSUANT
TO THIS PROSPECTUS AND AN ACCOMPANYING PROSPECTUS SUPPLEMENT SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF OR THAT THE INFORMATION
CONTAINED HEREIN OR THEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THEREOF. THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE
SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied, at prescribed rates, at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, Room 1024, as
well as at the regional offices of the Commission at Seven World Trade Center,
13th Floor, New York, New York 10048, and the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60601. Copies of such
material may also be obtained at prescribed rates by writing to the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a website that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http:\www.sec.gov. The Common Stock is listed on the American Stock Exchange
(the "AMEX"). Reports, proxy statements and other information described above
may also be inspected and copied at the offices of the American Stock Exchange
at 86 Trinity Place, New York, New York 10006.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Securities offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
Securities offered hereby, reference is made to the Registration Statement and
the exhibits and schedules thereto. Statements contained herein concerning the
provisions of any documents are necessarily summaries of those documents, and
each statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission. The Registration Statement and
any amendments thereto, including exhibits filed as a part thereof, are
available for inspection and copying as set forth above.
2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed with the Commission are
incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the year ended December
31, 1997;
(2) The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A, including all amendments and reports
filed for the purpose of updating such description; and
(3) The Company's Current Reports on Form 8-K, dated December 19, 1997,
as amended, and January 28, 1998, as amended.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of all Securities shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any accompanying Prospectus Supplement
relating to a specific offering of Securities or in any other subsequently
filed document which also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus or any accompanying Prospectus Supplement.
Subject to the foregoing, all information appearing in this Prospectus is
qualified in its entirety by the information appearing in the documents
incorporated herein by reference.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any and all of the documents described above under "Incorporation of
Certain Documents by Reference," other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference therein. Such requests
should be directed to: Impac Mortgage Holdings, Inc., 20371 Irvine Avenue,
Santa Ana Heights, California 92707, Attention: Investor Relations, Telephone:
(714) 438-2100.
3
THE COMPANY
Unless the context otherwise requires, references herein to the "Company"
refer to Impac Mortgage Holdings, Inc. ("IMH"), Impac Funding Corporation
(together with its wholly owned subsidiary, Impac Secured Assets Corp., "IFC"),
IMH Assets Corp. ("IMH Assets"), IMH/ICH Dove Street, LLC, and Impac Warehouse
Lending Group, Inc. ("IWLG"), collectively.
General
Impac Mortgage Holdings, Inc. is a specialty finance company, which,
together with its subsidiaries and related companies, operates three
businesses: (1) the Long-Term Investment Operations, (2) the Conduit
Operations, and (3) the Warehouse Lending Operations. The Long-Term Investment
Operations invests primarily in non-conforming residential mortgage loans and
securities backed by such loans. The Conduit Operations purchases and sells or
securities primarily non-conforming mortgage loans, and the Warehouse Lending
Operations provides warehouse and repurchase financing to originators of
mortgage loans. These latter two businesses include certain ongoing operations
contributed to the Company in 1995 by Imperial Credit Industries, Inc.
("ICII"), a leading specialty finance company (the "Contribution Transaction").
IMH is organized as a real estate investment trust ("REIT") for federal income
tax purposes, which generally allows it to pass through qualified income to
stockholders without federal income tax at the corporate level.
Long-Term Investment Operations. The Long-Term Investment Operations,
conducted by IMH, invests primarily in non-conforming residential mortgage
loans and mortgage-backed securities secured by or representing interests in
such loans and, to a lesser extent, in second mortgage loans. Non-conforming
residential mortgage loans are residential mortgages that do not qualify for
purchase by government-sponsored agencies such as the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
Such loans generally provide higher yields than conforming loans. The principal
differences between conforming loans and non-conforming loans include the
applicable loan-to-value ratios, the credit and income histories of the
mortgagors, the documentation required for approval of the mortgagors, the type
of properties securing the mortgage loans, the loan sizes, and the mortgagors'
occupancy status with respect to the mortgaged properties. Second mortgage
loans are higher yielding mortgage loans secured by a second lien on the
property and made to borrowers owning single-family homes for the purpose of
debt consolidation, home improvements, education and a variety of other
purposes.
Conduit Operations. The Conduit Operations, conducted by IFC, purchases
primarily non-conforming mortgage loans and, to a lesser extent, second
mortgage loans from its network of third party correspondents and subsequently
securitizes or sells such loans to permanent investors, including the Long-Term
Investment Operations. IFC's ability to design non-conforming mortgage loans
which suit the needs of its correspondent loan originators and their borrowers
while providing sufficient credit quality to investors, as well as its
efficient loan purchasing process, flexible purchase commitment options and
competitive pricing, enable it to compete effectively with other non-conforming
mortgage loans conduits. In addition to earnings generated from ongoing
securitizations and sales to third party investors, IFC supports the Long-Term
Investment Operations of the Company by supplying IMH with non-conforming
mortgage loans and securities backed by such loans. Prior to the Contribution
Transaction, IFC was a division or subsidiary of ICII since 1990. IMH owns 99%
of the economic interest in IFC, while Joseph R. Tomkinson, the Company's Chief
Executive Officer, William S. Ashmore, the Company's President, and Richard J.
Johnson, the Company's Chief Financial Officer, are the holders of all the
outstanding voting stock of, and 1% of the economic interest in, IFC.
Warehouse Lending Operations. The Warehouse Lending Operations, conducted by
IWLG, provides warehouse and repurchase financing to IFC and to approved
mortgage banks, most of which are correspondents of IFC, to finance mortgage
loans during the time from the closing of the loans to their sale or other
settlement with pre-approved investors.
4
IMH's principal sources of income are (1) income from the Long-Term
Investment Operations, (2) income from the Warehouse Lending Operations, and
(3) income from IMH's equity investment in the Conduit Operations. In addition,
the Company expects to receive dividend income from its investment in the
common stock of Impac Commercial Holdings, Inc. (formerly IMH Commercial
Holdings, Inc.) ("ICH"), a REIT in which IMH currently holds shares of Common
Stock and shares of non-voting Class A Common Stock which are convertible into
an equivalent number of shares of ICH's Common Stock. The income of the Conduit
Operations is fully subject to federal and state income taxes. The principal
source of income from IMH's Long-Term Investment Operations is net interest
income, which is the net spread between interest earned on mortgage loans and
securities held for investment and the interest costs associated with the
borrowings used to finance such loans and securities, including CMO debt. "CMO"
means an adjustable or fixed-rate debt obligation (bond) that is collateralized
by mortgage loans or mortgage certificates and issued by the Government
National Mortgage Association. The principal sources of income from the
Warehouse Lending Operations are net interest income, which is the net spread
between interest earned on warehouse loans and the interest costs associated
with the borrowings used to finance such loans, and the fee income received
from the borrowers in connection with such loans. The principal sources of
income from the Conduit Operations are gains recognized on the sale of mortgage
loans and securities, net interest income earned on loans purchased by IFC
pending their securitization or resale, servicing fees, commitment fees and
processing fees.
The Company is located at 20371 Irvine Avenue, Santa Ana Heights, California
92707 and its telephone number is (714) 556-0122.
Operating Strategy
The Company believes that a structural change has occurred in the mortgage
banking industry which has increased demand for higher yielding non-conforming
mortgage loans. This change has been caused by a number of factors, including:
(1) investors' demand for higher yielding assets due to historically low
interest rates over the past few years; (2) increased securitization of high-
yielding non-conforming mortgage loans by the investment banking industry; (3)
quantification and development of standardized credit criteria by credit rating
agencies for securities backed by non-conforming mortgage loans; (4) increased
competition in the securitization industry, which has reduced borrower interest
rates and fees, thereby making non-conforming mortgage loans more affordable;
and (5) the end of the refinance "boom" of 1992 and 1993, which has caused many
mortgage banks, attempting to sustain origination volume, to seek out non-
conforming mortgage loan borrowers.
The Company's strategy is to take advantage of the increased demand for non-
conforming mortgage loans through IFC's network of correspondents, which sell
non-conforming mortgage loans to IFC for resale or securitization. The
Company's strategic objective is to exploit the structural changes in the non-
conforming mortgage loan market through the Conduit Operations and to invest in
the non-conforming mortgage loans and mortgage-backed securities originated and
created by the Conduit Operations. Management believes that the Long-Term
Investment Operations complements the Conduit Operations by providing IFC with
a reliable investor for a portion of its loan sales and securitizations while
IFC supports the Long-Term Investment Operations by providing non-conforming
mortgage loans and securities backed by non-conforming mortgage loans. The
Company believes the Warehouse Lending Operations provides synergies with the
Company's other operations because it provides funding to the Conduit
Operations and extends the scope of the Company's relationships with certain of
its correspondent loan originators.
The Company purchases mortgage assets, through its network of correspondents
and through bulk purchases, and invests a substantial portion of its long-term
investment portfolio in, non-conforming mortgage loans because management
believes that non-conforming mortgage loans provide an attractive net income
earnings profile and produce higher yields without commensurately higher credit
risks, when compared with conforming mortgage loans. Although a substantial
majority of the non-conforming loans purchased by the Conduit Operations are
"A" and "A-" grade mortgage loans, the Company's strategy includes the purchase
of
5
"B" and "C" grade mortgage loans. In general, "B" and "C" grade mortgage loans
are residential mortgage loans made to borrowers with lower credit ratings than
borrowers of "A" grade mortgage loans, and are normally subject to greater
frequency of losses and delinquency. As a result, "B" and "C" grade mortgage
loans normally bear a higher rate of interest and higher fees.
Management believes that IMH's tax and corporate structure as a REIT
provides it with an advantage over other financial institutions and mortgage
banking competitors. As a REIT, IMH can generally pass through qualifying
earnings as dividends to stockholders without federal income tax at the
corporate level. Thus, the Company expects to be able to pay higher annual
dividends than traditional mortgage lending institutions, which are subject to
federal income tax. In addition, management believes that the Company provides
a more attractive method of investing in mortgages than regulated financial
institutions because the Company is not subject to most of the federal and
state regulations imposed upon insured financial institutions, and therefore,
does not incur their related costs.
Dividend Policy and Distributions
To maintain its qualification as a REIT, IMH intends to make annual
distributions to stockholders of at least 95% of its taxable income (which does
not necessarily equal net income as calculated in accordance with generally
accepted accounting principles) determined without regard to the deduction for
dividends paid and excluding any net capital gains. Any taxable income
remaining after the distribution of regular quarterly dividends or other
dividends will be distributed annually, on or prior to the date of the first
regular quarterly dividend payment date of the following taxable year. The
dividend policy is subject to revision at the discretion of the Board of
Directors. All distributions in excess of those required for IMH to maintain
REIT status will be made by IMH at the discretion of the Board of Directors and
will depend on the taxable earnings of IMH, the financial condition of IMH and
such other factors as the Board of Director deems relevant. The Board of
Directors has not established a minimum distribution level.
Tax Status of IMH
IMH has elected 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 ended December 31, 1995, 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, any 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, IMH generally will not be
subject to federal income tax on net income it distributes currently to its
stockholders. If IMH fails to qualify as a REIT in any taxable year, it
generally will be subject to federal income tax at regular corporate rates. See
"Federal Income Tax Considerations" and "Risk Factors-- Consequences of Failure
to Maintain REIT Status May Include IMH Being Subject to Tax as a Regular
Corporation." Even if IMH qualifies for taxation as a REIT, IMH may be subject
to certain federal, state and local taxes on its income. In addition, IFC is
subject to federal and state income tax at regular corporate rates on its net
income.
6
RISK FACTORS
Before investing in the Securities, 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.
Certain information contained in this Prospectus and the documents
incorporated by reference herein constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act, and Section 21e of the
Exchange Act, which can be identified by the use of forward-looking terminology
such as "may," "will," "expect," "anticipate," "estimate" or "continue" or the
negatives thereof or other variations thereon or comparable terminology. The
statements under the captions "Risk Factors" in this Prospectus constitute
cautionary statements identifying important factors, including certain risks
and uncertainties, with respect to such forward-looking statements that could
cause the actual results, performance or achievements of the Company to differ
materially from those reflected in such forward-looking statements.
Net Interest Income May Be Adversely Affected By Interest Rate Fluctuations;
Prepayments of Mortgage Loans May Adversely Affect Net Income
The Company's income may be affected by changes in market interest rates. In
conducting its Conduit Operations, the Company is subject to the risk of rising
mortgage interest rates between the time the Company commits to purchase
mortgage loans at a fixed price and the time the Company sells or securitizes
those mortgage loans. An increase in interest rates will generally result in a
decrease in market value of loans that the Company has committed to purchase at
a fixed price, but has not yet sold or securitized.
Higher rates of interest may discourage potential mortgagors from
refinancing mortgage loans, borrowing to purchase a home or seeking a second
mortgage loan, thus decreasing the volume of mortgage loans available to be
purchased by the Conduit Operations. In addition, an increase in short-term
interest rates may decrease or eliminate or, under certain circumstances, cause
to be negative, the Company's net interest spread during the accumulation of
mortgage loans held for sale or the net interest spread on mortgage loans held
for investment when such loans are financed through reverse repurchase
agreements. Should short-term interest rates exceed long-term interest rates
(an "inverted yield curve" scenario), the negative effect on the Company's net
interest spread would likely be coupled with a reduction in any income on any
servicing portfolio held by the Company to the extent prepayments on the
underlying mortgage loans increased as long-term interest rates declined.
In conducting its Long-Term Investment Operations, a significant portion of
the Company's mortgage assets held for long-term investment bear adjustable
interest ("ARMs") or pass-through rates based on short-term interest rates, and
substantially all of the Company's borrowings bear interest at fixed rates and
have maturities of less than 60 days. Consequently, changes in short-term
interest rates may significantly influence the Company's net interest income.
Mortgage loans owned by the Company that are ARMs or mortgage-backed securities
backed by ARMs are subject to periodic interest rate adjustments based on
objective indices such as the CMT Index, which is the one year constant
maturity Treasury index, or LIBOR, the London interbank offered rate. Interest
rates on the Company's borrowings are also based on short-term indices. To the
extent any of the Company's mortgage assets are financed with borrowings
bearing interest based on an index different from that used for the related
mortgage assets, so-called "basis" interest rate risk will arise. In such
event, if the index used for the subject mortgage assets is a "lagging" index
(such as the 11th District Cost of Funds) that reflects market interest rate
changes on a delayed basis, and the rate borne by the related borrowings
reflects market rate changes more rapidly, the Company's net interest income
will be adversely affected in periods of increasing market interest rates.
Additionally, the Company's mortgage assets are subject to periodic interest
rate adjustments that may be less frequent than the increases or decreases in
rates borne by the borrowings or financings utilized by the Company.
Accordingly, in a period of increasing interest rates, the Company could
experience a decrease in net interest income or a net interest loss because the
interest rates on borrowings could adjust faster than the interest rates on the
Company's ARMs or mortgage-backed securities backed by ARMs. Moreover, ARMs are
typically subject to periodic and lifetime interest rate caps, which limit
7
the amount an ARMs interest rate can change during any given period. The
Company's borrowings are not subject to similar restrictions. Hence, in a
period of rapidly increasing interest rates, the Company could also experience
a decrease in net interest income or a net interest loss in the absence of
effective hedging because the interest rates on borrowings could increase
without limitation by caps while the interest rates on the Company's ARMs and
mortgage-backed securities backed by ARMs would be so limited. Further, some
ARMs may be subject to periodic payment caps that result in some portion of the
interest accruing on the ARMs being deferred and added to the principal
outstanding. This could result in less cash received by the Company on its ARMs
than is required to pay interest on the related borrowings, which will not have
such payment caps. The Company expects that the net effect of these factors,
all other factors being equal, will be to lower the Company's net interest
income or cause a net interest loss during periods of rapidly rising interest
rates, which could negatively impact the market price of the Securities. No
assurance can be given as to the amount or timing of changes in income. To the
extent that the Company utilizes short-term debt financing for fixed rate
mortgages or mortgage-backed securities backed by fixed rate mortgages, the
Company may also be subject to interest rate risks. To the extent that some of
the warehouse loans made by the Company bear interest based upon an
intermediate-term index while the Company's borrowings to fund such loans bear
interest based upon a short-term index, the Company will be subject to the risk
of narrowing interest rate spreads.
Higher rates of interest may have a negative effect, in particular, on the
yield of any Company portfolio of "principal-only" securities and other types
of mortgage-backed securities purchased at a discount. If the Company were
required to dispose of any "principal-only" securities held in its portfolio in
a rising rate environment, a loss could be incurred. Lower long-term rates of
interest may negatively affect the yield on any Company portfolio of "interest-
only" securities, servicing fees receivable, and other mortgage loan and
mortgage-backed securities purchased at a premium. It is also possible that in
certain low interest rate environments the Company would not fully recoup any
initial investment in such securities or investments.
Mortgage prepayment rates vary from time to time and may cause changes in
the amount of the Company's net interest income. Prepayments on ARMs and
mortgage-backed securities backed by ARMs generally increase when mortgage
interest rates fall below the then current interest rates on such ARMs.
Conversely, prepayments of such mortgage loans generally decrease when mortgage
interest rates exceed the then-current interest rate on such mortgage loans.
Prepayment experience also may be affected by the geographic location of the
property securing the mortgage loans, the credit grade of the mortgage loan,
the assumability of the mortgage loans, the ability of the borrower to convert
to a fixed-rate loan, conditions in the housing and financial markets and
general economic conditions. In addition, prepayments on ARMs are affected by
conditions in the fixed-rate mortgage market. If the interest rates on ARMs
increase at a rate greater than the interest rates on fixed-rate mortgage
loans, prepayments on ARMs will tend to increase. In periods of fluctuating
interest rates, interest rates on ARMs may exceed interest rates on fixed-rate
mortgage loans, which may tend to cause prepayments on ARMs to increase at a
greater rate than anticipated. Prepayment rates also vary by credit grade.
Second mortgage loans generally have smaller average principal balances than
first mortgage loans and are not viewed by borrowers as permanent financing.
Accordingly, second mortgage loans may experience a higher rate of prepayment
than first mortgage loans. In addition, any future limitations on the right of
borrowers to deduct interest payments on mortgage loans for Federal income tax
purposes may result in a higher rate of prepayment on mortgage loans.
Prepayments of mortgage loans could affect the Company in several adverse
ways. A substantial portion of the ARMs acquired by the Company (either
directly as mortgage loans or through mortgage-backed securities backed by
ARMs) have been newly originated within six months of purchase and generally
bear initial interest rates which are lower than their "fully-indexed" rates
(the applicable index plus the margin). In the event that such an ARM is
prepaid prior to or soon after the time of adjustment to a fully-indexed rate,
the Company will have experienced an adverse effect on its net interest income
during the time it held such ARM compared with holding a fully-indexed ARM and
will have lost the opportunity to receive interest at the fully-indexed rate
over the expected life of the ARM.
8
The prepayment of any mortgage loan that had been purchased at a premium by
the Company would result in the immediate write-off of any remaining
capitalized premium amount and a consequent decrease in the Company's interest
income. The Conduit Operations' strategy at the present time is to purchase
mortgage loans on a "servicing released" basis (i.e., the Company will acquire
both the mortgage loans and the rights to service them). This strategy requires
payment of a higher purchase price by the Company for the mortgage loans, and
to the extent a premium is paid, the Company is more exposed to the adverse
effects of early prepayments of the mortgage loans, as described above.
Company Operations May Be Adversely Affected if the Company Fails to
Effectively Hedge Against Interest Rate Changes or if Losses are Incurred in
Connection with Hedging Activities
To mitigate risks associated with its Conduit Operations, the Company,
through IFC, enters into transactions designed to hedge interest rate risks,
which may include mandatory and optional forward selling of mortgage loans or
mortgage-backed securities, interest rate caps, floors and swaps and buying and
selling of futures and options on futures. To mitigate risks associated with
its Long-Term Investment Operations, the Company's policy is to attempt to
match the interest rate sensitivities of its adjustable rate mortgage assets
held for investment with the associated liabilities. The Company may purchase
interest rate caps, interest rate swaps or similar instruments to attempt to
mitigate the cost of its variable rate liabilities increasing at a faster rate
than the earnings on its subject assets during a period of rising interest
rates. The nature and quantity of the hedging transactions for the Conduit
Operations and the Long-Term Investment Operations is determined by the
management of the Company based on various factors, including market conditions
and the expected volume of mortgage loan purchases, and there have been no
limitations placed on management's use of certain instruments in such hedging
transactions. No assurance can be given that such hedging transactions will
offset the risks of changes in interest rates, and it is possible that there
will be periods during which the Company could incur losses after accounting
for its hedging activities.
Acquiring and Investing in Mortgage Loans May Entail Substantial Risks
The Company makes long-term investments in mortgage loans and mortgage-
backed securities. The Company does not obtain credit enhancements such as
mortgage pool or special hazard insurance for its mortgage loans and
investments other than private mortgage insurance and only when specified by
its underwriting criteria. Accordingly, during the time it holds mortgage loans
for investment, the Company is subject to risks of borrower defaults and
bankruptcies and special hazard losses that are not covered by standard hazard
insurance (such as those occurring from earthquakes or floods). In the event of
a default on any mortgage loan held by the Company, the Company bears the risk
of loss of principal to the extent of any deficiency between the value of the
related mortgaged property, plus any payments from an insurer or guarantor, and
the amount owing on the mortgage loan. Defaulted mortgage loans will also cease
to be eligible collateral for borrowings, and will have to be financed by the
Company out of other funds until ultimately liquidated.
Credit risks associated with non-conforming mortgage loans, especially "B"
and "C" grade loans, may be greater than those associated with conforming
mortgage loans that comply with FNMA and FHLMC guidelines. Non-conforming
mortgage loans generally consist of jumbo mortgage loans (loans with a
principal balance in excess of $227,400) or loans that are originated in
accordance with underwriting or product guidelines that differ from those
applied by FNMA or FHLMC. The principal differences between conforming loans
and the non-conforming loans purchased by the Company include the applicable
loan-to-value ratios, the credit and income histories of the mortgagors, the
documentation required for approval of the mortgagors, the types of properties
securing the mortgage loans, loan sizes and the mortgagors' occupancy status
with respect to the mortgaged property. As a result of these and other factors,
the interest rates charged on non-conforming loans are often higher than those
charged for conforming loans. The combination of different underwriting
criteria and higher rates of interest may lead to higher delinquency rates
and/or credit losses for non-conforming as compared to conforming loans and
could have an adverse effect on the Company's operations to the extent that the
Company invests in such loans or securities evidencing interests in such loans.
9
In addition, with respect to second mortgage loans, the Company's security
interest in the property securing such loans is subordinated to the interest of
the first mortgage holder. If the value of the property securing the second
mortgage loan is not sufficient to repay the borrower's obligation to the first
mortgage holder upon foreclosure or if there is no additional value in such
property after satisfying the borrower's obligation to the first mortgage loan
holder, the borrower's obligation to the Company will likely not be satisfied.
The yield derived from certain classes of mortgage-backed securities created
in connection with securitizations by IFC and subsequently retained by the
Company, including, but not limited to, "interest-only," "principal-only" and
subordinated securities, is particularly sensitive to interest rate, prepayment
and credit risks. The Company's investment portfolio includes each of these
classes of securities. See "--Net Interest Income May be Adversely Affected by
Interest Rate Fluctuations; Prepayment's of Mortgage Loans May Adversely Affect
Net Income." Because subordinated securities, in general, bear all credit
losses prior to the related senior securities, the amount of credit risk
associated with any investment in such subordinated securities is significantly
greater than that associated with a comparable investment in the related senior
securities and, on a percentage basis, the risk is greater than holding the
underlying mortgage loans directly. See "--Value of Interest-Only, Principal-
Only, Residual Interest and Subordinated Securities Subject to Fluctuation."
The Company also bears risk of loss on any mortgage-backed securities it
purchases in the secondary mortgage market. To the extent third parties have
been contracted to insure against these types of losses, the Company would be
dependent in part upon the creditworthiness and claims paying ability of the
insurer and the timeliness of reimbursement in the event of a default on the
underlying obligations. Further, the insurance coverage for various types of
losses is limited, and losses in excess of the limitation would be borne by the
Company.
As a warehouse lender, the Company is a secured creditor of mortgage bankers
and is subject to the risks associated with such businesses, including the
risks of fraud, borrower default and bankruptcy, any of which could result in
credit losses for the Company. Any claim of the Company as a secured lender in
a bankruptcy proceeding may be subject to adjustment and delay.
In connection with its Conduit Operations, IFC has engaged in
securitizations and bulk whole loan sales. In connection with the issuance of
mortgage-backed securities by IFC, such securities have been non-recourse to
IFC, except in the case of a breach of the standard representations and
warranties made by IFC when mortgage loans are securitized. While IFC has
recourse to the sellers of mortgage loans for any such breaches, there can be
no assurance of the sellers' abilities to honor their respective obligations.
IFC has engaged in bulk whole loan sales pursuant to agreements that provide
for recourse by the purchaser against IFC (and, in certain cases, IMH as
guarantor) in the event of a breach of representation or warranty made by IFC,
any fraud or misrepresentation during the mortgage loan origination process or
upon early default on such mortgage loans. IFC has generally limited the
remedies of such purchasers to the remedies IFC receives from the persons from
whom IFC purchased such mortgage loans. However, in some cases, the remedies
available to a purchaser of mortgage loans from IFC are broader than those
available to IFC against its seller, and should a purchaser exercise its rights
against IFC, IFC may not always be able to enforce whatever remedies IFC may
have against its sellers. IFC may from time to time make provisions for loan
losses related to estimated losses from the breach of a standard representation
and warranty.
Dependence on Securitizations May Create Liquidity Risks
The Company securitizes a substantial portion of the mortgage loans it
purchases. IFC relies significantly upon securitizations to generate cash
proceeds for repayment of its warehouse line and to create credit availability.
Further, gains on sales from IFC's securitizations represent a significant
portion of IFC's earnings. Several factors affect the Company's ability to
complete securitizations of its mortgage loans, including conditions in the
securities markets generally, conditions in the asset-backed securities market
specifically, the
10
credit quality of the mortgage loans purchased by the Conduit Operations and
the Company's ability to obtain credit enhancement. If IFC were unable to
securitize profitably a sufficient number of its mortgage loans in a particular
financial reporting period, then IFC's revenues for such period would decline,
which could result in lower income or a loss for such period. In addition,
unanticipated delays in closing a securitization could also increase IFC's
interest rate risk by increasing the warehousing period for its mortgage loans.
IFC endeavors to effect quarterly public securitizations of its loan pools.
However, market and other considerations, including the volume of IFC's
mortgage acquisitions and the conformity of such loan pools to the requirements
of insurance companies and rating agencies, may affect the timing of such
transactions. Any delay in the sale of a loan pool beyond the end of a fiscal
quarter would postpone the recognition of gain related to such loans and would
likely result in lower income or a loss for such quarter being reported by IFC.
In order to gain access to the securitization market, the Company has
relied, and in the future may rely, on credit enhancements provided by
insurance companies to guarantee senior interests in the related trusts to
enable them to obtain "AAA/Aaa" ratings for such interests. Any unwillingness
of insurance companies to guarantee the senior interests in the Company's loan
pools could have a material adverse effect on the Company's results of
operations and financial condition.
The Company also relies on securitizations in the form of CMO borrowings to
finance a substantial portion of the loans held by the Long-Term Investment
Operations. Any reduction in the Company's ability to complete additional
securitizations would require the Company to utilize other sources of financing
which may be on less favorable terms.
Value of Interest-Only, Principal-Only, Residual Interest and Subordinated
Securities Subject to Fluctuation
The Company's assets include "interest-only," "principal-only," residual
interest and subordinated securities, valued by the Company in accordance with
SFAS No. 115, "Accounting for Certain Debt and Equity Securities," if purchased
by the Company in the secondary market or in accordance with SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," if created in connection with the securitization of mortgages
held for sale by IFC. IMH records its retained interest in IFC securitizations
(including "interest-only," "principal-only" and subordinated securities) as
investments classified as trading securities and records its purchased residual
interests and subordinated securities as available for sale securities.
Realization of these "interest-only," "principal-only," residual interest and
subordinated securities in cash is subject to the timing and ultimate
realization of cash flows associated therewith, which is in turn effected by
the prepayment and loss characteristics of the underlying loans. Because
subordinated securities, in general, bear all credit losses prior to the
related senior securities, the amount of credit risk associated with any
investment in such subordinated securities is significantly greater than that
associated with a comparable investment in the related senior securities and,
on a percentage basis, the risk associated with holding subordinated securities
is greater than holding the underlying mortgage loans directly due to the
concentration of losses in such subordinated securities and because
subordinated securities receive payments of principal and interest after such
payments on related senior securities and the underlying mortgages. The Company
estimates future cash flows from these "interest-only," "principal-only,"
residual interest and subordinated securities and values such securities
utilizing assumptions that it believes to be consistent with those that would
be utilized by an unaffiliated third party purchaser. If actual experience
differs from the assumptions used in the determination of the asset value,
future cash flows and earnings could be negatively impacted, and the Company
could be required to reduce the value of its "interest-only," "principal-only,"
residual interest and subordinated securities in accordance with SFAS No. 115
and SFAS 125. The value of such securities can fluctuate widely and may be
extremely sensitive to changes in discount rates, projected mortgage loan
prepayments and loss assumptions. The Company believes that its aggregate
delinquency and loan loss experience will increase as its mortgage portfolio
matures. To the Company's knowledge, the market for the sale of the "interest-
only," "principal-only," residual interest and subordinated
11
securities is limited. No assurance can be given that "interest-only,"
"principal-only," residual interest and subordinated securities could be sold
at their reported value, if at all.
The risks of investing in mortgage-backed securities include risks that the
existing credit support will prove to be inadequate, either because of
unanticipated levels of losses or, if such credit support is provided by a
third party, because of difficulties experienced by such credit support
provider. Delays or difficulties encountered in servicing mortgage-backed
securities may cause greater losses and, therefore, greater resort to credit
support than was originally anticipated, and may cause a rating agency to
downgrade a security.
The Company also bears risk of loss on any mortgage-backed securities it
purchases in the secondary market. To the extent third parties have contracted
to insure against these types of losses, the Company would be dependent in part
upon the creditworthiness and claims paying ability of the insurer and the
timeliness of reimbursement in the event of a default on the underlying
obligations. Further, the insurance coverage for various types of losses is
limited, and losses in excess of the limitation would be borne by the Company.
Mortgage Servicing Rights Subject to Volatility
When IFC purchases loans that include the associated servicing rights or
originates loans, the allocated cost of the servicing rights will be reflected
on its financial statements as Mortgage Servicing Rights ("MSRs"). MSRs are
amortized in proportion to, and over the period of, expected 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 components of the loan. To determine the fair value of the
servicing rights created, IFC uses a valuation model that calculates the
present value of future net servicing revenues to determine the fair value of
the servicing rights. In using this valuation method, IFC incorporates
assumptions that it believes market participants would use in estimating future
net servicing income which include estimates of the cost of servicing, an
inflation rate, ancillary income per loan, a prepayment rate, a default rate
and a discount rate commensurate with the risks involved.
MSRs are subject to some degree of volatility in the event of unanticipated
prepayments or defaults. Prepayments in excess of those anticipated at the time
MSRs are recorded could result in a decline in the fair value of the MSRs below
their carrying value requiring a provision to increase the MSRs' valuation
allowance. The rate of prepayment of loans is affected by a variety of economic
and other factors, including prevailing interest rates and the availability of
alternative financing. The effect of those factors on loan prepayment rates may
vary depending on the particular type of loan. Estimates of prepayment rates
are made based on management's expectations of future prepayment rates, which
are based, in part, on the historical rate of prepayment of IFC's loans, and
other considerations. There can be no assurance of the accuracy of the
Company's prepayment estimates. If actual prepayments with respect to loans
serviced occur more quickly than were projected at the time such loans were
sold, the carrying value of the MSRs may have to be reduced through a provision
recorded to increase the MSRs' valuation allowance in the period the fair value
declined below the MSRs' carrying value. If actual prepayments with respect to
loans occur more slowly than estimated, the carrying value of MSRs would not
increase except for the impact of a reduction in the valuation allowance.
Borrowings and Substantial Leverage Have the Potential For Net Interest and
Operating Losses; Liquidity
The Company has employed a financing strategy to increase the size of its
investment portfolio by borrowing a substantial portion (up to approximately
98%, depending on the nature of the underlying asset) of the market value of
substantially all of its investments in mortgage loans and mortgage-backed
securities. The Company initially intended to maintain a ratio of equity
capital (book value of stockholders' equity) to total assets of approximately
15%. This target ratio was developed on the assumption that the Company would
utilize the sale of pass-through mortgage-backed securities as its primary
securitization technique, as compared to financing the loans in the Company's
long-term investment portfolio through CMOs. Subsequently, the
12
Company has elected to utilize CMO borrowings to a substantial degree because
CMOs are more consistent with IMH's maintenance of its REIT tax status. CMOs
receive financing treatment as opposed to sale treatment. Financing treatment
allows the Company to recognize spread income over time as qualifying interest
income under the REIT gross income tests, as compared to gains at IFC from the
issuance of pass-through securities, which receives sale treatment and is fully
taxable. The value of the assets collateralizing CMO borrowings are reflected
on the Company's balance sheet, while the value of the assets backing pass-
through securities are not reflected on the balance sheet. Consequently, CMO
borrowings tend to increase the assets of the Company and to reduce the
Company's ratio of equity capital to total assets, as compared to the sale of
pass-through securities. It is currently expected that the continued use of
CMOs will likely result in a ratio of equity capital to total assets generally
between 8% to 13%, although such ratio may vary substantially depending upon,
among other things, the timing of IFC's securitizations and the Company's
offerings of equity capital.
The use of CMOs as financing vehicles tends to increase the Company's
leverage as mortgage loans held for CMO collateral are retained for investment
rather than sold in a secondary market transaction. Retaining mortgage loans as
CMO collateral exposes the Company to greater potential credit losses than from
the use of securitization techniques that are treated as sales. The creation of
a CMO involves an equity investment by the Company to fund collateral in excess
of the amount of the securities issued. Should the Company experience credit
losses greater than expected, the value of the Company's equity investment in
its CMOs would decrease and the Company's financial condition and results of
operations would be materially adversely affected.
A majority of other Company borrowings are collateralized, primarily in the
form of reverse repurchase agreements, which are based on the market value of
the Company's assets pledged to secure the specific borrowings. The cost of
borrowings under a reverse repurchase agreement corresponds to the referenced
interest rate (e.g., the CMT Index or LIBOR) plus or minus a margin. The margin
over or under the referenced interest rate varies depending upon the lender,
the nature and liquidity of the underlying collateral, the movement of interest
rates, the availability of financing in the market and other factors. If the
returns on the assets and mortgage-backed securities financed with borrowed
funds fail to cover the cost of the borrowings, the Company will experience net
interest losses and may experience net losses.
The ability of the Company to achieve its investment objectives depends not
only on its ability to borrow money in sufficient amounts and on favorable
terms but also on the Company's ability to renew or replace on a continuous
basis its maturing short-term borrowings. The Company's business strategy
relies on short-term borrowings to fund long-term mortgage loans and investment
securities available for sale. In the event the Company is not able to renew or
replace maturing borrowings, the Company could be required to sell, under
adverse market conditions, all or a portion of its mortgage loans and
investment securities available for sale, and could incur losses as a result.
In addition, in such event the Company may be required to terminate hedge
positions, which could result in further losses to the Company. Such events
could have a materially adverse effect on the Company.
Certain of the Company's mortgage loans may be cross-collateralized to
secure multiple borrowing obligations of the Company to a single lender. A
decline in the market value of such assets could limit the Company's ability to
borrow or result in lenders initiating margin calls (i.e., requiring a pledge
of cash or additional mortgage loans to reestablish the ratio of the amount of
the borrowing to the value of the collateral). The Company could be required to
sell mortgage loans under adverse market conditions in order to maintain
liquidity. If these sales were made at prices lower than the carrying value of
its mortgage loans, the Company would experience losses. A default by the
Company under its collateralized borrowings could also result in a liquidation
of the collateral, including any cross-collateralized assets, and a resulting
loss of the difference between the value of the collateral and the amount
borrowed. Additionally, in the event of a bankruptcy of the Company, certain
reverse repurchase agreements may qualify for special treatment under the
Bankruptcy Code, the effect of which is, among other things, to allow the
creditors under such agreements to avoid the automatic stay provisions of the
Bankruptcy Code and to liquidate the collateral under such agreements without
delay.
13
Conversely, in the event of a bankruptcy of a party with whom the Company had a
reverse repurchase agreement, the Company might experience difficulty
repurchasing the collateral under such agreement if it were to be repudiated
and the Company's claim against the bankrupt lender for damages resulting
therefrom were to be treated simply as one of an unsecured creditor. Should
this occur, the Company's claims would be subject to significant delay and, if
and when received, may be substantially less than the damages actually suffered
by the Company. Although the Company has entered into reverse repurchase
agreements with several different parties and has developed procedures to
reduce its exposure to such risks, no assurance can be given that the Company
will be able to avoid such third party risks.
The REIT provisions of the Code require IMH to distribute to its
stockholders substantially all of its taxable income. As a result, such
provisions restrict the Company's ability to retain earnings and replenish the
capital committed to its business activities.
The Company's liquidity is also affected by its ability to access the debt
and equity capital markets. To the extent that the Company is unable to
regularly access such markets, the Company could be forced to sell assets at
unfavorable prices or discontinue various business activities in order to meet
its liquidity needs. As a result, any such inability to access the capital
markets could have a negative impact on the Company's earnings.
Substantially all of the assets of the Conduit Operations have been pledged
to secure the repayment of mortgage-backed securities issued in the
securitization process, reverse repurchase agreements or other borrowings. In
addition, substantially all of the mortgage loans that the Company has acquired
and will in the future acquire have been or will be pledged to secure
borrowings pending their securitization or sale or as a part of their long-term
financing. The cash flows received by the Company from its investments that
have not yet been distributed, pledged or used to acquire mortgage loans or
other investments may be the only unpledged assets available to unsecured
creditors and stockholders in the event of liquidation of the Company.
Reduction in Demand for Residential Mortgage Loans and the Company's Non-
Conforming Loan Products May Adversely Affect the Company's Operations
The availability of mortgage loans meeting the Company's criteria is
dependent upon, among other things, the size and level of activity in the
residential real estate lending market and, in particular, the demand for
non-conforming mortgage loans. The size and level of activity in the
residential real estate lending market depend on various factors, including the
level of interest rates, regional and national economic conditions and
inflation and deflation in residential property values, as well as the general
regulatory and tax environment as it relates to mortgage lending. To the extent
the Company is unable to obtain sufficient mortgage loans meeting its criteria,
the Company's business will be adversely affected.
FNMA and FHLMC are not currently permitted to purchase mortgage loans with
original principal balances above $227,400. If this dollar limitation is
increased without a commensurate increase in home prices, the Company's ability
to maintain or increase its current acquisition levels could be adversely
affected as the size of the non-conforming mortgage loan market may be reduced,
and FNMA and FHLMC may be in a position to purchase a greater percentage of the
mortgage loans in the secondary market than they currently acquire.
In general, lower interest rates prompt greater demand for mortgage loans,
because more individuals can afford to purchase residential properties, and
refinancing and second mortgage loan transactions increase. However, if low
interest rates are accompanied by a weak economy and high unemployment, demand
for housing and residential mortgage loans may decline. Conversely, higher
interest rates and lower levels of housing finance and refinance activity may
decrease mortgage loan purchase volume levels, resulting in decreased economies
of scale and higher costs per unit, reduced fee income, smaller gains on the
sale of non-conforming mortgage loans and lower net income.
14
Although the Company seeks geographic diversification of the properties
underlying the Company's mortgage loans and mortgage-backed securities, it does
not set specific limitations on the aggregate percentage of its portfolio
composed of such properties located in any one area (whether by state, zip code
or other geographic measure). Concentration in any one area will increase
exposure of the Company's portfolio to the economic and natural hazard risks
associated with such area. In addition, management estimates that a majority of
the loans included in securitizations in which IMH holds subordinated interests
are secured by properties in California. Certain parts of California have
experienced an economic downturn in past years, particularly in areas of high
defense industry concentration, and have suffered the effects of certain
natural hazards such as earthquakes, fires and floods, as well as riots.
Delinquency Ratios and Company Performance May Be Affected by Contracted Sub-
servicing
IFC currently contracts for the sub-servicing of all loans it purchases and
holds for sale or investment with third-party sub-servicers. This arrangement
allows the Conduit Operations to increase the volume of loans it originates and
purchases without incurring the expenses associated with servicing operations.
As with any external service provider, IFC is subject to risks associated with
inadequate or untimely services. Many of IFC's borrowers require notices and
reminders to keep their loans current and to prevent delinquencies and
foreclosures. A substantial increase in the IFC's delinquency rate or
foreclosure rate could adversely affect its ability to access profitably the
capital markets for its financing needs, including future securitizations. IFC
regularly reviews the delinquencies of its servicing portfolio. Although the
Conduit Operations periodically reviews the costs associated with establishing
operations to service the loans it purchases, it has no plans to establish and
perform servicing operations at this time.
Each of IFC's sub-servicing agreements with its third-party sub-servicers
provides that if IFC terminates the agreement without cause (as defined in the
agreement), IFC will be required to pay the third-party sub-servicer a fee.
Further, one such agreement provides that IFC shall pay the third-party sub-
servicer a transfer fee per loan for any mortgage loan which IFC transfers to
another sub-servicer without terminating the agreement. Depending upon the size
of IFC's loan portfolio sub-serviced at any point in time, the termination
penalty that IFC would be obligated to pay upon termination without cause, may
be substantial.
IFC also subcontracts with sub-servicers to service the loans in each of the
Company's public securitizations. With respect to such loans, the related
pooling and servicing agreements permit IFC to be terminated as servicer under
specific conditions described in such agreements, which generally include the
failure to make payments, including advances, within specific time periods.
Such termination would generally be at the option of the trustee and/or the
financial guaranty insurer for such securitization, if applicable, but not at
the option of the Company. If, as a result of a sub-servicer's failure to
perform adequately, IFC were terminated as servicer of a securitization, the
value of any servicing rights held by IFC would be adversely impacted. In
addition, poor performance by a sub-servicer with respect to any such
securitization may result in greater than expected delinquencies and losses on
the related loans, which would adversely impact the value of any "interest-
only," "principal-only" and subordinated securities held by the Company in
connection with such securitization, which are more sensitive to credit risk.
See "--Value of Interest-Only, Principal-Only, Residual Interest and
Subordinated Securities Subject to Fluctuation."
Limited History of Operations of Limited Relevance in Predicting Future
Performance
The Company commenced operations on November 20, 1995. Prior to the date of
the Contribution Transaction, IFC was a division or subsidiary of ICII, and
IWLG was a division of Southern Pacific Bank (formerly Southern Pacific Thrift
and Loan Association) ("SPB"), a subsidiary of ICII. Although the Company has
experienced substantial growth in mortgage loan originations and total
revenues, there can be no assurance that the Company will be profitable in the
future or that these rates of growth will be sustainable or indicative of
future results. Prior to the Company's initial public offering in November 1995
(the "Initial Public Offering"), each of IFC and IWLG benefited from the
financial, administrative and other resources of ICII and SPB, respectively.
15
In light of this growth, the historical financial performance of the Company
may be of limited relevance in predicting future performance. Since the Company
commenced operations in November 1995, its growth in purchasing loans has been
significant. Also, the loans purchased by the Company and included in the
Company's securitizations have been outstanding for a relatively short period
of time. Consequently, the delinquency and loss experience of the Company's
loans to date may not be indicative of future results. It is unlikely that the
Company will be able to maintain delinquency and loan loss ratios at their
present levels as the portfolio becomes more seasoned.
Competition for Mortgage Loans May Adversely Affect the Company's Operations
In purchasing non-conforming mortgage loans and issuing securities backed by
such loans, the Company competes with established mortgage conduit programs,
investment banking firms, savings and loan associations, banks, thrift and loan
associations, finance companies, mortgage bankers, insurance companies, other
lenders and other entities purchasing mortgage assets. Continued consolidation
in the mortgage banking industry may also reduce the number of current sellers
to the Conduit Operations, thus reducing the Company's potential customer base,
resulting in the Company purchasing a larger percentage of mortgage loans from
a smaller number of sellers. Such changes could negatively impact the Conduit
Operations. Mortgage-backed securities issued through the Conduit Operations
face competition from other investment opportunities available to prospective
investors. See "--Reduction in Demand for Residential Mortgage Loans and the
Company's Non-Conforming Loan Products May Adversely Affect the Company's
Operations."
The Company's operations may be affected by the activities of ICII and its
affiliates. As an end-investor in non-conforming mortgage loans, SPB may
compete with the Company. Also, Southern Pacific Funding Corporation ("SPFC")
is an affiliate of ICII whose business is primarily to act as a wholesale
originator and a bulk purchaser of non-conforming mortgage loans. ICII or any
of its affiliates may compete with the Company's Long-Term Investment
Operations, the Conduit Operations and the Warehouse Lending Operations. While
the Company believes such activities will not have a material adverse effect on
the Company's operations, there can be no assurance of this. See "--
Relationship with ICII and its Affiliates; Conflicts of Interest."
No Assurance of Continued Expansion
The Company's total revenues and net income (before non-recurring charges in
1997) have grown significantly since the Company's inception, primarily due to
increased mortgage purchasing, sales and investing activities. The Company
intends to continue to pursue a growth strategy for the foreseeable future, and
its future operating results will depend largely upon its ability to expand its
Long-Term Investment Operations, its Conduit Operations and its Warehouse
Lending Operations. Each of these plans requires additional personnel and
assets and there can be no assurance that the Company will be able to
successfully expand and operate its expanded operations profitably. There can
be no assurance that the Company will anticipate and respond effectively to all
of the changing demands that its expanding operations will have on the
Company's management, information and operating systems, and the failure to
adapt its systems could have a material adverse effect on the Company's results
of operations and financial condition. There can be no assurance that the
Company will successfully achieve its continued expansion or, if achieved, that
the expansion will result in profitable operations.
Conflicts of Interest with Affiliated Entities
Benefit to Insiders; Interlocking Relationships; Other Considerations
The Company is subject to conflicts of interest arising from its
relationships with ICH, RAI Advisors, LLC ("RAI") and their officers, directors
and affiliates. First, IMH owns a substantial number of shares of ICH's common
stock. Second, RAI renders management services to ICH and will be paid certain
incentive
16
compensation for each quarter, resulting in a direct benefit to its owners, who
are officers or directors of ICH and IMH. Third, IFC has entered into a
submanagement agreement with RAI pursuant to which ICH will pay IFC (through
RAI) for all costs and services under such contract, plus a 15% service charge.
Fourth, many of the officers and directors of the Company are officers,
directors and owners of ICH, RAI and Impac Commercial Capital Corporation
(formerly Imperial Commercial Capital Corporation) ("ICCC").
RAI oversees the day-to-day operations of ICH, pursuant to a management
agreement (the "RAI Management Agreement") entered into in August 1997. RAI is
owned one-third by Joseph R. Tomkinson, IMH's and ICH's Chairman of the Board
and Chief Executive Officer; one-third by William S. Ashmore, IMH's and ICH's
President and Chief Operating Officer; and one-third by Richard J. Johnson,
IMH's and ICH's Executive Vice President, Chief Financial Officer, Treasurer
and Secretary. Pursuant to the RAI Management Agreement, ICH pays incentive
compensation to RAI on a quarterly basis, resulting in a direct benefit to its
owners.
The Company is subject to conflicts of interest arising from its
relationship with RAI, and with RAI's affiliates. RAI has interests that may
conflict with those of the Company in fulfilling certain of its duties.
Specifically, all of the persons who are officers of RAI are also officers or
directors of IMH and ICH. In order to utilize the IMH infrastructure, RAI has
entered into a submanagement agreement with IMH and IFC to provide
substantially all of the administrative services required by ICH. IMH owns all
of the outstanding shares of non-voting preferred stock of IFC, representing
99% of the economic interest in IFC, and Messrs. Tomkinson, Johnson and Ashmore
own all of the outstanding shares of common stock of IFC, representing 1% of
the economic interest. Each of Messrs. Tomkinson, Ashmore and Johnson and Ms.
Glass-Schannault has modified his or her employment agreement with IFC to allow
him or her to become an officer of RAI (and of ICH and ICCC). However, such
officers are expected to devote the majority of their time and effort towards
the management and operations of IMH and IFC. RAI has agreed to cause each of
its officers to devote as much of his or her time to the operations of ICH as
is necessary. ICH will reimburse RAI, who will reimburse IFC, on a dollar for
dollar basis, for the actual cost of providing the services of its officers to
ICH based upon the compensation payable to them by IFC, plus a 15% service
charge. ICH will reimburse RAI for expenses incurred by RAI, plus a service
charge of 15% on all expenses owed by RAI to IFC for costs and services under
the submanagement agreement with IFC and RAI will pay all such third parties on
a dollar for dollar basis for the aforementioned amounts received by it from
the ICH; no such 15% service charge will be paid to third party service
providers other than IFC. For the first three years of the RAI Management
Agreement, there is a minimum amount of $500,000 (including the 15% service
charge) payable by ICH in connection with services provided and expenses
incurred by RAI and payable by RAI to IFC. After the third year, ICH will only
be responsible for reimbursing expenses and services provided, plus the 15%
service charge for amounts due to IFC. RAI's officers are expected to devote
the majority of their time and effort towards the management and operations of
IMH and IFC. Should the operations of ICH and ICCC and those of the Company
require immediate attention or action by RAI or any of its officers, there can
be no assurance that the officers of RAI will be able to properly allocate
sufficient time to the operations of the Company. The failure or inability of
the Company's officers and directors to provide the services required of them
under their respective employment agreements or any other agreements or
arrangements with the Company could have a material adverse effect on the
Company's business and results of operations.
Many of the affiliates of IMH, RAI and IFC have interlocking executive
positions and share common ownership. Joseph R. Tomkinson, IMH's Chairman of
the Board and Chief Executive Officer and IFC's Chief Executive Officer and a
Director, is the Chief Executive Officer and Chairman of the Board of ICH, a
one-third owner of RAI, an owner of one-third of the common stock of IFC, and
an owner of 25% of the common stock of ICCC. William S. Ashmore, IMH's
President, Chief Operating Officer and a Director and IFC's President and a
Director, is the President and Chief Operating Officer of ICH, a one-third
owner of RAI, an owner of one-third of the common stock of IFC, and an owner of
25% of the common stock of ICCC. Richard J. Johnson, IMH's Executive Vice
President, Chief Financial Officer, Treasurer and Secretary, and Senior Vice
President and a Director of IFC, is an Executive Vice President, Chief
Financial Officer, Treasurer and
17
Secretary of ICH, a one-third owner of RAI, an owner of one-third of the common
stock of IFC, and a 25% owner of the common stock of ICCC. Mary C. Glass-
Schannault, IMH's and IFC's Senior Vice President, is a Senior Vice President
of ICH. Each of James Walsh, Frank P. Filipps and Stephan R. Peers, Directors
of IMH, are Directors of ICH. In addition, as owners of all of the outstanding
shares of voting stock of IFC, Messrs. Tomkinson, Ashmore, and Johnson, have
the right to elect all directors of IFC and the ability to control the outcome
of all matters for which the consent of the holders of the common stock of IFC
is required. Ownership of 100% of the common stock of IFC entitles the owners
thereof to an aggregate of 1% of the economic interest in IFC.
Effect of Right of First Refusal Agreement
It is anticipated that RAI will act as the Manager for other REITs, some of
which may have been or will be affiliated with the Company, ICH, or their
respective conduit operations (an "Affiliated REIT"). In such an event, any
Affiliated REIT utilizing RAI as its Manager may be in competition with the
Company. In August 1997, RAI, ICH, ICCC, IMH and IFC entered into a ten-year
right of first refusal agreement (the "Right of First Refusal Agreement"). It
is expected that any Affiliated REIT utilizing RAI as its Manager will become a
party to the Right of First Refusal Agreement, but such event is outside the
control of the Company and there can be no assurance that any or all Affiliated
REITs will actually become parties to the Right of First Refusal Agreement.
Pursuant to this Agreement, RAI has agreed that any mortgage loan or mortgage-
backed security investment opportunity (an "Investment Opportunity") which is
offered to it on behalf of either the Company, ICH or any Affiliated REIT will
first be offered to that entity (the "Principal Party") whose initial primary
business as described in its initial public offering documentation (the
"Initial Primary Business") most clearly aligns with such Investment
Opportunity. In addition, both IMH and IFC on the one hand and ICH and ICCC on
the other have agreed that any Investment Opportunity offered to either of them
which falls outside the scope of its Initial Primary Business shall be offered
to the Principal Party. Should the Principal Party decline to take advantage of
an Investment Opportunity offered to RAI, RAI will make an independent
evaluation of which REIT's business is more greatly enhanced by such Investment
Opportunity. Should all of said REITs decline such Investment Opportunity, RAI
may offer the investment opportunity to any third party. Should the Principal
Party decline to take advantage of an Investment Opportunity offered to a REIT
which is a party to the Right of First Refusal Agreement, said REIT shall then
be free to pursue the Investment Opportunity. In such an event there can be no
assurance that the Company will be able to take advantage of any such
Investment Opportunity or that any competitive activity of ICH, or any
Affiliated REIT will not adversely affect the Company's operations. In
addition, the Company may become further prejudiced by the Right of First
Refusal Agreement to the extent that the Company desires to pursue or pursues a
business outside its Initial Primary Business.
Effect of Termination Agreement
In December 1997, IMH and IFC entered into a termination agreement with
Imperial Credit Advisors, Inc. ("ICAI") and ICII and Joseph R. Tomkinson,
William S. Ashmore and Richard J. Johnson (the "Termination Agreement"),
pursuant to which ICAI discontinued providing management services to the
Company under a management agreement entered into in November 1995, and as
amended and restated in January 1997 (the "Management Agreement"), in return
for a $44.0 million termination payment consisting of $35.0 million or
2,009,310 shares of Common Stock of IMH and other assets comprising the
balance. The $44.0 million termination payment was treated as a non-recurring,
non-cash expense and resulted in a charge of $44.4 million to the earnings for
the three months ended December 31, 1997. The Company is currently negotiating
with the principals of RAI to provide the management services. See "--Benefit
to Insiders; Interlocking Relationships; Other Considerations" for a
description of affiliations between the Company and RAI. In either case, the
arrangement pursuant to which management services will be provided to the
Company will be on terms no less favorable to the Company on a pro rata basis
than the terms of the agreement with ICAI. The inability of the Company to
contract with the principals of RAI would have a material adverse effect on the
Company's operations. Furthermore, if RAI or its principals are contracted with
to provide management services to the Company, there may be conflicts of
interest as described in "--Conflicts of Interest with Affiliated Entities."
18
Risks of Investment in ICH
As of March 31, 1998, IMH owned 719,789 shares of ICH Common Stock and
674,211 shares of ICH non-voting Class A Common Stock which are convertible
into an equivalent number of shares of ICH Common Stock. IMH's investment in
ICH is recorded on the Company's financial statements in "Investment in Impac
Commercial Holdings, Inc." Of the net income or loss of ICH, 17.4% is
recognized on a pre-tax basis in the Company's financial statements. Any such
recognized net loss may adversely affect the Company's ability to conduct
future activities under borrowing facilities. As an originator of mortgage
loans, each of ICH and/or ICCC is or may be subject to many of the same risks
applicable to IMH and IFC. In addition, as an originator of commercial
mortgages, each of ICH and/or ICCC is or may be specifically subject to
additional risks relating to the following:
Limited History of Operations of Limited Relevance in Predicting Future
Performance
Since each of ICH and ICCC recently commenced operations in 1997, their
historical performance may be of limited relevance in predicting future
performance. In addition, the commercial mortgages purchased to date by ICH
have been outstanding for a relatively short period of time. Consequently, the
delinquency and loss experience of ICH's commercial mortgages to date may not
be indicative of future results. It is unlikely that ICH will be able to
maintain delinquency and loan loss ratios at their present levels as the
portfolio grows and becomes more seasoned. ICH intends to pursue a growth
strategy for the foreseeable future, and its future operating results will
depend largely upon its ability to expand its operations. These plans require
additional personnel and assets and there can be no assurance that ICH will be
able to successfully expand and operate its expanded operations profitably.
Competition in the Commercial Mortgage Industry May Adversely Affect ICH's
Operations
Other multifamily residences, self-storage facilities, retail shopping
facilities, office buildings and combination warehouse/industrial facilities
located in the areas of the mortgaged properties securing ICH's commercial
mortgages will compete with the mortgaged properties of such types to attract
residents, retail correspondents, tenants and customers. Increased competition
could adversely affect income from, and the market value, of the mortgaged
properties. In addition, the business conducted at each mortgaged property may
face competition from other industries and industry segments.
Originating and Investing in Commercial Mortgages May Entail Substantial Risks
ICH makes long-term investments in commercial mortgages. Accordingly, during
the time it holds commercial mortgages for investment, ICH is subject to risks
of borrower defaults, bankruptcies and losses that are not covered by insurance
(such as those occurring from earthquakes or floods). Commercial mortgage
lending is generally viewed as exposing the lender to a greater risk of loss
than residential mortgage lending in part, because it typically involves larger
loans to single borrowers or groups of related borrowers than residential
mortgage loans. Further, the repayment of commercial mortgages secured by
income-producing properties is typically dependent upon the tenants ability to
meet its obligations under the lease relating to such property, which in turn
depends upon profitable operation of the related property. Furthermore, the
value of commercial mortgages may be adversely affected due to characteristics
of underlying commercial properties and facilities.
Balloon Payment at Maturity and Extension Maturity Increases Lender Risks
It is expected that a substantial percentage of ICH's commercial mortgages
will have a balloon payment due for each such commercial mortgage at its
respective maturity date. Commercial mortgages with balloon payments involve a
greater risk to a lender than self-amortizing loans, because the ability of a
borrower to pay such amount will normally depend on its ability to fully
refinance the commercial mortgage or sell the related property at a price
sufficient to permit the borrower to make the balloon payments. The ability of
a borrower to
19
effect a refinancing or sale will be affected by a number of factors,
including, without limitation, the value of the related property, the level of
available mortgage interest rates at the time of refinancing, the related
borrower's equity in the property, the financial condition and operating
history of the borrower and the related property, the strength of the
commercial and multifamily real estate markets, tax laws, and prevailing
general economic conditions.
Environmental Risks May Adversely Affect Value of Underlying Commercial
Mortgages
Contamination of real property may give rise to a lien on that property to
assure payment of the cost of clean-up or, in certain circumstances, may result
in liability to the lender for that cost. Such contamination may also reduce
the value of the property. Environmental clean-up costs may be substantial. It
is possible that such costs could become a liability of ICH reducing the return
to holders of its Common Stock if such remedial costs were incurred.
Relationship with ICII and its Affiliates; Conflicts of Interest
The Company is subject to conflicts of interest arising from its
relationship with ICAI, and ICAI's affiliates. In December 1997, IMH and IFC
entered into a services agreement (the "Services Agreement") with ICAI pursuant
to which ICAI agreed to provide certain human resource, data and phone
communications services for IMH and IFC. ICAI, through its affiliation with
ICII, has interests that may conflict with those of the Company in fulfilling
certain of its duties. In addition, certain of the officers and Directors of
ICII or its affiliates are also officers and Directors of the Company,
including H. Wayne Snavely and Joseph R. Tomkinson, a Director and Chief
Executive Officer of IMH, respectively. The Company also relies upon ICAI to
provide the services under the Services Agreement. All other operations of the
Company are conducted through IFC and IWLG. No assurance can be given that the
Company's relationships with ICAI and its affiliates will continue
indefinitely. The failure or inability of ICAI to provide the services required
of it under the Services Agreement or any other agreements or arrangements with
the Company would have a material adverse effect on the Company's business.
It is the intention of the Company and ICII that any agreements and
transactions, taken as a whole, between the Company, on the one hand, and ICII
or its affiliates, on the other hand, are fair to both parties. To minimize or
avoid potential conflicts of interests, all three Unaffiliated Directors must
independently and by majority vote approve all such agreements and
transactions. However, there can be no assurance that each of such agreements
or transactions will be on terms at least as favorable to the Company as could
have been obtained from unaffiliated third parties.
Consequences of Failure to Maintain REIT Status May Include IMH Being Subject
to Tax as a Regular Corporation
Commencing with its taxable year ended December 31, 1995, IMH has operated
and intends to continue to operate so as to qualify as a REIT under the Code.
Although IMH believes that it has operated and will continue to operate in such
a manner, no assurance can be given that IMH was organized or has operated, or
will be able to continue to operate, in a manner which will allow it to qualify
as a REIT. Qualification as a REIT involves the satisfaction of numerous
requirements (some on an annual and others on a quarterly basis) established
under highly technical and complex Code provisions for which there are only
limited judicial and administrative interpretations, and involves the
determination of various factual matters and circumstances not entirely within
IMH's control. For example, in order to qualify as a REIT, at least 95% of
IMH's gross income (including the gross income of IWLG and IMH Assets) in any
year must be derived from qualifying sources, and IMH must pay distributions to
stockholders aggregating annually at least 95% of its (including IWLG's and IMH
Assets') taxable income (determined without regard to the dividends paid
deduction and by excluding net capital gains). No assurance can be given that
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
20
income tax consequences of such qualification. IMH has received an opinion from
Latham & Watkins, tax counsel to IMH, as of September 8, 1997, to the effect
that, commencing with IMH's taxable year ended December 31, 1995, IMH 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 IMH" and "Legal Matters." Such
legal opinion is based on various assumptions and factual representations by
IMH regarding IMH'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.
Among the requirements for REIT qualification is that the value of any one
issuer's securities held by a REIT may not exceed the value of 5% of the REIT's
total assets on certain testing dates. See "Federal Income Tax Considerations--
Taxation of IMH--Requirements for Qualification." IMH believes that the
aggregate value of the securities of IFC held by IMH have been and will
continue to be less than 5% of the value of IMH's total assets. In rendering
its opinion as to the qualification of IMH as a REIT, Latham & Watkins is
relying on the representation of IMH regarding the value of its securities in
IFC.
IMH owns 100% of the nonvoting preferred stock of IFC, which represents
approximately 99% of the economic value of all classes of stock of IFC. IMH
does not and will not own any of the voting securities of IFC, and therefore
IMH will not be considered to own more than 10% of the voting securities of IFC
(which would be prohibited by the REIT asset tests currently set forth in the
Code). President Clinton's 1999 federal budget proposal contains a provision
which would amend the REIT asset tests so as to prohibit REITs from owning
stock of a corporation possessing more than 10% of the vote or value of all
classes of stock of the corporation. This proposal would be effective with
respect to stock acquired on or after the date of the first Congressional
committee action with respect to the proposal (the "Action Date"). In addition,
to the extent that a REIT's stock ownership is grandfathered by virtue of this
effective date, such grandfathered status would terminate if the subsidiary
corporation engages in a trade or business that it is not engaged in on the
Action Date or acquires substantial new assets on or after such date.
Accordingly, if this provision of the budget proposal were enacted in its
present form, IMH's stock ownership in IFC would be grandfathered, but such
grandfathered status would terminate if IFC engages in a trade or business that
it is not engaged in on the Action Date or acquires substantial new assets
(including additional mortgage loans) on or after such date, even if such
activities are underaken or assets are acquired prior to the adoption of the
proposal. In such case, IMH's continued ownership of more than 10% of the
economic value of IFC beyond IMH's next quarterly asset testing date following
the Action Date (which could occur prior to the adoption of the proposal) could
cause IMH to fail to qualify as a REIT. See "Federal Income Tax
Considerations--Failure to Qualify." It is presently uncertain whether any
proposal regarding REIT subsidiaries, such as IFC, will be enacted, or if
enacted, what the terms of such proposal (including its effective date) will
be. At this time, it is expected that IFC will continue to acquire additional
mortgage loans notwithstanding the proposed legislation regarding REIT
subsidiaries. Furthermore, if the proposal passes, then in order to maintain
its REIT status, IMH may be required to dispose of its ownership of IFC either
through a sale of IFC or a distribution of the shares of IFC to IMH's
stockholders in connection with a spin-off. It is anticipated that upon any
distribution of the shares in connection with a spin-off, that a right of first
refusal would be entered into between IMH and IFC so that IFC will be
obligatged to first offer mortgage assets to IMH. A sale of IFC, whether if
required pursuant to the proposal or otherwise, would leave IMH without a
concentrated origination source which would require IMH to purchase mortgage
assets from other sources. As such, approval of the proposal may have a
material adverse effect on the Company's business and result of operations.
Lastly, any distribution of shares to IMH's stockholders would have a number of
tax consequences including, without limitation, the possibility of IMH's
stockholders recognizing a material amount of dividend income.
If IMH were to fail to qualify as a REIT in any taxable year, IMH would be
subject to federal income tax (including any applicable alternative minimum
tax) on its (including IWLG's and IMH Assets') taxable income at regular
corporate rates and would not be allowed a deduction in computing its taxable
income for amounts
21
distributed to its stockholders. Moreover, unless entitled to relief under
certain statutory provisions, IMH also would be disqualified from treatment as
a REIT for the four taxable years following the year during which qualification
is lost. This treatment would reduce the net income of IMH available for
investment or distribution to stockholders because of the additional tax
liability to IMH for the years involved. In addition, distributions to
stockholders would no longer be required to be made. See "Federal Income Tax
Considerations--Taxation of IMH--Requirements for Qualification."
Even if IMH maintains its REIT status, it may be subject to certain federal,
state and local taxes on its income. For example, if IMH has net income from a
prohibited transaction, such income will be subject to a 100% tax. See "Federal
Income Tax Considerations--Taxation of IMH." In addition, the net income, if
any, from the Conduit Operations conducted through IFC is subject to federal
income tax at regular corporate tax rates. See "Federal Income Tax
Considerations--Other Tax Consequences."
Company's Operations may be Adversely Affected if the Company is Subject to the
Investment Company Act
The Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act.
Accordingly, the Company does not expect to be subject to the restrictive
provisions of the Investment Company Act. The Investment Company Act exempts
entities that are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interests"). Under the current interpretation of the staff of the
Commission, in order to qualify for this exemption, the Company must, among
other things, maintain at least 55% of its assets directly in mortgage loans,
qualifying pass-through certificates and certain other Qualifying Interests in
real estate. In addition, unless certain mortgage securities represent all the
certificates issued with respect to an underlying pool of mortgages, such
mortgage securities may be treated as securities separate from the underlying
mortgage loans and, thus, may not qualify as Qualifying Interests for purposes
of the 55% requirement. The Company's ownership of certain mortgage loans
therefore may be limited by the provisions of the Investment Company Act. In
addition, in meeting the 55% requirement under the Investment Company Act, the
Company intends to consider privately issued certificates issued with respect
to an underlying pool as to which the Company holds all issued certificates as
Qualifying Interests. If the Commission, or its staff, adopts a contrary
interpretation with respect to such securities or otherwise believes the
Company does not satisfy the above exception, the Company could be required to
restructure its activities to the extent its holdings of such privately issued
certificates did not comply with the interpretation. Such a restructuring could
require the sale of a substantial amount of privately issued certificates held
by the Company at a time it would not otherwise do so. Further, in order to
insure that the Company at all times continues to qualify for the above
exemption from the Investment Company Act, the Company may be required at times
to adopt less efficient methods of financing certain of its mortgage loans and
investments in mortgage-backed securities than would otherwise be the case and
may be precluded from acquiring certain types of such mortgage assets whose
yield is somewhat higher than the yield on assets that could be purchased in a
manner consistent with the exemption. The net effect of these factors will be
to lower at times the Company's net interest income, although the Company does
not expect the effect to be material. If the Company fails to qualify for
exemption from registration as an investment company, its ability to use
leverage would be substantially reduced, and it would be unable to conduct its
business as described herein. Any such failure to qualify for such exemption
could have a material adverse effect on the Company.
Future Revisions in Policies and Strategies at the Discretion of the Board of
Directors May Be Affected Without Stockholder Consent
The Board of Directors, including a majority of the Unaffiliated Directors,
has established the investment policies and operating policies and strategies.
With respect to other matters, the Company may, in the future, but currently
has no present plans to, invest in the securities of other REITs for the
purpose of exercising control, offer securities in exchange for property or
offer to repurchase or otherwise reacquire its shares or
22
other securities. The Company may also, but does not currently intend to
underwrite the securities of other issuers. However, any of the policies,
strategies and activities referenced above or described in this Prospectus may
be modified or waived by the Board of Directors, subject in certain cases to
approval by a majority of the Unaffiliated Directors, without stockholder
consent.
Effect of Future Offerings May Adversely Affect Market Price of the Securities
The Company in the future intends to increase its capital resources by
making additional private or public offerings of Securities. The actual or
perceived effect of such offerings, the timing of which cannot be predicted,
may be the dilution of the book value or earnings per share of the Company's
Common Stock or other Securities then outstanding, which may result in the
reduction of the market price of such Common Stock or other Securities.
Risk Relating to Common Stock
Shares Eligible for Future Sale May Adversely Affect the Market Price of the
Securities. 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 such Common Stock or other Securities then
outstanding.
Risk Relating to Preferred Stock
Issuance of Preferred Stock Could Adversely Affect Common Stockholders.
IMH's charter (the "Charter") authorizes the Board of Directors to issue shares
of Preferred Stock and to classify or reclassify any unissued shares of Common
Stock or Preferred Stock into one or more classes or series of stock. The
Preferred Stock may be issued from time to time with such designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption as shall be determined by the Board of Directors
subject to the provisions of the Charter regarding restrictions on transfer of
stock. Preferred Stock is available for possible future financing of, or
acquisitions by, IMH and for general corporate purposes without further
stockholder authorization. Thus, the Board could authorize the issuance of
shares of Preferred Stock with terms and conditions which could have the effect
of delaying, deferring or preventing a change in control of IMH by means of a
merger, tender offer, proxy contest or other transaction which could 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 IMH to make distributions
to the common stockholders. As of the date hereof, no shares of Preferred Stock
have been issued but such securities may be offered hereby. The issuance of any
shares of Preferred Stock covered by this Prospectus would require further
action by the Board of Directors. See "Description of Securities."
Risk Relating to Debt Securities
Substantial Leverage; Ability to Service Outstanding Indebtedness. The
Company's ability to make scheduled payments of the principal of, or to pay the
interest on, any Debt Securities will depend upon its future performance which,
to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors beyond its control. There can be no
assurance, however, that the Company's business will generate sufficient cash
flow from operations or that future borrowings will be available in an amount
sufficient to enable the Company to service any Debt Securities. It may be
necessary for the Company to refinance all or a portion of the principal of any
Debt Securities on or prior to maturity, under certain circumstances, but there
can be no assurance that the Company will be able to effect such refinancing on
commercially reasonable terms or at all.
The degree to which the Company is leveraged following the issuance of any
Debt Securities could have material adverse effects on the Company and the
holders of any Debt Securities, including, but not limited to, the following:
(i) the Company's ability to obtain additional financing in the future for
working capital, capital
23
expenditures, acquisitions, and general corporate or other purposes may be
impaired, (ii) a substantial portion of the Company's cash flow from operations
will be dedicated to debt service and will be unavailable for other purposes,
(iii) certain of the Company's borrowings may be at variable rates of interest,
which could result in higher interest expense in the event of increases in
interest rates and (iv) the Company will likely be subject to a variety of
restrictive covenants, the failure to comply with which could result in events
of default that, if not cured or waived, could restrict the Company's ability
to make payments of principal of, and interest on any Debt Securities.
Legal Restrictions on Sales of Securities Underlying the Securities Warrants
and the Securities Warrants
The Securities Warrants are not exercisable unless, at the time of the
exercise, the Company has a current prospectus covering the Securities issuable
upon exercise of the Securities Warrants, and such shares have been registered,
qualified or deemed to be exempt under the securities laws of the state of
residence of the exercising holder of the Securities Warrants. Although the
Company will use its best efforts to have all the Securities issuable upon
exercise of the Securities Warrants registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Securities Warrants, there can be no assurance that it will
be able to do so. Further, although the Company intends to seek to qualify the
Securities underlying the Securities Warrants for sale in those states in which
such Securities are to be offered, no assurance can be given that such
qualification will be achieved. The Securities Warrants may be deprived of any
value if a current prospectus covering the Securities issuable upon the
exercise thereof is not filed and kept effective or if such underlying
Securities are not, or cannot be, registered in the applicable states.
Substantial Shares of Common Stock Reserved for Exercise of Warrants
The existence of the Securities Warrants may prove to be a hindrance to
future equity financing by the Company. Further, the holders of such Securities
Warrants may exercise them at a time when the Company would otherwise be able
to obtain additional equity capital on terms more favorable to the Company.
Absence of Public Market for the Preferred Stock, Debt Securities and Warrants
All of the Securities when issued will be a new issue of securities with no
established trading market, other than the Common Stock, which is listed on the
AMEX. Any Common Stock sold pursuant to a Prospectus Supplement will be listed
on the AMEX, subject to official notice of issuance. Any underwriters to whom
Securities are sold by the Company for public offering and sale may make a
market in such Securities, but such underwriters will not be obligated to do so
and may discontinue any market making at any time without notice. No assurance
can be given as to the liquidity of the secondary market for any such
Securities.
Restrictions on Ownership of Common Stock May Inhibit Market Activity; Possible
Anti-takeover Effect May Deter Takeover of the Company
In order for IMH to maintain its qualification as a REIT, not more than 50%
in value of the outstanding shares of IMH's stock, including Common Stock, may
be owned, actually or constructively, by or for five or fewer individuals (as
defined in the Code to include certain entities) at any time during the last
half of a taxable year (other than the first year for which the election to be
treated as a REIT has been made). Furthermore, after the first taxable year for
which the REIT election was made, IMH's shares of stock, including Common
Stock, must be held by a minimum of 100 persons for at least 335 days of a 12-
month taxable year (or a proportionate part of a shorter taxable year). In
order to protect IMH against the risk of losing REIT status due to a
concentration of ownership among its stockholders, the Charter limits actual or
constructive ownership of (i) the outstanding shares of Common Stock by any
person to 9.5% (the "Ownership Limit") (in value or in number of shares,
whichever is more restrictive) of the then outstanding shares of Common Stock
or (ii) the outstanding shares of stock of IMH by any person to 9.5% in value
(the "Aggregate Ownership Limit"). See "Description of Securities--Capital
Stock--Repurchase of Shares and Restrictions on Transfer." Although the
24
Board of Directors presently has no intention of doing so (except as described
below), the Board of Directors, in its sole discretion, could waive the
Ownership Limit or the Aggregate Ownership Limit with respect to a particular
person if it were satisfied, based upon the advice of tax counsel or otherwise,
that ownership by such person in excess of the Ownership Limit would not
jeopardize IMH's status as a REIT. The Board of Directors may from time to time
increase the Ownership Limit or the Aggregate Ownership Limit.
Actual or constructive ownership of shares of stock in excess of the
Ownership Limit or the Aggregate Ownership Limit, or, with the consent of the
Board of Directors, such other limit, which would cause IMH not to qualify as a
REIT, will cause the violative transfer of ownership to be void with respect to
the intended transferee or owner as to that number of shares in excess of such
limit, and such shares will be automatically transferred to a trustee for the
benefit of a trust for the benefit of a charitable beneficiary. The trustee of
such trust shall sell such shares and distribute the net proceeds generally as
follows: the intended transferee shall receive the lesser of (i) the price paid
by the intended transferee for such excess shares and (ii) the sales proceeds
received by the trustee for such excess shares. Any proceeds in excess of the
amount distributable to the intended transferee will be distributed to the
charitable beneficiary. In addition, shares of stock held in trust shall be
deemed to have been offered for sale to IMH, or its designee, at a price per
share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the trust and (ii) the Market Price (as defined
below) on the date IMH, or its designee, accepts such offer. IMH shall have the
right to accept such offer until the trustee has sold the shares held in the
trust. Upon such a sale to IMH, the interest of the charitable beneficiary in
the shares sold shall terminate and the trustee shall distribute the net
proceeds of the sale to the intended transferee. Also, such intended transferee
shall have no right to vote such shares or be entitled to dividends or other
distributions with respect to such shares. See "Description of Securities--
Capital Stock--Repurchase of Shares and Restrictions on Transfer" for
additional information regarding the Ownership Limit.
These provisions may inhibit market activity in shares of Common Stock and
may delay, defer or prevent a change of control or other transaction involving
the opportunity for IMH's stockholders to receive a premium for their shares
that might otherwise exist if any person were to attempt to assemble a block of
shares of Common Stock in excess of the number of shares permitted under the
Charter. Such provisions also may make IMH an unsuitable investment vehicle for
any person seeking to obtain ownership of more than 9.5% of the outstanding
shares of Common Stock.
In addition, certain provisions of the Maryland General Corporation Law
("MGCL") and of IMH's Charter and Bylaws may also have the effect of delaying,
deferring or preventing a change in control of the Company or other transaction
that may involve a premium price for holders of Common Stock or otherwise be in
their best interest. See "Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws."
25
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement for any
offering of Securities, the net proceeds from the sale of Securities offered by
the Company will be available for the general corporate purposes of the
Company. These general corporate purposes may include, without limitation,
funding the Long-Term Investment Operations, the Conduit Operations and the
Warehouse Lending Operations, repayment of maturing obligations, redemption of
outstanding indebtedness, financing future acquisitions (including acquisitions
of mortgage loans and other mortgage-related products), capital expenditures
and working capital. Pending any such uses, the Company may invest the net
proceeds from the sale of any Securities or may use them to reduce short-term
indebtedness. If the Company intends to use the net proceeds from a sale of
Securities to finance a significant acquisition, the related Prospectus
Supplements will describe the material terms of such acquisition.
If Debt Securities are issued to one or more persons in exchange for the
Company's outstanding debt securities, if any, the accompanying Prospectus
Supplement related to such offering of Debt Securities will set forth the
aggregate principal amount of the outstanding debt securities which the Company
will receive in such exchange and which will cease to be outstanding, the
residual cash payment, if any, which the Company may receive from such persons
or which such persons may receive from the Company, as appropriate, the dates
from which the Company will pay interest accrued on the outstanding debt
securities to be exchanged for the offered Debt Securities and an estimate of
the Company's expenses in respect of such offering of the Debt Securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following is the computation of ratio of earnings to fixed charges,
including CMO debt(1):
Year Ended December 31
----------------------------------------------
Pro Forma
1997(2) 1997(3) 1996 1995(4) 1994(4) 1993(4)
--------- ------- ---- ------- ------- -------
Ratio of earnings to fixed
charges....................... 1.2x -- 1.2x 1.6x 1.6x 9.9x
==== === ==== ==== ==== ====
--------
(1) Earnings used in computing the ratio of earnings to fixed charges consist
of net income before income taxes plus fixed charges. Fixed charges consist
of interest expense on long-term debt (including amortization of loan
premiums and the portion of rental expense deemed to represent the interest
factor).
(2) Earnings used in computing the pro forma ratio of earnings to fixed charges
consist of net income before income taxes, excluding the non-recurring
charge of $44.4 million incurred in connection with the Termination
Agreement, effective December 19, 1997, entered into among the Company,
ICII, ICAI, Richard J. Johnson, William S. Ashmore and Joseph R. Tomkinson.
(3) Earnings were insufficient to cover fixed charges by $16,029,000.
(4) Data prior to the Contribution Transaction is based upon the historical
operations of IWLG, as a division of SPB, and includes the Company's equity
interest in IFC, as a division of ICII.
These ratios represent a measure of the ability to meet debt service
obligations from funds generated from operations.
26
DESCRIPTION OF SECURITIES
The following is a brief description of the material terms of the
Securities. This description does not purport to be complete and is subject and
qualified in its entirety by reference to applicable Maryland law and to the
Company's Charter and Bylaws, copies of which are on file with the Commission,
and are incorporated by reference herein. See "Incorporation of Certain
Documents by Reference" and "Available Information."
General
The Company may offer under this Prospectus one or more of the following
categories of its Securities: (i) shares of its Common Stock, $0.01 par value
per share; (ii) shares of its Preferred Stock, $0.01 par value per share, in
one or more series; (iii) Debt Securities, in one or more series, any series of
which may be either Senior Debt Securities or Subordinated Debt Securities;
(iv) Common Stock Warrants; (v) Preferred Stock Warrants; (vi) Debt Warrants;
and (vii) any combination of the foregoing, either individually or as units
consisting of one or more of the types of Securities described in clauses (i)
through (vi). The terms of any specific offering of securities, including the
terms of any units offered, will be set forth in a Prospectus Supplement
relating to such offering.
The authorized stock of IMH consists of 50,000,000 shares of Common Stock,
$0.01 par value per share, and 10,000,000 shares of Preferred Stock, $0.01 par
value per share. It is expected that meetings of the stockholders of IMH will
be held annually. Special meetings of the stockholders may be called by the
President, Chief Executive Officer, a majority of the entire Board of Directors
or a majority of the Unaffiliated Directors and must be called upon the written
request of holders of shares entitled to cast at least 25% of all the votes
entitled to be cast at the meeting. The Charter reserves to IMH the right to
amend any provision thereof in the manner prescribed by Maryland law upon the
affirmative vote of stockholders entitled to cast at least a majority of all
the votes entitled to be cast on the matter, except that the provision
requiring the affirmative vote of the holders of two-third of votes entitled to
be cast in the election of directors to remove a director may only be amended
upon the affirmative vote of the holders of two-thirds of the votes entitled to
be cast in the election of directors. The Common Stock is listed on the
American Stock Exchange. The Company intends to list any additional shares of
its Common Stock which are issued and sold hereunder. The Company may list any
series of its Preferred Stock which is offered and sold hereunder, as described
in the Prospectus Supplement relating to such series of Preferred Stock.
Capital Stock
Common Stock
Each share of Common stock is entitled to participate equally in dividends
when and as authorized by the Board of Directors and in the distribution of
assets of IMH upon liquidation. Each share of Common Stock is entitled to one
vote, subject to the provisions of the Charter regarding restrictions on
transfer of stock, and will be fully paid and nonassessable by IMH upon
issuance. Shares of Common Stock have no preference, conversion, exchange,
preemptive or cumulative voting rights. The authorized stock of IMH may be
increased and altered from time to time in the manner prescribed by Maryland
law upon the affirmative vote of stockholders entitled to cast at least a
majority of all the votes entitled to be cast on the matter. The Charter
authorizes the Board of Directors to reclassify any unissued shares of its
Common Stock in one or more classes or series of stock.
Preferred Stock
The Charter authorizes the Board of Directors to issue shares of Preferred
Stock and to classify or reclassify any unissued shares of Preferred Stock into
one or more classes or series of stock. The Preferred Stock may be issued from
time to time with such designations, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of
27
redemption as shall be determined by the Board of Directors for each class or
series of stock subject to the provisions of the Charter regarding restrictions
on transfer of stock. Preferred Stock is available for possible future
financing of, or acquisitions by, IMH and for general corporate purposes
without further stockholder authorization unless such authorization is required
by applicable law or the rules of either the AMEX or the principal national
securities exchange on which such stock is listed or admitted for trading.
Thus, the Board could authorize the issuance of shares of Preferred Stock with
terms and conditions which could have the effect of delaying, deferring or
preventing a change in control of IMH by means of a merger, tender offer, proxy
contest or otherwise. The Preferred Stock, if issued, may have a preference on
dividend payments which could reduce the assets available to IMH to make
distributions to the common stockholders. As of the date hereof, no shares of
Preferred Stock have been issued. The particular terms of any series of
Preferred Stock offered hereby will be described in the applicable Prospectus
Supplement.
Repurchase of Shares and Restrictions on Transfer
For IMH to qualify as a REIT under the Code, no more than 50% in value of
its outstanding shares of stock may be owned, actually or constructively, by or
for five or fewer individuals (as defined in the Code to include certain
entities) at any time during the last half of a taxable year (other than the
first year for which an election to be treated as a REIT has been made). In
addition, a REIT's stock must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year (other than the first year for
which an election to be treated as a REIT has been made).
Because IMH expects to continue to qualify as a REIT, the Charter contains
restrictions on the transfer of Common Stock which are intended to assist IMH
in complying with these requirements. The Charter prohibits any person, subject
to certain specified exceptions discussed below, from owning, actually or
constructively, (i) shares of Common Stock in excess of 9.5% (in value or in
number, whichever is more restrictive) of the outstanding shares of Common
Stock or (ii) shares of stock of IMH in excess of 9.5% in value the aggregate
value of the outstanding shares of stock of the Company (the "Aggregate
Ownership Limit"). The constructive ownership rules are complex, and may cause
shares of stock owned actually or constructively by a group of related
individuals and/or entities to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.5% of the outstanding
shares of Common Stock (or the acquisition of an interest in an entity that
owns, actually or constructively, shares of Common Stock) by an individual or
entity, could nevertheless cause that individual or entity, or another
individual or entity, to own constructively shares of stock in excess of the
Ownership Limit or the Aggregate Ownership Limit, or such other limit as
provided in the Charter or as otherwise permitted by the Board of Directors.
The Board of Directors may, but in no event will be required to, exempt a
person from the Ownership Limit or the Aggregate Ownership Limit if it
determines that such person's ownership of shares of stock in excess of such
limits will not jeopardize IMH's status as a REIT. As a condition of such
waiver, the Board of Directors may require a ruling from the Internal Revenue
Service or opinions of counsel satisfactory to it and/or undertakings or
representations from the applicant with respect to IMH's status as a REIT.
IMH's Charter further prohibits (a) any person from actually or
constructively owing shares of Common Stock that would result in IMH being
"closely held" under Section 856(h) of the Code or otherwise cause IMH to fail
to qualify as a REIT, and (b) any person from transferring shares of Common
Stock if such transfer would result in shares of Common Stock being owned by
fewer than 100 persons. Any person who acquires or attempts or intends to
acquire actual or constructive ownership of shares of stock of IMH that will or
may violate any of the foregoing restrictions on transferability and ownership
is required to give written notice immediately to IMH and provide IMH with such
other information as it may request in order to determine the effect of such
transfer on its status as a REIT. The foregoing restrictions on transferability
and ownership will not apply if the Board of Directors determines that it is no
longer in the best interest of IMH to attempt to qualify, or to continue to
qualify, as a REIT. The Board of Directors may from time to time increase the
Ownership Limit and the Aggregate Ownership Limit.
28
Pursuant to the Charter, if any purported transfer of Common Stock or any
other event would otherwise result in any person owning shares of stock in
excess of the Ownership Limit or the Aggregate Ownership Limit or in IMH being
"closely held" as described above or otherwise failing to qualify as a REIT,
then that number of shares of stock the actual or constructive ownership of
which otherwise would cause such person to violate such restrictions (rounded
to the nearest whose share) will be automatically transferred to a trustee (the
"Trustee") as trustee of a trust (the "Trust") for the exclusive benefit of one
or more charitable beneficiaries (the "Charitable Beneficiary"), and the
intended transferee will not acquire any rights in such shares. Shares held by
the Trustee will constitute issued and outstanding shares of stock. The
intended transferee will not benefit economically from ownership of any shares
held in the Trust, will have no rights to dividends and will not possess any
rights to vote or other rights attributable to the shares held in the Trust.
The Trustee will have all voting rights and rights to dividends or other
distributions with respect to shares held in the Trust, which rights will be
exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend
or other distribution paid prior to the discovery by IMH that shares of stock
have been transferred to the Trustee will be paid with respect to such shares
to the Trustee upon demand and any dividend or other distribution authorized
but unpaid will be paid when due to the Trustee. Any dividends or distributions
so paid over to the Trustee will be held in trust for the Charitable
Beneficiary. Subject to Maryland law, effective as of the date that such shares
have been transferred to the Trustee, the Trustee will have the authority (at
the Trustee's sole discretion) (i) to rescind as void any vote cast by an
intended transferee prior to the discovery by IMH that such shares have been
transferred to the Trustee and (ii) to recast such vote in accordance with the
desires of the Trustee acting for the benefit of the Charitable Beneficiary.
Within 20 days of receiving notice from IMH that shares of stock have been
transferred to the Trust, the Trustee will sell the shares held in the Trust to
a person designated by the Trustee whose ownership of the shares will not
violate the ownership restrictions set forth in the Charter. Upon such sale,
the interest of the Charitable Beneficiary in the shares sold will terminate
and the Trustee will distribute the net proceeds of the sale to the intended
transferee and to the Charitable Beneficiary as follows: the intended
transferee will receive the lesser of (1) the price paid by the intended
transferee for the shares or, if the intended did not give value for the shares
in connection with the event causing the shares to be held in the Trust (e.g.,
in the case of a gift, devise or other such transaction), the Market Price (as
defined below) of the shares on the day of the event causing the shares to be
held in the Trust and (2) the price per share received by the Trustee from the
sale or other disposition of the shares held in the Trust. Any net sales
proceeds in excess of the amount payable to the intended transferee will be
immediately paid to the Charitable Beneficiary.
In addition, shares of stock held in Trust will be deemed to have been
offered for sale to IMH, or its designee, at a price per share equal to the
lesser of (i) the price per share in the transaction that resulted in such
transfer to the Trust (or, in the case of a devise or gift, the Market Price
(as defined below) at the time of such devise or gift) and (ii) the Market
Price on the date IMH, or its designee, accepts such offer. IMH will have the
right to accept such offer until the Trustee has sold the shares held in the
Trust. Upon such a sale to IMH, the interest of the Charitable Beneficiary in
the shares sold will terminate and the Trustee will distribute the net proceeds
of the sale to the intended transferee.
The Charter defines the term "Market Price" on any date, with respect to any
class or series of outstanding shares of IMH's stock, as the Closing Price (as
defined below) for such shares on such date. The "Closing Price" on any date
shall mean the last sale price for such shares, regular way, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices, regular way, for such shares, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the NYSE or, if such shares are not listed or
admitted to trading on the NYSE, as reported on the principal consolidated
transaction reporting system with respect to securities listed on the principal
national securities exchange on which such shares are listed or admitted to
trading or, if such shares are not listed or admitted to trading on any
national securities exchange, the last quoted price, or, if not so quoted, the
average of the high bid and low asked prices in the over-the-customer market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer in use, the principal other
automated quotation system that may then be in use or, if such shares are not
quoted by
29
any such organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in such shares
selected by the Board of Directors or, in the event that no trading price is
available for such shares, the fair market value of the shares, as determined
in good faith by the Board of Directors.
If any purported transfer of shares of stock of IMH shall cause IMH to be
beneficially owned be fewer than 100 persons, such transfer will be null and
void in its entirety and the intended transferee will acquire no rights to such
shares.
All certificates representing shares of Common Stock bear a legend referring
to the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by the
Code or the regulations promulgated thereunder) of all classes or series of the
Company's stock, including shares of Common Stock, within 30 days after the end
of each taxable year, is required to give written notice to the Company stating
the name and address of such owner, the number of shares of each class and
series of stock of the Company beneficially owned and a description of the
manner in which such shares are held. Each such owner shall provide to the
Company such additional information as the Company may request in order to
determine the effect, if any, of such beneficial ownership on IMH's status as a
REIT and to ensure compliance with the Ownership Limit.
Dividend Reinvestment and Stock Purchase Plan
The Company has established a Dividend Reinvestment and Stock Purchase Plan
pursuant to which holders of record and beneficial owners of shares of Common
Stock of IMH may elect to have dividends reinvested automatically in additional
shares of Common Stock of the Company, generally at a discount to the market
price, and to make optional cash purchases of Common Stock of the Company.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock is Boston
EquiServe, L.P., North Quincy, Massachusetts.
Securities Warrants
General
The Company may issue Securities Warrants for the Purchase of Common Stock,
Preferred Stock or Debt Securities. Such warrants are referred to herein as
Common Stock Warrants, Preferred Stock Warrants or Debt Warrants, as
appropriate. Securities Warrants may be issued independently or together with
any other Securities covered by the Registration Statement and offered by this
Prospectus and any accompanying Prospectus Supplement and may be attached to or
separate from such other Securities. Each series of Securities Warrants will be
issued under a separate agreement (each, a "Securities Warrant Agreement") to
be entered into between the Company and a bank or trust company, as agent
(each, a "Securities Warrant Agent"), all as set forth in the Prospectus
Supplement relating to the particular issue of offered evidenced by warrant
certificates (the "Securities Warrant Certificates"). The Securities Warrant
Agent will act solely as an agent of the Company in connection with the
Securities Warrant Certificates and will not assume any obligation or
relationship of agency or trust for or with any holders of Securities Warrant
Certificates or beneficial owners of Securities Warrants. Copies of the
definitive Securities Warrant Agreements and Securities Warrant Certificates
will be filed with the Commission by means of a Current Report on Form 8-K in
connection with the offering of such series of Securities Warrants.
If Securities Warrants are offered, the applicable Prospectus Supplement
will describe the terms of such Securities Warrants, including in the case of
Securities Warrants for the purchase of Debt Securities, the following where
applicable: (i) the offering price; (ii) the currencies in which such Debt
Warrants are being
30
offered; (iii) the designation, aggregate principal amount, currencies,
denominations and terms of the series of Debt Securities purchasable upon
exercise of such Debt Warrants; (iv) the designation and terms of any
Securities with which such Debt Warrants are being offered and the number of
such Debt Warrants being offered with each such Security; (v) the date on and
after which such Debt Warrants and the related Securities will be transferable
separately; (vi) the principal amount of the series of Debt Securities
purchasable upon exercise of each such Debt Warrant and the price at which the
currencies in which such principal amount of Debt Securities of such series may
be purchased upon such exercise; (vii) the date on which the right to exercise
such Debt Warrants shall commence and the date on which such right shall expire
(the "Expiration Date"); (viii) whether the Debt Warrant will be issued in
registered or bearer form; (ix) certain federal income tax consequences; and
(x) any other material terms of such Debt Warrants.
In the case of Securities Warrants for the purchase of Preferred Stock or
Common Stock, the applicable Prospectus Supplement will describe the terms of
such Securities Warrants, including the following where applicable: (i) the
offering price; (ii) the aggregate number of shares purchasable upon exercise
of such Securities Warrants, and in the case of Securities Warrants for
Preferred Stock, the designation, aggregate number and terms of the series of
Preferred Stock purchasable upon exercise of such Securities Warrants;
(iii) the designation and terms of the Securities with which such Securities
Warrants are being offered and the number of such Securities Warrants being
offered with each such Security; (iv) the date on and after which such
Securities Warrants and the related Securities will be transferable separately;
(v) the number of shares of Preferred Stock or shares of Common Stock
purchasable upon exercise of each such Securities Warrant and the price at
which such number of shares of Preferred Stock of such series or shares of
Common Stock may be purchased upon such exercise; (vi) the date on which the
right to exercise such Securities Warrants shall commence and the Expiration
Date on which such right shall expire; (vii) certain federal income tax
consequences; and (viii) any other material terms of such Securities Warrants.
Securities Warrant Certificates may be exchanged for new Securities Warrant
Certificates of different denominations, may (if in registered form) be
presented for registration of transfer, and may be exercised at the corporate
trust office of the appropriate Securities Warrant Agent or other office
indicated in the applicable Prospectus Supplement. Prior to the exercise of any
Securities Warrant to purchase Debt Securities, holders of such Debt Warrants
will not have any of the rights of Holders of the Debt Securities purchasable
upon such exercise, including the right to receive payments of principal,
premium, if any, or interest, if any, on the Debt Securities purchasable upon
such exercise or to enforce covenants in the applicable Indenture. Prior to the
exercise of any Securities Warrants to purchase Preferred Stock or Common
Stock, holders of such Preferred Stock Warrants or Common Stock Warrants will
not have any rights of holders of the respective Preferred Stock or Common
Stock purchasable upon such exercise, including the right to receive payments
of dividends, if any, on the Preferred Stock or Common Stock purchasable upon
such exercise or to exercise any applicable right to vote.
Exercise of Securities Warrants
Each Securities Warrant will entitle the holder thereof to purchase such
principal amount of Debt Securities or number of shares of Preferred Stock or
shares of Common Stock, as the case may be, at such exercise price as shall in
each case be set forth in, or calculable from, the Prospectus Supplement
relating to the offered Securities Warrants. After the close of business on the
Expiration Date (or such later date to which such Expiration Date may be
extended by the Company), unexercised Securities Warrants will become void.
Securities Warrants may be exercised by delivering to the Securities Warrant
Agent payment, as provided in the applicable Prospectus Supplement, of the
amount required to purchase the applicable Debt Securities, Preferred Stock or
Common Stock purchasable upon such exercise together with certain information
set forth on the reverse side of the Securities Warrant Certificate. Upon
receipt of such payment and the definitive Securities Warrant Certificates
properly completed and duly executed at the corporate trust office of the
Securities Warrant Agent or any other office indicated in the applicable
Prospectus Supplement, the Company will, as soon as practicable, issue and
deliver the applicable Debt Securities, Preferred Stock or Common Stock
31
purchasable upon such exercise. If fewer than all of the Securities Warrants
represented by such Securities Warrant Certificate are exercised, a new
Securities Warrant Certificate will be issued for the remaining amount of
Securities Warrants.
Amendments and Supplements to Securities Warrant Agreements
Each Securities Warrant Agreement may be amended or supplemented without the
consent of the holders of the Securities Warrants issued thereunder to effect
changes that are not inconsistent with the provisions of the Securities
Warrants and that do not adversely affect the interests of the holders of the
Securities Warrants.
Common Stock Warrant Adjustments
Unless otherwise indicated in the applicable Prospectus Supplement, the
exercise price of, and the number of shares of Common Stock covered by, a
Common Stock Warrant are subject to adjustment in certain events, including:
(i) the issuance of Common Stock as a dividend or distribution on the Common
Stock; (ii) subdivisions and combinations of the Common Stock; (iii) the
issuance to all holders of Common Stock of certain rights or warrants entitling
them to subscribe for or purchase Common Stock within the number of days,
specified in the applicable Prospectus Supplement, after the date fixed for the
determination of the stockholders entitled to receive such rights or warrants,
at less than the current market price (as defined in the Securities Warrant
Agreement governing such series of Common Stock Warrants); and (iv) the
distribution to all holders of Common Stock of evidences of indebtedness or
assets of the Company (excluding certain cash dividends and distributions
described below). The terms of any such adjustment will be specified in the
related Prospectus Supplement for such Common Stock Warrants.
No Rights as Stockholders
Holders of Common Stock Warrants will not be entitled by virtue of being
such holders, to vote, to consent, to receive dividends, to receive notice as
stockholders with respect to any meeting of stockholders for the election of
directors of the Company of any other matter, or to exercise any rights
whatsoever as stockholders of the Company.
Existing Securities Holders
The Company may issue, as a dividend at no cost, such Securities Warrants to
holders of record of the Company's Securities or any class thereof on the
applicable record date. If Securities Warrants are so issued to existing
holders of Securities, the applicable Prospectus Supplement will describe, in
addition to the terms of the Securities Warrants and the Securities issuable
upon exercise thereof, the provisions, if any, for a holder of such Securities
Warrants who validly exercises all Securities Warrants issued to such holder to
subscribe for unsubscribed Securities (issuable pursuant to unexercised
Securities Warrants issued to other holders) to the extent such Securities
Warrants have not been exercised.
Debt Securities
General
The Company may offer one or more series of its Debt Securities representing
general, unsecured obligations of the Company. Any series of Debt Securities
may either (1) rank prior to all subordinated indebtedness of the Company and
pari passu with all other unsecured indebtedness of the Company outstanding on
the date of the issuance of such Debt Securities ("Senior Debt Securities") or
(2) be subordinated in right of payments to certain other obligations of the
Company outstanding on the date of issuance ("Subordinated Debt Securities").
In this Prospectus, any indenture relating to Subordinated Debt Securities is
referred to as a "Subordinated Indenture," any indenture relating to Senior
Debt Securities is referred to as a "Senior Indenture" and the term "Indenture"
refers to Senior and Subordinated Indentures, collectively.
32
The aggregate principal amount of Debt Securities which may be issued by the
Company will be set from time to time by the Board of Directors. Further, the
amount of Debt Securities which may be offered by this Prospectus will be
subject to the aggregate initial offering price of Securities specified in the
Registration Statement. Each Indenture will permit the issuance of an unlimited
amount of Debt Securities thereunder from time to time in one or more series.
Additional debt securities may be issued pursuant to another registration
statement for issuance under any Indenture. Any offering of Debt Securities may
be denominated in any currency composite designated by the Company.
The following description of the Debt Securities which may be offered by the
Company hereunder describes certain general terms and provisions of the Debt
Securities to which any Prospectus Supplement may relate. The particular terms
and provisions of the Debt Securities and the extent to which the following
general provisions may apply to such offering of Debt Securities will be
described in the accompanying Prospectus Supplement relating to such offering
of Debt Securities. The following descriptions of certain provisions of the
Indentures do not purport to be complete and are qualified in their entirety by
reference to the form of Senior Indenture or Subordinated Indenture, as
appropriate. The definitive Indenture relating to each offering of Debt
Securities will be filed with the Commission by means of a Current Report on
Form 8-K in connection with the offering of such Debt Securities. All article
and section references appearing herein are references to the articles and
sections of the appropriate Indenture and, unless defined herein, all
capitalized terms have the respective meanings specified in the appropriate
Indenture.
The Prospectus Supplement relating to any offering of Debt Securities will
set forth the following terms and other information to the extent applicable
with respect to the Debt Securities being offered thereby; (1) the designation,
aggregate principal amount, authorized denominations and priority of such Debt
Securities; (2) the price (expressed as a percentage of the aggregate principal
amount of such Debt Securities) at which such Debt Securities will be issued;
(3) the currency or currency units for which the Debt Securities may be
purchased and in which; (4) the stated maturity of such Debt Securities or
means by which a maturity date may be determined; (5) the rate at which such
Debt Securities will bear interest or the method by which such rate of interest
is to be calculated (which rate may be zero in the case of certain Debt
Securities issued at a price representing a discount from the principal amount
payable at maturity); (6) the periods during which such interest will accrue,
the dates on which such interest will be payable (or the method by which such
dates may be determined; including without limitation that such rate of
interest may bear an inverse relationship to some index or standard) and the
circumstances under which the Company may defer payment of interest;
(7) redemption provisions, including any optional redemption, required
repayment or mandatory sinking fund provisions; (8) any terms by which such
Debt Securities may be convertible into shares of the Company's Common Stock,
Preferred Stock or any other Securities of the Company, including a description
of the Securities into which any such Debt Securities are convertible; (9) any
terms by which the principal of such Debt Securities will be exchangeable for
any other Securities of the Company; (10) whether such Debt Securities are
issuable as definitive Fully- Registered Securities (as defined below) or
Global Securities and, if Global Securities are to be issued, the terms
thereof, including the manner in which interest thereon will be payable to the
beneficial owners thereof and other book-entry procedures, any terms for
exchange of such Global Securities into definitive Fully-Registered Securities
(as defined below) and any provisions relating to the issuance of a temporary
Global Security; (11) any additional restrictive covenants included for the
benefit of the holders of such Debt Securities; (12) any additional events of
default provided with respect to such Debt Securities; (13) the terms of any
Securities being offered together with such Debt Securities, (14) whether such
Debt Securities represent general, unsecured obligations of the Company and
(15) any other material terms of such Debt Securities.
If any of the Debt Securities are sold for foreign currency units, the
restrictions, elections, tax consequences, specific terms, and other
information with respect to such issue of Debt Securities and such currencies
or currency units will be set forth in the Prospectus Supplement relating to
thereto.
33
Indenture Provisions
The Debt Securities may be issued in definitive, fully registered form
without coupons ("Fully Registered Securities"), or in a form registered as to
principal only with coupons or in bearer form with coupons. Unless otherwise
specified in the Prospectus Supplement, the Debt Securities will only be Fully
Registered Securities. In addition, Debt Securities of a series may be issuable
in the form of one or more Global Securities, which will be denominated in an
amount equal to all or a portion of the aggregate principal amount of such Debt
Securities. See "Global Securities" below.
One or more series of Debt Securities may be sold at a substantial discount
below their stated principal amount, bearing no interest or interest at a rate
that at the time of issuance is below market rates. Federal income tax
consequences and special considerations applicable to any such series will be
described in the Prospectus Supplement relating thereto.
Unless otherwise indicated in the related Prospectus Supplement for a series
of Debt Securities, there are no provisions contained in the Indentures that
would afford holders of Debt Securities protection in the event of a highly
leveraged transaction involving the Company.
Global Securities. Any series of Debt Securities may be issued in whole or
in part in the form of one or more Global Securities that will be deposited
with, or on behalf of, the Depositary identified in the Prospectus Supplement
relating to such series. Unless and until it is exchanged in whole or in part
for Debt Securities in individually certificated form, a Global Security may
not be transferred except as a whole to a nominee of the Depositary for such
Global Security, or by a nominee for the Depositary to the Depositary, or to a
successor of the Depositary or a nominee of such successor.
The specific terms of the Depositary arrangement with respect to any series
of Debt Securities and the rights of, and limitations on, owners of beneficial
interests in a Global Security representing all or a portion of a series of
Debt Securities will be described in the Prospectus Supplement relating to such
series.
Modification of Indentures. Unless otherwise specified in the related
Prospectus Supplement, each Indenture, the rights and obligations of the
Company, and the rights of the Holders may be modified with respect to one or
more series of Debt Securities issued under such Indenture with the consent of
the Holders of not less than a majority in principal amount of the outstanding
Debt Securities of each such series affected by the modification or amendment.
No modification of the terms of payment of principal or interest, and no
modification reducing the percentage required for modification, is effective
against any Holder without his consent.
Events of Default. Unless otherwise specified in the related Prospectus
Supplement, each Indenture, will provide that the following are Events of
Default with respect to any series of Debt Securities issued thereunder: (1)
default in the payment of the principal of any Debt Security of such series
when and as the same shall be due and payable; (2) default in making a sinking
fund payment, if any, when and as the same shall be due and payable by the
terms of the Debt Securities of such series; (3) default for 30 days in payment
of any installment of interest on any Debt Securities of such series; (4)
default for a specified number of days after notice in the performance of any
other covenants in respect of the Debt Securities of such series contained in
the Indenture; (5) certain events of bankruptcy, insolvency or reorganization,
or court appointment of a receiver, liquidator, or trustee of the Company or
its property; and (6) any other Event of Default provided in the applicable
supplemental indenture under which such series of Debt Securities is issued. An
Event of Default with respect to a particular series of Debt Securities issued
under an Indenture will not necessarily constitute an Event of Default with
respect to any other series of Debt Securities issued under such Indenture. The
trustee under an Indenture may withhold notice to the Holders of any series of
Debt Securities of any default with respect to such series (except in the
payment of principal or interest) if it considers such withholding in the
interests of such Holders.
34
If an Event of Default with respect to any series of Debt Securities shall
have occurred and be continuing, the appropriate trustee under the Indenture or
the Holders of not less than 25% in the aggregate principal amount of the Debt
Securities of such series may declare the principal, or in the case of
discounted Debt Securities, such portion thereof as may be described in the
Prospectus Supplement, of all the Debt Securities of such series to be due and
payable immediately.
Within four months after the close of each fiscal year, the Company will
file with each trustee under the indentures a certificate, signed by specified
officers, stating whether or not such officers have knowledge of any default,
and, if so, specifying each such default and the nature thereof.
Subject to provisions relating to its duties in case of default, a trustee
under the Indentures shall be under no obligation to exercise any of its rights
or powers under the applicable Indenture at the request, order, or direction of
any Holder, unless such Holders shall have offered to such trustee reasonable
indemnity. Subject to such provisions for indemnification, the Holders of a
majority in principal amount of the Debt Securities of any series may direct
the time, method, and place of conducting any proceeding for any remedy
available to the appropriate trustee, or exercising any trust or power
conferred upon such trustee, with respect to the Debt Securities of such
series.
Payment and Transfer. Principal of, and premium and interest, if any, on,
Fully Registered Securities will be payable at the Place of Payment as
specified in the applicable Prospectus Supplement, provided that payment of
interest, if any, may be made, unless otherwise provided in the applicable
Prospectus Supplement, by check mailed to the person in whose names such Debt
Securities are registered at the close of business on the day or days specified
in the Prospectus Supplement or transfer to an account maintained by the payee
located inside the United States. The principal of, and premium and interest,
if any, on, Debt Securities in other forms will be payable in the manner and at
the place or places as designated by the Company and specified in the
applicable Prospectus Supplement. Unless otherwise provided in the Prospectus
Supplement, payment of interest may be made, in the case of a Bearer Security
by the transfer to an account maintained by the payee with a bank outside the
United States.
Fully Registered Securities may be transferred or exchanged at the corporate
trust office of the trustee or any other office or agency maintained by the
Company for such purposes, subject to the limitations in the applicable
Indenture, without the payment of any service charge except for any tax or
governmental charge incidental thereto. Provisions with respect to the transfer
and exchange of Debt Securities in other forms will be set forth in the
applicable Prospectus Supplement.
Defeasance. The indentures provide that each will cease to be of further
effect with respect to a certain series of Debt Securities (except for certain
obligations to register the transfer or exchange of Securities) if (a) the
Company delivers to the Trustee for the Securities of such series for
cancellation of all Securities of all series and the coupons, if any,
appertaining thereto, or (b) if the Company deposits into trust with the
Trustee money or United States government obligations, that, through the
payment of interest thereon and principal thereof in accordance with their
terms, will provide money in an amount sufficient to pay all of the principal
of, and interest on, the Securities of such series on the dates such payments
are due or redeemable in accordance with the terms of such Securities.
35
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of the MGCL and of the Charter
and the Bylaws of IMH does not purport to be complete and is subject to and
qualified in its entirety by reference to Maryland law and to the Charter and
the Bylaws of IMH, copies of which are filed with the Commission. See
"Available Information." For a description of additional restrictions on
transfer of the Common Stock, see "Description of Securities--Capital Stock--
Repurchase of Shares and Restrictions on Transfer."
Removal of Directors
The Charter provides that a director may be removed from office at any time
but only by the affirmative vote of the holders of at least two-thirds of the
votes entitled to be cast in the election of directors.
Business Combinations
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting
power of the corporation's shares or an affiliate of the corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then outstanding
voting stock of the corporation (an "Interested Stockholder") or an affiliate
of such an Interested Stockholder are prohibited for five years after the most
recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative vote
of at least (a) 80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation and (b) two-thirds of the votes
entitled to be cast by holders of voting stock of the corporation other than
shares held by the Interested Stockholder with whom (or with whose affiliate)
the business combination is to be effected, unless, among other conditions, the
corporation's common stockholders receive a minimum price (as defined in the
MGCL) for their shares and the consideration is received in cash or in the same
form as previously paid by the Interested Stockholder for its shares. These
provisions of Maryland law do not apply, however, to business combinations that
are approved or exempted by the board of directors of the corporation prior to
the time that the Interested Stockholder becomes an Interested Stockholder.
Pursuant to the statute, IMH has exempted any business combinations involving
ICII and, consequently, the five-year prohibition and the super-majority vote
requirements of the statute will not in any event apply to business
combinations between ICII and IMH. As a result, ICII may be able to enter into
business combinations with IMH, which may not be in the best interest of the
stockholders, without compliance by IMH with the super-majority vote
requirements and the other provisions of the statute.
Control Share Acquisitions
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror, by officers or by
directors who are employees of the corporation. "Control shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror or in respect of which the acquiror is able
to exercise or direct the exercise of voting power (except solely by virtue of
a revocable proxy), would entitle the acquiror to exercise voting power in
electing directors within one of the following ranges of voting power: (1) one-
fifth or more but less than one-third, (2) one-third or more but less than a
majority, or (3) a majority or more of all voting power. Control shares do not
include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
36
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of stockholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a stockholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote,
all other stockholders may exercise appraisal rights. The fair value of the
shares as determined for purposes of such appraisal rights may not be less than
the highest price per share paid by the acquiror in the control share
acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation and adopted at any time before the acquisition of
shares.
The Bylaws of IMH contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of IMH's shares of
stock. There can be no assurance that such provision will not be amended or
eliminated at any time in the future.
Amendment to the Charter
IMH reserves the right from time to time to make any amendment to its
Charter, now or hereafter authorized by law, including any amendment which
alters the contract rights as expressly set forth in the Charter, of any shares
of outstanding stock. The Charter may be amended only by the affirmative vote
of holders of shares entitled to cast not less than a majority of all the votes
entitled to be cast on the matter; provided, however, that provisions on
removal of directors may be amended only by the affirmative vote of holders of
shares entitled to cast not less than two-thirds of all the votes entitled to
be cast in the election of directors.
Dissolution of the Company
The dissolution of IMH must be approved by the affirmative vote of holders
of shares entitled to cast not less than a majority of all the votes entitled
to be cast on the matter.
Advance Notice of Director Nominations and New Business
The Bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors and
the proposal of business to be considered by stockholders may be made only (1)
pursuant to IMH's notice of the meeting, (2) by the Board of Directors or (3)
by a stockholder who is entitled to vote at the meeting and has complied with
the advance notice procedures set forth in the Bylaws and (b) with respect to
special meetings of stockholders, only the business specified in IMH's notice
of meeting may be brought before the meeting of stockholders and nominations of
persons for election to the Board of Directors may be made only (1) pursuant to
IMH's notice of the meeting, (2) by the Board of Directors or (3) provided that
the Board of Directors has determined that directors shall be elected at such
meeting, by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the Bylaws.
37
Possible Anti-Takeover Effect of Certain Provisions of Maryland Law and of the
Charter and Bylaws
The business combination provisions and, if the applicable provision in the
Bylaws is rescinded, the control share acquisition provisions of the MGCL, the
provisions of the Charter on ownership and transfer of stock and on removal of
directors and the advance notice provisions of the Bylaws could delay, defer or
prevent a transaction or a change in control of IMH or other transaction that
might involve a premium price for holders of Common Stock or otherwise be in
their best interest.
38
PLAN OF DISTRIBUTION
The Company may sell Securities (1) to or through underwriters or dealers,
(2) directly to one or more purchasers, or (3) through agents. Each Prospectus
Supplement will set forth the terms of the offering of the Securities offered
thereby, including the name or names of any underwriters, the purchase price of
the Securities, and the proceeds to the Company from the sale, any underwriting
discounts and other items constituting underwriters' compensation, any initial
public offering price, any discounts or concessions allowed or reallowed or
paid to dealers, and any securities exchange on which the Securities may be
listed. Only underwriters so named in the Prospectus Supplement are deemed to
be underwriters in connection with the Securities offered thereby.
If underwriters are used in the sale in a firm commitment underwriting, the
Securities will be acquired by the underwriters for their own account and may
be resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. The obligations of the underwriters to purchase the
Securities will be subject to certain conditions precedent, and the
underwriters will be obligated to purchase all the Securities of the series
offered by the Company's Prospectus Supplement if any of the Securities are
purchased. Any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time to time.
The Company may grant underwriters who participate in the distribution of
Securities an option to purchase additional Securities to cover over-
allotments, if any.
The place and date of delivery for the Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement.
Unless otherwise indicated in the applicable Prospectus Supplement, the
Securities in respect of which this Prospectus is being delivered (other than
Common Stock) will be a new issue of securities, will not have an established
trading market when issued and may not be listed on any securities exchange.
Any underwriters or agents to or through whom such Securities are sold by the
Company for public offering and sale may make a market in such Securities, but
such underwriters or agents will not be obligated to do so and may discontinue
any market making at any time without notice. No assurance can be given as to
the liquidity of the trading market for any such Securities.
Securities may also be sold directly by the Company or through agents
designated by the Company from time to time. The Securities offered hereby may
also be sold from time to time through agents for the Company by means of (i)
ordinary broker's transactions, (ii) block transactions (which may involve
crosses) in accordance with the rules of the Exchanges, in which such agents
may attempt to sell Securities as agent but may purchase and resell all or a
portion of the blocks as principal, (iii) "fixed price offerings" in accordance
with the rules of the Exchanges, or (iv) a combination of any such methods of
sale. A Prospectus Supplement sets forth the terms of any such "fixed price
offering," "exchange distributions" and "special offerings." If the agent
purchases Securities as principal, it may sell such Securities by any of the
methods described above. Any agent involved in the offering and sale of
Securities in respect of which this Prospectus is delivered is named, and any
commissions payable by the Company to such agent are set forth, in the
Prospectus Supplement. Unless otherwise indicated herein or in the Prospectus
Supplement, any such agent is acting on a best-efforts basis for the period of
its appointment.
If so indicated in the Prospectus Supplement, the Company will authorize
agents, underwriters, or dealers to solicit offers by certain institutional
investors to purchase Securities providing for payment and delivery on a future
date specified in the Prospectus Supplement. There may be limitations on the
minimum amount which may be purchased by any such institutional investor or on
the portion of the aggregate principal amount of the particular Securities
which may be sold pursuant to such arrangements. Institutional investors to
which such offers may be made, when authorized, include commercial and savings
banks, insurance companies, pension funds, investment companies, educational
and charitable institutions, and such other institutions as may be
39
approved by the Company. The obligations of any such purchasers pursuant to
such delayed delivery and payment arrangements will not be subject to any
conditions except (1) the purchase by an institution of the particular
Securities shall not at the time of delivery be prohibited under the laws of
any jurisdiction in the United States to which such institution is subject, and
(2) if the particular Securities are being sold to underwriters, the Company
shall have sold to such underwriters the total principal amount of such
Securities less the principal amount thereof covered by such arrangements.
Underwriters will not have any responsibility in respect of the validity of
such arrangements or the performance of the Company or such institutional
investors thereunder.
Agents and underwriters may be entitled under agreements entered into with
the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which the agents or underwriters and their affiliates
may from time to time be required to make in respect thereof. Agents and
underwriters may engage in transactions with, or perform services for, the
Company in the ordinary course of business and receive customary compensation
therefor.
40
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations to the
Company is based on current law, is for general information only, and is not
tax advice. The tax treatment of a holder of any of the Securities will vary
depending upon the terms of the specific Securities acquired by such holder, as
well as his particular situation, and this discussion provides only a general
summary of certain limited aspects of federal income taxation relating to
holders of Securities. This summary does not purport to deal with the aspects
of taxation that may be relevant to prospective holders of Securities in light
of such holder's particular investment or tax circumstances, or to certain
types of holders subject to special treatment under the federal income tax
laws, including, without limitation, insurance companies, certain financial
institutions, broker-dealers, holders holding Securities 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, or foreign
corporations, foreign partnerships and persons who are not citizens or
residents of the United States. Furthermore, the summary below does not
consider the effect of any foreign, state, local or other tax laws that may be
applicable to the Company or holders of Securities. Certain federal income tax
considerations relevant to holders of the Securities will be provided in the
applicable Prospectus Supplement relating thereto.
The information in this section is based on the Code, current, temporary and
proposed Treasury Regulations promulgated under the Code, the legislative
history of the Code, current administrative interpretations and practices of
the Service (including its practices and policies as expressed in certain
private letter rulings which are not binding on the Service except with respect
to the particular taxpayers who requested and received such rulings), and court
decisions, all as of the date hereof. No assurance can be given that future
legislation, Treasury Regulations, administrative interpretations and practices
and/or court decisions will not adversely affect existing interpretations. Any
such change could apply retroactively to transactions preceding the date of the
change. IMH has not requested, and does not plan to request, any ruling from
the Service concerning the tax treatment of IMH. Thus, no assurance can be
provided that the statements set forth herein (which are, in any event, not
binding on the Service or courts) will not be challenged by the Service or will
be sustained by a court if so challenged.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AND THE
APPLICABLE PROSPECTUS SUPPLEMENT REGARDING THE SPECIFIC TAX CONSEQUENCES TO
THEM OF THE PURCHASE, OWNERSHIP AND SALE OF THE SECURITIES, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Taxation of IMH
General. IMH elected to be taxed as a REIT under Sections 856 through 860 of
the Code, commencing with its taxable year ended December 31, 1995. IMH
believes that, commencing with such taxable year, it has been organized and has
operated in such a manner as to qualify for taxation as a REIT under the Code,
and IMH intends to continue to operate in such a manner. However, no assurance
can be given that IMH has operated or will continue to operate in such a manner
so as to qualify or remain qualified as a REIT.
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, tax counsel to IMH, rendered an opinion to IMH as of
September 8, 1997 to the effect that commencing with IMH's taxable year ended
December 31, 1995, IMH has been organized in conformity with the requirements
for qualification as a REIT, and its proposed method of operation has enabled
and will
41
enable it to meet the requirements for qualification and taxation as a REIT
under the Code. It must be emphasized that this opinion was based on various
factual assumptions relating to the organization and operation of IMH and was
conditioned upon certain representations made by IMH as to factual matters. In
addition, this opinion was based upon the factual representations of IMH
concerning its business and assets as set forth in this Prospectus.
Furthermore, this opinion relied on, and assumed the accuracy of, the opinions,
dated as of September 8, 1997, of Thacher Proffitt & Wood with respect to the
characterization, as debt, of the CMOs issued by Imperial CMB Trust Series
1996-1 ("1996 CMB Trust") and Imperial CMB Trust Series 1997-1 (the "1997 CMB
Trust"), each on behalf of IMH Assets in August 1996, and May 1997,
respectively, and with respect to the classification of each of 1996 CMB Trust
and the 1997 CMB Trust for federal income tax purposes. Moreover, such
qualification and taxation as a REIT depends upon IMH'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 IMH'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--
Consequences of Failure to Maintain REIT Status May Include IMH Being Subject
to Tax as a Regular Corporation" and "--Failure to Qualify."
If IMH qualifies for taxation as a REIT, it generally will not be subject to
federal corporate income taxes on its net income that is currently distributed
to stockholders. This treatment substantially eliminates the "double taxation"
(at the corporate and stockholder levels) that generally results from
investment in a regular corporation. However, IMH will be subject to federal
income tax as follows: First, IMH will be taxed at regular corporate rates on
any undistributed "REIT taxable income," including undistributed net capital
gains. Second, under certain circumstances, IMH may be subject to the
"alternative minimum tax" on its items of tax preference. Third, if IMH has (i)
net income from the sale or other disposition of "foreclosure property"
(defined generally as property acquired through foreclosure or otherwise as a
result of a default on a loan secured by the property or a lease of such
property) which is held primarily for sale to customers in the ordinary course
of business, or (ii) other nonqualifying net income from foreclosure property,
it will be subject to tax at the highest corporate rate on such income. Fourth,
if IMH has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business other than foreclosure property),
such income will be subject to a 100% tax. Fifth, if IMH should fail to satisfy
the 75% gross income test or the 95% gross income test (as discussed below),
but has nonetheless maintained its qualification as a REIT because certain
other requirements have been met, it will be subject to a 100% tax on an amount
equal to (a) the gross income attributable to the greater of the amount by
which IMH fails the 75% or 95% test multiplied by (b) a fraction intended to
reflect IMH's profitability. Sixth, if IMH should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year, and
(iii) any undistributed taxable income from prior periods, IMH would be subject
to a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, if IMH has excess inclusion income (attributable
to its interest, if any, in a residual interest in a REMIC or if all or a
portion of IMH, IMH Assets, or IWLG is treated as a taxable mortgage pool) and
a disqualified organization (generally, tax-exempt entities not subject to tax
on unrelated business income, including governmental organizations) holds
shares of stock in IMH, IMH will be taxed at the highest corporate tax rate on
the amount of excess inclusion income for the taxable year allocable to the
shares held by such disqualified organization. Eighth, with respect to any
asset (a "Built-In Gain Asset") acquired by IMH from a corporation which is or
has been a C corporation (i.e., generally a corporation subject to full
corporate-level tax) in a transaction in which the basis of the Built-In Gain
Asset in the hands of IMH is determined by reference to the basis of the asset
in the hands of the C corporation, if IMH recognizes gain on the disposition of
such asset during the ten-year period (the "Recognition Period") beginning on
the date on which such asset was acquired by IMH, then, to the extent of the
Built-In Gain (i.e., the excess of (a) the fair market value of such asset over
(b) IMH's adjusted basis in such asset, determined as of the beginning of the
Recognition Period), such gain will be subject to tax at the
42
highest regular corporate rate pursuant to Treasury Regulations that have not
yet been promulgated. The results described above with respect to the
recognition of Built-In Gain assume that IMH will make an election pursuant to
IRS Notice 88-19 and that the availability or nature of such election is not
modified as proposed in President Clinton's 1999 federal budget proposal.
Ninth, IMH may be subject to tax on any "excess inclusion income" (as defined
in the Code) to the extent that shares of its capital stock are held by certain
disqualified organizations.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) which would be
taxable as a domestic corporation but for Sections 856 through 859 of the Code;
(iv) which is neither a financial institution nor an insurance company subject
to certain provisions of the Code; (v) the beneficial ownership of which is
held by 100 or more persons; (vi) during the last half of each taxable year not
more than 50% in value of the outstanding stock of which is owned, actually or
constructively, by or for five or fewer individuals (as defined in the Code to
include certain entities); and (vii) which meets certain other tests, described
below, regarding the nature of its income and assets and the amount of its
distributions. The Code provides that conditions (i) to (iv), inclusive, must
be met during the entire taxable year and that condition (v) must be met during
at least 335 days of a taxable year of twelve months, or during a proportionate
part of a taxable year of less than twelve months. For purposes of conditions
(v) and (vi), pension funds and certain other tax-exempt entities are treated
as individuals, subject to a "look-through" exception in the case of condition
(vi). In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. IMH has a calendar taxable year.
The Company believes that it has previously issued sufficient shares of
Common Stock with sufficient diversity of ownership to allow IMH to satisfy
conditions (v) and (vi). In addition, the Charter provides for restrictions
regarding the transfer and ownership of shares, which restrictions are intended
to assist IMH in continuing to satisfy the share ownership requirements
described in (v) and (vi) above. Such ownership and transfer restrictions are
described in "Description of Capital Stock--Repurchase of Shares and
Restrictions on Transfer." These restrictions, however, may not, in all cases,
ensure that IMH will be able to satisfy the share ownership requirements
described above. If IMH fails to satisfy such share ownership requirements,
IMH's status as a REIT will terminate; provided, however, that if IMH complies
with the rules contained in the applicable Treasury Regulations requiring IMH
to attempt to ascertain the actual ownership of its shares, and IMH does not
know, and would not have known through the exercise of reasonable diligence,
whether it failed to meet the requirement set forth in condition (vi) above,
IMH will be treated as having met such requirement. See "--Failure to Qualify."
Ownership of IWLG and IMH Assets. IMH has owned 100% of the stock of IWLG
and IMH Assets at all times that IWLG and IMH Assets have been in existence. As
a result, IWLG and IMH Assets will be treated as "qualified REIT subsidiaries"
("QRSs"). Code Section 856(i) provides that a corporation which is a "qualified
REIT subsidiary" will not be treated as a separate corporation, and all assets,
liabilities, and items of income, deduction, and credit of a "qualified REIT
subsidiary" will be treated as assets, liabilities and such items (as the case
may be) of the REIT for all purposes of the Code including the REIT
qualification tests. Thus, in applying the requirements described herein, the
QRSs will be ignored, and all assets, liabilities and items of income,
deduction and credit of such subsidiaries will be treated as assets,
liabilities and such items (as the case may be) of IMH. For this reason,
references under "Federal Income Tax Considerations" to the income and assets
of IMH shall include the income and assets of the QRSs. Because the QRSs will
be treated as "qualified REIT subsidiaries" they will not be subject to federal
income tax. In addition, IMH's ownership of the voting stock of the QRSs will
not violate the restrictions against ownership of securities of any one issuer
which constitute more than 10% of such issuer's voting securities or more than
5% of the value of IMH's total assets, described below under "--Asset Tests."
Income Tests. In order to maintain its qualification as a REIT, IMH annually
must satisfy two gross income requirements. First, at least 75% of IMH's gross
income (excluding gross income from prohibited
43
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 IMH's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from the sources described
above with respect to the 75% gross income test, dividends, interest, and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing). In addition, for taxable years beginning prior to August 5,
1997, short-term gain from the sale or other disposition of stock or
securities, gain from prohibited transactions, and gain on the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and sales or other dispositions of foreclosure
property) must represent less than 30% of IMH's gross income (including gross
income from prohibited transactions). The 30% gross income test has been
repealed and will not apply beginning with IMH's 1998 taxable year.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of
receipts or sales.
Generally, if a loan is secured by both personal property and real property,
interest must be allocated between the personal property and the real property,
with only the interest allocable to the real property qualifying as mortgage
interest under the 75% gross income test. Treasury Regulations provide that if
a loan is secured by both personal and real property and the fair market value
of the real property as of the commitment date (generally, the date on which
the REIT's obligation to make the loan becomes binding) equals or exceeds the
amount of the loan, the entire interest amount will qualify under the 75% gross
income test. If the amount of the loan exceeds the fair market value of the
real property as of the commitment date, the interest income allocated to the
real property is an amount equal to the interest income multiplied by a
fraction, the numerator of which is the fair market value of the real property
as of the commitment date, and the denominator of which is the amount of the
loan. The interest income allocated to the personal property is an amount equal
to the excess of the total interest income over the interest income allocated
to the real property.
Interest earned on mortgage loans, and mortgage-backed securities secured by
or representing an interest in such loans, will qualify as "interest" for
purposes of both the 95% and 75% gross income tests to the extent such assets
are treated as obligations secured by mortgages on real property or on
interests in real property. However, income attributable to securities or other
obligations that are not treated as obligations secured by mortgages on real
property or on interests in real property (and which are not otherwise
"Qualified REIT Assets", as defined below), dividends on stock (including any
dividends IMH receives from IFC, but not including dividends IMH receives from
other qualifying REITs or from the QRSs), and gains from the sale or
disposition of such stock or such securities or other obligations will not
qualify under the 75% gross income test. Such income will qualify under the 95%
gross income test, however, if such income constitutes interest, dividends or
gain from the sale or disposition of stock or securities. Income from loan
guarantee fees, mortgage servicing contracts or other contracts will not
qualify under either the 95% or 75% gross income test if such income
constitutes fees for services rendered by IMH or is not treated as interest (on
obligations secured by mortgages on real property or on interests in real
property for purposes of the 75% gross income test).
44
Similarly, income from hedging, including the sale of hedges, will not qualify
under the 75% or 95% gross income tests unless such hedges constitute certain
qualified hedges, in which case such income will qualify under the 95% gross
income test. For purposes of the discussion herein, the term "Qualified REIT
Assets" shall mean (i) real property (including interests in real property and
interests in mortgages on real property), (ii) shares (or transferable
certificates of beneficial interest) in other REITs which meet the requirements
of Sections 856-859 of the Code, (iii) stock or debt instruments (not otherwise
described in (i), (ii) or (iv)) held for not more than one year that were
purchased with the proceeds of (a) an offering of stock in IMH (other than
amounts received pursuant to a dividend reinvestment plan) or (b) a public
offering of debt obligations of IMH which have maturities of at least five
years, and (iv) a regular or residual interest in a REMIC, but only if 95% or
more of the assets of such REMIC are assets described in (i) through (iii).
Furthermore, IFC receives servicing and processing fees and income from gain
on the sale of certain mortgage loans and mortgage securities. Such fees do not
accrue to IMH, but IMH receives dividends on its nonvoting preferred stock in
IFC. Such dividends will qualify under the 95% gross income test, but will not
qualify under the 75% gross income test.
In order to comply with the 95% and 75% gross income tests, IMH has limited
and will continue to limit substantially all of the assets that it acquires to
mortgage loans or other securities or obligations that are treated as
obligations secured by mortgages on real property or on interests in real
property or to other Qualified REIT Assets. As a result, IMH may limit the type
of assets, including hedging contracts, that it otherwise might acquire and,
therefore, the type of income it otherwise might receive, including income from
hedging, other than income from certain qualified hedges.
In order to comply with the REIT gross income tests, IMH has monitored and
will continue to monitor its income, including income from dividends, warehouse
lending, hedging transactions, futures contracts, servicing and sales of
mortgage assets, gains on the sale of securities, and other income not derived
from Qualified REIT Assets. IMH believes that the aggregate amount of any
nonqualifying income in any taxable year has not exceeded and will not exceed
the limit on nonqualifying income under the gross income tests.
If IMH fails to satisfy one or both of the 75% or 95% gross income 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 IMH's failure to meet such tests was
due to reasonable cause and not due to willful neglect, IMH attaches a schedule
of the sources of its income to its federal income tax return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances IMH
would be entitled to the benefit of these relief provisions. For example, if
IMH fails to satisfy the gross income tests because nonqualifying income that
IMH intentionally incurs exceeds the limits on such income, the Service could
conclude that IMH's failure to satisfy the tests was not due to reasonable
cause. If these relief provisions are inapplicable to a particular set of
circumstances involving IMH, IMH will not qualify as a REIT. As discussed above
in "Federal Income Tax Considerations--Taxation of IMH--General," even if these
relief provisions apply and IMH retains its status as a REIT, a 100% tax would
be imposed on an amount equal to (a) the gross income attributable to the
greater of the amount by which IMH failed the 75% or 95% test multiplied by (b)
a fraction intended to reflect IMH's profitability. There can be no assurance
that IMH will always be able to maintain compliance with the gross income tests
for REIT qualification despite its periodic monitoring procedures. No similar
mitigation provision provides relief if IMH fails the 30% gross income test. In
such case, IMH would cease to qualify as a REIT. See "--Failure to Qualify."
Any gain realized by IMH on the sale of any property (including mortgage
loans and mortgage-backed securities) 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 IMH's ability to satisfy the income tests for qualification as a REIT.
Under existing law, whether property is held as inventory or primarily for sale
to customers in the ordinary course of a trade or business is a question of
fact that depends on all the facts and
45
circumstances with respect to the particular transaction. IFC securitizes
mortgage loans and sells the resulting mortgage securities. If IMH were to sell
such mortgage securities on a regular basis, there is a substantial risk that
such sales would constitute prohibited transactions and that all of the profits
therefrom would be subject to a 100% tax. Therefore, such sales have been made
and will be made only by IFC. IFC is not subject to the 100% penalty tax on
income from prohibited transactions, which is only applicable to a REIT.
Asset Tests. IMH, at the close of each quarter of its taxable year, must
also satisfy three tests relating to the nature of its assets. First, at least
75% of the value of IMH's total assets must be represented by Qualified REIT
Assets, cash, cash items and government securities. Second, not more than 25%
of IMH's total assets may be represented by securities other than those in the
75% asset class. Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by IMH may not exceed 5% of the
value of IMH's total assets and IMH may not own more than 10% of any one
issuer's outstanding voting securities. IMH believes that substantially all of
its assets, other than the nonvoting preferred stock of IFC, and the amount of
any loans made to ICCC and certain loans made to IFC, are Qualified REIT
Assets.
As described above, IMH will be treated as owning all assets, liabilities
and items of income, deduction, and credit of the QRSs. IWLG provides short-
term lines of credit ("warehouse loans") to IFC and approved mortgage banks,
most of which are correspondents of IFC, to finance mortgage loans during the
time from the closing of the loans to their sale or other settlement with pre-
approved investors, including IMH. IWLG's warehouse loans are secured by
assignments of first priority perfected security interests in and liens on,
among other items of collateral, mortgages loans and related mortgage notes
owned by the customer that in turn are secured by mortgages on real property.
The Service has issued a Revenue Ruling in which it ruled that loans similar to
IWLG's warehouse loans to IFC were obligations secured by mortgages on real
property and interests in mortgages on real property, and therefore that such
loans were Qualified REIT Assets. Based on such Revenue Ruling, IMH believes
that IWLG's warehouse loans are Qualified REIT Assets. However, in the event
that the IWLG's warehouse loans are not treated as Qualified REIT Assets, IMH
would likely fail the 5% asset test and fail to qualify as a REIT. See "--
Failure to Qualify."
As described above, IMH owns 100% of the nonvoting preferred stock of IFC,
which represents approximately 99% of the economic value of all classes of
stock of IFC. IMH does not and will not own any of the voting securities of
IFC, and therefore IMH will not be considered to own more than 10% of the
voting securities of IFC (which would be prohibited by the REIT asset tests
currently set forth in the Code). President Clinton's 1999 federal budget
proposal contains a provision which would amend the REIT asset tests so as to
prohibit REITs from owning stock of a corporation possessing more than 10% of
the vote or value of all classes of stock of the corporation. This proposal
would be effective with respect to stock acquired on or after the date of the
first Congressional committee action with respect to the proposal (the "Action
Date"). In addition, to the extent that a REIT's stock ownership is
grandfathered by virtue of this effective date, such grandfathered status would
terminate if the subsidiary corporation engages in a trade or business that it
is not engaged in on the Action Date or acquires substantial new assets on or
after such date. Accordingly, if this provision of the budget proposal were
enacted in its present form, IMH's stock ownership in IFC would be
grandfathered, but such grandfathered status would terminate if IFC engages in
a trade or business that it is not engaged in on the Action Date or acquires
substantial new assets (including additional mortgage loans) on or after such
date, even if such activities are undertaken or assets are acquired prior to
the adoption of the proposal. In such case, IMH's continued ownership of more
than 10% of the economic value of IFC beyond IMH's next quarterly asset testing
date following the Action Date (which could occur prior to the adoption of the
proposal) could cause IMH to fail to qualify as a REIT. See "--Failure to
Qualify." It is presently uncertain whether any proposal regarding REIT
subsidiaries, such as IFC, will be enacted, or if enacted, what the terms of
such proposal (including its effective date) will be. At this time, it is
expected that IFC will continue to acquire additional mortgage loans
notwithstanding the proposed legislation regarding REIT subsidiaries.
IMH believes that the aggregate value of its securities of IFC has not at
any time exceeded 5% of the total value of IMH's assets, and will not exceed
such amount in the future. Latham & Watkins, in rendering its
46
opinion as to the qualification of IMH as a REIT, relied on the representation
of IMH to such effect. There can be no assurance that the Service will not
contend that the value of the securities of IFC held by IMH exceeds the 5%
value limitation.
The 5% asset test requires that IMH revalue its assets at the end of each
calendar quarter in which IMH acquires additional securities in IFC for the
purpose of applying such test. Although IMH plans to take steps to ensure that
it satisfies the 5% asset test for any quarter with respect to which retesting
is to occur, there can be no assurance that such steps will always be
successful, or will not require a reduction in IMH's overall interest in IFC.
IMH has taken and will continue to take measures to prevent the value of
securities issued by any one entity that do not constitute Qualified REIT
Assets from exceeding 5% of the value of IMH's total assets as of the end of
each calendar quarter. In particular, as of the end of each calendar quarter,
IMH has limited and diversified and will continue to limit and diversify its
ownership of securities of IFC and other securities that do not constitute
Qualified REIT Assets as necessary to satisfy the REIT asset tests described
above.
When purchasing mortgage-related securities, IMH and its counsel may rely on
opinions of counsel for the issuer or sponsor of such securities given in
connection with the offering of such securities, or statements made in related
offering documents, for purposes of determining whether and to what extent
those securities constitute Qualified REIT Assets for purposes of the REIT
asset tests and produce income which qualifies under the REIT gross income
tests discussed above. The inaccuracy of any such opinions or statements may
have an adverse impact on IMH's qualification as a REIT.
A regular or residual interest in a REMIC will be treated as a Qualified
REIT Asset for purposes of the REIT asset tests and income derived with respect
to such interests will be treated as interest on obligations secured by
mortgages on real property, assuming that at least 95% of the assets of the
REMIC are Qualified REIT Assets. If less than 95% of the assets of the REMIC
are Qualified REIT Assets, only a proportionate share of the assets of and
income derived from the REMIC will be treated as qualifying under the REIT
asset and income tests. Based on information provided to IMH by each REMIC in
which IMH holds an interest, IMH believes that its REMIC interests fully
qualify for purposes of the REIT gross income and asset tests. IMH has not
acquired and does not expect to acquire or retain residual interests issued by
REMICs.
If IMH invests in a partnership, it will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to the
income of the partnership attributable to such share. In addition, the
character of the assets and gross income of the partnership shall retain the
same character in the hands of IMH for purposes of the REIT gross income and
asset tests.
After initially meeting the asset tests at the close of any quarter, IMH
will not lose its status as a REIT for failure to satisfy the asset tests at
the end of a later quarter solely by reason of changes in asset values. If the
failure to satisfy the asset tests results from an acquisition of securities or
other property during a quarter, the failure can be cured by the disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
IMH intends to maintain adequate records of the value of its assets to ensure
compliance with the asset tests and to take such other actions within 30 days
after the close of any quarter as may be required to cure any noncompliance. If
IMH fails to cure noncompliance with the asset tests within such time period,
IMH would cease to qualify as a REIT.
Annual Distribution Requirements. IMH, in order to maintain its
qualification as a REIT, is required to distribute dividends (other than
capital gain dividends) to its stockholders in an amount at least equal to (i)
the sum of (a) 95% of IMH's "REIT taxable income" (generally, income of IMH
computed without regard to the dividends paid deduction and by excluding its
net capital gain) and (b) 95% of the excess of the net income, if any, from
foreclosure property over the tax imposed on such income, minus (ii) the excess
of the sum of certain items of noncash income over 5% of "REIT taxable income."
In addition, if IMH disposes of any Built-In Gain Asset during its Recognition
Period, IMH will be required, pursuant to Treasury Regulations
47
which have not yet been promulgated, to distribute at least 95% of the Built-in
Gain (after tax), if any, recognized on the disposition of such asset. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before IMH timely files its tax return for
such year and if paid on or before the first regular dividend payment date
after such declaration and if IMH so elects and specifies the dollar amount on
its tax return. Such distributions are taxable to holders of Common Stock
(other than certain tax-exempt entities, as discussed below) in the year in
which paid, even if such distributions relate to the prior year for purposes of
IMH's 95% distribution requirement. The amount distributed must not be
preferential (e.g., each holder of shares of Common Stock must receive the same
distribution per share). To the extent that IMH does not distribute all of its
net capital gain or distributes at least 95%, but less than 100%, of its "REIT
taxable income," as adjusted, it will be subject to tax on the undistributed
portion at regular ordinary and capital gain corporate tax rates. Furthermore,
if IMH should fail to distribute during each calendar year (or, in the case of
distributions with declaration and record dates falling in the last three
months of the calendar year, by the end of January immeidately following such
year) at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, IMH would be subject to a 4%
excise tax on the excess of such required distributions over the amounts
actually distributed. Any REIT taxable income and net capital gain on which
this excise tax is imposed for any year is treated as an amount distributed
that year for purposes of calculating such tax. IMH believes that it has and
intends to continue to make timely distributions sufficient to satisfy these
annual distribution requirements.
IMH anticipates that it will generally have sufficient cash or liquid assets
to enable it to satisfy the distribution requirements described above. It is
possible, however, that IMH, from time to time, may not have sufficient cash or
other liquid assets to meet these distribution requirements due to timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of IMH. For instance, IMH may realize
income without a corresponding cash payment, as in the case of original issue
discount or accrued interest on defaulted mortgage loans. In the event that
such timing differences occur, in order to meet the distribution requirements,
IMH may find it necessary to sell assets, arrange for short-term, or possibly
long-term, borrowings, or pay dividends in the form of taxable stock dividends.
The Service has ruled that if a REIT's dividend reinvestment plan allows
stockholders of the REIT to elect to have cash distributions reinvested in
shares of the REIT at a purchase price equal to at least 95% of fair market
value on the distribution date, then such cash distributions reinvested
pursuant to such a plan qualify under the 95% distribution test. IMH expects
that the terms of its DRP will comply with this ruling.
Under certain circumstances, IMH may be able to rectify a failure to meet
the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in IMH's deduction for
dividends paid for the earlier year. Thus, IMH may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, IMH will be required
to pay interest based upon the amount of any deduction taken for deficiency
dividends.
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 IMH has 2,000 or more
stockholders of record, from persons holding 5% or more of IMH's outstanding
shares of Common Stock; if IMH has over 200 but fewer than 2,000 stockholders
of record, from persons holding 1% or more of IMH's outstanding shares of
Common Stock; and if IMH has 200 or fewer shareholders of record, from persons
holding 1/2% or more of IMH's outstanding shares of Common Stock) regarding
their ownership of shares. In addition, IMH 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 the actual stock ownership and
other information. IMH has maintained and will continue to maintain the records
and demand statements as required by Treasury Regulations.
48
Failure to Qualify
If IMH fails to qualify for taxation as a REIT in any taxable year, and the
relief provisions do not apply, IMH will be subject to tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Distributions to stockholders in any year in which IMH fails to qualify
will not be deductible by IMH nor will they be required to be made. As a
result, IMH's failure to qualify as a REIT would substantially reduce the cash
available for distribution by IMH to its stockholders. In addition, if IMH
fails to qualify as a REIT, all distributions to stockholders will be taxable
as ordinary income, to the extent of IMH's current and accumulated earnings and
profits, and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, IMH will also be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification was lost. It is not possible to state whether
in all circumstances IMH would be entitled to such statutory relief. Failure to
qualify for even one year could result in the IMH's incurring substantial
indebtedness (to the extent borrowings are feasible) or liquidating substantial
investments in order to pay the resulting taxes. In addition, President
Clinton's 1999 federal budget proposal contains a provision which, if enacted
in its present form, would result in the immediate taxation of all gain
inherent in a C corporation's assets upon an election by the corporation to
become a REIT in taxable years beginning after January 1, 1999, and thus could
effectively preclude IMH from re-electing to be taxed as a REIT following a
loss of its REIT status.
Taxation of Holders of Securities
Set forth below is a brief summary of certain federal income tax
consequences to holders of Securities. Holders are urged to consult the
applicable Prospectus Supplement for a more detailed description of such tax
consequences.
Common Stock and Preferred Stock. In general, as long as IMH qualifies as a
REIT, distributions made by IMH with respect to the Common Stock or the
Preferred Stock out of IMH's current or accumulated earnings and profits (and
not designated as capital gain dividends) will constitute dividends taxable as
ordinary income to holders of Common Stock or Preferred Stock, as the case may
be. For purposes of determining whether distributions are out of current or
accumulated earnings and profits, the earnings and profits of IMH will be
allocated first to IMH's Preferred Stock, and then to IMH's Common Stock. Such
distributions will not be eligible for the dividends received deduction in the
case of holders of Common Stock or Preferred Stock that are corporations. Under
certain other circumstances, distributions made by IMH with respect to the
Common Stock or the Preferred Stock may constitute return of capital and/or
capital gain to the holder.
In general, any gain or loss realized upon a taxable disposition of shares
of Common Stock or Preferred Stock will be treated as capital gain or loss and,
in the case of a non-corporate stockholder, mid-term or long-term capital gain
or loss if the shares have been held as a capital asset for more than twelve
months or eighteen months, respectively, and otherwise as short-term capital
gain or loss. However, any loss realized upon a taxable disposition of shares
held for six months or less will be treated as long-term capital loss to the
extent of any capital gain dividends previously received with respect to such
shares of Common Stock or Preferred Stock.
Debt Securities. Interest and original issue discount, if any, on a Debt
Security will be treated as ordinary income to a holder. Any special tax
considerations applicable to a Debt Security will be described in the related
Prospectus Supplement.
Securities Warrants. Upon a holder's exercise of a Securities Warrant, the
holder will, in general, (i) not recognize any income, gain or loss for federal
income tax purposes, (ii) receive an initial tax basis in the Security received
equal to the sum of the holder's tax basis in the exercised Securities Warrant
and the exercise price paid for such Security and (iii) have a holding period
for the Security received beginning on the date of exercise. If a holder of a
Securities Warrant sells or otherwise disposes of such Securities Warrant in a
taxable
49
transaction (other than by its exercise), the holder generally will recognize
capital gain or loss (in the case of an individual, mid-term or long-term
capital gain or loss if the holder holds such Securities Warrant as a capital
asset and its holding period for the Securities Warrant exceeds twelve months
or eighteen months, respectively, on the date of disposition, and otherwise,
short term capital gain or loss) equal to the difference between (i) the cash
and fair market value of other property received and (ii) the holder's tax
basis (on the date of disposition) in the Securities Warrant sold. Such a
holder generally will recognize a capital loss upon the expiration of an
unexercised Securities Warrant equal to the holder's tax basis in the
Securities Warrant on the expiration date.
Backup Withholding
IMH will report to holders of Common Stock, Preferred Stock and Debt
Securities and the Service the amount of dividends or interest paid during each
calendar year, and the amount of tax withheld, if any. Under the backup
withholding rules, a holder may be subject to backup withholding at the rate of
31% with respect to dividends or interest 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 holder
that does not provide IMH with his correct taxpayer identification number may
also be subject to penalties imposed by the Service. Any amount paid as backup
withholding will be creditable against the holder's income tax liability. In
addition, IMH may be required to withhold a portion of capital gain
distributions to any holders who fail to certify their non-foreign status to
IMH.
Other Tax Consequences
IFC does not qualify as a REIT and will pay federal, state and local income
taxes on its taxable income at normal corporate rates. As a result, IFC is able
to distribute only its net after-tax earnings to its shareholders, including
IMH, as dividend distributions, thereby reducing the cash available for
distribution by IMH to its stockholders.
State and Local Taxes
IMH and holders of Securities may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of IMH and
holders of Securities may not conform to the federal income tax consequences
discussed above. Consequently, prospective holders of Securities should consult
their own tax advisors regarding the effect of state and local tax laws on an
investment in IMH.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed on for the
Company by Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation,
Beverly Hills, California, certain tax matters will be passed on for the
Company by Latham & Watkins, Los Angeles, California, and certain legal matters
with respect to Maryland law will be passed on for the Company by Ballard Spahr
Andrews & Ingersoll, LLP, Baltimore, Maryland.
EXPERTS
The financial statements of Impac Mortgage Holdings, Inc. and Impac Funding
Corporation incorporated in this Prospectus by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 have been so
incorporated by reference herein in reliance upon the reports of KPMG
Peat Marwick LLP, independent auditors, and upon the authority of said firm as
experts in auditing and accounting.
50
6,350,932 Shares
IMPAC MORTGAGE HOLDINGS, INC.
COMMON STOCK
This prospectus relates to the offer and sale from time to time by Impac
Funding Corporation, Inc., a California corporation, and HBK MasterFund L.P.
(each a "selling stockholder" and together the "selling stockholders"), of up
to 6,350,932 shares of our common stock.
The selling stockholders will receive all of the proceeds from the sale of
the common stock, less any discounts, commissions or other compensation that
they may pay to the underwriters, broker-dealers or other selling agents
effecting the sales.
Our common stock is traded on the American Stock Exchange under the symbol
"IMH." On August 24, 2001, the last reported sale price for the common stock on
the American Stock Exchange was $7.15 per share.
----------------
Your purchase of the common stock involves a high degree of risk.
See "Risk Factors" beginning at page 1.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities offered or sold
under this prospectus, nor have these organizations determined that this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
----------------
The date of this prospectus is August 30, 2001.
We have not authorized any dealer, salesperson or any other person to give
any information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information. This prospectus does not offer
to sell or seek an offer to buy any shares in any jurisdiction where it is
unlawful. The information contained in this prospectus is correct only as of
the date of this prospectus, regardless of the time of the delivery of this
prospectus or any sale of the shares.
Certain information contained in this prospectus and the reports
incorporated herein constitute forward-looking statements under the Securities
Act of 1933 and the Exchange Act of 1934. These forward-looking statements can
be identified by the use of forward-looking terminology including, but not
limited to, "may," "will," "expect," "intend," "should," "anticipate,"
"estimate," or "believe" or comparable terminology. Our actual results may
differ materially from those contained in the forward-looking statements.
Purchasers of our common shares should not place undue reliance on these
forward-looking statements, which speak only as of the date of this prospectus.
Table of Contents
Summary................................................................. i
Risk Factors............................................................ 1
Use of Proceeds......................................................... 14
Selling Security Holders and Plan of Distribution....................... 14
Description of Capital Stock............................................ 16
Material Federal Income Tax Consequences................................ 18
Legal Matters........................................................... 25
Experts................................................................. 25
Where You Can Find More Information..................................... 26
SUMMARY
We are a mortgage real estate investment trust, commonly known as a REIT,
which, together with our subsidiaries and related companies, primarily operates
three businesses: (1) our long-term investment operations, (2) our mortgage
operations, and (3) our warehouse lending operations. Our long-term investment
operations invests primarily in non-conforming residential mortgage loans and
securities backed by such loans. Our mortgage operations purchases or
originates and sells and securitizes primarily non-conforming residential
mortgage loans. Non-conforming residential mortgage loans are residential
mortgages that generally do not qualify for purchase by government-sponsored
agencies such as the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation. Our warehouse lending operations provides warehouse
and repurchase financing to originators of mortgage loans. We have elected to
be taxed as a REIT for federal income tax purposes, which generally allows us
to pass through income to stockholders without payment of federal income tax at
the corporate level.
On February 21, 2001 and March 30, 2001, Impac Funding Corporation purchased
a total of 400,000 shares of our Series C 10.5% Cumulative Convertible
Preferred Stock from LBP, Inc. (OTC Bulletin Board: LBPI.OB). HBK Masterfund LP
purchased 400,000 shares of our Series C Convertible Preferred Stock from us in
December 1998 and 400,000 shares from LBP, Inc. on February 26, 2001. The
shares offered under this prospectus were issued pursuant to the conversion of
the preferred stock.
Our principal executive offices are located at 1401 Dove Street, Newport
Beach, California, 92660. Our telephone number is (949) 475-3600.
In this prospectus, the terms "Company," "we," "us," and "our" refer to
Impac Mortgage Holdings, Inc., a Maryland corporation. The term "IFC" or
"selling stockholder" refers to Impac Funding Corporation, a California
corporation. Unless the context otherwise indicates, "common stock" refers to
the common stock, par value $0.01 per share, of Impac Mortgage Holdings, Inc.
i
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
consider the following factors carefully before deciding to purchase shares of
our common stock. Additional risks not presently known to us or that we
currently deem immaterial may also impair our business operations.
Inability to Generate Liquidity May Adversely Affect Our Operations
If we cannot generate sufficient liquidity, we will be unable to continue
our operations, grow our asset base and pay dividends. We have traditionally
derived our liquidity from three sources:
. financing facilities provided to us by others to acquire mortgage
assets;
. whole loan sales and securitizations of acquired mortgage loans; and
. our issuance of equity securities.
However, we cannot assure you that any of these alternatives will be
available to us, or if available, that we will be able to negotiate favorable
terms. If we cannot raise cash by selling debt and equity securities, we may be
forced to sell our assets at unfavorable prices or discontinue various business
activities. Our inability to access the capital markets could have a negative
impact on our earnings and ability to pay dividends.
Margin Calls on Financing Facilities May Adversely Affect Our Operations
Prior to the fourth quarter of 1998, we generally had no difficulty in
obtaining favorable financing facilities or in selling acquired mortgage loans.
However, during the fourth quarter of 1998 the mortgage industry experienced
substantial turmoil as a result of a lack of liquidity in the secondary
markets. At that time, investors expressed unwillingness to purchase interests
in securitizations due in part to:
. higher than expected credit losses on many companies' securitization
interests, and
. the widening of returns expected by institutional investors on
securitization interests over the prevailing Treasury rate.
As a result, many mortgage loan originators, including our company, were
unable to access the securitization market on favorable terms, which resulted
in some companies declaring bankruptcy. Originators, like our company, were
required to sell loans on a whole loan basis and liquidate holdings of
mortgage-backed securities to repay financing facilities. However, the large
amount of loans available for sale on a whole loan basis affected the pricing
offered for these loans which in turn reduced the value of the collateral
underlying the financing facilities. Therefore, many providers of financing
facilities initiated margin calls. Margin calls resulted when our lenders
evaluated the market value of the collateral securing our financing facilities
and required us to provide them with additional equity or collateral to secure
our borrowings.
Our financing facilities were short-term borrowings and due to the turmoil
in the mortgage industry during the latter part of 1998 many traditional
providers of financing facilities were unwilling to provide facilities on
favorable terms, or at all. If we cannot renew or replace maturing borrowings,
we may have to sell, on a whole loan basis, the loans securing these facilities
which, depending upon market conditions, may result in substantial losses.
Dependence on Securitizations for Liquidity
We rely significantly upon securitizations to generate cash proceeds to
repay borrowings and to create credit availability. Any reduction in our
ability to complete securitizations may require us to utilize other sources of
financing, which may be on less than favorable terms. In addition, gains on
sales from our securitizations represent a significant portion of our earnings.
1
Several factors could affect our ability to complete securitizations of our
mortgages, including:
. conditions in the securities markets;
. credit quality of the mortgage loans originated or purchased by our
mortgage operations;
. volume of our mortgage loan originations and purchases; and
. ability to obtain credit enhancement.
If we are unable to profitably securitize a significant number of our
mortgage loans in a particular financial reporting period, then it could result
in lower income or a loss for that period. As a result of turmoil in the
securitization market during the latter part of 1998, many mortgage lenders,
including our company, were required to sell mortgage loans on a whole loan
basis under adverse market conditions in order to generate liquidity. Many of
these sales were made at prices lower than our carrying value of the mortgage
loans and we experienced losses. We cannot assure you that we will be able to
continue to profitably securitize or sell our loans on a whole loan basis, or
at all.
Gains on sales from our securitizations have historically represented a
substantial portion of our earnings. Our ability to complete securitizations is
dependent upon general conditions in the securities and secondary markets and
the credit quality of the mortgage loans. In addition, delays in closing sales
of our loans increases our risk by increasing the warehousing period for the
loans, further exposing our company to credit risk.
The market for first loss risk securities, which are securities that take
the first loss when mortgages are not paid by the borrowers, is generally
limited. In connections with our securitizations, we will endeavor to sell all
securities subjecting us to a first loss risk. If we cannot sell these
securities, then we may be required to hold them for an extended period,
subjecting us to a first loss risk.
We May Not Pay Dividends to Stockholders
REIT provisions of the Internal Revenue Code require us to distribute to our
stockholders substantially all of our taxable income. These provisions restrict
our ability to retain earnings and renew capital for our business activities.
We may decide at a future time not to be treated as a REIT, which would cause
us to be taxed at the corporate level and to cease paying regular dividends.
Also, to date a portion of our dividends to stockholders consisted of
distributions by our mortgage operations subsidiary to our long-term investment
operations entity. However, our mortgage operations was not, and is not,
required under the REIT provisions to make these distributions. Since we are
trying to retain earnings for future growth, we may not cause our mortgage
operations subsidiary to make these distributions in the future. This would
materially affect the amount of dividends, if any, paid by us to our
stockholders.
Our Borrowings and Substantial Leverage May Cause Losses
Risks of Use of Collateralized Mortgage Obligations
To grow our investment portfolio, we borrow a substantial portion of the
market value of substantially all of our investments in mortgage loans and
mortgage-backed securities. We currently prefer to use collateralized mortgage
obligations as financing vehicles to increase our leverage, since mortgage
loans held for collateralized mortgage obligation collateral are retained for
investment rather than sold in a secondary market transaction. Retaining
mortgage loans as collateralized mortgage obligation collateral exposes our
operations to greater credit losses than the use of securitization techniques
that are treated as sales. In creating a collateralized mortgage obligation, we
make a cash equity investment to fund collateral in excess of the amount of the
securities issued. If we experience credit losses on the pool of loans subject
to the collateralized mortgage obligation greater than we expected, the value
of our equity investment decreases and we would have to adjust the value of the
investment in our financial statements.
2
Cost of Borrowings May Exceed Return on Assets
The cost of borrowings under our financing facilities corresponds to a
referenced interest rate plus or minus a margin. The margin varies depending on
factors such as the nature and liquidity of the underlying collateral and the
availability of financing in the market. We will experience net interest losses
if the returns on our assets financed with borrowed funds fail to cover the
cost of our borrowings.
Default Risks Under Financing Facilities
If we default under our collateralized borrowings, our lenders could force
us to liquidate the collateral. If the value of the collateral is less than the
amount borrowed, we could be required to pay the difference in cash. If we were
to declare bankruptcy, some of our reverse repurchase agreements may obtain
special treatment and our creditors would then be allowed to liquidate the
collateral without any delay. On the other hand, if a lender with whom we have
a reverse repurchase agreement declares bankruptcy, we might experience
difficulty repurchasing our collateral, or enforcing our claim for damages, and
it is possible that our claim could be repudiated and we could be treated as an
unsecured creditor. If this occurs, our claims would be subject to significant
delay and we may receive substantially less than our actual damages.
Risk of Lack of Return of Investment on Liquidation
We have pledged a substantial portion of our assets to secure the repayment
of collateralized mortgage obligations issued in securitizations, our financing
facilities or other borrowings. We will also pledge substantially all of our
current and future mortgage loans to secure borrowings pending their
securitization or sale. The cash flows we receive from our investments that
have not yet been distributed, pledged or used to acquire mortgage loans or
other investments may be the only unpledged assets available to our unsecured
creditors and you if our company were liquidated.
Interest Rate Fluctuations May Adversely Affect Our Operating Results
Our operations, each as a mortgage loan originator and warehouse lender, may
be adversely affected by rising and falling interest rates. Higher interest
rates may discourage potential borrowers from refinancing mortgages, borrowing
to purchase homes or seeking second mortgages. This may decrease the amount of
mortgages available to be acquired by our mortgage operations and decrease the
demand for warehouse financing provided by our warehouse lending operations to
originators of mortgage loans. If short-term interest rates exceed long-term
interest rates, there is a higher risk of increased loan prepayments, as
borrowers may seek to refinance their mortgage loans at lower long-term
interest rates. Increased loan prepayments could lead to a reduction in the
number of loans we service, the fees we receive for loan servicing and our loan
servicing income.
We are subject to the risk of rising mortgage interest rates between the
time we commit to purchase mortgages at a fixed price and the time we sell or
securitize those mortgages. An increase in interest rates will generally result
in a decrease in the market value of mortgages that we have committed to
purchase at a fixed price, but have not yet sold or securitized.
Risks of Repricing of Assets and Liabilities
Our principal source of revenue is net interest income or net interest
spread, which is the difference between the interest we earn on our interest
earning assets and the interest we pay on our interest bearing liabilities. The
rates we pay on our borrowings are independent of the rates we earn on our
assets and may be subject to more frequent periodic rate adjustments.
Therefore, we could experience a decrease in net interest income or a net
interest loss because the interest rates on our borrowings could increase
faster than the interest rates on our assets. If our net interest spread
becomes negative, we will be paying more interest on our borrowings than we
will be earning on our assets and we will be exposed to a risk of loss.
3
Additionally, the rates paid on our borrowings and the rates received on our
assets may be based upon different indices (i.e., LIBOR, U.S. Treasuries,
etc.). If the index used to determine the rate on our borrowings increases
faster than the index used to determine the rate on our assets, we will
experience a declining net interest spread which will have a negative impact on
our profitability and may result in losses.
Risks of Adjustable Rate Mortgages
A significant portion of the mortgage assets held by our long-term
investment operations are adjustable rate mortgages or bear interest based upon
short-term interest rate indices. We generally fund these mortgage assets with
borrowings. To the extent that there is a difference between the interest rate
index used to determine the interest rate on our adjustable rate mortgage
assets and the interest rate index used to determine the borrowing rate for our
related financing, our business may be negatively impacted.
Interest Rate Caps
Adjustable rate mortgages typically have interest rate caps, which limit
interest rates charged to the borrower during any given period. Our borrowings
are not subject to similar restrictions. In a period of rapidly increasing
interest rates, the interest rates we pay on our borrowings could increase
without limitation, while the interest rates we earn on our adjustable rate
mortgage assets would be capped. If this occurs, our net earnings could be
significantly reduced or we could suffer a net interest loss.
Payment Caps
Some of our adjustable rate mortgages may be subject to payment caps meaning
some portion of the interest accruing on the mortgage is deferred and added to
the principal outstanding. Our borrowings do not have similar provisions. This
could cause us to receive less cash on our adjustable rate assets than the
interest due on our related borrowings. Also, the increased principal amount
outstanding as a result of interest deferral may result in a higher rate of
defaults on these loans.
Our Quarterly Operating Results May Fluctuate
Our results of operations, and more specifically our earnings, may
significantly fluctuate from quarter to quarter based on several factors,
including:
. changes in the amount of loans we originate;
. between our cost of funds on borrowings and the average interest rates
earned on our loans;
. inability to complete or decisions not to complete significant bulk whole
loan sales or securitizations in a particular quarter; and
. generally affecting the mortgage loan industry.
A delay in closing a particular mortgage loan sale or securitization would
also increase our exposure to interest rate fluctuations by lengthening the
period during which our variable rate borrowings under our warehouse facilities
are outstanding. If we were unable to sell a sufficient number of mortgage
loans at a premium during a particular reporting period, our revenues for that
period would decline, which could have a material adverse affect on our
operations. As a result, our stock price could also fluctuate.
4
Our Share Prices Have Been and May Continue to be Volatile
Historically, the market price of our common stock has been volatile. During
2000, our stock reached a high of $4.38 and a low of $1.83. On June 1, 2001,
the closing sale price was $5.75. The market price of our common stock is
likely to continue to be highly volatile and could be significantly affected by
factors including:
. availability of liquidity in the securitization market;
. loan sale pricing;
. calls by warehouse lenders or changes in warehouse lending rates;
. unanticipated fluctuations in our operating results;
. prepayments on mortgages;
. valuations of securitization related assets;
. cost of funds; and
. general market conditions.
In addition, significant price and volume fluctuations in the stock market
have particularly affected the market prices for the common stocks of mortgage
REIT companies such as ours. These broad market fluctuations have adversely
affected and may continue to adversely affect the market price of our common
stock. If our results of operations fail to meet the expectations of securities
analysts or investors in a future quarter, the market price of our common stock
could also be materially adversely affected.
Prepayments of Mortgage Loans May Adversely Affect Our Operations
Mortgage prepayments generally increase when fixed mortgage interest rates
fall below the then-current interest rates on outstanding adjustable rate
mortgage loans. Prepayments on mortgage loans are also affected by the terms
and credit grades of the loans and general economic conditions. Most of our
adjustable rate mortgages and those backing mortgage-backed securities are
originated within six months of the time we purchased the mortgages and
generally bear initial interest rates which are lower than their "fully-
indexed" amount (the applicable index plus the margin). If we acquire these
mortgages at a premium and they are prepaid prior to or soon after the time of
adjustment to a fully-indexed rate, we would not have received interest at the
fully-indexed rate during such period. This means we would lose the opportunity
to earn interest at that rate over the expected life of the mortgage. Also, if
prepayments on our adjustable rate mortgage loans increase when interest rates
are declining, our net interest income may decrease if we cannot reinvest the
prepayments in mortgage assets bearing comparable rates.
We generally acquire mortgages on a "servicing released" basis, meaning we
acquire both the mortgages and the rights to service them. This strategy
requires us to pay a higher purchase price or premium for the mortgages. If our
mortgage loans that we acquired at a premium prepay faster than originally
projected, generally accepted accounting principles require us to write down
the remaining capitalized premium amounts at a faster speed than was originally
projected, which would decrease our future interest income.
Value of Our Portfolio of Mortgage-Backed Securities May be Adversely Affected
We invest in mortgage-backed securities known as "interest-only,"
"principal-only," residual interest and subordinated securities. These
securities are generally created through our own securitizations. Investments
in residual interest and subordinated securities are much riskier than
investments in senior mortgage-backed securities because these subordinated
securities bear all credit losses prior to the related senior securities. On a
percentage basis, the risk associated with holding residual interest and
subordinated securities is greater than holding the underlying mortgage loans
directly due to the concentration of losses in the subordinated securities.
5
We estimate future cash flows from these securities and value them utilizing
assumptions based in part on projected discount rates, mortgage loan
prepayments and credit losses. If our actual experience differs from our
assumptions we would be required to reduce the value of these securities. The
market for our asset-backed securities is extremely limited and we cannot
assure you that we could sell these securities at their reported value, or at
any value or that we could recoup our initial investment.
We also bear the risk of loss on any mortgage-backed securities we purchase
in the secondary mortgage market. If third parties have been contracted to
insure against these types of losses, we would be dependent in part upon the
creditworthiness and claims paying ability of the insurer and the timeliness of
reimbursement in the event of a default on the underlying obligations. The
insurance coverage for various types of losses is limited, and we bear the risk
of any losses in excess of the limitation or outside of the insurance coverage.
In addition, we may not obtain our anticipated yield or we may incur losses
if the credit support available within certain mortgage-backed securities is
inadequate due to unanticipated levels of losses, or due to difficulties
experienced by the credit support provider. Delays or difficulties encountered
in servicing mortgage-backed securities may cause greater losses and,
therefore, greater resort to credit support than was originally anticipated,
and may cause a rating agency to downgrade certain classes of our securities.
We Undertake Additional Risks by Acquiring and Investing in Mortgage Loans
Risk of Failure to Obtain Credit Enhancements
We do not obtain credit enhancements such as mortgage pool or special hazard
insurance for all of our mortgage loans and investments. Borrowers may obtain
private mortgage insurance, but we only require this insurance in limited
circumstances. During the time we hold mortgage loans for investment, we are
subject to risks of borrower defaults and bankruptcies and special hazard
losses that are not covered by standard hazard insurance. If a borrower
defaults on a mortgage loan that we hold, we bear the risk of loss of principal
to the extent there is any deficiency between the value of the related
mortgaged property and the amount owing on the mortgage loan. In addition,
since defaulted mortgage loans are not considered eligible collateral under our
borrowing arrangements, we bear the risk of being required to own these loans
without the use of borrowed funds until they are ultimately liquidated.
Greater Risks from Non-Conforming Mortgage Loans
Non-conforming residential mortgage loans are residential mortgages that do
not qualify for purchase by government sponsored agencies such as the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation.
Our operations may be negatively affected due to our investments in non-
conforming loans or securities evidencing interests in such loans. Credit risks
associated with non-conforming mortgage loans are greater than conforming
mortgage loans. The interest rates we charge on non-conforming loans are often
higher than those charged for conforming loans. The purchase market of non-
conforming loans has typically provided for higher interest rates in order to
compensate for the lower liquidity. Due to the lower level of liquidity in the
non-conforming loan market, we may realize higher returns upon securitization
of loans than would be realized upon securitization of conforming loans.
However, lower levels of liquidity may cause us to hold loans or other
mortgage-related assets supported by these loans. By doing this, we assume the
potential risk of increased delinquency rates and/or credit losses as well as
interest rate risk. Additionally, the combination of different underwriting
criteria and higher rates of interest leads to greater risk including higher
prepayment rates and higher delinquency rates and/or credit losses.
Second Mortgages Entail Greater Risks
Our security interest in the property securing second mortgages is
subordinated to the interest of the first mortgage holder. If the value of the
property is equal to or less than the amount needed to repay the borrower's
obligation to the first mortgage holder upon foreclosure, all or a portion of
our second mortgage loan will not be repaid.
6
Geographic Concentration of Mortgage Loans Has Higher Risks
We do not set limitations on the percentage of our mortgage asset portfolio
composed of properties located in any one area (whether by state, zip code or
other geographic measure). Concentration in any one area increases our exposure
to the economic and natural hazard risks associated with that area. We estimate
that a high concentration of the loans included in securitizations in which we
hold subordinated interests are secured by properties in California. Certain
parts of California have experienced an economic downturn in past years and
have suffered the effects of certain natural hazards.
Potential Losses Related to Recourse Obligations
Mortgage-backed securities issued in connection with our securitizations
have been non-recourse to us, except in the case of a breach of standard
representations and warranties made by us when the loans are securitized. While
we have recourse against the sellers of mortgage loans, we cannot assure you
that they will honor their obligations. We also engaged in bulk whole loan
sales pursuant to agreements that provide for recourse by the purchaser against
us. In some cases, the remedies available to a purchaser of mortgage loans from
us are broader than those available to us against those who sell us these
loans. If a purchaser exercises its rights against us, we may not always be
able to enforce whatever remedies we may have against our sellers.
We Undertake Additional Risks in Providing Warehouse Financing
As a warehouse lender, we lend money to mortgage bankers on a secured basis
and we are subject to the risks associated with lending to mortgage banks,
including the risks of fraud, borrower default and bankruptcy, any of which
could result in credit losses for us. Our claims as a secured lender in a
bankruptcy proceeding may be subject to adjustment and delay.
Value of our Mortgage Servicing Rights is Subject to Adjustment
When we purchase loans that include the associated servicing rights, the
allocated cost of the servicing rights is reflected on our financial statements
as mortgage servicing rights. To determine the fair value of these servicing
rights, we use assumptions to estimate future net servicing income including
projected discount rates, mortgage loan prepayments and credit losses. If
actual prepayments or defaults with respect to loans serviced occur more
quickly than we originally assumed, we would have to reduce the carrying value
of our mortgage servicing rights. We do not know if our assumptions will prove
correct.
Our Operating Results Will be Affected by the Results of Our Hedging Activities
To offset the risks associated with our mortgage operations, we enter into
transactions designed to hedge our interest rate risks. To offset the risks
associated with our long-term investment operations, we attempt to match the
interest rate sensitivities of our adjustable rate mortgage assets held for
investment with the associated financing liabilities. Our management determines
the nature and quantity of the hedging transactions based on various factors,
including market conditions and the expected volume of mortgage loan purchases.
We do not limit management's use of certain instruments in such hedging
transactions. While the Company believes that it is properly hedging its
interest rate risk, the accounting for such hedging activities do not generally
qualify for hedge accounting under accounting principles generally accepted in
the United States of America and FAS 133. The effect of the Company's hedging
strategy may result in some volatility in its quarterly earnings as interest
rates go up or down. The volatility in earning is a result of the Company
marking to market its hedges but not being allowed to mark to market the
underlying loans related to the hedges in place. While the Company believes it
is properly hedging its interest rate risk, we cannot assure you that our
hedging transactions will offset our risks of losses.
7
Reduction in Demand for Residential Mortgage Loans and Our Non-Conforming Loan
Products May Adversely Affect Our Operations
The availability of sufficient mortgage loans meeting our criteria is
dependent in part upon the size and level of activity in the residential real
estate lending market and, in particular, the demand for non-conforming
mortgage loans, which is affected by:
. interest rates;
. national economic conditions;
. residential property values; and
. regulatory and tax developments.
If our mortgage loan purchases decrease, we will have:
. decreased economies of scale;
. higher origination costs per loan;
. reduced fee income;
. smaller gains on the sale of non-conforming mortgage loans; and
. an insufficient volume of loans to effect securitizations which requires
us to accumulate loans over a longer period.
Our Delinquency Ratios and Our Performance May be Adversely Affected by the
Performance of Parties Who Sub-Service our Loans
We contract with third-party sub-servicers for the sub-servicing of all our
loans, including those in our securitizations, and our operations are subject
to risks associated with inadequate or untimely servicing. Poor performance by
a sub-servicer may result in greater than expected delinquencies and losses on
our loans. A substantial increase in our delinquency or foreclosure rate could
adversely affect our ability to access the capital and secondary markets for
our financing needs. Also, with respect to loans subject to a securitization,
greater delinquencies would adversely impact the value of any interest-only,
principal-only and subordinated securities we hold in connection with that
securitization.
In a securitization, relevant agreements permit us to be terminated as
servicer under specific conditions described in these agreements, such as the
failure of a sub-servicer to perform certain functions within specific time
periods. If, as a result of a sub-servicer's failure to perform adequately, we
were terminated as servicer of a securitization, the value of any servicing
rights held by us would be adversely affected.
Intense Competition for Mortgage Loans May Adversely Affect Our Operations
We compete in purchasing non-conforming mortgage loans and issuing
mortgage-backed securities with:
. other mortgage conduit programs;
. investment banking firms;
. savings and loan associations;
. banks;
. thrift and loan associations;
. finance companies;
. mortgage bankers;
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. insurance companies;
. other lenders; and
. other entities purchasing mortgage assets.
Consolidation in the mortgage banking industry may adversely affect us by
reducing the number of current sellers to our mortgage operations and our
potential customer base. As a result, we may have to purchase a larger
percentage of mortgage loans from a smaller number of customers, which could
cause us to have to pay higher premiums for loans.
If We Fail to Maintain Our REIT Status We May be Subject to Taxation as a
Regular Corporation
Consequences if We Fail to Qualify as a REIT
We believe that we have operated and intend to continue to operate in a
manner that enables us to meet the requirements for qualification as a REIT for
Federal income tax purposes. We have not requested, and do not plan to request,
a ruling from the Internal Revenue Service that we qualify as a REIT.
Moreover, no assurance can be given that legislation, new regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification. Our continued qualification as a REIT will
depend on our satisfaction of certain asset, income, organizational and
stockholder ownership requirements on a continuing basis.
If we fail to qualify as a REIT, we would not be allowed a deduction for
distributions to stockholders in computing our taxable income and would be
subject to Federal income tax at regular corporate rates. We also could be
subject to the Federal alternative minimum tax. Unless we are entitled to
relief under specific statutory provisions, we could not elect to be taxed as a
REIT for four taxable years following the year during which we were
disqualified. Therefore, if we lose our REIT status, the funds available for
distribution to you would be reduced substantially for each of the years
involved.
Effect of Distribution Requirements
As a REIT, we are subject to annual distribution requirements, which limit
the amount of cash we have available for other business purposes, including
amounts to fund our growth.
Other Tax Liabilities
Even if we qualify as a REIT, we may be subject to certain Federal, state,
and local taxes on our income, property and operations that could reduce
operating cash flow.
Recent Developments
The Tax Relief Extension Act of 1999 was enacted and it contains several tax
provisions regarding REITs. It includes a provision, which reduces the annual
distribution requirement for REIT taxable income from 95% to 90%. It also
changes the 10% voting securities test under current law to a 10% vote or value
test. Thus, subject to certain exceptions, a REIT will no longer be allowed to
own more than 10% of the vote or value of the outstanding securities of any
issuer, other than a qualified REIT subsidiary or another REIT. One exception
to this new test, which is also an exception to the 5% asset test under current
law, allows a REIT to own any or all of the securities of a taxable REIT
subsidiary. A taxable REIT subsidiary can perform non-customary services as
well as engage in non-real estate activities. A taxable REIT subsidiary will be
taxed as a regular C corporation but will be subject to earnings stripping
limitations on the deductibility of interest paid to its REIT. In addition, the
REIT will be subject to a 100% excise tax to the extent any transaction between
the taxable REIT subsidiary and the REIT is not conducted on an arm's length
basis. Securities of a taxable REIT
9
subsidiary will constitute non-real-estate assets for purposes of determining
whether at least 75% of a REIT's assets consist of real estate assets. In
addition, no more that 20% of a REIT's total assets can consist of securities
of taxable REIT subsidiaries. These new tax provisions became effective January
1, 2001. In addition, grandfather protection is provided with respect to the
10% value test for securities of a corporation held by a REIT on July 12, 1999,
but such protection ceases to apply after the corporation engages in a
substantial new line of business or acquires any substantial asset and also
ceases to apply after the acquisition of additional securities of the
corporation by the REIT after July 12, 1999.
Because we currently own more than 10% of the value of IFC, we have made an
election to have IFC become a taxable REIT subsidiary as of January 1, 2001.
Potential Characterization of Distributions or Gain on Sale as Unrelated
Business Taxable Income to Tax-Exempt Investors
If (1) all or a portion of our assets are subject to the rules relating to
taxable mortgage pools, (2) we are a "pension-held REIT," (3) a tax-exempt
stockholder has incurred debt to purchase or hold our common stock, or (4) the
residual REMIC interests we buy generate "excess inclusion income," then a
portion of the distributions to and, in the case of a stockholder described in
(3), 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 under
the Internal Revenue Code.
Classification as a Taxable Mortgage Pool Could Subject Us to Increased
Taxation
If we have borrowings with two or more maturities and, (1) those borrowings
are secured by mortgage loans or mortgage-backed securities and, (2) the
payments made on the borrowings are related to the payments received on the
underlying assets, then the borrowings and the pool of mortgage loans or
mortgage backed securities to which such borrowings relate may be classified as
a taxable mortgage pool under the Internal Revenue Code. If any part of our
company were to be treated as a taxable mortgage pool, then our REIT status
would not be impaired, but a portion of the taxable income we recognize may,
under regulations to be issued by the Treasury Department, be characterized as
"excess inclusion" income and allocated among our stockholders to the extent of
and generally in proportion to the distributions we make to each stockholder.
Any excess inclusion income would:
. not be allowed to be offset by a stockholder's net operating losses;
. be subject to a tax as unrelated business income if a stockholder were a
tax-exempt stockholder;
. 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
. be taxable (at the highest corporate tax rate) to us, rather than to our
stockholders, to the extent the excess inclusion income relates to stock
held by disqualified organizations (generally, tax-exempt companies not
subject to tax on unrelated business income, including governmental
organizations).
Based on advice of our tax counsel, we take the position that our existing
financing arrangements do not create a taxable mortgage pool. However, the IRS
may successfully maintain that our financing arrangements do qualify as a
taxable mortgage pool. In addition, we may enter into arrangements creating
excess inclusion income in the future.
Our Operations May be Adversely Affected if We are Subject to the Investment
Company Act
We intend to conduct our business at all times so as not to become regulated
as an investment company under 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.
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In order to qualify for this exemption we must maintain at least 55% of our
assets directly in mortgage loans, qualifying pass-through certificates and
certain other qualifying interests in real estate. Our ownership of certain
mortgage assets may be limited by the provisions of the Investment Company Act.
If the Securities and Exchange Commission adopts a contrary interpretation with
respect to these securities or otherwise believes we do not satisfy the above
exception, we could be required to restructure our activities or sell certain
of our assets. To insure that we continue to qualify for the exemption we may
be required at times to adopt less efficient methods of financing certain of
our mortgage assets and we may be precluded from acquiring certain types of
higher-yielding mortgage assets. The net effect of these factors will be to
lower at times our net interest income. If we fail to qualify for exemption
from registration as an investment company, our ability to use leverage would
be substantially reduced, and we would not be able to conduct our business as
described. Our business will be materially and adversely affected if we fail to
qualify for this exemption.
Future Revisions in Policies and Strategies at the Discretion of Our Board of
Directors May be Affected Without Stockholder Consent
Our board of directors, including a majority of our unaffiliated directors,
has established our investment and operating policies and strategies. We may:
. invest in the securities of other REITs for the purpose of exercising
control;
. issue securities in exchange for property; and
. repurchase or otherwise reacquire our shares or other securities in the
future.
In October 1998, we adopted a repurchase plan to repurchase up to $5.0
million of our common stock in the open market. In 1999, the board of directors
approved common stock repurchases up to an additional $5.0 million, or a total
of $10.0 million. During 1999, we repurchased 2.0 million shares of our common
stock for $9.9 million. During 2000, we adopted a repurchase plan to repurchase
up to $3.0 million of our common stock in the open market. As of December 31,
2000, we had repurchased 991,000 shares for $2.3 million. We may also
underwrite the securities of other issuers, although we have no present
intention to do so. Any of the policies, strategies and activities may be
modified or waived by our board of directors, subject in certain cases to
approval by a majority of our unaffiliated directors, without stockholder
consent.
Effect of Future Offerings May Adversely Affect Market Price of Our Securities
We may elect to increase our capital resources by making additional private
or public offerings of securities in the future. We do not know:
. the actual or perceived effect of these offerings;
. the timing of these offerings;
. the dilution of the book value or earnings per share of our securities
then outstanding; and
. the effect on the market price of our securities then outstanding.
Risk Relating to Common Stock
The sale or the proposed sale of substantial amounts of our common stock in
the public market could materially adversely affect the market price of our
common stock or other outstanding securities.
Maryland Business Combination Statute
The Maryland General Corporation Law establishes special requirements for
"business combinations" between a Maryland corporation and "interested
stockholders" unless exemptions are applicable. An interested stockholder is
any person who beneficially owns 10% or more of the voting power of our then-
outstanding
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voting stock. Among other things, the law prohibits for a period of five years
a merger and other similar transactions between our company and an interested
stockholder unless the board of directors approved the transaction prior to the
party becoming an interested stockholder. The five-year period runs from the
most recent date on which the interested stockholder became an interested
stockholder. The law also requires a supermajority stockholder vote for such
transactions after the end of the five-year period. This means that the
transaction must be approved by at least:
. 80% of the votes entitled to be cast by holders of outstanding voting
shares,
. 66% of the votes entitled to be cast by holders of outstanding voting
shares other than shares held by the interested stockholder with whom the
business combination is to be effected.
The business combination statute could have the effect of discouraging
offers to acquire us and of increasing the difficulty of consummating any such
offers, even if our acquisition would be in our stockholders' best interests.
Maryland Control Share Acquisition Statute
Maryland law 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 stockholder vote. Two-thirds of the shares eligible to
vote must vote in favor of granting the "control shares" voting rights.
"Control shares" are shares of stock that, taken together with all other shares
of stock the acquirer previously acquired, would entitle the acquirer to
exercise at least 10% of the voting power in electing directors. Control shares
do not include shares of stock the acquiring person is 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.
If a person who has made (or proposes to make) a control share acquisition
satisfies certain conditions (including agreeing to pay expenses), he may
compel our board of directors to call a special meeting of stockholders to be
held within 50 days to consider the voting rights of the shares. If such a
person makes no request for a meeting, we have the option to present the
question at any stockholders' meeting.
If voting rights are not approved at a meeting of stockholders then we may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value. We will determine the fair value
of the shares, without regard to voting rights, as of the date of either:
. the last control share acquisition, or
. the meeting where stockholders considered and did not approve voting
rights of the control shares.
If voting rights for control shares are approved at a stockholders' meeting
and the acquirer becomes entitled to vote a majority of the shares of stock
entitled to vote, all other stockholders may exercise appraisal rights. This
means that you would be able to force us to redeem your stock for fair value.
Under Maryland law, the fair value may not be less than the highest price per
share paid in the control share acquisition. Furthermore, certain limitations
otherwise applicable to the exercise of dissenters' rights would not apply in
the context of a control share acquisition. The control share acquisition
statute would not apply to shares acquired in a merger, consolidation or share
exchange if we were a party to the transaction. The control share acquisition
statute could have the effect of discouraging offers to acquire us and of
increasing the difficulty of consummating any such offers, even if our
acquisition would be in our stockholders' best interests.
Possible Adverse Consequences of Limits on Ownership of Shares
Our charter limits ownership of our capital stock by any single stockholder
to 9.5% of our outstanding shares. Our charter also prohibits anyone from
buying shares if the purchase would result in us losing our REIT status. This
could happen if a share transaction results in fewer than 100 persons owning
all of our shares or in five or fewer persons, applying certain broad
attribution rules of the Internal Revenue Code, owning more than
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50% (by value) of our shares. If you or anyone else acquires shares in excess
of the ownership limit or in violation of the ownership requirements of the
Internal Revenue Code for REITs, we:
. will consider the transfer to be null and void;
. will not reflect the transaction on our books;
. may institute legal action to enjoin the transaction;
. will not pay dividends or other distributions with respect to those
shares;
. will not recognize any voting rights for those shares;
. will consider the shares held in trust for the benefit of our Company;
and
. will either direct the affected person to sell the shares and turn over
any profit to us, or
. we will redeem the shares. If we redeem the shares, it will be at a
price equal to the lesser of:
(a) the price paid by the transferee of the shares, or
(b) the average of the last reported sales prices on the American Stock
Exchange on the ten trading days immediately preceding the date fixed for
redemption by our board of directors.
An individual who acquires shares that violate the above rules bears the
risk that (1) he may lose control over the power to dispose of his shares, (2)
he may not recognize profit from the sale of his shares if the market price of
the shares increases and (3) he may be required to recognize a loss from the
sale of his shares if the market price decreases.
Limitations on Acquisition and Change in Control Ownership Limit
The 9.5% ownership limit discussed above may have the effect of precluding
acquisition of control of our company by a third party without consent of our
board of directors.
13
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of common shares
pursuant to this prospectus.
SELLING SECURITY HOLDERS AND PLAN OF DISTRIBUTION
All of the common stock registered for sale under this prospectus is owned
by the selling stockholders. The shares offered in this prospectus by IFC were
acquired from LBP, Inc. (OTC Bulletin Board: LBPI.OB). The shares offered in
this prospectus by HBK MasterFund LP were acquired from us and LBP, Inc.
The following table sets forth the names of the selling stockholders, the
number of shares of common stock which may be deemed to be beneficially owned
by the selling stockholders and the maximum number of shares which may be
offered by the selling stockholders.
Shares of Number of Shares of
Common Stock Shares of Common Stock
Beneficially Common Stock Beneficially
Owned Prior to Being Owned After
Name of selling stockholders Offering Offered Offering
---------------------------- -------------- ------------ ------------
Impac Funding Corporation, Inc. ... 2,118,644 2,118,644 0
HBK MasterFund, LP................. 4,232,288 4,232,288 0
IMH owns 100% of the non-voting preferred stock of, and 99% of the economic
interest in, IFC. Joseph R. Tomkinson, IMH's Chairman of the Board and Chief
Executive Officer and IFC's Chief Executive Officer and a director is an owner
of one-third of the common stock of IFC. William S. Ashmore, IMH's President,
Chief Operating Officer and a director and IFC's President and a director is an
owner of one-third of the common stock of IFC. Richard J. Johnson, IMH's
Executive Vice President and Chief Financial Officer and Executive Vice
President, Chief Financial Officer and a director of IFC, is an owner of one-
third of the common stock of IFC.
HBK Investments L.P. has voting and investment control over the securities
held in the name of HBK Master Fund L.P. pursuant to an Investment Management
Agreement. Each of Harlan B. Korenvaes, Kenneth M. Hirsh, Laurence H. Lebowitz,
William E. Rose, Richard L. Booth, David C. Haley and Jamiel A. Akhtar may be
deemed to have voting and investment control over such securities as the
members of HBK Management LLC, the general partner of HBK Partners II L.P.,
which is the general partner of HBK Investments L.P. William E. Rose is a
director of IMH.
The selling stockholders may sell the common stock:
. directly to purchasers;
. to or through underwriters;
. through dealers, agents or institutional investors; or
. through a combination of such methods.
Regardless of the method used to sell the common stock, we will provide a
prospectus supplement that will disclose:
. the identity of any underwriters, dealers, agents or investors who
purchase the common stock;
. the material terms of the distribution, including the number of shares
sold and the consideration paid;
. the amount of any compensation, discounts or commissions to be received
by the underwriters, dealers or agents;
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. the terms of any indemnification provisions, including indemnification
from liabilities under the federal securities laws; and
. the nature of any transaction by an underwriter, dealer or agent during
the offering that is intended to stabilize or maintain the market price
of our common stock.
The selling stockholders and any underwriters, broker/dealers or agents that
participate in the distribution of the shares may be deemed to be
"underwriters" within the meaning of the Securities Act.
15
DESCRIPTION OF CAPITAL STOCK
The following is a brief description of the material terms of the securities
to be registered. This description is not complete and is subject and qualified
by reference to Maryland law and our charter and Bylaws, copies of which are on
file with the Securities and Exchange Commission, and are incorporated by
reference herein. Please see "Where You Can Find More Information."
General
Our authorized stock consists of 50,000,000 shares of common stock, $0.01
par value per share, and 10,000,000 shares of preferred stock, $0.01 par value
per share. Our stockholder meetings are held annually. Pursuant to our charter,
we reserve the right to amend any provision of our charter 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 our common stock is entitled to participate equally in
dividends when authorized by our board of directors and in the distribution of
our assets upon liquidation. Each share of common stock is entitled to one
vote, subject to the provisions of our charter regarding restrictions on
transfer of stock, and will be fully paid and nonassessable upon issuance.
Shares of common stock have no preference, conversion, exchange, redemption,
appraisal, preemptive or cumulative voting rights. Our authorized stock 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. Our charter
authorizes our board of directors to reclassify any unissued shares of common
stock in one or more classes or series of stock.
Preferred Stock
Our charter authorizes our board of directors to issue shares of preferred
stock and to classify or reclassify any unissued shares of preferred stock into
one or more classes or series of stock. The preferred stock may be issued from
time to time with such designations, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of redemption as shall be
determined by the board of directors for each class or series of stock subject
to the provisions of our charter regarding restrictions on transfer of stock.
Preferred stock is available for possible future financings or acquisitions and
for general corporate purposes without further stockholder authorization,
unless such authorization is required by applicable law or the rules of the
principal national securities exchange on which such stock is listed or
admitted to trading.
Repurchase of Shares and Restrictions on Transfer
Pursuant to our charter, if certain proposed transfers of common stock or
other events occur that result in a person owning shares in excess of our
ownership limits and, consequently, we fail to qualify as a REIT, then that
number of shares of stock actually or constructively owned by that person in
violation of the ownership limits will be automatically transferred to a
trustee of a trust for the exclusive benefit of one or more charitable
beneficiaries. The intended transferee will not acquire any rights in the
shares. Shares held by the trustee will constitute issued and outstanding
shares of stock. 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 our discovery
that shares of stock have been transferred to the trustee will be paid 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
paid to the trustee will be held in trust for the charitable beneficiary.
Subject to Maryland law, effective as of the date that such shares have been
transferred to the trustee, the trustee will have the authority (at the
trustee's sole discretion) (1) to rescind as void any vote cast by an intended
transferee prior to our discovery that such shares have been transferred to the
trustee and (2) to recast such vote in accordance with the desires of the
trustee acting for the benefit of the charitable beneficiary.
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Within 20 days of receiving notice from us that shares of stock have been
transferred to the trust, the trustee will sell the shares held in the trust to
a person designated by the trustee whose ownership of the shares will not
violate the ownership restrictions set forth in our 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
. the price paid by the intended transferee for the shares or, if the
intended did not give value for the shares in connection with the event
causing the shares to be held in the trust, the market price of the
shares on the day of the event causing the shares to be held in the trust
and
. the price per share received by the trustee from the sale or other
disposition of the shares held in the trust.
Any net sales proceeds in excess of the amount payable to the intended
transferee will be immediately paid to the charitable beneficiary.
In addition, shares of stock held in trust will be deemed to have been
offered for sale to us, or our designee, at a price per share equal to the
lesser of
. 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
. the market price on the date we, or our designee, accept such offer.
We will have the right to accept such offer until the trustee has sold the
shares held in the trust. If the shares are sold to us, 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.
Market price is defined in our charter as the closing price for shares on a
particular date. The closing price on any date shall mean the last sale price
for such shares, or, in case no such sale takes place on such day, the average
of the closing bid and asked prices, for such shares, in either case as
reported on the American Stock Exchange or the principal national securities
exchange on which shares are listed or admitted to trading.
All certificates representing shares of common stock bear a legend referring
to the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by the
Internal Revenue Code of all classes or series of our stock, within 30 days
after the end of each taxable year, is required to give us written notice
stating
. the name and address of such owner
. the number of shares of each class and series of our stock beneficially
owned and
. a description of the manner in which the shares are held.
Each owner shall provide us any additional information that we may request
in order to determine the effect, if any, of such beneficial ownership on our
status as a REIT and to ensure compliance with the ownership limit.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Based on various assumptions and factual representations made by us
regarding our operations, in the opinion of McKee Nelson LLP, our tax counsel,
commencing with our taxable year ended December 31, 1995, we have been and will
continue to be organized in conformity with the requirements for qualification
as a REIT under the Code, and our method of operating has enabled us, and our
proposed method of operating in the future will enable us, to meet the
requirements for qualification and taxation as a REIT. Our qualification as a
REIT depends upon our ability to meet the various requirements imposed under
the Code through our actual operations. McKee Nelson LLP will not review our
operations, and no assurance can be given that our actual operations will meet
the requirements imposed under the Code. The opinion of McKee Nelson LLP is not
binding on the IRS or any court. The opinion of McKee Nelson LLP is based upon
existing law, Treasury regulations, currently published administrative
positions of the IRS, and judicial decisions, all of which are subject to
change either prospectively or retroactively.
The provisions of the Code pertaining to REITs are highly technical and
complex. Under the Code, if certain requirements are met in a taxable year, a
REIT generally will not be subject to federal income tax with respect to income
that it distributes to its shareholders. If we fail to qualify during any
taxable year as a REIT, unless certain relief provisions are available, we will
be subject to tax (including any applicable alternative minimum tax) on our
taxable income at regular corporate rates, which could have a material adverse
effect upon our stockholders.
The following discussion summarizes the material United States federal
income tax consequences that relate to our qualification and taxation as a REIT
and that flow from an investment in our stock. No assurance can be given that
the conclusions set out below, if challenged by the IRS, would be sustained by
a court. This discussion deals only with stock that is held as a capital asset,
which generally means property that is held for investment. In addition, except
to the extent discussed below, this summary does not address tax consequences
applicable to you if you are subject to special tax rules. For instance, the
discussion does not address tax consequences applicable to the following
categories of stockholders:
. dealers or traders in securities;
. financial institutions;
. insurance companies;
. stockholders that hold our stock as a hedge, part of a straddle,
conversion transaction or other arrangement involving more than one
position;
. stockholders whose functional currency is not the United States dollar;
or
. stockholders that are tax-exempt organizations or foreign taxpayers.
The discussion set out below is intended only as a summary of the material
United States federal income tax consequences of our treatment as a REIT and of
an investment in our stock. Taxpayers and preparers of tax returns (including
returns filed by any partnership or other arrangement) should be aware that
under Treasury regulations a provider of advice on specific issues of law is
not considered an income tax return preparer unless the advice is (i) given
with respect to events that have occurred at the time the advice is rendered
and is not given with respect to the consequences of contemplated actions, and
(ii) is directly relevant to the determination of an entry on a tax return.
Accordingly, we urge you to consult your own tax advisors regarding the tax
consequences of an investment in our stock, including the application to your
particular situation of the tax matters discussed below, as well as the
application of state, local or foreign tax laws. The statements of United
States tax law set out below are based on the laws in force and their
interpretation as of the date of this prospectus, and are subject to changes
occurring after that date.
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REIT Qualification Requirements
The following is a brief summary of the material technical requirements
imposed by the Code that we must satisfy on an ongoing basis to qualify, and
remain qualified, as a REIT.
Stock Ownership Requirements
We must meet the following stock ownership requirements:
(1) our capital stock must be transferable;
(2) our capital stock must be held by at least 100 persons during at
least 335 days of a taxable year of 12 months (or during a proportionate
part of a taxable year of less than 12 months); and
(3) no more than 50% of the value of our capital stock may be owned,
directly or indirectly, by five or fewer individuals at any time during the
last half of the taxable year. In applying this test, the Code treats some
entities as individuals.
Tax-exempt entities, other than private foundations and certain
unemployment compensation trusts, are generally not treated as individuals for
these purposes. The requirements of items (2) and (3) above did not apply to
the first taxable year for which we made an election to be taxed as a REIT.
However, these stock ownership requirements must be satisfied in each
subsequent taxable year. Our charter imposes restrictions on the transfer of
our shares to help us meet the stock ownership requirements. In addition,
Treasury regulations require us to demand from the record holders of
designated percentages of our capital stock, annual written statements
disclosing actual and constructive ownership of our stock. The same
regulations require us to maintain permanent records showing the information
we have received regarding actual and constructive stock ownership and a list
of those persons failing or refusing to comply with our demand.
Asset Requirements
We generally must meet the following asset requirements at the close of
each quarter of each taxable year:
(a) at least 75% of the value of our total assets must be "qualified
REIT real estate assets" (described below), government securities, cash and
cash items;
(b) no more than 25% of the value of our total assets may be securities
other than securities in the 75% asset class (for example, government
securities and certain mortgage-backed securities);
(c) no more than 20% of the value of our total assets may be securities
of one or more Taxable REIT subsidiaries (described below); and
(d) except for securities in the 75% asset class, securities in a
Taxable REIT subsidiary or "qualified REIT subsidiary," and certain
partnership interests and debt obligations--
(1) no more than 5% of the value of our total assets may be
securities of any one issuer,
(2) we may not hold securities that possess more than 10% percent of
the total voting power of the outstanding securities of any one issuer,
and
(3) we may not hold securities that have a value of more than 10
percent of the total value of the outstanding securities of any one
issuer.
"Qualified REIT real estate assets" means assets of the type described in
section 856(c)(5)(B) of the Code, and generally include (among other assets)
interests in mortgages on real property and certain mortgage-backed
securities, and shares in other REITs.
A "Taxable REIT subsidiary" is a corporation that may earn income that
would not be qualifying income if earned directly by the REIT. A REIT may hold
up to 100% of the stock in a Taxable REIT subsidiary. Both
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the subsidiary and the REIT must jointly elect to treat the subsidiary as a
Taxable REIT subsidiary by jointly filing a Form 8875 with the IRS. A Taxable
REIT subsidiary will pay tax at the corporate rates on any income it earns.
Moreover, the Code contains rules to ensure contractual arrangements between a
Taxable REIT subsidiary and the parent REIT are at arm's length. We have,
together with IFC, filed an election to have IFC treated as our Taxable REIT
subsidiary as of January 1, 2001.
If we fail to meet any of the asset tests as of the close of a calendar
quarter due to the acquisition of securities or other assets, the Code allows
us a 30-day period following the close of the calendar quarter to come into
compliance with the asset tests. If we do cure a failure within the 30-day
period, we will be treated as having satisfied the asset tests at the close of
the calendar quarter.
Gross Income Requirements
We generally must meet the following gross income requirements for each
taxable year:
(a) at least 75% of our gross income must be derived from the real
estate sources specified in section 856(c)(3) of the Code, including
interest income and gain from the disposition of qualified REIT real estate
assets, and "qualified temporary investment income" (generally, income we
earn from investing new capital, provided we received that income within
one year of acquiring such new capital); and
(b) at least 95% of our gross income for each taxable year must be
derived from sources of income specified in section 856(c)(2) of the Code,
which includes the types of gross income described just above, as well as
dividends, interest, and gains from the sale of stock or other financial
instruments (including interest rate swap and cap agreements, options,
futures contracts, forward rate agreements or similar financial instruments
entered into to reduce interest rate risk with respect to debt incurred or
to be incurred to acquire or carry qualified REIT real estate assets) not
held for sale in the ordinary course of business.
Distribution Requirements
We generally must distribute dividends (other than capital gain dividends)
to our stockholders in an amount at least equal to (1) the sum of (a) 90% of
our REIT taxable income (computed without regard to the dividends paid
deduction and net capital gains) and (b) 90% of the net income (after tax, if
any) from foreclosure property, minus (2) the sum of certain items of non-cash
income. In addition, if we were to recognize "Built in Gain" (as defined below)
on disposition of any assets acquired from a "C" corporation in a transaction
in which Built in Gain was not recognized (for instance, assets acquired in a
statutory merger), we would be required to distribute at least 90% of the Built
in Gain recognized net of the tax we would pay on such gain. Built in Gain is
the excess of (a) the fair market value of an asset (measured at the time of
acquisition) over (b) the basis of the asset (measured at the time of
acquisition). We do not hold any assets having Built in Gain.
We are not required to distribute our net capital gains. Rather than
distribute them, we may elect to retain and pay the federal income tax on them,
in which case our stockholders will (1) include their proportionate share of
the undistributed net capital gains in income, (2) receive a credit for their
share of the federal income tax we pay and (3) increase the bases in their
stock by the difference between their share of the capital gain and their share
of the credit.
Failure to Qualify
If we fail to qualify as a REIT in any taxable year and the relief
provisions provided in the Code do not apply, we will be subject to federal
income tax, including any applicable alternative minimum tax, on our taxable
income in that taxable year and all subsequent taxable years at the regular
corporate income tax rates. We will not be allowed to deduct distributions to
shareholders in these years, nor will the Code require us to make
distributions. Further, unless entitled to the relief provisions of the Code,
we also will be barred from re-electing REIT status for the four taxable years
following the year in which we fail to qualify. It is not possible to state in
what circumstances we would be entitled to any statutory relief.
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We intend to monitor on an ongoing basis our compliance with the REIT
requirements described above. To maintain our REIT status, we will be required
to limit the types of assets that we might otherwise acquire, or hold some
assets at times when we might otherwise have determined that the sale or other
disposition of these assets would have been more prudent.
Taxation as a REIT
In any year in which we qualify as a REIT, we generally will not be subject
to federal income tax on that portion of our REIT taxable income or capital
gain that we distribute to our stockholders. We will, however, be subject to
federal income tax at regular corporate income tax rates on any undistributed
taxable income or capital gain.
Notwithstanding our qualification as a REIT, we may also be subject to tax
in the following other circumstances:
. If we fail to satisfy either the 75% or the 95% gross income test, but
nonetheless maintain our qualification as a REIT because we meet other
requirements, we generally will be subject to a 100% tax on the greater
of the amount by which we fail either the 75% or the 95% gross income
test multiplied by a fraction intended to reflect our profitability.
. We will be subject to a tax of 100% on net income derived from any
"prohibited transaction" which is, in general, a sale or other
disposition of property held primarily for sale to customers in the
ordinary course of business.
. If we have (1) net income from the sale or other disposition of
foreclosure property that is held primarily for sale to customers in the
ordinary course of business or (2) other non-qualifying income from
foreclosure property, it will be subject to federal income tax at the
highest corporate income tax rate.
. If we fail to distribute during each calendar year at least the sum of
(1) 85% of our REIT ordinary income for such year, (2) 95% of our REIT
capital gain net income for such year and (3) any amount of undistributed
ordinary income and capital gain net income from preceding taxable years,
we will be subject to a 4% federal excise tax on the excess of the
required distribution over the amounts actually distributed during the
taxable year.
. If we acquire a Built in Gain asset from a C corporation in a transaction
in which the basis of the asset is determined by reference to the basis
of the asset in the hands of the C corporation and we recognize Built in
Gain upon a disposition of such asset occurring within 10 years of its
acquisition, then we will be subject to federal tax to the extent of any
Built in Gain at the highest corporate income tax rate.
. We may also be subject to the corporate alternative minimum tax, as well
as other taxes in situations not presently contemplated.
Taxation of Stockholders
Unless you are a tax-exempt entity, distributions that we make to you,
including constructive distributions, generally will be subject to tax as
ordinary income to the extent of our current and accumulated earnings and
profits as determined for federal income tax purposes. If the amount we
distribute to you exceeds your allocable share of current and accumulated
earnings and profits, the excess will be treated as a return of capital to the
extent of your adjusted basis in your stock, which will reduce your basis in
your stock but will not be subject to tax. To the extent the amount we
distribute to you exceeds both your allocable share of current and accumulated
earnings and profits and your adjusted basis, this excess amount will be
treated as a gain from the sale or exchange of a capital asset. Distributions
to our corporate stockholders, whether characterized as ordinary income or as
capital gain, are not eligible for the corporate dividends received deduction.
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Distributions that we designate as capital gain dividends generally will be
taxable in your hands as long-term capital gains, to the extent such
distributions do not exceed our actual net capital gain for the taxable year.
In the event that we realize a loss for the taxable year, you will not be
permitted to deduct any share of that loss. Further, if we, or a portion of our
assets, were to be treated as a taxable mortgage pool, any excess inclusion
income that is allocated to you could not be offset by any losses or other
deductions you may have. Future Treasury regulations may require you to take
into account, for purposes of computing your individual alternative minimum tax
liability, some of our tax preference items.
Dividends that we declare during the last quarter of a calendar year and
actually pay to you during January of the following taxable year, generally are
treated as if we had paid, and you had received them on December 31 of the
calendar year and not on the date actually paid. In addition, we may elect to
treat other dividends distributed after the close of the taxable year as having
been paid during the taxable year, so long as they meet the requirements
described in the Code, but you will be treated as having received these
dividends in the taxable year in which the distribution is actually made.
If you sell or otherwise dispose of our stock, you will generally recognize
a capital gain or loss in an amount equal to the difference between the amount
realized and your adjusted basis in the stock, which gain or loss will be long-
term if the stock is held for more than one year. Any loss recognized on the
sale or exchange of stock held for six months or less generally will be treated
as a long-term capital loss to the extent of (1) any long-term capital gain
dividends you receive with respect to the stock and (2) your proportionate
share of any long-term capital gains that we retain (see the discussion under
the caption Distribution Requirements).
If we fail to qualify as a REIT in any year, distributions we make to you
will be taxable in the same manner discussed above, except that:
. we will not be allowed to designate any distributions as capital gain
dividends;
. distributions (to the extent they are made out of our current and
accumulated earnings and profits) will be eligible for the corporate
dividends received deduction;
. the excess inclusion income rules will not apply to the stockholders; and
. you will not receive any share of our tax preference items.
In this event, however, we could be subject to substantial federal income
tax liability as a C corporation, and the amount of earnings and cash available
for distribution to you and other stockholders could be significantly reduced
or eliminated.
Information Reporting and Backup Withholding
For each calendar year, we will report to our domestic stockholders and to
the IRS the amount of distributions that we pay, and the amount of tax (if any)
that we withhold on these distributions. Under the backup withholding rules,
you may be subject to backup withholding tax at a rate of 31% with respect to
distributions paid unless you:
. are a corporation or come within another exempt category and demonstrate
this fact when required; or
. provide a taxpayer identification number, certify as to no loss of
exemption from backup withholding tax and otherwise comply with the
applicable requirements of the backup withholding tax rules.
A domestic stockholder may satisfy this requirement by providing us an
appropriately prepared Form W-9. If you do not provide us with your correct
taxpayer identification number, then you may also be subject to penalties
imposed by the IRS.
Backup withholding tax is not an additional tax. Any amounts withheld under
the backup withholding tax rules will be refunded or credited against your
United States federal income tax liability, provided you furnish the required
information to the IRS.
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Taxation of Tax-Exempt Entities
The discussion under this heading only applies to you if you are a tax-
exempt entity.
Subject to the discussion below regarding a pension-held REIT, distributions
received from us or gain realized on the sale of our stock will not be taxable
as unrelated business taxable income (UBTI), provided that:
. you have not incurred indebtedness to purchase or hold our stock;
. you do not otherwise use our stock in trade or business unrelated to your
exempt purpose; and
. we, consistent with our present intent, do not hold a residual interest
in a REMIC that gives rise to excess inclusion income as defined under
section 860E of the Code.
If all or a portion of our assets were to be treated as a taxable mortgage
pool, however, a substantial portion of the dividends you receive may be
subject to tax as UBTI.
In addition, a substantial portion of the dividends you receive may
constitute UBTI if we are treated as a "pension-held REIT" and you are a
"qualified pension trust" that holds more than 10% by value of our stock at any
time during a taxable year. For these purposes, a "qualified pension trust" is
any pension or other retirement trust that satisfies the requirements imposed
under section 401(a) of the Code. We will be treated as a "pension-held REIT"
if (1) we would not be a REIT if we had to treat stock held in a qualified
pension trust as owned by the trust (instead of as owned by the trust's
multiple beneficiaries) and (2) (a) at least one qualified pension trust holds
more than 25% of our stock by value, or (b) one or more qualified pension
trusts (each owning more than 10% of our stock by value) hold in the aggregate
more than 50% of our stock by value. Assuming compliance with the ownership
limit provisions set forth in our articles of incorporation, it is unlikely
that pension plans will accumulate sufficient stock to cause us to be treated
as a pension-held REIT.
If you qualify for exemption under sections 501(c)(7), (c)(9), (c)(17), and
(c)(20) of the Code, then distributions received by you may also constitute
UBTI. We urge you to consult your tax advisors concerning the applicable set
aside and reserve requirements.
United States Federal Income Tax Considerations Applicable to Foreign
Stockholders
The discussion under this heading only applies to you if you are not a U.S.
person (hereafter, "foreign stockholder"). A U.S. person is a person who is:
. a citizen or resident of the United States;
. a corporation, partnership, or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof;
. an estate whose income is includible in gross income for United States
Federal income tax purposes regardless of its source; or
. a trust, if (1) a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more
U.S. persons have authority to control all substantial decisions of the
trust, or (2) the trust was in existence on August 26, 1996, was treated
as a domestic trust prior to such date, and has made an election to
continue to be treated as a U.S. person.
This discussion is only a brief summary of the United States federal tax
consequences that apply to you, which are highly complex, and does not consider
any specific facts or circumstances that may apply to you and your particular
situation. We urge you to consult your tax advisors regarding the United States
federal tax consequences of acquiring, holding and disposing of our stock, as
well as any tax consequences that may arise under the laws of any foreign,
state, local or other taxing jurisdiction.
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Distributions
Except for distributions attributable to gain from the disposition of real
property interests or distributions designated as capital gains dividends,
distributions you receive from us generally will be subject, to the extent of
our earnings and profits, to federal withholding tax at the rate of 30%, unless
reduced or eliminated by an applicable tax treaty or unless the distributions
are treated as effectively connected with your United States trade or business.
If you wish to claim the benefits of an applicable tax treaty, you may need to
satisfy certification and other requirements, such as providing Form W-8BEN. If
you wish to claim distributions are effectively connected with your United
States trade or business, you may need to satisfy certification and other
requirements such as providing Form W-8ECI.
Distributions you receive that are in excess of our earnings and profits
will be treated as a tax-free return of capital to the extent of your adjusted
basis in your stock. If the amount of the distribution also exceeds your
adjusted basis, this excess amount will be treated as gain from the sale or
exchange of your stock as described below. If we cannot determine at the time
we make a distribution whether the distribution will exceed our earnings and
profits, the distribution will be subject to withholding at the same rate as
dividends. These withheld amounts, however, will be refundable or creditable
against your United States federal tax liability if it is subsequently
determined that the distribution was, in fact, in excess of our earnings and
profits. If you receive a dividend that is treated as being effectively
connected with your conduct of a trade or business within the United States,
the dividend will be subject to the United States federal income tax on net
income that applies to United States persons generally, and may be subject to
the branch profits tax if you are a corporation.
Distributions that we make to you and designate as capital gains dividends,
other than those attributable to the disposition of a United States real
property interest, generally will not be subject to United States federal
income taxation, unless:
. your investment in our stock is effectively connected with your conduct
of a trade or business within the United States; or
. you are a nonresident alien individual who is present in the United
States for 183 days or more in the taxable year, and other requirements
are met.
Distributions that are attributable to a disposition of United States real
property interests are subject to income and withholding taxes pursuant to the
Foreign Investment in Real Property Act of 1980 (FIRPTA), and may also be
subject to branch profits tax if you are a corporation that is not entitled to
treaty relief or exemption. However, because we do not expect to hold assets
that would be treated as United States real property interests as defined by
FIRPTA, the FIRPTA provisions should not apply to investment in our stock.
Gain on Disposition
You generally will not be subject to United States federal income tax on
gain recognized on a sale or other disposition of our stock unless:
. the gain is effectively connected with your conduct of a trade or
business within the United States;
. you are a nonresident alien individual who holds our stock as a capital
asset and are present in the United States for 183 or more days in the
taxable year and other requirements are met; or
. you are subject to tax under the FIRPTA rules discussed below.
Gain that is effectively connected with your conduct of a trade or business
within the United States will be subject to the United States federal income
tax on net income that applies to United States persons generally and may be
subject to the branch profits tax if you are a corporation. However, these
effectively connected gains will generally not be subject to withholding. We
urge you to consult applicable treaties, which may provide for different rules.
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Under FIRPTA, you may be subject to tax on gain recognized from a sale or
other disposition of your stock if we were to both (1) hold United States real
property interests and (2) fail to qualify as a domestically controlled REIT. A
REIT qualifies as a domestically-controlled REIT as long as less than 50% in
value of its shares of beneficial interest are held by foreign persons at all
times during the shorter of (1) the previous five years and (2) the period in
which the REIT is in existence. As mentioned above, we do not expect to hold
any United States real property interests. Furthermore, we will likely qualify
as a domestically controlled REIT, although no assurances can be provided
because our shares are publicly traded.
Information Reporting and Backup Withholding Tax
The information reporting and backup withholding tax requirements (discussed
above) will generally not apply to foreign holders in the case of distributions
treated as (1) dividends subject to the 30% (or lower treaty rate) withholding
tax (discussed above), or (2) capital gain dividends. Also, as a general
matter, backup withholding and information reporting will not apply to the
payment of proceeds from shares sold by or through a foreign office of a
foreign broker. However, in some cases (for example, a sale of shares through
the foreign office of a U.S. broker), information reporting is required unless
the foreign holder certifies under penalty of perjury that it is a foreign
holder, or otherwise establishes an exemption. A foreign stockholder may
satisfy this requirement by using an appropriately prepared Form W-8 BEN.
Federal Estate Taxes
In general, if an individual who is not a citizen or resident (as defined in
the Code) of the United States owns (or is treated as owning) our stock at the
date of death, such stock will be included in the individual's estate for
United States Federal estate tax purposes, unless an applicable treaty provides
otherwise.
State and Local Taxes
We and our stockholders may be subject to state or local taxation in various
jurisdictions, including those in which we or they transact business or reside.
The state and local tax treatment that applies to us and our stockholders may
not conform to the federal income tax consequences discussed above.
Consequently, we urge you to consult your own tax advisors regarding the effect
of state and local tax laws.
LEGAL MATTERS
The validity of the issuance of the shares offered in this prospectus will
be passed upon for us by Kirkpatrick & Lockhart LLP, Los Angeles, California.
Certain legal matters described under "Material Federal Income Tax
Consequences" and certain matters with respect to Maryland law will be passed
upon for us by McKee Nelson LLP, Washington, D.C.
EXPERTS
The consolidated financial statements of Impac Mortgage Holdings, Inc. and
of Impac Funding Corp. as of December 31, 2000 and 1999, and for each of the
years in the three-year period ending December 31, 2000, have been incorporated
by reference herein and in the registration statement in reliance upon the
report of KPMG LLP, independent auditors, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document it files at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., in Washington, D.C. 20549. Please
call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the operation of the public reference room. In addition, the
Securities and Exchange Commission maintains an Internet site that contains our
reports, proxy and information statements and other information at
http://www.sec.gov.
The Securities and Exchange Commission allows us to "incorporate by
reference" the information it files with it, which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is part of this prospectus, and later
information that we file with the Securities and Exchange Commission will
automatically update and supersede this information. We incorporate by
reference the documents listed below. We also incorporate by reference any
future filings made with the Securities and Exchange Commission under Sections
13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934. This
prospectus is part of a registration statement that Impac Mortgage Holdings has
filed with the Securities and Exchange Commission.
. Impac Mortgage Holding's Annual Report on Form 10-K for the year ended
December 31, 2000 filed with the Securities and Exchange Commission on
March 30, 2001.
. Impac Mortgage Holdings's Quarterly Reports on Form 10-Q for the quarter
ended March 31, 2001 filed with the Securities and Exchange Commission on
May 15, 2001 and for the quarter ended June 30, 2001 filed with the
Securities and Exchange Commission on August 14, 2001.
. Impac Mortgage Holding's Current Reports on Form 8-K filed with the SEC
on July 31, 2001, June 27, 2001, June 1, 2001, March 30, 2001, March 5,
2001 and January 19, 2001.
. Impac Mortgage Holdings Definitive Proxy Statement dated June 1, 2001
relating to the 2001 Annual Meeting of Stockholders.
You may request a copy of these filings, at no cost, by writing our Investor
Relations Department us at the following address: 1401 Dove Street, Suite 100,
Newport Beach, CA 92660, or by calling (949) 475-3700.
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