SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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[X] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
IMPAC COMMERCIAL HOLDINGS, INC.
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(Name of Registrant as Specified In Its Charter)
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FOR IMMEDIATE RELEASE
IMPAC COMMERCIAL HOLDINGS, INC.
EXPLAINS TO ITS SHAREHOLDERS THE BOARD'S DECISION TO REJECT PROPOSAL BY
APEX MORTGAGE CAPITAL, INC.
NEW YORK, October 28, 1999 - In a letter addressed to its shareholders
(copy attached), Impac Commercial Holdings, Inc. ("ICH") explained the
principal reasons for the Board's unanimous decision to reject Apex
Mortgage Capital, Inc.'s stock-for-stock proposal to merge with Apex. ICH
will be providing additional detail in its revised proxy statement, which
is expected to be available in the next few weeks.
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Lilly Donohue
Vice President
Fortress Investment Group LLC
1301 Avenue of the Americas
42nd Floor
New York, NY 10019
212.798.6118 (direct)
212.798.6133 (fax)
[email protected]
[Impac Commercial Holdings, Inc. letterhead]
October 28, 1999
Dear Shareholder:
As you know, on August 4, 1999 the Board approved an agreement
and plan of merger between Impac and AMRESCO Capital Trust ("AMCT") and
resolved to recommend that merger to shareholders. The merger contemplates
a stock-for-stock transaction in which each of Impac's shares would be
converted into 0.66094 of a share of the combined company, which would
continue to be managed by Impac's external manager, an affiliate of
Fortress Investment Group. The Board endorsed a strategic alliance with
AMCT principally because it believed that a company with a larger capital
base and greater liquidity which combined AMCT's loan origination and asset
management expertise and Fortress' structured finance and capital markets
expertise would be able to position itself as a market leader and
consolidator of other specialty finance companies and mortgage REITs.
On September 7, 1999, Impac received in a letter addressed to
the Board, an unsolicited proposal from Apex Mortgage Capital, Inc.
("Apex") proposing that Impac and Apex be merged, with Impac stockholders
receiving 0.60328 of a share of Apex common stock for each share of Impac
common stock. Citing the then current market price of Apex common stock,
the proposal letter declared itself to be "superior" to the AMCT
transaction and offered that Apex would enter into a confidentiality
agreement and commence work immediately in order to satisfy a due diligence
contingency. The proposal letter also stated that the resulting company
would be managed by Apex's external manager, an affiliate of TCW. Apex
publicized its proposal and urged the Board to appoint a special committee
of independent directors to evaluate its proposal and enter into
negotiations with it towards a definitive agreement.
On October 25, 1999, the Board advised Apex that it had
unanimously rejected the Apex proposal and reaffirmed its determination to
move forward with the AMCT transaction.
The purpose of this letter is to share with you the Board's
principal reasons for determining to reject the Apex proposal and explain
the context in which that determination was made.
REASONS FOR THE BOARD'S DECISION
In considering the Apex proposal, the Board took into account
(i) the form as well as the amount of the consideration offered, (ii) the
business plan proposed by Apex, (iii) the pro forma net asset value of the
combined companies, (iv) the market price of the Apex stock and certain
factors currently and prospectively affecting that market price, (v) the
track record of the Apex manager, (vi) the terms of the Apex management
agreement, (vii) the size of the investment by Apex's manager in the
combined company, (viii) the prospects for future growth in the value of
Apex stock and (ix) a presentation from Impac's independent financial
advisor, Bear Stearns & Co. Inc.
Form of Consideration
It is important to note at the outset that the Apex proposal
did not propose to cash out the Company's shareholders; rather, it offered
Apex stock as the consideration to be received by Impac's shareholders in
the merger. Accordingly, a crucial inquiry for the Board was not just the
amount of the merger consideration (as would be the case in a cash
transaction) but, more importantly, the value of the consideration. This
required analysis of not only the current market price of Apex's shares,
but also factors affecting that value on both a current and prospective
basis.
Business Plan
One of the critical questions posed by the Board to Apex
concerned its proposed business plan for the combined company. In response,
Apex indicated that the combined company would follow the current Apex
business plan. The Board made the following observations about the Apex
business plan.
. High leverage - The Apex business plan as disclosed in its public
filings calls primarily for purchasing highly rated single-family
adjustable and fixed rate mortgage related assets and highly
leveraging them - historically on average between 10-12 times.
. Short term financing - The financing used to implement this
business plan to date appears to be of a very short term nature.
Specifically, at June 30, 1999 Apex had $736.7 million in
financing with a stated average term of 1.8 months.
. Exposure to rising interest rates - The book value of Apex is
very sensitive to changes in interest rates. Apex estimates in
its public disclosure that a 100 basis point rise in interest
rates would result in a corresponding decline of approximately
$2.20/share in Apex book value. In the period since the most
recent filing in June, interest rates have risen substantially.
Using the U.S. Treasury rate as a reference and applying this
formula, the increase in interest rates since June 30, 1999 would
indicate a book value decline of approximately $1.00/share since
the close of the second quarter. This is in addition to a decline
in net asset value of nearly 17% during the first six months of
1999.
The Board noted that the Apex portfolio has experienced approximately
a 200% average annual turnover since inception. Because REITs generally are
required to pay a 100% tax on trading profits, the Board was concerned, but
unable to verify whether Apex would be subject to this tax. The Board also
noted that, in apparent contradiction to Apex's stated business plan of
investing primarily in single-family adjustable and fixed rate mortgage
related assets, approximately $21.5 million (or 29%) of Apex's equity was
invested in equity securities as of June 30, 1999.
The Board concluded that Apex's business plan is one that
differs substantially from virtually every aspect of Impac's business plan.
Apex's plan has considerably greater financing and interest rate risk. The
past year has produced several noteworthy examples (including Long Term
Capital and Criimi Mae) of the risks associated with a strategy of high
leverage and short term financing, particularly during periods of financial
market instability.
Track Record
In Apex's letters to the Board, numerous references were made
to Apex's "superior track record" and "continuous profitability." After
carefully reviewing the Apex historical record the Board made several
observations. First, based on the information supplied by Apex, the total
return on an investment in Apex from the IPO in December 1997 to present is
approximately 1.15%, which in the Board's experience is typically not the
return profile associated with a "superior track record." Second, in June
1997, the FASB issued FAS 130, which requires companies like Apex that
invest primarily in liquid securities to report Comprehensive Income (which
includes unrealized gains and losses on investments available for sale) as
a more inclusive measure of performance than net income alone. Analyzing
Apex's performance, using this measure, the Board noted that although net
reported income for the first six months of this year was approximately
$5,816,000, Comprehensive Income during the same period was a loss of
approximately ($10,182,000), which seemingly is at odds with Apex's claim
of "continuous profitability."
The Board noted that this Comprehensive Loss resulted in a
reported decline of the stated book value of Apex by approximately 17%
during the first six months of this year. In addition, the Board noted that
if Apex has been adversely affected by the recent rise in interest rates in
the manner described in its public filings, Apex's book value will have
declined by approximately an additional 9%.
Apex's performance this year, in the Board's view, reflects the
obvious risks of the Apex business plan in an increasing interest rate
environment.
Transaction Consideration
The Board analyzed Apex's proposal on the basis of three traditional
valuation criteria: (a) stock price, (b) net asset value and (c) earnings
per share.
Stock price: The Apex proposal contemplates the exchange of 0.60328
shares of Apex common stock for each share of Impac common stock,
which reflects a current premium over the current market value of the
shares intended to be received in the
AMCT transaction.
. Volume - Apex's shares are very thinly traded - the average daily
trading volume of Apex over the previous 90 days was
approximately 8,100 shares, or approximately $100,000 per day.
The Board believes that in this context stock price alone is not
an accurate indicator of value and that the "premium" reflected
in the current share price may well be illusory, particularly
under concerted selling pressure.
. Upside price limitation - Both Apex and AMCT are mortgage REITs,
albeit with considerably different business plans. Apex currently
is valued at a price equal to its reported book value, while AMCT
is currently valued at a price equal to approximately 70% of
reported book value. As a result, in the view of the Board, Impac
shareholders have relatively limited upside, but significant
downside, with respect to an investment in Apex stock. The
opposite is true with respect to an investment by Impac
shareholders in AMCT stock, which if it were to trade at a value
closer to its book value would result in meaningful upside.
Net Asset Value: NAV is widely considered to be a meaningful measure
of value for mortgage REITs. The AMCT transaction reflects a premium
to Impac's shareholders as compared to Apex's proposal on an NAV
basis (using the most recently available public numbers and before
taking into account any further diminution resulting from rising
interest rates). In addition, the transaction as proposed by Apex
will trigger a number of transaction costs: (i) a merger agreement
termination and expense payment, (ii) a management agreement
termination payment and (iii) new due diligence and transaction
costs. Apex was asked to clarify whether an outside party would bear
these incremental expenses (as is the case in the AMCT transaction,
where Fortress is bearing the $11.1 million cost associated with the
acquisition of the AMCT management contract) and declined to do so.
In the event Apex intends that the shareholders of Impac and Apex,
and not the Apex manager, bear these expenses, the Apex proposal will
result in a further diminution in shareholder book value.
Earnings: The year 2000 pro forma dividend to Impac shareholders as a
result of the proposed transaction with AMCT is $1.09 per share based
on earnings of $1.15 per share. Based on the information supplied by
Apex, the Board believes this is likely to be significantly higher
than the Apex proposal.
Management contracts/alignment of interests
Both the AMCT transaction and the Apex proposal provide for the combined
companies to be externally managed. Accordingly, the Board analyzed the
proposed Apex management contract and the proposed AMCT management
contract, and found that, while the AMCT contract provides for a higher
base management fee, the Apex contract provides for a higher incentive fee.
On balance, the Board determined that the AMCT contract offered better
value to the Impac shareholders for the following reasons:
. Cumulative returns - The Apex proposed contract calls for
quarterly incentive payments without regard to whether the
company has generated an overall cumulative positive return from
year to year. Indeed, although Apex's cumulative total return to
date is lower than the incentive fee hurdle rate of 10-year
Treasuries plus 100 basis points, Apex's manager has received
$1.16 million in incentive fees. The AMCT proposed contract calls
for no incentive compensation unless the company has generated
positive returns above the hurdle rate on a cumulative basis.
. Termination fee - The Apex proposed contract calls for
calculation of a termination fee as if the contract runs in
perpetuity. The Board is not aware of a similar provision in a
management contract of this type, and expressed concern about the
cost to shareholders if the provision ever were invoked. The AMCT
proposed contract calls for a termination fee based on the twelve
prior months of management fees plus whatever incentive fee would
be due upon liquidation of all of the assets, which the Board
believes is consistent with the market standard.
The Board also noted that in the AMCT transaction, the external manager
through a combination of existing ownership and additional cash investment
will own approximately 16% of the combined company which the Board believes
significantly aligns the interests of the manager with those of
shareholders. In contrast, under the Apex proposal, the manager would
appear to be the beneficial owner (although it is not clear to what extent
it would be the economic owner) of approximately 3% of the combined equity.
On balance, the Board carefully considered these and other
issues in consultation with its independent financial advisor as described
below and unanimously concluded that the Apex proposal is not superior to
the transaction contemplated by the AMCT merger agreement. The Board's
intention at this time is to continue to pursue the AMCT transaction as
described in the merger agreement, which the Board believes will result in
the highest value to the shareholders.
CONTEXT FOR THE BOARD'S DECISION
The AMCT merger agreement contains a number of provisions
customary in public company transactions, including a reciprocal
prohibition against either company soliciting a competing third-party
acquisition proposal. Specifically, the agreement provides that unless and
until the Board concludes in good faith that an unsolicited acquisition
proposal is a "superior proposal" (having first received written advice to
that effect from an independent financial advisor), Impac and its
representatives are not allowed to "participate in or encourage any
discussion or negotiations regarding, or furnish to any person any
non-public information with respect to" any such acquisition proposal.
Breach of this provision (which is reciprocally binding on AMCT) would
subject Impac to liability for breach of contract.
After receiving the Apex proposal, the Board met telephonically on
September 10, 1999 to begin its consideration. As a threshold matter, after
consulting with its outside counsel Skadden, Arps, Slate, Meagher & Flom
LLP and Ballard Spahr Andrews & Ingersoll, LLP, it was decided that the
whole Board rather than a special committee should consider the matter. For
an externally managed REIT, the Board believes that the Board
representatives of Impac's external manager are analogous to senior
officers/board members of any public corporation who have employment
agreements with the company. Such persons are not generally viewed as being
subject to any inherent conflict in evaluating proposals to acquire the
company. The Board noted that the management agreement with Fortress
contains a customary termination provision providing for fair compensation
to the manager if the agreement were to be terminated as a result of a
merger transaction. The Board also believed that Fortress' 16.7% equity
investment in the Company and Fortress' agreement to convert its preferred
stock to common stock in the AMCT transaction aligned its interests with
those of the Company's shareholders. Finally, the Board observed that a
majority of the members of the whole Board were not affiliates of the
manager. If the Board were to determine to proceed with the Apex proposal,
it reserved the right to establish a separate committee for the purpose of
overseeing the termination of the Fortress management agreement.
The Board then began the process of considering whether the
proposal did, in fact, constitute a "superior proposal" and retained Bear
Stearns & Co. Inc. to assist it in reviewing and analyzing such proposal.
The Company also requested in writing clarification regarding certain
aspects of the Apex proposal. In addition, on Friday, October 15, 1999,
Impac authorized Bear Stearns together with counsel to engage in a
telephonic conference call with Apex and its representatives to give Apex
an opportunity to more responsively address certain of the questions
previously raised and which might provide Bear Stearns and Impac with
information that would facilitate their evaluation. With few exceptions,
the Apex representatives declined to make any clarifications or changes, or
offer new information, with respect to their proposal or to make available
any further information regarding Apex, its assets, financing, hedging
strategies and business plans, that was not already publicly available.
On October 20, 1999, at a telephonic meeting, the Board
considered at length the Apex proposal, including a presentation by Bear
Stearns. After considering carefully the matters discussed at the previous
meeting including the Bear Stearns presentation the Board reconvened on
October 22 and unanimously voted to reject the Apex proposal and proceed
with the AMCT merger for the reasons summarized above.
Impac expects to make available definitive proxy material
relating to the AMCT transaction within the next few weeks which will
provide significantly greater information about that transaction than is
summarized in this letter. After reviewing that material, I hope that you
will concur with the Board's continuing recommendation to vote in favor of
that transaction.
Sincerely,
Wesley R. Edens
Chairman of the Board
LEGEND REQUIRED BY RULE 14A-12
Impac, FIC Management, Impac's manager, and certain of their
respective directors and executive officers may be deemed to be
participants in the solicitation of proxies in connection with the proposed
merger of Impac with and into AMRESCO Capital Trust. The participants in
this solicitation may include the directors of Impac (Wesley Edens, Frank
Filipps, Robert Kauffman, Christopher Mahowald and Joseph Tomkinson); the
directors of FIC Management (Wesley Edens, Robert Kauffman, Randal Nardone
and Erik Nygaard); and the following executive officers of Impac and FIC
Management: Wesley Edens (Chairman and Chief Executive Officer), Gregory
Hughes (Chief Financial Officer), Randal Nardone (Chief Operating Officer
and Secretary), Jon Ashley (Vice President) and Lilly Donohue (Assistant
Secretary).
As of the date of this communication, with the exception of Messrs.
Tomkinson and Filipps, each of whom owns less than 1.5% of the outstanding
shares of Impac common stock, none of the individuals listed above directly
owns any shares of Impac common stock. Fortress Partners, L.P., the
majority stockholder of FIC Management, owns Impac series B preferred stock
which is convertible into approximately 16.7% of the outstanding shares of
Impac Common Stock. Messrs. Edens and Kauffman, each serve as a director
and executive officer of Fortress Investment Corp., the sole general
partner of Fortress Partners, and together with Messrs. Nardone and
Nygaard, collectively own all of the beneficial interests of Fortress
Principal Investment Holdings LLC which owns 12.8% of the common stock of
Fortress Investment Corp.; Messrs. Edens, Kauffman, Nardone and Nygaard may
be deemed to be the beneficial owners of the shares of Impac series B
preferred stock owned by Fortress Partners, as well as the shares of Impac
common stock into which those shares are convertible.
Upon completion of the merger with AMRESCO, all of the current
directors of Impac will become trust managers of the combined company. In
addition, FIC Management will become the manager of the combined company
and will be entitled to receive certain compensation for management
services from the combined company. In addition, FIC Management will
acquire from AMRESCO's current manager and an affiliate of its parent
1,500,111 AMRESCO common shares at $8.9375 per share and options to acquire
an additional 1,000,011 AMRESCO common shares 700,008 of which are
exercisable at $15.00 per share and 300,003 of which are exercisable at
$18.75 per share.
