<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only
[ ] Definitive Proxy Statement (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
</TABLE>
AMRESCO CAPITAL TRUST
IMPAC COMMERCIAL HOLDINGS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, $0.01 par value, of Impac Commercial Holdings, Inc.
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
10,101,835 shares of Common Stock, $0.01 par value, of Impac Commercial
Holdings, Inc.
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
Calculated solely for the purpose of determining the fee required by
Rule 0-11 by multiplying 1/50 of 1% by the product of $5.437 (the
average of the reported high and low prices of a share of common
stock, $0.01 par value, of Impac Commercial Holdings, Inc. ("Impac")
on September 7, 1999) multiplied by 10,101,835 (the maximum number
of shares of common stock of Impac that may be transferred in the
transaction, assuming the conversion of all outstanding shares of
preferred stock of Impac).
--------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$54,923,676
------------------------------------------------------------------------
(5) Total fee paid:
$10,985
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
Subject to completion, dated September 10, 1999.
These materials constitute preliminary proxy materials filed with respect
to future special shareholder meetings. Some of the information is presented as
it is expected to exist when definitive proxy materials are mailed to
shareholders, and will be revised to reflect facts that exist at that time.
[AMRESCO logo] [Impac logo]
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
THE BOARD OF TRUST MANAGERS OF AMRESCO CAPITAL TRUST AND THE BOARD OF
DIRECTORS OF IMPAC COMMERCIAL HOLDINGS, INC. HAVE APPROVED A MERGER OF IMPAC
INTO AMRESCO AND RECOMMEND THAT YOU VOTE IN FAVOR OF THE MERGER. WE BELIEVE THAT
THE COMBINED COMPANY WILL BE ABLE TO CREATE MORE SHAREHOLDER VALUE THAN COULD BE
ACHIEVED BY THE COMPANIES INDIVIDUALLY.
If the merger is completed, each share of Impac common stock will be
converted into 0.66094 of a common share of the combined company and each common
share of AMRESCO will remain outstanding as a share of the combined company.
After the merger, the current Impac stockholders will own approximately 40% and
the current AMRESCO shareholders will own approximately 60% of the outstanding
common shares of the combined company.
The AMRESCO common shares to be issued in the merger [have been approved]
for listing on the NASDAQ Stock Market, subject to official notice of issuance.
The merger cannot be completed unless the shareholders of both AMRESCO and
Impac approve it. Each of the companies has scheduled a special meeting for you
to vote on the merger. Your vote is very important.
We are also asking AMRESCO shareholders to approve an amendment to
AMRESCO's declaration of trust to change the name of the combined company to
"Garrison Investment Trust."
AMRESCO, INC. and its affiliates, which own a total of approximately 15% of
the outstanding AMRESCO common shares, have indicated their intention to vote in
favor of the merger and the amendment to AMRESCO's declaration of trust.
Fortress Partners L.P., which owns Impac preferred stock representing
approximately 16.7% of the outstanding shares of Impac voting stock, has
indicated its intention to vote in favor of the merger.
The dates, times and places of the special meetings are:
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For AMRESCO shareholders: For Impac stockholders:
, 1999 , 1999
9:00 a.m., central standard time 10:00 a.m., eastern standard time
North Tower of the Plaza of the Americas 1301 Avenue of the Americas
17th Floor 42nd Floor
700 North Pearl Street New York, New York
Dallas, Texas
</TABLE>
This document provides you with detailed information about the proposed
merger. We encourage you to read this entire document carefully.
SEE THE RISK FACTORS BEGINNING ON PAGE 15 OF THIS DOCUMENT FOR A DISCUSSION
OF RISKS THAT YOU SHOULD CONSIDER IN EVALUATING THE MERGER.
<TABLE>
<S> <C>
Robert L. Adair III Wesley R. Edens
Chairman of the Board and Chairman of the Board and
Chief Executive Officer Chief Executive Officer
of AMRESCO Capital Trust of Impac Commercial Holdings, Inc.
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued under this
document or determined if this document is truthful or complete. Any
representation to the contrary is a criminal offense.
Joint proxy statement and prospectus dated , 1999, and first
mailed to shareholders on , 1999.
<PAGE> 3
IMPAC COMMERCIAL HOLDINGS, INC.
C/O FORTRESS INVESTMENT GROUP LLC
1301 AVENUE OF THE AMERICAS, 42ND FLOOR
NEW YORK, NEW YORK 10019
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
------------------------
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of IMPAC
COMMERCIAL HOLDINGS, INC., a Maryland corporation, will be held at the offices
of Fortress Investment Group LLC located at 1301 Avenue of the Americas, 42nd
Floor, New York, New York on , , 1999 at 10:00 a.m., eastern
standard time, for the following purposes:
1. To consider and vote upon the proposed merger of Impac with and
into AMRESCO Capital Trust, a Texas real estate investment trust, pursuant
to the Agreement and Plan of Merger by and between Impac and AMRESCO dated
as of August 4, 1999, including the other transactions contemplated
thereby, a copy of which is attached as Annex A to the accompanying
document; and
2. To adjourn the special meeting, if necessary, to permit further
solicitation of proxies if there are not sufficient votes at the originally
scheduled time of the special meeting to approve the merger.
Approval of the merger and the transactions contemplated thereby requires
(a) the affirmative vote of the holders of at least a majority of the votes
entitled to be cast by the holders of shares of Impac's common stock and series
B preferred stock outstanding on the record date for determining the
stockholders entitled to notice of and to vote at the Impac special meeting,
voting together as a single group, with each share of Impac series B preferred
stock entitled to the number of votes equal to the number of shares of Impac's
common stock into which it is convertible as of the record date, and (b) the
affirmative vote of holders of at least two-thirds of the shares of series B
preferred stock outstanding on the record date, voting separately as a class.
Approval of the proposal to adjourn the special meeting to solicit additional
proxies, if necessary, requires the affirmative vote of the holders of at least
a majority of the shares of Impac common stock voted on the matter.
Stockholders of Impac are not entitled to appraisal rights in connection
with the merger.
The enclosed proxy card will enable you to vote your shares on the matters
to be considered at the special meeting. All you need to do is mark the proxy
card to indicate your vote, date and sign the proxy card, and then return it
promptly in the self-addressed stamped envelope provided. The giving of the
proxy will not affect your right to attend the meeting, nor, if you choose to
revoke the proxy, your right to vote in person.
The Impac board of directors has fixed the close of business on
, 1999 as the record date for determination of stockholders entitled
to notice of and to vote at the special meeting.
By Order of the Board of Directors,
Randal A. Nardone
Secretary
, 1999
New York, New York
<PAGE> 4
AMRESCO CAPITAL TRUST
700 NORTH PEARL STREET
SUITE 2400, LB 342
DALLAS, TEXAS 75201-7424
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
------------------------
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of AMRESCO
CAPITAL TRUST, a Texas real estate investment trust, will be held on the 17th
Floor of the North Tower of the Plaza of the Americas, 700 North Pearl Street,
Dallas, Texas on , , 1999 at 9:00 a.m., central
standard time, for the following purposes:
1. To consider and vote upon the proposed merger of Impac Commercial
Holdings, Inc., a Maryland corporation, with and into AMRESCO Capital
Trust, pursuant to the Agreement and Plan of Merger by and between Impac
and AMRESCO dated as of August 4, 1999, including the other transactions
contemplated thereby, a copy of which is attached as Annex A to the
accompanying document;
2. To consider and vote upon the proposed amendment to AMRESCO's
declaration of trust to change AMRESCO's name to "Garrison Investment
Trust" if the merger is approved and consummated;
3. To adjourn the special meeting, if necessary, to permit further
solicitation of proxies if there are not sufficient votes at the time of
the special meeting to approve proposal 1 or 2; and
4. To transact such other business as may properly come before the
special meeting or any postponement or adjournment of the special meeting.
Approval of the merger agreement and the transactions contemplated thereby
requires the affirmative vote of holders of at least a majority of the
outstanding common shares of AMRESCO entitled to vote at the AMRESCO special
meeting. Approval of the amendment to AMRESCO's declaration of trust requires
the affirmative vote of holders of at least two-thirds of the outstanding common
shares of AMRESCO entitled to vote at the AMRESCO special meeting. If the merger
is not approved at the AMRESCO and Impac special meetings, AMRESCO's declaration
of trust will not be amended, regardless of whether or not the name change
amendment is approved. Approval of adjournment of the special meeting requires
the affirmative vote of the holders of at least a majority of the common shares
of AMRESCO present in person or represented by a properly executed proxy at the
special meeting.
Shareholders of AMRESCO are not entitled to appraisal rights in connection
with the merger.
The enclosed proxy card will enable you to vote your shares on the matters
to be considered at the special meeting. All you need to do is mark the proxy
card to indicate your vote, date and sign the proxy card, and then return it
promptly in the self-addressed stamped envelope provided. The giving of the
proxy will not affect your right to attend the special meeting, nor, if you
choose to revoke the proxy, your right to vote in person.
The board of trust managers has fixed the close of business on ,
1999 as the record date for determination of shareholders entitled to notice of
and to vote at the special meeting.
By Order of the Board of Trust
Managers,
Michael L. McCoy
Secretary
, 1999
Dallas, Texas
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SUMMARY..................................................... 1
Questions and Answers About the Merger.................... 1
The Companies............................................. 4
The Special Meetings...................................... 5
The Merger Agreement...................................... 6
Comparative Per Share Data................................ 8
Market Prices and Dividend Information.................... 9
Selected Historical Financial Data of AMRESCO............. 12
Selected Historical Financial Data of Impac............... 13
Unaudited Pro Forma Combined Summary Financial Data....... 14
RISK FACTORS................................................ 15
Risk factors relating to the merger....................... 15
Risk factors relating to ownership of the combined
company's common shares after completion of the
merger................................................. 16
Cautionary statement regarding forward-looking
statements............................................. 17
THE MERGER.................................................. 18
Terms of the merger....................................... 18
Background of the merger.................................. 18
AMRESCO's reasons for the merger; Recommendations of the
AMRESCO board.......................................... 22
Opinions of AMRESCO's financial advisors.................. 25
Interests of AMRESCO's trust managers, executive officers
and affiliates......................................... 33
Impac's reasons for the merger; Recommendations of the
Impac board............................................ 34
Opinion of Impac's financial advisor...................... 36
Interests of Impac directors, executive officers and
affiliates............................................. 42
Management and operations of the combined company after
the merger............................................. 42
Material federal income tax consequences of the merger.... 46
Accounting treatment...................................... 47
Restrictions on sales by affiliates....................... 47
No appraisal rights....................................... 47
THE MERGER AGREEMENT........................................ 48
General................................................... 48
Expenses.................................................. 48
Effective time of the merger.............................. 48
Exchange of Impac shares.................................. 48
Conditions to the merger.................................. 49
Representations and warranties............................ 51
Covenants................................................. 52
Distributions............................................. 53
No solicitation of acquisition proposals.................. 53
Termination............................................... 54
Break-up fees and expenses................................ 55
Indemnification........................................... 55
Amendment and waiver...................................... 56
THE PURCHASE AGREEMENT...................................... 56
THE AMENDED AND RESTATED MANAGEMENT AGREEMENT............... 57
Payments to the manager................................... 57
</TABLE>
i
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary of other terms.................................... 59
Conflicts of interest in relationship with the manager.... 63
THE SPECIAL MEETINGS........................................ 64
The AMRESCO special meeting............................... 64
The Impac special meeting................................. 65
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS........... 67
COMPARISON OF SHAREHOLDER RIGHTS............................ 73
DESCRIPTION OF AMRESCO SECURITIES........................... 84
Common shares............................................. 84
Preferred shares.......................................... 84
Registration rights....................................... 85
Restrictions on size of holdings.......................... 85
Preferred share purchase rights........................... 86
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
OF AMRESCO................................................ 87
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
OF IMPAC.................................................. 89
EXISTING BUSINESS OF AMRESCO................................ 91
Overview.................................................. 91
Employees................................................. 91
Business strategy......................................... 92
Investment activities..................................... 93
Competition............................................... 97
Environmental matters..................................... 97
Industry trends........................................... 98
Properties................................................ 99
Legal proceedings......................................... 99
AMRESCO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 100
Overview.................................................. 100
Results of operations..................................... 101
Liquidity and capital resources........................... 108
REIT status............................................... 110
Year 2000 issue........................................... 110
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF AMRESCO'S MARKET
RISKS..................................................... 113
Mortgage loans............................................ 114
Commercial mortgage-backed securities..................... 114
Borrowing facilities...................................... 115
BUSINESS OF IMPAC........................................... 117
General................................................... 117
The manager............................................... 117
Existing Impac management agreement....................... 118
Long-term investment operations........................... 119
Conduit operations........................................ 122
Recent operations developments............................ 123
Regulation................................................ 124
Competition............................................... 124
Employees................................................. 124
</TABLE>
ii
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
<S> <C>
Properties................................................ 124
Legal proceedings......................................... 124
IMPAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 126
General................................................... 126
Significant transactions.................................. 126
Business operations....................................... 127
Results of operations of Impac............................ 129
Results of operations of Impac Commercial Capital
Corporation............................................ 135
Liquidity and capital resources........................... 135
Cash flows................................................ 136
Inflation................................................. 137
Year 2000 Compliance...................................... 137
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF IMPAC ABOUT
MARKET RISK............................................... 139
FEDERAL INCOME TAX CONSIDERATIONS........................... 140
General................................................... 140
REIT qualification........................................ 141
Taxation as a REIT........................................ 148
Failure to qualify as a REIT.............................. 149
Tax aspects of investments in affiliated entities......... 150
Taxation of taxable U.S. shareholders..................... 151
Information reporting and backup withholding.............. 153
Taxation of tax-exempt shareholders....................... 153
Taxation of foreign shareholders.......................... 153
Proposed legislation...................................... 155
State, local and foreign taxes............................ 156
WHERE YOU CAN FIND MORE INFORMATION......................... 157
LEGAL MATTERS............................................... 157
EXPERTS..................................................... 157
OTHER MATTERS............................................... 158
INDEX TO AUDITORS' REPORTS AND CONSOLIDATED FINANCIAL
STATEMENTS................................................ F-1
ANNEXES
AGREEMENT AND PLAN OF MERGER................................ A-1
OPINION OF PRUDENTIAL SECURITIES INCORPORATED............... B-1
OPINION OF DEUTSCHE BANK SECURITIES......................... C-1
OPINION OF BANC OF AMERICA SECURITIES LLC................... D-1
</TABLE>
iii
<PAGE> 8
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. AMRESCO and Impac have
included page references in parentheses to direct you to a more complete
description of the topics presented in this summary. To understand the merger
fully and for a more complete description of the legal terms of the merger, you
should read carefully this entire document and the documents to which we have
referred you. See "Where You Can Find More Information" on page 157.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT TRANSACTIONS ARE BEING PROPOSED?
A: It is proposed that AMRESCO and Impac be merged, with AMRESCO as the
surviving company in the merger. At the closing of the merger, FIC
Management, Inc., Impac's current manager and an affiliate of Fortress
Investment Group LLC, a real estate investment and asset manager, will
become the manager of the combined company. FIC Management or its affiliates
will own approximately 15.7% of the outstanding shares of the combined
company following the merger.
Q: WHY ARE AMRESCO AND IMPAC PROPOSING THIS MERGER?
A: AMRESCO and Impac expect the combined company resulting from the merger to
have the following important characteristics, which are intended to create
long-term shareholder value.
- The combined company's larger capital base should enhance its ability to
access additional capital and pursue investments in the commercial
mortgage sector.
- The combined company's larger shareholder base should result in greater
liquidity for shareholders.
- The combination of AMRESCO's loan origination and asset management
expertise, Impac's liquidity and the new manager's structured finance and
capital markets expertise should enable the combined company to position
itself as a market leader and consolidator of other specialty finance
companies and mortgage REITs.
- The combined company will have a more diversified asset base, which
should minimize the effects of individual credit events.
- Integrating the operations of Impac and AMRESCO should reduce duplicative
general and administrative costs.
Q: WHAT ARE POSSIBLE DETRIMENTS OF THE PROPOSED MERGER?
A: - The exchange ratio is fixed, which means that the AMRESCO shares that
Impac stockholders will receive in the merger may have a greater or lesser
value than the value contemplated at the time the merger agreement was
signed because of fluctuations in the market price of AMRESCO and Impac
shares.
- Substantial management time and effort will be required to complete the
merger and integrate the operations of the two companies.
- There is a risk that the benefits sought in the merger will not be
obtained.
Q: WHAT IS THE COMBINED COMPANY'S DIVIDEND POLICY?
A: As a result of the factors described above, the combined company expects to
continue paying dividends at substantially the same rate currently paid by
AMRESCO, which averaged $.375 per share over the last two quarters, and as
necessary to maintain its status as a REIT. However, the board of trust
managers will continue to evaluate the financial condition and earnings
level of the combined company, which could result in changes in future
distribution levels.
1
<PAGE> 9
Q: WHAT IS THE COMBINED COMPANY'S BUSINESS PLAN?
A: The combined company's business plan is to:
- originate short-term commercial mortgage loans of 1 to 3 years and use
term financing to carry them to maturity;
- invest in commercial mortgage-backed securities and finance them to
maturity through the use of collateralized loan or bond obligations;
- revise the manager's base compensation to an equity-based fee that is
more consistent with institutional practice, rather than a fee based on
gross asset value;
- continue to elect to be taxed as a REIT; and
- consolidate and integrate management under FIC Management, Inc., Impac's
current manager.
Q: HOW WILL THE COMBINED COMPANY BE MANAGED?
A: The combined company plans to integrate AMRESCO's real estate capabilities
with Fortress's structured finance and capital markets expertise. AMRESCO's
officers will continue to play a significant role in identifying,
underwriting and placing mortgage investments. Fortress management will
focus on raising capital and on general operating strategies and balance
sheet management, including term financings and securitizations.
FIC Management, Inc. and its affiliates have a team of 57 professionals with
structured finance, capital markets and real estate experience. An affiliate
of FIC Management is the external manager of Fortress Investment Corp., a
$410 million private equity fund formed in June 1998 and headquartered in
New York City. Prior to their involvement with FIC Management, the team of
professionals invested $627 million in 33 transactions on behalf of
BlackRock Asset Investors, a closed-end mutual fund.
Q: HOW WAS THE FIXED EXCHANGE RATIO DETERMINED?
A: The fixed exchange ratio of 0.66094 of an AMRESCO common share for each
share of Impac common stock was determined as a result of arm's-length
bargaining between the two companies and reflects the relative contribution
of each company to the combined enterprise on a variety of measures. The
exchange ratio was principally determined based on a "mark to market"
valuation of the assets of both companies obtained by their management,
rather than historical cost. In a number of instances, the negotiated values
attributed to assets in this process were substantially lower than the
historical cost reflected in the companies' financial statements.
Q: WILL AMRESCO SHAREHOLDERS RECEIVE ANY SHARES AS A RESULT OF THE MERGER?
A: No. AMRESCO shareholders will continue to hold the same number of AMRESCO
shares they currently own. However, the equity ownership of the combined
company will be shared with former Impac stockholders. Accordingly, the
equity interest that each AMRESCO shareholder holds in the combined company
will be converted into a smaller percentage ownership in a larger company.
Q: WHAT DO I NEED TO DO NOW?
A: Just mail your signed proxy card in the enclosed return envelope as soon as
possible, so that your shares can be voted at the AMRESCO special
shareholder meeting, if you are an AMRESCO shareholder, or at the Impac
special stockholder meeting, if you are an Impac stockholder.
2
<PAGE> 10
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions to your
broker on how to vote. You should contact your broker and ask what
directions your broker will need from you. Your broker will not be able to
vote your shares without instructions from you.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time before your proxy is voted at the
applicable special meeting. You can do this in one of three ways. First, you
can send a written notice stating that you revoke your proxy. Second, you
can complete and submit a new proxy card. Third, you can attend the
appropriate meeting and vote in person. Your attendance by itself will not,
however, revoke your proxy. If you have instructed a broker to vote your
shares, you must follow directions received from your broker to change those
instructions.
Q: SHOULD I SEND IN CERTIFICATES NOW?
A: No. If you are an Impac stockholder, after the merger is completed you will
receive written instructions for exchanging your shares of Impac common
stock for AMRESCO common shares, and any cash payments you may be entitled
to receive. If you are an AMRESCO shareholder, you should retain your
certificates, as you will continue to hold the AMRESCO shares you currently
own.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
A: We have structured the merger so that neither AMRESCO, Impac nor our
respective shareholders or stockholders will recognize any gain or loss for
federal income tax purposes in the merger, except for any gain or loss
attributable to cash received by Impac stockholders in lieu of a fraction of
an AMRESCO common share. The closing of the merger is conditioned, among
other things, on the delivery of legal opinions of AMRESCO's counsel as to
the tax consequences of the merger to AMRESCO and AMRESCO's shareholders and
Impac's counsel as to the tax consequences to Impac and Impac's
stockholders.
Q: WHAT WILL IMPAC STOCKHOLDERS' TAX BASIS BE IN THE COMBINED COMPANY'S COMMON
SHARES THEY RECEIVE IN THE MERGER?
A: Impac stockholders' aggregate tax basis in their combined company's common
shares will be equal to their current aggregate tax basis in their Impac
common stock that they surrender in the merger, decreased by any amount
allocable to a fraction of an AMRESCO common share for which cash is
received. See "The Merger -- Material federal income tax consequences of the
merger" beginning on page 46.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We hope to complete the merger as quickly as possible after the special
meetings, which are scheduled for , 1999.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: AMRESCO shareholders should contact:
Natalie Johnson
AMRESCO Capital Trust
700 North Pearl Street, Suite 2400
LB 342
Dallas, Texas 75201
Telephone: (214) 999-7300
(800) 966-7887
Fax: (214) 953-7828
Impac stockholders should contact:
Lilly Donohue
Impac Commercial Holdings, Inc.
c/o Fortress Investment Group LLC
1301 Avenue of the Americas, 42nd Floor
New York, New York 10019
Telephone: (212) 798-6118
Fax: (212) 798-6133
3
<PAGE> 11
THE COMPANIES
THE COMBINED COMPANY
Upon the completion of the merger, the combined company is expected to have
a total equity capitalization of approximately $195 million, based on the
closing price of AMRESCO common shares on August 4, 1999. The combined company
will own assets totaling approximately $308 million based on book value as of
June 30, 1999, consisting of approximately $149 million in loans, $60 million in
real estate related assets, $50 million in commercial mortgage-backed securities
and $49 million in cash and cash equivalents. The combined company will be
managed and administered by FIC Management, Inc., the manager of Impac since May
1999. The combined company will continue to elect to be taxed as a real estate
investment trust under the Internal Revenue Code.
AMRESCO CAPITAL TRUST
700 North Pearl Street, Suite 2400
Dallas, Texas 75201
Telephone: (214) 953-7700
(800) 966-7887
AMRESCO, which will be the surviving company in the merger, was organized
in January 1998 as a real estate investment trust under the laws of the State of
Texas. AMRESCO was formed to take advantage of mid- to high-yield lending and
investment opportunities in real estate related assets, including various types
of commercial mortgage loans, commercial mortgage-backed securities, commercial
real estate, equity investments in joint ventures and/or partnerships and other
real estate related assets. AMRESCO's day-to-day operations commenced on May 12,
1998 concurrent with its initial public offering, and are managed by AMREIT
Managers, L.P., an affiliate of AMRESCO, INC.
IMPAC COMMERCIAL HOLDINGS, INC.
c/o Fortress Investment Group LLC
1301 Avenue of the Americas, 42nd Floor
New York, New York 10019
Telephone: (212) 798-6100
Impac is a corporation organized under Maryland law and has elected to be
taxed as a real estate investment trust under the Internal Revenue Code. Impac
was formed in February 1997 to seek opportunities in the commercial mortgage
market, including the origination, purchase, securitization and sale of
commercial mortgages and investment in commercial mortgages and commercial
mortgage-backed securities. Impac's day-to-day operations are managed by FIC
Management, Inc., an affiliate of Fortress Investment Group LLC.
4
<PAGE> 12
THE SPECIAL MEETINGS
THE AMRESCO SPECIAL MEETING (SEE PAGE 64)
- The AMRESCO special meeting of shareholders is scheduled to be held at
9:00 a.m., central time, on , 1999 on the 17th Floor of
the North Tower of the Plaza of the Americas at 700 North Pearl Street,
Suite 2400, Dallas, Texas.
- The AMRESCO board of trust managers has fixed the close of business on
, 1999 as the record date for the determination of holders
of AMRESCO common shares entitled to notice of and to vote at the AMRESCO
special meeting of shareholders.
- Approval of the merger agreement requires the affirmative vote of the
holders of at least a majority of the outstanding AMRESCO common shares
entitled to vote at the AMRESCO special meeting.
- Approval of the amendment to AMRESCO's declaration of trust to change
AMRESCO's name to "Garrison Investment Trust" requires the affirmative
vote of the holders of at least two-thirds of the outstanding AMRESCO
common shares entitled to vote at the AMRESCO special meeting. If the
merger is not approved at the AMRESCO and Impac special meetings,
AMRESCO's declaration of trust will not be amended, regardless of whether
or not the name change amendment is approved.
- AMRESCO, INC. and its affiliates, which own a total of approximately 15%
of the outstanding AMRESCO common shares, have indicated their intention
to vote in favor of the merger and the amendment to AMRESCO's declaration
of trust.
THE IMPAC SPECIAL MEETING (SEE PAGE 65)
- The Impac special meeting of stockholders is scheduled to be held at
10:00 a.m., eastern standard time, on , ,
1999 at the offices of Fortress Investment Group LLC located at 1301
Avenue of the Americas, 42nd Floor, New York, New York.
- The Impac board of directors has fixed the close of business on
, 1999 as the record date for the determination of holders
of Impac stock entitled to notice of and to vote at the Impac special
meeting of stockholders.
- Approval of the merger and the transactions contemplated thereby requires
(a) the affirmative vote of the holders of at least a majority of the
votes entitled to be cast by the holders of shares of Impac's common
stock and series B preferred stock outstanding on the record date, voting
together as a group, with each share of Impac series B preferred stock
entitled to the number of votes equal to the number of shares of Impac's
common stock into which it is convertible as of the record date, and (b)
the affirmative vote of holders of at least two-thirds of the shares of
Impac's series B preferred stock outstanding on the record date, voting
separately as a class.
- Fortress Partners L.P., which owns Impac series B preferred stock
representing approximately 16.7% of the outstanding shares of Impac
voting stock, has indicated its intention to vote in favor of the merger.
5
<PAGE> 13
THE MERGER AGREEMENT
We encourage you to read the entire merger agreement, which is attached as
Annex A at the back of this document.
MERGER CONSIDERATION
Impac common stockholders will receive 0.66094 of a common share of the
combined company in exchange for each share of Impac common stock that they hold
at the effective time of the merger.
AMRESCO will not issue fractional shares in the merger. As a result, the
total number of AMRESCO common shares that an Impac stockholder will receive in
the merger will be rounded down to the nearest whole number. Impac stockholders
will receive a cash payment for the value of the remaining fraction of an
AMRESCO common share that they otherwise would have received.
Based upon the number of AMRESCO shares and shares of Impac common stock
outstanding on , 1999, assuming the conversion of all 479,999
outstanding shares of Impac's series B preferred stock into 1,683,635 shares of
Impac common stock, the holders of Impac stock immediately prior to the merger
will hold, immediately after the merger, approximately 40% of the aggregate
number of common shares of the combined company expected to be outstanding after
the merger. This does not take into account shares issuable upon the exercise of
outstanding AMRESCO or Impac options and warrants.
EFFECTIVE TIME OF THE MERGER
Subject to the satisfaction or waiver of the conditions to the merger, we
currently expect the merger to become effective as quickly as possible after the
special meetings, which are scheduled to occur on , 1999.
CONDITIONS TO THE MERGER (SEE PAGE 49)
The obligations of AMRESCO and Impac to complete the merger are subject to
the satisfaction or waiver of a number of conditions, including:
(1) the approval of the merger by the shareholders of AMRESCO and the
stockholders of Impac;
(2) the satisfaction by Impac of one of two tests:
- either the average closing price of Impac common stock for the 20
consecutive trading days ending on the fifth trading day prior to
the closing date of the merger is equal to or greater than $7.40;
or
- the aggregate of Impac's cash and cash equivalents, including for
these purposes $25 million attributable to specified Impac
collateralized mortgage obligations, mortgage-backed securities and
investments approved by AMRESCO, as shown on Impac's consolidated
balance sheet, dated as of the fifth trading day prior to the
closing date of the merger, is not less than $75 million;
(3) the authorization for listing on the NASDAQ Stock Market of the
AMRESCO common shares issuable in the merger;
(4) the completion of the purchase by FIC Management or its designated
affiliates of specified assets, including AMRESCO's existing management
agreement and 1,500,111 AMRESCO common shares, and the execution of an
amended and restated management agreement between the combined company and
FIC Management; and
(5) the receipt of satisfactory legal opinions regarding each of
Impac's and AMRESCO's status as a real estate investment trust for federal
income tax purposes and the treatment of the merger as a tax-free
reorganization for federal income tax purposes.
6
<PAGE> 14
TERMINATION (SEE PAGE 54)
The merger agreement may be terminated by either party if the merger is not
completed on or before December 31, 1999. In addition, the merger agreement may
be terminated in specified circumstances by either AMRESCO or Impac, if, for
example, conditions to the merger discussed above are not met or if one party
receives an economically superior proposal. In some instances, the terminating
party will be entitled to receive a break-up fee of up to $5 million and
break-up expenses up to $250,000 instead of other damages.
OPINIONS OF FINANCIAL ADVISORS (SEE PAGES 25 THROUGH 32 AND 36 THROUGH 42)
Each of Prudential Securities Incorporated and Deutsche Bank Securities, on
behalf of AMRESCO, and Banc of America Securities LLC, on behalf of Impac,
rendered opinions as to the fairness of the consideration to be paid or received
in the merger from a financial point of view. These opinions, which are based
upon and subject to various qualifications and assumptions, are attached as
Annexes B, C and D to this document. We encourage you to read these opinions.
Summaries of the analyses prepared by Prudential Securities, Deutsche Bank
Securities and Banc of America Securities are included in this document under
the captions "The Merger -- Opinions of AMRESCO's financial advisors" and
"-- Opinion of Impac's financial advisor."
NO APPRAISAL RIGHTS
AMRESCO shareholders do not have appraisal rights under Texas law. Impac
stockholders do not have appraisal rights under Maryland law.
REGULATORY APPROVALS
The parties are not aware of any federal or state regulatory approvals
which must be obtained in connection with the merger and the related
transactions.
ACCOUNTING TREATMENT
The combined company will account for the merger under the purchase method
of accounting. Accordingly, the combined company will record the assets and
liabilities acquired from Impac at AMRESCO's cost, the consideration paid to
Impac stockholders in the merger.
COMPARISON OF SHAREHOLDER RIGHTS (SEE PAGE 73)
The rights of Impac stockholders are currently governed by Maryland law and
Impac's charter and bylaws. If the merger is approved, the rights of Impac
stockholders will be governed by Texas law and AMRESCO's declaration of trust
and bylaws. In many cases, the rights of Impac stockholders will be different
after the merger. For a discussion of the material differences, see "Comparison
of Shareholder Rights."
7
<PAGE> 15
COMPARATIVE PER SHARE DATA
We have summarized below the per share information for our respective
companies on a historical, pro forma combined and pro forma equivalent basis.
Pro forma equivalent cash dividends, earnings and book value per share
information for Impac was calculated by multiplying the pro forma combined per
share amounts for AMRESCO by 0.66094, the exchange ratio of Impac common stock
for AMRESCO common shares in the merger.
<TABLE>
<CAPTION>
AT OR FOR THE PERIOD FROM FEBRUARY 2, 1998
THROUGH DECEMBER 31, 1998(A)
---------------------------------------------------
IMPAC
AMRESCO IMPAC PRO FORMA PRO FORMA
HISTORICAL HISTORICAL COMBINED EQUIVALENT
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Cash dividends declared per share............... $ 0.74 $ 1.30 $ 0.74 $ 0.49
Earnings per common share....................... 0.56 (1.31) (0.27) (0.18)
Book value per share............................ 13.02 11.98 n/a n/a
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------------------
IMPAC
AMRESCO IMPAC PRO FORMA PRO FORMA
HISTORICAL HISTORICAL COMBINED EQUIVALENT
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Cash dividends declared per share............... $ 0.75(B) $ 0.13(B) $ 0.75 $0.50
Earnings per common share....................... 0.50 0.06 0.47 0.31
Book value per share............................ 12.92 11.38(C) 11.69 7.73
</TABLE>
- ---------------
(A) AMRESCO was initially capitalized on February 2, 1998.
(B) Historical cash dividends per share for the six months ended June 30, 1999
include dividends for this period, or a portion of this period, which were
declared in July 1999.
(C) Book value per share was calculated using the number of shares of Impac
common stock outstanding plus the shares of common stock issuable upon
conversion of Impac series B preferred stock.
8
<PAGE> 16
MARKET PRICES AND DIVIDEND INFORMATION
MARKET PRICES
AMRESCO common shares are traded on the Nasdaq Stock Market under the
symbol "AMCT." Impac common stock is traded on the American Stock Exchange under
the symbol "ICH." The table below shows:
- the closing sale prices of AMRESCO common shares, as reported on the
Nasdaq Stock Market, and Impac common stock, as reported on the American
Stock Exchange, on August 4, 1999, the last trading day prior to the
signing of the merger agreement;
- the closing sale prices of AMRESCO common shares, as reported on the
Nasdaq Stock Market, and Impac common stock, as reported on the American
Stock Exchange, on , 1999, the last trading day prior to the
date of this document; and
- the equivalent pro forma prices of Impac common stock on those dates, as
determined by multiplying the last reported sale prices of AMRESCO common
shares by 0.66094.
<TABLE>
<CAPTION>
AMRESCO IMPAC
COMMON COMMON IMPAC
SHARES STOCK EQUIVALENT
------- ------ ----------
<S> <C> <C> <C>
August 4, 1999...................................... $10.00 $5.875 $6.61
, 1999..................................
------ ------ -----
</TABLE>
The number of AMRESCO common shares to be received by Impac stockholders in
the merger is fixed at 0.66094 of an AMRESCO common share for each share of
Impac common stock. This number will not be adjusted regardless of any future
increase or decrease in the price of either AMRESCO common shares or Impac
common stock. You are urged to obtain current market quotations for AMRESCO
common shares and Impac common stock. See "Risk Factors" beginning on page 15.
The following table shows, for the periods indicated, the range of the high
and low sale prices of AMRESCO common shares, as reported on the Nasdaq Stock
Market, and Impac common stock, as reported on the American Stock Exchange. In
reviewing the following table, you should be aware that:
- AMRESCO common shares were not listed for trading prior to May 7, 1998
and, accordingly, no share price information for AMRESCO is available
prior to that date; and
- Impac common stock was not listed for trading prior to August 4, 1997
and, accordingly, no stock price information for Impac is available prior
to that date.
<TABLE>
<CAPTION>
AMRESCO IMPAC
COMMON SHARES COMMON STOCK
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
1997
Third Quarter............................................. -- -- $20.75 $16.56
Fourth Quarter............................................ -- -- 19.31 15.25
1998
First Quarter............................................. -- -- $19.75 $17.00
Second Quarter............................................ $15.06 $12.38 18.13 14.00
Third Quarter............................................. 13.50 8.69 15.25 8.81
Fourth Quarter............................................ 10.44 5.88 11.63 1.88
1999
First Quarter............................................. $10.50 $ 8.25 $ 6.63 $ 4.94
Second Quarter............................................ 10.75 8.25 7.25 4.63
Third Quarter (through September 7, 1999)................. 11.06 8.56 6.63 4.63
</TABLE>
9
<PAGE> 17
As of , 1999, the last trading day prior to the date of this
document, shares of Impac common stock were outstanding, which
were held of record by holders, and AMRESCO common shares were
outstanding, which were held of record by holders.
DIVIDENDS PAID
The following table shows, for the periods indicated, the dividends
declared and paid by each of AMRESCO and Impac. In reviewing the following
table, you should be aware that:
- no dividends were declared on AMRESCO common shares prior to its initial
public offering on May 12, 1998; and
- no dividends were declared on the Impac common stock prior to its initial
public offering on August 4, 1997.
<TABLE>
<CAPTION>
AMRESCO IMPAC
COMMON SHARES COMMON STOCK
------------- -------------
<S> <C> <C>
1997
Third Quarter........................................ -- $0.150
Fourth Quarter....................................... -- 0.380
1998
First Quarter........................................ -- $0.400
Second Quarter....................................... $0.100 0.450
Third Quarter........................................ 0.240 0.450
Fourth Quarter....................................... 0.400 0.000
1999
First Quarter........................................ $0.360 0.000
Second Quarter....................................... 0.390 $0.125
</TABLE>
AMRESCO'S DIVIDEND POLICY
For federal income tax purposes, all 1998 AMRESCO dividends were reported
as ordinary income to AMRESCO's shareholders. No portion of AMRESCO's 1998
distributions was a return of capital. All dividends declared thus far in 1999
should be treated as ordinary dividends. In order to maintain its qualification
as a REIT, AMRESCO must make annual distributions to its shareholders of at
least 95% of its taxable income, excluding net capital gains. For its initial
taxable year ended December 31, 1998, AMRESCO declared dividends totaling $0.74
per share, which satisfied the 95% distribution requirement. Under some
circumstances, AMRESCO may be required to make distributions in excess of cash
available for distribution in order to meet the REIT distribution requirements.
In this event, AMRESCO presently would expect to borrow funds, or to sell assets
for cash, to the extent necessary to obtain cash sufficient to make the
distributions required to retain its qualification as a REIT for federal income
tax purposes.
AMRESCO's policy is to distribute at least 95% of its REIT taxable income
to shareholders each year. Future distributions, if any, paid by AMRESCO will be
at the discretion of the board of trust managers and will be dependent upon
AMRESCO's tax basis income, its financial condition, capital requirements, the
annual distribution requirements under the REIT provisions of the Internal
Revenue Code and other factors as the AMRESCO board of trust managers deems
relevant. AMRESCO will annually furnish to each of its shareholders a statement
setting forth distributions paid during the preceding year and their
characterization as ordinary income, capital gains or return of capital.
IMPAC'S DIVIDEND POLICY
To maintain its qualification as a REIT, Impac intends prior to the closing
of the merger to make annual distributions to stockholders of at least 95% of
its taxable income, determined without regard to the deduction for dividends
paid and excluding any net capital gains. Impac's taxable income may not
necessarily equal net
10
<PAGE> 18
earnings as calculated in accordance with generally accepted accounting
principles. Impac generally declares regular quarterly dividend distributions.
Any taxable income remaining after the distribution of the regular quarterly 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 Impac's board of
directors. All distributions in excess of those required for Impac to maintain
REIT status will be made by Impac at the discretion of its board of directors
and will depend on the taxable earnings of Impac, the financial condition of
Impac and other factors as the Impac board of directors deems relevant. The
Impac board of directors has not established a minimum distribution level.
Distributions to Impac stockholders have generally been taxable as ordinary
income, although a portion of these distributions may constitute a tax-free
return of capital or capital gain. Impac has annually furnished to each of its
stockholders a statement setting forth distributions paid during the preceding
year and their characterization as ordinary income, capital gains or return of
capital. Of the dividends paid for the 1998 tax year, approximately $1.0 million
represented a return of capital.
11
<PAGE> 19
SELECTED HISTORICAL FINANCIAL DATA OF AMRESCO
AMRESCO is providing the following information to aid you in your analysis
of the financial aspects of the merger. AMRESCO derived this information from
audited consolidated financial statements for the period from February 2, 1998,
the date AMRESCO was initially capitalized, through December 31, 1998, which
have been audited by Deloitte & Touche LLP, and from unaudited consolidated
financial statements for the six months ended June 30, 1999 and the period from
February 2, 1998 through June 30, 1998. In the opinion of AMRESCO management,
the unaudited consolidated financial statements include all adjustments,
consisting of normal and recurring accruals, necessary to present fairly the
results for these periods. This information is only a summary and you should
read it together with AMRESCO's historical consolidated financial statements and
the notes to these statements, which are included elsewhere in this document.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
AND FOR THE AT DECEMBER 31, 1998
AT JUNE 30, 1999 PERIOD FROM AND FOR THE
AND FOR THE FEBRUARY 2, PERIOD FROM
SIX MONTHS 1998 FEBRUARY 2, 1998
ENDED THROUGH THROUGH
JUNE 30, 1999 JUNE 30, 1998 DECEMBER 31, 1998
---------------- ---------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C>
Revenues.................................... $ 10,216 $ 1,261 $ 8,745
Net income.................................. $ 5,051 $ 757 $ 3,952
Earnings per common share:
Basic..................................... $ 0.50 $ 0.23(A) $ 0.56(A)
Diluted................................... $ 0.50 $ 0.23(A) $ 0.56(A)
Dividends per common share.................. $ 0.75(B) $ 0.10(C) $ 0.74
Total assets................................ $ 234,664 $142,426 $ 190,926
Debt obligations............................ $ 96,729 -- $ 46,838
Total shareholders' equity.................. $ 129,364 $140,569 $ 130,266
Debt to equity ratio........................ 0.75 to 1 n/a 0.36 to 1
Debt to equity ratio (excluding non-recourse
debt on real estate)...................... 0.54 to 1 n/a 0.30 to 1
</TABLE>
- ---------------
(A) AMRESCO had no earnings prior to the commencement of its operations on May
12, 1998. When calculated for the period from May 12, 1998, the date of its
inception of operations, through June 30, 1998, AMRESCO's basic and diluted
earnings were $0.08 per common share. When calculated for the period from
May 12, 1998 through December 31, 1998, AMRESCO's basic and diluted earnings
were $0.39 per common share.
(B) Includes AMRESCO's second quarter 1999 dividend of $0.39 per common share,
which was declared on July 22, 1999.
(C) AMRESCO's dividend of $0.10 per common share for its initial 50-day period
of operations (from May 12, 1998 through June 30, 1998) was declared on July
23, 1998.
12
<PAGE> 20
SELECTED HISTORICAL FINANCIAL DATA OF IMPAC
Impac is providing the following financial information to aid you in your
analysis of the financial aspects of the merger. Impac derived this information
from audited financial statements for the period from January 15, 1997, the date
of commencement of Impac's operations, through December 31, 1997 and the year
ended December 31, 1998, which were audited by KPMG LLP, and from unaudited
financial statements for the six months ended June 30, 1998 and June 30, 1999.
The information is only a summary and you should read it together with Impac's
historical financial statements and related notes appearing elsewhere in this
document.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE SIX FOR THE SIX JANUARY 15, 1997
MONTHS MONTHS FOR THE (COMMENCEMENT OF
ENDED ENDED YEAR ENDED OPERATIONS) THROUGH
JUNE 30, 1999 JUNE 30, 1998 DECEMBER 31, 1998 DECEMBER 31, 1997
------------- ------------- ----------------- -------------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income....................... $17,010 $14,478 $ 35,845 $ 7,459
Equity in net earnings (loss) of
ICCC................................ -- (876) (19,199) 1,694
Net earnings (loss)................... 638 4,849 (11,013) 2,811
Net earnings per share -- basic....... 0.06 0.60 (1.26) 0.61
Net earnings per share -- diluted..... 0.06 0.60 (1.26) 0.61
Dividends declared per share.......... 0.13 0.85 1.30 0.53
</TABLE>
<TABLE>
<CAPTION>
AT AT DECEMBER 31, AT DECEMBER 31,
JUNE 30, 1999 1998 1997
------------- --------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets......................................... $417,973 $451,219 $218,839
Total liabilities.................................... 302,978 347,882 115,597
CMO borrowings....................................... 277,834 285,021 4,176
Total stockholders' equity........................... 114,995 103,337 103,242
</TABLE>
13
<PAGE> 21
UNAUDITED PRO FORMA COMBINED SUMMARY FINANCIAL DATA
We have presented below unaudited pro forma combined financial information,
which reflects the purchase method of accounting and is intended to give you a
better picture of what our businesses might have looked like had the merger
occurred on the dates assumed. The unaudited pro forma combined balance sheet
data gives effect to the merger as if it had occurred on June 30, 1999. The
unaudited pro forma combined statement of operations data for the period from
February 2, 1998, the date of initial capitalization of AMRESCO, through
December 31, 1998 and for the six months ended June 30, 1999 is presented as if
the merger had occurred at the beginning of the periods presented.
The summary unaudited pro forma combined financial information is presented
for comparative purposes only and is not necessarily indicative of what the
actual combined financial position or the results of operations of AMRESCO and
Impac would have been if the merger had occurred as of June 30, 1999 or at the
beginning of the periods presented. Additionally, this information does not
purport to be indicative of the combined company's financial condition or
results of operations as of future dates or for future periods.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 2,
1998
SIX MONTHS THROUGH
ENDED DECEMBER 31,
JUNE 30, 1999 1998
------------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE AND RATIO DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $ 27,244 $28,939
Net income (loss)......................................... 7,890 (3,690)
Earnings per common share:
Basic.................................................. 0.47 (0.27)
Diluted................................................ 0.47 (0.27)
Dividends per common share................................ 0.75 0.74
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1999
-------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets.............................................. $ 307,815
Debt obligations.......................................... $ 101,234
Total shareholders' equity................................ $ 195,131
Debt to equity ratio...................................... 0.52 to 1
Debt to equity ratio (excluding non-recourse debt on real
estate)................................................ 0.38 to 1
</TABLE>
This information is only a summary and you should read it together with the
historical financial statements of AMRESCO and Impac and the unaudited pro forma
combined financial statements appearing elsewhere in this document. You should
also be aware that a number of assumptions and adjustments were made to arrive
at the pro forma amounts, including those relating to the following:
- the dispositions of assets by Impac between June 30, 1999 and the closing
date, and the reduction of liabilities and the receipt of investment
securities and cash in connection with those dispositions; and
- the elimination of Impac personnel and other expenses that would not have
been borne by the combined company had the new management agreement been
in place.
14
<PAGE> 22
RISK FACTORS
You should consider carefully the factors set forth below in evaluating the
merger. The following list summarizes material risks related to the merger and
the ownership of the combined company's common shares.
RISK FACTORS RELATING TO THE MERGER
Fixed merger consideration may not reflect changes in share value
The exchange ratio of AMRESCO common shares for Impac common stock in the
merger is fixed at 0.66094 and will not be adjusted for any increase or decrease
in the value of Impac common stock or AMRESCO common shares. Accordingly, at the
time you vote on the merger, you will not know the precise market value of the
consideration to be received by Impac stockholders in the merger. The market
value of AMRESCO common shares and Impac common stock at the effective time of
the merger may be different from the price and value of those securities on the
date the merger consideration was determined.
The fairness opinions obtained by AMRESCO and Impac do not address changes
in the relative value of the companies since the date of the merger agreement
AMRESCO does not intend to obtain an updated fairness opinion of Prudential
Securities Incorporated or Deutsche Bank Securities, and Impac does not intend
to obtain an updated fairness opinion of Banc of America Securities LLC. Changes
in the operations and prospects of AMRESCO or Impac, general market and economic
conditions and other factors which are beyond the control of AMRESCO or Impac,
on which the opinions of Prudential Securities Incorporated, Deutsche Bank
Securities and Banc of America Securities LLC are based, may alter the relative
value of the companies. Therefore, the opinions of Prudential Securities
Incorporated, Deutsche Bank Securities and Banc of America Securities LLC may
not accurately address the fairness of the merger consideration at the time the
merger is completed.
The expected benefits of the merger may not occur
Impac and AMRESCO have entered into the merger agreement with the
expectation that the merger will result in benefits, including larger
capitalization and improved access to capital, operational cost savings and
other efficiencies. Achieving the anticipated benefits of the merger will depend
in part upon the integration of the businesses of Impac and AMRESCO in an
efficient manner, and there can be no assurance that this will occur. There can
also be no assurance that the combined company will realize any of the
anticipated benefits of the merger. For a discussion of other factors and
assumptions related to the anticipated benefits of the merger, see "The
Merger -- AMRESCO's reasons for the merger; Recommendation of the AMRESCO board"
and "-- Impac's reasons for the merger; Recommendation of the Impac board."
The companies have expended resources and capital in the pursuit of this
merger, and if the merger fails to occur, the companies will not benefit from
these expenses and may incur additional payments
The merger is subject to a number of conditions, the satisfaction of which
are beyond the control of AMRESCO and Impac. Accordingly, the merger may not be
completed. If the merger is not completed, AMRESCO and Impac will have incurred
substantial expenses for which no ultimate benefit will have been received by
either AMRESCO or Impac. Additionally, if the merger agreement is terminated,
AMRESCO may be required to pay Impac up to $5,250,000 or Impac may be required
to pay AMRESCO up to $5,250,000 in break-up fees and expenses. The obligation to
pay these amounts may adversely affect AMRESCO's or Impac's ability to engage in
another transaction if the merger is not completed and it may also adversely
affect the financial condition of the entity that incurs the obligation. For a
further discussion of these break-up fees and expenses, see "The Merger
Agreement -- Break-up fees and expenses."
15
<PAGE> 23
The trust managers, officers and affiliates of AMRESCO may have interests
in the merger that are different from or in addition to the interests of other
AMRESCO shareholders and the directors, officers and affiliates of Impac may
have interests in the merger that are different from or in addition to the
interests of other Impac stockholders
In considering the recommendation of AMRESCO's board of trust managers with
respect to the merger and deciding whether or not to approve the merger,
AMRESCO's shareholders should be aware that some of AMRESCO's trust managers,
executive officers and affiliates have interests in the merger different from or
in addition to those of other AMRESCO shareholders. In considering the
recommendation of Impac's board of directors with respect to the merger and
deciding whether or not to approve the merger, Impac's stockholders should be
aware that some of Impac's directors, executive officers and affiliates have
interests in the merger that are different from or in addition to those of other
Impac stockholders. See "The Merger -- Interests of AMRESCO's trust managers,
executive officers and affiliates" and "-- Interests of Impac's directors,
executive officers and affiliates."
Necessary financing for the combined company's business plan may not be
obtained
Achievement of the combined company's business plan will depend, in part,
upon obtaining adequate financing for the implementation of its business plan.
We cannot assure you that financing can be obtained at all, or that financing
will be obtained on terms satisfactory to the combined company.
Rights of AMRESCO shareholders differ from those of Impac stockholders
The rights of stockholders of Impac currently are governed by Maryland law
applicable to corporations and Impac's charter and bylaws. Upon completion of
the merger, stockholders of Impac will become shareholders of the combined
company and their rights will be governed by Texas law applicable to real estate
investment trusts and the combined company's declaration of trust and bylaws.
The rights of stockholders of Impac differ from the rights of shareholders of
the combined company. Therefore, the rights of the former Impac stockholders as
shareholders of the combined company may be less favorable than their former
rights as stockholders of Impac. Some of these differences, including the
staggered board of trust managers of the combined company, may make it more
difficult for a third party to acquire control of the combined company without
the consent of the board of trust managers. See "Comparison of Shareholder
Rights."
RISK FACTORS RELATING TO OWNERSHIP OF THE COMBINED COMPANY'S COMMON SHARES AFTER
COMPLETION OF THE MERGER
Significant influence of the combined company's principal shareholder may
impact its management and operations
FIC Management, which will manage the combined company, together with its
affiliates will own approximately 15.7% of the combined company's common shares
upon the completion of the merger. Through their ownership of the combined
company's common shares, FIC Management and its affiliates will control
approximately 15.7% of the vote on matters submitted for shareholder action,
including the election of trust managers. The trust managers so elected would be
in a position to exercise significant influence over the affairs of the combined
company if they were to act together in the future. Upon completion of the
merger, two of the combined company's trust managers will be employees of FIC
Management and its affiliates. Accordingly, FIC Management may make decisions
that do not fully represent the interests of all shareholders of the combined
company. Other than FMR Corp., which currently owns approximately 12.6% of
AMRESCO's outstanding common shares, FIC Management and its affiliates and
AMRESCO, INC. and its affiliates, no other shareholder may hold more than 9.8%
of the outstanding common shares of the combined company. For further
information regarding limitations on the amount of common shares an individual
combined company shareholder may own, see "Description of AMRESCO
Securities -- Restrictions on size of holdings."
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We make "forward-looking statements" in this document within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements are usually identified by the use of
words such as "believes," "will," "anticipates," "estimates," "expects,"
"projects," "plans," "intends," "should" or similar expressions. These
forward-looking statements reflect our current views about the combined
company's plans, strategies and prospects, which are based on the information
currently available to us and on assumptions we have made.
Although we believe that our plans, intentions and expectations as
reflected in or suggested by those forward-looking statements are reasonable, we
can give no assurance that the plans, intentions or expectations will be
achieved. We have listed below and have discussed elsewhere in this document
some important risks, uncertainties and contingencies that could cause the
combined company's actual results to be materially different from the
forward-looking statements we make in this document. These risks, uncertainties
and contingencies include, but are not limited to, the following:
- changes in international, national, regional or local economic
environments;
- changes in prevailing interest rates;
- credit and prepayment risks;
- basis and asset/liability risks;
- spread risk;
- event risk;
- conditions which may affect public securities and debt markets generally
or the markets in which the combined company operates;
- the Year 2000 issue;
- the availability of and costs associated with obtaining adequate and
timely sources of liquidity;
- dependence on existing sources of funding;
- the size and liquidity of the secondary market for commercial
mortgage-backed securities;
- geographic or product type concentrations of assets, temporary or
otherwise;
- hedge mismatches with liabilities;
- other factors generally understood to affect the real estate acquisition,
mortgage and leasing markets and securities investments;
- changes in federal income tax laws and regulations; and
- other risks discussed in this document.
Except for their ongoing obligations to disclose material information as
required by the federal securities laws, neither AMRESCO nor Impac undertakes
any obligation to release publicly any revisions to any forward-looking
statements to reflect events or circumstances after the date of this document or
to reflect the occurrence of unanticipated events.
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THE MERGER
TERMS OF THE MERGER
The AMRESCO board of trust managers and the Impac board of directors have
each approved the merger in accordance with the merger agreement, a copy of
which is attached to the back of this document as Annex A and incorporated in
this document by reference. Under the merger agreement, upon the satisfaction,
or waiver, of the conditions set forth in the merger agreement, at the effective
time of the merger:
- Impac will be merged with and into AMRESCO, with AMRESCO being the
surviving entity; and
- each issued and outstanding share of Impac common stock will be converted
into 0.66094 of a combined company common share and, unless earlier
converted, all of the outstanding shares of Impac series B preferred
stock will automatically be converted into 1,112,782 combined company
common shares.
If AMRESCO shareholders by separate vote approve a proposed amendment to
AMRESCO's declaration of trust, the name of the combined company will be
"Garrison Investment Trust." If the AMRESCO shareholders do not approve the
amendment, the combined company will continue to be called "AMRESCO Capital
Trust."
No fraction of an AMRESCO common share will be issued in the merger.
Instead of fractional shares, a holder of Impac common stock otherwise entitled
to a fractional share will be paid an amount in cash equal to the product of
multiplying the fractional share interest to which the holder otherwise would
have been entitled to receive by the average closing price of AMRESCO common
shares on the NASDAQ Stock Market during the five trading days immediately
following the effective time of the merger.
Each holder of a certificate representing Impac common stock or Impac
preferred stock will after the effective time of the merger cease to have any
rights with respect to that certificate, except the right to receive
certificates representing the AMRESCO common shares into which its Impac shares
have been converted as of the effective time, including the associated preferred
share purchase rights, and cash instead of fractional AMRESCO common shares,
upon the surrender of the certificate. At or prior to the effective time of the
merger, AMRESCO will deposit with The Bank of New York, or another exchange
agent mutually agreeable to AMRESCO and Impac, certificates representing the
AMRESCO shares to be issued in the merger and cash instead of fractional AMRESCO
common shares. The exchange agent will mail a letter of transmittal and
instructions to holders of certificates representing Impac shares, as of the
effective time, for use in effecting the surrender of their Impac stock
certificates in exchange for certificates representing AMRESCO shares and cash
instead of fractional AMRESCO common shares. See "The Merger
Agreement -- Exchange of Impac shares."
BACKGROUND OF THE MERGER
Since its formation, Impac's fundamental business objective has been to
maximize total return to its stockholders by increasing dividends per share and
increasing the long-term value of Impac's assets. A key strategy in achieving
that objective has been to originate, finance, securitize and otherwise invest
in commercial mortgages and commercial mortgage-backed securities. AMRESCO's
principal business objective since its inception has been very similar, although
AMRESCO has focused on assets with a higher unleveraged return on capital.
AMRESCO has aimed to maximize total return to its shareholders by producing cash
flow for distribution to its shareholders through investment in mid- to
high-yield real estate related assets that earn an attractive spread over
AMRESCO's cost of funds. To achieve this objective, AMRESCO's strategy has
included investing in commercial mortgage loans, commercial mortgage-backed
securities and commercial real estate.
Beginning in mid 1998, market prices for publicly traded real estate
investment trusts began a significant decline and, during the third and fourth
quarters of 1998, the commercial mortgage-backed securitization market
deteriorated. Because of these developments, AMRESCO and Impac found themselves
limited in their abilities to obtain financing and to achieve their business
strategies.
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By late 1998, Impac's board of directors began looking for a strategic
partner who could provide needed capital and management expertise. Also in late
1998, AMRESCO's board of trust managers began discussions of ways to strengthen
AMRESCO's balance sheet, gain access to additional sources of capital and
provide AMRESCO with liquidity to use for future investments and operations.
On February 25, 1999, Prudential Securities made a presentation to the
AMRESCO board regarding potential strategic alternatives available to AMRESCO,
including remaining an independent entity, converting from a REIT to a C
corporation or entering into a business combination. The purpose of the
presentation was to assist the AMRESCO board in identifying the best
alternative, or combination of alternatives, for AMRESCO and its shareholders.
During the course of this presentation and the discussion of the alternatives,
the AMRESCO board also expressed an interest in evaluating the acquisition of
other companies as an additional strategic alternative. At the conclusion of the
presentation, the AMRESCO board authorized the engagement of Prudential
Securities as AMRESCO's financial advisor for the purposes of further reviewing
and evaluating the strategic alternatives that might be available to AMRESCO,
contacting third parties that might be interested in potential transactions with
AMRESCO and advising AMRESCO in connection with any proposals or inquiries that
might be received from third parties.
During the following several weeks, Prudential Securities identified and
contacted various third parties in connection with a potential transaction
involving AMRESCO. Prudential Securities and AMRESCO management also began
preparing public and non-public information for distribution to interested
parties after they entered into confidentiality agreements with AMRESCO. On
April 6, 1999, AMRESCO signed an engagement letter with Prudential Securities
relating to the provision of financial advisory services and the rendering of a
fairness opinion in connection with a potential transaction.
On May 5, 1999, Impac entered into a stock purchase agreement to issue to
Fortress Partners L.P. approximately $12.0 million of series B preferred stock,
initially convertible into 1,683,635 shares of Impac common stock. At this time,
FIC Management, an affiliate of Fortress Partners L.P., assumed Impac's existing
management agreement. Four Impac directors then serving resigned from the board
and Fortress' designees, Wesley Edens, Robert Kauffman and Christopher Mahowald,
were appointed to the Impac board joining Joseph Tomkinson and Frank Filipps who
remained as directors. Also, the executive officers of Impac resigned as a
group, and Mr. Edens, Mr. Kauffman, Randal Nardone and Eric Nygaard, all
Fortress employees, were appointed as the new executive officers of Impac.
At the same time, Impac's new management team recognized a serious need to
add liquidity to Impac's balance sheet. New management's initial plan has been
to add liquidity by liquidating non-core assets for cash and reducing reliance
on short-term funding. However, new management recognized the trend towards
consolidation in the mortgage real estate investment trust sector and formulated
a long-term plan to merge Impac with another established entity in the sector.
Shortly before closing its investment in Impac, Fortress had identified several
potential merger candidates for Impac, including AMRESCO. Under the direction of
the Impac board of directors, management continued to identify several other
potential merger candidates in May 1999. AMRESCO was viewed as a prime candidate
for Impac on the basis of its established business plan of commercial mortgage
origination, capable management team and the relative quality of its asset
portfolio, coupled with AMRESCO's similar need for additional liquidity.
In late April and May, AMRESCO entered into confidentiality agreements
covering six third parties, including Fortress, under which each agreed to keep
discussions with AMRESCO and materials provided by AMRESCO confidential.
Prudential Securities then distributed to these parties a letter on behalf of
AMRESCO soliciting written, preliminary non-binding proposals for a business
combination with AMRESCO.
During the first week of May, Prudential Securities received four
indications of interest in response to its letters, one of which was on behalf
of Impac. The Impac proposal was for a stock-for-stock merger and contemplated a
separate purchase of AMRESCO's current management agreement and all of the
AMRESCO common shares owned by AMRESCO, INC. and its affiliates for cash. One of
the other proposals also consisted of a stock-for-stock merger with a
publicly-traded mortgage REIT referred to as company A based upon each entity's
current share price. The third proposal consisted of a predominately cash
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proposal from a group of financial buyers referred to as company B. The fourth
proposal was from a privately-held entity referred to as company C.
During a regularly scheduled meeting of AMRESCO's board held on May 11,
1999, Prudential Securities reviewed its analysis of the preliminary indications
of interest with the AMRESCO board and management. This included a comparison of
the strengths and weaknesses and a review of the relative merits of each of the
four proposals. Due to the preliminary nature of the proposals and lack of
detail on each bidder's proposed business plan, no detailed analysis of the
proposals was possible at that time. The AMRESCO board reaffirmed that AMRESCO's
management and Prudential Securities should continue their discussions with each
bidder regarding a possible business combination.
At a meeting of the AMRESCO board held on May 20, 1999, representatives of
company A made a presentation to the AMRESCO board to merge the two companies
and presented a more detailed business plan for the combined entity. After the
presentation by company A, Wesley Edens and Jonathan Ashley, representing Impac
and Fortress, then made a presentation to the AMRESCO board to merge Impac and
AMRESCO to create a combined company to be managed by FIC Management. Messrs.
Edens and Ashley suggested that AMRESCO's existing business plan would be better
served with an increased capital base and scale of operations, and that a
combination of the two companies would result in an entity of sufficient size to
operate more effectively in the mortgage REIT sector. The Impac and Fortress
representatives proposed a business plan to originate and hold short-term
opportunities in commercial mortgage loans and finance the mortgage loans to
maturity and invest in commercial mortgage-backed securities and finance the
commercial mortgage-backed securities to maturity through the use of
collateralized loan or bond obligations. Messrs. Edens and Ashley suggested that
the proposed combined company would benefit from the relative strengths of the
two companies, including AMRESCO's loan origination and asset management
expertise, Impac's liquidity and cash position and FIC Management's structured
finance and capital markets expertise.
At a meeting of the AMRESCO board held on June 3, 1999, representatives of
company B made a presentation to acquire control of AMRESCO through a preferred
share investment. Representatives of company C then made a presentation to enter
into a predominately cash proposal with AMRESCO. The AMRESCO board instructed
Prudential Securities to prepare further analyses of all of the proposals that
had been received to date.
On June 11, 1999, Wesley Edens sent a revised proposal on behalf of Impac
and Fortress to Prudential Securities. The proposal contemplated a
stock-for-stock merger of AMRESCO and Impac and a purchase by a Fortress entity
of the AMRESCO management agreement and the common shares of AMRESCO held by
AMRESCO, INC. and its affiliates. This proposal was supplemented by a June 14,
1999 letter from Mr. Edens to Prudential Securities, which described conditions
and adjustments to the proposal.
On June 11, 1999, the AMRESCO board met telephonically with Prudential
Securities to review the terms and the relative merits of the proposals. The
AMRESCO board determined that, based upon the board's consideration of the
financial terms of these proposals and its comparison of the potential value and
feasibility of the proposals, the proposals of company A and company C were not
acceptable. The AMRESCO board then directed Prudential Securities to continue
discussions with representatives of Impac/Fortress and company B regarding the
terms of their proposals.
Subsequently, further discussions took place with company B and company C,
which resulted in clarifications and, in some cases, adjustments to their
original proposals.
On June 22, 1999, the AMRESCO board again met telephonically with
Prudential Securities to review the terms and relative merits of the updated
proposals. Based upon the information gathered by Prudential Securities and
management and an assessment of the business and prospects that would be
available under each alternative, the AMRESCO board determined that the
Impac/Fortress proposal was superior and authorized negotiations with Fortress
and Impac of a merger with Impac. The board also authorized management to
conduct due diligence and enter into an exclusive dealing agreement relating to
negotiations about the merger. The AMRESCO board also recommended and authorized
the engagement of an additional financial advisor that did not have significant
relationships with AMRESCO, AMRESCO, INC., Fortress
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Partners or Impac and as approved by the independent trust managers, to provide
financial advisory services and render a fairness opinion in connection with the
merger with Impac.
On June 25, 1999, AMRESCO and Impac entered into an exclusive dealing
agreement in which they agreed to negotiate a potential transaction exclusively
with each other through July 19, 1999. Thereafter, AMRESCO, its legal advisors,
Locke Liddell & Sapp LLP, and its financial advisors, and Impac, its legal
advisors, Skadden, Arps, Slate, Meagher & Flom LLP, its financial advisors and
Fortress, commenced due diligence with respect to each other's operations, and
prepared preliminary drafts of the merger agreement and related documents,
including the purchase agreement and management agreement.
On July 14, 1999, following a special meeting of the Impac board, attended
by all Impac directors except Mr. Tomkinson, who participated telephonically, as
well as representatives of Skadden Arps, Banc of America Securities and Jolson
Securities, the Impac board was briefed concerning the proposed transaction.
Since significant terms of the proposed transaction including the exchange ratio
were still being negotiated, no formal action was taken by the board at this
time. Thereafter, the negotiations between AMRESCO and Impac intensified.
On July 15, 1999, AMRESCO and Impac extended their exclusive dealing
agreement through August 10, 1999.
On July 19, 1999, AMRESCO signed an engagement letter with Deutsche Bank
Securities for the provision of financial advisory services and rendering of a
fairness opinion in connection with the merger.
On July 26, 1999, Impac signed an engagement letter with Banc of America
Securities LLC for the provision of financial advisory services and rendering of
a fairness opinion in connection with the merger. On August 3, 1999, Impac also
signed an engagement letter with Jolson Securities to provide financial advisory
services in connection with the merger.
By August 4, 1999 both Impac and AMRESCO, advised by their legal and
financial advisors, had negotiated a substantially final definitive merger
agreement.
On August 4, 1999, the Impac board held a special meeting attended by all
directors, except Messrs. Tomkinson and Filipps, who participated
telephonically, and by representatives of each of Ballard Spahr Andrews &
Ingersoll, LLP (Maryland counsel to Impac), Skadden Arps, Banc of America
Securities and Jolson Securities. Banc of America Securities rendered its oral
opinion to the Impac board (subsequently confirmed by delivery of a written
opinion dated as of August 4, 1999) to the effect that, as of the date of the
opinion, and based upon and subject to the various qualifications and
assumptions described therein, that the consideration to be received by holders
of Impac common stock (other than Fortress and its affiliates) pursuant to the
merger agreement is fair from a financial point of view to such holders. Banc of
America Securities also reviewed with the Impac Board the valuation
methodologies employed by Banc of America Securities in formulating its fairness
opinion. A copy of Banc of America Securities' written opinion is attached as
Annex D, and the stockholders of Impac are urged to, and should, read this
opinion in its entirety. Please also see the section of this document entitled
"The Merger -- Opinion of Impac's financial advisor." Counsel to Impac reviewed
the material terms of the draft merger agreement that had been previously
distributed to the Impac board and discussed various aspects of the directors'
duties under Maryland law in the context of the merger. Following further
discussion, during which the Impac directors asked numerous questions that were
responded to by representatives of management and by Impac's financial and legal
advisors, the Impac board unanimously approved the merger and authorized the
officers of Impac to finalize, execute and deliver the definitive merger
agreement.
On August 4, 1999, a meeting of the AMRESCO board was held to consider the
transaction with Impac as negotiated and documented. Also at this meeting were
representatives of each of Locke Liddell, Prudential Securities and Deutsche
Bank Securities. Prudential Securities rendered its oral opinion (subsequently
confirmed by delivery of a written opinion dated August 4, 1999) that as of
August 4, 1999, the exchange ratio is fair to AMRESCO and the holders of AMRESCO
common shares, other than affiliates of AMRESCO, from a financial point of view.
In addition, Deutsche Bank Securities rendered its oral opinion (subsequently
confirmed by delivery of a written opinion dated August 4, 1999) that the
exchange ratio is fair, from a
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financial point of view, to AMRESCO and accordingly to its shareholders, other
than affiliates of AMRESCO. Also, Prudential Securities and Deutsche Bank
Securities each reviewed with the AMRESCO board the valuation methodologies it
employed in formulating its respective fairness opinion. Counsel to AMRESCO
reviewed the material terms of the draft merger agreement that had been
previously distributed to the AMRESCO board and discussed various aspects of the
trust manager's fiduciary duties under Texas law in the context of the merger.
Following further discussion, during which the AMRESCO trust managers asked
numerous questions that were responded to by representatives of management and
by AMRESCO's financial and legal advisors, the AMRESCO board unanimously
approved the merger and authorized the officers of AMRESCO to execute and
deliver the definitive merger agreement.
Impac and AMRESCO executed the merger agreement on August 5, 1999 and both
companies issued press releases announcing the merger.
On September 8, 1999, FIC Management, AMRESCO, INC., AMREIT Managers, L.P.,
AMREIT Holdings, Inc. and MLM Holdings, Inc. executed the contemplated purchase
agreement. Under this agreement, FIC Management agreed that it or one of its
designees would purchase specified assets, including AMRESCO's existing
management agreement and 1,500,111 AMRESCO common shares.
AMRESCO'S REASONS FOR THE MERGER; RECOMMENDATIONS OF THE AMRESCO BOARD
THE AMRESCO BOARD HAS DETERMINED THAT THE TERMS OF THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED BY THAT AGREEMENT ARE ADVISABLE AND IN THE BEST
INTERESTS OF THE AMRESCO SHAREHOLDERS. ACCORDINGLY, THE AMRESCO BOARD RECOMMENDS
THAT THE AMRESCO SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER AND FOR APPROVAL
OF THE AMENDMENT TO AMRESCO'S DECLARATION OF TRUST TO CHANGE ITS NAME TO
"GARRISON INVESTMENT TRUST." THIS AMENDMENT IS RECOMMENDED BECAUSE AFTER THE
MERGER THE COMBINED COMPANY WILL NO LONGER BE MANAGED BY AN AFFILIATE OF
AMRESCO, INC.
In considering the recommendation of AMRESCO's board with respect to the
merger, AMRESCO shareholders should be aware that some of AMRESCO's trust
managers have interests in the merger that are different than, or in addition
to, the interests of shareholders of AMRESCO generally. The AMRESCO board was
aware of these interests and considered them, among other matters, in approving
the merger agreement and the merger. See "-- Interests of AMRESCO's trust
managers, executive officers and affiliates."
In its deliberations with respect to the merger and the merger agreement,
the AMRESCO board consulted with AMRESCO's management and the financial and
legal advisors to AMRESCO. The factors considered by the AMRESCO board include
those enumerated below. While all of these factors were considered by the
AMRESCO board, the AMRESCO board did not make determinations with respect to
each such factor. Rather, the AMRESCO board made its judgment with respect to
the merger and the merger agreement based on the total mix of information
available to it, and the judgments of individual trust managers may have been
influenced to a greater or lesser degree by their individual views with respect
to different factors.
In making its decision to approve the merger and the merger agreement,
AMRESCO's board considered a number of factors, including those listed below:
(1) The merger should strengthen the combined company's balance sheet
and provide the combined company with a large balance of cash and cash
equivalents to use for future investments and operations. Prior to the
execution of the merger agreement, Impac's management and advisors informed
AMRESCO that Impac was in the process of selling a number of its assets.
AMRESCO's obligation to complete the merger is subject to Impac's
satisfaction of one of two tests:
- either the average closing price of Impac shares for the 20
consecutive trading days ending on the fifth trading day prior to
the closing date is equal to or greater than $7.40 per share; or
- the aggregate of Impac's cash and cash equivalents, including for
these purposes $25 million attributable to specified Impac
collateralized mortgage obligations, mortgage-backed securities
and investments approved by AMRESCO, at the closing date is at
least $75 million.
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(2) The number of outstanding shares of the combined company will
increase as a result of the merger, which should result in greater
liquidity for holders of AMRESCO shares. The AMRESCO board believes that
institutional investors prefer larger capitalization companies when making
investment decisions due to greater liquidity. This greater liquidity
should allow the purchase and sale of larger volumes of shares without
disrupting the market for those shares. This should increase the
attractiveness of the combined company to potential investors, and
ultimately may result in an improved ability to access favorably priced
equity and debt capital.
(3) The combined company will be managed by FIC Management, Inc.,
Impac's current manager, which will retain many of AMRESCO's current
officers. FIC Management or one of its affiliates will also hold
approximately 15.7% of the combined company's outstanding shares. The
AMRESCO board believes that this share ownership should align the manager's
interest with that of the combined company's other shareholders.
(4) The combination of AMRESCO's loan origination and asset management
experience, Impac's, liquidity and FIC Management's structured finance and
capital markets expertise should enable the combined company to position
itself as a market leader and consolidator of other specialty finance
companies and mortgage REITs.
(5) The analyses performed by AMRESCO's financial advisors, Prudential
Securities and Deutsche Bank Securities, of projected future results of
operations of the combined company in arriving at their opinions, which
analyses incorporated the terms of the new proposed management agreement
between the combined company and FIC Management, Inc.
(6) The analyses performed by management, which were reviewed by
Prudential Securities and Deutsche Bank Securities, show that the merger
should be accretive to the combined company's operating performance.
(7) The merger will create a larger and more diversified company with
prospects for long-term growth and increased investment value. The AMRESCO
board believes that the increased asset size and diversity should be
attractive to capital markets and equity investors and should minimize the
effects of individual credit events.
(8) A strong board and management team drawn from both AMRESCO,
Fortress and Impac will manage the combined company. The AMRESCO board
believes that the continued involvement of AMRESCO trust managers and
management should minimize the disruption resulting from changing the
manager and integrating the entities. The AMRESCO board also believes that
these individuals have similar investment philosophies and complementary
strengths, which should facilitate the accomplishment of the merger in an
efficient and cooperative manner and enhance the ability of the combined
company to succeed.
(9) The knowledge of the AMRESCO board of the business, operations,
assets, properties, operating results and financial condition of AMRESCO
and information concerning the financial position, results of operations,
businesses, competitive position and prospects of a business combination
with Impac.
(10) AMRESCO's strategic alternatives, including the prospects of
positioning AMRESCO for the future by remaining a stand-alone entity or by
effecting a strategic business combination with another company, and
information concerning AMRESCO's prospects as a stand-alone entity.
(11) The terms of the merger agreement, which provide for reciprocal
representations and warranties, conditions to closing and rights to
termination, and balanced rights and obligations as discussed under "The
Merger Agreement."
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(12) AMRESCO has entered into an agreement with Holliday Fenoglio
Fowler, L.P. under which Holliday Fenoglio Fowler has agreed to present to
AMRESCO, on a non-exclusive basis, investment opportunities that meet
AMRESCO's investment criteria and objectives. Mark D. Gibson is the
president of Holliday Fenoglio Fowler and a trust manager of AMRESCO and
will be a trust manager of the combined company. A correspondent
relationship between the combined company and Holliday Fenoglio Fowler is
expected to continue after the merger. The AMRESCO board believes that the
continued presence of Mr. Gibson on the combined company's board should be
beneficial to the relationship between the combined company and Holliday
Fenoglio Fowler.
(13) Combining AMRESCO and Impac should eliminate redundant positions
and activities, including duplicate public company expenses. AMRESCO
expects that operating costs and general and administrative expenses will
be spread out over a larger number of shares and thus increase the combined
company's profitability.
(14) The merger is expected to be tax-free to AMRESCO and its
shareholders.
(15) The financial presentations and written opinions of Prudential
Securities and Deutsche Bank Securities to the effect that, subject to the
conditions set forth in the respective opinions, the exchange ratio is fair
to AMRESCO and its shareholders from a financial point of view.
The AMRESCO board also considered the matters described above under "Risk
Factors" as well as a number of negative factors, including those discussed
below, in its deliberations concerning the merger.
(1) The fixed exchange ratio may require AMRESCO to issue shares in
the merger that have a greater value than the value contemplated at the
time the merger agreement was signed.
(2) AMRESCO shareholders will not maintain their current ownership
percentage of AMRESCO.
(3) The potential difficulties of integrating AMRESCO and Impac and
changing AMRESCO's manager.
(4) The risk that the expected benefits of the merger may not be fully
realized.
(5) The effect of the public announcement of the merger on the
parties' ability to retain employees and on the trading price of AMRESCO
and Impac shares.
(6) The risks associated with ceding board and management control to
Impac's current external manager.
(7) The pro forma capitalization of the combined company will remain
relatively modest at approximately $195 million and additional transactions
may be necessary for the combined company to attract an institutional
following.
(8) The risks associated with Impac's possible contingent liabilities
in connection with its loans, loan repurchase obligations and lease
obligations.
All of the material factors considered by AMRESCO's board are described
above. In view of the wide variety of factors, both positive and negative,
considered by the board, the board did not quantify or otherwise attempt to
assign relative weights to the specific factors considered in making its
determination. However, in the view of AMRESCO's board, the potentially negative
factors considered by it did not outweigh the benefits and advantages of the
merger.
If the merger is not consummated for any reason, AMRESCO will return to
executing its strategy of taking advantage of mid- to high-yield lending and
investment opportunities in real estate related assets. To the extent
opportunities are available, AMRESCO may consider other potential combinations
with public or private entities that AMRESCO's board and management believe are
in the best interests of AMRESCO's shareholders.
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OPINIONS OF AMRESCO'S FINANCIAL ADVISORS
Opinion of Prudential Securities
On August 4, 1999, Prudential Securities delivered its oral opinion to the
AMRESCO board of trust managers to the effect that, as of such date, the
exchange ratio was fair, from a financial point of view, to AMRESCO and its
shareholders. Prudential Securities made a presentation of the financial
analysis underlying its oral opinion at a meeting of the AMRESCO board on August
4, 1999. This analysis, as presented to the AMRESCO board, is summarized below.
Prudential Securities subsequently confirmed its opinion in writing on August 4,
1999.
In requesting the opinion, the AMRESCO board did not give any special
instructions to Prudential Securities or impose any limitation upon the scope of
the investigation that Prudential Securities deemed necessary to enable it to
deliver its opinion. A copy of Prudential Securities' opinion, which sets forth
the assumptions made, matters considered and limits on the review undertaken, is
attached to this document as Annex B and is incorporated in this document by
reference. The summary of the opinion set forth below is qualified in its
entirety by reference to the full text of the opinion. AMRESCO shareholders are
urged to read the opinion in its entirety.
THE OPINION OF PRUDENTIAL SECURITIES IS DIRECTED ONLY TO THE FAIRNESS OF
THE EXCHANGE RATIO TO AMRESCO AND ITS SHAREHOLDERS FROM A FINANCIAL POINT OF
VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW THE
SHAREHOLDER SHOULD VOTE AT THE AMRESCO SPECIAL MEETING OR AS TO ANY OTHER ACTION
THE SHAREHOLDER SHOULD TAKE REGARDING THE MERGER.
In conducting its analysis and arriving at the opinion dated August 4,
1999, Prudential Securities reviewed information and considered financial data
and other factors as Prudential Securities deemed relevant under the
circumstances, including, among others, the following:
- a draft, dated August 3, 1999, of the merger agreement;
- publicly available historical, financial and operating data for AMRESCO,
including, but not limited to, AMRESCO's annual report to shareholders,
annual report on Form 10-K for the fiscal year ended December 31, 1998
and quarterly reports on Form 10-Q for the fiscal quarters ended June 30,
1998, September 30, 1998 and March 31, 1999;
- publicly available historical, financial and operating data concerning
Impac, including, but not limited to, Impac's annual report to
shareholders, annual report on Form 10-K for the fiscal year ended
December 31, 1998 and quarterly reports on Form 10-Q for the fiscal
quarters ended March 31, 1998, June 30, 1998, September 30, 1998 and
March 31, 1999;
- historical stock market prices and trading volumes for AMRESCO common
shares and Impac common stock;
- information relating to AMRESCO, including financial forecasts, prepared
by AMRESCO's management;
- information relating to the combined company, including financial
forecasts, prepared by AMRESCO's management;
- publicly available financial, operating and stock market data concerning
a number of companies that are engaged in businesses Prudential
Securities deemed comparable to AMRESCO or otherwise relevant to
Prudential Securities' inquiry; and
- other financial studies, analyses and investigations Prudential
Securities deemed appropriate.
Prudential Securities assumed, with AMRESCO's consent, that the draft of
the merger agreement which Prudential Securities reviewed, as referred to above,
would conform in all material respects to that document when in final form.
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<PAGE> 33
Prudential Securities met with the senior management of AMRESCO and Impac
to discuss the following:
- the historical and current operating and financial condition of their
respective businesses;
- the prospects for their respective businesses;
- their estimates of their respective businesses' future financial
performance; and
- other matters as Prudential Securities deemed relevant.
While Prudential Securities reviewed some financial multiples of several
companies involved in the origination, purchase, securitization and sale of
commercial mortgage loans as well as other real estate investment strategies,
Prudential Securities did not identify any companies that it deemed to be
relevant for purposes of its analysis and opinion.
In connection with its review and analysis and in arriving at its opinion,
Prudential Securities relied upon the accuracy and completeness of the financial
and other information provided to Prudential Securities by AMRESCO and Impac.
Prudential Securities did not undertake any independent verification of this
information or any independent valuation or appraisal of any of the assets or
liabilities of AMRESCO or Impac. Prudential Securities also was not furnished
with any similar valuation or appraisal. With respect to the financial forecasts
provided to Prudential Securities by AMRESCO, Prudential Securities assumed that
this information, and the assumptions and bases for this information,
represented the best currently available estimates and judgments of AMRESCO's
management as to the future financial performance of AMRESCO on a stand-alone
basis and after giving effect to the merger. Prudential Securities' opinion was
predicated on the merger qualifying as a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. Further, this opinion
was necessarily based on economic, financial and market conditions as they
existed and can only be evaluated as of August 4, 1999.
Prudential Securities' opinion does not address nor should it be construed
to address the relative merits of the merger and alternative business strategies
that may be available to AMRESCO. In addition, this opinion did not in any
manner address the prices at which the AMRESCO common shares will trade
following the consummation of the merger.
In addition, Prudential Securities' opinion and the presentation to the
AMRESCO board was one of the many factors taken into consideration by the
AMRESCO board in making its determination to recommend approval of the merger
agreement and the merger. Consequently, the analyses of Prudential Securities
described below should not be viewed as determinative of the opinion of the
AMRESCO board with respect to the exchange ratio in connection with the Merger.
The exchange ratio to be received by the holders of Impac common stock was
determined through arm's length negotiations between AMRESCO and Impac and was
approved by the AMRESCO board.
In arriving at its opinion, Prudential Securities performed a variety of
financial analyses, including those summarized in this document. The summary set
forth below of the analyses presented to the AMRESCO board at the August 4, 1999
meeting does not purport to be a complete description of the analyses performed.
The preparation of a fairness opinion is a complex process that involves various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of these methods to the particular circumstance.
Therefore, an opinion is not necessarily susceptible to partial analysis or
summary description. Prudential Securities believes that its analysis must be
considered as a whole and that selecting portions of the opinion or portions of
the factors considered by it, without considering all analyses and factors,
could create an incomplete view of the evaluation process underlying the
opinion. Prudential Securities made numerous assumptions with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of AMRESCO
and Impac. Any estimates contained in Prudential Securities' analyses are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, estimates of the values of businesses and securities do not
purport to be appraisals or necessarily reflect the prices at which businesses
or securities may be sold. Accordingly, these analyses and estimates are
inherently subject to
26
<PAGE> 34
substantial uncertainty. Subject to the foregoing, the following is a summary of
the material financial analyses presented by Prudential Securities to the
AMRESCO board in connection with its opinion dated August 4, 1999.
Contribution analysis. Prudential Securities observed that AMRESCO
shareholders would own 60.0% of the common shares of the combined company
outstanding after the merger. Prudential Securities reviewed the relative
contributions to the total pro forma equity book value of the combined company
as of June 30, 1999, the pro forma equity market value of the combined company
as of July 30, 1999 and combined net income for the quarter ended June 30, 1999.
The analysis indicated that AMRESCO would contribute 53% of the pro forma total
equity book value, 63% of the pro forma equity market value and 64% of the
combined net income for the quarter ended June 30, 1999.
Pro forma combination analysis. Prudential Securities also analyzed the
pro forma effect of the merger on AMRESCO's book value per share as of September
30, 1999, on projected earnings per share for the fiscal years ending December
31, 2000 and 2001 calculated on a basis consistent with generally accepted
accounting principles as well as on a tax basis and on AMRESCO's net present
value based upon projections for the years ending December 31, 2000 and 2001
using a discount rate of 15% in both the stand-alone and merger cash flow
projections. Prudential Securities observed that the merger would be accretive
to AMRESCO's book value by 2.4%, to net present value by 5.1% and to earnings
per share in both 2000 and 2001 by a range of 1.9% to 11.9%.
Stock trading analysis. Prudential Securities also analyzed the history of
the trading prices for AMRESCO common shares and Impac common stock. Prudential
Securities observed that between May 15, 1998 and July 30, 1999, the implied
exchange ratio was within a range of 1.25 and 0.40.
AMRESCO selected Prudential Securities to provide a fairness opinion
because it is a nationally recognized investment banking firm engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions and for other purposes and has substantial experience in
transactions similar to the merger and because of Prudential Securities'
familiarity with AMRESCO.
Under an engagement letter with Prudential Securities, AMRESCO is obligated
to pay Prudential Securities an advisory fee of $500,000 upon the delivery of
the opinion and to pay an additional fee of approximately $1.4 million upon
consummation of the merger. In addition, the engagement letter with Prudential
Securities provides that AMRESCO will reimburse Prudential Securities for its
reasonable out-of-pocket expenses and will indemnify Prudential Securities and
some related persons against specified liabilities, including liabilities under
securities laws, arising out of the merger or its engagement.
Prudential Securities has provided various investment banking and other
financial advisory services to AMRESCO from time to time in the past and has
received customary fees for the rendering of these services. Recent services
rendered by Prudential Securities to AMRESCO include acting as lead managing
underwriter of the initial public offering of AMRESCO common shares.
Prudential Securities Credit Corp., an affiliate of Prudential Securities,
currently provides AMRESCO with a $300 million warehouse financing arrangement.
Prudential Securities Credit Corp. is also a party to a repurchase agreement
under which it provides AMRESCO with up to $100 million to finance the purchase
of mortgage-backed securities.
Prudential Securities and other investment banking firms also acted as
underwriters in the public offering by AMRESCO, INC., an affiliate of AMRESCO,
of 4,500,000 shares of its common stock.
Since August 31, 1997, Prudential Securities has been paid net fees
totalling $4,641,000 by AMRESCO mainly relating to AMRESCO's initial public
offering, which excludes the amounts relating to the merger, and net fees
totalling $18,667,000 by AMRESCO, INC. and other affiliates of AMRESCO.
Prudential Securities holds warrants to purchase 250,002 AMRESCO common
shares at $9.83 per share. Also, in the ordinary course of business, Prudential
Securities may actively trade the AMRESCO common shares and shares of IMPAC
common stock for its own account and for the accounts of customers, and
accordingly, may at any time hold a long or short position in these securities.
27
<PAGE> 35
Opinion of Deutsche Bank Securities Inc.
Deutsche Bank Securities Inc. has acted as financial advisor to the
committee of independent trust managers of AMRESCO in connection with the
proposed merger. At the August 4, 1999 meeting of the AMRESCO board at which all
members of the committee of independent trust managers were present, Deutsche
Bank Securities delivered its oral opinion, subsequently confirmed in writing as
of the same date, to the effect that, as of the date of such opinion, based upon
and subject to the assumptions made, matters considered and limits of the review
undertaken by Deutsche Bank Securities, the exchange ratio was fair, from a
financial point of view, to AMRESCO, and accordingly to its shareholders.
THE FULL TEXT OF DEUTSCHE BANK SECURITIES' WRITTEN OPINION, DATED AUGUST 4,
1999, WHICH SETS FORTH, AMONG OTHER THINGS, THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN BY DEUTSCHE BANK SECURITIES IN
CONNECTION WITH THE OPINION, IS ATTACHED AS ANNEX C TO THIS DOCUMENT AND IS
INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS OF AMRESCO ARE URGED TO READ
DEUTSCHE BANK SECURITIES' OPINION IN ITS ENTIRETY. THE SUMMARY OF DEUTSCHE BANK
SECURITIES'S OPINION SET FORTH IN THIS DOCUMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF DEUTSCHE BANK SECURITIES' OPINION.
In connection with Deutsche Bank Securities's role as financial advisor to
the committee of independent trust managers of AMRESCO, and in arriving at its
opinion, Deutsche Bank Securities has, among other things:
- reviewed certain publicly available financial information and other
information concerning AMRESCO and Impac;
- reviewed certain internal analyses and other information furnished to it
by AMRESCO and Impac;
- held discussions with the members of the senior managements of AMRESCO
and Impac regarding the businesses and prospects of their respective
companies and the joint prospects of a combined company;
- reviewed the reported prices and trading activity for the common stock of
both AMRESCO and Impac;
- compared certain financial and stock market information for AMRESCO and
Impac with similar information for selected companies whose securities
are publicly traded;
- reviewed the terms of the merger agreement and certain related documents;
and
- performed such other studies and analyses and considered such other
factors as it deemed appropriate.
In preparing its opinion, Deutsche Bank Securities did not assume
responsibility for the independent verification of, and did not independently
verify, any information, whether publicly available or furnished to it,
concerning AMRESCO or Impac, including, without limitation, any financial
information, forecasts or projections, considered in connection with the
rendering of its opinion. Accordingly, for purposes of its opinion, Deutsche
Bank Securities assumed and relied upon the accuracy and completeness of all
such information. Deutsche Bank Securities did not conduct a physical inspection
of any of the properties or assets, and did not prepare or obtain any
independent evaluation or appraisal of any of the assets or liabilities of
AMRESCO or Impac. With respect to the financial forecasts and projections,
including analyses and forecasts made available to Deutsche Bank Securities and
used in its analysis, Deutsche Bank Securities has assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the management of AMRESCO and Impac, as the case may be, as to
the matters covered thereby. In rendering its opinion, Deutsche Bank Securities
expressed no view as to the reasonableness of such forecasts and projections, or
the assumptions on which they are based. Deutsche Bank Securities's opinion was
necessarily based upon economic, market and other conditions as in effect on,
and the information made available to Deutsche Bank Securities as of, the date
of its opinion.
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<PAGE> 36
For purposes of rendering its opinion, Deutsche Bank Securities has assumed
that, in all respects material to its analysis:
- the representations and warranties of AMRESCO and Impac contained in the
merger agreement are true and correct;
- AMRESCO and Impac will each perform all of the covenants and agreements
to be performed by it under the merger agreement;
- all conditions to the obligations of each of AMRESCO and Impac to
consummate the merger will be satisfied without any waiver thereof;
- all material governmental, regulatory or other approvals and consents
required in connection with the consummation of the transactions
contemplated by the merger agreement will be obtained; and
- in connection with obtaining any necessary governmental, regulatory or
other approvals and consents, or any amendments, modifications or waivers
to any agreements, instruments or orders to which either AMRESCO or Impac
is a party or is subject or by which it is bound, no limitations,
restrictions or conditions will be imposed or amendments, modifications
or waivers made that would have a material adverse effect on AMRESCO or
Impac or materially reduce the contemplated benefits of the merger to
AMRESCO.
In addition, Deutsche Bank Securities has been advised by AMRESCO, and
accordingly has assumed for purposes of its opinion, that the merger will be
tax-free to each of AMRESCO and Impac.
Deutsche Bank Securities also has assumed for purposes of its opinion that
the transactions to be effected in connection with the merger agreement and
under the terms of the purchase agreement, which transactions include, without
limitation, the following:
- the purchase by FIC Management, Inc. of approximately 1,500,000 AMRESCO
common shares from AMREIT Holdings, Inc. and AMRESCO, INC.;
- the assumption by FIC Management, Inc. of the management agreement, dated
as of May 12, 1998, between AMRESCO and AMREIT Managers L.P.; and
- the acquisition by FIC Management, Inc. of all of the options to purchase
AMRESCO common shares of AMRESCO held by AMREIT Managers, L.P., are
commercially reasonable.
Deutsche Bank Securities was not requested to and did not express any
opinion as to such transactions.
In connection with Deutsche Bank Securities's role as financial advisor to
the committee of independent trust managers of AMRESCO and in arriving at its
opinion, Deutsche Bank Securities was not requested to or authorized to solicit
or evaluate, and did not solicit or evaluate, any alternative transactions to
the merger.
Set forth below is a brief summary of certain financial analyses performed
by Deutsche Bank Securities in connection with its opinion and reviewed at the
August 4, 1999 meeting of the AMRESCO board, which was attended by the entire
committee of independent trust managers.
Analysis of selected publicly traded companies. Deutsche Bank Securities
compared certain financial information and commonly used valuation measurements
for AMRESCO and Impac to corresponding information and measurements for a group
of ten comparable publicly traded mortgage real estate investment trusts
consisting of Anthracite Capital Inc., Dynex Capital Inc., Impac Mortgage
Holdings, Imperial Credit Commercial Mortgage Investment Corporation, Ocwen
Asset Investment Corp., Criimi Mae Inc., Wilshire Real Estate Investment Trust,
Resource Asset Investment Trust, Starwood Financial Trust and PMC Commercial
Trust.
Such financial information and valuation measurements included, among other
things:
- ratios of common equity market value to book value;
- common equity market valuation;
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<PAGE> 37
- equity to assets ratios;
- operating performance; and
- ratios of common equity market prices per share to earnings per share.
To calculate the trading multiples for AMRESCO, Impac and the comparable
companies, Deutsche Bank Securities used publicly available information
concerning historical and projected financial performance, including published
historical financial information and earnings estimates reported by the
Institutional Brokers Estimate System ("IBES"). IBES is a data service that
monitors and publishes compilations of earnings estimates by selected research
analysts regarding companies of interest to institutional investors.
For each of the comparable companies, Deutsche Bank Securities calculated
equity market values as a multiple of latest twelve months (commonly referred to
as "LTM") net income as of June 30, 1999, as multiples of estimates of net
income for fiscal years 1999 and 2000, and as a multiple of book value. This
analysis indicated multiple medians for the comparable companies of 12.2x last
twelve month net income, 7.1x 1999 estimated net income and 4.1x 2000 estimated
net income, with multiple ranges, based on plus or minus 1.0x the applicable
median multiple, of 11.2x to 13.2x last twelve month net income, 6.1x to 8.1x
1999 estimated net income, and 3.1x to 5.1x 2000 estimated net income. The
analysis also indicated a multiple median for the comparable companies of .50x
book value, with a multiple range, based on plus or minus 1.25x the book value
multiple median, of .375x to .625x book value. Deutsche Bank Securities then
calculated the implied equity values of each of AMRESCO on a stand alone basis
and the combined company and the implied prices for the common shares of each of
AMRESCO on a stand alone basis and of the combined company, in each case based
on the multiple ranges for the comparable companies. The implied equity values
and the implied prices for common shares for each of AMRESCO on a stand alone
basis and for the combined company, in each case based on the multiple ranges
for the comparable companies, are as follows:
<TABLE>
<CAPTION>
AMRESCO (STAND ALONE) COMBINED COMPANY
------------------------------------ ------------------------------------
IMPLIED IMPLIED IMPLIED IMPLIED
MULTIPLE FACTOR EQUITY VALUE SHARE PRICE EQUITY VALUE SHARE PRICE
- --------------- ------------------ -------------- ------------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
LTM Net Income........ $92,281 - $108,773 $9.21 - $10.86 N.A N.A.
1999 Net Income....... $93,032 - $123,390 $9.29 - $12.32 $101,716 - $134,908 $6.09 - $8.08
2000 Net Income....... $53,494 - $88,480 $5.34 - $8.83 $91,286 - $150,990 $5.47 - $9.05
Book Value............ $48,512 - $80,853 $4.84 - $8.07 $81,921 - 136,535 $4.91 - $8.18
</TABLE>
None of the companies utilized as a comparison are identical to AMRESCO or
Impac. Accordingly, Deutsche Bank Securities believes the analysis of the
publicly traded comparable companies is not simply mathematical. Rather, it
involves complex considerations and qualitative judgments concerning differences
in financial and operating characteristics of the comparable companies and other
factors that could affect the public trading value of the comparable companies.
Contribution analysis. Deutsche Bank Securities analyzed the relative
contributions of AMRESCO and Impac, as compared to AMRESCO's and Impac's
relative ownership of approximately 55.6% and 44.4% respectively of the common
shareholders' equity, and approximately 60% and 40% respectively of the
outstanding shares, of the combined company, to the pro forma income statement
and balance sheet of the combined company. This analysis showed that on a pro
forma combined basis (excluding (i) the effect of any synergies that may be
realized as a result of the merger and (ii) non-recurring expenses relating to
the merger) based, unless otherwise provided in the table below, on the actual
results for the six month period
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<PAGE> 38
ended June 30, 1999, and as of June 30, 1999, AMRESCO and Impac would make the
following contributions to the combined company:
<TABLE>
<CAPTION>
AMRESCO IMPAC
------- -----
<S> <C> <C>
Pro forma assets........................................ 65.7% 34.3%
Indebtedness............................................ 95.6% 4.4%
IBES 1999 earnings...................................... 76.0% 24.0%
Net income (based on the actual results for the
three-month period ended June 30, 1999)............... 72.1% 27.9%
Market value (based on market values as of August 3,
1999)................................................. 61.7% 38.3%
</TABLE>
Discounted cash flow analysis. Deutsche Bank Securities performed a
discounted cash flow analysis for both AMRESCO on a stand alone basis and for
the combined company. Deutsche Bank Securities calculated the discounted cash
flow values for each of AMRESCO on a stand alone basis and the combined company
as the sum of the net present values of (1) the estimated future cash flow that
AMRESCO on a stand alone basis or the combined company, as the case may be, will
generate for the period described below, plus (2) the value of AMRESCO on a
stand alone basis or the combined company, as the case may be, at the end of
such period. The estimated future cash flows were based on the financial
projections for AMRESCO for the years 1999 through 2001 prepared by AMRESCO's
management. The terminal value of AMRESCO on a stand alone basis was calculated
based on projected estimated cash flow to common equity for 2001 and a range of
multiples of 7.0x and 10.0x. The terminal value of the combined company was
calculated based on projected estimated cash flow to common equity for 2001 and
a range of multiples of 7.0x and 10.0x. Deutsche Bank Securities used discount
rates in each case ranging from 11.0% to 15.0%. Deutsche Bank Securities used
such discount rates based on its judgment of the estimated weighted average cost
of capital of comparable companies, and used such multiples based on its review
of the trading characteristics of the common stock of comparable companies. This
analysis indicated the following:
<TABLE>
<CAPTION>
IMPLIED IMPLIED
PER SHARE PRICE EQUITY VALUES
--------------- ---------------------------
<S> <C> <C>
AMRESCO.......................... $12.53 - $17.65 $125,474,000 - $176,742,000
Combined Company................. $13.42 - $19.02 $224,719,000 - $318,687,000
</TABLE>
Pro forma combined earnings analysis. Deutsche Bank Securities analyzed
some pro forma effects of the merger. Based on such analysis, Deutsche Bank
Securities computed the resulting dilution/accretion to the combined company's
earnings per share estimate for the fiscal years ending December 31, 1999,
December 31, 2000 and December 31, 2001 before taking into account any potential
cost savings and other synergies identified by management that AMRESCO and Impac
could achieve if the merger were consummated and before non-recurring costs
relating to the merger. Deutsche Bank Securities noted that, before taking into
account any potential cost savings and other synergies and before non-recurring
costs, the merger would be approximately 3.3% dilutive, 2.4% accretive and 10.2%
accretive to the combined company's earnings per share for the fiscal years
ending December 31, 1999, December 31, 2000 and December 31, 2001, respectively.
Other considerations. In connection with its opinion Deutsche Bank
Securities also considered, among other things:
- the historical and pro forma financial profile of AMRESCO;
- the ownership profile of AMRESCO;
- movements in the price of shares of common stock of AMRESCO and Impac
relative to movements in the common stock of the comparable companies;
- analysts' reports, including earning estimates, with respect to AMRESCO;
and
- the historical exchange ratio of the implied market capitalizations of
AMRESCO and Impac.
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<PAGE> 39
The foregoing summary describes all analyses and factors that Deutsche Bank
Securities deemed material in its presentation at the August 4, 1999 meeting of
the AMRESCO board at which all members of the committee of independent trust
managers were present, but is not a comprehensive description of all analyses
performed and factors considered by Deutsche Bank Securities in connection with
preparing its opinion. The preparation of a fairness opinion is a complex
process involving the application of subjective business judgment in determining
the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and, therefore, is
not readily susceptible to summary description. Deutsche Bank Securities
believes that its analyses must be considered as a whole and that considering
any portion of such analyses and of the factors considered without considering
all analyses and factors could create a misleading view of the process
underlying the opinion. In arriving at its fairness determination, Deutsche Bank
Securities did not assign specific weights to any particular analyses.
In conducting its analyses and arriving at its opinions, Deutsche Bank
Securities utilized a variety of generally accepted valuation methods. The
analyses were prepared solely for the purpose of enabling Deutsche Bank
Securities to provide its opinion to the committee of independent trust managers
of AMRESCO as to the fairness to AMRESCO, and accordingly to its shareholders,
of the exchange ratio and does not purport to be appraisals or necessarily
reflect the prices at which businesses or securities actually may be sold, which
are inherently subject to uncertainty. In connection with its analyses, Deutsche
Bank Securities made, and was provided by AMRESCO's management with, numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond AMRESCO's or Impac's
control. Analyses based on estimates or forecasts of future results are not
necessarily indicative of actual past or future values or results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of AMRESCO, Impac or their respective
advisors, neither AMRESCO nor Deutsche Bank Securities nor any other person
assumes responsibility if future results or actual values are materially
different from these forecasts or assumptions.
The terms of the merger were determined through negotiations between
AMRESCO and Impac and were approved by the trust managers of AMRESCO. Although
Deutsche Bank Securities provided advice to the committee of independent trust
managers of AMRESCO during the course of these negotiations, the decision to
enter into the merger was solely that of the AMRESCO board. As described above,
the opinion of Deutsche Bank Securities to the committee of independent trust
managers of AMRESCO and the presentation of Deutsche Bank Securities at the
August 4, 1999 meeting were only one of a number of factors taken into
consideration by the trust managers of AMRESCO in making its determination to
approve the merger. Deutsche Bank Securities's opinion was provided to the
committee of independent trust managers of AMRESCO to assist it in connection
with its consideration of the merger and does not constitute a recommendation to
any holder of AMRESCO common shares as to how to vote with respect to the
merger.
The committee of independent trust managers selected Deutsche Bank
Securities as financial advisor in connection with the merger based on Deutsche
Bank Securities's qualifications, expertise, reputation and experience in
mergers and acquisitions. AMRESCO has retained Deutsche Bank Securities pursuant
to an engagement letter dated July 19, 1999. As compensation for Deutsche Bank
Securities's services in connection with the merger, AMRESCO has paid Deutsche
Bank Securities a cash fee of $350,000. Regardless of whether the merger is
consummated, AMRESCO has agreed to reimburse Deutsche Bank Securities for
reasonable fees and disbursements of Deutsche Bank Securities's counsel and all
of Deutsche Bank Securities's reasonable travel and other out-of-pocket expenses
incurred in connection with the merger or otherwise arising out of the retention
of Deutsche Bank Securities under the engagement letter. AMRESCO has also agreed
to indemnify Deutsche Bank Securities and certain related persons to the full
extent lawful against certain liabilities, including certain liabilities under
the federal securities laws arising out of its evaluation of the merger.
Deutsche Bank Securities is an internationally recognized investment
banking firm experienced in providing advice in connection with mergers and
acquisitions and related transactions. Deutsche Bank Securities and its
affiliates may actively trade securities of AMRESCO for their own account or the
account of their customers and, accordingly, may from time to time hold a long
or short position in such securities.
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<PAGE> 40
INTERESTS OF AMRESCO'S TRUST MANAGERS, EXECUTIVE OFFICERS AND AFFILIATES
In considering the recommendation of AMRESCO's board of trust managers with
respect to the merger, shareholders should be aware that some trust managers,
executive officers and affiliates have interests in the merger that are
different from or in addition to those of other shareholders. AMRESCO's board
was aware of these interests and considered them, along with other matters, in
approving the merger.
Payments under the purchase agreement
Under the purchase agreement, FIC Management or its designated affiliates
agreed to purchase the assets from the sellers listed below.
<TABLE>
<CAPTION>
SELLER ASSETS
- ------ ------
<S> <C>
AMREIT Managers, L.P........................ Management Agreement, dated as of May 12,
1998, between AMREIT Managers, L.P. and
AMRESCO
Management Agreement, dated as of February
2, 1999, between AMREIT Managers, L.P.,
and OLY/ACT, L.P.
Personal property, information and records
and permits required to the provision of
management services
Options to purchase 1,000,011 common shares
of AMRESCO
AMREIT Holdings, Inc. ...................... 1,500,011 common shares of AMRESCO
AMRESCO, INC. .............................. 100 common shares of AMRESCO
MLM Holdings, Inc. ......................... 475 shares of voting common stock of AMREIT
II, Inc.
</TABLE>
AMREIT II, Inc. is a subsidiary of AMRESCO. All of the partnership
interests of AMREIT Managers, L.P. are owned by affiliates of AMRESCO, INC. The
general partner of AMREIT Managers, L.P. is AMREIT Managers G.P., Inc., which is
a wholly-owned subsidiary of AMREIT Holdings, Inc. Michael L. McCoy, an officer
of AMRESCO, is a shareholder and sole director of MLM Holdings, Inc. The
following table summarizes the positions held by persons who hold officer and/or
director positions in AMRESCO and AMRESCO, INC.
<TABLE>
<CAPTION>
NAME POSITION IN AMRESCO CAPITAL TRUST POSITION IN AMRESCO, INC.
- ---- --------------------------------- ---------------------------
<S> <C> <C>
Robert L. Adair III........ Chairman of the Board of Director, President and
Trust Managers and Chief Chief
Executive Officer Operating Officer
Robert H. Lutz, Jr. ....... Trust Manager Chairman of Board and Chief
Executive Officer
</TABLE>
Benefits to employees
Effective January 1, 2000, some employees of AMREIT Managers, L.P. will
become employees of FIC Management. AMRESCO, INC. has agreed that, on the
closing date, all of the restricted shares of AMRESCO, INC. held by these
executive officers will vest and become fully exercisable. The following table
lists the number of restricted shares held by these executive officers.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NAME AND TITLE AMRESCO, INC.
- -------------- -------------
<S> <C>
Jonathan S. Pettee........................... 35,352
David M. Striph.............................. 6,532
Thomas R. Lewis II........................... 1,576
</TABLE>
33
<PAGE> 41
Trust managers and officers of the combined company
At the effective time of the merger, Mr. Adair, John C. Deterding and Mark
D. Gibson will continue as trust managers of the combined company. Also at the
effective time, Jonathan S. Pettee, the president of AMRESCO, will become the
president of the combined company, and Thomas R. Lewis, the vice president and
controller of AMRESCO, will become the senior vice president and controller of
the combined company.
Agreements with employees
Under the purchase agreement for the purchase of AMRESCO's existing
management agreement and other specified assets, FIC Management has agreed to
enter into agreements with each of Messrs. Pettee, Lewis and Striph effective as
of the time of the closing of the purchase transactions. These agreements will
provide that if any of these individuals are terminated by FIC Management or any
of its affiliates for any reason other than due to fraud, arrest for a felony or
a material violation of FIC Management's policies or procedures, the terminated
employee will receive the following:
- with respect to Mr. Pettee, $250,000; and
- with respect to Messrs. Lewis or Striph, a lump sum equal to his previous
year's base salary.
IMPAC'S REASONS FOR THE MERGER; RECOMMENDATIONS OF THE IMPAC BOARD
IMPAC'S BOARD OF DIRECTORS HAS DETERMINED THAT THE TERMS OF THE MERGER
AGREEMENT ARE ADVISABLE AND FAIR TO, AND THAT THE MERGER IS IN THE BEST
INTERESTS OF, IMPAC AND ITS STOCKHOLDERS AND RECOMMENDS THAT IMPAC STOCKHOLDERS
VOTE FOR THE APPROVAL OF THE MERGER.
In considering the recommendation of Impac's board with respect to the
merger, Impac stockholders should be aware that Wesley Edens, Frank Filipps,
Robert Kauffman, Christopher Mahowald and Joseph Tomkinson, five members of the
Impac board, will become trust managers of AMRESCO following completion of the
merger and Messrs. Edens and Kauffman are officers and principals of Fortress
and its affiliates, including FIC Management, which will manage the combined
company's operations after completion of the merger. Therefore, such directors
have interests in the merger that are different than, or in addition to, the
interests of stockholders of Impac generally. The Impac board was aware of these
interests and considered them, among other matters, in approving the merger
agreement and the merger. See "-- Interests of Impac directors, executive
officers and affiliates."
In its deliberations with respect to the merger and the merger agreement,
the Impac board consulted with Impac's management and the financial and legal
advisors to Impac. The factors considered by the Impac board include those
enumerated below. While all of these factors were considered by the Impac board,
the Impac board did not make determinations with respect to each such factor.
Rather, the Impac board made its judgment with respect to the merger and the
merger agreement based on the total mix of information available to it, and the
judgments of individual directors may have been influenced to a greater or
lesser degree by their individual views with respect to different factors.
Positive factors considered by the Impac board
The factors considered by the Impac board in evaluating the merger and the
merger agreement included the following:
(1) its knowledge of the business, operations, assets, properties,
operating results and financial condition of Impac;
(2) Impac's strategic alternatives, including the prospects of
positioning Impac for the future and restoring and enhancing long-term
stockholder value by remaining an independent company or by effecting a
strategic business combination with another company;
(3) information concerning Impac's prospects as an independent
company;
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<PAGE> 42
(4) information concerning the financial position, results of
operations, businesses, competitive position and prospects of a business
combination with AMRESCO;
(5) the philosophies of the management of AMRESCO, and the similarity
of those with that of Impac's management;
(6) specifically, with respect to a business combination with AMRESCO:
(A) the exchange ratio and recent trading prices for shares of
Impac common stock and AMRESCO common shares;
(B) the opportunity for the stockholders of Impac to receive a
premium over the market price for their Impac common stock immediately
prior to the announcement of the merger agreement; the exchange ratio
implied a premium of approximately $0.73, or 12.5%, over the closing
market price of $5.875 per share of Impac common stock on August 4, 1999
based on the closing market price of $10.00 for AMRESCO common shares on
the same day;
(C) the anticipated positive effects of the merger on Impac
stockholders through their ownership of stock in a combined company that
will likely have greater stability and strength due to its larger
capitalization and increased access to capital and financial markets
allowing it to compete more effectively in the commercial mortgage REIT
sector, its expected cost savings and synergies expected to result from
the consolidation of Impac's and AMRESCO's stand-alone operations, and
its expected increased flexibility and leverage in financing and
acquisition activities;
(D) the terms of the merger agreement, which provide for reciprocal
representations and warranties, conditions to closing and rights to
termination, and balanced rights and obligations as discussed under "The
Merger Agreement";
(E) the expected tax treatment of the merger; and
(F) the presentations made by Banc of America Securities and Jolson
Securities to the Impac board during the negotiation process and the
opinion of Banc of America Securities rendered to the Impac board on
August 4, 1999 that as of such date, and based on and subject to the
various qualifications and assumptions described therein, the
consideration to be received by holders of Impac common stock (other
than Fortress and its affiliates) pursuant to the merger agreement was
fair from a financial point of view to such holders. See "-- Opinion of
Impac's financial advisor."
Negative factors considered by the Impac board
Impac's board of directors also considered the following potentially
negative factors in its deliberations concerning the merger:
(1) the risk that the benefits sought in the merger would not be
obtained;
(2) the risk of a decline in the trading price for AMRESCO common
shares and its effect on the value to be received by Impac's common
stockholders;
(3) the risk that a decline in the trading price of AMRESCO common
shares could result in the value of the consideration received by Impac
stockholders being less than the value of Impac's assets;
(4) the risk that the merger would not be completed;
(5) the effect of the public announcement of the merger on each of
Impac's and AMRESCO's ability to retain employees and on the trading price
of Impac's common stock and AMRESCO's common shares;
(6) the substantial management time and effort that will be required
to complete the merger and integrate the operations of the two companies;
(7) the impact of the merger on Impac personnel; and
35
<PAGE> 43
(8) other matters described under "Risk Factors" on pages 15 to 17.
In the judgment of the Impac board of directors, the potential benefits of
the merger to Impac's stockholders clearly outweighed the risks inherent in the
transaction.
On September 7, 1999, the Impac board of directors received a letter from
Apex Mortgage Capital, Inc. regarding a proposed acquisition of Impac by Apex
Mortgage. According to filings made by Apex Mortgage with the SEC, Apex Mortgage
beneficially owns 7.5% of Impac's common stock and is a real estate investment
trust that invests in United States agency and other single-family real estate
adjustable and fixed rate mortgages. Apex Mortgage has proposed that Impac and
Apex Mortgage would be merged, with Impac stockholders receiving 0.60328 of a
share of Apex Mortgage common stock for each of their shares of Impac common
stock. The Apex Mortgage proposal stated that it is conditioned upon the
satisfactory completion of due diligence by Apex Mortgage. The Impac board has
begun the process of evaluating the Apex Mortgage proposal and has not yet made
any determination regarding the merits of the proposal or the course of action
to be pursued by Impac.
OPINION OF IMPAC'S FINANCIAL ADVISOR
At the August 4, 1999 meeting of the Impac board of directors, Banc of
America Securities rendered its oral opinion, which was subsequently confirmed
by a written opinion dated as of the same date, that as of such date, and based
upon and subject to the various qualifications and assumptions described
therein, the consideration to be received by the holders of Impac common stock
(other than Fortress and its affiliates) pursuant to the merger agreement was
fair from a financial point of view to such holders.
The following is a summary of the report by Banc of America Securities in
connection with the rendering of its oral opinion presented to the board of
directors of Impac on August 4, 1999, subsequently confirmed by a written
opinion addressed to the Impac board, dated as of August 4, 1999.
THE FULL TEXT OF THE WRITTEN OPINION OF BANC OF AMERICA SECURITIES DATED AS
OF AUGUST 4, 1999 WITH RESPECT TO THE CONSIDERATION TO BE RECEIVED BY THE
HOLDERS OF IMPAC COMMON STOCK (OTHER THAN FORTRESS AND ITS AFFILIATES) PURSUANT
TO THE MERGER AGREEMENT AND SETTING FORTH THE ASSUMPTIONS MADE, PROCEDURES
FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN
CONNECTION WITH THE OPINION IS ATTACHED AS ANNEX D TO THIS DOCUMENT AND IS
INCORPORATED HEREIN BY REFERENCE. HOLDERS OF IMPAC COMMON STOCK ARE URGED TO,
AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY.
Banc of America Securities' written opinion is addressed to the Impac board
and addresses only the fairness to the holders of Impac common stock (other than
Fortress and its affiliates) of the consideration to be received by such
stockholders pursuant to the merger agreement and does not constitute a
recommendation to any stockholder of Impac as to how such holder should vote
with respect to the merger nor does it constitute a recommendation to the Impac
board as to whether it should approve the merger.
In arriving at its opinion, Banc of America Securities, among other things:
(1) reviewed certain publicly available financial statements and other
business and financial information of Impac and AMRESCO, respectively;
(2) reviewed certain internal financial statements and other financial
and operating data concerning Impac and AMRESCO prepared by the managements
of Impac and FIC Management and AMRESCO and AMREIT Managers, respectively;
(3) analyzed certain financial forecasts and net asset value
calculations with senior executives of Impac and FIC Management prepared by
the managements of Impac and FIC Management and AMRESCO and AMREIT
Managers, respectively;
(4) reviewed and discussed with senior executives of Impac, FIC
Management, AMRESCO and AMREIT Managers, the strategic rationale for the
merger and information relating to certain strategic, financial and
operational benefits anticipated from the transactions contemplated by the
merger
36
<PAGE> 44
agreement, including anticipated cost savings and operational synergies,
prepared by the managements of Impac and FIC Management and AMRESCO and
AMREIT Managers, respectively;
(5) discussed the past and current operations, financial condition and
prospects of Impac with senior executives of Impac and FIC Management and
discussed the past and current operations, financial condition and
prospects of AMRESCO with senior executives of AMRESCO and AMREIT Managers;
(6) reviewed the pro forma impact of the merger on AMRESCO's earnings
per share, cash flow, consolidated capitalization and financial ratios;
(7) reviewed information prepared by members of senior managements of
Impac, FIC Management, AMRESCO and AMREIT Managers relating to the relative
contributions of Impac and AMRESCO to the combined company;
(8) reviewed the reported prices and trading activity for the Impac
common stock and AMRESCO's common shares;
(9) compared the financial performance of Impac and AMRESCO and the
prices and trading activity of Impac common stock and AMRESCO's common
shares with those of certain other publicly traded companies comparable
with Impac and AMRESCO, respectively, and with their securities;
(10) reviewed the financial terms, to the extent publicly available,
of certain acquisition transactions which it deemed relevant;
(11) participated in discussions among representatives of Impac, FIC
Management, AMRESCO and AMREIT Managers and their financial and legal
advisors;
(12) reviewed the draft of the merger agreement dated August 4, 1999,
the definitive merger agreement dated as of August 4, 1999, the draft of
the purchase agreement dated August 4, 1999 and certain related documents;
and
(13) performed such other analysis and considered such other factors
as Banc of America Securities deemed necessary or appropriate for purposes
of its opinion.
In rendering its opinion, Banc of America Securities assumed and relied
upon, without independent verification, the accuracy and completeness of the
information supplied or otherwise made available to it for the purposes of its
opinion. With respect to the financial forecasts (including but not limited to
the availability and pricing of warehouse and repurchase agreements and levels
and yields on loan originations) and net asset valuations, Banc of America
Securities assumed that they had been reasonably prepared on bases reflecting
the best currently available estimates and good faith judgments of the future
financial performance of Impac and AMRESCO. In arriving at its opinion, Banc of
America Securities relied upon, without independent verification, the
assessments of the managements of Impac and FIC Management and AMRESCO and
AMREIT Managers of the amount and timing of the potential synergies and cost
savings that AMRESCO expects to realize from the merger and of the strategic,
financial and operational benefits anticipated from the merger. Banc of America
Securities did not make any independent valuation or appraisal of the assets or
liabilities of Impac or AMRESCO, nor was it furnished with any such appraisals.
Banc of America Securities' opinion is necessarily based on economic,
market and other conditions (including prevailing interest rates) as in effect
on, and the information made available to Banc of America Securities as of, the
date of Banc of America Securities' opinion. Subsequent developments may affect
the conclusions contained in the written opinion dated as of August 4, 1999, and
Banc of America Securities does not have any obligation to update, revise or
reaffirm its opinion. Banc of America Securities expressed no opinion as to the
prices at which AMRESCO's common shares will trade following consummation of the
merger. In addition, Banc of America Securities expressed no opinion or
recommendation as to how the stockholders of Impac or AMRESCO should vote at
their respective stockholders' meetings held in connection with the merger.
In accordance with customary investment banking practice, Banc of America
Securities employed generally accepted valuation methods in reaching its
opinion. The following summarizes certain of the
37
<PAGE> 45
analyses performed by Banc of America Securities in connection with the
rendering of its oral opinion of August 4, 1999, and its written opinion dated
as of August 4, 1999. Some of the summaries below include information in tabular
format. The tables alone are not a complete description of the financial
analyses and should be read together with the text of each summary.
Premium based on market value
Banc of America Securities (a) compared Impac's August 3, 1999 stock price
to the value of the consideration to be received by holders of Impac common
stock, based upon the application of the exchange ratio of 0.66094 to AMRESCO's
August 3, 1999 stock price, and (b) compared Impac's latest 20 trading days
stock price average to the value of the consideration to be received by holders
of Impac common stock, based upon the application of the exchange ratio of
0.66094 to AMRESCO's latest 20 trading days stock price average and (c) compared
Impac's 1999 average stock price to the value of the consideration received by
holders of Impac common stock, based upon the application of the exchange ratio
of 0.66094 to AMRESCO's 1999 average stock price. The results of such
comparisons are summarized in the following table.
<TABLE>
<CAPTION>
STOCK PRICE
---------------- MERGER PREMIUM/
IMPAC AMRESCO CONSIDERATION DISCOUNT
----- ------- ------------- --------
<S> <C> <C> <C> <C>
Price as of 8/3/99.............................. $6.00 $ 9.75 $6.44 7.4%
Last 20 trading days average.................... $6.28 $10.35 $6.84 8.9%
1999 average (1/1/99-8/3/99).................... $5.89 $ 9.51 $6.28 6.6%
</TABLE>
Contribution analysis
Banc of America Securities analyzed the net asset value, current equity
market capitalization, GAAP earnings, and tax earnings that would be contributed
to the combined company by Impac and AMRESCO, respectively.
<TABLE>
<CAPTION>
IMPAC AMRESCO
----- -------
<S> <C> <C>
Net Asset Value............................................. 44% 56%
Net Asset Value -- Impac (low), AMRESCO (high).............. 41% 59%
4th quarter 1999 GAAP earnings.............................. 25% 75%
Fiscal 2000 GAAP earnings................................... 26% 74%
4th quarter 1999 tax earnings............................... 14% 86%
Fiscal 2000 tax earnings.................................... 26% 74%
</TABLE>
Banc of America Securities observed that an exchange ratio of 0.66094
implies a pro forma ownership of the combined company of: (1) 60% by holders of
AMRESCO common stock and (2) 40% by holders of Impac common stock (assuming
conversion of the Impac series B preferred stock).
In performing the comparison of net asset value, Banc of America Securities
relied upon a net asset value estimate for Impac and AMRESCO prepared by the
managements of Impac and FIC Management AMRESCO and AMREIT Managers. In
performing the comparison of equity market capitalization, Banc of America
Securities assumed the conversion of the Impac series B preferred stock and made
such comparisons calculating the equity market capitalization using the closing
stock prices of Impac and AMRESCO common stock as of August 3, 1999. In
performing the comparison of GAAP earnings and tax earnings, Banc of America
Securities relied upon estimates provided by the managements of Impac and FIC
Management and AMRESCO and AMREIT Managers with respect to Impac and AMRESCO,
respectively.
Accretion analysis
Banc of America Securities compared the projected tax earnings per share
("EPS") and the dividend yield of Impac based upon the assumption that Impac did
not enter into the merger and operated on a "stand alone" basis, to the
projected tax EPS and dividend yield of the combined company. In order to
compare the projected tax EPS of the combined company to Impac on a "stand
alone" basis, the projected tax EPS of the combined company was multiplied by
the exchange ratio of 0.66094. Banc of America Securities calculated
38
<PAGE> 46
the dividend yield for Impac on a "stand alone" basis by annualizing Impac's
latest quarterly dividend and dividing it by Impac's August 3, 1999 stock price.
The dividend yield for the combined company was estimated based on 95% of
projected fourth quarter taxable EPS annualized, divided by AMRESCO's August 3,
1999 stock price.
<TABLE>
<CAPTION>
IMPAC COMBINED IMPAC PER
STAND-ALONE COMPANY SHARE EQUIVALENT ACCRETION
----------- -------- ---------------- ---------
<S> <C> <C> <C> <C>
4th quarter 1999 tax
earnings/share.................... $0.09 $0.37 $0.24 162%
Fiscal 2000 tax earnings/share...... $0.70 $1.65 $1.09 56%
Dividend yield...................... 8.3% 14.4%
</TABLE>
Banc of America Securities relied on financial information and estimates
provided by the managements of Impac and FIC Management and AMRESCO and AMREIT
Managers with respect to Impac and AMRESCO, respectively. In order to obtain
projected tax EPS for the combined company, Banc of America Securities made
certain assumptions, as provided by the managements of Impac and FIC Management
and AMRESCO and AMREIT Managers, including $4 million of annual cost savings, $5
million of transaction expenses, the conversion of the Impac series B preferred
stock and the implementation of the proposed management contract in the fourth
quarter of 1999.
Comparable company analysis
Using publicly available information, Banc of America Securities reviewed
and compared selected historical and projected financial, operating and stock
market performance data of Impac to the corresponding data of certain publicly
traded companies that Banc of America Securities deemed relevant to Impac. The
selected comparable companies (the "Comparable Companies," each a "Comparable
Company") consisted of five commercial mortgage real estate investment trusts
with similar capital structures:
- Imperial Credit Commercial Mortgage;
- Anthracite Capital, Inc.;
- Ocwen Asset Investment Corp.;
- Clarion Commercial Holdings, Inc.; and
- AMRESCO.
Banc of America Securities calculated the implied value of a share of Impac
common stock by multiplying (a) the average tax earnings multiples for the
Comparable Companies by (b) Impac tax EPS estimates. Banc of America Securities
then compared the resulting implied values to the implied Impac value per share
of common stock of $6.44 related to the merger (based on the proposed exchange
ratio of 0.66094 for a share of AMRESCO common stock and the AMRESCO August 3,
1999 stock price of $10.00). Banc of America Securities noted that the implied
share price of $6.44 related to the merger was in excess of the implied Impac
values based on the Comparable Company average tax earnings multiples as set
forth in the following chart.
<TABLE>
<CAPTION>
COMPARABLE COMPANY
AVERAGE TAX IMPAC IMPLIED
EARNINGS MULTIPLE TAXABLE EPS IMPAC VALUE
------------------ ----------- -----------
<S> <C> <C> <C>
1999E.................................... 6.5x $0.40 $2.60
2000E.................................... 5.7x $0.70 $3.99
</TABLE>
For purposes of determining the Impac 1999 taxable EPS, Banc of America
Securities excluded an estimated net $15.4 million loss related to affiliate
debt charge-offs taken in the first quarter of 1999. The average price for the
Comparable Companies was based on closing stock prices as of August 3, 1999 and
earnings estimates for the Comparable Companies were provided by First Call.
Taxable EPS estimates for Impac were provided by the managements of Impac and
FIC Management.
39
<PAGE> 47
Banc of America Securities also calculated the implied value of a share of
Impac common stock based on applying the average book to market value ratio for
the Comparable Companies to Impac's book value per share as of June 30, 1999.
The book to market value ratios were calculated by dividing the book value
(based on Comparable Company book shareholders equity as of March 31, 1999 as
presented in public financial reports) by current market value (defined as
equity market capitalization as of August 3, 1999 plus outstanding debt as of
March 31, 1999 as provided by public financial reports) for the Comparable
Companies. The average book to market value ratio for the Comparable Companies
was calculated as .70x. The implied value per common share of Impac was $7.92
based on a .70x ratio multiplied by a book value per share of $11.31. Impac book
value per share was provided by the managements of Impac and FIC Management.
No company utilized in the selected comparable company analysis is
identical to Impac. An analysis of the results therefore requires complex
considerations and judgments regarding the financial and operating
characteristics of Impac and the comparable companies, as well as other facts
that could affect their publicly-traded and/or transaction value. The numerical
results are not in themselves meaningful in analyzing the comparable companies.
Comparable transaction analysis
Banc of America Securities considered certain recently announced
acquisitions in the commercial mortgage industry which it deemed comparable to
the merger. Banc of America Securities selected the following announced and
pending transactions (the "Comparable Transactions"):
- Harvard Private Capital Holdings' and Capricorn Investors' investment in
WMF Group;
- Imperial Credit Industries' proposed acquisition of Imperial Credit
Commercial Mortgage Investments; and
- Ocwen Financial Corporation's proposed acquisition of Ocwen Asset
Investment Corporation.
In considering the Comparable Transactions, Banc of America Securities
compared the implied Impac value per common share (calculated by multiplying the
Comparable Transactions average tax earnings multiple by the Impac estimated
taxable EPS) to the implied Impac value per share of common stock of $6.44
related to the merger (based on the proposed exchange ratio of 0.66094 for a
share of AMRESCO common stock and the AMRESCO August 3, 1999 stock price of
$9.75). Harvard Private Capital Holdings' and Capricorn Investors' investment in
WMF Group was excluded from the estimated 2000 average calculation due to the
lack of a 2000 earnings estimate. Banc of America Securities noted that the
implied share price of $6.44 related to the merger was in excess of the implied
values based on the Comparable Transactions average tax earnings multiple as set
forth in the following chart.
<TABLE>
<CAPTION>
COMPARABLE TRANSACTIONS
AVERAGE TAX IMPAC IMPLIED
EARNINGS MULTIPLE TAXABLE EPS IMPAC VALUE
----------------------- ----------- -----------
<S> <C> <C> <C>
1999E................................. 7.3x $0.40 $2.93
2000E................................. 6.7x $0.70 $4.69
</TABLE>
For purposes of determining the Impac 1999 taxable EPS, Banc of America
Securities excluded an estimated net $15.4 million loss related to affiliate
debt charge-offs taken in the first quarter of 1999. Earnings estimates for
Imperial Credit Commercial Mortgage Investments for 1999 and 2000 and 1999 for
Ocwen Asset Investment Corporation were obtained from First Call. Earnings
estimates for 2000 for Ocwen Asset Investment Corporation were assumed to be the
1999 earnings estimates provided by First Call increased by the secular growth
rate as provided by First Call.
Banc of America Securities also calculated the implied value of a share of
Impac common stock based on applying the average purchase price to book value
ratio for the Comparable Transactions to Impac's book value per share as of June
30, 1999. The purchase price to book value ratios were calculated by dividing
the purchase price by book value (based on the acquired company's book
shareholders equity as of March 31,
40
<PAGE> 48
1999 as presented in public financial reports). The average purchase to book
value ratio for the Comparable Transactions was calculated as .73x. The implied
value per common share of Impac was $8.29 based on a .73x ratio multiplied by a
book value per share of $11.31. Impac book value per share was provided by the
managements of Impac and FIC Management.
No company utilized in the selected comparable transaction analysis is
identical to either Impac or AMRESCO nor is any transaction identical to the
contemplated transaction between Impac and AMRESCO. An analysis of the results
therefore requires complex considerations and judgements regarding the financial
and operating characteristics of Impac and AMRESCO and the companies involved in
the comparable transactions, as well as other facts that could affect their
publicly-traded and/or transaction value. The numerical results are not in
themselves meaningful in analyzing the contemplated transaction as compared to
comparable transactions.
The summary set forth above does not purport to be a complete description
of the analysis presented by Banc of America Securities. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. Banc of America Securities believes
that selecting any portion of its analyses or of the summary set forth above,
without considering the analyses as a whole, would create an incomplete view of
the processes underlying Banc of America Securities' opinion. In arriving at its
opinion, Banc of America Securities considered the results of all such analyses.
The analyses were prepared solely for purposes of Banc of America Securities
providing its opinion to the Impac board of directors as to the fairness, from a
financial point of view, of the consideration to be received by the holders of
Impac common stock (other than Fortress and its affiliates) pursuant to the
merger agreement and do not purport to be appraisals or necessarily reflect the
prices at which businesses or securities actually may be sold. Analyses based
upon forecasts or future results are not necessarily indicative of actual values
or future results, which may be significantly more or less favorable than
suggested by such analyses. Because such analyses are inherently subject to
uncertainty, being based upon numerous factors or events beyond the control of
the parties or their respective advisors, none of Banc of America Securities,
Impac, AMRESCO or any other person assumes responsibility if future results or
actual values are materially different from those forecast. As described above,
Banc of America Securities' opinion to the Impac board of directors was one of
many factors taken into consideration by the Impac board of directors in making
its determination to approve the merger agreement and the merger. The foregoing
summary does not purport to be a complete description of the analysis performed
by Banc of America Securities and is qualified by reference to the written
opinion of Banc of America Securities set forth in Annex D hereto.
Banc of America Securities, as part of its investment banking business, is
routinely engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. The Impac
board of directors selected Banc of America Securities as its financial advisor
because it is a nationally recognized investment banking firm that has
substantial experience in transactions similar to the merger and because of Banc
of America Securities' familiarity with Impac.
Banc of America Securities provides a full range of financial, advisory and
security services and in the ordinary course of its normal trading, brokerage,
investment banking, principal investing, investment management and financing
activities may at any time hold long or short positions or other investments,
and may trade or otherwise effect transactions, for its own account, those of
its affiliates, or the accounts of its customers, in debt or equity securities
or senior loans of Impac, AMRESCO, Fortress or their affiliates.
Pursuant to a letter agreement dated July 26, 1999, the Impac board of
directors engaged Banc of America Securities as its financial advisor and to
render an opinion with respect to the fairness of the financial consideration to
be received by holders of Impac common stock (other than Fortress and its
affiliates). Pursuant to the terms of the Banc of America Securities engagement
letter, Impac has agreed to pay Banc of America Securities a fee of $250,000
upon delivery of its fairness opinion and $500,000 upon consummation of the
merger; provided that $125,000 of the fee paid for the fairness opinion, will be
credited against the $500,000 transaction fee. Impac has agreed to reimburse
Banc of America Securities for its reasonable out-of-
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<PAGE> 49
pocket expenses, including attorney's fees, and to indemnify Banc of America
Securities against liabilities it incurs, including liabilities under the
federal securities laws.
Pursuant to a letter agreement dated August 3, 1999, the Impac board of
directors also engaged Jolson Securities as its financial advisor with regard to
the merger. Pursuant to the terms of the Jolson Securities engagement letter,
Impac has agreed to pay Jolson Securities a fee of $625,000 upon consummation of
the merger. Impac has also agreed to reimburse Jolson Securities for its
reasonable out-of-pocket expenses, including attorney's fees, and to indemnify
Jolson Securities against liabilities it incurs, including liabilities under the
federal securities laws. Jolson Securities has not been requested by Impac to
render and is not rendering a fairness opinion with respect to the merger.
INTERESTS OF IMPAC DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATES
In considering the recommendation of Impac's board of directors with
respect to the merger, stockholders should be aware that some directors,
executive officers and affiliates have interests in the merger in addition to
those of other stockholders. Impac's board was aware of these interests and
considered them, along with other matters, in approving the merger.
Amended and restated management agreement
Upon completion of the merger, FIC Management and the combined company will
enter into an amended and restated management agreement under which FIC
Management will be entitled to receive fees for the performance of management
services. See "The Amended and Restated Management Agreement."
Directors and officers of the combined company
At the effective time of the merger, all of the current directors serving
on Impac's board, Wesley Edens, Frank Filipps, Robert Kauffman, Christopher
Mahowald and Joseph Tomkinson, will become trust managers of AMRESCO. Mr. Edens
and Mr. Kauffman are also directors and executive officers of Fortress and some
of its affiliates, including FIC Management. Also at the effective time, Wesley
Edens, the chairman and chief executive officer of Impac, will become the
chairman and chief executive officer of the combined company, Gregory Hughes,
the chief financial officer of Impac, will become the executive vice president
and chief financial officer of the combined company and Randal Nardone, the
chief operating officer and secretary of Impac, will become the executive vice
president and secretary of the combined company. In addition to Mr. Edens and
Mr. Kauffman, Mr. Nardone and Mr. Hughes are executive officers of Fortress and
some of its affiliates, including FIC Management.
Conversion of director's stock options
Under the terms of the merger agreement, all outstanding options to
purchase shares of Impac common stock will be converted in the merger into
options to purchase a comparable number of AMRESCO common shares. Joseph R.
Tomkinson and Frank R. Filipps, each of whom is a director of Impac, hold
options to acquire 6,666 shares of Impac common stock and 10,000 shares of Impac
common stock, respectively. If these options are not exercised prior to the
merger, each option will be converted in the merger into an option to acquire
0.660940 of a common share of the combined company, with an appropriately
adjusted exercise price.
MANAGEMENT AND OPERATIONS OF THE COMBINED COMPANY AFTER THE MERGER
After the effective time of the merger, the combined company's board of
trust managers will consist of eight persons. Five of the trust managers, Wesley
R. Edens, Frank P. Filipps, Robert I. Kauffman, Christopher W. Mahowald and
Joseph R. Tomkinson, are members of Impac's current board. Three of the trust
managers, Robert L. Adair III, John C. Deterding and Mark D. Gibson, are members
of AMRESCO's current board. At the effective time, the size of the combined
company's board will increase from seven to eight members, the five Impac
designees will be appointed to the combined company's board and current trust
managers of AMRESCO other than Messrs. Adair, Deterding and Gibson will resign
from the combined company's board.
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<PAGE> 50
The combined company's board of trust managers is divided into three
classes. Class I directors will serve until the third annual meeting following
the effective time, class II directors will serve until the second annual
meeting following the effective time and class III directors will serve until
the first annual meeting following the effective time.
The persons who will serve on the combined company's board are:
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION WITH AMRESCO OR IMPAC CLASS
- ---- --- -------------------------------------- -----
<S> <C> <C> <C>
Robert L. Adair III.................. 55 Chairman of the Board and Chief Executive I
Officer of AMRESCO
John C. Deterding.................... 66 Trust Manager of AMRESCO II
Wesley R. Edens...................... 37 Chairman of the Board and Chief Executive I
Officer of Impac
Frank P. Filipps..................... 51 Director of Impac III
Mark D. Gibson....................... 40 Trust Manager of AMRESCO II
Robert I. Kauffman................... 35 President and Director of Impac I
Christopher W. Mahowald.............. 37 Director of Impac II
Joseph R. Tomkinson.................. 51 Director of Impac III
</TABLE>
Mr. Adair is chairman of the board and chief executive officer of AMRESCO.
Mr. Adair has served as chief executive officer of AMRESCO since November 1998
and has served as chairman of the board since its inception in 1998. Since 1994,
Mr. Adair has also served as a director, president and chief operating officer
of AMRESCO, INC. Mr. Adair has served AMRESCO, INC. and its predecessors in
various capacities since 1987. Mr. Adair is also a director of Stratus
Properties, Inc.
Mr. Deterding has been a member of the AMRESCO board since May 1998. Mr.
Deterding served as senior vice president and general manager of the commercial
real estate division of General Electric Capital Corporation from 1975 to June
1993. In directing the real estate activities of General Electric Capital
Corporation, Mr. Deterding was responsible for both domestic and international
lending activities, portfolio purchases, joint ventures, asset management and
real estate securitization. From November 1989 to June 1993, Mr. Deterding also
served as chairman of the General Electric Real Estate Investment Company, a
privately held REIT. From 1986 to 1993, Mr. Deterding also served as a director
of GECC Financial Corporation. Since retiring from General Electric Capital
Corporation in June 1993, Mr. Deterding has worked as a private real estate
consultant. He also served as a director of Patriot American Hospitality Inc., a
publicly-held REIT (or its predecessors), from September 1995 until the time of
the merger of Patriot American and Wyndam International, Inc. in June 1999, and
is a former member and trustee of the Urban Land Institute.
Mr. Edens has been the chairman of the board and chief executive officer of
Impac since May 1999 and has been the chief executive officer of Fortress
Investment Group, LLC and Fortress Investment Corp., as well as the chairman of
the board of Fortress Investment Group, since their formation. Mr. Edens
co-founded Fortress Investment Group, which manages Fortress Investment Corp.'s
investment activity, with Robert Kauffman, Randal Nardone and Erik Nygaard.
Prior to forming Fortress Investment Group. Mr. Edens was the head of the Global
Principal Finance Group at Union Bank of Switzerland as well as managing
director of Union Bank of Switzerland. Mr. Edens was a partner and managing
director of BlackRock Financial Management, Inc. and the chief operating officer
of BlackRock Asset Investors, a real estate investment fund with approximately
$560 million in capital. In addition, Mr. Edens was formerly a partner and
managing director of Lehman Brothers, where he was head of the Non-Agency
Mortgage Trading Desk, and was primarily responsible for initially building
Lehman's commercial and non-agency mortgage effort.
Mr. Filipps has been a director of Impac since February 1997 and a director
of Impac's predecessor since August 1995. Mr. Filipps was elected president of
CMAC Investment Corp. and chairman, president and chief executive officer of
Commonwealth Mortgage Assurance Company in January 1995. In May 1995, Mr.
Filipps was elected a director of CMAC Investment Corp. and in January 1996, he
was elected chief executive officer of CMAC Investment Corp. Mr. Filipps joined
Commonwealth Mortgage in 1992 as senior
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<PAGE> 51
vice president and chief financial officer, where he was responsible for the
company's financial, investment and data processing operations, as well as the
legal and human resources functions. In 1994, Mr. Filipps was promoted to
executive vice president and chief operating officer for both CMAC Investment
Corp. and Commonwealth Mortgage, where his additional responsibilities included
the company's sales, marketing, underwriting and risk management operations.
Mr. Gibson has served as a member of the AMRESCO board since 1998. Until
November 1998, Mr. Gibson also served as president and chief executive officer
of both AMRESCO and AMREIT Managers, G.P., Inc., the general partner of AMREIT
Managers, L.P. Mr. Gibson also serves as executive managing director of Holliday
Fenoglio Fowler, L.P. and is a member of the executive committee of AMRESCO,
INC. Mr. Gibson joined Holliday Fenoglio Fowler in 1984 and has served at
Holliday Fenoglio Fowler in various capacities since that time. Prior to joining
Holliday Fenoglio Fowler, Mr. Gibson was employed by Bank of the Southwest in
various capacities from 1981 to 1984, including vice president of commercial
lending.
Mr. Kauffman has been the president and a director of Impac since May 1999,
and has been the president of Fortress Investment Group and Fortress Investment
Corp., and a member of the board of directors of Fortress Investment Corp.,
since June 1998. Mr. Kauffman co-founded Fortress Investment Group with Messrs.
Edens, Nardone and Nygaard. Previously, Mr. Kauffman was the head of the
acquisitions and risk management department of Global Principal Finance, as well
as a managing director of Union Bank of Switzerland. Prior to joining Global
Principal Finance in 1997, Mr. Kauffman was a principal of BlackRock Financial
Management, and a managing director of BlackRock Asset Investors, where he was
responsible for acquisitions and risk management. Prior to joining BlackRock
Financial Management, Mr. Kauffman was the executive director of Lehman Brothers
International.
Mr. Mahowald has been a director of Impac since May 1999. Mr. Mahowald is
the president of EFO Realty and vice president of EFO Holdings, Inc. During the
six years prior to forming EFO Realty in January 1997, Mr. Mahowald was a
partner in the Robert M. Bass Group where he was a founding principal of the
Brazos Fund, a $250 million real estate private equity fund, and Colony Capital,
a major buyer of distressed mortgages from the Resolution Trust Company. Prior
to joining the Bass Group he was a principal for the Trammell Crow Company,
where he developed and leased industrial real estate projects.
Mr. Tomkinson has been chairman of the board and chief executive officer of
Impac and its predecessor since their formations. Mr. Tomkinson has been the
vice chairman of the board and chief executive officer of Impac Mortgage
Holdings, Inc. and chairman of the board and chief executive officer of Impac
Funding Corporation and Impac Warehouse Lending Group, Inc. since August 1995.
In April 1998, he became chairman of the board of Impac Mortgage Holdings. Mr.
Tomkinson 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, a subsidiary of Imperial Bank,
one of the companies that combined to become Imperial Credit Industries in 1992.
Mr. Tomkinson has been a director of Imperial Credit Industries since December
1991. Mr. Tomkinson is also director of BNC Mortgage, Inc. Mr. Tomkinson has 22
years of combined experience in real estate, real estate financing and mortgage
banking experience.
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<PAGE> 52
After the effective time the following persons will serve as executive
officers of the combined company:
<TABLE>
<CAPTION>
NAME POSITION WITH THE COMBINED COMPANY CURRENT POSITION
- ---- ---------------------------------- ----------------
<S> <C> <C>
Wesley R. Edens...................... Chairman and Chief Executive Chairman of the Board and
Officer Chief Executive Officer of
Impac
Jonathan S. Pettee................... President President and Chief Operating
Officer of AMRESCO
Gregory F. Hughes.................... Executive Vice President and Chief Chief Financial Officer of
Financial Officer Impac
Randal A. Nardone.................... Executive Vice President and Chief Operating Officer of
Secretary Impac
Thomas R. Lewis II................... Senior Vice President and Vice President and Controller
Controller of AMRESCO
</TABLE>
Biographical information for Mr. Edens is set forth above.
Mr. Pettee has served as president and chief operating officer of both
AMRESCO and AMREIT Managers since November 1998. Prior to November 1998, Mr.
Pettee served as executive vice president and chief operating officer of both
AMRESCO and AMREIT Managers. From 1996 to March 1998, Mr. Pettee was responsible
for mortgage product development, capital raising and management of a
non-investment grade portfolio of commercial mortgage-backed securities for
AMRESCO, INC. and its affiliates. Mr. Pettee has over 13 years of experience in
corporate finance, fixed income and real estate. From 1995 to 1996, Mr. Pettee
was managing director for BBC Investment Advisors, a joint venture between Back
Bay Advisors and Copley Real Estate Advisors. At BBC, Mr. Pettee managed an
investment grade CMBS portfolio. From 1992 to 1994, Mr. Pettee held positions as
managing director at Copley Real Estate, where he was responsible for managing
the external financing activities for Copley's institutional funds. From 1986 to
1992, Mr. Pettee was a senior associate at Morgan Stanley Realty, where he
executed sale, financing and investment banking transactions.
Mr. Hughes is the chief financial officer of Impac, Fortress Investment
Group LLC and Fortress Investment Corp. Prior to joining Fortress in 1999, Mr.
Hughes was the chief financial officer for Wellsford Real Properties, Inc., a
real estate merchant banking firm which acquires, finances, develops and
operates real properties and organizes and invests in private and public real
estate companies. From 1993 to 1997, Mr. Hughes served as the chief financial
officer for Wellsford Residential Property Trust, a $1 billion real estate
investment trust which owned and operated 20,000 apartment units. During 1992,
Mr. Hughes was a controller with Jones Lang Wootton Realty Advisors.
Mr. Nardone has been the chief operating officer and secretary of Impac
since May 5, 1999. Mr. Nardone has also served as the chief operating officer
and secretary of Fortress Investment Group LLC and Fortress Investment Corp.
since inception. Mr. Nardone was previously the head of the structured finance
and contract finance departments of Global Principal Finance as well as a
managing director of UBS Securities (SWAPS) Inc. from May 1997 to May 1998. Mr.
Nardone was responsible for the structuring, negotiation and documentation of
all transactions. Prior to joining UBS Securities in 1997, Mr. Nardone was a
principal of BlackRock Financial Management, Inc. and managing director of
BlackRock Asset Investors and BlackRock Capital Finance, L.P., where he also ran
the structured finance and contract finance groups.
Mr. Lewis has served as vice president and controller of both AMRESCO and
AMREIT Managers since their formation in 1998. Mr. Lewis has been employed by
AMRESCO, INC. since November 1995 and until April 1998 had responsibility for
accounting, cash management and reporting for its 40 institutional advisory
clients. Mr. Lewis has over 13 years of experience in real estate accounting and
reporting. From 1993 to 1995, Mr. Lewis served in a similar capacity as vice
president-finance for Acacia Realty Advisors, Inc. From 1989 to 1993, Mr. Lewis
served as senior controller for Prentiss Properties Limited, Inc., an affiliate
of Acacia, where he was responsible for the identification and resolution of
technical accounting and reporting issues as well as the annual business
planning and reporting for several closed-end commingled real estate investment
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<PAGE> 53
partnerships. Mr. Lewis worked in the Dallas office of Price Waterhouse from
1985 to 1989, where he was responsible for the audit of a large real estate
development company and the related audits of its second-tier partnerships and
joint ventures.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary of the material federal income tax consequences
of the merger to holders of Impac's common stock. This summary is based on the
Internal Revenue Code of 1986, as amended, regulations promulgated by the U.S.
Treasury Department, administrative rulings and pronouncements, and judicial
decisions, all as of the date of this document and all of which are subject to
change, possibly with retroactive effect. This summary assumes that Impac
shareholders hold their Impac common stock as capital assets within the meaning
of Section 1221 of the Internal Revenue Code. Generally, capital assets are
property held for investment. This summary does not address all aspects of
Federal taxation that may be relevant to particular holders of Impac common
stock in light of their personal investment circumstances, or to holders of
Impac's common stock that are subject to special treatment under the Internal
Revenue Code. Specifically, financial institutions, tax-exempt organizations,
insurance companies, broker-dealers, regulated investment companies, holders who
received Impac common stock through the exercise of employee stock options or
otherwise as compensation, foreign corporations, persons who are not citizens or
residents of the United States, and persons holding Impac common stock as part
of a "straddle," "hedge," "conversion transaction," "synthetic security" or
other integrated investment may be subject to tax rules that differ
significantly from those described below. This summary also does not discuss any
foreign, state or local tax consequences of the merger. HOLDERS OF IMPAC COMMON
STOCK ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF ANY
STATE, LOCAL, FOREIGN INCOME AND OTHER TAX LAWS, AND OF CHANGES IN APPLICABLE
TAX LAWS.
As a condition to their respective obligations to complete the merger,
AMRESCO will receive an opinion of Locke Liddell & Sapp LLP and Impac will
receive an opinion of Skadden, Arps, Slate, Meagher & Flom LLP to the effect
that, for federal income tax purposes, the merger will constitute a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code. The opinions of Locke Liddell & Sapp LLP and of Skadden, Arps, Slate,
Meagher & Flom LLP are based upon assumptions and conditioned upon
representations and covenants made by AMRESCO and Impac, and these
representations and covenants will be reconfirmed prior to the closing of the
merger.
Share consideration received in the merger
Provided that the merger qualifies as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code:
(1) no gain or loss will be recognized by holders of Impac common
stock on the receipt of AMRESCO common shares in the merger;
(2) the holding period of the AMRESCO common shares received by Impac
stockholders in the merger will include the holding period of the Impac
common stock surrendered in the merger, provided that the shares of Impac
common stock were held as capital assets at the consummation of the merger;
and
(3) the aggregate tax basis of the AMRESCO common shares received by
Impac stockholders in the merger will be the same as the aggregate tax
basis of the Impac common stock surrendered in the merger, reduced by any
amounts allocable to a fractional share interest for which cash is
received.
Cash received for fractional shares
Cash received by an Impac stockholder instead of a fractional common share
of AMRESCO will be treated, for Federal income tax purposes, as if the
fractional share was actually received and then redeemed for cash and, in
general, gain or loss will be recognized, measured by the difference between the
amount of cash received for the fractional share and the basis of the Impac
common stock allocable to the fractional share for which the cash was received.
This gain or loss will generally constitute capital gain or loss if the Impac
common stock was held as a capital asset at the time of the merger.
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<PAGE> 54
No ruling has been or will be obtained from the Internal Revenue Service in
connection with the merger. Impac stockholders should be aware that an opinion
of counsel is not binding on the Internal Revenue Service or the courts, and no
assurance can be given that the Internal Revenue Service will not challenge the
tax treatment of the merger.
Impac stockholders will be required to attach a statement to their tax
returns for the year of the merger that contains the information listed in
Treasury Regulation Section 1.368-3(b). Such statement must include the
stockholder's tax basis in the stockholder's Impac common stock and a
description of the AMRESCO common stock received.
Maximum tax rates
The maximum individual federal income tax rate, which applies to ordinary
income and gains from the sale or exchange of capital assets held for one year
or less, is 39.6%. The maximum individual federal income tax rate on gains from
the sale of capital assets held for more than one year is generally 20%. The
maximum corporate federal income tax rate, which applies to ordinary income and
capital gains, is 35%.
ACCOUNTING TREATMENT
The combined company will account for the merger under the purchase method
of accounting. Accordingly, the combined company will record the assets and
liabilities acquired from Impac at AMRESCO's cost, the consideration paid to
Impac stockholders in the merger.
RESTRICTIONS ON SALES BY AFFILIATES
The AMRESCO common shares to be issued in the merger will be registered
under the Securities Act of 1933. Such securities will be freely transferable
under the Securities Act of 1933, except for those issued to any person who may
be deemed to be an affiliate of Impac, as such term is defined for purposes of
Rule 145 under the Securities Act of 1933. Affiliates of Impac may not sell
their AMRESCO common shares acquired in connection with the merger except
pursuant to an effective registration statement under the Securities Act of 1933
covering such securities, paragraph (d) of Rule 145 or any other applicable
exemption under the Securities Act of 1933. Impac has agreed to use its
reasonable best efforts to procure written agreements from executive officers,
directors and other affiliates containing appropriate representations and
commitments intended to ensure compliance with Rule 145.
NO APPRAISAL RIGHTS
AMRESCO shareholders do not have appraisal rights under Texas law. Impac
stockholders do not have appraisal rights under Maryland law.
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<PAGE> 55
THE MERGER AGREEMENT
GENERAL
The merger agreement provides for the merger of Impac with and into
AMRESCO. In the merger, each share of Impac common stock will be converted into
0.66094 of an AMRESCO common share plus cash for any fraction of an AMRESCO
common share. Unless earlier converted, the outstanding shares of Impac's series
B preferred stock outstanding immediately prior to the effective time will be
converted into 1,112,782 AMRESCO common shares. The merger is intended to
qualify as a tax-free reorganization for federal income tax purposes. The
discussion in this document of the merger agreement is qualified in its entirety
by reference to the merger agreement, a copy of which is attached to this
document as Annex A and which is incorporated in this document by reference.
EXPENSES
All fees and expenses including financial advisory and other professional
services fees incurred in connection with the merger agreement and the
transactions contemplated by the merger agreement will be paid by the party
incurring the expenses, except for those fees and expenses incurred in
connection with filing, printing and mailing of this document, which will be
shared equally by AMRESCO and Impac. The costs of solicitation of proxies from
AMRESCO shareholders will be borne by AMRESCO. The costs of solicitation of
proxies from Impac stockholders will be borne by Impac. AMRESCO and Impac will
reimburse brokers, fiduciaries, custodians and other nominees for reasonable
out-of-pocket expenses incurred in sending this document and other proxy
materials to, and obtaining instructions relating to such material from, AMRESCO
and Impac shareholders. AMRESCO shareholder proxies may be solicited by trust
managers, officers or employees of AMRESCO or AMREIT Managers in person, by
letter or by telephone or facsimile. [AMRESCO has retained to assist
in the solicitation of proxies. The fee of is not expected to exceed
$ plus reimbursement of reasonable out-of-pocket expenses.] Impac
stockholder proxies may be solicited by directors or officers of Impac in
person, by letter or by telephone or facsimile. [Impac has retained
to assist in the solicitation of proxies. The fee
of is not expected to exceed $ plus
reimbursement of reasonable out-of-pocket expenses.]
EFFECTIVE TIME OF THE MERGER
Subject to the satisfaction or waiver of the conditions to the obligations
of AMRESCO and Impac to complete the merger, the merger will be completed as
quickly as possible following the approval by the shareholders of AMRESCO and
the stockholders of Impac of the merger at their respective special meetings. At
the effective time, the declaration of trust and the bylaws of AMRESCO will be
the declaration of trust and the bylaws of the surviving entity, respectively,
except that, if approved by the separate vote of at least two-thirds of the
outstanding AMRESCO common shares, the name of the entity specified in these
documents will be "Garrison Investment Trust" and, if not so approved, the name
of the entity specified in these documents will be "AMRESCO Capital Trust."
EXCHANGE OF IMPAC SHARES
At or prior to the effective time of the merger, AMRESCO will deposit cash
in an amount sufficient to pay cash in lieu of fractional AMRESCO common shares
and certificates representing the AMRESCO common shares to be issued in exchange
for outstanding shares of Impac stock with The Bank of New York or another
exchange agent mutually acceptable to AMRESCO and Impac. The deposit of the cash
and certificates will be for the benefit of the holders of shares of Impac
stock, for exchange in accordance with the merger agreement.
As soon as reasonably practicable after the effective time, the exchange
agent will mail to each holder of record of shares of Impac stock a letter of
transmittal. The letter of transmittal will specify that delivery will be
effected and risk of loss and title to the certificates will pass only upon
delivery of the Impac certificates to the
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<PAGE> 56
exchange agent. The letter of transmittal will also contain instructions for
surrendering Impac certificates in exchange for certificates representing common
shares of the combined company. Upon surrender of an Impac certificate for
cancellation to the exchange agent, together with the letter of transmittal,
duly executed, and any other documents reasonably required by the combined
company or the exchange agent, the holder of an Impac certificate formerly
representing shares of Impac stock will be entitled to receive in exchange a
certificate representing that number of common shares of the combined company
into which the holder's Impac shares have been converted at the effective time,
cash in lieu of fractional common shares and any unpaid distributions of the
combined company with a record date after the effective time that the holder has
the right to receive. The surrendered Impac certificate will be canceled.
Impac stock that is not registered in the transfer records of Impac may be
transferred and a certificate representing the appropriate number of common
shares may be paid and issued to a transferee if the Impac certificate is
presented to the exchange agent properly endorsed or accompanied by appropriate
stock powers and otherwise in proper form for transfer and accompanied by all
documents required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. After the effective time of the
merger, each Impac certificate will represent only the right to receive, upon
surrender, the certificate representing common shares of the combined company,
cash in lieu of fractional common shares of the combined company and any unpaid
distributions of the combined company that such holder has the right to receive.
The exchange agent will not be entitled to vote or exercise any rights of
ownership with respect to common shares of the combined company it holds, except
that it will receive and hold all dividends or other distributions paid or
distributed with respect to the shares for the account of persons entitled to
the dividends or distributions.
CONDITIONS TO THE MERGER
The obligations of AMRESCO and Impac to effect the merger and the other
transactions contemplated by the merger agreement are subject to the
satisfaction or waiver of each of the following conditions at or prior to the
closing date of the merger:
(1) the stockholders of Impac and the shareholders of AMRESCO have
approved the merger and the merger agreement at their respective special
meeting;
(2) the New York Stock Exchange or the NASDAQ Stock Market has
approved for listing the AMRESCO common shares to be issued in the merger,
subject to official notice of issuance;
(3) the registration statement of which this document is a part has
become effective under the Securities Act of 1933 and is not the subject of
any stop order or proceedings by the Securities and Exchange Commission
seeking a stop order;
(4) no order, injunction or other legal restraint or prohibition
preventing the consummation of the merger or any of the other transactions
contemplated by the merger agreement is in effect;
(5) AMRESCO has received all state securities or "blue sky" permits
and other authorizations necessary to issue the common shares of the
combined company under the merger agreement;
(6) the transactions contemplated by the purchase agreement, which are
described on page 56, have been consummated prior to, or are being
consummated simultaneously with, the merger;
(7) all material actions by or in respect of or filings with any
governmental entity required for the consummation of, the transactions
contemplated, by the merger agreement have been obtained or made; and
(8) the amended and restated management agreement between AMRESCO and
FIC Management has become effective.
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<PAGE> 57
The obligation of Impac to effect the merger and the other transactions
contemplated by the merger agreement are subject to the satisfaction by AMRESCO
or waiver by Impac of each of a number of conditions at or prior to the closing
date of the merger, including the following:
(1) the representations and warranties of AMRESCO set forth in the
merger agreement are true and correct as of the closing date, which
condition will be deemed satisfied unless any or all breaches of AMRESCO's
representations and warranties in the merger agreement could reasonably be
expected to have a material adverse effect on AMRESCO;
(2) AMRESCO has performed in all material respects all obligations
required to be performed by it under the merger agreement at or prior to
the effective time;
(3) since August 4, 1999, there has been no change that could
reasonably be expected to have a material adverse effect on AMRESCO;
(4) Impac has received an opinion of Locke Liddell & Sapp LLP, counsel
to AMRESCO, dated as of the closing date of the merger, to the effect that
AMRESCO has qualified as a REIT under the Internal Revenue Code, and that,
after giving effect to the transactions contemplated by the merger
agreement, AMRESCO's proposed method of operation will enable it to so
qualify;
(5) Impac has received an opinion dated as of the closing date of the
merger from Skadden, Arps, Slate, Meagher & Flom LLP, counsel to Impac, to
the effect that the merger will qualify as a tax-free reorganization under
the provisions of Section 368(a) of the Internal Revenue Code; and
(6) all material consents and waivers from third parties necessary in
connection with the consummation of the transactions contemplated by the
merger agreement have been obtained.
The obligation of AMRESCO to effect the merger and the other transactions
contemplated by the merger agreement are subject to the satisfaction by Impac or
waiver by AMRESCO of each of a number of conditions at or prior to the closing
date of the merger, including the following:
(1) the representations and warranties of Impac set forth in the
merger agreement are true and correct as of the closing date, which
condition will be deemed satisfied unless any or all breaches of Impac's
representations and warranties in the merger agreement could reasonably be
expected to have a material adverse effect on Impac;
(2) Impac has performed in all material respects all obligations
required to be performed by it under the merger agreement at or prior to
the effective time;
(3) since August 4, 1999, there has been no change that could
reasonably be expected to have a material adverse effect on Impac;
(4) AMRESCO has received an opinion of Brown & Wood LLP, tax counsel
to Impac, dated as of the closing date of the merger, to the effect that
Impac has qualified as a REIT under the Internal Revenue Code;
(5) AMRESCO has received an opinion dated as of the closing date of
the merger from Locke Liddell & Sapp LLP, counsel to AMRESCO, to the effect
that the merger will qualify as a tax-free reorganization under the
provisions of Section 368(a) of the Internal Revenue Code;
(6) all material consents and waivers from third parties necessary in
connection with the consummation of the transactions contemplated by the
merger agreement have been obtained;
(7) either the average closing price of Impac common stock for the 20
consecutive trading days ending on the fifth trading day prior to the
closing date of the merger is equal to or greater than $7.40 or the
aggregate of Impac's cash and cash equivalents, including for these
purposes $25 million attributable to specified Impac collateralized
mortgage obligations, mortgage-backed securities and investments approved
by AMRESCO, as shown on Impac's consolidated balance sheet, dated as of the
fifth trading day prior to the closing date of the merger, is not less than
$75 million;
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(8) the aggregate of the cash and cash equivalents, including for
these purposes $25 million attributable to specified Impac collateralized
mortgage obligations, mortgage-backed securities and investments approved
by AMRESCO, as shown on Impac's consolidated balance sheet, dated as of the
fifth trading day prior to the closing date of the merger, as of the
effective time of the merger is equal to or greater than the amount shown
on the consolidated balance sheet dated as of the fifth trading day prior
to the closing date; and
(9) the optional termination right described in the Impac CMB Trust
1998-C1 documents owned by Impac has been sold.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various customary representations and
warranties relating to, among other things:
(1) the due organization, subsidiaries, power, authority and standing
of AMRESCO and Impac and similar corporate matters;
(2) the capital structure of AMRESCO and Impac;
(3) the authorization of the merger agreement by each party, the
absence of any violations caused by the merger, and the required consents
and approvals in connection with the execution of the merger;
(4) the availability and accuracy of the documents filed by AMRESCO
and Impac with the Securities and Exchange Commission;
(5) the accuracy of the information supplied by each party for
inclusion in this document;
(6) the accuracy of and compliance with generally accepted accounting
principles of financial information supplied by each party;
(7) the absence of changes or events relating to each party since
information was most recently filed by each party with the Securities and
Exchange Commission;
(8) the absence of undisclosed material liabilities of each party;
(9) the absence of any default by each party;
(10) compliance with applicable laws by each party;
(11) the absence of litigation relating to each party;
(12) specified tax matters;
(13) specified employee matters and pension and benefit plans of each
party and their compliance with the laws and regulations governing these
plans;
(14) indebtedness relating to each party;
(15) the absence of transactions with affiliates of each party;
(16) compliance with environmental laws and other environmental
matters by each party;
(17) maintenance of insurance by each party;
(18) ownership of real properties by each party;
(19) mortgage backed securities and mortgage loans held by each party;
(20) the vote required of each party's shareholders or stockholders
necessary to approve the merger;
(21) the absence of broker's fees by each party except for fees owed
to Prudential Securities Incorporated and Deutsche Bank Securities, which
represented AMRESCO, and Banc of America Securities LLC and Jolson Merchant
Partners, LLC, which represented Impac;
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(22) the absence of a requirement for either party to register as an
investment company under the Investment Company Act 1940;
(23) the approval of amendments to each party's shareholder rights
plan, as necessary, and the exemption of the merger from the application of
state antitakeover laws; and
(24) the existence and terms of the material contracts of each party.
COVENANTS
AMRESCO and Impac have agreed that they will, prior to the effective time
of the merger, carry on their respective business in the usual, regular and
ordinary course in substantially the same manner as previously conducted and, to
the extent consistent with this practice, use commercially reasonable efforts to
preserve intact their respective current business organization, goodwill and
ongoing business.
In addition, except as expressly permitted or contemplated by the merger
agreement, unless the other party has agreed in writing, AMRESCO and Impac have
each agreed that they will not, and will not permit any of their respective
subsidiaries to:
(1) except for dividends paid in the ordinary course of business,
consistent with past practice, declare, set aside or pay any dividends or
distributions in respect of any capital shares;
(2) split, combine, reclassify, acquire or issue any capital shares or
partnership interests or any security convertible into capital shares or
partnership interests;
(3) except as specified in the merger agreement, issue, deliver, sell
or grant any option or other right in respect of any capital shares or
partnership interests;
(4) except as specified in the merger agreement, amend its charter or
organizational documents;
(5) merge or consolidate;
(6) except as specified in the merger agreement, enter into any
transaction or series of related transactions involving capital, securities
or other assets or indebtedness in excess of $100,000;
(7) in general, make or rescind any tax election;
(8) except as may be required by the Securities and Exchange
Commission, applicable law or generally accepted accounting principles,
materially change any of its accounting methods, principles or practices;
(9) except as specified in the merger agreement, settle or compromise
any action or proceeding;
(10) except as specified in the merger agreement, adopt any new
employee plan, grant new stock appreciation rights or amend any existing
plan or rights;
(11) except as specified in the merger agreement, pay, discharge,
settle or satisfy any claims, liabilities or objections;
(12) settle any shareholder derivative or class action claims arising
out of or in connection with any of the transactions contemplated by the
merger agreement; and
(13) enter into any new agreements or arrangements with affiliates,
executive officers, directors or trust managers.
AMRESCO and Impac have each also agreed that:
(1) subject to the requirements of confidentiality agreements with
third parties, it will afford to the other party and its representatives
reasonable access to all of its properties, books, contracts, commitments,
personnel and records and, furnish promptly to the other a copy of each
document filed or received pursuant to the requirements of federal or state
securities laws in connection with the transactions contemplated by the
merger agreement, and any other information as may be reasonably requested;
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(2) it will give prompt notice to the other party if any
representation or warranty made by it contained in the merger agreement
becomes, in general, untrue or incorrect or it fails to comply or
materially satisfy any covenant, condition or agreement to be complied with
or satisfied by it under the merger agreement;
(3) it will not take any action that would in general result in any of
its representations and warranties becoming untrue;
(4) it will use its commercially reasonable efforts to cause to be
delivered to the other party letters of its certified public accountants
reasonably customary in scope and substance for letters delivered by
independent public accountants in connection with transactions similar to
those contemplated by the merger agreement;
(5) it will duly call, give notice of, convene and hold a meeting of
its shareholders or stockholders for the purpose of obtaining the approval
required by the merger agreement; and
(6) it will cooperate and use its commercially reasonable efforts to
consummate the transactions contemplated by the merger agreement.
AMRESCO and Impac further agreed to consult with each other before issuing,
and provide each other the opportunity to review and comment upon, any press
release or other public statement with respect to the transactions contemplated
by the merger agreement and not to issue any such press release or make any such
public statement prior to such consultation.
DISTRIBUTIONS
AMRESCO and Impac have agreed to coordinate with each other the declaration
and payment of dividends with respect to AMRESCO common shares and shares of
Impac common stock after the date of the merger agreement, with the intention
that:
(1) Impac will pay whatever preclosing distributions that are
necessary to satisfy the distribution requirements to which REITs are
subject; and
(2) holders of AMRESCO common shares and Impac common stock and Impac
preferred stock will not receive two dividends, or fail to receive one
dividend, for any single calendar quarter with respect to their Impac stock
and Impac preferred stock, on the one hand, and any AMRESCO shares that any
such holder receives in the merger, on the other hand.
NO SOLICITATION OF ACQUISITION PROPOSALS
In the merger agreement, each of Impac and AMRESCO have agreed on their own
behalf and on behalf of their subsidiaries that it will not initiate, solicit or
encourage, directly or indirectly any bona fide proposal with respect to a
merger, consolidation, share exchange, tender offer or similar transaction or
any purchase or other acquisition involving that party or all or a significant
portion of its assets or any equity interest in that party. Each party also
agreed not to participate in or encourage any discussion or negotiations
regarding, or furnish to any person any non-public information with respect to,
or take any other action to facilitate any inquiries or the making of, any
proposal that constitutes, or may reasonably be expected to lead to, any such
acquisition proposal.
However, the merger agreement does not prohibit the board of either AMRESCO
or Impac from furnishing information to, or entering into discussions with, any
person or entity that makes an unsolicited acquisition proposal to the extent
that:
(1) the board, based upon the advice of outside legal counsel,
determines in good faith that the action is required for it to comply with
its fiduciary obligations to its shareholders or stockholders, as the case
may be, under applicable law;
(2) prior to taking any action, the party receives from the person or
entity making the acquisition proposal an executed confidentiality
agreement; and
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(3) the board concludes in good faith, after receiving advice from its
independent financial advisor, that the acquisition proposal is more
favorable to its shareholders or stockholders, as the case may be, than the
merger, taking into account all relevant factors.
The party receiving an unsolicited acquisition proposal is required to
provide immediate notice to the other party of the receipt of the proposal or
any inquiry that could reasonably be expected to lead to any acquisition
proposal and specified information relating to the proposal or inquiry.
Nothing contained in the merger agreement prohibits either AMRESCO or Impac
or their respective boards from:
(1) taking and disclosing to their shareholders or stockholders,
pursuant to Rules 14d-9 and 14e-2 under the Securities Exchange Act of
1934, a position with respect to a tender or exchange offer by a third
party that is consistent with its obligations under the merger agreement;
or
(2) disclosing to their shareholders or stockholders as, in the good
faith judgment of the applicable board, after receiving advice from outside
counsel, is consistent with its obligations under the merger agreement and
is required by applicable law.
However, neither AMRESCO nor Impac may, except as described above, withdraw,
qualify or modify, in a manner adverse to the other party, the approval or
recommendation of its board of the merger.
TERMINATION
The merger agreement may be terminated at any time prior to the effective
time of the merger, whether before or after approval by the shareholders of
AMRESCO and stockholders of Impac, under the following circumstances:
(1) by mutual written consent of the boards of AMRESCO and Impac;
(2) by AMRESCO or Impac, if the merger is not consummated on or before
December 31, 1999 and if the failure of the terminating party to fulfill
any obligation under the merger agreement has not been the cause of, or
resulted in, the failure of the merger to occur on or before December 31,
1999;
(3) by AMRESCO or Impac, if any governmental entity has determined not
to grant a consent that is a condition to the obligations of AMRESCO and
Impac to consummate the merger and all appeals of that determination have
been taken and have been unsuccessful;
(4) by AMRESCO or Impac, if any court of competent jurisdiction has
issued a judgment, order or decree (other than a temporary restraining
order) restraining, enjoining or otherwise prohibiting the consummation of
the merger, which has become final and nonappealable;
(5) by AMRESCO or Impac, if the required approval of AMRESCO
shareholders is not obtained;
(6) by AMRESCO or Impac, if the required approval of Impac
stockholders is not obtained;
(7) by Impac, if:
(a) there has been, in general, a material breach by AMRESCO of any
representation, warranty, covenant, obligation or agreement set forth in
the merger agreement, which breach has not been cured within ten
business days following receipt by AMRESCO of notice of a breach, or if
any representation or warranty of Impac has become untrue, in either
case so that a specified closing condition would be incapable of being
satisfied by December 31, 1999, as extended in accordance with the
merger agreement,
(b) there has been a change that could reasonably be expected to
have a material adverse effect on AMRESCO,
(c) the board of trust managers of AMRESCO has withdrawn or
modified in a manner adverse to Impac its approval or recommendation of
the merger or the merger agreement to permit AMRESCO to execute a
definitive agreement providing an economically superior proposal, or
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(d) the board of directors of Impac has withdrawn or modified in a
manner adverse to Impac its approval or recommendation of the merger or
the merger agreement to permit Impac to execute a definitive agreement
providing for an economically superior proposal; or
(8) by AMRESCO, if:
(a) there has been, in general, a material breach by Impac of any
representation, warranty, covenant, obligation or agreement set forth in
the merger agreement, which breach has not been cured within ten
business days following receipt by Impac of notice of a breach, or if
any representation or warranty of AMRESCO has become untrue, in either
case so that specified closing conditions would be incapable of being
satisfied by December 31, 1999, as extended in accordance with the
merger agreement, including the condition that the average closing price
of Impac common stock for the 20 consecutive trading days ending on the
fifth trading day prior to the closing date of the merger is equal to or
greater than $7.40 or the aggregate of Impac's cash and cash
equivalents, including for such purposes $25 million attributable to
specified Impac collateralized mortgage obligations, mortgage-backed
securities and investments approved by AMRESCO, as shown on Impac's
consolidated balance sheet, dated as of the fifth trading day prior to
the closing date of the merger, is not less than $75 million,
(b) there has been a change that could reasonably be expected to
have a material adverse effect on Impac,
(c) the board of directors of Impac has withdrawn or modified in a
manner adverse to AMRESCO its approval or recommendation of the merger
or the merger agreement to permit Impac to execute a definitive
agreement providing an economically superior proposal, or
(d) the board of trust managers of AMRESCO has withdrawn or
modified in a manner adverse to Impac its approval or recommendation of
the merger or the merger agreement to permit AMRESCO to execute a
definitive agreement providing for an economically superior proposal.
Impac will not have the right to terminate the merger agreement under the
provisions described in paragraph (7), and AMRESCO will not have the right to
terminate the merger agreement under the provisions disclosed in paragraph (8),
if that party, at that time, is in material breach of any representation,
warranty, covenant or agreement set forth in the merger agreement.
BREAK-UP FEES AND EXPENSES
If the merger agreement is terminated under the provisions described in the
preceding section in paragraphs (5), (7)(a), (7)(b), (7)(c) or (8)(d), and if
AMRESCO is not entitled to terminate the merger agreement by reason of the
provisions described in the preceding section in paragraphs (2), (3), (4), (6),
(8)(a), (8)(b) or (8)(c), then AMRESCO is required to pay to Impac a fee of $5
million and expenses of $250,000.
If the merger agreement is terminated under the provisions described in the
preceding section in paragraphs (6), (7)(d), (8)(a), (8)(b) or (8)(c), and if
Impac is not entitled to terminate the merger agreement by reason of the
provisions described in the preceding section in paragraphs (2), (3), (4), (5),
(7)(a), (7)(b) or (7)(c), then Impac is required to pay to AMRESCO a fee of $5
million and expenses of $250,000.
The amount of the break-up fee and expenses may be limited by the
provisions of the Internal Revenue Code regarding receipt by REITs of
non-qualifying income.
INDEMNIFICATION
The combined company agreed in the merger agreement to indemnify all
officers and directors of Impac and its subsidiaries against all liabilities
relating to the fact that the person is or was serving in that capacity before
the effective time. This indemnification will be to the full extent Impac would
have been permitted under applicable law and its charter documents to indemnify
these officers and directors. The combined
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company also agreed to in general pay expenses in advance of the final
disposition of any action to these officers and directors to the full extent
permitted by law.
The merger agreement also provides that for six years from the closing date
the combined company will use its commercially reasonable efforts to provide
directors' and officers' liability insurance coverage to those persons covered
by Impac's directors' and officers' liability insurance policy for events
occurring before the closing date. This coverage will be no less advantageous
than Impac's current coverage. The combined company is not, however, required to
expend, maintain or procure insurance coverage in any amount per year over 150%
of the combined company's current annual premiums.
AMENDMENT AND WAIVER
The merger agreement may be amended in writing by action of the boards of
AMRESCO and Impac before or after the approval of the AMRESCO shareholders or
Impac stockholders. However, after these approvals are obtained, the merger
agreement may not be amended to alter the amount or change the form of
consideration to be delivered to shareholders or alter the terms or conditions
of the merger agreement if this change would adversely affect AMRESCO's
shareholders or Impac's stockholders without the further approval of these
persons. At any time prior to the effective time of the merger, AMRESCO or Impac
may:
(1) extend the time for the performance of any of the obligations of
the other party;
(2) waive any inaccuracies in the representations and warranties of
the other party contained in the merger agreement or in any document
delivered pursuant to the merger agreement; or
(3) subject to the provisions regarding amendment of the merger
agreement, waive compliance with any of the agreements or conditions of the
other party contained in the merger agreement.
THE PURCHASE AGREEMENT
Concurrently with the closing of the merger, FIC Management and its
designated affiliates will purchase, pursuant to a purchase agreement, dated
September 8, 1999, with AMRESCO, INC., AMREIT Managers, L.P., AMREIT Holdings,
Inc. and MLM Holdings, Inc. (all of which are affiliates of AMRESCO) the
following:
(1) specified assets, including the existing management agreement with
AMRESCO and the existing management agreement between AMREIT Managers and
OLY/ACT L.P., options to purchase 1,000,011 common shares of AMRESCO and
computer equipment and other personal property from AMREIT Managers,
AMRESCO's current manager;
(2) 1,500,011 common shares of AMRESCO, with registration rights, from
AMREIT Holdings, Inc.;
(3) 475 shares of voting common stock of AMREIT II, Inc., a subsidiary
of AMRESCO, from MLM Holdings, Inc.; and
(4) 100 common shares of AMRESCO, with registration rights, from
AMRESCO, INC.
The aggregate purchase price payable to the sellers under the purchase
agreement is $25 million with the AMRESCO common shares being purchased at
$8.9375 per share and with approximately $11.1 million being allocated to the
AMRESCO management agreement. The closing of the transactions contemplated by
the purchase agreement will result in the following:
(1) FIC Management, the current manager of Impac, being substituted
for the current manager of AMRESCO;
(2) FIC Management or one of its affiliates acquiring the ownership
position of AMRESCO, INC. and its affiliates in the common shares of
AMRESCO; and
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(3) the purchase by FIC Management of the voting common shares
interest in AMREIT II, Inc., AMRESCO's non-qualified REIT subsidiary, from
MLM Holdings.
Under the purchase agreement, FIC Management may assign some or all of its
rights to one or more affiliates of FIC Management. Upon consummation of the
merger, the combined company and FIC Management will enter into an amended and
restated management agreement. In addition, effective January 1, 2000, some
executive officers of AMREIT Managers will become employees of FIC Management
and continue to perform services on behalf of the combined company in similar
capacities. See "The Amended and Restated Management Agreement" and "Description
of AMRESCO Securities -- Registration rights."
THE AMENDED AND RESTATED MANAGEMENT AGREEMENT
In connection with and as a condition to the merger, the management
agreement between AMRESCO and its current external manager will be assumed by
FIC Management. At the effective time of the merger, FIC Management will become
the manager for the combined company and AMRESCO's current management agreement
will be amended and restated.
The following summarizes the terms of the amended and restated management
agreement. The discussion in this document of the terms of the amended and
restated management agreement is qualified in its entirety by reference to the
amended and restated management agreement, the form of which is filed as an
exhibit to the registration statement of which this document is a part.
PAYMENTS TO THE MANAGER
Management fee
The manager will receive an annual management fee equal to 1.5% of the
combined company's gross equity. The term "gross equity" for any period means:
(1) the sum of the book equity capital of the combined company at the
closing date of the merger, plus the proceeds net of expenses of any equity
capital raised by the combined company from and after the closing date of
the merger; less
(2) any capital dividends or capital distributions made by the
combined company to its shareholders.
The management fee is intended to compensate the manager for providing
management and advisory services to the combined company. The management fee
will be calculated based on the weighted daily average of the gross equity for
that month. The management fee will be payable monthly in arrears within 25 days
after the end of each month.
The manager will use a portion of the management fee to pay compensation to
its officers and employees. Some of these officers and employees will also be
officers or employees of the combined company. However, it is not currently
contemplated that any officers or employee will receive cash compensation
directly from the combined company, other than possibly dividend equivalent
rights associated with stock options.
Expenses and reimbursements
The combined company will pay all operating expenses, except those
specifically required to be paid by the manager under the management agreement.
The operating expenses required to be paid by the manager are the compensation
of the manager's officers and employees, rent for facilities occupied by the
manager and
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all other "overhead" expenses of the manager. The expenses that will be paid by
the combined company will include, but not necessarily be limited to, the
following:
- issuance and transaction costs incident to the acquisition, disposition
and financing of investments;
- legal, accounting, tax, auditing, administrative and other similar
services rendered for the combined company by providers retained by the
manager or, if provided by the manager's or its affiliates' employees,
the amount of the cost that would have been payable had these services
been provided by third parties in amounts no greater than those that
would be payable to outside professionals or consultants engaged to
perform these services under agreements negotiated on an arm's-length
basis;
- the compensation and expenses of the independent trust managers and the
cost of liability insurance to indemnify the combined company's trust
managers and officers;
- the costs associated with the establishment and maintenance of any credit
facilities and other indebtedness of the combined company, including
commitment fees, legal fees, closing and other costs, or any other
securities offerings of the combined company;
- expenses connected with communication to the combined company's security
holders and in complying with the reporting and other requirements of the
Securities and Exchange Commission and other governmental entities and
the exchanges on which the combined company's securities are listed;
- costs incurred by employees and agents of the manager for travel in
connection with the purchase, financing, sale or other disposition of an
investment by the combined company;
- costs associated with any computer software or hardware that is used
solely for the combined company;
- the compensation and expenses of the combined company's custodian and
transfer agent; and
- all other expenses actually incurred by the manager that are reasonably
necessary for the performance by the manager of its duties under the
management agreement.
The manager will be reimbursed quarterly for expenses it incurs on behalf
of the combined company within 60 days after the end of each quarter.
Performance incentive fee
The manager or an affiliate of the manager will be entitled to receive a
quarterly performance incentive fee on a cumulative, but not compounding, basis
in an amount equal to the product of the following:
(1) 25% of the dollar amount by which funds from operations (as
defined below) of the combined company, before the performance incentive
fee, per common share (based on the weighted average number of common
shares outstanding for the relevant period), plus gains and minus losses
from debt restructuring and sales of property and other assets per common
share (based on the weighted average number of common shares outstanding
for the relevant period), exceed the product of:
(a) the weighted average of the imputed price per common share of
the combined company (as defined below) on the closing date of the
merger and the prices per common share received in any subsequent
offerings by the combined company, adjusted for any prior capital
dividends or capital distributions, multiplied by
(b) the sum of the ten-year U.S. treasury rate at the time of
determination plus 250 basis points, divided by four to adjust for
quarterly calculations,
(2) multiplied by the weighted average number of common shares
outstanding during such period.
As used in this document, "imputed price per common share of the combined
company" is equal to the book equity capital at the closing date of the merger
divided by the number of combined company common shares issued and outstanding
as of the closing date of the merger.
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Also as used in this document, "funds from operations," as defined by the
National Association of Real Estate Investment Trusts, means:
(1) net income computed in accordance with generally accepted
accounting principles;
(2) excluding gains or losses from debt restructuring and gains or
losses from sales of property;
(3) plus depreciation and amortization on real estate assets, and
after adjustments for unconsolidated partnerships and joint ventures.
Funds from operations does not represent cash generated from operating
activities in accordance with generally accepted accounting principles. Funds
from operations should not be considered as an alternative to net income as an
indication of the combined company's performance or to cash flows as a measure
of liquidity or ability to make distributions.
The payment of the performance incentive fee may in the future be made in
the form of a distribution on a special class of security issued by the combined
company or one of its affiliates to the manager.
Manager options
Under the purchase agreement, FIC Management will acquire options to
purchase 700,008 common shares of the combined company at $15 per share and
300,003 common shares at $18.75 per share. The exercise prices of these options
are subject to adjustment as necessary to preserve the value to the manager of
the options in connection with the occurrence of specified events, including
capital dividends and capital distributions made by the combined company. After
the completion of the merger, the combined company will offer to the manager and
some existing option holders the right to exchange their options for a reduced
number of options with dividend equivalent rights, as determined by an
independent consultant and approved by the combined company's board. The manager
options will provide a means of performance-based compensation in order to
provide an incentive for the manager to enhance the value of the combined
company's common shares.
SUMMARY OF OTHER TERMS
Term and termination
The combined company will enter into the amended and restated management
agreement with FIC Management concurrently with the closing of the merger for an
initial three-year term. After the initial three-year term, the manager's
performance will be reviewed annually and the management agreement will be
automatically renewed each year for an additional one-year term unless a
majority consisting of at least two-thirds of the independent trust managers of
the combined company or a majority of holders of the outstanding common shares
of the combined company agree that there has been unsatisfactory performance
that is materially detrimental to the combined company. In addition, a majority
of the independent trust managers of the combined company may terminate the
management agreement after the expiration of the initial three-year term if they
determine that the compensation to the manager is not fair. The manager may
prevent this compensation-related termination by accepting a revised fee
determined to be fair by the majority of independent trust managers. If the
management agreement is terminated as described in this paragraph, the combined
company will pay to the manager a termination fee equal to the sum of:
- the management fee earned by manager during the twelve-month period
preceding the termination; and
- the performance incentive fee that would be payable to the manager under
the management agreement if the management agreement were not terminated
and all of the combined company's assets were sold for cash at their then
current fair market value calculated as specified in the management
agreement.
These provisions may deter the combined company from terminating the management
agreement.
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In addition, the management agreement may be terminated by the combined
company without payment of the termination fee upon 60 days notice if the
manager becomes insolvent or incurably and materially violates the management
agreement.
Assignment by the manager
The manager may subcontract or assign any or all of its responsibilities
under the management agreement to any affiliate of the manager or to any
affiliate of Fortress Investment Corp., the general partner of Fortress
Partners, L.P. In this case, the manager will remain liable for its duties and
obligations under the management agreement. The manager may also at any time
assign its duties under the management agreement to any other person with the
consent of the majority of the independent trust managers of the combined
company.
Manager's duties
The management agreement requires the manager to manage the business
affairs of the combined company in conformity with the policies and the
investment guidelines that are approved and monitored by the board of trust
managers of the combined company. The manager will be required to prepare
regular reports for the board of the combined company.
The manager's management of the combined company at all times will be under
the direction of the combined company's board of trust managers. The manager
will have only the functions and authority as the combined company's board may
delegate to the manager. The manager will be responsible for the day-to-day
operations of the combined company and will perform or cause to be performed
those services and activities relating to the assets and operations of the
combined company, including, without limitation, the following:
(1) providing a complete program of investing and reinvesting the
capital and assets of the combined company in pursuit of its investment
objectives and in accordance with the investment guidelines and policies
adopted by the board of trust managers from time to time;
(2) serving as the combined company's consultant with respect to
formulation of investment criteria and policies and preparation of the
investment guidelines by the board of trust managers;
(3) making available to the combined company its knowledge and
experience with respect to mortgage loans, CMBS, real estate and other real
estate-related assets;
(4) representing and making recommendations to the combined company in
connection with the origination of mortgage loans, the purchase of mortgage
loans, CMBS, real estate and other real estate related assets, the
financing of mortgage loans, CMBS, real estate and other real
estate-related assets, and the sale and commitment to sell mortgage loans,
CMBS, real estate and other real estate-related assets;
(5) advising, negotiating and overseeing the securitization of the
combined company's mortgage loans, negotiating terms with rating agencies
and coordinating with investment bankers as to the structure and pricing of
such securities as directed by the board of trust managers;
(6) monitoring and providing to the board of trust managers price
information and other data, obtained from certain nationally recognized
brokers or dealers identified by the board of trust managers from time to
time, and providing data and recommendations to the board of trust managers
in connection with the identification of such brokers or dealers;
(7) monitoring and providing to the board of trust managers price
information and other data, obtained from nationally-recognized dealers who
maintain markets in mortgage loans identified by the board of trust
managers from time to time;
(8) providing the executive and administrative personnel and office
space and office and administrative services required in rendering services
to the combined company as otherwise contemplated in the management
agreement;
(9) monitoring the operating performance of the combined company's
investments and providing periodic reports to the board of trust managers,
including comparative information with respect to operating performance and
budgeted or projected operating results;
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<PAGE> 68
(10) administering the day-to-day operations of the combined company
and performing and supervising the performance of other administrative
functions necessary for the management of the combined company and its
assets as may be agreed upon by the manager and the board of trust
managers, including the collection of revenues and the payment of the
combined company's debts and obligations;
(11) communicating on behalf of the combined company with the holders
of any equity or debt securities of the combined company as required to
satisfy the reporting and other requirements of any governmental bodies or
agencies and to maintain effective relations with such holders;
(12) counseling the combined company in connection with policy
decisions made or to be made by the board of trust managers;
(13) advising the combined company regarding its status as a REIT,
consulting with legal counsel as appropriate regarding the application of
the REIT provisions of the Internal Revenue Code to the proposed
investments and operations of the combined company and monitoring
compliance by the combined company with the REIT provisions of the Internal
Revenue Code;
(14) advising the combined company regarding the status of its
exemption from the Investment Company Act of 1940, consulting with legal
counsel as appropriate regarding the nature of its proposed investments and
the impact of such proposed investments on the combined company's exemption
from registration under this act and monitoring the combined company's
continuing exemption from registration;
(15) evaluating and recommending hedging strategies to the board of
trust managers and, upon approval by the board of trust managers, engaging
in hedging activities on behalf of the combined company, consistent with
the combined company's status as a REIT and with the investment guidelines;
(16) investing and re-investing any moneys and securities of the
combined company and advising the combined company as to its capital
structure and capital raising;
(17) causing the combined company to retain qualified accountants
and/or legal counsel to assist in developing appropriate accounting
procedures, compliance procedures and testing systems with respect to
financial reporting obligations and compliance with the REIT provisions of
the Internal Revenue Code and to conduct quarterly compliance reviews;
(18) causing the combined company to qualify to do business in all
applicable jurisdictions;
(19) assisting the combined company in complying with all federal,
state and local regulatory requirements applicable to the combined company
in respect of its business activities, including, without limitation,
preparing or causing to be prepared all financial statements required under
applicable regulations and contractual undertakings and all reports and
documents, if any, required under the Securities Exchange Act of 1934;
(20) taking all necessary actions to enable the combined company to
make required federal, state and local tax filings and reports;
(21) handling and resolving all claims, disputes or controversies in
which the combined company may be involved or to which the combined company
may be subject arising out of the combined company's day-to-day operations,
subject to such limitation or parameters as may be imposed from time to
time by the board of trust managers;
(22) using commercially reasonable efforts to cause expenses incurred
by or on behalf of the combined company to be reasonable or customary and
within any budgeted parameters or investment guidelines set by the board of
trust managers from time to time;
(23) using commercially reasonable efforts to cause the combined
company to comply with all applicable laws; and
(24) performing other services as may be required from time to time
for management or other activities relating to the assets of the combined
company in furtherance of the manager's obligations
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<PAGE> 69
under the management agreement, as the board of trust managers reasonably
requests or the manager deems appropriate under the particular
circumstances.
The manager will perform portfolio management services on behalf of the
combined company. These services include, but are not limited to, the following:
(1) consulting with the combined company on the purchase and sale of,
and other investment opportunities in connection with, the combined
company's portfolio of assets;
(2) collecting information and submitting reports pertaining to the
combined company's assets, interest rates and general economic conditions;
(3) periodically reviewing and evaluating the performance of the
combined company's portfolio of assets;
(4) acting as liaison between the combined company and banking,
mortgage banking, investment banking and other parties with respect to the
purchase, financing and disposition of assets; and
(5) performing other customary functions related to portfolio
management.
The manager may enter into subcontracts with other parties, including its
affiliates, to provide these services to the combined company. However, any
contract entered into with an affiliate of the manager must contain terms and
conditions (including price and any indemnification) at least as favorable as
those which the combined company would obtain in an arms-length transaction with
an independent third party.
The manager will perform monitoring services on behalf of the combined
company with respect to loan servicing activities provided by third parties,
other than with respect to loans that are included within securitizations. These
monitoring services will include, but not be limited to, the following
activities:
(1) serving as the combined company's consultant with respect to the
servicing of loans;
(2) collecting information and submitting reports pertaining to the
mortgage loans and the moneys remitted to the manager or the combined
company by servicers;
(3) periodically reviewing and evaluating the performance of each
servicer to determine its compliance with the terms and conditions of the
servicing agreement and, if deemed appropriate, recommending to the
combined company the termination of such servicing agreement;
(4) acting as a liaison between servicers and the combined company and
working with servicers to the extent necessary to improve their servicing
performance;
(5) reviewing and making recommendations as to fire losses, easement
problems and condemnation, delinquency and foreclosure procedures with
regard to mortgage loans;
(6) reviewing servicers' delinquency, foreclosure and other reports on
mortgage loans;
(7) advising as to and supervising claims filed under any mortgage
insurance policies; and
(8) enforcing the obligation of any servicer to repurchase mortgage
loans from the combined company.
The manager will perform monitoring services on behalf of the combined
company with respect to loan servicing activities provided by third parties and
with respect to the combined company's portfolio of special servicing rights.
Such monitoring services will include, but not be limited to, the following:
(1) negotiating special servicing agreements;
(2) acting as liaison between the special servicers of the mortgage
loans and the combined company;
(3) reviewing special servicers' reports regarding delinquency and
foreclosures and other reports on mortgage loans;
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<PAGE> 70
(4) supervising claims filed under any mortgage insurance policies;
and
(5) enforcing the obligation of any servicer or special servicer to
repurchase mortgage loans.
Pursuant to the management agreement, the manager has agreed, at all times
during which it is serving as manager of the combined company, to maintain a
tangible net worth of at least $250,000. In addition, the manager is obligated
to maintain "errors and omissions" insurance coverage in an amount which is
comparable to that customarily maintained by other managers or servicers of
other assets similar to those held by the combined company.
Limits of responsibility
Under the management agreement, the manager will not assume any
responsibility other than to render the services called for under the management
agreement and will not be responsible for any action by the combined company's
board of trust managers in following or declining to follow its advice or
recommendations. The manager, or its affiliates, will not be liable to the
combined company, the independent trust managers of the combined company, the
combined company's shareholders or partners, any issuer of CMBS or any other
party for acts or omissions under or in connection with the management
agreement, except by reason of acts constituting bad faith, willful misconduct
or gross negligence. The combined company has agreed to indemnify the manager,
its affiliates and their respective stockholders, directors, partners, officers
and employees with respect to all expenses, losses, damages, liabilities,
demands, charges and claims arising from acts or omissions of the manager not
constituting bad faith, willful misconduct, or gross negligence.
CONFLICTS OF INTEREST IN RELATIONSHIP WITH THE MANAGER
The combined company, on the one hand, and the manager and its affiliates,
on the other, will enter into a number of relationships other than those
governed by the management agreement. Some of these may give rise to conflicts
of interest. Moreover, two of the members of the board of trust managers of the
combined company and all of its officers will also be employed by the manager.
Under the management agreement, the conduct of the daily operations of the
combined company by the manager and its affiliates is not required to be
approved by the combined company's independent trust managers. However, the
independent trust managers will periodically review the manager's performance.
In conducting this review, the independent trust managers will rely primarily on
information provided to them by the manager. Furthermore, transactions entered
into by the manager may be difficult or impossible to unwind by the time they
are reviewed by the independent trust managers.
Nothing in the management agreement limits the manager or its affiliates
from engaging in other businesses or from rendering services of any kind to any
other person, including Fortress Investment Corp. and its affiliates. The
manager may invest in or provide advisory service to others who invest in any
type of real estate, including investments which meet the principal investment
objectives of the combined company.
The manager currently does not have any employees and relies upon the
services of employees of its affiliates obtained through one or more
submanagement agreements or arrangements. Such agreements or arrangements are
permitted under the management agreement.
The market in which the combined company purchases assets is characterized
by rapid evolution of products and services. Thus, there may in the future be
relationships between the combined company and the manager and its affiliates in
addition to those described above.
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<PAGE> 71
THE SPECIAL MEETINGS
THE AMRESCO SPECIAL MEETING
Purpose of the meeting
At the AMRESCO special meeting, the holders of AMRESCO common shares will
be asked to consider and vote upon approval of the merger agreement, approval of
the amendment to AMRESCO's declaration of trust to change AMRESCO's name to
"Garrison Investment Trust" and adjournment of the AMRESCO special meeting, if
necessary to solicit additional proxies if there are not sufficient votes to
approve either of the other proposals.
Date, time and place; record date
The AMRESCO special meeting is scheduled to be held on , on
the 17th Floor of the North Tower of the Plaza of the Americas, 700 North Pearl
Street, Dallas, Texas.
The AMRESCO board has fixed the close of business on , 1999 as
the record date for the determination of holders of AMRESCO common shares
entitled to notice of and to vote at the AMRESCO special meeting. On September
1, 1999, there were 10,015,111 AMRESCO common shares outstanding, which were
held by approximately record holders. Each AMRESCO common share is
entitled to one vote on all matters presented for shareholder action. As of
September 1, 1999, AMRESCO's affiliates, trust managers and executive officers
owned and had the right to vote an aggregate of 1,657,161 AMRESCO common shares
or approximately 16.5% of the outstanding AMRESCO common shares entitled to vote
at the special meeting.
Voting rights
The presence, either in person or by proxy, of the holders of a majority of
the outstanding AMRESCO common shares is necessary to constitute a quorum at the
AMRESCO special meeting. Assuming the existence of a quorum, the affirmative
vote of the holders of at least a majority of the outstanding AMRESCO common
shares entitled to vote at the AMRESCO special meeting is required to approve
the merger agreement. The affirmative vote of the holders of at least two-thirds
of the outstanding AMRESCO common shares entitled to vote at the AMRESCO special
meeting is required to approve the name change amendment. The affirmative vote
of the holders of at least a majority of the AMRESCO common shares present in
person or represented by a properly executed proxy at the AMRESCO special
meeting is required to approve an adjournment of the meeting. If the merger
agreement is not approved at the AMRESCO and Impac special meetings, AMRESCO's
declaration of trust will not be amended, regardless of whether or not the
amendment is approved at the AMRESCO special meeting. Holders of record of
AMRESCO common shares on the AMRESCO record date are entitled to one vote per
AMRESCO common share at the AMRESCO special meeting.
AMRESCO, INC. and its affiliates, which own a total of approximately 15% of
the outstanding AMRESCO common shares, have indicated their intention to vote in
favor of the merger and the amendment to AMRESCO's declaration of trust.
If an AMRESCO shareholder attends the AMRESCO special meeting, he or she
may vote by ballot. However, since many shareholders may be unable to attend the
AMRESCO special meeting, the AMRESCO board is soliciting proxies so that each
holder of AMRESCO common shares on the record date for the meeting has the
opportunity to vote on the proposals to be considered at the AMRESCO special
meeting. When a proxy card is returned properly signed and dated, the AMRESCO
common shares represented thereby will be voted in accordance with the
instructions on the proxy card. If a shareholder does not return a signed proxy
card, the shareholder's AMRESCO common shares will not be voted and thus will
have the effect of a vote "against" the merger and amendment proposals.
Similarly, a broker non-vote or an abstention will have the effect of a vote
"against" the merger and name change amendment proposals. Shareholders are urged
to mark the box on the proxy card to indicate how their AMRESCO common shares
are to be voted. If
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<PAGE> 72
a shareholder returns a signed proxy card, but does not indicate how its AMRESCO
common shares are to be voted, the AMRESCO common shares represented by the
proxy card will be voted "FOR" the proposals. The proxy card also confers
discretionary authority on the individuals appointed by the AMRESCO board and
named on the proxy card to vote the AMRESCO common shares represented thereby on
any other matter that is properly presented for action at the AMRESCO special
meeting. This discretionary authority will not be used to vote for adjournment
of the AMRESCO special meeting to permit further solicitation of proxies if the
shareholder votes against any proposal.
Any AMRESCO shareholder who executes and returns a proxy card may revoke
that such proxy at any time before it is voted by:
(1) notifying in writing the Secretary of AMRESCO prior to the vote at
the AMRESCO special meeting at AMRESCO Capital Trust, 700 North Pearl
Street, Suite 2400, Dallas, Texas 75201, Attention: Secretary;
(2) granting a subsequent proxy; or
(3) appearing in person and voting at the AMRESCO special meeting.
Attendance at the AMRESCO special meeting will not in and of itself
constitute revocation of a proxy.
Other matters
AMRESCO is not aware of any business or matter other than those indicated
above which may be properly presented at the AMRESCO special meeting.
Any proposal by a shareholder intended to be presented at the 2000 annual
meeting of shareholders must have been received by AMRESCO at its principal
executive offices not later than December 10, 1999 for inclusion in AMRESCO's
proxy statement and form of proxy relating to AMRESCO's 2000 annual meeting of
shareholders.
THE IMPAC SPECIAL MEETING
Purpose of the meeting
At the Impac special meeting, the holders of Impac common and preferred
stock will be asked to consider and vote upon approval of the proposed merger
and adjournment of the Impac special meeting, if necessary, to solicit
additional proxies if there are not sufficient votes to approve the merger
proposal.
Date, time and place; record date
The Impac special meeting is scheduled to be held at [ ], 1999.
The Impac board has fixed the close of business on [ ], 1999 as the
record date for the determination of holders of Impac common stock entitled to
notice of and to vote at the Impac special meeting. On September 8, 1999, there
were 8,418,200 shares of Impac common stock outstanding, which were held by
approximately 95 record holders and 479,999 shares of Impac series B preferred
stock outstanding, which were held of record by Fortress Partners L.P. Each
share of Impac common stock is entitled to one vote on all matters presented for
stockholder action. Each share of series B preferred stock is entitled to (a)
one vote per share when the series B preferred stock votes as a separate class
and (b) the number of votes equal to the number of shares of common stock into
which the share is convertible as of the record date when the series B preferred
stock votes together on a matter with the common stock. As of September 8, 1999,
Impac's directors, executive officers and affiliates beneficially owned an
aggregate of 1,830,251 shares of Impac common stock or approximately 21.7% of
the outstanding shares of Impac common stock and Fortress Partners, L.P.
beneficially owned an aggregate of 479,999 shares of Impac preferred stock or
all of the outstanding shares of Impac preferred stock.
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<PAGE> 73
Quorum; voting rights; votes required for approval
The presence, either in person or by proxy, of stockholders entitled to
cast a majority of all the votes entitled to be cast at the special meeting
constitutes a quorum at the Impac special meeting. Assuming the existence of a
quorum, (a) the affirmative vote of the holders of at least a majority of the
votes entitled to be cast by the holders of shares of Impac common stock and
series B preferred stock outstanding on the record date, with each share of
Impac's series B convertible preferred stock entitled to the number of votes
equal to the number of shares of Impac's common stock into which it is
convertible as of the record date, and (b) the affirmative vote of the holders
of at least two-thirds of the shares of series B preferred stock outstanding on
the record date, voting separately as a class, are required to approve the
merger. The affirmative vote of the holders of at least a majority of the shares
of common stock voted on the matter is required to approve the adjournment of
the meeting.
Fortress Partners L.P., the sole holder of all of the outstanding shares of
Impac series B preferred stock, which are convertible into approximately 16.7%
of the outstanding shares of Impac common stock entitled to vote on the merger,
has indicated its intention to vote in favor of the merger.
If an Impac stockholder attends the Impac special meeting, he or she may
vote by ballot. However, since many stockholders may be unable to attend the
Impac special meeting, the Impac board is soliciting proxies so that each holder
of Impac common stock on the Impac record date has the opportunity to vote on
the merger and any other proposals to be considered at the Impac special
meeting. When a proxy card is returned properly signed and dated, the Impac
common stock represented thereby will be voted in accordance with the
instructions on the proxy card. If an Impac stockholder does not return a signed
proxy card, his or her Impac common stock will not be voted and thus will have
the effect of a vote "against" the merger and the merger agreement. Similarly, a
broker non-vote or an abstention will have the effect of a vote "against" the
merger and the merger agreement. Impac stockholders are urged to mark the box on
the proxy card to indicate how their shares of Impac common stock or preferred
stock are to be voted. If an Impac stockholder returns a signed proxy card, but
does not indicate how his or her Impac stock is to be voted, the Impac stock
represented by the proxy card will be voted "FOR" the merger and the merger
agreement. The proxy card also confers discretionary authority on the
individuals appointed by the Impac board and named on the proxy card to vote the
Impac common stock represented thereby on any other matter that is properly
presented for action at the Impac special meeting. Such discretionary authority
will not be used to vote for adjournment of the Impac special meeting to permit
further solicitation of proxies if the stockholder votes against the approval of
the merger.
Any Impac stockholder who executes and returns a proxy card may revoke such
proxy at any time before it is voted by:
(1) notifying in writing the Secretary of Impac prior to the vote at
the Impac special meeting at Impac Commercial Holdings, Inc., c/o Fortress
Investment Group LLC, 1301 Avenue of the Americas, 42nd Floor, New York,
New York, Attention: secretary;
(2) granting a subsequent proxy; or
(3) appearing in person and voting at the Impac special meeting.
Attendance at the Impac special meeting will not in and of itself
constitute revocation of a proxy.
Other matters
Impac is not aware of any business or matter other than the proposal to
approve the merger which may be properly presented at the Impac special meeting.
If, however, any other matter properly comes before the Impac special meeting,
the proxy holders will vote thereon in their discretion.
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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to the merger under the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations." In the
opinion of management of AMRESCO and Impac, all significant adjustments
necessary to reflect the effects of the merger have been made. The merger
adjustments are based on preliminary estimates and currently available
information. These adjustments could change as additional information becomes
available, as estimates are refined or as additional events occur.
The unaudited pro forma combined balance sheet gives effect to the merger
as if it had occurred on June 30, 1999, the last day of AMRESCO's most recently
completed fiscal quarter. The unaudited pro forma combined statements of
operations give effect to the merger as if it had occurred at the beginning of
the periods presented. During 1998 and early 1999, Impac operated a significant
conduit business that experienced substantial losses as a result of the
deterioration in the securitization markets. The combined company's business
plan does not contemplate the operation of a conduit business. The combined
company expects instead to originate and hold short-term mortgage loans and to
invest in collateralized mortgage-backed securities.
The unaudited pro forma combined financial statements are presented for
comparative purposes only. The unaudited pro forma combined balance sheet is not
necessarily indicative of what the actual combined financial position of AMRESCO
and Impac would have been at June 30, 1999, nor does it purport to represent the
future combined financial position of AMRESCO and Impac. Similarly, the
unaudited pro forma combined statements of operations are not necessarily
indicative of what the actual combined results of AMRESCO and Impac would have
been for each of the periods presented as if the merger had occurred at the
beginning of those periods, nor do they purport to be indicative of the results
of operations in future periods. The unaudited pro forma combined financial
statements should be read in conjunction with, and are qualified in their
entirety by, the respective historical financial statements and related notes of
AMRESCO and Impac included elsewhere in this document.
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UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------- -------------------------
MERGER COMBINED
AMRESCO IMPAC(A) ADJUSTMENTS COMPANY
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Mortgage loans, net....................... $114,506 $ 37,748 $ (35,934)(B) $116,320
Acquisition, development and construction
loan arrangements accounted for as real
estate or investments in joint
ventures............................... 34,987 -- -- 34,987
CMO collateral............................ -- 317,347 (317,347)(B) --
-------- -------- --------- --------
149,493 355,095 (353,281) 151,307
Allowance for loan losses................. (2,048) (1,427) 1,427(B) (2,048)
-------- -------- --------- --------
Total loan investments, net of allowance
for losses............................. 147,445 353,668 (351,854) 149,259
Investment securities..................... 26,099 25,314 40,210(B) 50,476
(41,147)(C)
Real estate, net.......................... 40,223 12,696 (11,354)(B) 40,723
(842)(C)
Investments in unconsolidated partnerships
and subsidiary......................... 11,696 -- -- 11,696
Receivables and other assets.............. 5,431 4,481 (1,906)(B) 6,647
(1,359)(C)
Cash and cash equivalents................. 3,770 21,814 28,460(B) 49,014
(5,030)(D)
-------- -------- --------- --------
TOTAL ASSETS...................... $234,664 $417,973 $(344,822) $307,815
======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and other liabilities.... $ 8,071 $ 7,139 $ (5,110)(B) $ 10,950
850(E)
Repurchase agreements..................... 10,393 4,505 -- 14,898
Line of credit............................ 59,338 13,500 (13,500)(B) 59,338
Non-recourse debt on real estate.......... 26,998 -- -- 26,998
CMO borrowings............................ -- 277,834 (277,834)(B) --
-------- -------- --------- --------
TOTAL LIABILITIES................. 104,800 302,978 (295,594) 112,184
-------- -------- --------- --------
Minority interests........................ 500 -- -- 500
-------- -------- --------- --------
SHAREHOLDERS' EQUITY:
Convertible participating preferred
stock.................................. -- 5 (5)(F) --
Common stock.............................. 100 84 (17)(G) 167
Additional paid-in-capital................ 140,998 137,521 (71,821)(G) 206,698
Unearned stock compensation............... (435) -- -- (435)
Accumulated other comprehensive income
(loss)................................. (9,296) 682 (682)(G) (9,296)
Accumulated deficit....................... (2,003) (23,297) 23,297(G) (2,003)
-------- -------- --------- --------
TOTAL SHAREHOLDERS' EQUITY........ 129,364 114,995 (49,228) 195,131
-------- -------- --------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY............ $234,664 $417,973 $(344,822) $307,815
======== ======== ========= ========
</TABLE>
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NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(A) Reclassifications have been made to Impac's historical balance sheet to
conform to AMRESCO's balance sheet presentation.
(B) The merger agreement requires that Impac dispose of some of its assets and
that either a minimum cash balance is obtained by Impac or Impac's common
stock trades at or above a specified average price prior to the completion
of the merger. The following adjustments are made (at book value) to
reflect the disposition of assets that have occurred subsequent to June 30,
1999, the expected disposition of assets designated for sale prior to the
completion of the merger, and the reduction of liabilities and the receipt
of investment securities and cash in connection with these dispositions:
<TABLE>
<S> <C>
Mortgage loans........................................... $ (35,934)
CMO collateral........................................... (317,347)
Allowance for loan losses................................ 1,427
Investment securities.................................... 40,210
Real estate.............................................. (11,354)
Receivables and other assets............................. (1,906)
Cash and cash equivalents................................ 28,460
Accounts payable and other liabilities................... 5,110
Line of credit........................................... 13,500
CMO borrowings........................................... 277,834
</TABLE>
(C) Adjustments to reduce assets acquired to their estimated fair values.
(D) To record estimated merger costs and registration costs of $4,030 and
$1,000, respectively, as a decrease in cash and cash equivalents.
(E) To accrue estimated lease termination costs and severance costs of $750 and
$100, respectively.
(F) To record the conversion of Impac series B preferred stock into Impac
common stock in the merger.
(G) To adjust AMRESCO's shareholders' equity and Impac's stockholders' equity
to reflect the issuance of 6,677 (at an exchange ratio of 0.66094) AMRESCO
common shares at the August 4, 1999 closing price of AMRESCO common shares
of $10.00 per share, in exchange for all of the 10,102 outstanding shares
of Impac common stock (taking into account the conversion of Impac's series
B preferred stock into Impac common stock as described in Note (F) above)
and to record the estimated registration costs in connection with the
merger of $1,000, as follows:
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE ACCUMULATED
STOCK CAPITAL INCOME (LOSS) DEFICIT
------ ---------- ------------- -----------
<S> <C> <C> <C> <C>
Issuance of AMRESCO shares............. $ 67 $ 66,700 $ -- $ --
Registration costs incurred in
connection with the merger........... -- (1,000) -- --
Impac's historical stockholders'
equity............................... (84) (137,521) (682) 23,297
---- --------- ----- -------
Pro forma adjustments................ $(17) $ (71,821) $(682) $23,297
==== ========= ===== =======
</TABLE>
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UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM FEBRUARY 2, 1998 (DATE OF INITIAL CAPITALIZATION OF AMRESCO
CAPITAL TRUST) THROUGH DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL -----------------------
------------------ MERGER COMBINED
AMRESCO IMPAC(A) ADJUSTMENTS COMPANY
------- -------- ----------- --------
<S> <C> <C> <C> <C>
REVENUES:
Interest income on mortgage loans............ $4,278 $ 19,042 $23,320
Income from commercial mortgage-backed
securities................................ 1,563 3,980 5,543
Operating income from real estate............ 392 1,044 1,436
Equity in earnings (losses) of unconsolidated
subsidiary, partnerships and other real
estate ventures........................... 588 (9,864) $4,072(B) (5,204)
Interest income from short-term
investments............................... 1,924 396 2,320
Other interest income........................ -- 1,524 1,524
------ -------- ------ -------
TOTAL REVENUES....................... 8,745 16,122 4,072 28,939
------ -------- ------ -------
EXPENSES:
Interest expense............................. 567 20,692 21,259
Management fees.............................. 1,187 691 622(B) 2,500
General and administrative................... 1,294 1,450 (485)(B) 2,259
Depreciation................................. 100 402 502
Participating interest in mortgage loans..... 277 -- 277
Provision for loan losses.................... 1,368 1,546 2,914
------ -------- ------ -------
TOTAL EXPENSES....................... 4,793 24,781 137 29,711
------ -------- ------ -------
INCOME (LOSS) BEFORE LOSSES AND MINORITY
INTERESTS.................................... 3,952 (8,659) 3,935 (772)
Loss on sale of loans........................ -- (906) (906)
Unrealized loss on residual interest in
securitization, held for trading.......... -- (1,690) (1,690)
------ -------- ------ -------
INCOME (LOSS) BEFORE MINORITY INTERESTS........ 3,952 (11,255) 3,935 (3,368)
Minority interests........................... -- (322) (322)
------ -------- ------ -------
NET INCOME (LOSS).............................. $3,952 $(11,577) $3,935 $(3,690)
====== ======== ====== =======
EARNINGS PER COMMON SHARE:
Basic........................................ $ 0.56 $ (1.31) $ (0.27)
====== ======== =======
Diluted...................................... $ 0.56 $ (1.31) $ (0.27)
====== ======== =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic........................................ 7,027 8,841 13,704(D)
====== ======== =======
Diluted...................................... 7,031 8,841 13,708(D)
====== ======== =======
</TABLE>
70
<PAGE> 78
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ------------------------
------------------- MERGER COMBINED
AMRESCO IMPAC(A) ADJUSTMENTS COMPANY
------- -------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Interest income on mortgage loans........... $6,935 $14,709 $21,644
Income from commercial mortgage-backed
securities............................... 1,848 1,892 3,740
Operating income from real estate........... 1,177 510 1,687
Equity in earnings (losses) of
unconsolidated subsidiary, partnerships
and other real estate ventures........... 134 (788) $ 214(B) (440)
Interest income from short-term
investments.............................. 122 296 418
Other interest income....................... -- 113 113
Other income................................ -- 82 82
------ ------- ------- -------
TOTAL REVENUES...................... 10,216 16,814 214 27,244
------ ------- ------- -------
EXPENSES:
Interest expense............................ 1,658 11,985 13,643
Management fees............................. 1,003 -- 505(B) 1,508
Personnel costs............................. -- 1,320 (1,320)(B) --
General and administrative.................. 782 2,188 (1,017)(B) 1,953
Depreciation................................ 297 430 (155)(B) 572
Participating interest in mortgage loans.... 829 -- 829
Provision for loan losses................... 1,180 -- 1,180
------ ------- ------- -------
TOTAL EXPENSES...................... 5,749 15,923 (1,987) 19,685
------ ------- ------- -------
INCOME BEFORE GAINS (LOSSES).................. 4,467 891 2,201 7,559
Gain associated with repayment of ADC loan
arrangement.............................. 584 -- 584
Gain on sale of loans....................... -- 247 247
Unrealized loss on residual interest in
securitization, held for trading......... -- (500) (500)
------ ------- ------- -------
NET INCOME.................................... 5,051 638 2,201 7,890
Preferred stock dividends................... -- 159 (159)(C) --
------ ------- ------- -------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS... $5,051 $ 479 $ 2,360 $ 7,890
====== ======= ======= =======
EARNINGS PER COMMON SHARE:
Basic....................................... $ 0.50 $ 0.06 $ 0.47
====== ======= =======
Diluted..................................... $ 0.50 $ 0.06 $ 0.47
====== ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic....................................... 10,000 8,503 16,677(D)
====== ======= =======
Diluted..................................... 10,009 8,503 16,686(D)
====== ======= =======
</TABLE>
71
<PAGE> 79
NOTES TO UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(A) Reclassifications have been made to Impac's historical statements of
operations to conform to AMRESCO's presentation of its operating
performance.
(B) Represents the elimination of Impac's personnel, occupancy, equipment and
other overhead expenses which would not have been borne by the combined
company had the new management agreement been in place at the beginning of
each of the periods presented. Under the terms of the new management
agreement, these costs would have been borne by the manager. Some cost
reimbursements to Impac's manager have also been eliminated as these costs
would not have been reimbursable by the combined company under the terms of
the new management agreement. The management fee has been adjusted to
reflect what it would have been had the terms of the new management
agreement been effective throughout the periods presented. See "The Amended
and Restated Management Agreement."
(C) To eliminate historical preferred stock dividends resulting from the
conversion of Impac series B preferred stock into Impac common stock in the
merger.
(D) The pro forma basic and diluted weighted average shares outstanding are the
historical weighted average number of AMRESCO common shares outstanding
adjusted for the issuance of 6,677 AMRESCO common shares on February 2,
1998.
(E) Although not presented as pro forma adjustments because they do not meet the
criteria for such presentation, management anticipates that the merger will
result in the elimination of duplicative general and administrative costs of
at least $750,000 in the first full year of operations.
72
<PAGE> 80
COMPARISON OF SHAREHOLDER RIGHTS
At the effective time of the merger, Impac stockholders will become
shareholders of the combined company. Accordingly, after the merger, the rights
of Impac stockholders will cease to be governed by Maryland law applicable to
corporations and Impac's charter and bylaws and will be governed by the Texas
Real Estate Investment Trust Act and the combined company's declaration of trust
and bylaws. The following summarizes some of the differences between the current
rights of Impac stockholders and those of shareholders of the combined company
following the merger.
The Texas REIT Act was amended effective September 1, 1995 to conform
substantially to modern corporation statutes based upon the Model Business
Corporation Act. Accordingly, a Texas REIT, and the rights, duties and
obligations of its shareholders, will be very similar to a corporation, and the
rights, duties and obligations of its shareholders, organized and existing under
Texas law. If the Texas REIT Act does not specifically address a situation, the
question is governed by the Texas Business Corporation Act and related case law.
The following summary is not complete, and is qualified by reference to
AMRESCO's declaration of trust and bylaws and Impac's charter and bylaws and
applicable law. Copies of AMRESCO's declaration of trust and bylaws and Impac's
charter and bylaws are incorporated by reference in this proxy statement and
will be sent to shareholders upon request. See "Where You Can Find More
Information."
<TABLE>
<CAPTION>
MARYLAND CORPORATION TEXAS REIT
<S> <C>
REIT Qualification
Maryland law has no corresponding provision. The Texas REIT Act provides that if any provision of
the Texas REIT Act is contrary to or inconsistent
with the Internal Revenue Code, the Internal Revenue
Code will prevail over the provisions of the Texas
REIT Act.
Liability of Shareholders
In most cases, a stockholder is not obligated or Like Maryland law, the Texas REIT Act generally
liable to a Maryland corporation or its creditors limits a shareholder's obligation to a Texas REIT or
except for any unpaid subscription price or other its creditors to full payment of the consideration
agreed consideration for the stock or unless for the shares unless it is demonstrated that the
liability is imposed under another provision of the shareholder caused the Texas REIT to be used for the
Corporations and Associations Article of the purpose of perpetrating and the Texas REIT did
Annotated Code of Maryland. Common law theories of perpetrate an actual fraud primarily for the
"piercing the corporate veil" may be used to impose shareholder's direct personal benefit. Both the Texas
liability on stockholders in some instances. REIT Act and AMRESCO's bylaws provide that no
shareholder will be personally liable for any debt,
act, omission or obligation incurred by AMRESCO or
its trust managers. Conducting business in other
states, however, may give rise to shareholder
liability in those states that may not recognize the
status of a Texas REIT or the limited liability
afforded shareholders under the Texas REIT Act. For
this reason, AMRESCO may hold assets or conduct
business in states other than Texas through wholly
owned subsidiaries if AMRESCO determines that there
could exist in that state a significant risk of
shareholder liability if the assets were owned or the
business conducted directly by AMRESCO. AMRESCO is
not aware of any state that has attempted to impose
liability on shareholders of a Texas REIT.
</TABLE>
73
<PAGE> 81
<TABLE>
<CAPTION>
MARYLAND CORPORATION TEXAS REIT
<S> <C>
In addition, AMRESCO's bylaws provide that AMRESCO
will indemnify each shareholder against any claims or
liabilities to which the shareholder may become
subject by reason of being or having been a
shareholder. AMRESCO's bylaws also provide that
AMRESCO will reimburse shareholders for all legal and
other expenses they reasonably incur in connection
with these claims or liabilities. Also, AMRESCO may,
if it deems necessary, include a provision in its
contracts that provides that shareholders assume no
personal liability for obligations entered into on
behalf of AMRESCO. However, shareholders may, in some
jurisdictions, be personally liable for tort claims,
contractual claims where liability is not negated by
the terms of the contract, claims for taxes and some
statutory liability to the extent that AMRESCO does
not pay these claims. AMRESCO carries public
liability insurance that it believes is adequate for
tort claims. Therefore, any risk of personal
liability to shareholders is limited to situations in
which AMRESCO's unencumbered assets plus its
insurance coverage is insufficient to satisfy the
claims against AMRESCO and its shareholders.
Inspection Rights
Under Maryland law, one or more stockholders who Under the Texas REIT Act, persons who have been
together are and for at least six months have been shareholders of record for more than six months
stockholders of record of at least 5% of the immediately preceding their demand, or hold at least
outstanding stock of any class may inspect and copy 5% of all the outstanding shares of a Texas REIT,
the corporation's books of account and stock ledger, upon written demand stating their purpose, have the
request a statement of the corporation's affairs right to examine, for any proper purpose, the trust's
(setting forth in reasonable detail the corporation's books and records of account, minutes and record of
assets and liabilities as of a reasonably current shareholders, and are entitled to make extracts from
date) and request a stockholder list. Any stockholder these records.
may inspect and copy the bylaws, minutes of
proceedings of the stockholders, annual statements of
affairs and any voting trust agreements on file of a
Maryland corporation and may request a statement
showing all stock and securities issued by the
corporation during a specified period of not more
than 12 months before the date of the request.
Special Meetings of Shareholders
Impac's bylaws provide that the president, chief AMRESCO's bylaws provide that the trust managers, any
executive officer or board of directors may call officer or the holders of at least 10% of all of the
special meetings of stockholders. Special meetings shares entitled to vote at a special meeting may call
will also be called upon the written request of the a special meeting of shareholders.
holders of not less than a majority of the votes
entitled to be cast at that meeting.
</TABLE>
74
<PAGE> 82
<TABLE>
<CAPTION>
MARYLAND CORPORATION TEXAS REIT
<S> <C>
Boards of Directors/Trust Managers
Impac's bylaws provide that the number of directors AMRESCO's bylaws provide that the number of trust
cannot be less than the minimum number required by managers cannot be less than two nor more than nine.
Maryland law nor more than 15. There are currently There are currently seven trust managers. Under
seven directors. Under Maryland law and Impac's AMRESCO's declaration of trust, trust managers are
bylaws, directors are elected by a plurality of all elected by the affirmative vote of the holders of a
votes cast at a meeting, which means that those majority of the shares outstanding and entitled to
nominees receiving the greatest number of votes are vote for the election of trust managers. AMRESCO's
elected as directors, whether or not any nominee for bylaws also provide that at least a majority of the
director receives a majority of the votes entitled to trust managers cannot:
be cast on the matter and present in person or - be an officer or employee of AMRESCO or any of its
represented by proxy. Impac's bylaws also provide affiliates;
that a majority of the members of Impac's board must - be an affiliate of any advisor or manager to
not be affiliates (as defined in the bylaws) of an AMRESCO under an advisory or management agreement;
individual or corporate management company to whom and
the board has delegated management duties. The - have performed more than a "de minimis' amount of
unaffiliated directors must also be independent from services for the advisor or manager of AMRESCO
Impac, except for being directors, and from Impac other than as a trust manager or as a director of
Mortgage Holdings, Inc. and its affiliates. any entity controlled by AMRESCO.
Removal of Directors/Trust Managers
Impac's directors may be removed, with or without AMRESCO's trust managers may be removed at any time,
cause, by the vote of holders of at least two-thirds only for cause, by the vote of holders of at least
of the votes entitled to be cast in the election of two-thirds of the shares then outstanding and
directors. entitled to vote generally in the election of trust
managers.
Staggered Board
Impac's board of directors is not divided into Under AMRESCO's declaration of trust, the board of
classes. All of Impac's directors are, therefore, trust managers is divided into three classes, each
elected each year. class consisting of as nearly as possible one-third
of the trust managers. The term of office of one
class of trust managers expires each year. Trust
managers of the class elected at an annual meeting
hold office for a three-year term. The staggered
board provision may make the removal of incumbent
trust managers more difficult and time-consuming,
which could discourage a third party from making a
tender offer or otherwise attempting to obtain
control of AMRESCO, even though such an attempt might
be beneficial to AMRESCO and its shareholders. At
least two annual meetings, instead of one, will
generally be required to effect a change in the
majority of the board. Thus, the staggered board
provision could increase the likelihood that
incumbent trust mangers will retain their positions.
</TABLE>
75
<PAGE> 83
<TABLE>
<CAPTION>
MARYLAND CORPORATION TEXAS REIT
<S> <C>
Advance Notice of Director/Trust Manager Nominations and New Business
Impac's bylaws provide that for nominations or other AMRESCO's bylaws contain similar advance notice
business to be properly brought before an annual provisions, which may delay, defer or prevent a
meeting by a stockholder, the stockholder must have change in control of AMRESCO or other transaction
given timely notice in writing to Impac's secretary that might involve a premium price for holders of
and the other business must otherwise be a proper AMRESCO shares or otherwise be in their best
matter for action by stockholders. To be timely, the interests.
notice must generally be delivered not later than the
60th day and not earlier than the 90th day prior to
the first anniversary of the preceding year's annual
meeting. If Impac calls a special meeting for the
purpose of electing directors, a stockholder entitled
to call a special meeting may nominate directors if
the stockholder's notice is delivered not later than
the 60th day and not earlier than the 90th day prior
to the special meeting or the tenth day following the
day on which the public announcement is first made of
the date of the special meeting and of the nominees
proposed by the board to be elected at the meeting.
Share Redemption and Retirement
Under Maryland law, a corporation may purchase or Under the Texas REIT Act, a Texas REIT may purchase
acquire its own shares, unless: or acquire its own shares, unless:
- - the corporation would not be able to pay its debts - after giving effect to the acquisition, the Texas
as they become due in the usual course of business; REIT would be insolvent; or
or
- the amount paid exceeds the surplus of the Texas
- - the corporation's total assets would be less than REIT.
the sum of the corporation's total liabilities
plus, unless its charter permits otherwise, the The term "surplus," for a Texas REIT, is the excess
amount that would be needed, if the corporation of the net assets over stated capital.
were to be dissolved at the time of the purchase or
acquisition, to satisfy the preferential rights AMRESCO's declaration of trust provides that AMRESCO
upon dissolution of stockholders whose preferential may purchase its own shares, unless following a
rights on dissolution are superior to those whose repurchase AMRESCO would not be able to pay its debts
shares are purchased or acquired. Impac's charter as they become due in the ordinary course of its
provides that the amount needed to satisfy the business.
preferential rights of the series B preferred
stockholders does not need to be included with the
corporation's total liabilities for this purpose.
</TABLE>
76
<PAGE> 84
<TABLE>
<CAPTION>
MARYLAND CORPORATION TEXAS REIT
<S> <C>
Dividends
Maryland law permits the payment of dividends unless: Under the Texas REIT Act, a Texas REIT may make a
- - the corporation would not be able to pay its debts distribution, unless:
as they become due in the usual course of business; - after giving effect to the distribution, the Texas
or REIT would be insolvent; or
- - the corporation's total assets would be less than - the distribution exceeds the surplus of the Texas
the sum of the corporation's total liabilities REIT.
plus, unless its charter permits otherwise, the The term "surplus," for a Texas REIT, is the excess
amount that would be needed, if the corporation of net assets over stated capital.
were to be dissolved at the time of payment of such
dividends, to satisfy the preferential rights on
dissolution of stockholders whose preferential
rights on dissolution are superior to those
receiving the dividends. Impac's charter provides
that the amount needed to satisfy the preferential
rights of the series B preferred stockholders does
not need to be included with the corporation's
total liabilities for this purpose.
Limitations on Director/Trust Manager and Officer Liability
Impac's charter limits the liability of directors and AMRESCO's declaration of trust provides that trust
officers to Impac or its stockholders for money managers or officers will not be liable to AMRESCO
damages to the maximum extent permitted under for losses arising from the performance of their
Maryland law. duties, except for their own willful misfeasance,
willful malfeasance or gross negligence.
</TABLE>
77
<PAGE> 85
<TABLE>
<CAPTION>
MARYLAND CORPORATION TEXAS REIT
<S> <C>
Indemnification
Impac's bylaws provide for the indemnification of AMRESCO's declaration of trust provides for the
present and former directors and officers and persons indemnification of present and former trust managers
who, while a director of Impac and at Impac's and officers and persons who, while serving as a
request, serve or served as a director, officer, trust manager or officer, served at AMRESCO's request
partner or trustee of another entity to the maximum as a functionary of another entity to the fullest
extent permitted by Maryland law. extent permitted by Texas law.
Maryland law provides that a corporation may The Texas REIT Act provides that a Texas REIT may
indemnify any director made a party to any proceeding indemnify persons who are named defendants or
by reason of service in that capacity unless it is respondents in a proceeding because the persons are
established that: or were trust managers only if it is determined in
- - the act or omission of the director was material to accordance with the Texas REIT Act that the persons
the matter giving rise to the proceeding and was satisfied the following three conditions, to the
committed in bad faith or was the result of active extent applicable. First, the persons must have
and deliberate dishonesty; conducted themselves in good faith. Second, the
- - the director actually received an improper personal persons must have reasonably believed, in the case of
benefit in money, property or services; or conduct in their official capacity as trust mangers,
- - in the case of a criminal proceeding, the director that their conduct was in the REIT's best interests.
had reasonable cause to believe that the act or In all other cases, the persons must have reasonably
omission was unlawful. believed that their conduct was at least not opposed
Maryland law provides that the indemnification and to the REIT's best interests. Third, in the case of
advancement of expenses provided or authorized by any criminal proceeding, the persons must have had no
Maryland law is not exclusive of a director's rights reasonable cause to believe that their conduct was
under the charter, the bylaws, a resolution of unlawful.
stockholders or directors or an agreement or
otherwise. Maryland law also provides that the The Texas REIT Act also provides that a provision
termination of any proceeding by judgment, order or contained in the declaration of trust, bylaws or an
settlement does not create a presumption that the agreement that makes mandatory the indemnification
director did not meet the requisite standard of permitted by the Texas REIT Act, or the payment or
conduct to be indemnified, and the termination of any reimbursement of expenses permitted by the Texas REIT
proceeding by conviction or plea of nolo contendere, Act, will be deemed to constitute authorization of
or its equivalent, or an entry of an order of indemnification in the manner required by the Texas
probation prior to judgment, creates a rebuttable REIT Act even though that provision may not have been
presumption that the director did not meet the adopted or authorized in the same manner as the
requisite standard of conduct to be indemnified. In determination that indemnification is permissible.
proceedings by or in the right of the corporation, AMRESCO's declaration of trust and bylaws contain
indemnification is not permitted in respect of any this mandatory provision.
proceeding in which the director or officer is The Texas REIT Act further provides that the
adjudged liable to the corporation. termination of a proceeding by judgment, order,
settlement or conviction, or a plea of nolo
contendere or its equivalent, is not itself
determinative that the person did not meet the
requirements for indemnification set forth in the
Texas REIT Act.
</TABLE>
78
<PAGE> 86
<TABLE>
<CAPTION>
MARYLAND CORPORATION TEXAS REIT
<S> <C>
Amendment of Charter
Maryland law requires that any amendment to the The Texas REIT Act and AMRESCO's declaration of trust
charter be approved by the board of directors and the require that any amendment to the declaration of
holders of two-thirds of the shares entitled to vote trust be approved by the board of trust managers and
on the matter, unless the corporation's charter the holders of two-thirds of the shares entitled to
provides for a different vote requirement. Impac's vote on the matter. However, amendment to the
charter requires charter amendments to be approved by provisions relating to approval of business
the board of directors and the holders of only a combinations, the 9.8% share ownership limitation and
majority of the shares entitled to vote on the amendment of the declaration of trust require
matter. approval by the holders of 80% of the outstanding
shares.
Amendment of Bylaws
Impac's bylaws provide that its board of directors AMRESCO's declaration of trust provides that the
has the exclusive power to adopt, alter or repeal any board, without any action by shareholders, may adopt,
provision of the bylaws or to make new bylaws. amend or repeal bylaws. AMRESCO's bylaws provide that
the bylaws may be amended by:
- with respect to all bylaw provisions, the
affirmative vote of a majority of trust managers;
- with respect to the provisions relating to
shareholder meetings, trust managers and amendment
of the bylaws, the affirmative vote of the holders
of two-thirds of the shares entitled to vote on the
matter; or
- with respect to all other bylaws, the affirmative
vote of the holders of a majority of the
outstanding shares entitled to vote on the matter.
</TABLE>
79
<PAGE> 87
<TABLE>
<CAPTION>
MARYLAND CORPORATION TEXAS REIT
<S> <C>
Business Combinations
Maryland law establishes special requirements with The Texas REIT Act has no comparable provision,
respect to business combinations between a Maryland although AMRESCO's declaration of trust establishes
corporation and any interested stockholder, which is special requirements with respect to business
defined as a stockholder who beneficially owns, combinations between AMRESCO and any related person,
directly or indirectly, 10% or more of the voting which is defined to include any person and the
power of the corporation's shares or an affiliate or affiliates and associates of that person that
associate of the corporation who was the beneficial together own more than 50% of AMRESCO's shares. In
owner, directly or indirectly, of 10% or more of the general, a business combination between AMRESCO and a
then outstanding voting power at any time within the related person must be approved by the affirmative
two-year period prior to the date in question. These vote of the holders of not less than 80% of the
requirements apply to various types of business outstanding shares, including the affirmative vote of
combinations, including mergers, consolidations, the holders of not less than 50% of the shares not
share exchanges, or, in specified circumstances, owned by the related person. The 50% voting
asset transfers or issuances or reclassifications of requirement will not apply if the business
equity securities. In general, an interested combination is approved by the affirmative vote of
stockholder or any of its affiliates may not engage the holders of not less than 90% of the outstanding
in a business combination with the corporation for a shares. In addition, neither 50% nor the 80% voting
period of five years following the most recent date requirement will apply if:
it became an interested stockholder. - 80% of the trust managers have approved in advance
After this five-year period, the business combination the acquisition of shares that caused the related
must be approved by: person to become a related person;
- - the board of directors; - 80% of the trust managers have approved the
- - the affirmative vote of at least (a) 80% of the business combination prior to the date on which the
votes entitled to be cast by outstanding voting related person involved in the business combination
shares of the corporation, voting together as a became a related person;
single group and (b) two-thirds of the votes - the business combination is solely between AMRESCO
entitled to be cast by holders of voting shares and a corporation of which AMRESCO owns all the
other than voting shares held by the interested voting shares;
stockholder with whom the business combination is - the business combination is proposed to be
to be effected, or by an affiliate or associate of consummated within one year of the closing of a
such interested stockholders; and fair tender offer, which is defined as a tender
- - unless, among other conditions, the corporation's offer in which all of shareholders other than the
common stockholders receive a minimum price (as related person receive cash or the fair market
defined in the Maryland code) for their shares and value of any security at least equal to the fair
the consideration is received in cash or in the price paid by a related person or persons making a
same form as previously paid by the interested tender offer;
stockholder for its shares. - the rights described below have become exercisable;
These provisions of Maryland law do not apply, or
however, to business combinations that are approved - specified conditions designed to ensure that
or exempted by the board of directors before the shareholders receive at least the fair market value
time that the interested stockholder becomes an for their shares have been met.
interested stockholder.
</TABLE>
80
<PAGE> 88
<TABLE>
<CAPTION>
MARYLAND CORPORATION TEXAS REIT
<S> <C>
If a person has become a related person and within
one year after the date of the transaction in which
the related person became a related person:
- a business combination meeting all of the
conditions designed to ensure that shareholders
receive at least the fair market value for their
shares has not been consummated;
- a fair tender offer has not been consummated; and
- AMRESCO has not been dissolved and liquidated,
then, the beneficial owner of each share, other than
the related person, will have the right to sell to
AMRESCO one share upon the exercise of a right. The
rights may be exercised during the 90-day period
starting on the one-year anniversary of the date the
person became a related person. At 5:00 p.m., Dallas,
Texas time, at the end of the 90-day period, the
rights not exercised will become void. The purchase
price for a share upon exercise of a right will be
equal to the fair price paid by the related person.
These provisions are designed to prevent a purchaser
from using two-tier pricing and similar tactics in an
attempted takeover, and may make it more difficult to
acquire and exercise control of AMRESCO. These
provisions may also provide the trust managers with
the enhanced ability to block a proposed acquisition
and to retain their positions, even if their
continued service would not be in the best interests
of AMRESCO.
</TABLE>
81
<PAGE> 89
<TABLE>
<CAPTION>
MARYLAND CORPORATION TEXAS REIT
<S> <C>
Control Share Acquisitions
Maryland law provides that control shares of a The Texas REIT Act has no comparable provision.
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 by stockholders, excluding shares
owned by the acquiror and officers and directors who
are employees of the corporation. Control shares are
voting shares that, if aggregated with all other
shares previously acquired by the acquiror or in
respect of which the acquiror is able to exercise or
direct the exercise of voting power (except by virtue
of a revocable proxy), would entitle the acquiror to
exercise voting power in the election of directors
within one of the following ranges of voting power:
- - 20% or more but less than one-third;
- - one-third or more but less than a majority; or
- - a majority or more of all voting power.
Control shares do not include shares that the
acquiring person is entitled to vote on the basis of
prior stockholder approval. A control share
acquisition means the acquisition of control shares
subject to specified exemptions.
A person who has made or proposed to make a control
share acquisition, upon satisfaction of specified
conditions (including an undertaking to pay
expenses), may compel the board of directors 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.
</TABLE>
82
<PAGE> 90
<TABLE>
<CAPTION>
MARYLAND CORPORATION TEXAS REIT
<S> <C>
If voting rights are not approved at a stockholders'
meeting or if the acquiring person does not deliver
an acquiring person statement as required by statute,
then, subject to specified 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, as of the date of the last control share
acquisition or of any special meeting of stockholders
at which the voting rights of the control 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 for purposes of the appraisal
rights may not be less than the highest price per
share in the control share acquisition.
The control share acquisition statute does not apply
to shares acquired in a merger, consolidation or
share exchange if the corporation is a party to the
transaction, or if the acquisition is approved or
exempted by the charter or bylaws of the corporation
prior to a control share acquisition.
The bylaws of Impac contain a provision exempting any
and all acquisitions of shares of Impac stock from
the control share acquisition statute. Although there
can be no assurance that this bylaw provision will
not be amended or repealed in the future, while it is
in effect there is no difference in the rights of
Impac stockholders and AMRESCO shareholders resulting
from the control share acquisition statute.
</TABLE>
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<PAGE> 91
DESCRIPTION OF AMRESCO SECURITIES
COMMON SHARES
AMRESCO's declaration of trust provides that AMRESCO may issue up to
250,000,000 shares of beneficial interest, consisting of 200,000,000 common
shares and 50,000,000 preferred shares. As of September 1, 1999, 10,015,111
common shares were issued and outstanding and no preferred shares were issued or
outstanding. The following description sets forth general terms and provisions
of AMRESCO's common shares.
Voting rights
Each outstanding common share entitles the holder to one vote on all
matters submitted to a vote of shareholders, including the election of trust
managers. There is no cumulative voting in the election of trust managers, which
means that the holders of a majority of the outstanding common shares can elect
all of the trust managers then standing for election.
Dividends
Holders of common shares are entitled to receive ratably dividends, in
cash, property or shares, as may be declared by AMRESCO's board of trust
managers. AMRESCO may not declare or pay a dividend when AMRESCO is unable to
pay its debts as they become due in the usual course, when the payment of a
dividend would result in AMRESCO becoming unable to pay its debts as they become
due, when the payment of a dividend would cause AMRESCO to be insolvent or when
the distribution exceeds the surplus of AMRESCO.
Liquidation rights
If AMRESCO liquidates, dissolves or winds-up its affairs, holders of common
shares will be entitled to share ratably in AMRESCO's assets remaining after
provision for liabilities to creditors and payment of liquidation preferences to
holders of preferred shares, if any.
Other terms
Holders of common shares have no redemption, preference, conversion,
exchange or preemptive rights to subscribe to any of AMRESCO's securities. All
outstanding common shares are fully paid and nonassessable.
Transfer agent
The transfer agent and registrar for AMRESCO's common shares is The Bank of
New York, 101 Barclay Street, New York, New York 10286.
PREFERRED SHARES
AMRESCO's declaration of trust provides that the board of trust managers
may issue preferred shares in one or more series, without the approval of the
holders of common shares. Prior to the issuance of shares in a series, the board
will establish the applicable rights of the shares to be included in that
series, including:
- the number of shares constituting the series;
- the dividend rate on the shares of the series, whether these dividends
are cumulative and the relation of these dividends to the dividends
payable on any other class of shares;
- whether the shares of the series are redeemable and the terms of any
redemption;
- whether the shares will be convertible into common shares and the terms
of any conversion;
- the amount per share payable on the series or other rights of holders of
these preferred shares on liquidation or dissolution of AMRESCO; and
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<PAGE> 92
- the voting rights, if any, of shares of the series.
Because the trust managers have the power to establish the preferences and
rights of each class or series of preferred shares, holders in any series or
class of preferred shares may be afforded dividend rights, preferences, powers
and voting and other rights senior to the rights of holders of common shares.
Issuance of a series of preferred shares also could, depending on the terms of
the series, either impede or facilitate the completion of a merger, tender offer
or other takeover attempt. Although the board is required to make a
determination as to the best interest of AMRESCO's shareholders when issuing
preferred shares, the board could act in a manner that would discourage an
acquisition attempt or other transaction that some, or a majority, of the
shareholders might believe to be in the best interest of AMRESCO or in which
shareholders might receive a premium for their shares over the then-prevailing
market price. The authorized preferred shares are available for issuance without
further action by common shareholders, other than any action required by
applicable law or the rules of any stock exchange on which the common shares may
then be listed.
REGISTRATION RIGHTS
Under the purchase agreement, FIC Management, Inc. agreed that it or its
designee will purchase, among other assets, 1,500,111 common shares of AMRESCO,
and will receive registration rights relating to these shares. Accordingly, the
combined company will be obligated, upon the demand of FIC Management, to file
and use its best efforts to have declared effective a registration statement
covering the resale of these shares. The combined company is also obligated to
keep this registration statement effective until the time as sales may be made
in reliance on Rule 144(k) under the Securities Act of 1933.
RESTRICTIONS ON SIZE OF HOLDINGS
For AMRESCO to qualify as a REIT under the Internal Revenue Code, not more
than 50% in value of its outstanding shares may be owned by five or fewer
individuals during the last half of a taxable year. In addition, shares 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.
Because AMRESCO's board of trust managers believes it is essential for AMRESCO
to continue to qualify as a REIT, AMRESCO's declaration of trust provides that
in general no holder may own more than 9.8% of AMRESCO's total outstanding
shares. The board may waive this ownership limit, and has done so with respect
to FMR Corp. and affiliates of AMRESCO, INC. and FIC Management, Inc. The
ownership limit may preclude acquisition of control of AMRESCO unless the board
determines that maintenance of REIT status is no longer in the best interest of
AMRESCO.
If any transfer of shares occurs that would result in any person owing more
than 9.8% of AMRESCO's total outstanding shares, then shares in excess of this
ownership limit will deemed to have been automatically transferred to a
charitable trust for the benefit of a charitable beneficiary. The trustee of the
charitable trust will have all voting rights and rights to dividends or other
distributions with respect to shares held in the charitable trust.
Within 20 days of receiving notice from AMRESCO that shares have been
transferred to the charitable trust, the trustee of the charitable trust will
sell the shares held in the charitable trust to a person, designated by the
trustee, whose ownership of the shares will not violate the ownership limit. The
prohibited owner will receive the lesser of:
- the price paid by the prohibited owner for the shares or, if the
prohibited owner did not give value for these shares, the market price of
the shares on the day of the event causing the shares to be held in the
charitable trust; and
- the net price received by the trustee from the sale of the shares held in
the charitable trust.
Any proceeds above the amount payable to the prohibited owner will be
immediately paid to the charitable beneficiary. If, prior to the discovery by
AMRESCO that shares have been transferred to the trustee, the shares are sold by
a prohibited owner, then these shares will be deemed to have been sold on behalf
of the
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charitable trust. If the prohibited owner received an amount for these shares
above the amount that the prohibited owner was entitled to receive, the excess
will be paid to the trustee upon demand.
Until the trustee has sold the shares held in the charitable trust, AMRESCO
has the right to purchase shares transferred to the trustee. Upon a purchase by
AMRESCO, the trustee will distribute all of the net sales proceeds to the
prohibited owner. The price that AMRESCO may purchase the shares is equal to the
lesser of:
- the price per share in the transaction that resulted in a transfer to the
charitable trust or, in the case of a gift, the market price at the time
of the gift; and
- the market price on the date AMRESCO purchases the shares.
All certificates representing shares will bear a legend referring to the
restrictions described above. Any person who acquires or attempts or intends to
acquire shares that will or may violate the ownership limit or any person who
would have owned shares that were transferred to the charitable trust must
immediately give written notice to AMRESCO.
PREFERRED SHARE PURCHASE RIGHTS
On February 25, 1999, AMRESCO's board of trust managers declared a dividend
of one preferred share purchase right for each common share outstanding, payable
to holders of common shares of record at the close of business on March 11,
1999. The holders of additional common shares issued after this date and before
the redemption or expiration of the purchase rights are also entitled to receive
one preferred share purchase right for each additional common share. Each
preferred share purchase right entitles the holder to purchase from AMRESCO one
one-hundredth of a series A junior participating preferred share at a price of
$37.50 per one-hundredth of a series A junior participating preferred share,
subject to adjustment. Preferred share purchase rights are exercisable when a
person or group of persons, other than affiliates of AMRESCO, INC. or FIC
Management, Inc., acquires 15% or more of the outstanding common shares without
board of trust manager approval or upon a tender offer or exchange offer the
consummation of which would result in a person acquiring 15% or more of the
outstanding common shares. Under specific circumstances, each preferred share
purchase right entitles the holder to purchase, at the preferred share purchase
right's then current exercise price, a number of AMRESCO common shares having a
market value of twice the preferred share purchase right's exercise price. The
acquisition of AMRESCO in a merger or other business combination or the sale of
50% or more of AMRESCO's assets after a person becomes a 15% shareholder would
entitle each holder to purchase, at the preferred share purchase right's then
current exercise price, a number of the acquiring company's common shares having
a market value equal to twice the preferred share purchase rights exercise
price. The preferred share purchase rights held by 15% shareholders, other than
affiliates of AMRESCO, INC. or FIC Management, Inc., would not be exercisable.
The preferred share purchase rights will expire on March 1, 2009, and are
subject to redemption in whole, but not in part, at a price of $.001 per
preferred share purchase right payable in cash, shares of AMRESCO or any other
form of consideration specified by AMRESCO's board. Each common share issued by
AMRESCO in the merger will have a preferred share purchase right attached to it.
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<PAGE> 94
SECURITY OWNERSHIP OF
PRINCIPAL SHAREHOLDERS AND MANAGEMENT OF AMRESCO
The following table sets forth, as of September 1, 1999, the pro forma
beneficial ownership of AMRESCO common shares as of that date and as of the
effective time, after giving effect to the merger, for the following:
(1) each person who will be a beneficial owner of more than 5% of the
AMRESCO common shares;
(2) each trust manager and executive officer of AMRESCO; and
(3) all trust managers and executive officers of AMRESCO as a group.
Unless otherwise indicated in the footnotes, all of the AMRESCO shares will
be owned directly, and the indicated person or entity will have sole voting and
dispositive power. The number and percent of AMRESCO common shares that will be
beneficially owned by a person assume that all options held by that person which
are exercisable within 60 days will be exercised, but that no options held by
other persons have been exercised.
Unless otherwise noted, the mailing address for each person identified
below is c/o AMRESCO Capital Trust, 700 North Pearl Street, Suite 2400, Dallas,
Texas 75201.
<TABLE>
<CAPTION>
COMMON SHARES COMMON SHARES
OWNED AS OF OWNED AS OF THE
SEPTEMBER 1, 1999 EFFECTIVE TIME
-------------------- --------------------
NAME OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
- ------------------------ --------- ------- --------- -------
<S> <C> <C> <C> <C>
AMRESCO, INC.(1)................................... 1,750,114 17.1% 0(13) 0
FMR Corp.(2)....................................... 1,263,594 12.6% 1,263,594 7.8%
Wellington Management Company, LLP(3).............. 582,500 5.8% 582,500 3.5%
John C. Deterding(4)............................... 6,500 * 6,500 *
Bruce W. Duncan(4)................................. 20,200 * 20,200 *
Christopher B. Leinberger(4)....................... 11,750 * 11,750 *
James C. Leslie(4)................................. 11,500 * 11,500 *
Robert H. Lutz, Jr.(5)............................. 21,250 * 21,250 *
Mark D. Gibson(6).................................. 39,350 * 39,350 *
Robert L. Adair III(7)............................. 91,250 * 91,250 *
Jonathan S. Pettee(8).............................. 14,500 * 14,500 *
Michael L. McCoy(9)................................ 6,750 * 6,750 *
John M. Jumonville(10)............................. 3,500 * 3,500 *
Thomas R. Lewis II(11)............................. 2,500 * 2,500 *
David M. Striph(11)................................ 1,750 * 1,750 *
All trust managers and executive officers as a
group
(12 persons)(12)................................. 230,800 2.3% 230,800 1.4%
</TABLE>
- ---------------
* Less than 1%
(1) Includes options which are exercisable by AMREIT Managers, L.P. to purchase
250,003 AMRESCO common shares. AMREIT Holdings, Inc., a wholly-owned
subsidiary of AMRESCO, INC., owns 1,500,011 shares. AMRESCO, INC. owns 100
shares. The partnership interests of AMREIT Managers, L.P. are owned by
AMREIT Holdings and a wholly-owned subsidiary of AMREIT Holdings. AMREIT
Holdings' address is 330 E. Warm Springs Road, Las Vegas, Nevada 89119.
(2) FMR Corp. is the parent holding company of an investment management company
registered under Section 203 of the Investment Advisers Act of 1940 that
provides investment advisory and management services to its clients.
According to a Schedule 13G filed by FMR Corp. with the Securities and
Exchange Commission on February 10, 1999, FMR Corp. disclaims investment
power or voting power over any of the securities referenced above; however,
it may be deemed to "beneficially own" such
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<PAGE> 95
securities by virtue of Rule 13d-3 under the Securities Exchange Act of
1934. FMR Corp.'s address is 82 Devonshire Street, Boston, Massachusetts
02109.
(3) This information is based solely on Schedule 13G filed by Wellington
Management Company, LLP with the Securities and Exchange Commission on
February 8, 1999 reporting its holdings as of December 31, 1998. Wellington
Management Company, LLP reported that, through its subsidiaries, it had
sole voting power with respect to zero shares and sole dispositive power
with respect to zero shares. Wellington Management Company, LLP is the
parent holding company of an investment management company that holds
investment power and, in some cases, voting power over the securities
reported in its Schedule 13G. The investment management company, which is
registered under Section 203 of the Investment Advisers Act of 1940, and a
subsidiary, which is a "bank" as defined in Section 3(a)(6) of the
Securities Exchange Act of 1934, provide investment advisory and management
services for their respective clients. Wellington Management Company, LLP
disclaims investment power or voting power over any of the securities
referenced above; however, it may be deemed to "beneficially own" such
securities by virtue of Rule 13d-3 under the Securities Exchange Act of
1934. Wellington Management Company, LLP's address is 75 State Street,
Boston, Massachusetts 02109.
(4) Includes options to purchase 5,000 AMRESCO common shares.
(5) Includes options to purchase 11,250 AMRESCO common shares. Excludes 5,000
AMRESCO common shares which are owned by Mr. Lutz' spouse as to which Mr.
Lutz disclaims beneficial ownership.
(6) Includes options to purchase 15,000 AMRESCO common shares.
(7) Includes options to purchase 11,250 AMRESCO common shares.
(8) Includes options to purchase 7,500 AMRESCO common shares.
(9) Includes options to purchase 3,750 AMRESCO common shares.
(10) Includes options to purchase 2,000 AMRESCO common shares.
(11) Includes options to purchase 1,500 AMRESCO common shares.
(12) Includes options to purchase 73,750 AMRESCO common shares.
(13) Assumes the sale of all AMRESCO common shares beneficially owned by
AMRESCO, INC. to FIC Management under the purchase agreement.
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SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS
AND MANAGEMENT OF IMPAC
The following table sets forth the beneficial ownership, reported to Impac
as of September 8, 1999, of Impac common stock, including shares as to which a
right to acquire ownership exists, of: (1) each person known by Impac to be the
record or beneficial owner of 5% or more of the outstanding Impac common stock,
(2) each director of Impac; (3) each executive officer of Impac; and (4) all
directors and executive officers of Impac as a group. In addition, with respect
to (1) each beneficial owner of 5% or more of the outstanding Impac common
stock, (2) each director of Impac and (3) all directors and executive officers
of Impac as a group, the following table also shows the percentage of the
outstanding AMRESCO common shares which such person's or group's holdings will
represent after the merger. Unless otherwise indicated in the footnotes to the
table, the beneficial owners named have, to the knowledge of Impac, sole voting
and investment power with respect to the shares beneficially owned, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE OF PERCENTAGE OF
NATURE IMPAC COMMON COMBINED COMPANY
OF BENEFICIAL STOCK AS OF COMMON SHARES
NAME OWNERSHIP SEPTEMBER , 1999 AFTER MERGER
- ---- ------------- ------------------ ----------------
<S> <C> <C> <C>
Fortress Partners, L.P....................... 1,683,635(1) 16.7% 6.7%
FIC Management, Inc.......................... 0 0 10.3%(8)
Apex Mortgage Capital, Inc. ................. 627,300(2) 7.5% 2.5%
Ryback Management Corporation................ 438,000(3) 5.2% 2.6%
Wesley R. Edens.............................. 0(4) 0 0(9)
Robert I. Kauffman........................... 0(4) 0 0(9)
Gregory F. Hughes............................ 0(3) 0 0(9)
Randal A. Nardone............................ 0(4) 0 0(9)
Erik P. Nygaard.............................. 0(4) 0 0(9)
Christopher Mahowald......................... 0(4) 0 0(9)
Joseph R. Tomkinson.......................... 124,616(5) 1.5% *
Frank P. Filipps............................. 22,000(6) * *
All directors and executive officers as a
group
(8 persons)................................ 146,616(7) 1.7% *
</TABLE>
- ---------------
* Less than 1%.
(1) Represents shares of Impac common stock issuable upon conversion of the
479,999 shares of Impac series B preferred stock held by Fortress Partners,
L.P. The address of Fortress is 1301 Avenue of the Americas, 42nd Floor, New
York, New York 10019.
(2) Based on a Schedule 13D filed by Apex Mortgage Capital, Inc., The TCW Group,
Inc., and Robert A. Day on September 7, 1999. The address of Apex Mortgage
Inc., TCW Group and Mr. Day is 865 South Figueroa Street, Suite 1800, Los
Angeles, California 90017. The 627,300 shares listed as owned by Apex
Mortgage include 249,000 shares owned directly by Apex Mortgage, 366,300
shares owned indirectly by TCW Group through its wholly owned subsidiary,
TCW Asset Management Company, and 12,000 shares owned by Daniel K. Osborne,
the Executive Vice President, Chief Operating Officer and Chief Financial
Officer of Apex Mortgage. Apex Mortgage and TCW Group claim shared voting
and dispositive power and Mr. Day claims sole voting and dispositive power
with respect to the shares listed as owned by Apex Mortgage. Although Apex
Mortgage and TCW Group acknowledge that they may be deemed to be a "group"
for purposes of Rule 13d-5 under the Exchange Act, each of Apex Mortgage,
TCW Asset Management and Mr. Osborne disclaim membership in any such group
as well as beneficial ownership of shares held by any other affiliated
entity or person. In its Schedule 13D filing, Apex Mortgage has indicated
that it has acquired the shares listed as owned by it in furtherance of its
intention to acquire control of Impac. For a discussion of the transaction
proposed by Apex Mortgage, see "The Merger -- Impac's reasons for the
merger; Recommendations of the Impac board."
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<PAGE> 97
(3) Based on a Schedule 13G filed on February 10, 1999, Ryback's address is 7711
Carondelete Avenue, Box 16800, St. Louis, Missouri 63105. Ryback has sole
voting and dispositive power as to 431,200 shares and shared voting and
dispositive power as to 6,800 shares. All 438,000 shares were held in a
fiduciary capacity by Ryback Management Corporation (a registered Investment
Company Advisor) and/or Lindner Investment Series Trust (a registered
Investment Company) as of December 31, 1998.
(4) As a result of their positions as directors and executive officers of
Fortress Investment Corp., the sole general partner of Fortress Partners,
L.P., Messrs. Edens, Kauffman, Nardone, Nygaard and Mahowald may be deemed
to be the beneficial owners of the 479,999 shares of Impac series B
preferred stock held by Fortress Partners, L.P. Messrs. Edens, Kauffman,
Hughes, Nardone, Nygaard and Mahowald disclaim beneficial ownership of such
shares.
(5) Includes options to purchase 6,666 shares of Impac common stock which are
currently exercisable and 7,500 shares held in a trust of which Mr.
Tomkinson is trustee.
(6) Includes options to purchase 10,000 shares of Impac common stock which are
currently exercisable.
(7) Includes options to purchase a total of 16,666 shares of Impac common stock
which are currently exercisable.
(8) Assumes the purchase of 1,500,111 AMRESCO common shares and vested options
to acquire an additional 250,003 AMRESCO common shares by FIC Management,
Inc., an affiliate of Fortress Partners, L.P, under the purchase agreement.
For further information regarding the terms of the purchase agreement, see
"The Purchase Agreement."
(9) As a result of their positions as directors and executive officers of
affiliates of FIC Management, Inc., following the merger Messrs. Edens,
Kauffman, Hughes, Nardone, Nygaard and Mahowald may be deemed to be the
beneficial owners of the 1,750,114 combined company common shares that will
be held by FIC Management or its affiliates and the 1,112,782 combined
company common shares that will be held by Fortress Partners, L.P. Messrs.
Edens, Kauffman, Nardone, Nygaard and Mahowald disclaim beneficial ownership
of such shares. See notes 3 and 7 above.
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EXISTING BUSINESS OF AMRESCO
OVERVIEW
AMRESCO was organized on January 6, 1998 as a real estate investment trust
under the laws of the State of Texas. AMRESCO was formed to take advantage of
mid- to high-yield lending and investment opportunities in real estate-related
assets, including the following:
- various types of commercial mortgage loans, including participating
loans, mezzanine loans, acquisition loans, construction loans,
rehabilitation loans and bridge loans;
- commercial mortgage-backed securities, commonly referred to as CMBS;
- commercial real estate; and
- equity investments in joint ventures and/or partnerships.
AMRESCO believes it has operated and it intends to continue to operate in a
manner so as to continue to qualify as a REIT under the Internal Revenue Code.
As a result, AMRESCO will generally not be subject to federal income tax on that
portion of its ordinary income or capital gain that is currently distributed to
its shareholders if it complies with a number of requirements, which include:
- distributing to shareholders at least 95% of its annual REIT taxable
income; and
- satisfying a number of other organizational and operational requirements,
including those relating to the ownership of its outstanding common
shares, the nature of its assets and the sources of its income.
Under AMRESCO's current management agreement and subject to the direction
and oversight of the board of trust managers, AMRESCO's day-to-day operations,
which commenced on May 12, 1998, and investment activities are currently managed
by AMREIT Managers, L.P., an affiliate of AMRESCO, INC. For its services, the
manager is entitled to receive the following:
- a base management fee equal to 1% per year of AMRESCO's average invested
non-investment grade assets and 0.5% per year of AMRESCO's average
invested investment grade assets;
- incentive compensation in an amount equal to 25% of the dollar amount by
which funds from operations (as defined by the National Association of
Real Estate Investment Trusts), as adjusted, exceeds a specified
threshold; and
- reimbursement for the manager's costs of providing specified due
diligence and professional services to AMRESCO.
Subject to limited exceptions, AMRESCO, INC. has granted to AMRESCO a right
of first refusal with respect to the first $100 million of targeted mortgage
loan investments which are identified by or to any affiliate of AMRESCO, INC.
during any calendar quarter and all mortgage-backed securities, other than
mortgage-backed securities issued in securitizations sponsored in whole or in
part by AMRESCO, INC. or any of its affiliates. AMRESCO does not expect this
right of first refusal to be available to the combined company after the
effective time. Additionally, AMRESCO has entered into a correspondent agreement
with Holliday Fenoglio Fowler, L.P., an affiliate of AMRESCO, INC. Under this
agreement, Holliday Fenoglio Fowler presents to AMRESCO on a non-exclusive basis
investment opportunities identified by Holliday Fenoglio Fowler that meet
AMRESCO's investment criteria and objectives.
EMPLOYEES
AMRESCO has no employees nor does it maintain a separate office. Instead,
AMRESCO relies on the facilities and resources of AMREIT Managers and its
executive officers, each of whom is employed by AMRESCO, INC. AMRESCO is not a
party to any collective bargaining agreements. AMRESCO, INC. is a
publicly-traded, diversified financial services company specializing in real
estate lending, asset management services and commercial finance. AMRESCO, INC.
is headquartered in Dallas, Texas and has offices located
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throughout the United States, as well as internationally in Canada, the United
Kingdom, Mexico and Japan. AMRESCO, INC., which began operating in 1987,
employed approximately 3,800 people as of June 30, 1999.
BUSINESS STRATEGY
AMRESCO's principal business objective has been to maximize shareholder
value by producing cash flow for distribution to shareholders through investment
in mid- to high-yield real estate related assets which earn an attractive spread
over AMRESCO's cost of funds. AMRESCO intends to achieve this objective by
making opportunistic investments while maintaining a conservative leverage
position. AMRESCO's strategy is described below.
- Invest in senior mortgage loans, mezzanine loans, CMBS, commercial real
estate, either directly or through investment in joint ventures and/or
partnerships, and in other opportunistic investments. These investments
may include foreign real estate and loans to borrowers in foreign
countries or secured by foreign real estate, principally in the markets
in which AMRESCO, INC. and its affiliates conduct business, and
distressed loans and/or real estate. AMRESCO invests opportunistically,
pursuing those investments which it believes will generate the highest
risk-adjusted returns on capital invested, after considering all relevant
factors determined by AMRESCO and its manager to be material. These
include the limitations imposed by the Internal Revenue Code as a result
of AMRESCO's historical status as a REIT.
- Take advantage of expertise existing within, and investment and
co-investment opportunities arising from the business and operations of,
AMRESCO, INC. and its affiliates. Since its inception, AMRESCO has
acquired 10 loans from these companies at an aggregate purchase price of
$39.7 million.
- Utilize the expertise and resources of Holliday Fenoglio Fowler to
monitor trends and demands in the mortgage loan and real estate markets.
AMRESCO adjusts its mortgage loan products in response to these trends
and demands in order to increase its ability to successfully compete for
investments.
- Through its manager, capitalize upon the market research capabilities of
AMRESCO, INC. and its affiliates to analyze AMRESCO's investment
opportunities and the economic conditions in AMRESCO's proposed
geographic markets. This assists AMRESCO in selecting investments that
satisfy its investment criteria and targeted returns.
- Through its manager, utilize the expertise of AMRESCO, INC. and its
affiliates in the underwriting, origination and closing of mortgage loans
and in the acquisition, management and servicing of mortgage loans,
mortgage loan portfolios and CMBS.
- Borrow against or leverage its investments through its existing credit
facilities and any new sources of debt financing which AMRESCO may be
able to secure in order to increase the size of its portfolio and
increase potential returns to its shareholders. This is done only to the
extent consistent with AMRESCO's leverage policies. Currently, AMRESCO
intends to maintain a debt to equity ratio of no more than 2.5 to 1,
excluding non-recourse debt on real estate. At June 30, 1999, AMRESCO's
debt to equity ratio, excluding non-recourse debt on real estate, was
0.54 to 1. Including non-recourse debt on real estate, AMRESCO's debt to
equity ratio was 0.75 to 1 at June 30, 1999.
- Implement various hedging strategies, including, but not limited to,
interest rate swaps and interest rate collars, caps or floors to the
extent permitted by the REIT provisions of the Internal Revenue Code.
These strategies help to minimize the effects of interest rate
fluctuations on AMRESCO's investments and its borrowings. Hedging
strategies are implemented if, given the cost of these hedges and
AMRESCO's desire not to jeopardize its status as a REIT, the manager
determines that these strategies are in the best interest of AMRESCO's
shareholders.
- Manage the credit risk of AMRESCO's assets by:
(a) extensively underwriting investments utilizing the processes
developed and utilized by AMRESCO, INC. and its affiliates;
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(b) selectively choosing investments for origination or acquisition in
compliance with AMRESCO's investment policies;
(c) actively monitoring through the servicing and asset management
capabilities of AMRESCO, INC. and its affiliates the credit
quality of AMRESCO's assets; and
(d) maintaining appropriate capital levels and allowances for credit
losses.
INVESTMENT ACTIVITIES
General
The manager is authorized by the terms of the management agreement to make
the day-to-day investment decisions of AMRESCO based on guidelines in effect and
approved by AMRESCO's board of trust managers. The trust managers review all of
AMRESCO's transactions on a quarterly basis to determine compliance with the
guidelines. Due to the typically higher risk nature of its investments, the
manager selectively and extensively underwrites AMRESCO's targeted investments
utilizing the expertise, processes and procedures developed by AMRESCO, INC. and
its affiliates.
AMRESCO operates exclusively as an investor in real estate related assets.
Its asset allocation decisions and investment strategies are influenced by
changing market factors and conditions. AMRESCO has no policy that requires that
any specific percentage of its assets be invested in any particular type or form
of real estate investment. Also, except for CMBS, AMRESCO does not limit any
particular type or form of real estate investment to a specific percentage. CMBS
investments, by policy, cannot exceed 40% of AMRESCO's total consolidated
assets. From time to time, the percentage of AMRESCO's investments that will be
invested in a particular category of real estate assets will vary. Future
investment opportunities that may be available to AMRESCO will depend upon many
factors, including regional, national and international economic conditions and
other factors.
To date, AMRESCO's investment activities have been focused in three primary
areas: loan investments, CMBS and equity investments in real estate. Each of
these investment categories is more fully described below.
AMRESCO does not have, nor does it rely upon, any major customers.
Consistent with its investments to date, AMRESCO currently expects that a
substantial portion of its new investments will be made in the form of senior
mortgage loans. To date, AMRESCO has made no investments outside of the United
States nor has it made any investments in distressed loans and/or real estate,
although it may do so in the future.
Loan investments
AMRESCO specializes in providing mid- to high-yield senior and mezzanine
financing to real estate owners and developers on a participating and
non-participating basis. Mezzanine loans, the repayment of which is subordinated
to senior mortgage loans, are secured by a second lien mortgage and/or a pledge
of the ownership interests of the borrower. Mezzanine loans generally afford a
relatively higher yield and entail greater risks than senior mortgage loans.
Senior mortgage loans comprised 85% and mezzanine loans comprised 15% of
AMRESCO's loan investment portfolio at June 30, 1999, based on committed amount.
AMRESCO's existing mortgage loan commitments range in size from $0.5 million to
$45 million. AMRESCO's manager, on behalf of AMRESCO, is currently targeting
loans ranging in size from $5 million to $20 million.
AMRESCO believes that its relationship with AMRESCO, INC. and its
affiliates and, in particular, Holliday Fenoglio Fowler, one of the largest
commercial mortgage bankers in the United States in 1998 based on origination
volume, provides AMRESCO with a competitive advantage in sourcing loan and
equity investment opportunities. During 1998, Holliday Fenoglio Fowler sourced
45% of AMRESCO's loan and equity real estate commitments based on commitment
amount. In addition to the product sourcing capabilities of Holliday Fenoglio
Fowler, AMRESCO's manager relies upon its numerous business relationships,
referral business and repeat customers in generating investment opportunities
for consideration by AMRESCO.
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Loan structures vary as they are usually customized to fit the
characteristics and purpose of the loans. Generally, AMRESCO's loans have terms
ranging from one to three years. Many of AMRESCO's loans, particularly
construction and rehabilitation loans, provide for initial investments followed
by subsequent advances as costs are incurred by the borrower. Typically, loans
provide for a fixed pay rate and fixed accrual rate of interest and, in some
cases, may also provide for profit participation above the contractual accrual
rate. The incremental interest earned at the accrual rate is often times not
payable by the borrower until maturity of the loan. At June 30, 1999, AMRESCO
had 16 loan investments which accrue interest at accrual rates ranging from
10.5% to 16% per year. Three of the 16 loan investments provide AMRESCO with the
opportunity for profit participation in excess of the contractual accrual rates.
AMRESCO is obligated to fund its loan commitments to the extent that the
borrowers are not in violation of any of the conditions established in the loan
agreements. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee if amounts are repaid
to AMRESCO during the specified prepayment lock-out periods. A portion of the
commitments could expire without being drawn upon. Therefore, the total
commitment amounts do not necessarily represent future cash requirements. Until
the investment portfolio becomes larger, geographic and product type
concentrations are expected. As AMRESCO's loan portfolio grows, AMRESCO's
manager intends to seek further geographic and product type diversification.
AMRESCO typically originates its loan investments. It may, however, also
purchase mortgage loans from other parties, including AMRESCO, INC. or its
affiliates. To the extent AMRESCO acquires mortgage loans from these related
parties, the acquisitions are made in strict conformance with AMRESCO's policies
regarding transactions with related parties. During the period from May 12,
1998, the date of inception of AMRESCO's operations, through June 30, 1999,
AMRESCO acquired 10 loans from these related parties for a total purchase price
of $39.7 million. Currently, any proposed acquisition or sale of assets
involving AMRESCO, INC. or its affiliates requires the prior approval of a
majority of the independent trust managers of the investment committee of the
board of trust managers.
The underwriting process for loans takes into account special risks
associated with mid- to high-yield lending. These risks include the following:
- an in-depth assessment of the character, experience (including operating
history) and financial capacity of the borrower or the borrowers'
principal(s);
- a detailed analysis of the property or project being financed; and
- an analysis of the market in which the borrower operates, including
competition, market share data, comparable properties, absorption rates
and market rental rates as well as general information such as
population, employment trends, median income and demographic data.
Prior to closing, AMRESCO's manager will either obtain a Phase I
environmental assessment or review a recently obtained Phase I environmental
assessment and at least one of the manager's representatives will perform a site
inspection. Sources of information which may be examined if available during the
due diligence process include the following:
- current and historical operating statements;
- existing or new appraisals;
- sales comparables;
- industry statistics and reports regarding operating expenses;
- existing leases and market rates for comparable leases; and
- deferred maintenance observed during site inspections and described in
structural and engineering reports.
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Using all of the information obtained during the due diligence process,
AMRESCO's manager then develops projections of net operating income and cash
flows to determine current and expected exit values, as well as appropriate
lending limits and pricing given the risks inherent in each transaction.
Commercial mortgage-backed securities
AMRESCO acquires primarily non-investment grade classes of CMBS from
various sources. In most commercial mortgage securitizations, a series of CMBS
is issued in multiple classes in order to obtain investment-grade credit ratings
for the senior classes (i.e., those with credit ratings of "BBB," "A," "AA" or
"AAA") in order to increase their marketability. The non-investment grade, or
subordinated classes, typically include classes with ratings below investment
grade "BBB." These subordinated classes also typically include an unrated
higher-yield, credit-support class, which generally is required to absorb the
first losses on the underlying mortgage loans. Each class of CMBS may be issued
with a specific fixed rate or variable coupon rate and has a stated maturity or
final scheduled distribution date. As the subordinated classes provide credit
protection to the senior classes by absorbing losses from underlying mortgage
loan defaults or foreclosures, they carry more credit risk than the senior
classes. Subordinated classes are generally issued at a discount to their
outstanding face value and therefore generally afford a higher yield than the
senior classes.
AMRESCO's investments in CMBS are classified as available for sale and are
carried at estimated fair value as determined by quoted market rates when
available or by discounting estimated cash flows at current market rates. Any
unrealized gains or losses are excluded from earnings and reported as a
component of accumulated other comprehensive income or loss in shareholders'
equity.
To date, AMRESCO has not directly acquired any unrated CMBS although it may
do so in the future. In early 1999, AMRESCO, through a minority-owned
partnership, acquired a 5% interest in unrated CMBS, which were purchased by the
partnership for $830,000. Although AMRESCO is not prohibited from investing in
residential mortgage-backed securities, it has no present intention to do so.
AMRESCO may also invest in other mortgage derivative products, such as interest
only and principal only securities. Although AMRESCO does not currently intend
to acquire any of these securities directly, AMRESCO, through a minority-owned
partnership, acquired a 5% interest in interest only securities in early 1999.
The interest only securities were acquired by the partnership at a total cost of
$625,000.
There are numerous characteristics to consider when evaluating CMBS for
purchase. Therefore, each CMBS is analyzed individually, taking into
consideration both objective data as well as subjective analysis. AMRESCO's
manager's due diligence may include an analysis of the following:
- the underlying collateral pool;
- the prepayment and default history of the mortgage loans previously
originated by the originator;
- cash flow analyses under various prepayment and interest rate scenarios
(including sensitivity analyses); and
- an analysis of various default scenarios.
Which of these characteristics, if any, are important and how important
each characteristic may be to the evaluation of a particular CMBS depends on the
individual circumstances. AMRESCO's manager uses sampling and other analytical
techniques to determine on a loan-by-loan basis which mortgage loans will
undergo a full-scope review and which mortgage loans will undergo a more
streamlined review process. Although the choice is a subjective one,
considerations that influence the choice for scope of review often include
mortgage loan size, debt service coverage ratio, loan-to-value ratio, mortgage
loan maturity, lease rollover, property type and geographic location. A
full-scope review may include, among other factors, the following:
- a site inspection;
- tenant-by-tenant rent roll analysis;
- review of historical income and expenses for each property, securing the
mortgage loan;
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- a review of major leases for each property, if available;
- recent appraisals, if available;
- engineering and environmental reports, if available; and
- the price paid for similar CMBS by unrelated third parties in arm's
length purchases and sales, if available, or a review of broker price
opinions if the price paid by a bona fide third party for similar CMBS is
not available and price opinions are available.
For those mortgage loans that are selected for the more streamlined review
process, the manager's evaluation may include the following:
- a review of the property operating statements;
- summary loan level data;
- third party reports; and
- a review of prices paid for similar CMBS by bona fide third parties or
broker price opinions, each as available.
If the manager's review of this information does not reveal any unusual or
unexpected characteristics or factors, no further due diligence will be
performed.
Equity investments in real estate
AMRESCO has made and intends to continue to make equity investments in real
estate. These investments may be made directly by AMRESCO or through
partnerships and/or joint ventures. AMRESCO expects to acquire real estate or
interests in real estate on a leveraged basis that will provide sufficient cash
flow to provide a return on its investment after debt service within AMRESCO's
target parameters. The tax depreciation associated with these investments is
used to offset the non-cash accrual of interest on some loan investments and
original issue discount generally associated with CMBS.
AMRESCO has entered into a master partnership that, through individual
subsidiary partnerships, has acquired interests in five newly constructed,
grocery-anchored shopping centers in the Dallas/Fort Worth, Texas area. AMRESCO
holds a 99.5% interest in the master partnership. As of June 30, 1999, the
master partnership had acquired interests in the first four of these centers. In
August 1999, the fifth center was acquired. Information about these centers is
summarized below.
<TABLE>
<CAPTION>
PERCENT LEASED AS
ACQUISITION DATE LOCATION SQUARE FEET OF JUNE 30, 1999
- ---------------- ------------------- ----------- -----------------
<S> <C> <C> <C>
October 1998 Arlington, Texas 85,730 100%
April 1999 Flower Mound, Texas 86,516 97%
April 1999 Grapevine, Texas 85,611 98%
April 1999 Fort Worth, Texas 61,440 94%
August 1999 Richardson, Texas 87,540 n/a
</TABLE>
The approximate purchase price of the Arlington center was $10.3 million.
In connection with this acquisition, the subsidiary partnership obtained a $7.5
million non-recourse loan from an unaffiliated third party. Immediately prior to
the closing, AMRESCO contributed $3.4 million of capital to the master
partnership which, in turn, was then contributed to the subsidiary partnership.
The proceeds from this contribution were used, in part, to fund the balance of
the purchase price and to pay partnership formation expenses and costs
associated with the non-recourse financing.
The approximate aggregate purchase price of the Flower Mound, Grapevine and
Fort Worth centers was $30.2 million. In connection with these acquisitions, the
three subsidiary partnerships which hold title to these assets obtained
non-recourse financing totaling $19.5 million from an unaffiliated third party.
Immediately prior to the closing, AMRESCO contributed $11.4 million of capital
to the master partnership. The master
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partnership, in turn, contributed these funds to the subsidiary partnerships.
The proceeds from this contribution were used to fund the balance of the
purchase price, to pay costs associated with the financing and to provide
initial working capital to the subsidiary partnerships.
The approximate purchase price of the Richardson center was $10.7 million.
In connection with this acquisition, the subsidiary partnership obtained a $7.6
million non-recourse loan from an unaffiliated third party. Immediately prior to
the closing, AMRESCO contributed $3.4 million of capital to the master
partnership which, in turn, was then contributed to the subsidiary partnership.
The proceeds from this contribution were used, in part, to fund the balance of
the purchase price, to pay costs associated with the financing and to provide
initial working capital to the subsidiary partnership.
AMRESCO does not operate the real estate owned by the subsidiary
partnerships, but rather it relies upon a qualified and experienced real estate
operator unaffiliated with AMRESCO. Future investments will be similarly managed
by experienced third party operators.
In considering potential equity investments in real estate, AMRESCO's
manager performs due diligence substantially similar to that described above in
connection with the acquisition or origination of loan investments.
COMPETITION
AMRESCO competes in the acquisition and origination of investments with a
significant number of other REITs, investment banking firms, savings and loan
associations, banks, mortgage bankers, insurance companies, mutual funds, credit
companies and other entities. Some of these entities have greater financial
resources than AMRESCO. In addition, there are several REITs similar to AMRESCO,
and others may be organized in the future. The effect of the existence of
additional investors may be to increase competition for the available supply of
targeted investments. The availability of targeted investments is dependent
upon, among other things, the size of and level of activity in the commercial
real estate lending market. These depend on various factors, including the level
of interest rates, regional and national economic conditions and inflation and
deflation in commercial real estate values. To the extent AMRESCO is unable to
acquire and maintain a sufficient volume of investments, AMRESCO's income and
AMRESCO's ability to make distributions to its shareholders will be adversely
affected.
In addition, AMRESCO, to the extent it owns commercial real estate directly
or through investments in joint ventures and/or partnerships, and the owners of
real properties securing AMRESCO's mortgage loans compete with numerous other
owners and operators of similar properties. These include commercial developers,
real estate companies and REITs. Many of these entities may have greater
financial and other resources and more operating experience than AMRESCO or the
owners of real properties securing AMRESCO's mortgage loans, as applicable.
AMRESCO expects that many of the real properties which may be owned by it and
those owned and operated by borrowers under its mortgage loans will be located
in markets or submarkets in which significant construction or rehabilitation of
properties may occur. This could result in overbuilding in these markets or
submarkets. Any overbuilding could adversely impact the ability of AMRESCO to
lease its properties and the ability of the borrowers under AMRESCO's mortgage
loans to lease their respective properties and repay their mortgage loans. This
could, in turn, adversely impact AMRESCO's income and its ability to make
distributions to its shareholders.
ENVIRONMENTAL MATTERS
Under existing and future environmental legislation, a current or previous
owner or operator of real estate may be liable for the remediation of hazardous
or toxic substances on, under or in the real estate. Accordingly, the value and
operating costs of real estate acquired by AMRESCO may be affected by the
obligation to pay for the cost of complying with this legislation. As a part of
the manager's due diligence activities, Phase I environmental assessments are
obtained on all real estate to be acquired by AMRESCO and on the real estate
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collateralizing its loan investments. The purpose of Phase I environmental
assessments is to identify potential environmental contamination that is made
apparent from the following:
- historical reviews of the real estate;
- reviews of public records;
- preliminary, non-invasive investigations of the sites and surrounding
real estate; and
- screening of relevant records for the presence of hazardous substances,
toxic substances and underground storage tanks.
AMRESCO cannot assure you that these assessments will reveal all existing
or potential environmental risks and liabilities. AMRESCO can also not assure
you that there will be no unknown or material environmental obligations or
liabilities.
Based on these assessments, AMRESCO believes that its real estate
investments and the real estate underlying its loan investments are in
compliance, in all material respects, with all federal, state and local
ordinances and regulations regarding hazardous or toxic substances and other
environmental matters, the violation of which could have a material adverse
effect on AMRESCO or the borrowers, as applicable. AMRESCO has not been notified
by any governmental authority of any material noncompliance, liability or claim
relating to hazardous or toxic substances or other environmental matters in
connection with any of its owned properties. AMRESCO is not aware of any
noncompliance with respect to the real estate collateralizing its loan
investments.
INDUSTRY TRENDS
Although it began on a positive note, 1998 was an extremely difficult year
for REITs in general and mortgage REITs in particular. Even though real estate
fundamentals generally remain strong in most markets, the poor price performance
of REIT stocks appears to have begun early in the year with the departure of
many growth and momentum investors from this market sector. Downward pressure on
REIT stock prices adversely affected the ability of REITs to access the capital
markets for new equity. REITs are limited in their ability to grow through
retained earnings because they are required to distribute at least 95% of their
REIT taxable income annually. In order to continue to grow its asset base, a
REIT must raise new capital either in the form of equity or debt. Mortgage REIT
stock prices were further jolted in August 1998 by Russia's default on its debt
payments and in October 1998 by the Chapter 11 bankruptcy filing of CRIIMI MAE
Inc., a mortgage REIT principally focused on subordinated CMBS.
In addition to limitations on access to additional equity, the Office of
the Comptroller of Currency warned federally regulated lenders about its concern
over the amount of debt, particularly unsecured debt, being extended to REITs.
This appears to have caused banks to reduce their level of lending to the REIT
industry and other lenders followed suit. The ability to raise new capital
through the issuance of public debt or preferred stock has also been limited due
to many of the factors affecting new equity issues. It was further impacted by a
flight on the part of bond investors to U.S. treasury bonds, which was triggered
by Russia's debt default. The result was a large increase in the premium over
U.S. treasury bonds required by investors on other types of bonds through all
ratings classifications. This bond spread widening not only increased the cost
of borrowing, but had a severe negative impact on commercial mortgage REITs that
were holding large portfolios of commercial mortgage-backed securities because
the value of those securities declined significantly and in some cases
precipitated large margin calls.
AMRESCO expects that the capital markets for additional equity will re-open
at some point in the future, but that the current conditions will prevail for an
indeterminate time. In the interim, AMRESCO's growth will be limited by the
availability under its credit facilities and to the borrowing restrictions
imposed by its lenders.
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PROPERTIES
AMRESCO does not maintain a separate office. It relies exclusively on the
facilities of its manager, AMREIT Managers, L.P., an affiliate of AMRESCO, INC.
The executive offices of AMRESCO, AMREIT Managers and AMRESCO, INC. are located
at 700 North Pearl Street, Suite 2400, Dallas, Texas 75201.
AMRESCO, through a majority-owned partnership, holds an interest in five
shopping centers in the Dallas/Fort Worth, Texas area. These properties are
described above under "Investment activities -- Equity investments in real
estate."
AMRESCO's unconsolidated taxable subsidiary indirectly holds interests in a
partnership which owns a 909,000 square foot mixed-use property in Columbus,
Ohio. The partnership interests were acquired through foreclosure on February
25, 1999. The property is held subject to a $17 million first lien mortgage
provided by an unaffiliated third party and a $6.8 million second lien mortgage
provided by one of AMRESCO's wholly-owned subsidiaries. As of June 30, 1999, the
property was 79% leased.
Effective March 2, 1999, AMRESCO acquired a 49% limited partner interest in
a partnership which owns a 116,000 square foot office building in Richardson,
Texas. The property is encumbered by a first lien mortgage with an outstanding
balance of $13.8 million as of June 30, 1999. As of June 30, 1999, the property
was 99% leased.
LEGAL PROCEEDINGS
AMRESCO is not a party to any material pending legal proceedings.
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AMRESCO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
AMRESCO was organized on January 6, 1998 as a real estate investment trust
under the laws of the State of Texas. AMRESCO was formed to take advantage of
mid- to high-yield lending and investment opportunities in real estate-related
assets, including the following:
- various types of commercial mortgage loans, including participating
loans, mezzanine loans, acquisition loans, construction loans,
rehabilitation loans and bridge loans;
- commercial mortgage-backed securities, commonly referred to as CMBS;
- commercial real estate; and
- equity investments in joint ventures and/or partnerships.
AMRESCO believes it has operated and it intends to continue to operate in a
manner so as to continue to qualify as a REIT under the Internal Revenue Code.
As a result, AMRESCO will generally not be subject to federal income tax on that
portion of its ordinary income or capital gain that is currently distributed to
its shareholders if it distributes to shareholders at least 95% of its annual
REIT taxable income and it complies with a number of other organizational and
operational requirements. These requirements concern, among other things, the
ownership of its outstanding common shares, the nature of its assets and the
sources of its income.
Subject to the direction and oversight of the board of trust managers,
AMRESCO's day-to-day operations are managed by AMREIT Managers, L.P., an
affiliate of AMRESCO, INC.
AMRESCO was initially capitalized through the sale of 100 common shares to
AMRESCO, INC. on February 2, 1998. AMRESCO commenced operations on May 12, 1998.
This was concurrent with the completion of AMRESCO's initial public offering of
9,000,000 common shares and private placement of 1,000,011 common shares with
AMREIT Holdings, Inc., a wholly-owned subsidiary of AMRESCO, INC. To date,
AMRESCO's investment activities have been focused in three primary areas: loan
investments, CMBS and equity investments in real estate. AMRESCO expects that
its mid- to high-yield loan investments and, to a lesser extent, equity
investments in real estate, will continue to comprise a substantial portion of
its investment portfolio. Similarly, AMRESCO expects to continue to have 15% to
20% of its invested capital, comprising equity and proceeds from its two credit
facilities, allocated to CMBS.
AMRESCO's investment activities increased during the second quarter of 1999
following the completion in early May of modifications to AMRESCO's line of
credit facility. During the quarter, AMRESCO closed one new loan investment
consisting of a $15.3 million commitment, of which $12.9 million was funded
initially. AMRESCO also approved two additional loan commitments. One of the two
approved loans closed in late July. Currently, AMRESCO does not expect the other
loan to close. Additionally, AMRESCO advanced $17.4 million under structured
loan commitments it had closed on or prior to December 31, 1998. Loan repayments
during the three months ended June 30, 1999 totaled $6.8 million. During the six
months ended June 30, 1999, advances under structured loan investments totaled
$48.1 million, while repayments totaled $19.4 million. Finally, AMRESCO's
aggregate capital contributions to partnerships which hold title to real estate
increased from $4.8 million at March 31, 1999 to $16.2 million at June 30, 1999.
This was as a result of AMRESCO's acquisition through a majority-owned
partnership of interests in three newly constructed, grocery-anchored shopping
centers in the Dallas/Fort Worth, Texas area. No commercial mortgage-backed
securities were acquired during the quarter ended June 30, 1999.
AMRESCO may experience high volatility in financial statement net income
and tax basis income from quarter to quarter and year to year. This volatility
is primarily as a result of fluctuations in interest rates, borrowing costs,
reinvestment opportunities, prepayment rates and favorable and unfavorable
credit related events such as profit participations or credit losses.
Additionally, AMRESCO's accounting for some real estate loan arrangements as
either real estate or joint venture investments may contribute to volatility in
financial
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statement net income. Because changes in interest rates may significantly affect
AMRESCO's activities, AMRESCO's operating results will depend, in large part,
upon the ability of AMRESCO to manage its interest rate, prepayment and credit
risks, while maintaining its status as a REIT.
The following discussion of results of operations and liquidity and capital
resources should be read in conjunction with AMRESCO's consolidated financial
statements and the notes thereto included elsewhere in this document.
RESULTS OF OPERATIONS
Three and six months ended June 30, 1999
Under generally accepted accounting principles, net income for the three
and six months ended June 30, 1999 was $2,707,000 and $5,051,000, respectively,
or $0.27 and $0.50 per common share, respectively. AMRESCO's primary sources of
revenue for the three and six months ended June 30, 1999, totaling $5,743,000
and $10,216,000, respectively, were as follows:
- $3,996,000 and $7,160,000, respectively, from loan investments. As some
of AMRESCO's loan investments are accounted for as either real estate or
joint venture investments for financial reporting purposes, these
revenues are included in the consolidated statement of income for the
three and six months ended June 30, 1999 as follows: interest income on
mortgage loans - $3,878,000 and $6,935,000, respectively; and operating
income from real estate - $118,000 and $225,000, respectively. The loan
investments earn interest at accrual rates ranging from 10.5% to 16% per
annum as of June 30, 1999.
- $934,000 and $1,848,000, respectively, from investments in CMBS.
- $713,000 and $952,000, respectively, of operating income from real estate
owned by AMRESCO (through a majority-owned partnership).
Additionally, AMRESCO realized a gain of $584,000 during the three months
ended March 31, 1999 in connection with the repayment of an ADC loan
arrangement. The gain was comprised principally of interest income earned at the
accrual rate over the life of the loan investment. No gains were realized during
the three months ended June 30, 1999.
AMRESCO incurred expenses of $3,036,000 and $5,749,000, respectively,
during the three and six months ended June 30, 1999, consisting primarily of the
following:
- $415,000 and $1,003,000, respectively, of management fees, including
$511,000 and $958,000, respectively, of base management fees payable to
the manager pursuant to the management agreement and $(96,000) and
$45,000, respectively, of expense associated with compensatory options
granted to the manager. No incentive fees were incurred during either
period.
- $259,000 and $782,000, respectively, of general and administrative costs,
including $0 and $200,000, respectively, of resolution costs associated
with a non-performing loan, $103,000 and $199,000, respectively, for
professional services, $58,000 and $117,000, respectively, for directors'
and officers' insurance, $70,000 and $104,000, respectively, of
reimbursable costs pursuant to the management agreement, $(47,000) and
$(20,000), respectively, related to compensatory options granted to some
employees of AMRESCO, INC. and $23,000 and $45,000, respectively, related
to restricted stock awards to AMRESCO's independent trust managers.
- $1,069,000 and $1,658,000, respectively, of interest expense (net of
capitalized interest totaling $235,000 and $386,000, respectively)
associated with AMRESCO's credit facilities and four non-recourse loans
secured by real estate.
- $438,000 and $1,180,000, respectively, of provision for loan losses.
During the three months ended March 31, 1999, AMRESCO charged-off
$500,000 against an existing allowance for losses related to the
non-performing loan referred to above. This loan is discussed further in
this section of Manage-
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ment's Discussion and Analysis of Financial Condition and Results of Operations
under the sub-heading "Loan investments."
Year ended December 31, 1998
AMRESCO commenced operations on May 12, 1998. Under generally accepted
accounting principles, net income for the period from May 12, 1998 through
December 31, 1998 was $3,952,000, or $0.39 per common share. AMRESCO had no
income during the period from February 2, 1998, the date of initial
capitalization, through May 11, 1998. AMRESCO's primary sources of revenue for
the period from May 12, 1998 through December 31, 1998, totaling $8,745,000,
were as follows:
- $4,834,000 from loan investments. Some of AMRESCO's loan investments are
accounted for as either real estate or joint venture investments for
financial reporting purposes. Therefore, these revenues are included in
the consolidated statement of income as follows:
(a) interest income on mortgage loans -- $4,278,000;
(b) operating income from real estate -- $211,000; and
(c) equity in earnings of other real estate ventures -- $345,000. The
loan investments earned interest at accrual rates ranging from 10.5%
to 16% per year as of December 31, 1998.
- $1,924,000 of other interest income generated primarily from the
temporary investment of proceeds from AMRESCO's initial public offering
and the private placement of shares that occurred at that time.
- $1,563,000 from investments in commercial mortgage-backed securities.
- $181,000 of operating income from real estate owned by AMRESCO through a
majority-owned partnership.
Revenue increased during the period from May 12, 1998 through December 31,
1998 as funds from the initial public offering and the private placement were
invested in real estate related assets and AMRESCO began to utilize its
financing facilities.
AMRESCO incurred expenses of $4,793,000 for the period from May 12, 1998
through December 31, 1998, consisting primarily of the following:
- $1,187,000 of management fees, including $835,000 of base management fees
payable to the manager under the management agreement and $352,000 of
expense associated with compensatory options granted to the manager. No
incentive fees were incurred during the period.
- $1,294,000 of general and administrative costs, including the following:
(a) $330,000 of due diligence costs associated with an abandoned
transaction;
(b) $396,000 for professional services;
(c) $162,000 for directors' and officers' insurance;
(d) $140,000 of reimbursable costs under the management agreement;
(e) $68,000 related to compensatory options granted to some employees
of AMRESCO, INC.;
(f) $56,000 related to restricted stock awards to AMRESCO's independent
trust managers; and
(g) $142,000 related to other miscellaneous expenses.
- $567,000 of interest expense, net of capitalized interest totaling
$57,000, associated with AMRESCO's credit facilities and a non-recourse
loan secured by real estate. Substantially all of this interest expense
was incurred during the fourth quarter of 1998 as AMRESCO began to
leverage its investments on September 30, 1998.
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<PAGE> 110
- $1,368,000 of provision for loan losses. AMRESCO did not incur any
realized loan losses during the period. One loan, representing 5% of
AMRESCO's outstanding loan portfolio, was over 30 days past due as of
December 31, 1998. This loan is discussed further in this section of
Management's Discussion and Analysis of Financial Condition and Results
of Operations of AMRESCO under the sub-heading "Loan investments."
Distributions
AMRESCO's policy is to distribute at least 95% of its REIT taxable income
to shareholders each year. To that end, dividends are paid quarterly. Tax basis
income differs from income reported for financial reporting purposes. This is
due primarily to differences in methods of accounting for acquisition,
development and construction loan arrangements and stock-based compensation
awards and the nondeductibility, for tax purposes, of AMRESCO's loan loss
reserve. As a result of these accounting differences, net income under generally
accepted accounting principles is not necessarily an indicator of distributions
to be made by AMRESCO.
To date, the following dividends have been declared (dollars in thousands,
except per share amounts):
<TABLE>
<CAPTION>
DIVIDEND
PER
DIVIDEND COMMON
DECLARATION DATE RECORD DATE PAYMENT DATE PAID SHARE
----------------- ----------------- ----------------- -------- --------
<S> <C> <C> <C> <C> <C>
1998
Second Quarter
(commencing
May 12)............ July 23, 1998 July 31, 1998 August 17, 1998 $1,001 $0.10
Third Quarter........ October 22, 1998 October 31, 1998 November 16, 1998 2,401 0.24
Fourth Quarter....... December 15, 1998 December 31, 1998 January 27, 1999 4,002 0.40
------ -----
$7,404 $0.74
====== =====
1999
First Quarter........ April 22, 1999 April 30, 1999 May 17, 1999 $3,602 $0.36
Second Quarter....... July 22, 1999 July 31, 1999 August 16, 1999 3,905 0.39
------ -----
$7,507 $0.75
====== =====
</TABLE>
For federal income tax purposes, all 1998 dividends were reported as
ordinary income to AMRESCO's shareholders. Dividends declared to date in 1999
should be treated as ordinary income to AMRESCO's shareholders. Although the
dates may change, AMRESCO has announced its third and fourth quarter 1999
dividend payment schedule as follows:
<TABLE>
<CAPTION>
EXPECTED EXPECTED EXPECTED
DECLARATION DATE RECORD DATE PAYABLE DATE
----------------- ----------------- -----------------
<S> <C> <C> <C>
Third Quarter........... October 21, 1999 October 31, 1999 November 15, 1999
Fourth Quarter.......... December 15, 1999 December 31, 1999 January 27, 2000
</TABLE>
Bases of comparison of periods
At June 30, 1998, AMRESCO had invested $52.0 million of the $139.7 million
of net proceeds received from the issuance of its common shares in structured
finance arrangements and commercial mortgage-backed securities. The remaining
net proceeds were fully invested during the third quarter of 1998. As of June
30, 1998, AMRESCO had advanced $36.7 million under seven commercial mortgage
loan commitments. During its initial 50-day period of operations, AMRESCO,
either directly or through its unconsolidated taxable subsidiary, acquired three
commercial mortgage-backed securities at a total purchase price of $15.3
million. The following comparisons reflect the fact that during the entire three
and six months ended June 30, 1999, AMRESCO's net proceeds from the issuance of
its common shares were fully invested and it and its consolidated partnerships
had outstanding borrowings under several credit facilities. By contrast, during
the
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three months ended June 30, 1998 and the period from February 2, 1998, the date
that AMRESCO was initially capitalized, through June 30, 1998, AMRESCO had
operations for only 50 days (from May 12, 1998 through June 30, 1998). During
this 50-day period, AMRESCO had not fully invested its net proceeds from the
issuance of its common shares nor had it begun to borrow under its credit
facilities.
Three months ended June 30, 1999 compared to three months ended June 30,
1998
AMRESCO's revenues increased 355%, from $1,261,000 to $5,743,000, due
primarily to increases in interest income derived from mortgage loan
investments, income from commercial mortgage-backed securities and operating
income from real estate. As of June 30, 1998, AMRESCO had not made any equity
investments in real estate. The higher revenues were attributable to new loan
originations and acquisitions, acquisitions of CMBS and real estate, and
additional fundings under commitments which were closed during AMRESCO's initial
50-day period of operations. During the three months ended June 30, 1999, the
average book value of AMRESCO's assets, excluding cash and cash equivalents,
approximated $205 million. Excluding cash and cash equivalents, AMRESCO had no
assets on May 11, 1998. By June 30, 1998, AMRESCO had accumulated assets with a
book value of approximately $52.0 million, excluding cash and cash equivalents
of $90.2 million. Interest income on short-term investments declined from the
comparable period in 1998 as the uninvested portion of the net proceeds received
from the issuance of AMRESCO's common shares were temporarily invested during
this period in short-term investments.
AMRESCO's expenses increased 502%, from $504,000 to $3,036,000, due
primarily to the fact that AMRESCO incurred borrowing costs (including
participating interest in mortgage loans) during the three months ended June 30,
1999. During the comparable period in 1998, no such costs were incurred.
Additionally, base management fees were higher as a result of AMRESCO's larger
asset base upon which the fee is calculated. AMRESCO's loan loss provision was
higher as a result of significantly higher loan balances. Finally, depreciation
expense increased as a result of several real estate acquisitions which were
closed in October 1998 and April 1999.
For the reasons cited above, income before gains and net income increased
258%, from $757,000 to $2,707,000.
Six months ended June 30, 1999 compared to period from February 2, 1998
(date of initial capitalization) through June 30, 1998
For the reasons described above, AMRESCO's revenues increased 710%, from
$1,261,000 to $10,216,000, and its expenses increased 1,040%, from $504,000 to
$5,749,000. Income before gains increased 490%, from $757,000 to $4,467,000, and
net income increased 567%, from $757,000 to $5,051,000. In addition to the
factors cited above, net income increased partially as a result of a gain
realized in connection with the repayment of an ADC loan arrangement.
Loan investments
During the three months ended June 30, 1999, AMRESCO originated one new
loan, a $15.3 million first lien commitment. The initial advance under this loan
totaled approximately $12.9 million. Additionally, during this period two of
AMRESCO's loans, totaling $5.1 million in then outstanding balances, were fully
repaid.
During the six months ended June 30, 1999, four of AMRESCO's loans were
fully repaid, one loan origination was closed and one loan was sold to AMRESCO
Commercial Finance, Inc., an affiliate of AMRESCO, INC. Additionally, one loan
was reclassified, net of a $500,000 charge-off, to investment in unconsolidated
subsidiary following the subsidiary's acquisition through foreclosure on
February 25, 1999 of the partnership interests of one of AMRESCO's borrowers. In
connection with the loan sale, amounts due to AMRESCO Commercial Finance were
reduced by $2.0 million. As of June 30, 1999, amounts due to AMRESCO Commercial
Finance totaled $5.4 million. The proceeds from the four loan repayments and the
loan sale totaled $22.3 million, including accrued interest, a profit
participation and a prepayment fee aggregating $1.0 million. Principal
collections on some of AMRESCO's other loan investments totaled $1.7
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<PAGE> 112
million during the three months ended June 30, 1999. These collections totaled
$2.7 million during the six months ended June 30, 1999.
During the three months ended June 30, 1999, AMRESCO advanced $17.4 million
under loan commitments it had closed on or prior to December 31, 1998. During
the six months ended June 30, 1999, AMRESCO advanced $35.2 million under these
loan commitments.
Excluding the loan classified as an investment in unconsolidated
subsidiary, AMRESCO had 16 loans representing $191.4 million in aggregate
commitments as of June 30, 1999. As of June 30, 1999, $152.3 million had been
advanced under these facilities. A portion of the commitments may expire without
being drawn upon. Therefore, the total commitment amounts do not necessarily
represent future cash requirements. After giving effect to AMRESCO Commercial
Finance's economic interest, commitments totaled approximately $185.7 million
and amounts outstanding totaled approximately $147.6 million at June 30, 1999.
At June 30, 1999, AMRESCO Commercial Finance's contingent obligation for
additional advances which may be required to be made under some of AMRESCO's
loans approximated $990,000. Based upon the amounts outstanding under these
facilities and after giving effect to the contractual right sold to AMRESCO
Commercial Finance, AMRESCO's portfolio of commercial mortgage loans had a
weighted average interest pay rate of 10.6% and a weighted average interest
accrual rate of 11.8% as of June 30, 1999. Five of the 16 loans provide for
profit participation above the contractual accrual rate. Two of these five
facilities are included in the pool of loans in which AMRESCO Commercial Finance
has a contractual right to collect excess proceeds.
AMRESCO's loan investments are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING
AT INTEREST
DATE OF INITIAL PROPERTY COLLATERAL COMMITMENT JUNE 30, PAY
INVESTMENT SCHEDULED MATURITY LOCATION TYPE POSITION AMOUNT 1999(C) RATE
- --------------- ------------------ -------------------- ----------------- ---------------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien $ 14,700 $ 13,032 10.0%
June 1, 1998 June 1, 2001 Houston, TX Office First Lien 11,800 10,353 12.0%
June 12, 1998 June 30, 2000 Pearland, TX Apartment First Lien 12,827 10,987(b) 10.0%
June 17, 1998 June 30, 2000 San Diego, CA R&D/Bio-Tech First Lien 5,560 4,570(b) 10.0%
June 19, 1998 June 18, 2000 Houston, TX Office First Lien 24,000 14,016(b) 12.0%
June 22, 1998 June 19, 2000 Wayland, MA Office First Lien 45,000 36,951 10.5%
July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests 10,068 7,017(a) 10.0%
July 2, 1998 June 30, 2000 Washington, D.C Office First Lien 7,000 5,882 10.5%
July 10, 1998 July 31, 2000 Pasadena, TX Apartment First Lien 3,350 2,900 10.0%
Sept. 1, 1998 Feb. 28, 2001 Los Angeles, CA Mixed Use First Lien 18,419 17,418 10.0%
Sept. 30, 1998 Various San Antonio, TX/ Residential Lots First Lien 8,400 2,536 10.0%
Sunnyvale, TX
Sept. 30, 1998 October 7, 1999 Ft. Worth, TX Apartment Ptrshp Interests 2,650 2,649 10.5%
Sept. 30, 1998 Dec. 31, 1999 Dallas, TX Medical Office First Lien 3,015 2,596 10.0%
Sept. 30, 1998 Sept. 22, 1999 Norwood, MA Industrial/Office First Lien 8,765 8,195 10.0%
October 1, 1998 Dec. 31, 1999 Richardson, TX Office First Lien 567 300 9.3%
May 18, 1999 May 19, 2001 Irvine, CA Office First Lien 15,260 12,883 10.0%
-------- --------
191,381 152,285
AMRESCO Commercial Finance's Economic Interest (5,698) (4,708)
-------- --------
$185,683(d) $147,577(d)
======== ========
<CAPTION>
INTEREST
DATE OF INITIAL ACCRUAL
INVESTMENT RATE
- --------------- --------
<S> <C>
May 12, 1998 12.0%
June 1, 1998 12.0%
June 12, 1998 11.5%
June 17, 1998 13.5%
June 19, 1998 12.0%
June 22, 1998 10.5%
July 1, 1998 15.0%
July 2, 1998 10.5%
July 10, 1998 14.0%
Sept. 1, 1998 12.0%
Sept. 30, 1998 14.0%
Sept. 30, 1998 16.0%
Sept. 30, 1998 13.0%
Sept. 30, 1998 12.5%
October 1, 1998 15.0%
May 18, 1999 12.0%
AMRESCO Commerc
</TABLE>
- ---------------
(a) Accounted for as investment in joint venture for financial reporting
purposes.
(b) Accounted for as real estate for financial reporting purposes.
(c) For all loan investments, payments of interest only are due monthly at the
interest pay rate. All principal and all remaining accrued and unpaid
interest are due at the scheduled maturities of the loans.
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<PAGE> 113
(d) Amounts exclude the loan which was reclassified to investment in
unconsolidated subsidiary during the three months ended March 31, 1999.
AMRESCO provides financing through real estate loan arrangements that,
because of their nature, qualify either as real estate or joint venture
investments for financial reporting purposes (see notes (a) and (b) accompanying
the table above). As of June 30, 1999, loan investments representing
approximately $52,455,000 in total commitments were accounted for as either real
estate or joint venture interests. Approximately $36,590,000 had been advanced
to borrowers under the related agreements. For a discussion of these loan
arrangements, see AMRESCO's 1998 consolidated financial statements and the notes
thereto included elsewhere in this document.
A mezzanine (second lien) loan with an outstanding balance of $6,839,000
and a recorded investment of $6,659,000 was over 30 days past due as of December
31, 1998. The allowance for loan losses related to this investment totaled
$500,000 at December 31, 1998. On February 25, 1999, an unconsolidated taxable
subsidiary of AMRESCO assumed control of the borrower, which is a partnership,
through foreclosure of the partnership interests. In addition to the second lien
mortgage, the property is encumbered by a $17 million first lien mortgage
provided by an unaffiliated third party. During the first quarter of 1999,
AMRESCO charged-off $500,000 against the allowance for losses related to this
investment. If AMRESCO incurs an actual loss on this investment, tax basis
income would be adversely affected.
At June 30, 1999, AMRESCO's commercial mortgage loan commitments were
geographically dispersed as follows:
<TABLE>
<CAPTION>
LOCATION PERCENT
- -------- -------
<S> <C>
Texas........................................ 48%
Massachusetts................................ 27%
California................................... 21%
Washington, D.C. ............................ 4%
</TABLE>
The underlying collateral for these loans at June 30, 1999 was comprised of the
following property types:
<TABLE>
<CAPTION>
PROPERTY TYPE PERCENT
- ------------- -------
<S> <C>
Office....................................... 69%
Multifamily.................................. 10%
Mixed Use.................................... 10%
Residential.................................. 4%
Industrial................................... 3%
R&D/Bio-Tech................................. 3%
Medical Office............................... 1%
</TABLE>
AMRESCO's loan portfolio was comprised of the following loan types as of June
30, 1999:
<TABLE>
<CAPTION>
LOAN TYPE PERCENT
- --------- -------
<S> <C>
Acquisition.................................. 34%
Acquisition/Rehabilitation................... 30%
Construction................................. 29%
Single-Family Lot Development................ 5%
Bridge....................................... 2%
</TABLE>
Eighty-five percent of the portfolio is comprised of first lien loans while
the remaining 15% of the portfolio is secured by second liens and/or partnership
interests. The percentages reflected above are based upon committed loan amounts
and give effect to AMRESCO Commercial Finance's economic interest. Additionally,
the percentages exclude the loan which was reclassified to investment in
unconsolidated subsidiary during the first quarter of 1999.
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<PAGE> 114
Until the loan investment portfolio becomes larger, geographic and product
type concentrations are expected. AMRESCO expects to see more diversification
both geographically and by product type as the loan portfolio grows. Geographic
and product type concentrations present additional risks, particularly if there
is a deterioration in the general condition of the real estate market or in the
sub-market in which the loan collateral is located, or if demand for a
particular product type does not meet expectations due to adverse market
conditions that are different from those projected by AMRESCO. In an effort to
reduce concentration risks, AMRESCO is targeting transactions which will more
broadly diversify its loan investment portfolio.
Commercial mortgage-backed securities
As of June 30, 1999, AMRESCO held five commercial mortgage-backed
securities or CMBS, which were acquired at an aggregate purchase price of $34.5
million. All of these securities were acquired on or before September 1, 1998.
Due to an increase in comparable-term U.S. treasury rates and increasing spreads
in the CMBS market during the three and six months ended June 30, 1999, the
value of AMRESCO's CMBS holdings declined by $1,915,000 and $2,822,000,
respectively. Accordingly, AMRESCO recorded an unrealized loss of $1,915,000 and
$2,822,000, respectively, on its CMBS portfolio during the three and six months
ended June 30, 1999. Additionally, during the three and six months ended June
30, 1999, AMRESCO recorded an unrealized loss of $3,000 and an unrealized gain
of $1,000, respectively, net of tax effects, related to one commercial
mortgage-backed security owned by its unconsolidated taxable subsidiary. The
security held by this subsidiary has an investment rating of "B-."
As these securities are classified as available for sale, the aggregate
unrealized loss was reported as a component of accumulated other comprehensive
income (loss) in shareholders' equity for financial reporting purposes. The
cumulative unrealized losses of $9.3 million have had no impact on AMRESCO's
taxable income or cash flow. Management intends to retain these investments for
the foreseeable future. Excluding the potential tax effects associated with the
security held by AMRESCO's unconsolidated taxable subsidiary, the weighted
average unleveraged yield over the expected life of these investments is
expected to approximate 11.4%.
AMRESCO's direct CMBS investments as of June 30, 1999 are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE TOTAL BASED
SECURITY RATING AMORTIZED COST FAIR VALUE ON FAIR VALUE
- --------------- -------------- ---------- --------------
<S> <C> <C> <C>
BB-................................... $ 4,248 $ 3,429 13%
B..................................... 19,590 15,736 60%
B-.................................... 11,328 6,934 27%
------- ------- ----
$35,166 $26,099 100%
======= ======= ====
</TABLE>
AMRESCO's estimated returns on its CMBS investments are based upon a number
of assumptions, which are subject to a number of business and economic risks and
uncertainties. These include the timing and magnitude of prepayments and credit
losses on the underlying mortgage loans that may result from general and/or
localized real estate market factors. These risks and uncertainties are in many
ways similar to those affecting AMRESCO's commercial mortgage loans. These risks
and uncertainties may cause the actual yields to differ materially from expected
yields.
In February 1999, AMRESCO contributed $0.7 million to a newly formed
investment partnership with Olympus Real Estate Corporation. The partnership,
which is 5% owned by AMRESCO, acquired several classes of subordinated CMBS at
an aggregate purchase price of $12.7 million. Currently, AMRESCO does not expect
to make any additional investments in the partnership.
Equity investments in real estate
On March 2, 1999, AMRESCO acquired a 49% limited partner interest in a
partnership that owns a 116,000 square foot office building in Richardson,
Texas. The property is encumbered by a first lien mortgage
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<PAGE> 115
with an outstanding balance of $13.8 million at June 30, 1999. AMRESCO
contributed $1.4 million of capital to the partnership. On April 30, 1999,
AMRESCO, through a majority-owned partnership, acquired interests in three newly
constructed, grocery-anchored shopping centers in the Dallas/Fort Worth, Texas
area. These properties, which were acquired by three subsidiary partnerships at
an aggregate purchase price of $30.2 million, include an 86,516 square foot
facility in Flower Mound, Texas, a 61,440 square foot facility in Fort Worth,
Texas and an 85,611 square foot facility in Grapevine, Texas. In connection with
these acquisitions, the three title-holding partnerships obtained non-recourse
financing totaling $19.5 million from an unaffiliated third party. Immediately
prior to the closing, AMRESCO contributed $11.4 million of capital to the
partnership. The proceeds from this contribution were used to fund the balance
of the purchase price, to pay costs associated with the financing and to provide
initial working capital to the title-holding partnerships. On August 25, 1999,
AMRESCO, through the majority-owned partnership, acquired an interest in a newly
constructed, 87,540 square foot grocery-anchored shopping center in Richardson,
Texas (a suburb of Dallas, Texas). The property was acquired at a purchase price
of $10.7 million. In connection with this acquisition, the title-holding
partnership obtained non-recourse financing of $7.6 million from an unaffiliated
third party. Immediately prior to the closing, AMRESCO contributed $3.4 million
of capital to the partnership which was used to fund the balance of the purchase
price, to pay costs associated with the financing and to provide initial working
capital to the title-holding partnership. With these transactions, AMRESCO has
now contributed a total of $19.6 million of capital to partnerships that hold
title to real estate. The four non-recourse loans bear interest at 6.68% per
year and require interest only payments through January 1, 2002; thereafter,
interest and principal payments are due based upon 25-year amortization
schedules. The loans mature on January 1, 2014.
Ultimately, AMRESCO expects to construct an additional 62,000 square feet
of side-store space. This development is expected to occur at the four recently
acquired properties. AMRESCO currently anticipates that the development costs
will be financed with an additional $1 million equity contribution from AMRESCO
and $3.8 million of third party financing proceeds.
LIQUIDITY AND CAPITAL RESOURCES
AMRESCO's ability to execute its business strategy, particularly the growth
of its investment and loan portfolio, depends to a significant degree on its
ability to obtain additional capital. AMRESCO's principal demands for liquidity
are cash for operations, including funds for its lending activities and other
investments, interest expense associated with its indebtedness, debt repayments
and distributions to its shareholders. In the near term, AMRESCO's principal
sources of liquidity are the funds available to it under its financing
facilities described below.
Effective as of July 1, 1998, AMRESCO and some of its subsidiaries entered
into a $400 million credit facility with Prudential Securities Credit
Corporation. Subject to Prudential's approval on an asset by asset basis,
borrowings under the facility can be used to finance AMRESCO's structured loan
and equity real estate investments. As a result of the dislocation in the
capital markets in mid to late 1998, Prudential became more restrictive in the
application of its approval rights with respect to financing for new investments
sought by AMRESCO. Accordingly, very few new investments were consummated during
the fourth quarter of 1998 and the first quarter of 1999. Prior to the
modifications discussed below, borrowings under the line of credit bore interest
at rates ranging from LIBOR plus 1% per year to LIBOR plus 2% per year. At
December 31, 1998, $39,338,000 had been borrowed under the line of credit.
To reduce the impact that rising interest rates would have on this floating
rate indebtedness, AMRESCO entered into an interest rate cap agreement which
became effective on January 1, 1999. This agreement had a notional amount of
$33,600,000. This agreement was scheduled to expire on July 1, 2000 but has been
terminated. The agreement entitled AMRESCO to receive from a counterparty the
amounts, if any, by which one month LIBOR exceeded 6.0%. Prior to its
termination, no payments were due from the counterparty as one month LIBOR had
not exceeded 6.0%. On July 2, 1999, the agreement was terminated and replaced
with an interest rate cap agreement which became effective on August 1, 1999.
The new agreement, which was entered into to more closely match the then
outstanding borrowings, has a notional amount of $59,000,000. Until its
expiration on November 1, 2000, the agreement entitles AMRESCO to receive from a
counterparty the amounts, if any, by which one month LIBOR exceeds 6.25%. There
are no margin requirements associated
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<PAGE> 116
with interest rate caps and therefore there is no liquidity risk associated with
this particular hedging instrument.
Effective as of May 4, 1999, AMRESCO and some of its subsidiaries entered
into an amended and restated interim warehouse and security agreement with
Prudential, which amended AMRESCO's existing line of credit. The amended line of
credit includes the following modifications:
- a reduction in the size of the committed facility from $400 million to
$300 million;
- the elimination of the requirement that assets financed with proceeds
from the facility must be securitizable;
- a reduction in the amount of capital AMRESCO must fund with respect to
construction and rehabilitation loans before Prudential is required to
begin advancing funds;
- an extension of the maturity date from July 1, 2000 to November 3, 2000;
and
- the modification to, and addition of, certain sublimits on certain types
of loans and assets.
Under the amended line of credit, borrowings bear interest at LIBOR plus
1.25% per year to the extent borrowings do not exceed AMRESCO's tangible net
worth, as defined in the amended line of credit. Borrowings in excess of
AMRESCO's tangible net worth bear interest at LIBOR plus 3%. Borrowings are
secured by a first lien security interest in all assets funded with proceeds
from the amended line of credit. At June 30, 1999, $59,338,000 had been borrowed
under the amended line of credit. The weighted average interest rate at June 30,
1999 was 6.19%.
Effective as of July 1, 1998, AMRESCO and some of its subsidiaries entered
into a $100 million master repurchase agreement with Prudential Securities
Credit Corporation. Subsequently, Prudential was replaced by Prudential-Bache
International, Ltd., an affiliate of Prudential, as lender. Borrowings under the
repurchase agreement can be used to finance a portion of AMRESCO's portfolio of
mortgage-backed securities. The repurchase agreement provides that AMRESCO may
borrow a varying percentage of the market value of the purchased mortgage-backed
securities, depending on the credit quality of these securities. Borrowings
under the repurchase agreement bear interest at rates ranging from LIBOR plus
0.20% per year to LIBOR plus 1.5% per year depending upon the advance rate and
the credit quality of the securities being financed. Borrowings under the
facility are secured by an assignment to Prudential-Bache of all mortgage-backed
securities funded with proceeds from the repurchase agreement. The repurchase
agreement matures on June 30, 2000. At June 30, 1999, $10,393,000 was
outstanding under the repurchase agreement. At December 31, 1998, there were no
outstanding borrowings under this facility. The weighted average interest rate
at June 30, 1999 was 6.36%.
Under the terms of the amended line of credit and the repurchase agreement,
Prudential Securities Credit Corporation and Prudential-Bache, respectively,
retain the right to mark the underlying collateral to market value. A reduction
in the value of its pledged assets may require AMRESCO to provide additional
collateral or fund margin calls. From time to time, AMRESCO may be required to
provide additional collateral or fund margin calls.
AMRESCO believes that the funds available under its two credit facilities
will be sufficient to meet AMRESCO's liquidity and capital requirements through
the maturity date of the amended line of credit. AMRESCO believes that the
amended line of credit will provide it with more flexibility. AMRESCO also
believes that this, in turn, will allow it to utilize favorable financing terms
in connection with the origination of investments and enable it to resume the
growth of its assets, albeit at a slower rate than was achieved in the second
and third quarters of 1998. AMRESCO, however, remains subject to capital
constraints. In particular, AMRESCO's ability to raise additional capital
through the public equity and debt markets continues to be severely limited.
AMRESCO is continuing its efforts to obtain additional secured loan facilities
that would better match the duration of its assets. Additionally, these efforts
are designed to provide alternatives to the amended line of credit and,
ultimately, to replace it. However, there can be no assurances that AMRESCO will
be able to obtain renewal or additional financing on acceptable terms.
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<PAGE> 117
Management currently believes that the dislocation in the capital markets
will not extend long-term. However, its duration is impossible to predict at
this time. In the near term, AMRESCO believes it will be constrained from
accessing the public equity markets. In addition, new issues of long-term public
unsecured debt will be difficult to obtain and, in any event, will likely not be
available to AMRESCO at a reasonable cost. Additional secured debt beyond
AMRESCO's amended line of credit will also be difficult to obtain and may not be
offered at a reasonable cost. Aside from limiting AMRESCO's access to additional
capital in the near term to fund growth, AMRESCO has been relatively insulated
from the effects of the dislocation in the capital markets. While the market
value of AMRESCO's CMBS holdings has declined, AMRESCO invested in these bonds
for the long term yields that they are expected to produce. Management believes
that the current market dislocation presents significant investment
opportunities for selective acquisitions of CMBS and that the fundamental value
of the real estate mortgages underlying these bonds has been largely unaffected
to date, although general economic conditions could adversely impact real estate
values in the future.
REIT STATUS
Management believes that AMRESCO is operated in a manner that will enable
it to continue to qualify as a REIT for federal income tax purposes. As a REIT,
AMRESCO will not pay income taxes at the trust level on any taxable income which
is distributed to its shareholders, although AMREIT II, Inc., and any other
"non-qualified REIT subsidiaries," may be subject to tax at the corporate level.
Qualification for treatment as a REIT requires AMRESCO to meet specified
criteria, including specified requirements regarding the nature of its
ownership, assets, income and distributions of taxable income. AMRESCO may,
however, be subject to tax at normal corporate rates on any ordinary income or
capital gains not distributed. See "Federal Income Tax Considerations" below.
YEAR 2000 ISSUE
General
Many of the world's computers, software programs and other equipment using
microprocessors or embedded chips currently have date fields that use two digits
rather than four digits to define the applicable year. These computers, programs
and chips may be unable to properly interpret dates beyond the year 1999. For
example, computer software that has date sensitive programming using a two-digit
format may recognize a date using "00" as the year 1900 rather than the year
2000. This inability to properly process dates is commonly referred to as the
"Year 2000 issue," the "Year 2000 problem" or the "Millennium Bug." These errors
could potentially result in a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar normal business activities. This,
in turn, could lead to disruptions in AMRESCO's operations or performance.
All of AMRESCO's information technology infrastructure is provided by its
manager. The manager's systems are supplied by AMRESCO, INC. AMRESCO's
assessments of the cost and timeliness of completion of Year 2000 modifications
set forth below are based on representations made to AMRESCO and the best
estimates of the individuals within or engaged by AMRESCO, INC. charged with
handling the Year 2000 issue. These estimates were derived using numerous
assumptions relating to future events, including, without limitation, the
continued availability of internal and external resources and third party
readiness plans. Furthermore, as the AMRESCO, INC. Year 2000 initiative, which
is described below, progresses, AMRESCO, INC., AMREIT Managers and AMRESCO
continue to revise estimates of the likely problems and costs associated with
the Year 2000 issue and to adapt contingency plans. However, there can be no
assurance that any estimate or assumption will prove to be accurate.
The AMRESCO, INC. Year 2000 initiative
AMRESCO, INC. is conducting a comprehensive Year 2000 initiative with
respect to its internal business-critical systems, including those upon which
AMRESCO depends. This initiative encompasses information technology systems and
applications, as well as non-information technology systems and equipment with
embedded technology, such as fax machines and telephone systems, which may be
impacted
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by the Year 2000 issue. Business-critical systems encompass internal accounting
systems, including general ledger, accounts payable and financial reporting
applications; cash management systems; loan servicing systems; and decision
support systems; as well as the underlying technology required to support the
software. The initiative includes assessing, remediating or replacing, testing
and upgrading the business-critical information technology systems of AMRESCO,
INC. with the assistance of a consulting firm that specializes in Year 2000
readiness. Based upon a review of the completed and planned stages of the
initiative, and the testing done to date, AMRESCO, INC. does not anticipate any
material difficulties in achieving Year 2000 readiness with respect to its
internal business-critical systems used in connection with the operations of
AMREIT Managers or AMRESCO. AMRESCO has received a written representation from
AMRESCO, INC. that Year 2000 readiness was achieved by December 1998 with
respect to all its internal business-critical systems used in connection with
the operations of AMREIT Managers or AMRESCO.
In addition to the internal information technology systems and
non-information technology systems of AMRESCO, INC., AMRESCO may be at risk from
Year 2000 failures caused by or occurring to third parties. These third parties
can be classified into two groups. The first group includes borrowers,
significant business partners, lenders, vendors and other service providers with
whom AMRESCO, its manager or AMRESCO, INC. has a direct contractual
relationship. The second group, while encompassing some of the members of the
first group, is comprised of third parties providing services or functions to
large segments of society, both domestically and internationally, such as
airlines, utilities and national stock exchanges.
As is the case with most other companies, the actions AMRESCO, its manager
and AMRESCO, INC. can take to avoid any adverse effects from the failure of
companies, particularly those in the second group, to become Year 2000 ready is
extremely limited. However, AMRESCO, INC. is in the process of communicating
with those companies that have significant business relationships with AMRESCO,
INC., AMREIT Managers or AMRESCO, particularly those in the first group, to
determine their Year 2000 readiness status and the extent to which AMRESCO,
INC., AMREIT Managers or AMRESCO could be affected by any of their Year 2000
readiness issues. In connection with this process, AMRESCO, INC. has sought to
obtain written representations and other independent confirmations of Year 2000
readiness from the third parties with whom AMRESCO, INC., AMREIT Managers or
AMRESCO has material contracts. Responses from all third parties having material
contracts with AMRESCO, INC., AMREIT Managers or AMRESCO have not been received,
nor is it likely that responses will be received from all of these third
parties. In addition to contacting these third parties, where there are direct
interfaces between the systems of AMRESCO, INC. and the systems of these third
parties in the first group, AMRESCO, INC. conducted testing in the second
quarter of 1999 in conformance with the Guidelines of the Federal Financial
Institutions Examination Council. Based on responses received and testing to
date, it is not currently anticipated that AMRESCO, INC., AMREIT Managers or
AMRESCO will be materially affected by any third party Year 2000 readiness
issues in connection with the operations of AMRESCO or its manager.
For all business-critical systems interfaces used in connection with the
operations of AMREIT Managers and AMRESCO, AMRESCO, INC. has advised AMRESCO
that readiness was achieved by December 31, 1998. Replacement providers believed
to be compliant have been identified for significant third party providers that
did not complete their Year 2000 initiatives.
There can be no assurance that the systems of AMRESCO, INC. or those of
third parties will not experience adverse effects after December 31, 1999.
Furthermore, there can be no assurance that a failure to convert by another
company, or a conversion that is not compatible with the systems of AMRESCO,
INC. or those of other companies on which the systems of AMRESCO, INC. rely,
would not have a material adverse effect on AMRESCO.
Under the terms of AMRESCO's management agreement, all of the costs
associated with addressing AMRESCO's Year 2000 issue are to be borne by the
manager. Therefore, AMRESCO does not anticipate that it will incur material
expenditures in connection with any modifications necessary to achieve Year 2000
readiness.
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Potential risks
In addition to the internal systems of AMRESCO, INC. and the systems and
embedded technology of third parties with whom AMRESCO, INC., AMREIT Managers
and AMRESCO do business, there is a general uncertainty regarding the overall
success of global remediation efforts relating to the Year 2000 issue. This
includes those efforts of providers of services to large segments of society, as
described above in the second group. Due to the interrelationships on a global
scale that may be impacted by the Year 2000 issue, there could be short-term
disruptions in the capital or real estate markets or longer-term disruptions
that would affect the overall economy.
Due to the general uncertainty with respect to how this issue will affect
businesses and governments, it is not possible to list all potential problems or
risks associated with the Year 2000 issue. However, some examples of problems or
risks to AMRESCO that could result from the failure by third parties to
adequately deal with the Year 2000 issue include:
- in the case of lenders, the potential for liquidity stress due to
disruptions in funding flows;
- in the case of exchanges and clearing agents, the potential for funding
disruptions and settlement failures;
- in the case of counterparties, accounting and financial difficulties to
those parties that may expose AMRESCO to increased credit risk; and
- in the case of vendors or providers, service failures or interruptions,
such as failures of power, telecommunications and the embedded technology
in building systems such as HVAC, sprinkler and fire suppression,
elevators, alarm monitoring and security, and building and parking garage
access.
With respect to AMRESCO's loan portfolios, risks due to the potential
failure of third parties to be ready to deal with the Year 2000 issue include:
- potential borrower defaults resulting from increased expenses or legal
claims related to failures of embedded technology in building systems,
such as HVAC, sprinkler and fire suppression, elevators, alarm monitoring
and security, and building and parking garage access;
- potential reductions in collateral value due to failure of one or more of
the building systems;
- interruptions in cash flow due to borrowers being unable to obtain timely
lease payments from tenants or incomplete or inaccurate accounting of
rents;
- potential borrower defaults resulting from computer failures of retail
systems of major tenants in retail commercial real estate properties such
as shopping malls and strip shopping centers;
- construction delays resulting from contractors' failure to be Year 2000
ready and increased costs of construction associated with upgrading
building systems to be Year 2000 compliant; and
- delays in reaching projected occupancy levels due to construction delays,
interruptions in service or other market factors.
These risks are also applicable to AMRESCO's portfolio of CMBS as these
securities are dependent upon the pool of mortgage loans underlying them. If the
investors in these types of securities demand higher returns in recognition of
these potential risks, the market value of any CMBS portfolio of AMRESCO also
could be adversely affected.
Additionally, AMRESCO has made equity investments in a partnership that
owns interests in five grocery-anchored shopping centers and in a partnership
which owns a suburban office building. These operations will be subject to many
of the risks set forth above. Although AMRESCO intends to monitor Year 2000
readiness, there can be no guarantee that all building systems will be Year 2000
compliant.
AMRESCO believes that the risks most likely to affect AMRESCO adversely
relate to the failure of third parties, including its borrowers and sources of
capital, to achieve Year 2000 readiness. If its borrowers' systems fail, the
result could be a delay in making payments to AMRESCO or the complete business
failure
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of these borrowers. The failure, although believed to be unlikely, of AMRESCO's
sources of capital to achieve Year 2000 readiness could result in AMRESCO being
unable to obtain the funds necessary to continue its normal business operations.
Some of the risks associated with the Year 2000 issue may be mitigated
through insurance maintained or purchased by AMRESCO, its affiliates, its
business partners, borrowers and vendors. However, the scope of insurance
coverage in addressing these potential issues under existing policies has yet to
be tested, and the economic impact on the solvency of the insurers has not been
explored. Therefore, no assurance can be given that insurance coverage will be
available or, if it is available, that it will be available on a cost-effective
basis or that it will cover all or a significant portion of any potential loss.
Business continuity/disaster recovery plan
AMRESCO, INC. currently has a business continuity/disaster recovery plan
that includes business resumption processes that do not rely on computer systems
and the maintenance of hard copy files, where appropriate. The business
continuity/disaster recovery plan is monitored and updated as potential Year
2000 readiness issues of AMRESCO, INC. and third parties are specifically
identified. Due to the inability to predict all of the potential problems that
may arise in connection with the Year 2000 issue, there can be no assurance that
all contingencies will be adequately addressed by this plan.
QUANTITATIVE AND QUALITATIVE DISCLOSURE
OF AMRESCO'S MARKET RISKS
AMRESCO is a party to various financial instruments which are subject to
market risk. These instruments include mortgage loan investments, investments in
commercial mortgage-backed securities and some of AMRESCO's borrowing
facilities. AMRESCO is also a party to an interest rate cap agreement which it
entered into in order to mitigate the market risk exposure associated with its
credit facilities. AMRESCO's financial instruments involve, to varying degrees,
elements of interest rate risk. Additionally, AMRESCO's investment portfolio,
which is comprised of both financial instruments (mortgage loans and CMBS) and
equity investments in real estate, is subject to real estate market risk.
AMRESCO is a party to other financial instruments, including trade receivables
and payables and amounts due to affiliates, which, due to their short-term
nature, are not subject to market risk. Accordingly, no discussion of these
instruments is provided in this document.
All of AMRESCO's financial instruments, including its derivative financial
instruments, are entered into for purposes other than trading. AMRESCO has not
entered into, nor does it intend to enter into, any financial instruments for
trading or speculative purposes. As AMRESCO has no investments outside of the
United States, it is not currently subject to foreign currency exchange rate
risk.
AMRESCO generally intends to hold its investments over relatively long
periods of time. AMRESCO therefore does not attempt to hedge its exposure to
changes in the fair value of those investments through the use of derivative
instruments. Instead, these exposures are managed by AMRESCO through its
diversification efforts and strict underwriting of its investments. Furthermore,
as a real estate investment trust, AMRESCO is subject to specified limitations
imposed by the Internal Revenue Code as it relates to the use of derivative
instruments, particularly with regard to hedging fair value exposures. AMRESCO
generally intends to hold its mortgage loan investments to maturity. These loans
typically have terms ranging from one to three years. AMRESCO's investments in
CMBS are acquired for the yield that they offer, rather than with an intent to
sell. It is expected that CMBS investments, when made, will generally be held
for periods ranging from three years to maturity. Some of these investments,
however, may be held for shorter periods of time depending upon a number of
factors.
In the following discussion of market risk exposures, AMRESCO has employed
sensitivity analyses, where practicable to do so, in quantifying the potential
loss in future earnings, fair values or cash flows resulting from one or more
selected hypothetical changes in relevant market rates.
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MORTGAGE LOANS
AMRESCO provides mid- to high-yield senior and mezzanine financing to real
estate owners and developers. Mezzanine loans, the repayment of which is
subordinated to senior mortgage loans, are secured by a second lien mortgage
and/or a pledge of the ownership interests of the borrower. Typically, AMRESCO's
loans provide for a fixed pay rate and fixed accrual rate of interest and, in
some cases, may also provide for profit participation above the contractual
accrual rate. The incremental interest earned at the accrual rate is often times
not payable by the borrower until maturity of the loan. Generally, AMRESCO's
loans provide for higher loan-to-value ratios than most conventional loans.
The fair values of AMRESCO's mortgage loans are less sensitive (than are
the values of more conventional loans) to changes in interest rates. This is
because of their comparatively shorter duration and higher yield, equity-like
characteristics. For example, AMRESCO does not believe that a 10% increase or
decrease in general interest rates from those prevailing at June 30, 1999 would
have a significant impact on the fair value of its predominately fixed rate
mortgage loan portfolio. However, a general real estate market decline could
have a material adverse impact on AMRESCO. If rental rates were to decline
and/or vacant space was not able to be leased as a result of declining demand,
cash flows from the properties securing AMRESCO's loans might be inadequate to
service the loans. If shortfalls occur, borrowers may or may not be willing to
supplement property cash flows to pay AMRESCO all amounts due under the terms of
its mortgage loans. If real estate values were to decline, borrowers may find it
difficult, if not impossible, to repay some or all of the principal and accrued
interest in connection with a sale or refinancing of the underlying properties.
With the exception of some limited guarantees, most of AMRESCO's loans are
without recourse. Therefore, borrowers may have little or no incentive to retain
ownership of their properties if real estate values decline sharply. A number of
factors could lead to a real estate market decline, including, but not limited
to, a slowdown in the growth of the economy, increasing commercial mortgage
interest rates and supply and demand factors. If a decline occurs, some real
estate markets may be adversely impacted more than others. Despite generally
high loan-to-value ratios, AMRESCO's borrowers have varying amounts of equity at
risk. This equity, which is subordinate to AMRESCO's investment, serves to
protect AMRESCO in a declining real estate market. As a result of these factors
and the unique characteristics of AMRESCO's mortgage loan investments, it is not
possible for AMRESCO to quantify the potential loss in earnings or cash flows
that might result from a real estate market decline.
AMRESCO attempts to mitigate these risk exposures by carefully underwriting
its investments and by diversifying its mortgage loan portfolio. The
underwriting process for loans includes, among other things, an in-depth
assessment of the character, experience (including operating history) and
financial capacity of the borrower. If the real estate market declines, the
borrower's motivations and financial capacity could, to some extent, limit the
potential loss to AMRESCO. While AMRESCO attempts to mitigate these risk
exposures, there can be no assurance that these efforts will be successful.
COMMERCIAL MORTGAGE-BACKED SECURITIES
The fair values of AMRESCO's investments in non-investment grade CMBS are
subject to both interest rate risk and spread risk. The non-investment grade, or
subordinated classes, of CMBS typically include classes with credit ratings
below investment grade "BBB." As the subordinated classes provide credit
protection to the senior classes by absorbing losses from underlying mortgage
loan defaults or foreclosures, they also carry more credit risk than the senior
classes. Among other factors, the fair value of AMRESCO's interests in CMBS is
dependent upon, and is sensitive to changes in, comparable-term U.S. treasury
rates and the spreads over U.S. treasury rates in effect from time to time.
Spreads over comparable-term U.S. treasury rates, which are based upon supply
and demand factors, typically vary across different classes of CMBS and are
generally greater for each successively lower rated class of CMBS. Spreads are
influenced by a number of factors including, but not limited to, investor
expectations with respect to future economic conditions, interest rates and real
estate market factors. All or any of these factors can impact the ability of
borrowers to perform under the terms of the mortgage loans underlying CMBS. As a
result, even in an environment characterized by relatively constant U.S.
treasury rates and low commercial mortgage default rates, the value of AMRESCO's
CMBS holdings can be adversely impacted simply by increasing spreads. This
situation
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occurred during the latter half of 1998 and was the primary reason for the
decline in the value of AMRESCO's CMBS holdings. Notwithstanding this decline in
value, the cash flows from AMRESCO's CMBS were unaffected by this spread
widening.
As of June 30, 1999, AMRESCO held five commercial mortgage-backed
securities with credit ratings ranging from "BB-" to B-." The weighted average
duration of these bonds approximated 6.1 years as of that date. The estimated
fair value of AMRESCO's CMBS holdings was $26.1 million at June 30, 1999. All
other things being equal, a 100 basis point increase or decrease in
comparable-term U.S. treasury rates from those in effect as of June 30, 1999
would be expected to cause the value of AMRESCO's CMBS to decline or increase,
respectively, by approximately $1.6 million. Similarly, if comparable-term U.S.
treasury rates remained constant but spreads over U.S. treasury rates increased
by 100 basis points from those quoted as of June 30, 1999 for each of the
classes of CMBS owned by AMRESCO, the fair value of its securities portfolio
would also be expected to decline by approximately $1.6 million. Conversely, a
100 basis point decline in spreads across all classes of CMBS (all other things
being equal) would be expected to increase the value of the portfolio by a like
amount.
As these securities are classified as available for sale, unrealized gains
and losses are excluded from earnings and reported as a component of accumulated
other comprehensive income or loss in shareholders' equity. In the absence of a
sale or a decline in fair value that is deemed to be other than temporary,
AMRESCO's earnings would not be impacted by the changes in fair value described
above.
Although impossible to quantify, declines in rental rates and/or real
estate values could adversely impact the ability of borrowers to fully repay or
otherwise satisfy their loan obligations. This could, in turn, lead to losses
which would be absorbed initially by the holders of subordinated classes of CMBS
(in many cases, an unrated higher-yield, credit support class absorbs the first
losses). AMRESCO attempts to mitigate its exposure to these types of risks by
investing in various classes of subordinated CMBS which are backed by mortgage
loans secured by a mix of commercial real estate assets that are diversified
both by property type and location. Additionally, AMRESCO performs extensive due
diligence in its underwriting process in order to identify loans which may be
more likely to default. AMRESCO then attempts to quantify the risks and
projected losses from the pool of mortgage loans, which is then factored into
the price that AMRESCO is willing to pay for the securities. However, there can
be no assurances that these strategies will enable AMRESCO to avoid adverse
consequences in the future even if these bonds are held to maturity.
BORROWING FACILITIES
AMRESCO is a party to two credit facilities, each of which bears interest
at floating rates. Specifically, both facilities bear interest at varying
spreads over one-month LIBOR. One of the facilities can be used to finance
AMRESCO's structured loan and equity real estate investments. As of June 30,
1999, amounts outstanding under this facility totaled $59.3 million. The other
facility can be used to finance AMRESCO's CMBS. At June 30, 1999, $10.4 million
was outstanding under this facility. To reduce the impact of changes in interest
rates on these floating rate debt facilities, AMRESCO may purchase interest rate
swap and/or cap agreements. These agreements effectively convert AMRESCO's
variable-rate debt to fixed-rate debt and therefore reduce AMRESCO's risk of
incurring higher interest costs due to rising interest rates.
If the one-month LIBOR on June 30, 1999 increased by 100 basis points on
that date (from 5.24% to 6.24%) and then remained constant at the higher rate
throughout the balance of 1999, AMRESCO's interest costs on its outstanding
borrowings ($69.7 million), in the absence of the interest rate cap agreement
described below, would increase by approximately $348,500 for the six months
ending December 31, 1999. In order to reduce the impact that rising interest
rates would have on this floating rate indebtedness, AMRESCO entered into an
interest rate cap agreement effective August 1, 1999. The cap agreement has a
notional amount of $59 million. Until its expiration on November 1, 2000, the
agreement entitles AMRESCO to receive from the counterparty the amounts, if any,
by which one-month LIBOR exceeds 6.25%. If the one-month LIBOR increased as
described above, AMRESCO would not receive any payments from the counterparty
under the terms of the cap agreement. Any further increase in one-month LIBOR
would effect only that portion of AMRESCO's indebtedness in excess of the cap
agreement's notional amount. There are
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no margin requirements associated with interest rate caps and therefore there is
no liquidity risk to AMRESCO associated with holding this particular hedging
instrument.
Conversely, a sustained 100 basis point reduction in the one-month LIBOR if
it occurred on June 30, 1999 would increase earnings and cash flows for the six
months ending December 31, 1999 by approximately $348,500. Under this scenario,
no payments would be received from the counterparty under the cap agreement.
AMRESCO, through a majority-owned partnership, is indebted under the terms
of four non-recourse loans totaling $27 million at June 30, 1999. As the loans
bear interest at a fixed rate, AMRESCO's future earnings and cash flows would
not be reduced in the event of rising interest rates.
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BUSINESS OF IMPAC
Impac was incorporated in Maryland in February 1997 under the name Imperial
Credit Commercial Holdings, Inc. and changed its name to IMH Commercial
Holdings, Inc. in June 1997. Subsequently, by a vote of Impac's stockholders on
January 28, 1998, Impac changed its name from IMH Commercial Holdings, Inc. to
Impac Commercial Holdings, Inc. Impac's subsidiaries include Impac Commercial
Assets Corporation, IMH/ICH Dove Street, LLC and Impac Commercial Capital
Corporation.
GENERAL
Impac is a specialty commercial property finance company, which has elected
to be taxed at the corporate level as a real estate investment trust or REIT for
federal income tax purposes. This generally allows Impac to pass through income
to its stockholders without payment of federal income tax at the corporate level
provided that Impac distributes at least 95% of its taxable income to its
stockholders. Impac was formed to seek and capitalize on opportunities in the
commercial mortgage market, including the origination, purchase, securitization
and sale of commercial mortgages and investment in commercial mortgages and
commercial mortgage-backed securities.
Impac's commercial mortgage assets included mortgage loans on:
- condominium-conversions,
- commercial properties, such as industrial and warehouse space, office
buildings, retail space and shopping malls,
- hotels and motels, and
- nursing homes, hospitals, multifamily, congregate care facilities and
senior living centers.
Prior to August 1999, Impac's operations were divided into two segments:
long-term investment operations and conduit operations. Impac's long-term
investment operations, which are conducted by Impac, invest primarily in
commercial mortgages and mortgage-backed securities on commercial properties.
Impac's conduit operations, which were conducted by Impac's subsidiary, Impac
Commercial Capital Corporation, originated, purchased, securitized and sold
commercial mortgages. New Impac management, which took over Impac's day-to-day
operations in May 1999, has been formulating a new business plan which
management believes will result in a more profitable investment of stockholder
equity. Under the new business plan, Impac has terminated certain employees as
of August 1999 and is in the process of repositioning the assets in its
portfolio by selling certain assets to invest in higher yielding assets.
THE MANAGER
On May 5, 1999, Impac entered into a stock purchase agreement with Fortress
Partners L.P. Under the terms of the stock purchase agreement, Impac issued to
Fortress 479,999 shares of a newly created series of Impac preferred stock for
an aggregate purchase price of approximately $12.0 million. The Impac preferred
stock, which has been designated "Series B Cumulative Convertible Preferred
Stock," has a coupon of 8.5%, paid quarterly in arrears. The Impac series B
preferred stock is initially convertible into 1,683,635 shares of Impac common
stock, subject to adjustment under some circumstances. In connection with the
completion of the series B preferred stock issuance, Impac and Fortress entered
into a registration rights agreement. Under the terms of the registration rights
agreement, Fortress has the right to require Impac to register under federal and
applicable state securities laws the Impac common stock issuable upon conversion
of the Impac series B preferred stock.
In addition, on May 5, 1999, FIC Management Inc., an affiliate of Fortress,
entered into a definitive agreement with RAI Advisors, LLC, the then manager of
Impac. Under the terms of this agreement, RAI Advisors assigned to FIC
Management all of RAI Advisors' rights and interests in the existing management
agreement among RAI and Impac's wholly owned subsidiary, Impac Commercial
Capital. Following the
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assignment, FIC Management became the exclusive manager of Impac. FIC Management
is currently responsible for:
- asset-liability management -- primarily the analysis and oversight of the
purchasing, financing and disposition of Impac's assets,
- capital management -- primarily the oversight of Impac's capital raising,
and
- investor relations activities and operations management -- primarily the
oversight of Impac's operating subsidiaries.
In connection with the series B preferred stock purchase and the management
agreement assignment described above, the submanagement agreement among RAI
Advisors, Impac Mortgage Holdings, Inc., a former affiliate of Impac, and Impac
Funding Corp., a former affiliate of Impac which conducted Impac Mortgage's
conduit operations, was terminated and a new submanagement agreement was entered
into among FIC Management, Impac Mortgage and Impac Funding. The right of first
refusal agreement among RAI Advisors, Impac, Impac Commercial Capital, Impac
Mortgage and Impac Funding was also terminated. In addition, James Walsh,
Timothy Busch, Stephan Peers and Thomas Poletti resigned as directors of Impac
and Wesley Edens, Robert Kauffman and Christopher Mahowald, all of whom are
designees of Fortress, were appointed to the Impac board of directors. Joseph
Tomkinson and Frank Filipps, who served on the Impac board prior to the Fortress
investment in Impac, remain as Impac directors. Effective May 5, 1999, the
executive officers of Impac then serving resigned as a group. Following these
resignations,
- Mr. Edens was appointed as Impac's new chairman of the board and chief
executive officer,
- Mr. Kauffman was appointed as Impac's new president,
- Randal Nardone was appointed as Impac's new chief operating officer and
secretary, and
- Erik Nygaard was appointed as Impac's new chief information officer and
treasurer.
As a result of the various transactions with Fortress described above,
- Fortress now holds a significant equity interest in Impac, with shares of
Impac preferred stock which, upon conversion, would represent
approximately 16.7% of the issued and outstanding Impac common stock
following such conversion;
- the principal executive officers of Impac and a majority of the members
of the Impac board, are designees of Fortress; and
- an affiliate of Fortress, FIC Management, now controls the external
management of Impac's operations, as well as its submanagement functions.
EXISTING IMPAC MANAGEMENT AGREEMENT
Impac is party to an amended and restated management agreement dated as of
May 6, 1999 with FIC Management as the external manager. The following
summarizes some of the material terms of the Impac management agreement. The
discussion in this document of the terms of the Impac management agreement is
qualified in its entirety by reference to the Impac management agreement. This
agreement will be superseded upon the completion of the merger by the amended
and restated management agreement to be entered into by the combined company and
FIC Management. See "The Amended and Restated Management Agreement."
Term and termination fees. The management agreement has a term expiring on
December 31, 2002 and may be extended with the consent of the manager and by the
affirmative vote of a majority of Impac's independent directors, who are not
affiliated with Impac or the manager, or by a vote of the holders of a majority
of the outstanding shares of Impac's common stock. The agreement may be
terminated for cause on
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thirty days notice. The agreement may be terminated without cause on sixty days
notice by a majority vote of the independent Impac directors, who are not
affiliated with Impac or the manager, or by a vote of the holders of the
outstanding shares of Impac's common stock. If the agreement is terminated
without cause or not renewed, the manager is entitled to payment of all accrued
management fees and reimbursable expenses up to the date of termination plus a
termination fee or non-renewal fee, as the case may be, determined by a
nationally-recognized appraisal firm mutually selected by Impac and the manager.
Management fee. The manager is entitled to receive for each fiscal
quarter, an amount equal to 25% of Impac's net income, before deduction of this
management fee, in excess of the amount that would produce an annualized return
on equity equal to the daily average Ten Year U.S. Treasury Rate plus 2%. The
management fee is calculated quarterly in arrears before any income
distributions are made to stockholders for the corresponding period.
Expenses. Pursuant to the management agreement, Impac pays all operating
expenses incurred by the manager under the management agreement. The operating
expenses generally required to be incurred by the manager and reimbursed by
Impac include out-of-pocket costs, equipment and other personnel required for
Impac's operations, including amounts payable by the manager pursuant to
submanagement agreements with outside third parties, which may include
affiliates of the manager, to provide services to Impac. Impac reimburses the
manager for all reimbursable expenses, plus a service charge of 15% on all
reimbursable expenses incurred directly by the manager. No such 15% service
charge is paid to third party service providers.
LONG-TERM INVESTMENT OPERATIONS
Impac's long-term investment operations invest in mortgage loans to be held
as long-term investments and mortgage-backed securities. Income is earned
principally from net interest income earned on mortgage loans and
mortgage-backed securities held in the long-term investment portfolio and on
short-term warehouse loans or finance receivables. The purchase of mortgage
loans and mortgage-backed securities is financed with capital, long-term
financing through collateralized mortgage obligations and borrowings under
warehouse line agreements and reverse repurchase agreements. To date, Impac's
long-term investment operations have invested primarily in commercial mortgages
and commercial mortgage-backed securities. Impac Commercial Capital supports the
investment objectives of Impac by selling commercial mortgages and commercial
mortgage-backed securities to Impac at costs that are comparable to those
available through investment bankers and other third parties.
Commercial mortgages held in the portfolio
Until August 1999, Impac originated commercial mortgages through its
conduit operations, which are conducted by Impac Commercial Capital. All
commercial mortgages originated by Impac Commercial Capital were offered to
Impac at costs that were comparable to those available through investment
bankers and other third parties. Impac invested a portion of its assets in these
commercial mortgages, which were held in Impac's long-term investment portfolio.
Initially, the commercial mortgages were held in Impac's long-term investment
portfolio as commercial mortgages held-for-investment and were financed through
short-term warehouse line agreements and capital. The commercial mortgages
held-for-investment were used as collateral for the issuance of collateralized
mortgage obligations which provided Impac with long-term financing to fund its
commercial mortgages. At the time collateralized mortgage obligations were
issued, the commercial mortgages were reflected on Impac's balance sheet as
collateralized mortgage obligation collateral with a corresponding liability
referred to as collateralized mortgage obligation borrowings. Although to date
Impac has acquired all commercial mortgages held in its long-term investment
portfolio from Impac Commercial Capital, Impac can, and in the future expects
to, purchase mortgage loans from third party investors for long-term investment
and for resale. Impac management expects that the mortgage loans purchased from
third-party investors will be utilized in the same manner as mortgage loans
purchased from Impac Commercial Capital prior to the discontinuation of its
operations.
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Finance receivables
Impac provided short-term warehouse loans to Impac Commercial Capital to
fund the origination and acquisition of commercial mortgages during the time
between the closing of the commercial mortgages and their sale to or other
settlement with pre-approved investors or Impac. Impac Commercial Capital's
outstanding balances on warehouse lines appeared on Impac's balance sheet as
finance receivables and were structured to qualify under REIT asset tests and to
generate income qualifying under the 75% gross income test. As of July 1999, the
$900.0 million warehouse line formerly made available to Impac Commercial
Capital was discontinued.
Investments in mortgage-backed securities
Impac also may acquire commercial mortgage-backed securities and
mortgage-backed securities generated through its own securitization efforts as
well as commercial mortgage-backed securities and mortgage-backed securities
generated by third parties. In connection with the issuance of commercial
mortgage-backed securities by Impac in the form of real estate mortgage
investment conduits, commonly known as REMICs, Impac may retain the senior or
subordinated securities as regular interests of a REMIC on a short-term or
long-term basis. Any retained commercial mortgage-backed securities may include
"principal only," "interest only" or residual interest securities or other
interest rate or prepayment sensitive securities or investments. Any retained
securities or investments may subject Impac to credit, interest rate and/or
prepayment risks.
Mortgage-backed securities are securities that represent an interest in, or
are secured by, mortgage loans. Mortgage-backed securities may pay fixed or
floating rates of interest and generally have been structured as mortgage
pass-through securities, although other structures are possible. With a typical
mortgage pass-through security, payment of principal and interest on the
underlying mortgages, following deduction of servicing expenses, is passed
through directly to the holders of the securities. Mortgage pass-through
securities represent an obligation of the issuer, secured by a pool of mortgage
loans pledged as collateral for payments of principal and interest on the debt
instrument. The issuer's obligation to pay principal and interest under a
mortgage pass-through security is limited to the pledged collateral.
Mortgage-backed securities generally are structured with some form of
credit enhancement to protect against potential losses on the underlying
mortgage loans. Credit support increases the likelihood of timely and full
payment of principal and interest to the more senior class of mortgage-backed
securities. Because of the particular risks that accompany mortgage-backed
securities, the amount of such credit support may be substantial. Credit
supports used in the mortgage-backed securities market have included issuer
guarantees, reserve funds, subordinated securities (which bear the risks of
default before the more senior classes of securities of the same issuer),
cross-collateralization and over-collateralization. In addition to credit
support, mortgage-backed securities may be structured with liquidity protections
intended to provide assurance of timely payment of principal and interest. Such
protections may include surety bonds, letters of credit and payment advance
agreements.
The commercial mortgage-backed securities market is newer than the
residential mortgage-backed securities market and in terms of total outstanding
principal amount of issues is relatively small compared to the total size of the
market for residential mortgage-backed securities. Commercial mortgage-backed
securities have been issued in public and private transactions by a variety of
agency and private-label issuers. Commercial mortgage-backed securities have
been issued using a variety of structures, some of which were developed in the
residential mortgage market, including multi-class structures featuring senior
and subordinated classes. Because of the great diversity in characteristics of
the commercial mortgages that secure commercial mortgage-backed securities,
however, such securities have unique features and characteristics.
Financing
Impac's long-term investment operations principally have been financed
through the issuance of collateralized mortgage obligations, short-term
borrowings under warehouse line agreements and reverse repurchase agreements,
and proceeds from the sale of Impac capital stock. By the end of the first
quarter of 1999, however, Impac was notified by the two investment banks that
had previously provided Impac with up to
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$600.0 million of financing, including $200.0 million which was uncommitted,
that these warehouse line agreements would not be renewed upon their expiration
dates in February 1999 and May 1999.
Collateralized mortgage obligations
As Impac's long-term investment operations accumulate commercial mortgages
in the long-term investment portfolio, Impac issues collateralized mortgage
obligations secured by such loans as a method of financing its long-term
investment operations. The decision to issue collateralized mortgage obligations
is based on Impac's current and future investment needs, market conditions and
other factors. For accounting and tax purposes, in situations where the
collateralized mortgage obligations qualifies as a financing arrangement under
Statement of Financial Accounting Standard No. 125, the commercial mortgages
financed through the issuance of collateralized mortgage obligations are treated
as assets of Impac and the collateralized mortgage obligations are treated as
debt of Impac. Each issuance of collateralized mortgage obligations is expected
to be fully payable from the principal and interest payments on the underlying
commercial mortgages collateralizing such debt, any cash or other collateral
required to be pledged as a condition to receiving the desired rating on the
debt and any investment income on such collateral. Impac's long-term investment
operations earn the net interest spread between the interest income on the
commercial mortgages and the interest and other expenses associated with the
collateralized mortgage obligation financing. The net interest spread may be
directly impacted by the levels of prepayment of the underlying commercial
mortgages and to the extent collateralized mortgage obligation classes have
variable rates of interest, may be affected by changes in short-term interest
rates. Impac believes that under prevailing market conditions an issuance of
collateralized mortgage obligations receiving other than an investment grade
rating would require payment of an excessive yield to attract investors which
would reduce net interest spread earned as a result of such collateralized
mortgage obligation issuance. The collateralized mortgage obligations are
guaranteed for the holders by a mortgage loan insurer, giving the collateralized
mortgage obligations the highest rating established by a nationally recognized
rating agency.
Warehouse line agreements
Prior to May 1999, Impac had two warehouse facilities at interest rates
that management believed were consistent with Impac's financing objectives. A
warehouse line agreement acts as a financing under which Impac pledges a portion
of its commercial mortgages as collateral to secure a short-term loan.
Generally, the lender makes a loan in an amount equal to 75% to 92% of the fair
market value of the pledged collateral. By the end of the first quarter of 1999,
however, Impac was notified by the two investment banks that had previously
provided Impac with up to $600.0 million of financing, including $200.0 million
which was uncommitted, that these warehouse line agreements would not be renewed
upon their expiration dates in February 1999 and May 1999. Without any new
warehouse line agreements, Impac has no credit facility to fund its mortgage
loans. All originations since the expiration of the existing warehouse line
agreements have been, and future originations will be, brokered or table funded
with another lender until such time as Impac is successful in obtaining another
credit facility. In May 1999, Impac entered into a $13.5 million term loan
agreement to refinance the remaining balance on the expired warehouse lines. As
of June 30, 1999, the amount outstanding under the term loan was $13.5 million.
Reverse repurchase agreements
Impac also obtains reverse repurchase agreements from third-party lenders,
at interest rates that management believes are consistent with its financing
objectives. Reverse repurchase agreements take the form of a sale of securities
to the lender at a discounted price in return for the lender's agreement to
resell the same securities to the borrower at a future date -- the maturity of
the borrowing -- at an agreed price. A reverse repurchase agreement, although
structured as a sale and repurchase obligation, acts as a financing vehicle
under which Impac pledges a portion of its mortgage loans and/or mortgage-backed
securities as collateral to secure a short-term loan. Generally, the other party
to the agreement makes the loan in an amount equal to a percentage of the market
value of the pledged collateral. At the maturity of the reverse repurchase
agreement, Impac is required to repay the loan in exchange for the return of its
collateral. Under a
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reverse repurchase agreement, Impac retains the instruments of beneficial
ownership, including the right to distributions on the collateral and the right
to vote on matters as to which certificate holders vote. Upon a payment default
under such agreements, the lending party may liquidate the collateral. The
borrowing agreements may require Impac to pledge cash, additional mortgage loans
or mortgage-backed securities in the event the market value of the existing
collateral declines. Impac also may be required to sell assets to reduce its
borrowings to the extent that cash reserves are insufficient to cover such
deficiencies in collateral.
To reduce its exposure to the potential credit risk of reverse repurchase
agreement lenders, Impac enters into such agreements with different parties and
follows its own credit exposure procedures. Impac monitors the financial
condition of its reverse repurchase agreement lenders on a regular basis,
including the percentage of mortgage loans that are the subject of reverse
repurchase agreements with any single lender.
Other commercial mortgage-backed securities
As an additional alternative for the financing of its long-term investment
operations, Impac may issue other commercial mortgage-backed securities, if, in
the determination of Impac, the issuance of such other securities is
advantageous. In particular, mortgage pass-through certificates representing an
undivided interest in a pool of commercial mortgages formed by Impac may prove
to be an attractive vehicle for raising funds. The holders of commercial
mortgage-backed securities receive their pro rata share of the principal
payments made on a pool of commercial mortgages and interest at a pass-through
interest rate that is fixed at the time of offering. Impac may retain up to a
100% undivided interest in a significant number of the pools of commercial
mortgages underlying such pass-through certificates. The retained interest, if
any, may also be subordinated so that, in the event of a loss, payments to
certificate holders will be made before Impac receives its payments. Unlike the
issuance of collateralized mortgage obligations, the issuance of commercial
mortgage-backed securities will not result in an obligation of Impac to the
holders of the commercial mortgage-backed securities in the event of a borrower
default resulting in a short-fall in principal or interest payments on the
commercial mortgage-backed securities. However, as in the case of collateralized
mortgage obligations, Impac may be required to obtain various forms of credit
enhancements in order to obtain an investment grade rating for issues of
mortgage pass-through certificates by a nationally recognized rating agency.
Investment policies
The executive officers of FIC Management are empowered to make day-to-day
investment decisions, including the issuance of commitments on behalf of Impac
to purchase mortgage loans and mortgage-backed securities meeting the investment
criteria set from time to time by Impac's board of directors. Other than
statutory limitations imposed in order to allow Impac to be classified as a
REIT, there is no current limitation set by the Impac board of directors on the
percentage of assets which Impac may invest in any one type of investment or the
percentage of mortgage-backed securities of any one issue which Impac may
acquire. It is Impac's policy to acquire assets primarily for income and to
finance its operations by warehouse line and reverse repurchase agreements,
issuance of collateralized mortgage obligations and commercial mortgage-backed
securities, and proceeds from the issuance of capital stock.
CONDUIT OPERATIONS
Impac Commercial Capital operated Impac's mortgage conduit operations from
January 1997 until the termination of certain employees in August 1999. The
conduit operations originated and purchased and subsequently securitized and
sold commercial mortgages primarily secured by first liens on commercial
properties that were originated or purchased in accordance with Impac Commercial
Capital's underwriting guidelines. As the conduit operations of Impac, Impac
Commercial Capital acted as a flow originator and bulk purchaser of commercial
mortgages. All commercial mortgages originated or purchased by Impac Commercial
Capital were made available for sale to Impac at the same price at which the
loans were originated or purchased by Impac Commercial or fair market value at
the date of sale and subsequent transfer to Impac. Since Impac Commercial
Capital's inception, Impac Commercial Capital has originated all of the
commercial mortgages acquired by Impac.
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Impac issued commercial mortgage-backed securities or collateralized
mortgage obligations backed by the commercial mortgages originated by or
purchased through its conduit operations or long-term investment operations.
When commercial mortgage-backed securities or collateralized mortgage
obligations are issued, a trust is created, and commercial mortgages are
deposited into the trust for the benefit of the holders of the securities. When
the trust is created, the loan servicing functions for the commercial mortgages
deposited into the trust are commonly divided into two areas of responsibility:
master servicing and special servicing. The trustee and the depositor of the
commercial mortgages enter into an agreement, typically called a pooling and
servicing agreement, with one or more parties who will assume the
responsibilities for master servicing and special servicing. Master servicing
generally includes all of the servicing activities associated with non-
defaulted commercial mortgages, such as collecting and remitting loan payments,
making required advances, accounting for principal and interest, holding escrow
impound or reserve funds for payment of taxes and insurance, making inspections
or improvements of the mortgaged property, and remitting funds and reporting to
the trustee. Special servicing generally includes managing all loan default
matters and other more complicated issues associated with the servicing of the
loans, such as contacting delinquent borrowers and supervising foreclosures and
property dispositions in the event of borrower defaults which are not remedied.
Special servicing also includes overseeing condemnation issues, insurance claims
for casualty losses on collateral property and other matters of this nature.
Impac Commercial Capital contracted with qualified commercial mortgage master
servicers to assume the master servicing and special servicing roles. In the
future, Impac may act as special servicer. Impac believes that acting as special
servicer will allow it to monitor and manage those matters of significant risk
associated with the commercial mortgages in its portfolio. In this manner, Impac
believes it will be best positioned to protect any beneficial interest it may
retain in the trusts it creates. However, Impac reserves the right to act as
either the master servicer, the special servicer, both or neither in the future.
When Impac Commercial Capital purchased commercial mortgages that included
the associated commercial mortgage servicing rights commonly known as CMSRs or
originated commercial mortgages, the allocated cost of the servicing rights upon
securitizing such loans would be reflected on the financial statements of Impac
Commercial Capital as CMSRs. CMSRs are amortized in proportion to, and over the
period of, expected future net servicing income. Statement of Financial
Accounting Standard No. 125 requires that a portion of the cost of originating
or purchasing a mortgage loan be allocated to the mortgage loan servicing rights
based on the fair value of the origination costs relative to the fair value of
the components of the loan at the time the loan is sold. To determine the fair
value of the servicing rights created, Impac Commercial Capital used a valuation
model that calculated the present value of future net servicing revenues to
determine the fair value of the servicing rights. In using this valuation
method, Impac Commercial Capital would incorporate assumptions that it believed
market participants would use in estimating future net servicing income. These
assumptions included estimates of the cost of servicing or sub-servicing, an
inflation rate, ancillary income per commercial mortgage, a prepayment rate,
loss severity, a default rate and a discount rate commensurate with the risks
involved. During periods of declining interest rates, prepayments on mortgage
loans increase as borrowers look to refinance at lower rates, resulting in a
decrease in the value of the mortgage loan servicing portfolio. Mortgage loans
with higher interest rates are more likely to result in prepayments.
RECENT OPERATIONS DEVELOPMENTS
Overview
Impac's business operations primarily are funded from monthly interest and
principal payments from its commercial mortgage and commercial mortgage-backed
securities portfolios, warehouse line and reverse repurchase agreements secured
by commercial mortgages and commercial mortgage-backed securities,
collateralized mortgage obligation financing, proceeds from the sale of
commercial mortgages and proceeds from the issuance of Impac common stock. The
acquisition of commercial mortgages and commercial mortgage-backed securities by
Impac's long-term investment operations primarily are funded from monthly
principal and interest payments, warehouse line and reverse repurchase
agreements, collateralized mortgage obligations financing and proceeds from the
sale of Impac common stock. The acquisition of commercial
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mortgages by Impac's conduit operations were funded from reverse repurchase
agreements and the sale of commercial mortgages. Impac's ability to meet its
long-term liquidity requirements is subject to the renewal of its credit and
repurchase facilities and/or obtaining other sources of financing, including
additional debt or equity from time to time. Any decision by Impac's lenders
and/or investors to make additional funds available to Impac in the future will
depend upon a number of factors, such as Impac's compliance with the terms of
its existing credit arrangements, Impac's financial performance, industry and
market trends in Impac's various businesses, the general availability of and
rates applicable to financing and investments, such lenders' and/or investors'
own resources and policies concerning loans and investments, and the relative
attractiveness of alternative investment or lending opportunities.
New Impac management, which took over Impac's day-to-day operations in May
1999, has been formulating a new business plan which management believes will
result in a more profitable investment of stockholder equity. Under the new
business plan, Impac has terminated certain employees as of August 1999 and is
in the process of repositioning the assets in its portfolio by selling certain
assets to invest in higher yielding assets.
Long-term investment operations
During 1999, Impac's warehouse lenders did not renew their warehouse
facilities with Impac upon expiration in February and May of 1999. Without any
new warehouse line agreements, Impac has no credit facility to fund its mortgage
loans. All originations since the expiration of Impac's existing warehouse line
agreements have been, and any future originations will be, brokered or table
funded with another lender until such time as Impac is successful in obtaining
another credit facility. In May 1999, Impac entered into a $13.5 million term
loan agreement to refinance the remaining balance on the expired warehouse line,
which has since been repaid in full. Impac also has entered into reverse
repurchase agreements whereby Impac pledges specific commercial mortgage-backed
securities as collateral to secure short-term loans. The interest rates on the
borrowings are based on the one-month LIBOR plus a margin depending on the type
of collateral.
Impac's long-term investment operations use collateralized mortgage
obligation borrowings to finance commercial mortgages as a means of eliminating
some of the risks associated with warehouse line and reverse repurchase
agreements -- such as the potential need for deposits of additional collateral
- -that are not present with collateralized mortgage obligations borrowings. Terms
of the collateralized mortgage obligation borrowings require that an independent
third party custodian hold the mortgages. The maturity of each class of
collateralized mortgage obligation borrowing is affected directly by the rate of
principal prepayments on the related collateral. Equity in the collateralized
mortgage obligations is established at the time the collateralized mortgage
obligations are issued at levels sufficient to achieve desired credit ratings on
the securities from rating agencies. The amount of equity invested in
collateralized mortgage obligations by Impac's long-term investment operations
is also determined by Impac based upon the anticipated return on equity as
compared to the estimated proceeds from additional debt issuance. Total credit
loss exposure is limited to the equity invested in the collateralized mortgage
obligations at any point in time.
Conduit operations
On March 31, 1999, Impac repurchased all of the outstanding common shares
of Impac Commercial Capital making it a wholly owned subsidiary of Impac. As a
result of this transaction, the Impac Commercial Capital warehouse line with
Impac, which provided up to an aggregate of $900.0 million to finance Impac
Commercial Capital's originations, was eliminated through the consolidation of
the financial statements of Impac Commercial Capital with those of Impac.
REGULATION
The rules and regulations applicable to the conduit operations, among other
things, prohibit discrimination and establish underwriting guidelines that
include provisions for inspections and appraisals, require credit reports on
prospective borrowers and fix maximum loan amounts. Additionally, there are
various state and local laws and regulations that affect conduit operations.
Impac Commercial Capital is licensed in those states
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requiring such a license. Mortgage operations also may be subject to applicable
state usury statutes. Impac believes it is presently in material compliance with
all material rules and regulations to which it is subject.
COMPETITION
In originating commercial mortgages and issuing commercial mortgage-backed
securities, Impac 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. Commercial
mortgage-backed securities issued by Impac's conduit operations and
collateralized mortgage obligations issued by Impac's long-term investment
operations face competition from other investment opportunities available to
prospective investors. Prior to discontinuing such operations, Impac faced
competition in its conduit operations from other financial institutions,
including but not limited to banks and investment banks. Many of the
institutions with which Impac competes have significantly greater financial
resources than Impac.
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 Impac's commercial
mortgages compete with the corresponding types of properties in Impac's mortgage
portfolio to attract residents, retail correspondents, tenants and customers.
The leasing of real estate is highly competitive. The principal means of
competition are price, location and the nature and condition of the facility to
be leased. A borrower under a commercial mortgage competes with all lessors and
developers of comparable types of real estate in the area in which the mortgaged
property is located. Such lessors or developers could have lower rentals, lower
operating costs, more favorable locations or better facilities. While a borrower
under a commercial mortgage may renovate, refurbish or expand the mortgaged
property to maintain it and remain competitive, such renovation, refurbishment
or expansion may itself entail significant risk. Increased competition could
adversely affect income from the market value of the mortgaged properties. In
addition, the business conducted at each mortgaged property may face competition
from other industries and industry segments.
In acquiring residential loans and residential mortgage-backed securities,
Impac will compete with other REITs, investment banking firms, savings and loan
associations, banks, mortgage bankers, insurance companies, mutual funds, and
other entities purchasing mortgage assets, most of which have greater financial
resources than Impac. The existence of these competitors may increase
competition for the available supply of residential mortgage assets suitable for
purchase by Impac. Increased competition for the acquisition of eligible
residential mortgage assets or a diminution in the supply could result in higher
prices and, thus, lower yields on Impac's residential mortgage assets.
EMPLOYEES
Impac currently has only one employee, with the balance of its operations
being performed by employees of FIC Management. Impac is not a party to any
collective bargaining agreement.
PROPERTIES
Impac owns a commercial office building located in Newport Beach,
California. The commercial office building has approximately 74,000 square feet
of rentable office space. Impac currently leases office space in the building to
Impac Funding.
As of August 1999, Impac Commercial Capital has a lease obligation for
approximately 3,600 square feet in Sherman Oaks, California under a premises
operating lease that is scheduled to expire in May 2001.
LEGAL PROCEEDINGS
To the knowledge of Impac management, Impac is not a party to any material
legal proceedings.
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IMPAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Impac was incorporated in the state of Maryland on February 3, 1997 to seek
and capitalize on opportunities in the commercial mortgage market. Impac is a
specialty commercial property finance company that elects to be taxed at the
corporate level as a REIT for federal income tax purposes, which generally
allows Impac to pass through income to stockholders without payment of federal
income tax at the corporate level.
SIGNIFICANT TRANSACTIONS
On August 4, 1999, Impac entered into the merger agreement with AMRESCO.
Under the terms of the merger agreement, subject to the satisfaction or waiver
of a number of conditions, upon completion of the merger, Impac will be merged
into AMRESCO, with AMRESCO continuing as the surviving corporation. In the
merger, Impac stockholders will receive 0.66094 of an AMRESCO common share for
each share of Impac common stock they own when the merger is completed. In
addition, under the merger agreement, all of the shares of Impac series B
convertible preferred stock held by Fortress Partners, L.P. will be converted
into:
- 1,683,635 shares of Impac common stock, if converted prior to the
completion of the merger, or
- 1,112,782 AMRESCO common shares, if converted in the merger.
The merger will be accounted for under the purchase method of accounting. After
the merger, AMRESCO will have approximately 16.7 million common shares
outstanding. The parties anticipate that the merger will be completed in the
fourth quarter of 1999. The transactions contemplated by the merger agreement
are subject to customary conditions including approval by the shareholders of
AMRESCO and the stockholders of Impac.
New Impac management, which took over Impac's day-to-day operations in May
1999, has been formulating a new business plan which management believes will
result in a more profitable investment of stockholder equity. Under the new
business plan, Impac has terminated certain employees as of August 1999 and is
in the process of repositioning the assets in its portfolio by selling certain
assets to invest in higher yielding assets. Impac currently intends to procure
the services formerly provided by Impac Commercial Capital from third parties
and from AMRESCO following the merger.
On May 5, 1999, Impac entered into a number of agreements with Fortress
Partners, L.P. Under these agreements:
- Fortress acquired 479,999 shares of Impac series B preferred stock for an
aggregate purchase price of approximately $12.0 million,
- FIC Management, an affiliate of Fortress, assumed the management contract
between Impac and its former manager, RAI Advisors,
- FIC Management entered into a new submanagement contract with Impac
Mortgage and Impac Funding, former affiliates of Impac, and
- Fortress designees were appointed to positions as executive officers and
directors of Impac.
As a result of the various transactions with Fortress described above,
- Fortress now holds a significant equity interest in Impac, with shares of
Impac preferred stock which, upon conversion, would represent
approximately 16.7% of the issued and outstanding Impac common stock
following such conversion;
- the principal executive officers of Impac and a majority of the members
of the Impac board, are designees of Fortress; and
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- an affiliate of Fortress, FIC Management, now controls the external
management of Impac's REIT operations, as well as its submanagement
functions.
For a more detailed description of the transactions between Impac and
Fortress, see "Business of Impac -- The manager."
By the end of the first quarter of 1999, Impac was notified by the two
investment banks that had previously provided Impac with up to $600.0 million of
financing, of which $200.0 million was uncommitted, that these warehouse line
agreements would not be renewed upon their expiration dates in February 1999 and
May 1999.
On March 31, 1999, the Impac board of directors unanimously approved the
purchase of all the outstanding common shares of Impac Commercial Capital, which
represented 5% of the economic interest of Impac Commercial Capital. Subsequent
to the purchase date, Impac Commercial Capital became a wholly owned subsidiary
of Impac and Impac Commercial Capital has been included in Impac's federal
income tax returns and consolidated financial statements.
On October 21, 1998, Impac repurchased from Impac Mortgage 937,084 shares
of Impac common stock and 456,916 shares of Impac class A common stock at a per
share price of $4.375, based upon the closing sales price of the Impac common
stock on the American Stock Exchange on October 19, 1998, for a total repurchase
of $6.1 million.
On September 25, 1998, Impac's board of directors authorized Impac to
repurchase up to $5.0 million of Impac's common stock, in open market purchases
from time to time at the discretion of Impac's management; the timing and extent
of the repurchases will depend on market conditions. Impac intends to effect
such repurchases, if any, in compliance with the Rule 10b-18 under the
Securities Exchange Act of 1934. During the six months ended June 30, 1999,
Impac repurchased, in the open market, 206,800 shares of Impac common stock at a
weighed average price of $5.18 per share, or an aggregate purchase price of $1.1
million. All acquired shares were canceled.
On October 27, 1998, Impac purchased from Impac Mortgage its remaining 50%
ownership interest in a commercial office building in Newport Beach, California
for $6.0 million. After the purchase of the 50% ownership interest from Impac
Mortgage, Impac has a 100% ownership interest in the commercial office building.
BUSINESS OPERATIONS
Long-term investment operations
During the six months ended June 30, 1999, the long-term investment
operations conducted by Impac did not acquire any commercial mortgages from
Impac Commercial Capital as compared to $325.6 million of commercial mortgages
acquired from Impac Commercial Capital during the six months ended June 30,
1998. As of June 30, 1999, the long-term investment operations portfolio of
mortgage loans consisted of $317.3 million of mortgage loans held as collateral
for collateralized mortgage obligations, $29.8 million of commercial mortgages
held-for-sale and $8.0 million of commercial mortgages held-for-investment, of
which approximately 89% were fixed rate mortgages and 11% were adjustable rate
mortgages. The weighted average coupon of the long-term investment operations
portfolio of commercial mortgages was 8.06% at June 30, 1999. In addition, the
long-term investment operations had investment securities available-for-sale of
$16.5 million and residual interest in securitizations of $8.8 million at June
30, 1999.
During the year ended December 31, 1998, the long-term investment
operations acquired $522.1 million of commercial mortgages as compared to $41.2
million of commercial mortgages acquired during the period from January 15,
1997, the date of commencement of Impac's operations, through December 31, 1997.
Commercial mortgages purchased from Impac Commercial Capital during 1998
consisted of $499.1 million of fixed rate mortgages and $23.0 million of
adjustable rate mortgages secured by first liens on commercial property. During
1998, commercial mortgages purchased from Impac Commercial Capital's three
operating divisions, which are described below, consisted of $325.3 million of
Conduit Express loans, $184.1 million of
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<PAGE> 135
Commercial Express loans and $12.7 million of CondoSelect loans. As of December
31, 1998, the long-term investment operations' portfolio of commercial mortgages
consisted of $24.6 million of commercial mortgages held-for-investment and
$326.6 million of mortgage loans held as collateral for collateralized mortgage
obligations, of which approximately 85% were fixed rate mortgages and 15% were
adjustable rate mortgages. The weighted average coupon of the long-term
investment operations' portfolio of commercial mortgages was 8.13% at December
31, 1998. During 1998, the long-term investment operations sold $172.3 million
of commercial mortgages to third party investors and $43.2 million of commercial
mortgages to Impac Commercial Capital as compared to none during the
commencement period in 1997. In addition, the long-term investment operations
had outstanding finance receivables of $41.0 million, investment securities
available-for sale of $17.2 million and residual interest in securitization
held-for-trading of $8.8 million at December 31, 1998.
Conduit operations
Until August 1999, Impac's conduit operations, which were conducted by
Impac Commercial Capital, supported the long-term investment operations of Impac
by supplying Impac with commercial mortgages for its long-term investment
portfolio. Acting as the mortgage conduit for Impac, Impac Commercial Capital
operated three divisions: the ConduitExpress Division, the CommercialExpress
Division and the CondoSelect Division. The ConduitExpress Division originated no
loans during the first six months of 1999 as compared to $181.9 million during
1998. The CommercialExpress Division originated $5.6 million in loans during the
first six months of 1999 as compared to $106.3 million during 1998. The
CondoSelect Division originated no loans during the first six months ended June
30, 1999 as compared to $12.7 million during the first six months of 1998. The
decrease in originations in the ConduitExpress and CommercialExpress Divisions
was primarily the result of the global liquidity crisis that occurred during the
latter part of 1998 and Impac Commercial Capital's lack of a viable profitable
exit strategy for its commercial mortgage loans. Without sufficient liquidity to
accumulate enough commercial mortgage loans to effectuate a securitization,
Impac Commercial Capital was forced to sell all its commercial mortgage loan
originations on a whole loan service released basis. The sale of commercial
mortgage loans on a whole loan basis is an inefficient method of selling loans
in light of the liquidity crisis and without consistent industry underwriting
guidelines. In order to sell loans on a more profitable basis, Impac Commercial
Capital was forced to increase pricing spreads over a decreasing US 10-year
Treasury rate. The result was a decrease in overall production throughout the
fourth quarter of 1998 and during the first six months of 1999. In addition,
Impac Commercial Capital was notified by its warehouse lenders that its
warehouse lines would not be renewed upon expiration. In March of 1999, due to
the decrease in loan production, Impac Commercial Capital reduced its operations
to a core group of key officers and employees. As of June 30, 1999, Impac
Commercial Capital employed 15 as compared to 80 as of June 30, 1998. Impac
Commercial Capital's servicing portfolio decreased by 91% to $40.3 million as of
June 30, 1999 as compared to $452.8 million as of June 30, 1998. As of June 30,
1999, there was one delinquent commercial mortgage for $136,000 that was 60 days
past due in Impac Commercial Capital's servicing portfolio.
Impac Commercial Capital originated $425.1 million of commercial mortgages
during 1998 as compared to $233.5 million of commercial mortgages originated
during the commencement period. The Conduit Express Division originated $239.7
million of ConduitExpress loans during the year ended December 31, 1998 as
compared to $159.2 million during the commencement period. The CommercialExpress
Division originated $172.7 million of CommercialExpress loans during 1998 as
compared to $50.7 million during the commencement period. The CondoSelect
Division originated $12.7 million of CondoSelect loans during 1998 as compared
to $23.6 million during the commencement period. During the year ended December
31, 1998 and the commencement period, Impac Commercial Capital sold $525.2
million and $23.7 million, respectively, of commercial mortgages to Impac and
none and $73.4 million, respectively, to third parties. Impac Commercial
Capital's servicing portfolio increased 124% to $379.0 million as of December
31, 1998 as compared to $169.2 million as of December 31, 1997. The loan
delinquency rate of commercial mortgages in Impac Commercial Capital's servicing
portfolio was 1.13% at December 31, 1998 as compared to none at December 31,
1997.
In August 1999, all but one of the remaining employees of Impac Commercial
Capital were terminated.
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RESULTS OF OPERATIONS OF IMPAC
Six months ended June 30, 1999 as compared to six months ended June 30,
1998
Net earnings. Impac recorded net earnings available to common stockholders
of $479,000, or $0.06 basic and diluted earnings per common share, for the six
months ended June 30, 1999 as compared to net earnings of $4.8 million, or $0.60
basic and diluted earnings per common share, for the six months ended June 30,
1998. The decrease in net earnings for the six months ended June 30, 1999 was
primarily the result of decrease in net interest income and an increase in
non-interest expense.
Net interest income. Net interest income decreased 25% to $5.0 million
during the six months ended June 30, 1999 as compared to $6.7 million during the
six months ended June 30, 1998. The decrease in net interest income was
primarily the result of higher borrowing costs associated with the issuance of
Impac's first commercial mortgage backed collateralized mortgage obligations.
While the collateralized mortgage obligation borrowing costs were higher than
traditional warehouse borrowings, they are deemed to be permanent financing for
the investment in these loans. The net interest spread on commercial mortgage
assets decreased to 0.92% during the six months ended June 30, 1999 as compared
to 2.48% for the six months ended June 30, 1998. The decrease in net interest
spread on commercial mortgage assets was primarily due to a decrease in
collateralized mortgage obligations collateral yields as compared to finance
receivables and increased borrowing costs associated with the issuance of
fixed-rate collateralized mortgage obligations borrowings as compared to
variable-rate short-term warehouse borrowings.
The following table summarizes average balance, interest and
weighted-average yield on commercial mortgage assets and borrowings for the six
months ended June 30, 1999 and 1998 and includes interest income on commercial
mortgage assets and interest expense related to borrowings on commercial
mortgage assets only (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 1999 ENDED JUNE 30, 1998
-------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE AVG AVERAGE AVG
BALANCE INTEREST YIELD BALANCE INTEREST BALANCE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL MORTGAGE ASSETS:
Investment and residual
securities................. $ 25,480 $ 1,892 14.85% $ 29,083 $ 2,171 14.93%
Loan receivables:
commercial mortgages held-
for-investment.......... 13,950 617 8.85 112,608 4,763 8.46
commercial mortgages held-
for-sale................ 39,623 1,565 7.90 -- -- --
Collateralized mortgage
obligations
collateral.............. 323,042 12,527 7.76 4,251 227 10.68
Finance receivables........ -- -- -- 134,849 5,688 8.44
-------- ------- -------- -------
Total loan
receivables...... 376,615 14,709 7.81 251,708 10,678 8.48
-------- ------- -------- -------
Total commercial
mortgage
assets........... $402,095 $16,601 8.26% $280,791 $12,849 9.15
-------- ------- -------- -------
BORROWINGS:
Warehouse line agreements.... $ 32,591 $ 1,015 6.23% $202,229 $ 6,775 6.70%
Collateralized mortgage
obligations borrowings..... 281,687 10,540 7.48 4,154 135 6.50
Reverse repurchase
agreements................. 4,663 144 6.18 8,490 260 6.13
-------- ------- -------- -------
Total borrowings... $318,941 $11,699 7.34 $214,874 $ 7,170 6.67
-------- ------- -------- -------
Net interest spread........ 0.92% 2.48%
Net interest margin........ 2.44% 4.05%
</TABLE>
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<PAGE> 137
Interest income on commercial mortgage assets. Interest income on
commercial mortgages held-for-investment decreased to $617,000 during the six
months ended June 30, 1999 as compared to $4.8 million during the six months
ended June 30, 1998 as average commercial mortgages held-for-investment
decreased to $14.0 million as compared to $112.6 million, respectively. The
decrease in average commercial mortgages held-for-investment was the result of
Impac's long-term investment operations issuing its first collateralized
mortgage obligation securitization of commercial mortgage loans in August 1998.
The weighted-average yield on commercial mortgages held-for-investment increased
to 8.85% during the six months ended June 30, 1999 as compared to 8.46% during
the same period of 1998. The increase in the weighted-average yield during the
six months ended June 30, 1999 was due to the acquisition of higher yielding
ConduitExpress loans.
Interest income on finance receivables was eliminated during the six months
ended June 30, 1999 as a result of the consolidation of Impac Commercial
Capital's financial statements with those of Impac and the elimination of the
warehouse agreement between Impac Commercial Capital and Impac in the
consolidated financial statements. For the six months ended June 30, 1999, Impac
Commercial Capital's mortgage loans held-for-sale appear as a single line item
on the consolidated financial statements of Impac. In previous periods'
presentation, mortgage loans held-for-sale appear as finance receivables on
Impac's balance sheet. For comparative purposes, the average loans held-for-sale
decreased to $39.6 million during the six months ended June 30, 1999 as compared
to $134.8 million of finance receivables during the six months ended June 30,
1998. The decrease in outstanding balances was attributable to the decrease in
commercial mortgage originations during the six months ended June 30, 1999 as
compared to the same period in 1998.
Interest income on collateralized mortgage obligation collateral increased
to $12.5 million during the six months ended June 30, 1999 as compared to
$227,000 during the six months ended June 30, 1998 as average collateralized
mortgage obligation collateral increased to $323.0 million as compared to $4.3
million, respectively. Average collateralized mortgage obligation collateral
increased as the long-term investment operations issued collateralized mortgage
obligation totaling $291.0 million, which were collateralized by $320.9 million
in commercial mortgages, between June 30, 1998 and June 30, 1999. The
weighted-average yield on collateralized mortgage obligation collateral was
7.76% during the six months ended June 30, 1999 as compared to 10.68% during the
same period in 1998.
Interest income on investment securities available-for-sale decreased to
$1.9 million during the six months ended June 30, 1999 as compared to $2.2
million during the six months ended June 30, 1998 as average investment
securities available-for-sale, exclusive of securities valuation allowance,
decreased to $25.5 million as compared to $29.1 million, respectively. The
weighted-average yield on investment securities available-for-sale decreased to
14.85% during the six months ended June 30, 1999 as compared to 14.93% during
the six months ended June 30, 1998.
Interest expense on borrowings. Interest expense on warehouse lines used
to fund finance receivables or mortgage loans held-for-sale decreased to $1.0
million during the six months ended June 30, 1999 as compared to $6.8 million
during the six months ended June 30, 1998. The average balance of warehouse
lines decreased to $32.6 million during the six months ended June 30, 1999 as
compared to $202.2 million during the six months ended June 30, 1998. The
decrease in warehouse line borrowings was a direct result of the decreased
originations at Impac Commercial Capital. The weighted-average yield of
warehouse lines decreased to 6.23% during the six months ended June 30, 1999 as
compared to 6.70% during the six months ended June 30, 1998.
Interest expense on collateralized mortgage obligation borrowings increased
to $10.5 million during the six months ended June 30, 1999 as compared to
$135,000 during the six months ended June 30, 1998 as average borrowings on
collateralized mortgage obligation collateral increased to $281.7 million as
compared to $4.2 million, respectively. Average collateralized mortgage
obligation borrowings increased as the long-term investment operations issued
collateralized mortgage obligation totaling $291.0 million during the period
between June 30, 1998 and June 30, 1999. The weighted-average yield of
collateralized mortgage obligation borrowings was 7.48% during the six months
ended June 30, 1999 as compared to 6.50% during the same period in 1998.
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<PAGE> 138
Impac also uses commercial mortgage-backed securities as collateral to
borrow under reverse repurchase agreements to fund the purchase of commercial
mortgage-backed securities and to act as an additional source of liquidity for
Impac's operations. Interest expense on these reverse repurchase agreements
decreased to $144,000 during the six months ended June 30, 1999 as compared to
$260,000 during the six months ended June 30, 1998. The average balance on these
reverse repurchase agreements decreased to $4.7 million during the six months
ended June 30, 1999 as compared to $8.5 million during the six months ended June
30, 1998. The weighted-average yield of these reverse repurchase agreements was
6.18% during the six months ended June 30, 1999 as compared to 6.13% during the
six months ended June 30, 1998.
Total non-interest expense increased to $4.6 million for the six months
ended June 30, 1999 as compared to $1.3 million for the same period in the
previous year. Non-interest expense increased primarily as a result of the
consolidation of Impac Commercial Capital's operating expenses with those of
Impac for the three months ended June 30, 1999 as compared to the same period in
1998 when Impac Commercial Capital's operations were accounted for under the
equity method and appear in the equity in net loss of Impac Commercial Capital.
Management advisory fees decreased to none during the six months ended June
30, 1999 as compared to $379,000 for the same period of 1998. Management
advisory fees are paid only when Impac has excess taxable income over a certain
benchmark, which was not achieved during the six months ended June 30, 1999.
Credit exposures
Impac did not record a provision for loan loss during the six months ended
June 30, 1999 as compared to $118,000 recorded during the six months ended June
30, 1998. In addition, Impac recorded a provision for repurchases of $47,000
during the six months ended June 30, 1999 as compared to none during the same
period in 1998.
Year ended December 31, 1998 as compared to the period from January 15,
1997 (commencement of operations) through December 31, 1997
Net earnings. Impac recorded a net loss of $(11.0) million, or $(1.26)
basic and diluted loss per common share, during the year ended December 31, 1998
as compared to net earnings of $2.8 million, or $0.61 basic and diluted earnings
per common share, for the commencement period. Impac's net loss for 1998 was
primarily the result of an increase of $18.0 million in loss on sale of
commercial mortgages held-for-sale by Impac Commercial Capital, a non-cash
charge of $1.7 million on the write-down of the residual interest in
securitization held-for-trading and an increase of $982,000 in provision for
loan losses. These increases to 1998 net loss were partially offset by an
increase of 180% in net interest income to $14.3 million during 1998 as compared
to $5.1 million during the commencement period.
The loss on sale of commercial mortgages held-for-sale by Impac's conduit
operations during 1998 was $14.3 million as compared to a gain on sale of
commercial mortgages held-for-sale of $3.7 million during the commencement
period. The loss on sale of commercial mortgages held-for-sale resulted in a
deficit in equity in net loss of Impac Commercial Capital of $(19.2) million for
1998 as compared to equity in net earnings of Impac Commercial Capital of $1.7
million during the commencement period. The loss on sale of commercial mortgages
held-for-sale was the result of the sale of commercial mortgages during the
fourth quarter of 1998 in order to generate liquidity and help to protect Impac
against any future margin calls on borrowings under warehouse line and reverse
repurchase facilities. Impac's lenders required margin calls on Impac's
warehouse line and reverse repurchase facilities due to turmoil in the
commercial mortgage market-backed securitization during the third and fourth
quarters of 1998. Therefore, in order to meet those margin calls and provide
Impac additional liquidity, Impac completed the sale of $172.3 million of
commercial mortgages during the fourth quarter of 1998, which increased Impac's
liquidity by $25.6 million, at the time of sale, after paying down borrowings on
warehouse lines and reverse repurchase facilities. With net proceeds from the
sale of commercial mortgages, Impac was able to use these funds to pay its third
quarter dividend, which had been suspended, repurchase shares of its capital
stock at a price significantly below book value, purchase the
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<PAGE> 139
remaining 50% ownership interest in its commercial office building from Impac
Mortgage and have additional liquidity for general working capital needs.
Net interest income. Net interest income increased 180% to $14.3 million
during 1998 as compared to $5.1 million during the commencement period. Interest
income is primarily interest on commercial mortgage assets and includes interest
income on cash and cash equivalents and amounts due from affiliates. Interest
expense is primarily borrowings on commercial mortgage assets and includes
interest expense on due to affiliates. commercial mortgage assets include
investment securities available-for-sale, residual interest in securitization
held-for-trading, commercial mortgages held-for-investment, Collateralized
mortgage obligations collateral and finance receivables. The increase in net
interest income during 1998 as compared to the commencement period was primarily
the result of higher average commercial mortgage assets, which increased to
$385.3 million during 1998 as compared to $63.0 million during the commencement
period. The net interest spread on commercial mortgage assets decreased to 1.77%
during 1998 as compared to 3.15% during the commencement period. The decrease in
net interest spread on commercial mortgage assets during 1998 as compared to the
commencement period was primarily due to an increase in lower yielding finance
receivables outstanding with Impac Commercial Capital and a decrease in the
ten-year treasury yield, which Impac uses as an index to determine initial
interest rates on its commercial mortgages.
The following table summarizes average balance, interest and
weighted-average yield on commercial mortgage assets and borrowings for the year
ended December 31, 1998 and the commencement period and includes interest income
on commercial mortgage assets and interest expense related to borrowings on
commercial mortgage assets only (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998 FOR THE COMMENCEMENT PERIOD
------------------------------------------ -----------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVG % OF AVERAGE AVG % OF
BALANCE INTEREST YIELD PORTFOLIO BALANCE INTEREST YIELD PORTFOLIO
-------- -------- -------- --------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL MORTGAGE ASSETS:
Investment and residual
securities................ $ 28,349 $ 4,357 15.37% 7.36% $12,786 $2,234 17.47% 20.29%
Loan receivables:
Commercial mortgages
held-for-investment....... 127,015 10,452 8.23 32.97 22,030 2,066 9.38 34.97
Collateralized mortgage
obligations collateral.... 122,122 9,061 7.42 31.70 233 48 20.60 0.37
Finance receivables........... 107,777 9,063 8.41 27.97 27,956 2,372 8.48 44.37
-------- ------- ----- ------ ------- ------ ----- ------
Total loan
receivables........ 356,914 28,576 8.01 92.64 50,219 4,486 8.93 79.71
Total commercial
mortgage assets.... $385,263 $32,933 8.55% 100.00% $63,005 $6,720 10.67% 100.00%
======== ======= ===== ====== ======= ====== ===== ======
BORROWINGS:
Warehouse line agreements..... $193,370 $12,947 6.70% 63.44% $25,463 $1,847 7.25% 85.06%
CMO borrowings................ 103,180 7,203 6.98 33.85 228 15 6.58 0.76
Reverse repurchase
agreements.................. 8,270 514 6.22 2.71 1,938 115 5.93 6.47
Borrowings on residual
interest in
securitization.............. -- -- -- -- 2,307 275 11.92 7.71
Total borrowings..... $304,820 $20,664 6.78% 100.00% $29,936 $2,252 7.52% 100.00%
======== ======= ===== ====== ======= ====== ===== ======
Net interest
spread............. 1.77% 3.15%
Net interest
margin............. 3.18% 7.09%
</TABLE>
Interest income on commercial mortgage assets. Interest income on
commercial mortgages held-for-investment increased to $10.5 million during 1998
as compared to $2.1 million during the commencement period as average commercial
mortgages held-for-investment increased to $127.0 million as compared to $22.0
million, respectively. The increase in average commercial mortgages
held-for-investment was the result of the long-term investment operations
acquiring $522.1 million of commercial mortgages during 1998 as compared to
$41.2 million during the commencement period. The weighted-average yield on
commercial mortgages
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held-for-investment decreased to 8.23% during 1998 as compared to 9.38% during
the commencement period. The decrease in the weighted-average yield during 1998
was due to the acquisition of lower yielding ConduitExpress loans as compared to
the commencement period and the decrease in the ten-year treasury yield, which
Impac uses as an index to determine initial interest rates on its commercial
mortgages.
Interest income on finance receivables increased to $9.1 million during
1998 as compared to $2.4 million during the commencement period as average
finance receivables increased to $107.8 million as compared to $28.0 million,
respectively. The increase was primarily the result of an increase in Impac
Commercial Capital's loan originations, which are financed by the long-term
investment operations until Impac Commercial Capital sells the loans to third
party investors or to Impac. Impac Commercial Capital originated $425.1 million
of commercial mortgages during 1998 as compared to $233.5 million of commercial
mortgages originated during the commencement period. The weighted-average yield
on finance receivables decreased to 8.41% during 1998 as compared to 8.48%
during the commencement period as the prime rate decreased during 1998. The
prime rate is used as the index to determine the interest rate on finance
receivables.
Interest income on collateralized mortgage obligation collateral increased
to $9.1 million during 1998 as compared to $48,000 during the commencement
period as average collateralized mortgage obligation collateral increased to
$122.1 million as compared to $233,000, respectively. Average collateralized
mortgage obligation collateral increased as the long-term investment operations
issued collateralized mortgage obligation totaling $301.8 million, which were
collateralized by $325.0 million in commercial mortgages, in August 1998. The
weighted-average yield on collateralized mortgage obligation collateral was
7.42% during 1998.
Interest income on investment securities available-for-sale increased to
$4.4 million during 1998 as compared to $2.2 during the commencement period as
average investment securities available-for-sale, net of securities valuation
allowance, increased to $28.3 million as compared to $12.8 million,
respectively. The weighted-average yield on investment securities
available-for-sale decreased to 15.37% during 1998 as compared to 17.47% during
the commencement period.
Interest expense on borrowings. Interest expense on warehouse line
agreements used to fund finance receivables to Impac Commercial Capital and
commercial mortgages held-for-investment increased to $12.9 million during 1998
as compared to $1.8 million during the commencement period as the average
balance of warehouse line agreements increased to $193.4 million and $25.5
million, respectively. The increase was a result of an increase in finance
receivables made to Impac Commercial Capital to fund the acquisition of
commercial mortgages and to also fund the long-term investment operations
commercial mortgages held-for-investment, which were acquired from Impac
Commercial Capital. The weighted-average yield of warehouse line agreements
decreased to 6.70% during 1998 as compared to 7.25% during the commencement
period.
Interest expense on collateralized mortgage obligation borrowings increased
to $7.2 million during 1998 as compared to $15,000 during the commencement
period as average borrowings on collateralized mortgage obligation collateral
increased to $103.2 million as compared to $228,000, respectively. Average
collateralized mortgage obligation borrowings increased as Impac's long-term
investment operations issued collateralized mortgage obligations totaling $301.8
million during 1998. The weighted-average yield of collateralized mortgage
obligation borrowings was 6.98% during 1998.
Interest expense on borrowings on residual interest in securitization,
held-for-trading decreased to none during 1998 as compared to $275,000 during
the commencement period as the borrowings against the residual interest were
repaid with proceeds received from Impac's initial public offering on August 5,
1997. The weighted-average yield of borrowings on residual interest in
securitization, held-for-trading was 11.92% during the commencement period.
Impac also uses commercial mortgage-backed securities as collateral to
borrow under reverse repurchase agreements to fund the purchase of commercial
mortgage-backed securities and to act as an additional source of liquidity for
Impac's operations. Interest expense on these reverse repurchase agreements
increased to $514,000 during 1998 as compared to $115,000 during the
commencement period as the average balance on these reverse repurchase
agreements increased to $8.3 million as compared to $1.9 million, respectively.
The
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weighted-average yield of these reverse repurchase agreements was 6.22% during
1998 as compared to 5.93% during the commencement period.
Equity in net earnings (loss) of Impac Commercial Capital
Corporation. Equity in net loss of Impac Commercial Capital for 1998 was
$(19.2) million as compared to equity in net earnings of Impac Commercial
Capital of $1.7 million for the commencement period. The decrease in equity in
net earnings (loss) of Impac Commercial Capital for 1998 was primarily the
result of the aforementioned $14.3 million loss on sale of commercial mortgages
during 1998 as compared to a gain on sale of commercial mortgages of $3.7
million during the commencement period. For more information on the results of
operations of Impac Commercial Capital refer to "-- Results of Operations of
Impac Commercial Capital Corporation." For periods prior to March 31, 1999,
Impac recorded 95% of the earnings or losses from Impac Commercial Capital as
Impac owned 100% of Impac Commercial Capital's preferred stock of Impac
Commercial Capital, which represented 95% of the economic interest in, Impac
Commercial Capital. On March 31, 1999, Impac acquired all of the outstanding
shares of Impac Commercial Capital common stock and Impac Commercial Capital
became a wholly owned subsidiary of Impac.
Expenses
General and administrative and other expense. General and administrative
and other expense increased to $1.2 million during 1998 as compared to $156,000
during the commencement period. The increase in general and administrative
expense was primarily related to operational expenses Impac incurred subsequent
to August of 1997 as a result of becoming a public company. Additionally,
property expense on a commercial office building which Impac owns, increased to
$779,000 during 1998 as compared to $109,000 during the commencement period.
Advisory fees. Advisory fees are computed quarterly on tax basis earnings,
which are calculated by adjusting Impac's book basis earnings by various
differences between book basis earnings and tax basis earnings. Differences
between book basis earnings and tax basis earnings are estimates that are
derived from management's best knowledge. Although Impac recorded a net loss
during 1998, Impac recorded advisory fees based on tax basis earnings, which
were approximately $11.7 million. Therefore, Impac recorded an expense of
$745,000 during 1998 as compared to none during the commencement period.
Credit exposures. Impac recorded provision for loan losses of $1.5 million
during 1998 as compared to $564,000 during the commencement period.
Correspondingly, the allowance for loan losses increased to $2.1 million at
December 31, 1998 as compared to $564,000 at December 31, 1997. At December 31,
1998 and 1997, Impac's allowance for loan losses expressed as a percentage of
commercial mortgages held-for-investment, collateralized mortgage obligation
collateral and finance receivables (collectively "Gross Loan Receivables") was
0.54% and 0.35%, respectively. The allowance for loan losses is determined
primarily on management's judgment of net loss potential including specific
allowances for any known impaired loans, changes in the nature and volume of the
portfolio, value of the collateral and current economic conditions that may
affect the borrowers' ability to pay.
Delinquencies. The following table sets forth delinquency statistics for
Impac's long-term investment operations' portfolio of commercial mortgages
held-for-investment and collateralized mortgage obligation collateral for the
periods shown:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
--------------------- ---------------------
NUMBER % OF NUMBER % OF
OF SERVICING OF SERVICING
LOANS PORTFOLIO LOANS PORTFOLIO
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Loans delinquent for:
90 days............................................. 5 1.21 -- 0.0
----- ---- ----- ----
Total delinquencies, foreclosures and
bankruptcies..................................... 5 1.21% -- 0.0%
===== ==== ===== ====
</TABLE>
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RESULTS OF OPERATIONS OF IMPAC COMMERCIAL CAPITAL CORPORATION
Year ended December 31, 1998 as compared to the period from January 15, 1997
(commencement of operations) through December 31, 1997
Net earnings. Impac Commercial Capital recorded a net loss of $(20.2)
million during the year ended December 31, 1998 as compared to net earnings of
$1.4 million for the commencement period. Impac's net loss for 1998 was
primarily the result of an increase of $18.0 million in loss on sale of
commercial mortgages held-for-sale, an increase of $1.0 million in net interest
loss and an increase of $4.3 million in other operating expense.
Net interest income (expense). Impac Commercial Capital's net interest
expense increased by $1.0 million to $(1.0) million during 1998 as compared to
$57,000 during the commencement period as the deterioration of the commercial
mortgage-backed securitization market forced Impac Commercial Capital to hold
commercial mortgages in its portfolio during 1998. Commercial mortgages
held-for-sale earned lower yields than interest rates paid on borrowings used to
finance the commercial mortgages. The average yield earned on commercial
mortgages held-for-sale was 7.88% during 1998 as compared to financing costs of
8.40%. During the fourth quarter of 1998, Impac began concentrating its efforts
on the origination of higher yielding CommercialExpress loans and de-emphasizing
the origination of lower yielding ConduitExpress loans.
Non-interest income. The loss on sale of commercial mortgages
held-for-sale during 1998 was $14.3 million as compared to a gain on sale of
commercial mortgages held-for-sale of $3.7 million during the commencement
period. The loss on sale of commercial mortgages held-for-sale was the result of
the sale of commercial mortgages during the fourth quarter of 1998 in order to
generate liquidity and help to protect Impac against any future margin calls on
borrowings under warehouse line and reverse repurchase facilities. Impac's
lenders required margin calls on Impac's warehouse line and reverse repurchase
facilities due to turmoil in the commercial mortgage-backed securitization
market during the third and fourth quarters of 1998. In order to meet those
margin calls and provide Impac additional liquidity, Impac Commercial Capital
completed the sale of $172.3 million of commercial mortgages during the fourth
quarter of 1998.
Non-Interest Expense. Other operating expense increased to $5.4 million
during 1998 as compared to $1.0 million during the commencement period as Impac
Commercial Capital's loan originations increased to $425.1 million as compared
to $233.5 million, respectively. Personnel expense increased to $2.5 million
during 1998 as compared to $38,000 during the commencement period as Impac
Commercial Capital's staffing increased to 89 employees at September 30, 1998 as
compared to 50 employees at December 31, 1997 and 27 employees at September 30,
1997. During the fourth quarter of 1998, Impac Commercial Capital reduced its
staff levels by 35% due to the decrease in loan originations during the second
half of 1998 as compared to the first half of 1998. In addition, occupancy
expense increased to $1.0 million during 1998 as compared to $160,000 during the
commencement period and general and administrative and other expense increased
to $1.1 million as compared to $288,000, respectively, due to the increase in
Impac Commercial Capital's staffing levels and the expansion of its loan
origination operations.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Impac's business operations are primarily funded from monthly interest and
principal payments from its commercial mortgage and commercial mortgage-backed
securities portfolios, warehouse line and reverse repurchase agreements secured
by commercial mortgages and commercial mortgage-backed securities,
collateralized mortgage obligations financing, proceeds from the sale of
commercial mortgages, and proceeds from the issuance of Impac common stock. The
acquisition of commercial mortgages and commercial mortgage-backed securities by
Impac's long-term investment operations are primarily funded from monthly
principal and interest payments, warehouse and reverse repurchase agreements,
collateralized mortgage obligation financing, and proceeds from the sale of
Impac common stock. Prior to the discontinuation of its operations in August
1999, the acquisition of commercial mortgages by Impac's conduit operations was
funded from reverse repurchase agreements and the sale of commercial mortgages.
Impac's ability to meet its
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long-term liquidity requirements is subject to the renewal of its credit and
repurchase facilities and/or obtaining other sources of financing, including
additional debt or equity from time to time. Any decision by Impac's lenders
and/or investors to make additional funds available to Impac in the future will
depend upon a number of factors, such as Impac's compliance with the terms of
its existing credit arrangements, Impac's financial performance, industry and
market trends in Impac's various businesses, the general availability of and
rates applicable to financing and investments, such lenders' and/or investors'
own resources and policies concerning loans and investments, and the relative
attractiveness of alternative investment or lending opportunities.
Long-term investment operations
During 1999, Impac's warehouse lenders did not renew their warehouse
facilities with Impac upon their expiration in February and May of 1999. Without
any new warehouse line agreements, Impac has no credit facility to fund its
mortgage loans. All loan originations since the expiration of these warehouse
facilities have been, and any future originations will be, brokered or table
funded with another lender until such time as Impac is successful in obtaining
another credit facility. In May 1999, Impac entered into a $13.5 million term
loan agreement to refinance the remaining balance on the expired warehouse line.
As of June 30, 1999, the amount outstanding under this agreement was $13.5
million, which has since been repaid in full. Impac has also entered into
reverse repurchase agreements whereby Impac pledges specific commercial
mortgage-backed securities as collateral to secure short-term loans. The
interest rates on the borrowings are based on the one-month LIBOR plus a margin
depending on the type of collateral. As of June 30, 1999, amounts outstanding on
the reverse repurchase agreements were $4.5 million.
Impac's long-term investment operations uses collateralized mortgage
obligation borrowings to finance commercial mortgages as a means of eliminating
certain risks associated with warehouse line and reverse repurchase agreements
such as the potential need for deposits of additional collateral that are not
present with collateralized mortgage obligation borrowings. Terms of the
Collateralized mortgage obligation borrowings require that an independent third
party custodian hold the mortgages. The maturity of each class is directly
affected by the rate of principal prepayments on the related collateral. Equity
in the collateralized mortgage obligations is established at the time the
collateralized mortgage obligations are issued at levels sufficient to achieve
desired credit ratings on the securities from rating agencies. The amount of
equity invested in collateralized mortgage obligations by the long-term
investment operations is also determined by Impac based upon the anticipated
return on equity as compared to the estimated proceeds from additional debt
issuance. Total credit loss exposure is limited to the equity invested in the
collateralized mortgage obligations at any point in time. At June 30, 1999, the
long-term investment operations had $277.8 million of collateralized mortgage
obligation borrowings used to finance $317.3 million of collateralized mortgage
obligation collateral.
Conduit operations
On March 31, 1999, Impac repurchased all of the outstanding common shares
of Impac Commercial Capital making it a wholly-owned subsidiary of Impac. As a
result of this transaction, the Impac Commercial Capital warehouse line with
Impac which provided up to an aggregate of $900.0 million to finance Impac
Commercial Capital's originations, was eliminated through the consolidation of
the financial statements of Impac and Impac Commercial Capital. See Note 1 to
the Consolidated Financial Statements of Impac.
CASH FLOWS
Operating activities
During the six months ended June 30, 1999, net cash provided by operating
activities was $25.2 million. Net cash operating activities was primarily the
result of the sale of mortgage loans held-for-sale and the decrease of due from
affiliates balances.
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Investing activities
During the six months ended June 30, 1999, net cash provided by investing
activities was $15.6 million. Net cash provided by investing activities was
primarily the result of the sale of mortgage loans held-for-investment and
paydowns on the mortgage loans held-for-investment partially offset by
construction costs of Dove Street building.
Financing activities
During the six months ended June 30, 1999, net cash used in financing
activities was $33.1 million. Net cash used in financing activities was
primarily the result of a decrease in warehouse line borrowings and paydown on
collateralized mortgage obligation borrowings offset by the issuance of Impac
preferred stock.
INFLATION
The consolidated financial statements of Impac and related notes included
elsewhere in this document have been prepared in accordance with GAAP, which
requires the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased costs of Impac's operations. Unlike industrial companies,
nearly all of the assets and liabilities of Impac's operations are monetary in
nature. As a result, interest rates have a greater impact on the performance of
Impac's operations than the effects of general levels of inflation. Inflation
affects Impac's operations primarily through its effect on interest rates, since
interest rates normally increase during periods of high inflation and decrease
during periods of low inflation. During periods of increasing interest rates,
demand for mortgage loans and a borrowers' ability to qualify for mortgage
financing in a purchase transaction may be adversely affected. During periods of
decreasing interest rates, borrowers may prepay their mortgages, which in turn
may adversely affect Impac's yield and consequently the value of its portfolio
of mortgage assets.
YEAR 2000 COMPLIANCE
Project status
Impac's Year 2000 project was approximately 90% complete as of July 31,
1999. Impac Funding, as the submanager for Impac, has contracted with an outside
vendor to provide coordination, support, testing and implementation in regards
to Year 2000 compliance of hardware and software systems, both on an information
technology, commonly referred to as IT, and non-IT level.
Impac Funding has taken over management of the project from Impac's outside
vendors during the second quarter of 1999. Impac's primary IT systems include
loan servicing, loan tracking, master servicing and accounting and reporting.
Impac has obtained information and the published plan in regards of Year 2000
compliance from the loan servicing systems' outside vendor. Impac's IT
department will continue to monitor this vendor's progress on Year 2000
compliance. The loan tracking system is currently in compliance with Year 2000.
The master servicing system was tested and Impac believes that this system is
Year 2000 compliant. The accounting and reporting system is currently Year 2000
compliant. Impac's non-IT systems include its file servers, network systems,
workstations and communication systems, which are Year 2000 compliant. As of
June 30, 1999, the upgrade of Impac's communication systems, had been completed.
Testing on all other in-house hardware has been completed as of June 30, 1999.
The Year 2000 project is divided into two primary phases as follows:
(1) define scope of project and identify all IT and non-IT systems,
and
(2) test existing systems and implement new systems, if required.
The outside contractor on the Year 2000 project submits monthly status reports
to Impac Funding and communicates with Impac Funding on a daily basis. The
progress of Impac's Year 2000 project is monitored by Impac Funding through
monthly status reports and reviews.
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Phase I -- define scope of project. This phase primarily included the
inventorying of Year 2000 items, contacting outside vendors, including reviewing
contractual terms and conditions, reviewing internal software for compliance and
determining costs to complete the project. As of the end of October 1998, Phase
I of the project had been completed. Phase I of the project also included the
testing and implementation or upgrade of non-IT systems.
Phase II -- testing of systems. This phase of the Year 2000 project can be
divided into four separate processes as follows:
(1) Compliance Questionnaires,
(2) Hardware Certification Information,
(3) Software/Data Testing, and
(4) Hardware Testing.
Compliance questionnaires and hardware certification information. As of
July 31, 1999, these portions of Phase II were complete.
Software/data testing. The remaining tasks within this process included
analyzing a list of software being used, testing all software programs, testing
all data from incoming sources, and testing all outgoing data processes and
reporting. As of July 31, 1999, this portion of Phase II was completed.
Hardware testing. Impac has completed all testing and is compliant with
all internal Year 2000 hardware issues.
Costs
The total cost associated with required modifications or installations to
become Year 2000 compliant is not expected to be material to Impac's financial
condition. The estimated cost of the project is expected to be approximately
$108,000. The total estimate of the project includes the cost to upgrade Impac's
communications system, which was $30,000. As of July 31, 1999, Impac had paid
$59,000 to the outside vendor for completed work on the project. The majority of
Impac's estimated cost for the Year 2000 compliance has been or will be spent on
software upgrades and writing new program code on existing proprietary software.
Since most of Impac's hardware has been purchased within the last two years, the
cost of replacing hardware will be minimal.
Risks
Impac does not anticipate any material disruption of its operations as a
result of any failure by Impac to be compliant. However, Impac cannot be sure
that there will not be a delay in, or increased costs associated with, the need
to address the Year 2000 issue. Impac also relies, directly and indirectly, on
other businesses such as third party service providers, creditors and financial
organizations and governmental entities. Even if Impac's computer systems are
not materially adversely affected by the Year 2000 issue, Impac's business and
operations could be materially adversely affected by disruptions in the
operations of the enterprises with which Impac interacts.
Contingency plans
Impac believes its Year 2000 compliance process should enable it to be
successful in modifying its computer systems to be Year 2000 compliant.
Acceptance testing and sign-off is 90% complete with respect to Impac's in-house
systems. In addition to Year 2000 compliance system modification plans, Impac
has also developed contingency plans for all other systems classified as
critical and high risk. These contingency plans provide timetables to pursue
various alternatives based upon the failure of a system to be adequately
modified and/or sufficiently tested and validated to ensure Year 2000
compliance. However, Impac cannot be sure that either the compliance process or
contingency plans will avoid partial or total system interruptions or the costs
necessary to update hardware and software would not have a material adverse
effect on Impac's financial condition, results of operations, business or
business prospects.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES OF
IMPAC ABOUT MARKET RISK
SECURITIZATIONS/SALES -- HEDGING INTEREST RATE RISK
The most significant variable in the determination of gain on sale in a
securitization is the spread between the weighted average coupon on the
securitized loans and the pass-through interest rate. In the interim period
between loan origination or purchase and securitization or sale of such loans,
Impac is exposed to interest rate risk. The majority of loans are securitized or
sold within 90 days of origination of purchase. However, a portion of the loans
are held-for-sale or securitization for as long as 12 months -- or longer, in
very limited circumstances -- prior to securitization or sale. If interest rates
rise during the period that the mortgage loans are held, in the case of a
securitization, the spread between the weighted average interest rate on the
loans to be securitized and the pass-through interest rates on the securities to
be sold -- the latter having increased as a result of market rate movements
- -- would narrow. Upon securitization or sale, this would result in a reduction
of Impac's related gain on sale. During the six months ended June 30, 1999 and
June 30, 1998, Impac realized a net hedge gain of $2.6 million and a net hedge
gain of $628,000, respectively.
INTEREST-ONLY STRIPS
Impac had interest-only strips of $10.0 million and $10.6 million
outstanding at June 30, 1999 and December 31, 1998, respectively. These
instruments are carried at market value at June 30, 1999 and December 31, 1998.
Impac values these assets based on the present value of future cash flow streams
net of expenses using various assumptions.
These assets are subject to risk of accelerated mortgage prepayment or
losses in excess of assumptions used in valuation. Ultimate cash flows realized
from these assets would be reduced should prepayments or losses exceed
assumptions used in the valuation. Conversely, cash flows realized would be
greater should prepayments or losses be below expectations.
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FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary of material federal income tax consequences that may
be relevant to a holder of AMRESCO common shares is based on current law, is for
general information only and is not intended as tax advice. The following
discussion, which is not exhaustive of all possible tax consequences, does not
include a detailed discussion of any state, local or foreign tax consequences.
Nor does it discuss all of the aspects of federal income taxation that may be
relevant to a prospective shareholder in light of his or her particular
circumstances or to certain types of shareholders (including insurance
companies, tax-exempt entities, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States and shareholders holding securities as part of a conversion transaction,
a hedging transaction or as a position in a straddle for tax purposes) who are
subject to special treatment under the federal income tax laws.
The statements in this discussion are based on current provisions of the
Internal Revenue Code of 1986, as amended, existing, temporary and currently
proposed Treasury Regulations under the Internal Revenue Code, the legislative
history of the Internal Revenue Code, existing administrative rulings and
practices of the Internal Revenue Service and judicial decisions. No assurance
can be given that legislative, judicial or administrative changes will not
affect the accuracy of any statements in this discussion with respect to
transactions entered into or contemplated prior to the effective date of such
changes. Any such change could apply retroactively to transactions preceding the
date of the change. AMRESCO does not plan to request any rulings from the IRS
concerning its tax treatment, and the statements in this discussion are not
binding on the IRS or any court. Thus AMRESCO can provide no assurance that
these statements will not be challenged by the IRS, or that such challenge will
not be sustained by a court. This summary assumes that investors will hold their
AMRESCO common shares as "capital assets" (generally, property held for
investment).
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING.
EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE INVESTMENT IN AND
OWNERSHIP AND DISPOSITION OF COMMON STOCK IN AN ENTITY ELECTING TO BE TAXED AS A
REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF
SUCH INVESTMENT, OWNERSHIP, DISPOSITION AND ELECTION, AND OF POTENTIAL CHANGES
IN APPLICABLE TAX LAWS.
AMRESCO has elected to be treated as a REIT under Sections 856 through 860
of the Internal Revenue Code for federal income tax purposes commencing with its
taxable year ended December 31, 1998. AMRESCO believes that it has been
organized and has operated in a manner that qualifies for taxation as a REIT
under the Internal Revenue Code. AMRESCO also believes that it will continue to
operate in a manner that will preserve its status as a REIT. AMRESCO cannot,
however, assure you that such requirements will be met in the future.
AMRESCO has received an opinion from Locke Liddell & Sapp LLP, its legal
counsel, to the effect that: (i) AMRESCO qualified as a REIT under the Internal
Revenue Code for its taxable year ended December 31, 1998; (ii) AMRESCO has been
organized and its manner of operation has been in conformity with the
requirements for qualification and taxation as a REIT as of the date of this
prospectus; and (iii) that its proposed manner of operation and diversity of
equity ownership will enable it to continue to satisfy the requirements for
qualification as a REIT in the future if it operates in accordance with the
methods of operation described herein, including its representations concerning
its intended method of operation.
However, you should be aware that opinions of counsel are not binding on
the IRS or on the courts, and, if the IRS were to challenge these conclusions,
no assurance can be given that these conclusions would be sustained in courts.
The opinion of Locke Liddell & Sapp LLP is based on various assumptions as well
as on certain representations made by AMRESCO as to factual matters, including a
factual representation letter provided by AMRESCO. The rules governing REITs are
highly technical and require ongoing compliance with a variety of tests that
depend, among other things, on future operating results, asset diversification,
distribution levels and diversity of stock ownership. Locke Liddell & Sapp LLP
will not monitor AMRESCO's compliance with these requirements. While AMRESCO
expects to satisfy these tests, and to
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use its best efforts to do so, no assurance can be given that it will qualify as
a REIT for any particular year, or that the applicable law will not change and
adversely affect AMRESCO and its shareholders. See "Failure to Qualify as a
REIT." The following is a summary of the material federal income tax
considerations affecting AMRESCO as a REIT and its shareholders. This summary is
qualified in its entirety by the applicable Internal Revenue Code provisions,
relevant rules and regulations promulgated under the Internal Revenue Code, and
administrative and judicial interpretations of the Internal Revenue Code and
these rules and regulations.
REIT QUALIFICATION
In order to qualify as a REIT, in addition to the other requirements
described below, AMRESCO must be organized as an entity that would be taxable as
a regular corporation but for its qualification as a REIT. AMRESCO cannot be a
financial institution or an insurance company. AMRESCO must be managed by one or
more trust managers. AMRESCO's taxable year must be the calendar year. AMRESCO's
beneficial ownership must be evidenced by transferable shares. AMRESCO's capital
shares 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. Not more than 50% of the value of the shares of AMRESCO's
capital shares may be held, directly or indirectly, applying the applicable
constructive ownership rules of the Internal Revenue Code, by five or fewer
individuals at any time during the last half of each of AMRESCO's taxable years.
In addition, AMRESCO must elect to be taxed as a REIT. AMRESCO must also meet
other tests, described below, regarding the nature of its income and assets and
the amount of its distributions.
AMRESCO's outstanding common shares are owned and, following the merger,
will be owned by a sufficient number of investors and, AMRESCO believes, in
appropriate proportions to permit it to satisfy these share ownership
requirements. To protect against violations of these share ownership
requirements, AMRESCO's declaration of trust provides that no person is
permitted to own, applying constructive ownership tests set forth in the
Internal Revenue Code, more than 9.8% of its outstanding common shares, unless
the trust managers consent to an increase in this ownership limit after they are
provided evidence satisfactory to them in their sole discretion that its
qualification as a REIT will not be jeopardized. In addition, AMRESCO's
declaration of trust contains restrictions on transfers of capital shares, as
well as provisions that automatically deem the shares to be transferred to a
charitable trust for the benefit of a charitable beneficiary to the extent that
the ownership otherwise might jeopardize AMRESCO's REIT status. These
restrictions, however, may not ensure that AMRESCO will, in all cases, be able
to satisfy the share ownership requirements. If AMRESCO fails to satisfy these
share ownership requirements, except as provided in the next sentence, its
status as a REIT will terminate. See the section below entitled "Failure to
qualify as a REIT." However, if AMRESCO complies with the rules contained in
applicable Treasury Regulations that require it to ascertain the actual
ownership of its shares and AMRESCO does not know, or would not have known
through the exercise of reasonable diligence, that it failed to meet the 50%
ownership requirement described above, AMRESCO will be treated as having met
this requirement.
To monitor its compliance with the share ownership requirements, AMRESCO is
required by Treasury Regulations to and does maintain records disclosing the
actual ownership of its common shares. To do so, AMRESCO will demand written
statements each year from the record holders of certain percentages of shares in
which the record holders are to disclose the actual owners of the shares (i.e.,
those persons required to include in gross income dividends paid by AMRESCO). A
list of those persons failing or refusing to comply with this demand will be
maintained as part of AMRESCO's records. Shareholders who fail or refuse to
comply with the demand must submit a statement with their tax returns disclosing
the actual ownership of the shares and certain other information.
AMRESCO believes that it currently satisfies, and, following the merger,
expects to continue to satisfy, each of these requirements discussed above.
AMRESCO also believes that it currently satisfies, and expects to continue to
satisfy, the requirements that are separately described below concerning the
nature and amounts of its income and assets and the levels of required annual
distributions.
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Sources of gross income
In order to qualify as a REIT for a particular year, AMRESCO also must meet
two tests governing the sources of its income -- a 75% gross income test and a
95% gross income test. These tests are designed to ensure that a REIT derives
its income principally from passive real estate investments. The Internal
Revenue Code allows a REIT to own and operate a number of its properties through
subsidiaries which are "qualified REIT subsidiaries." A qualified REIT
subsidiary is any corporation wholly owned by a REIT, or by other qualified REIT
subsidiaries, or by a combination of the two. AMRESCO currently owns five
qualified REIT subsidiaries. The Internal Revenue Code provides that a qualified
REIT subsidiary is not treated as a separate corporation, and all of its assets,
liabilities and items of income, deduction and credit are treated as assets,
liabilities and items of the REIT, for all purposes, including the gross income
tests and the asset tests described below. Similarly, a single member limited
liability company generally would be disregarded as a separate entity for
federal income tax purposes and treated as a division of its owner.
Ownership of partnership interests
In the case of a REIT which is a partner in a partnership or any other
entity such as a limited liability company that is treated as a partnership for
federal income tax purposes (referred to collectively as subsidiary
partnerships), Treasury Regulations provide that the REIT will be deemed to own
its proportionate share of the assets of the partnership. The REIT's
proportionate share is determined based on its capital interest in the
Partnership. AMRESCO currently owns, directly and indirectly, an interest in
numerous partnerships. Also, AMRESCO will be deemed to be entitled to its
proportionate share of the income of each such partnership. The character of the
assets and gross income of the partnership retains the same character in the
hands of the REIT for purposes of Section 856 of the Internal Revenue Code,
including for purposes of the gross income tests and the asset tests described
below.
75% gross income test
At least 75% of a REIT's gross income for each taxable year must be derived
from specified classes of income that principally are real estate related. The
permitted categories of principal importance to AMRESCO are:
- rents from real property;
- interest on loans secured by mortgages on real property or on interests
in real property;
- gains from the sale of real property or loans secured by real property
(excluding gain from the sale of property held primarily for sale to
customers in the ordinary course of its business, referred to below as
"dealer property");
- income from the operation and gain from the sale of property acquired in
connection with the foreclosure of a mortgage securing that property if
AMRESCO makes an election to treat such property as foreclosure property;
- distributions on, or gain from the sale of, shares of other qualifying
REITs;
- abatements and refunds of real property taxes;
- amounts received as consideration for entering into agreements to make
loans secured by real property or to purchase or lease real property; and
- "qualified temporary investment income" (described below).
In evaluating AMRESCO's compliance with the 75% gross income test, as well
as the 95% gross income test, gross income does not include gross income from
"prohibited transactions." In general, a prohibited transaction is one involving
a sale of dealer property, not including foreclosure property and not including
certain dealer property AMRESCO has held for at least four years.
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AMRESCO expects that substantially all of its operating gross income will
be considered interest income and rent from real property. Interest on debt
secured by mortgages on real property or on interests in real property generally
is qualifying income for purposes of the 75% gross income test. However, if the
highest principal amount of a loan outstanding during a taxable year exceeds the
fair market value of the real property securing the loan as of the date AMRESCO
acquired the loan, a portion of the interest income from such loan will not be
qualifying income for purposes of the 75% gross income test (but will be
qualifying income for purposes of the 95% gross income test). The portion of the
interest income that will not be qualifying income for purposes of the 75% gross
income test will be equal to the portion of the principal amount of the loan
that is not secured by real property.
The term "interest," as defined for purposes of the 75% and 95% gross
income tests, generally excludes any amount that depends in whole or in part
upon the income or profits of any person. However, the term "interest" generally
does not exclude an amount solely because it is based on a fixed percentage or
percentages of receipts or sales. The term "interest" also generally does not
exclude an amount solely because it is based on the income or profits of a
debtor, as long as the debtor derives substantially all of its income from the
related property from leasing such property, to the extent that the amounts
received by the debtor would be characterized as "rents from real property" if
the REIT received such amounts. Furthermore, if a loan contains a provision that
entitles a REIT to a percentage of the borrower's gain upon the sale of the
secured property or a percentage of the appreciation in the property's value of
a certain date (a "shared appreciation provision"), income attributable to such
provision will be treated as gain from the sale of the secured property, which
may or may not be qualifying income for purposes of the 75% and 95% gross income
tests depending on the nature of the property. If the property is dealer
property, AMRESCO would be subject to a 100% prohibited transaction tax on its
share of the appreciation.
Rent from real property is qualifying income for purposes of the gross
income tests only if certain conditions are satisfied. Rent from real property
includes charges for services customarily rendered to tenants and rent
attributable to personal property leased together with the real property so long
as the personal property rent is not more than 15% of the total rent received or
accrued under the lease for the taxable year. AMRESCO does not expect to earn
material amounts of income in these categories. Rent from real property
generally does not include rent based on the income or profits derived from the
property. However, rent based on a percentage of gross receipts or sales is
permitted as rent from real property and AMRESCO (or AMRESCO's borrowers) will
have leases where rent is based on a percentage of gross receipts or sales.
AMRESCO generally does not intend to lease property and receive rentals based on
the tenant's income or profit. Also excluded from "rents from real property" is
rent received from a person or corporation in which AMRESCO (or any of its 10%
or greater owners) directly or indirectly through the constructive ownership
rules contained in the Internal Revenue Code, owns a 10% or greater interest.
A third exclusion from qualifying rent income covers amounts received with
respect to real property if AMRESCO furnishes services to the tenants or manages
or operates the property, other than through an "independent contractor" from
whom AMRESCO does not derive any income. The obligation to operate through an
independent contractor generally does not apply, however, if the services
AMRESCO provides are "usually or customarily rendered" in connection with the
rental of space for occupancy only and are not considered rendered primarily for
the convenience of the tenant (applying standards that govern in evaluating
whether rent from real property would be unrelated business taxable income when
received by a tax-exempt owner of the property). Further, if the value of the
non-customary service income with respect to a property, valued at no less than
150% of its direct cost of performing such services, is 1% or less of the total
income derived from the property, then the provision of such non-customary
services will not prohibit the rental income (except, for the portion
attributable to the non-customary services) from qualifying as "rents from real
property."
AMRESCO believes that the only material services generally to be provided
to tenants will be those usually or customarily rendered in connection with the
rental of space for occupancy only. AMRESCO does not intend to provide services
that might be considered rendered primarily for the convenience of the tenants,
such as hotel, health care or extensive recreational or social services.
Consequently, AMRESCO believes that
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substantially all of its rental income will be qualifying income under the gross
income tests, and that its provision of services will not cause the rental
income to fail to be included under that test.
Upon the ultimate sale of AMRESCO's properties, any gains realized also are
expected to constitute qualifying income under the REIT gross income tests, as
gain from the sale of real property (not involving a prohibited transaction).
95% gross income test
In addition to earning 75% of its gross income from the sources listed
above, 95% of AMRESCO's gross income for each taxable year must come either from
those sources, or from dividends, interest or gains from the sale or other
disposition of stock or other securities that do not constitute dealer property.
This test permits a REIT to earn a significant portion of its income from
traditional "passive" investment sources that are not necessarily real estate
related.
AMRESCO owns all of the nonvoting common and all of the preferred stock and
5% of the voting common stock of AMREIT II, Inc. The income from this
corporation does not accrue to AMRESCO (as in the case of AMRESCO's qualified
REIT subsidiaries), but AMRESCO derives dividend income from this corporation.
Such dividends qualify under the 95% gross income test, but not the 75% gross
income test. Following the merger, AMRESCO will also hold stock of, and may
receive dividends from, other taxable corporations.
AMRESCO believes that the interest and original issue discount income that
AMRESCO receives from mortgage-backed securities and other mortgage-related
assets generally is qualifying income for purposes of the 75% and 95% gross
income tests. In some cases, however, the loan amount of a mortgage loan AMRESCO
owns may exceed the value of the real property securing the loan. That scenario
will cause a portion of the income from the loan to be qualifying income for
purposes of the 95% gross income test, but not the 75% gross income test. It
also is possible that, in some instances, the interest income from a mortgage
loan may be based in part on the borrower's profits or net income. The scenario
generally will cause all of the income from the loan to be nonqualifying income
for purposes of both the 75% and the 95% gross income tests. AMRESCO has
represented that it will manage its loan portfolio so that substantially all of
the income from those assets will be qualifying income for purposes of these
tests. Furthermore, AMRESCO has represented that it will manage its real
property so that the rent received from such property qualifies as "rents from
real property." In summary, AMRESCO believes that it will be able to satisfy the
75% and 95% gross income tests on a continuing basis. However, AMRESCO may
receive income not described above that is not qualifying income for purposes of
the gross income tests. AMRESCO will monitor the amount of nonqualifying income
that its assets produce and will manage its portfolio to comply at all times
with the gross income tests.
Failing the 75% or 95% tests; Reasonable cause
As a result of the 75% and 95% tests, REITs generally are not permitted to
earn more than 5% of their gross income from active sources, including
commissions or other fees for services rendered. AMRESCO may receive certain
types of that income. This type of income will not qualify for the 75% test or
95% test but is not expected to be significant and that income, together with
other nonqualifying income, is not expected to preclude compliance with the
gross income requirements. While AMRESCO does not anticipate that it will earn
substantial amounts of nonqualifying income, if its nonqualifying income exceeds
the permitted percentages of its gross income, AMRESCO could lose its status as
a REIT. AMRESCO may establish subsidiaries of which it will hold less than 10%
of the voting stock to hold assets generating non-qualifying income. The gross
income generated by these subsidiaries would not be included in its gross
income. However, dividends that AMRESCO receives from these subsidiaries would
be included in its gross income and would qualify for purposes of the 95% income
test, but not the 75% income test.
If AMRESCO fails to meet either the 75% or 95% income tests during a
taxable year, AMRESCO may still qualify as a REIT for that year if (i) AMRESCO
reports the source and nature of each item of its gross income in its federal
income tax return for that year, (ii) the inclusion of any incorrect information
in its
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return is not due to fraud with intent to evade tax, and (iii) the failure to
meet the tests is due to reasonable cause and not willful neglect. It is not
possible, however, to state whether in all circumstances AMRESCO would be
entitled to the benefit of this relief provision. For example, if AMRESCO fails
to satisfy the gross income tests because nonqualifying income that AMRESCO
intentionally accrues or receives causes it to exceed the limits on
nonqualifying income, the IRS could conclude that its failure to satisfy the
tests was not due to reasonable cause. If these relief provisions do not apply
to a particular set of circumstances, AMRESCO will not qualify as a REIT. As
discussed below, even if these relief provisions apply, and AMRESCO retains its
status as a REIT, a tax would be imposed with respect to its non-qualifying
income. AMRESCO would be subject to a 100% tax based on its profit attributable
to the greater of the amount by which AMRESCO fails either the 75% or 95% income
tests for that year. See "Taxation as a REIT."
Prohibited transaction income
Any gain that AMRESCO realizes on the sale of any property held as
inventory or other property held primarily for sale to customers in the ordinary
course of business (including its share of any such gain realized by any
subsidiary partnerships), will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. This prohibited transaction
income also may adversely affect AMRESCO'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 depends on all the facts and circumstances surrounding the
particular transaction. AMRESCO intends to hold its assets and its subsidiary
partnerships intend to hold their assets for investment with a view to long-term
appreciation, to engage in the business of acquiring, developing and owning
assets, and to make occasional sales of the assets as are consistent with their
investment objectives. The IRS may contend, however, that one or more of these
sales is subject to the 100% penalty tax.
AMRESCO believes that none of its assets are held for sale to customers and
that a sale of any such asset would not be in the ordinary course of its
business. Whether a REIT holds an asset "primarily for sale to customers in the
ordinary course of a trade or business" depends, however, on the facts and
circumstances in effect from time to time, including those related to a
particular asset. Nevertheless, AMRESCO will attempt to comply with the terms of
safe-harbor provisions in the Internal Revenue Code prescribing when an asset
sale will not be characterized as a prohibited transaction. AMRESCO cannot
provide assurance, however, that it can comply with such safe-harbor provisions
or that it will avoid owning property that may be characterized as property that
AMRESCO holds "primarily for sale to customers in the ordinary course of a trade
or business."
Character of assets owned
At the close of each calendar quarter of its taxable year, AMRESCO also
must meet two tests concerning the nature of its investments. First, at least
75% of the value of its total assets generally must consist of real estate
assets, cash, cash items (including receivables) and U.S. government securities.
For this purpose, "real estate assets" include interests in real property,
interests in loans secured by mortgages on real property or by certain interests
in real property, shares in other REITs and certain options, but excluding
mineral, oil or gas royalty interests. The term "real estate assets" also
includes regular or residual interests in a real estate mortgage investment
conduit. However, if less than 95% of the assets of a REMIC consist of "real
estate assets" (determined as if AMRESCO held such assets), AMRESCO will be
treated as holding directly its proportionate share of the assets of such REMIC.
To the extent that the fair market value of the real property securing a loan
equals or exceeds the outstanding principal balance of the loan, the loan will
qualify as a real estate asset. However, if the outstanding principal balance of
a loan exceeds the fair market value of the real property securing the loan, the
portion of such loan in excess of the value of the associated real property
likely will not be a qualifying "real estate asset." The temporary investment of
new capital in debt instruments also qualifies under this 75% asset test, but
only for the one-year period beginning on the date AMRESCO receives the new
capital.
Second, although the balance of its assets generally may be invested
without restriction, AMRESCO will not be permitted to own (i) securities of any
one issuer that represent more than 5% of the value of its total
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assets or (ii) more than 10% of the outstanding voting securities of any single
issuer. Excluded from the definition of a security for this purpose is an
instrument that qualifies for purposes of the 75% asset test described above. A
REIT, however, may own 100% of the stock of a qualified REIT subsidiary, in
which case the assets, liabilities and items of income, deduction and credit of
the subsidiary are treated as those of the REIT. In evaluating a REIT's assets,
if the REIT invests in a partnership, it is deemed to own its proportionate
share of the assets of the partnership.
AMRESCO believes that its mortgage assets are qualifying assets for
purposes of the 75% asset test. However, if the outstanding principal balance of
a mortgage loan exceeds the fair market value of the real property securing the
loan, a portion of such loan will not be a qualifying "real estate asset." The
nonqualifying portion of the mortgage loan will be equal to the portion of the
loan amount that exceeds the value of the associated real property. AMRESCO will
monitor the status of assets for purposes of the various asset tests and AMRESCO
intends to manage its portfolio to comply with such tests.
AMRESCO owns 100% of the nonvoting common stock and preferred stock and 5%
of the voting stock of AMREIT II, Inc. This stock is not a qualifying real
estate asset. AMRESCO will not own more than 10% of the voting securities of
AMREIT II, Inc. In addition, AMRESCO believes that the value of its stock of
AMREIT II, Inc. does not exceed 5% of the total value of its assets and will not
exceed that amount in the future. No independent appraisals have been obtained
to support this conclusion. AMRESCO cannot assure its shareholders that the
Internal Revenue Service will not contend that the value of the securities of
AMREIT II, Inc. held by it exceeds the 5% value limitation. The 5% value test
must be satisfied not only on the date that AMRESCO acquired securities in
AMREIT II, Inc., but also each time that AMRESCO increases its ownership in
AMREIT II, Inc. Although AMRESCO believes that it presently satisfies the 5%
value test and plans to take steps to ensure that it satisfies this test for any
quarter with respect to which retesting is to occur, AMRESCO cannot assure its
stockholders that these tests will always be successful, or will not require a
reduction in its ownership interest in AMREIT II, Inc.
After initially meeting the asset tests at the close of any quarter,
AMRESCO 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 AMRESCO would otherwise fail to satisfy the asset tests because it acquires
securities or other property during a quarter, AMRESCO can cure this failure by
disposing of sufficient nonqualifying assets within 30 days after the close of
that quarter. AMRESCO intends to take such action within the 30 days after the
close of any quarter as may be required to cure any noncompliance. If AMRESCO
fails to cure noncompliance with the asset tests within this time period,
AMRESCO would cease to qualify as a REIT.
Annual distributions to shareholders
To maintain its REIT status, AMRESCO generally must distribute as a
dividend to its shareholders in each taxable year at least 95% of its net
ordinary income. Capital gain income is not required to be distributed. More
precisely, AMRESCO must distribute an amount equal to (i) 95% of the sum of (a)
its "REIT taxable income," computed before deduction of dividends paid and
excluding any net capital gain and (b) any net income from foreclosure property
less the tax on such income, minus (ii) certain limited categories of "excess
noncash income," including, income attributable to certain accrued rents,
cancellation of indebtedness income and original issue discount income. REIT
taxable income is defined to be the taxable income of the REIT, computed as if
it were an ordinary corporation, with certain modifications. For example, the
deduction for dividends paid is allowed, but neither net income from foreclosure
property, nor net income from prohibited transactions, is included. In addition,
the REIT may carry over, but not carry back, a net operating loss for up to 20
years following the year in which it was incurred.
A REIT may satisfy the 95% distribution test with dividends paid during the
taxable year and with certain dividends paid after the end of the taxable year.
Dividends paid in January that were declared during the last calendar quarter of
the prior year and were payable to shareholders of record on a date during the
last calendar quarter of that prior year are treated as paid on December 31 of
the prior year. Other dividends declared before the due date of the REIT's tax
return for the taxable year, including extensions, also will be treated as paid
in the prior year if they are paid (i) within 12 months of the end of that
taxable year and (ii) no later than its
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next regular distribution payment. Dividends that are paid after the close of a
taxable year that do not qualify under the rule governing payments made in
January (described above) will be taxable to the shareholders in the year paid,
even though AMRESCO may take them into account for a prior year. A nondeductible
excise tax equal to 4% will be imposed for each calendar year to the extent that
dividends declared and distributed or deemed distributed before December 31 are
less than the sum of (a) 85% of AMRESCO's "ordinary income" plus (b) 95% of its
capital gain net income plus (c) any undistributed income from prior periods.
To be entitled to a dividends paid deduction, the amount distributed by a
REIT must not be preferential. For example, every shareholder of the class of
shares to which a distribution is made must be treated the same as every other
shareholder of that class, and no class of shares may be treated otherwise than
in accordance with its dividend rights as a class.
AMRESCO will be taxed at regular corporate rates to the extent that it
retains any portion of its taxable income. For example, if AMRESCO distributes
only the required 95% of its taxable income, AMRESCO would be taxed on the
retained 5%. Under certain circumstances, AMRESCO may not have sufficient cash
or other liquid assets to meet the distribution requirement. This could arise
because of competing demands for its funds, or due to timing differences between
tax reporting and cash receipts and disbursements (i.e., income may have to be
reported before cash is received, or expenses may have to be paid before a
deduction is allowed). Although AMRESCO does not anticipate any difficulty in
meeting this requirement, no assurance can be given that necessary funds will be
available. In the event these circumstances do occur, then in order to meet the
95% distribution requirement, AMRESCO may arrange for short-term, or possibly
long-term, borrowings to permit the payment of required dividends.
If AMRESCO fails to meet the 95% distribution requirement because of an
adjustment to its taxable income by the IRS, AMRESCO may be able to cure the
failure retroactively by paying a "deficiency dividend," as well as applicable
interest and penalties, within a specified period.
From time to time, AMRESCO may experience timing differences between (i)
the actual receipt of income and actual payment of deductible expenses and (ii)
the inclusion of that income and deduction of such expenses in arriving at its
REIT taxable income. For example, AMRESCO may not deduct recognized capital
losses from its "REIT taxable income." In addition, AMRESCO will recognize
taxable income in advance of its related cash flow if any of its subordinated
MBS or mortgage loans are deemed to have original issue discount. AMRESCO
generally must accrue original issue discount based on a constant yield method
that takes into account projected prepayments but that defers credit losses
until they are actually incurred. AMRESCO also may recognize taxable market
discount income when AMRESCO receives the proceeds from the disposition of, or
principal payments on, loans that are "market discount bonds" (i.e., obligations
with a stated redemption price at maturity that is greater than its tax basis in
such obligations), although such proceeds often will be used to make
nondeductible principal payments on related borrowings. AMRESCO also may
recognize "excess inclusion" or other "phantom" taxable income from REMIC
residual interests and non-REMIC retained ownership interests. Furthermore,
AMRESCO may recognize taxable income without receiving a corresponding cash
distribution if AMRESCO forecloses on or makes a "significant modification" (as
defined in Treasury Regulations Section 1.1001-3) to a loan, to the extent that
the fair market value of the underlying property or the principal amount of the
modified loan, as applicable, exceeds its basis in the original loan. Finally,
although certain types of noncash income are excluded in determining the annual
distribution requirement, AMRESCO will incur corporate income tax and the 4%
excise tax with respect to those noncash income items if AMRESCO does not
distribute those items on a current basis. As a result of the foregoing, AMRESCO
may have less cash than is necessary to distribute all of its taxable income and
thereby avoid corporate income tax and the excise tax imposed on certain
undistributed income. In such a situation, AMRESCO may need to borrow funds or
issue preferred stock or additional common stock.
Absence of earnings and profits
In order to qualify as a REIT, AMRESCO must not have, at the close of any
taxable year, "earnings and profits" generated by a regular taxable corporation
(a subchapter C corporation). If AMRESCO succeeds to the earnings and profits of
a subchapter C corporation in connection with an acquisition of its assets or
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otherwise, it must distribute such earnings and profits effective on or before
December 31 of the year of such acquisition. Any adjustments to the subchapter C
corporation's income for taxable years ending on or before the closing of such
acquisition by AMRESCO, including as a result of an examination of its returns
by the IRS, could affect the calculation of its earnings and profits and thus
AMRESCO's ability to qualify as a REIT.
TAXATION AS A REIT
As a REIT, AMRESCO generally will not be subject to corporate income tax to
the extent AMRESCO currently distributes its REIT taxable income to its
shareholders. This treatment effectively eliminates the "double taxation"
imposed on investments in most corporations. Double taxation refers to taxation
that occurs once at the corporate level when income is earned and once again at
the shareholder level when such income is distributed. AMRESCO generally will be
taxed only on the portion of its taxable income that it retains, which will
include any undistributed net capital gain, because it will be entitled to a
deduction for dividends paid to shareholders during the taxable year. A
dividends paid deduction is not available for dividends that are considered
preferential within any given class of shares, or as between classes except to
the extent that a class is entitled to a preference. AMRESCO does not anticipate
that it will pay any preferential dividends that will not result in a
corresponding dividends paid deduction.
Even as a REIT, AMRESCO will be subject to tax in certain circumstances as
follows:
- AMRESCO would be subject to tax, in the manner described below, on any
income or gain from foreclosure property at the highest corporate rate
(currently 35%);
- a confiscatory tax of 100% applies to any 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;
- if AMRESCO fails to meet either the 75% or 95% source of income tests
described above, but still qualifies for REIT status under the reasonable
cause exception to those tests, a 100% tax would be imposed equal to the
amount obtained by multiplying (a) the greater of the amount, if any, by
which AMRESCO failed either the 75% income test or the 95% income test,
times (b) a fraction intended to reflect its profitability;
- AMRESCO will be subject to the alternative minimum tax on items of tax
preference, excluding items specifically allocable to its shareholders;
- if AMRESCO should fail to distribute with respect to each calendar year
at least the sum of (a) 85% of its REIT ordinary income for that year,
(b) 95% of its REIT capital gain net income for that year, and (c) any
undistributed taxable income from prior years, AMRESCO would be subject
to a 4% excise tax on the excess of the required distribution over the
amounts actually distributed;
- under regulations that are to be promulgated, AMRESCO also may be taxed
at the highest regular corporate tax rate on any built-in gain
attributable to assets that it acquires in certain tax-free corporate
transactions, to the extent the gain is recognized during the first ten
years after AMRESCO acquires those assets. Built-in gain is the excess of
(a) the fair market value of the asset over (b) its adjusted basis in the
asset, in each case determined as of the beginning of the ten-year
recognition period. The results described in this paragraph with respect
to the recognition of built-in gain assume that AMRESCO 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 2000
Federal Budget Proposal. See the section below entitled "Proposed
Legislation";
- AMRESCO will be taxed at regular corporate rates on any undistributed
REIT taxable income, including undistributed net capital gains;
- AMRESCO will pay a tax at the highest corporate rate on the portion of
any phantom taxable income that AMRESCO derives from REMIC residual
interests, referred to as "excess inclusion," equal to the percentage of
its stock held by "disqualified organizations." A "disqualified
organization" includes
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the United States, any state or political subdivision thereof, any
foreign government, any international organization, any agency or
instrumentality of any of the foregoing, any other tax-exempt
organization (other than a farmer's cooperative described in Section 521
of the Internal Revenue Code) that is exempt both from income taxation
and from taxation under the unrelated business taxable income provisions
of the Internal Revenue Code, or any rural electrical or telephone
cooperative; and
- AMRESCO also may be subject to tax at the highest corporate rate on the
portion of its allocable share of any "excess inclusion" that a REIT in
which AMRESCO owns an equity interest derives from REMIC residual
interests, equal to the percentage of AMRESCO's stock that is held by
"disqualified organizations."
REITs generally will incur tax at the maximum corporate rate on any income
from foreclosure property (other than income that would be qualifying income for
purposes of the 75% gross income test), less expenses directly connected with
the production of such income. "Foreclosure property" is any real property
(including interests in real property) and any personal property incident to
such real property that meets the following requirements:
- a REIT acquires the property when the REIT bids in such property at
foreclosure, or otherwise reduces such property to ownership or
possession by agreement or process of law, after a default (or imminent
default) on a lease of such property or on a debt owed to the REIT that
such property secured;
- the REIT acquired the related loan when default was not imminent or
anticipated; and
- the REIT elects to treat the property as foreclosure property.
AMRESCO does not anticipate that it will receive any income from
foreclosure property that is not qualifying income for purposes of the 75% gross
income test, but if its does receive any such income, AMRESCO will make an
election to treat the related property as foreclosure property to the extent it
is eligible to make such election.
Property is not eligible for the election to be treated as foreclosure
property if a REIT acquires the related loan while default is imminent or
anticipated. Therefore, if AMRESCO acquires a non-performing or under-
performing loan and AMRESCO later acquires the collateral by foreclosure, the
collateral will not qualify as foreclosure property if default was imminent or
anticipated when AMRESCO acquired the loan. If so, the income AMRESCO receives
with respect to such ineligible property will not be qualifying income for
purposes of the 75% and 95% gross income test (for example, in the case of
foreclosure of a hotel) unless the income would otherwise satisfy these
qualifying income requirements. AMRESCO anticipates that any income it receives
with respect to an ineligible property will be qualifying income for purposes of
the 75% and 95% gross income tests.
FAILURE TO QUALIFY AS A REIT
For any taxable year in which AMRESCO fails to qualify as a REIT and cannot
obtain the benefits of the relief provisions contained in the Internal Revenue
Code, AMRESCO would be taxed at regular corporate rates, including alternative
minimum tax rates, on all of its taxable income. Distributions to its
shareholders would not be deductible in computing that taxable income, and
distributions would no longer be required to be made. Any corporate level taxes
generally would reduce the amount of cash available for distribution to its
shareholders and, because the shareholders would continue to be taxed on the
distributions they receive, the net after-tax yield to the shareholders from
their investment likely would be reduced substantially. As a result, failure to
qualify as a REIT during any taxable year could have a material adverse effect
on an investment in AMRESCO common shares. If AMRESCO loses its REIT status,
unless statutory relief provisions apply, AMRESCO would not be eligible to elect
REIT status again until the fifth taxable year which begins after the taxable
year during which its election was terminated. It is not possible to state
whether in all circumstances AMRESCO would be entitled to this statutory relief.
In addition, President Clinton's 2000 Federal Budget Proposal contains a
provision which, if enacted, 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, 2000. If enacted, this
provision could result in the imposition of a tax on AMRESCO if it
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subsequently elected to be taxed as a REIT following a loss of REIT status. See
the section below entitled "Proposed Legislation."
TAX ASPECTS OF INVESTMENTS IN AFFILIATED ENTITIES
Partnerships
A portion of AMRESCO's investments are held indirectly through subsidiary
partnerships. Moreover, it is possible that in the future AMRESCO will
contribute substantially all of its assets to a partnership through which it
will conduct the majority of its activities and operations. In general,
partnerships are "pass-through" entities that are not subject to federal income
tax. Rather, partners are allocated their proportionate shares of the items of
income, gain, loss, deduction and credit of a partnership, and they are
potentially subject to tax thereon, without regard to whether the partners
receive a distribution from the partnership. AMRESCO will include in its income
its proportionate share of the foregoing partnership items for purposes of the
various REIT income tests and in the computation of its REIT taxable income.
Moreover, for purposes of the REIT asset tests, AMRESCO will include its
proportionate share of assets held by all of its subsidiary partnerships. See
"REIT Qualification -- Ownership of Partnership Interests."
Taxable corporations
A portion of the amounts to be used to fund distributions to shareholders
of AMRESCO is expected to come from distributions made by certain taxable
corporate subsidiaries, including AMREIT II, Inc., and interest paid by taxable
corporate subsidiaries on certain notes held by AMRESCO or one of its qualified
REIT subsidiaries or subsidiary partnerships. In general, taxable corporate
subsidiaries pay federal, state and local income taxes on their taxable income
at normal corporate rates. Any federal, state or local income taxes that the
taxable corporate subsidiaries are required to pay may reduce AMRESCO's cash
flow from operating activities and its ability to make payments to holders of
AMRESCO common shares.
In order for AMRESCO to qualify as a REIT, as of the end of each calendar
quarter, the value of its direct or indirect interest in any taxable corporate
subsidiary generally may not exceed 5% of the value of its total assets, and
AMRESCO may not directly or indirectly own more than 10% of the outstanding
voting securities of any of its taxable corporate subsidiaries. See "REIT
Qualification -- Character of Assets Owned". AMRESCO believes that it has
satisfied both the 5% and the 10% asset requirements as they relate to the
company's interests in taxable corporate subsidiaries, and AMRESCO intends to
monitor these interests so that the value of securities of any one issuer do not
exceed 5% of AMRESCO's total assets. However, no assurance can be given that the
relative values of the company's assets will not change or that they will be
accepted by the IRS.
Wholly-owned corporations
As described above (see "REIT Qualification -- Sources of gross income"), a
corporation that is wholly-owned by a REIT and constitutes a qualified REIT
subsidiary is generally disregarded for federal income tax purposes. In the
event that a qualified REIT subsidiary of AMRESCO ceases to be wholly owned, for
example if any equity interest in the subsidiary is acquired by a person other
than AMRESCO or another qualified REIT subsidiary of AMRESCO, the subsidiary
could no longer be treated as a qualified REIT subsidiary. Such an event could,
in turn, adversely affect AMRESCO's ability to satisfy the various asset and
gross income requirements applicable to REITs, including the requirement that a
REIT may not own, directly or indirectly, more than 10% of the voting securities
of a taxable corporate subsidiary. See "REIT Qualification -- Sources of Gross
Income" and "-- Character of Assets Owned".
Impac
In connection with the merger, AMRESCO will succeed to the assets and
assume the liabilities of Impac. AMRESCO's ability to qualify as a REIT
thereafter will depend, in part, upon the nature of Impac's assets and the
character of the income generated by those assets, and also may be affected by
Impac's past operations. AMRESCO believes that the nature of Impac's income,
assets, and operations is such that the
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merger will not adversely affect its ability to qualify as a REIT. AMRESCO's
belief is based on the assumption that Impac has qualified as a REIT at all
times since its inception. As a condition to AMRESCO's obligation to complete
the merger, AMRESCO will receive an opinion of Brown & Wood LLP, tax counsel to
Impac, dated as of the closing date of the merger, that commencing with its
taxable year ended December 31, 1997 through the closing date, Impac was
organized in conformity with the requirements for qualification as a REIT and
has so qualified during such period.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
Distributions to shareholders
Except as discussed below, distributions by AMRESCO generally will be
taxable to taxable U.S. shareholders as ordinary income to the extent of
AMRESCO's current or accumulated earnings and profits. AMRESCO may generate cash
in excess of its net earnings. If AMRESCO distributes cash to shareholders in
excess of its current and accumulated capital earnings and profits (other than
as a capital gain dividend), the excess cash will be deemed to be a return of
capital to each shareholder to the extent of the adjusted tax basis of the
shareholder's shares. Distributions in excess of the adjusted tax basis will be
treated as gain from the sale or exchange of the shares. A shareholder who has
received a distribution in excess of its current and accumulated earnings and
profits may realize, upon the sale of the shares, a higher taxable gain or a
smaller loss because the basis of the shares as reduced will be used for
purposes of computing the amount of the gain or loss. Distributions AMRESCO
makes, whether characterized as ordinary income or as capital gains, are not
eligible for the dividends received deduction for corporations.
Dividends that AMRESCO declares in October, November, or December of any
year and payable to a shareholder of record on a specified date in any of those
months are treated as both paid by AMRESCO and received by the shareholder on
December 31 of that year, provided AMRESCO actually pays the dividend on or
before January 31 of the following calendar year. Shareholders may not include
in their own income tax returns any of AMRESCO's net operating losses or capital
losses.
Distributions that AMRESCO properly designates as capital gain dividends
will be taxable to taxable U.S. shareholders as gains from the sale or
disposition of a capital asset to the extent that they do not exceed AMRESCO's
actual net capital gain for the taxable year. Depending on the period of time
held and the tax characteristics of the assets which produced these gains, and
on certain designations, if any, which AMRESCO may make, these gains may be
taxable to non-corporate U.S. shareholders at a 20% or 25% rate without regard
to the amount of time that the AMRESCO shareholder has held its AMRESCO common
shares. U.S. shareholders that are corporations, however, may be required to
treat up to 20% of certain capital gain dividends as ordinary income.
AMRESCO may elect to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains. If AMRESCO makes this election, it
would pay tax on its retained net long-term capital gains. In addition, to the
extent that AMRESCO designates, a U.S. shareholder generally would:
- include its proportionate share of its undistributed long-term capital
gains in computing its long-term capital gains in its return for its
taxable year in which the last day of its taxable year falls;
- be deemed to have paid the capital gains tax imposed on AMRESCO on the
designated amounts included in the U.S. shareholder's long-term capital
gains;
- receive a credit or refund for the amount of tax deemed paid by it;
- increase the adjusted basis of its common stock by the difference between
the amount of includable gains and the tax deemed to have been paid by
it; and
- in the case of a U.S. shareholder that is a corporation, appropriately
adjust its earnings and profits for the retained capital gains in
accordance with Treasury Regulations to be prescribed by the IRS.
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In any year in which AMRESCO fails to qualify as a REIT, the shareholders
generally will continue to be treated in the same fashion described above,
except that none of its dividends will be eligible for treatment as capital
gains dividends and corporate shareholders will qualify for the dividends
received deduction.
To the extent that AMRESCO has available net operating losses and capital
losses carried forward from prior tax years, such losses may reduce the amount
of distributions that AMRESCO must make in order to comply with the REIT
distribution requirements. See "REIT Qualification -- Annual Distributions to
Shareholders". Such losses, however, are not passed through to shareholders and
do not offset income of shareholders from other sources, nor would they affect
the character of any distributions that are actually made by AMRESCO, which are
generally subject to tax in the hands of shareholders to the extent that AMRESCO
has current or accumulated earnings and profits.
To the extent that AMRESCO owns REMIC residual interests, its U.S.
shareholders likely may not offset certain portions of the dividend income they
receive from AMRESCO with their current deductions or net operating loss
carryovers or carrybacks. This limitation would apply to the portion of a U.S.
shareholder's dividends equal to its allocable share of any "excess inclusion"
derived with respect to AMRESCO's REMIC residual interests. AMRESCO's "excess
inclusion" for any calendar quarter will equal the excess of its income from
REMIC residual interests over its "daily accruals" with respect to such
interests for the calendar quarter. Daily accruals for a calendar quarter are
computed by allocating to each day on which a REMIC residual interest is owned a
ratable portion of the product of (i) the "adjusted issue price" of the REMIC
residual interest at the beginning of the quarter and (ii) 120% of the long-term
federal interest rate (adjusted for quarterly compounding) on the date of
issuance of the REMIC residual interest. To the extent provided in future
Treasury Regulations, if AMRESCO owns a REMIC residual interest that does not
have significant value, the "excess inclusion" that AMRESCO derives from such
REMIC residual interest will be deemed to be equal to the entire amount of
income AMRESCO derives from such REMIC residual interest. Furthermore, if
AMRESCO owns stock in other REITs that own REMIC residual interests, a portion
of the dividends that AMRESCO receives from such REITs may be treated as "excess
inclusion." Those dividends may cause a portion of the dividends that AMRESCO
pays to its shareholders also to be treated as "excess inclusion."
If AMRESCO (or one of its qualified REIT subsidiaries) issues debt
obligations secured by its mortgage loans in non-REMIC transactions, AMRESCO or
such mortgage loans may be treated as a "taxable mortgage pool" under the
Internal Revenue Code if the payments on the debt obligations bear a
relationship to the payments on the underlying mortgage loans. In such a case,
to the extent provided in future Treasury Regulations, a portion or all of the
taxable income generated by its retained ownership interest in the mortgage
loans constituting a taxable mortgage pool may be characterized as "excess
inclusion" and allocated pro rata among its U.S. shareholders. U.S. shareholders
would not be permitted to offset certain portions of their dividend income that
are attributable to the non-REMIC transactions with their current deductions of
net operating loss carryovers or carrybacks. Although the U.S. Treasury
Department has not yet issued applicable Treasury Regulations, AMRESCO cannot
assure you that such regulations will not be issued in the future. AMRESCO also
cannot assure you that, if issued, such regulations will not be retroactive and
will not prevent U.S. shareholders from offsetting some portion of their
dividend income with deductions or losses from other sources.
Dispositions of AMRESCO common shares
Generally, gain or loss realized by a shareholder upon the sale of AMRESCO
common shares will be reportable as capital gain or loss. Such capital gain or
loss will be long-term capital gain or loss if the AMRESCO shareholder has held
its shares for more than 12 months at the time of disposition. Individual
AMRESCO shareholders will pay tax at rates not exceeding 20% on any such
long-term capital gain. If a shareholder receives a long-term capital gain
dividend from AMRESCO and has held the shares for six months or less, any loss
incurred on the sale or exchange of the shares is treated as a long-term capital
loss to the extent of the corresponding long-term capital gain dividend
received.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
AMRESCO will report to its shareholders and the IRS the amount of dividends
paid during each calendar year and the amount of tax withheld, if any. If a
shareholder is subject to backup withholding, AMRESCO will be required to deduct
and withhold from any dividends payable to that shareholder an amount equal to
31% of the dividend. These rules may apply (i) when a shareholder fails to
supply a correct taxpayer identification number, (ii) when the IRS notifies
AMRESCO that the shareholder is subject to the rules or has furnished an
incorrect taxpayer identification number, or (iii) in the case of corporations
or others within certain exempt categories, when they fail to demonstrate that
fact when required. A shareholder that does not provide a correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount withheld as backup withholding may be credited against the shareholder's
federal income tax liability. AMRESCO also may be required to withhold a portion
of capital gain distributions made to shareholders who fail to certify their
non-foreign status.
The United States Treasury recently has issued final regulations regarding
the withholding and information reporting rules discussed above. In general, the
final regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and clarify
reliance standards. The final regulations generally are effective for payments
made on or after January 1, 2000, subject to certain transition rules.
Prospective investors should consult their own tax advisors concerning the
adoption of the final regulations and the potential effect on their ownership of
AMRESCO common shares.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
In general, a tax-exempt entity that is a shareholder will not be subject
to tax on distributions or gain realized on the sale of shares. A tax-exempt
entity may be subject to tax on unrelated business taxable income (commonly
known as UBTI) however, to the extent that it has financed the acquisition of
its shares with "acquisition indebtedness" within the meaning of the Internal
Revenue Code.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
shareholders are complex and no attempt will be made herein to provide more than
a summary of such rules. Prospective non-U.S. shareholders should consult with
their own tax advisors to determine the impact of federal, state and local
income tax laws with regard to an investment in AMRESCO common shares, including
any reporting requirements, as well as the tax treatment of such an investment
under the laws of their home country. The discussion is based on current law and
is for general information only. The discussion addresses only certain and not
all aspects of United States federal income and estate taxation. For purposes of
this discussion, a "non-U.S. shareholder" is any person that holds AMRESCO
common shares other than (i) a citizen or resident of the United States, (ii) a
corporation or partnership created or organized in the United States or under
the laws of the United States or of any state thereof or the District of
Columbia, (iii) an estate whose income is includable in gross income for U.S.
federal income tax purposes regardless of its source, or (iv) a trust if a
United States court is able to exercise primary supervision over the
administration of such trust and one or more United States fiduciaries have the
authority to control all substantial decisions of such trust.
Ordinary dividends
Dividends that are not attributable to gain from any sales or exchanges
AMRESCO makes of United States real property interests and which AMRESCO does
not designate as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of its current or accumulated
earnings and profits. Those dividends ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the dividend unless an
applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the common shares is treated as effectively connected with the
non-U.S. shareholder's conduct of a United States trade or business, the
non-U.S. shareholder generally will be subject to a tax at graduated rates, in
the same manner as U.S. shareholders are taxed with respect to those dividends,
and may
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also be subject to the 30% branch profits tax in the case of a shareholder that
is a foreign corporation. For withholding tax purposes, AMRESCO is currently
required to treat all distributions as if made out of its current and
accumulated earnings and profits and thus AMRESCO intends to withhold at the
rate of 30%, or a reduced treaty rate if applicable, on the amount of any
distribution (other than distributions designated as capital gain dividends)
made to a non-U.S. shareholder unless (i) the non-U.S. shareholder files on IRS
Form 1001, (or any applicable successor form) claiming that a lower treaty rate
applies or (ii) the non-U.S. shareholder files an IRS Form 4224, (or any
applicable successor form) claiming that the dividend is effectively connected
income.
Non-dividend distributions
Under the final regulations, generally effective for distributions on or
after January 1, 2000, AMRESCO would not be required to withhold at the 30% rate
on distributions that it reasonably estimates to be in excess of its current and
accumulated earnings and profits. Distributions in excess of its current and
accumulated earnings and profits will not be taxable to a shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's shares,
but rather will reduce the adjusted basis of those shares. To the extent that
those dividends exceed the adjusted basis of a non-U.S. shareholder's shares,
they will give rise to tax liability if the non-U.S. shareholder would otherwise
be subject to tax on any gain from the sale or disposition of his shares, as
described below. If it cannot be determined at the time a distribution is paid
whether or not it will be in excess of current and accumulated earnings and
profits, the distribution will be subject to such withholding. AMRESCO does not
intend to make quarterly estimates of that portion of dividends that are in
excess of earnings and profits, and, as a result, all distributions will be
subject to such withholding. However, the non-U.S. shareholder may seek a refund
of those excess amounts from the IRS.
Capital gain dividends
For any year in which AMRESCO qualifies as a REIT, distributions that are
attributable to gain from its sales or exchanges of United States real property
interests will be taxed to a non-U.S. shareholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980 (commonly known as FIRPTA).
Under FIRPTA, those dividends are taxed to a non-U.S. shareholder as if the gain
were effectively connected with a United States business. Non-U.S. shareholders
thus would be taxed at the normal capital gain rates applicable to U.S.
shareholders subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals. Also,
dividends subject to FIRPTA may be subject to a 30% branch profits tax in the
hands of a corporate non-U.S. shareholder not entitled to treaty exemption.
AMRESCO is required by the Code and applicable Treasury Regulations to withhold
35% of any dividend that could be designated as a capital gain dividend. This
amount is creditable against the non-U.S. shareholder's FIRPTA tax liability.
Disposition of AMRESCO common shares
Gain recognized by a non-U.S. shareholder upon a sale of AMRESCO common
shares generally will not be taxed under FIRPTA if AMRESCO is not a United
States real property holding corporation or is a "domestically controlled REIT".
A United States real property holding corporation is generally defined as a
corporation if the fair market value of its United States real property interest
equals or exceeds 50% of its real estate and trade or business assets. A
domestically controlled REIT is defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the shares
were held directly or indirectly by foreign persons. It is currently anticipated
that AMRESCO will be a "domestically controlled REIT," and therefore the sale of
shares will not be subject to taxation under FIRPTA. Because the AMRESCO common
shares will be publicly traded, however, no assurance can be given that AMRESCO
will remain a "domestically controlled REIT."
If AMRESCO were not a domestically controlled REIT but was a United States
real property holding corporation, whether or not a non-U.S. shareholder's sale
of shares would be subject to tax under FIRPTA would depend on whether or not
the common shares were regularly traded on an established securities market
(such as the NYSE) and on the size of selling non-U.S. shareholder's interest in
its capital shares. If the gain
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on the sale of shares were to be subject to taxation under FIRPTA, the non-U.S.
shareholder will be subject to the same treatment as U.S. shareholders with
respect to that gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals and
the possible application of the 30% branch profits tax in the case of foreign
corporations) and the purchaser of its common shares may be required to withhold
10% of the gross purchase price.
Gain not subject to FIRPTA will be taxable to a non-U.S. shareholder if (1)
investment in the AMRESCO common shares is effectively connected with the
non-U.S. shareholder's United States trade or business, in which case the
non-U.S. shareholder will be subject to the same treatment as U.S. shareholders
with respect to that gain, and may also be subject to the 30% branch profits tax
in the case of a corporate non-U.S. shareholder, or (2) the non-U.S. shareholder
is a nonresident alien individual who was present in the United States for 183
days or more during the taxable year and has a "tax home" in the United States,
in which case the nonresident alien individual will be subject to a 30%
withholding tax on the individual's capital gains.
Estate tax
AMRESCO common shares owned or treated as owned by an individual who is not
a citizen or resident (as specially defined for U.S. federal estate tax
purposes) of the United States at the time of death will be includable in the
individual's gross estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise. Such individual's estate may be
subject to U.S. federal estate tax on the property includable in the estate for
U.S. federal estate tax purposes.
PROPOSED LEGISLATION
The rules dealing with federal income taxation are constantly under review
by Congress, the IRS and the Treasury Department. For example, on February 1,
1999, President Clinton released a proposed budget for fiscal year 2000. The
budget proposal contained a variety of proposed income tax changes, three of
which pertain to REITs. First, under current law, REITs may not own more than
10% of the voting stock of a regular corporation. Under the proposal, they also
would not be permitted to own more than 10% of the value of all classes of stock
of a corporation unless the corporation qualified as a "qualified business
subsidiary" or a "qualified independent contractor subsidiary." Even if it did
so qualify, the proposal would disallow a deduction for all interest payments on
debt to, or guaranteed by, a REIT that owns stock of such entities. Second, a
new restriction would be imposed on REITs, prohibiting any one person other than
a REIT from owning more than 50% of the total combined voting power of all
voting stock or more than 50% of the total value of shares of all classes of
stock of the REIT. Current law already contains ownership restrictions
applicable to individuals; this new limitation would affect owners other than
individuals. This proposal would be effective for entities electing REIT status
for taxable years beginning on or after the date of first action on the proposal
by a congressional committee. Third, a regular C corporation with a fair market
value of more than $5,000,000 which elects REIT status or merges into a REIT
would be treated as if it had liquidated and distributed all its assets to its
shareholders, and its shareholders had then contributed the assets to the
electing or existing REIT. This deemed liquidation would cause the regular
corporation to be taxed as if it had sold its assets for fair market value and
would cause its shareholders to be taxed as if they had sold their stock for
fair market value. The proposal would be effective for elections that are first
effective for a taxable year beginning after January 1, 2000, and for mergers
into REITs after December 31, 1999.
Partially in response to the first proposal described above, Congress has
passed a bill (the Taxpayer Refund Act of 1999) which, if it becomes law, would
among other things, also would prohibit a REIT from owning more than 10% of the
total voting power and more than 10% of the total value of the outstanding
securities of any one issuer such as AMREIT II, Inc., unless that issuer
constitutes a "taxable REIT subsidiary." The definition of a taxable REIT
subsidiary contained in this bill is broader than the budget proposal definition
of a qualified business subsidiary or a qualified independent contractor
subsidiary. The bill also contains a provision, similar to the President's
budget proposal, that would generally preclude any one entity from directly or
constructively owning more than 50% of the stock of a REIT. It does not contain
a provision that would require recognition of gain upon a regular C corporation
electing to become a REIT, or
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merging into a REIT in a transaction that would otherwise be tax free. President
Clinton has indicated that he intends to veto the bill.
Changes to the federal laws and interpretations thereof could adversely
affect the tax consequences of an investment in AMRESCO common shares. AMRESCO
cannot predict whether, when, in what forms, or with what effective dates, these
or any other provisions could become effective.
STATE, LOCAL AND FOREIGN TAXES
AMRESCO and its shareholders may be subject to state, local or foreign
taxation in various jurisdictions, including those in which it or they transact
business or reside. Consequently, prospective shareholders should consult their
own tax advisors regarding the effect of state, local and foreign income and
other tax laws on an investment in AMRESCO common shares.
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WHERE YOU CAN FIND MORE INFORMATION
AMRESCO and Impac are subject to the reporting requirements of the
Securities Exchange Act of 1934, and each files reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any materials AMRESCO or Impac files with the Securities and Exchange
Commission at its Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain information on the operation of the Public Reference
Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. In
addition, the Securities and Exchange Commission maintains an Internet site that
contains reports, proxies, information statements and other information
regarding issuers that file electronically, and the address of that site is
http://www.sec.gov. AMRESCO's outstanding common shares are listed on the NASDAQ
Stock Market under the symbol "AMCT," and Impac's common stock is listed on the
American Stock Exchange under the symbol "ICH." All reports, proxy statements
and other information filed by AMRESCO with the NASDAQ Stock Market may be
inspected at the National Association of Securities Dealers' offices at 1735 K
Street, N.W., Washington, D.C. 20006. All reports, proxy statements and other
information filed by Impac with the American Stock Exchange may be inspected at
the American Stock Exchange's offices at 86 Trinity Place, New York, New York
10006-1881.
AMRESCO [has filed] with the Securities and Exchange Commission a
registration statement on Form S-4 under the Securities Act of 1933 with respect
to the common shares of AMRESCO being issued in the merger. This document, which
is part of the registration statement, does not contain all of the information
set forth in the registration statement. Parts of the registration statement are
omitted from this document in accordance with the rules and regulations of the
Securities and Exchange Commission. For further information, your attention is
directed to the registration statement. Statements made in this document
concerning the contents of any documents referred to herein are not necessarily
complete, and in each case are qualified in all respects by reference to the
copy of such document filed with the Securities and Exchange Commission.
You should rely only on the information contained in this document. We have
not authorized anyone to provide you with information that is inconsistent with
information contained in this document. This document is not an offer to sell
these securities in any state where the offer and sale of these securities is
not permitted. The information in this document is current as of the date it is
mailed to security holders, and not necessarily as of any later date. If any
material change occurs during the period that this document is required to be
delivered, this document will be supplemented or amended.
All information regarding AMRESCO in this document has been supplied by
AMRESCO, and all information regarding Impac in this document has been supplied
by Impac.
LEGAL MATTERS
The validity of the AMRESCO common shares offered to holders of Impac
common stock by this document has been passed upon for AMRESCO by Locke Liddell
& Sapp LLP, Dallas, Texas, which has also rendered opinions as to tax aspects of
the merger and as to AMRESCO's continued REIT qualification following the
merger. An opinion as to the tax aspects of the merger has been rendered for
Impac by Skadden, Arps, Slate, Meagher & Flom LLP and an opinion as to Impac's
qualification as a REIT has been rendered for Impac by Brown & Wood LLP.
EXPERTS
The consolidated financial statements of AMRESCO as of December 31, 1998
and for the period from February 2, 1998 (date of initial capitalization)
through December 31, 1998 included herein have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report, which is included herein,
and has been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The consolidated financial statements of Impac as of December 31, 1998 and
1997, and for the year ended December 31, 1998 and for the period from January
15, 1997 to December 31, 1997, have been
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included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent auditors, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
OTHER MATTERS
Representatives of Deloitte & Touche LLP are expected to be present at the
AMRESCO special meeting, will have the opportunity to make a statement if they
so desire and will be available to respond to appropriate questions.
Representatives of KPMG LLP are expected to be present at the Impac special
meeting, will have the opportunity to make a statement if they so desire and
will be available to respond to appropriate questions.
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INDEPENDENT AUDITORS' REPORTS AND
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMRESCO CAPITAL TRUST
Consolidated Balance Sheets -- June 30, 1999 and December
31, 1998.................................................. F-2
Consolidated Statements of Income -- For the Three and Six
Months Ended June 30, 1999, the Three Months Ended June
30, 1998 and the Period from February 2, 1998 (Date of
Initial Capitalization) through June 30, 1998............. F-3
Consolidated Statement of Changes in Shareholders'
Equity -- For the Six Months Ended June 30, 1999.......... F-4
Consolidated Statements of Cash Flows -- For the Six Months
Ended June 30, 1999 and the Period from February 2, 1998
(Date of Initial Capitalization) through June 30, 1998.... F-5
Notes to Consolidated Financial Statements.................. F-6
AMRESCO CAPITAL TRUST
Independent Auditors' Report................................ F-15
Consolidated Balance Sheet -- December 31, 1998............. F-16
Consolidated Statement of Income -- For the Period from
February 2, 1998 (Date of Initial Capitalization) through
December 31, 1998......................................... F-17
Consolidated Statement of Changes in Shareholders'
Equity -- For the Period from February 2, 1998 (Date of
Initial Capitalization) through December 31, 1998......... F-18
Consolidated Statement of Cash Flows -- For the Period from
February 2, 1998 (Date of Initial Capitalization) through
December 31, 1998......................................... F-19
Notes to Consolidated Financial Statements.................. F-20
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, June 30, 1999 and December 31,
1998...................................................... F-35
Consolidated Statements of Operations and Comprehensive
Earnings, For the Three Months and Six Months Ended June
30, 1999 and 1998......................................... F-36
Consolidated Statements of Cash Flows, For the Six Months
Ended June 30, 1999 and 1998.............................. F-37
Notes to Consolidated Financial Statements.................. F-38
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
Independent Auditors' Report................................ F-45
Consolidated Balance Sheets at December 31, 1998 and
1997...................................................... F-46
Consolidated Statements of Operations and Comprehensive
Earnings (Loss) for the year ended December 31, 1998 and
for the period from January 15, 1997 (commencement of
operations) through December 31, 1997..................... F-47
Consolidated Statement of Changes in Stockholders' Equity
for the period from January 15, 1997 (commencement of
operations) through December 31, 1998..................... F-48
Consolidated Statements of Cash Flows for the year ended
December 31, 1998 and for the period from January 15, 1997
(commencement of operations) through December 31, 1997.... F-49
Notes to Consolidated Financial Statements.................. F-50
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
Independent Auditors' Report................................ F-71
Consolidated Balance Sheets at December 31, 1998 and
1997...................................................... F-72
Consolidated Statements of Operations for the year ended
December 31, 1998 and for the period from January 15, 1997
(commencement of operations) through December 31, 1997.... F-73
Consolidated Statement of Changes in Shareholders' Equity
and for the period from January 15, 1997 (commencement of
operations) through December 31, 1998..................... F-74
Consolidated Statements of Cash Flows for the year ended
December 31, 1998 and for the period from January 15, 1997
(commencement of operations) through December 31, 1997.... F-75
Notes to Consolidated Financial Statements.................. F-76
</TABLE>
F-1
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AMRESCO CAPITAL TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
----------- ------------
<S> <C> <C>
ASSETS
Mortgage loans, net....................................... $114,506 $ 96,976
Acquisition, development and construction loan
arrangements accounted for as real estate or
investments in joint ventures.......................... 34,987 39,550
-------- --------
Total loan investments.................................... 149,493 136,526
Allowance for loan losses................................. (2,048) (1,368)
-------- --------
Total loan investments, net of allowance for losses....... 147,445 135,158
Commercial mortgage-backed securities -- available for
sale (at fair value)................................... 26,099 28,754
Real estate, net of accumulated depreciation of $297 and
$56, respectively...................................... 40,223 10,273
Investments in unconsolidated partnerships and
subsidiary............................................. 11,696 3,271
Receivables and other assets.............................. 5,431 3,681
Cash and cash equivalents................................. 3,770 9,789
-------- --------
TOTAL ASSETS...................................... $234,664 $190,926
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and other liabilities.................... $ 2,103 $ 941
Amounts due to affiliates................................. 5,968 6,268
Repurchase agreement...................................... 10,393 --
Line of credit............................................ 59,338 39,338
Non-recourse debt on real estate.......................... 26,998 7,500
Dividends payable......................................... -- 4,002
-------- --------
TOTAL LIABILITIES................................. 104,800 58,049
-------- --------
Minority interests........................................ 500 2,611
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 49,650,000 shares
authorized, no shares issued........................... -- --
Series A junior participating preferred stock, $.01 par
value, 350,000 shares authorized, no shares issued..... -- --
Common stock, $.01 par value, 200,000,000 shares
authorized, 10,015,111 and 10,006,111 shares issued and
outstanding, respectively.............................. 100 100
Additional paid-in capital................................ 140,998 140,941
Unearned stock compensation............................... (435) (848)
Accumulated other comprehensive income (loss)............. (9,296) (6,475)
Distributions in excess of accumulated earnings........... (2,003) (3,452)
-------- --------
TOTAL SHAREHOLDERS' EQUITY........................ 129,364 130,266
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $234,664 $190,926
======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 168
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 2,
THREE MONTHS ENDED SIX MONTHS 1998
JUNE 30, ENDED THROUGH
------------------ JUNE 30, JUNE 30,
1999 1998 1999 1998
------- ------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Interest income on mortgage loans............... $3,878 $ 140 $ 6,935 $ 140
Income from commercial mortgage-backed
securities................................... 934 37 1,848 37
Operating income from real estate............... 831 17 1,177 17
Equity in earnings of unconsolidated subsidiary,
partnerships and other real estate
ventures..................................... 64 160 134 160
Interest income from short-term investments..... 36 907 122 907
------ ------ ------- ------
TOTAL REVENUES.......................... 5,743 1,261 10,216 1,261
------ ------ ------- ------
EXPENSES:
Interest expense................................ 1,069 -- 1,658 --
Management fees................................. 415 193 1,003 193
General and administrative...................... 259 198 782 198
Depreciation.................................... 211 3 297 3
Participating interest in mortgage loans........ 644 -- 829 --
Provision for loan losses....................... 438 110 1,180 110
------ ------ ------- ------
TOTAL EXPENSES.......................... 3,036 504 5,749 504
------ ------ ------- ------
INCOME BEFORE GAINS............................... 2,707 757 4,467 757
Gain associated with repayment of ADC loan
arrangement.................................. -- -- 584 --
------ ------ ------- ------
NET INCOME........................................ $2,707 $ 757 $ 5,051 $ 757
====== ====== ======= ======
EARNINGS PER COMMON SHARE:
Basic........................................... $ 0.27 $ 0.14 $ 0.50 $ 0.23
====== ====== ======= ======
Diluted......................................... $ 0.27 $ 0.14 $ 0.50 $ 0.23
====== ====== ======= ======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic........................................... 10,000 5,495 10,000 3,356
====== ====== ======= ======
Diluted......................................... 10,012 5,498 10,009 3,358
====== ====== ======= ======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 169
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
$.01 PAR VALUE ACCUMULATED DISTRIBUTIONS
------------------- ADDITIONAL UNEARNED OTHER IN EXCESS OF TOTAL
NUMBER OF PAID-IN STOCK COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS) EARNINGS EQUITY
---------- ------ ---------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999... 10,006,111 $100 $140,941 $(848) $(6,475) $(3,452) $130,266
Issuance of trust managers'
restricted shares.......... 9,000 -- 91 (91) --
Issuance of warrants......... 400 400
Decrease in fair value of
compensatory options....... (434) 434 --
Amortization of unearned
trust manager
compensation............... 45 45
Amortization of compensatory
options.................... 25 25
Dividends declared ($0.36 per
common share).............. (3,602) (3,602)
Unrealized loss on securities
available for sale......... (2,821) (2,821)
Net income................... 5,051 5,051
---------- ---- -------- ----- ------- ------- --------
Balance at June 30, 1999..... 10,015,111 $100 $140,998 $(435) $(9,296) $(2,003) $129,364
========== ==== ======== ===== ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 170
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 2,
SIX MONTHS 1998,
ENDED THROUGH
JUNE 30, JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 5,051 $ 757
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................... 1,180 110
Depreciation............................................ 297 3
Gain associated with repayment of ADC loan
arrangement............................................ (584) --
Amortization of prepaid assets.......................... 117 46
Discount amortization on commercial mortgage-backed
securities............................................. (170) --
Amortization of compensatory stock options and unearned
trust manager compensation............................. 70 95
Amortization of loan commitment fees.................... (324) (10)
Receipt of loan commitment fees......................... 186 568
Increase in receivables and other assets................ (1,191) (615)
Decrease (increase) in interest receivable related to
commercial mortgage-backed securities.................. 4 (96)
Increase in accounts payable and other liabilities...... 1,162 924
Increase in amounts due to affiliates................... 984 139
Increase in deferred income............................. -- 294
Equity in undistributed earnings of unconsolidated
subsidiary, partnerships and other real estate
ventures............................................... (134) (160)
Distributions from unconsolidated subsidiary and other
real estate venture.................................... 201 69
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... 6,849 2,124
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in mortgage loans............................. (31,778) (22,113)
Investments in ADC loan arrangements...................... (15,191) (14,100)
Sale of mortgage loan to affiliate........................ 4,585 --
Principal collected on mortgage loans..................... 8,072 --
Principal and interest collected on ADC loan
arrangement............................................. 11,513 --
Investments in real estate................................ (30,191) --
Investments in unconsolidated partnerships and
subsidiary.............................................. (2,334) (3,501)
Purchase of commercial mortgage-backed securities......... -- (11,882)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES............... (55,324) (51,596)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of credit............. 20,000 --
Proceeds from borrowings under repurchase agreement....... 11,795 --
Repayment of borrowings under repurchase agreement........ (1,402) --
Proceeds from financing provided by affiliate............. 725 --
Proceeds from non-recourse debt on real estate............ 19,498 --
Deferred financing costs associated with line of credit... (120) --
Deferred financing costs associated with non-recourse debt
on real estate.......................................... (436) --
Net proceeds from issuance of common stock................ -- 139,717
Dividends paid to common shareholders..................... (7,604) --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES........... 42,456 139,717
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (6,019) 90,245
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 9,789 --
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 3,770 $ 90,245
======== ========
SUPPLEMENTAL INFORMATION:
Interest paid, net of amount capitalized.................. $ 1,369 $ --
======== ========
Income taxes paid......................................... $ 25 $ --
======== ========
Minority interest contributions associated with ADC loan
arrangements............................................ $ -- $ 500
======== ========
Minority interest distribution associated with ADC loan
arrangement............................................. $ 2,111 $ --
======== ========
Receivables transferred in satisfaction of amounts due to
affiliate............................................... $ 280 $ --
======== ========
Amounts due to affiliate discharged in connection with
sale of mortgage loan................................... $ 1,729 $ --
======== ========
Issuance of warrants in connection with line of credit.... $ 400 $ --
======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 171
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. ORGANIZATION AND RELATIONSHIPS
AMRESCO Capital Trust (the "Company"), a real estate investment trust
("REIT"), was organized under the laws of the State of Texas. The Company was
formed to take advantage of certain mid- to high-yield lending and investment
opportunities in real estate related assets, including various types of
commercial mortgage loans (including, among others, participating loans,
mezzanine loans, acquisition loans, construction loans, rehabilitation loans and
bridge loans), commercial mortgage-backed securities ("CMBS"), commercial real
estate, equity investments in joint ventures and/or partnerships, and certain
other real estate related assets. The Company was initially capitalized on
February 2, 1998 and commenced operations on May 12, 1998, concurrent with the
completion of its initial public offering ("IPO") of 9,000,000 common shares and
private placement of 1,000,011 common shares.
Pursuant to the terms of a Management Agreement dated as of May 12, 1998
and subject to the direction and oversight of the Board of Trust Managers, the
Company's day-to-day operations are managed by AMREIT Managers, L.P. (the
"Manager"), an affiliate of AMRESCO, INC. (together with its affiliated
entities, the "AMRESCO Group"). For its services, the Manager is entitled to
receive a base management fee equal to 1% per annum of the Company's Average
Invested Non-Investment Grade Assets, as defined, and 0.5% per annum of the
Company's Average Invested Investment Grade Assets, as defined. In addition to
the base management fee, the Manager is entitled to receive incentive
compensation in an amount equal to 25% of the dollar amount by which Funds From
Operations (as defined by the National Association of Real Estate Investment
Trusts), as adjusted, exceeds a certain threshold. The Manager is also entitled
to receive reimbursement for its costs of providing certain services to the
Company. The base management fee, reimbursable expenses and incentive fee, if
any, are payable quarterly in arrears. During the three and six months ended
June 30, 1999, base management fees charged to the Company totaled $511,000 and
$958,000, respectively. Reimbursable expenses charged to the Company during
these periods totaled $70,000 and $104,000, respectively. During the three
months ended June 30, 1998 and the period from February 2, 1998 (date of initial
capitalization) through June 30, 1998, base management fees charged to the
Company totaled $123,000; reimbursable expenses charged to the Company during
these periods totaled $16,000. Since its inception, no incentive fees have been
charged to the Company. Immediately after the closing of the IPO, the Manager
was granted options to purchase 1,000,011 common shares; 70% of the options are
exercisable at an option price of $15.00 per share and the remaining 30% of the
options are exercisable at an option price of $18.75 per share. During the three
and six months ended June 30, 1999, management fees included compensatory option
charges totaling $(96,000) and $45,000, respectively. During the three months
ended June 30, 1998 and the period from February 2, 1998 (date of initial
capitalization) through June 30, 1998, management fees included compensatory
option charges totaling $70,000.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10,
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting principles
for complete financial statements. The consolidated financial statements include
the accounts of the Company, its wholly-owned subsidiaries and a majority-owned
partnership. The Company accounts for its investment in AMREIT II, Inc., a
taxable subsidiary, using the equity method of accounting, and thus reports its
share of income or loss based on its ownership interest. The Company uses the
equity method of accounting due to the non-voting nature of its ownership
interest and because the Company is entitled to substantially all of the
economic benefits of ownership of AMREIT II, Inc. The Company owns
non-controlling interests in two partnerships; the Company accounts for these
investments using the equity method of accounting and thus reports its share
F-6
<PAGE> 172
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of income or loss based on its ownership interests. The accompanying financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 (the "10-K"). The notes to the
financial statements included herein highlight significant changes to the notes
included in the 10-K.
In the opinion of management, the accompanying consolidated financial
statements include all adjustments (consisting of normal and recurring accruals)
necessary for a fair presentation of the interim financial statements. Operating
results for the periods presented are not necessarily indicative of the results
that may be expected for the entire fiscal year or any other interim period.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
at the date of the financial statements and revenues and expenses for the
reporting period. Significant estimates include the valuation of commercial
mortgage-backed securities, the allowance for loan losses and the determination
of the fair value of certain share option awards and warrants. Actual results
may differ from those estimates.
Certain prior period amounts have been reclassified to conform with the
current period's presentation.
3. LOAN INVESTMENTS
During the three months ended June 30, 1999, the Company originated one
loan and two of the Company's loans were fully repaid. During the six months
ended June 30, 1999, four of the Company's loans were fully repaid, one loan
origination was closed and one loan was sold to AMRESCO Commercial Finance, Inc.
("ACFI"), a member of the AMRESCO Group; additionally, one loan was
reclassified, net of a $500,000 charge-off, to investment in unconsolidated
subsidiary following the subsidiary's acquisition (through foreclosure on
February 25, 1999) of the partnership interests of one of the Company's
borrowers. As of June 30, 1999, the Company's loan investments are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING AT
DATE OF INITIAL SCHEDULED COMMITMENT JUNE 30,
INVESTMENT MATURITY LOCATION PROPERTY TYPE COLLATERAL POSITION AMOUNT 1999
- ------------------ ------------------ ---------------- ----------------- ------------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien $ 14,700 $ 13,032
June 1, 1998 June 1, 2001 Houston, TX Office First Lien 11,800 10,353
June 12, 1998 June 30, 2000 Pearland, TX Apartment First Lien 12,827 10,987
June 17, 1998 June 30, 2000 San Diego, CA R&D/Bio-Tech First Lien 5,560 4,570
June 19, 1998 June 18, 2000 Houston, TX Office First Lien 24,000 14,016
June 22, 1998 June 19, 2000 Wayland, MA Office First Lien 45,000 36,951
July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests 10,068 7,017
July 2, 1998 June 30, 2000 Washington, D.C. Office First Lien 7,000 5,882
July 10, 1998 July 31, 2000 Pasadena, TX Apartment First Lien 3,350 2,900
September 1, 1998 February 28, 2001 Los Angeles, CA Mixed Use First Lien 18,419 17,418
September 30, 1998 Various San Antonio, TX/ Residential Lots First Lien 8,400 2,536
Sunnyvale, TX
September 30, 1998 October 7, 1999 Ft. Worth, TX Apartment Ptrshp Interests 2,650 2,649
September 30, 1998 December 31, 1999 Dallas, TX Medical Office First Lien 3,015 2,596
September 30, 1998 September 22, 1999 Norwood, MA Industrial/Office First Lien 8,765 8,195
October 1, 1998 December 31, 1999 Richardson, TX Office First Lien 567 300
May 18, 1999 May 19, 2001 Irvine, CA Office First Lien 15,260 12,883
-------- --------
$191,381 $152,285
======== ========
<CAPTION>
INTEREST INTEREST
DATE OF INITIAL PAY ACCRUAL
INVESTMENT RATE RATE
- ------------------ -------- --------
<S> <C> <C>
May 12, 1998 10.0% 12.0%
June 1, 1998 12.0% 12.0%
June 12, 1998 10.0% 11.5%
June 17, 1998 10.0% 13.5%
June 19, 1998 12.0% 12.0%
June 22, 1998 10.5% 10.5%
July 1, 1998 10.0% 15.0%
July 2, 1998 10.5% 10.5%
July 10, 1998 10.0% 14.0%
September 1, 1998 10.0% 12.0%
September 30, 1998 10.0% 14.0%
September 30, 1998 10.5% 16.0%
September 30, 1998 10.0% 13.0%
September 30, 1998 10.0% 12.5%
October 1, 1998 9.3% 15.0%
May 18, 1999 10.0% 12.0%
</TABLE>
At June 30, 1999, amounts outstanding under construction loans,
acquisition/rehabilitation loans, acquisition loans, land development loans and
bridge loans totaled $40,684,000, $47,017,000, $53,553,000, $2,836,000 and
$8,195,000, respectively.
F-7
<PAGE> 173
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Three of the 16 loan investments provide the Company with the opportunity
for profit participation in excess of the contractual interest accrual rates.
The loan investments are classified as follows (in thousands):
<TABLE>
<CAPTION>
LOAN AMOUNT BALANCE SHEET
OUTSTANDING AT AMOUNT AT
JUNE 30, JUNE 30,
1999 1999
-------------- -------------
<S> <C> <C>
Mortgage loans, net............................... $115,695 $114,506
Real estate, net.................................. 29,573 28,740
Investment in real estate venture................. 7,017 6,247
-------- --------
Total ADC loan arrangements..................... 36,590 34,987
-------- --------
Total loan investments............................ $152,285 149,493
========
Allowance for loan losses......................... (2,048)
--------
Total loan investments, net of allowance for
losses.......................................... $147,445
========
</TABLE>
The differences between the outstanding loan amounts and the balance sheet
amounts are due primarily to loan commitment fees, interest fundings, minority
interests, capitalized interest and accumulated depreciation.
ADC loan arrangements accounted for as real estate consisted of the
following at June 30, 1999 (in thousands):
<TABLE>
<S> <C>
Land............................................... $ 4,648
Buildings and improvements......................... 4,377
Construction in progress........................... 19,815
-------
Total............................................ 28,840
Less: Accumulated depreciation..................... (100)
-------
$28,740
=======
</TABLE>
A summary of activity for mortgage loans and ADC loan arrangements
accounted for as real estate or investments in joint ventures is as follows (in
thousands):
<TABLE>
<S> <C>
Balance at December 31, 1998...................... $136,791
Investments in loans.............................. 48,052
Collections of principal.......................... (19,405)
Cost of mortgage sold............................. (6,314)
Foreclosure (partnership interests)............... (6,839)
--------
Balance at June 30, 1999.......................... $152,285
========
</TABLE>
The activity in the allowance for loan losses was as follows (in
thousands):
<TABLE>
<S> <C>
Balance at December 31, 1998........................ $1,368
Provision for losses................................ 1,180
Charge-offs......................................... (500)
Recoveries.......................................... --
------
Balance at June 30, 1999............................ $2,048
======
</TABLE>
F-8
<PAGE> 174
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of June 30, 1999, the Company had outstanding commitments to fund
approximately $39,096,000 under 16 loans, of which $990,000 is reimbursable by
ACFI. The Company is obligated to fund these commitments to the extent that the
borrowers are not in violation of any of the conditions established in the loan
agreements. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee if amounts are repaid
to the Company during certain prepayment lock-out periods. A portion of the
commitments could expire without being drawn upon and therefore the total
commitment amounts do not necessarily represent future cash requirements.
4. REAL ESTATE
On April 30, 1999, the Company (through a majority-owned partnership)
acquired interests in three newly constructed, grocery-anchored shopping centers
in the Dallas/Fort Worth (Texas) area. These properties, which were acquired by
subsidiary partnerships at an aggregate purchase price of $30.2 million, include
an 86,516 square foot facility in Flower Mound, Texas, a 61,440 square foot
facility in Fort Worth, Texas and an 85,611 square foot facility in Grapevine,
Texas. In connection with these acquisitions, the subsidiary partnerships which
hold title to these assets obtained non-recourse financing aggregating $19.5
million from an unaffiliated third party (Note 5). Immediately prior to the
closing, the Company contributed $11.4 million of capital to the partnership.
The proceeds from this contribution were used to fund the balance of the
purchase price, to pay costs associated with the financing and to provide
initial working capital to the title-holding partnerships.
Real estate, which is comprised entirely of amounts derived from the
Company's partnership investment, consisted of the following at June 30, 1999
and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Land.................................................. $11,285 $ 2,353
Buildings and improvements............................ 29,235 7,976
------- -------
Total............................................ 40,520 10,329
Less: Accumulated depreciation........................ (297) (56)
------- -------
$40,223 $10,273
======= =======
</TABLE>
In connection with the partnership's procurement of third party financing,
the Company was required to post two irrevocable standby letters of credit
totaling $1,084,000. The letters of credit, which were cancelled on May 4, 1999,
were collateralized by certificates of deposit in a like amount; the
certificates of deposit mature on August 31, 1999. Concurrent with the
cancellation and as a replacement for a portion thereof related to the financing
for an additional acquisition, the Company posted an irrevocable standby letter
of credit in the amount of $304,000. This letter of credit, which expires on
September 15, 1999, is collateralized by a $304,000 certificate of deposit which
matures on September 30, 1999. The certificates of deposit aggregating
$1,388,000 at June 30, 1999 are included in receivables and other assets in the
consolidated balance sheet.
5. DEBT AND FINANCING FACILITIES
Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $400 million Interim Warehouse and Security Agreement (the "Line
of Credit") with Prudential Securities Credit Corporation ("PSCC"). Subject to
certain limitations, borrowings under the facility can be used to finance the
Company's structured loan and equity real estate investments. Prior to the
modifications discussed below, borrowings under the Line of Credit bore interest
at rates ranging from LIBOR plus 1% per annum to LIBOR plus 2% per annum
depending upon the type of asset, its loan-to-value ratio and the advance rate
selected by
F-9
<PAGE> 175
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company. Advance rates on eligible assets ranged from 50% to 95% depending
upon the asset's characteristics.
Effective as of May 4, 1999, the Company (and certain of its subsidiaries)
entered into an Amended and Restated Interim Warehouse and Security Agreement
(the "Amended Line of Credit") with PSCC; the agreement amended the Company's
existing Line of Credit. The Amended Line of Credit includes for the following
modifications: (1) a reduction in the size of the committed facility from $400
million to $300 million; (2) the elimination of the requirement that assets
financed with proceeds from the facility must be securitizable; (3) a reduction
in the amount of capital the Company must fund with respect to construction and
rehabilitation loans before PSCC is required to begin advancing funds; (4) an
extension of the maturity date from July 1, 2000 to November 3, 2000; and (5)
the modification to, and addition of, certain sublimits on certain types of
loans and assets. Under the Amended Line of Credit, borrowings bear interest at
LIBOR plus 1.25% per annum to the extent such borrowings do not exceed the
Company's Tangible Net Worth, as defined; borrowings in excess of the Company's
Tangible Net Worth bear interest at LIBOR plus 3%. At June 30, 1999, the
weighted average interest rate under this facility was 6.19%.
As compensation for entering into the Amended Line of Credit and extending
the maturity date, the Company granted warrants to Prudential Securities
Incorporated, an affiliate of PSCC, to purchase 250,002 common shares of
beneficial interest at $9.83 per share. The exercise price represents the
average closing market price of the Company's common shares for the ten-day
period ending on May 3, 1999. The warrants were issued in lieu of a commitment
fee or other cash compensation. The estimated fair value of the warrants,
totaling $400,000, was measured at the grant date and is being amortized to
interest expense over the 18-month term of the facility using the straight-line
method.
Borrowings under the facility are secured by a first lien security interest
on all assets funded with proceeds from the Amended Line of Credit. The Amended
Line of Credit contains several covenants; among others, the more significant
covenants include the maintenance of a $100 million consolidated Tangible Net
Worth, subject to adjustment in connection with any future equity offerings;
maintenance of a Coverage Ratio, as defined, of not less than 1.4 to 1; and
limitation of Total Indebtedness, as defined, to no more than 400% of
shareholders' equity.
On July 2, 1999, the Company terminated its existing $33.6 million
(notional) interest rate cap agreement at a loss of $4,000. Concurrently, the
Company entered into a new cap agreement to reduce the impact that rising
interest rates would have on its floating rate indebtedness. The new agreement,
which became effective on August 1, 1999, has a notional amount of $59.0
million. Until its expiration on November 1, 2000, the agreement entitles the
Company to receive from the counterparty the amounts, if any, by which one month
LIBOR exceeds 6.25%. The premium paid for this cap, totaling $110,000, will be
amortized on a straight-line basis over the life of the agreement as an
adjustment of interest incurred.
Three consolidated title-holding partnerships are indebted under the terms
of three non-recourse loan agreements with Jackson National Life Insurance
Company. The loans, aggregating $19,498,000, bear interest at 6.68% per annum.
The loans require interest only payments through January 1, 2002; thereafter,
interest and principal payments are due based upon 25-year amortization
schedules. The loans, which mature on January 1, 2014, prohibit any prepayment
of the outstanding principal prior to January 1, 2006. Thereafter, prepayment is
permitted at any time, in whole or in part, upon payment of a yield maintenance
premium of at least 1% of the then outstanding principal balance.
F-10
<PAGE> 176
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Obligations under various financing arrangements were as follows at June
30, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Repurchase agreement.................................. $10,393 $ --
Line of credit........................................ 59,338 39,338
Non-recourse debt on real estate...................... 26,998 7,500
------- -------
$96,729 $46,838
======= =======
</TABLE>
6. STOCK-BASED COMPENSATION
As of June 30, 1999, the estimated fair value of the options granted to the
Manager and certain employees of the AMRESCO Group approximated $0.71 per share.
The fair value of the options granted was estimated at June 30, 1999 using the
Cox-Ross-Rubinstein option pricing model with the following assumptions: risk
free interest rates ranging from 5.97% to 6.17%; expected lives ranging from
four to seven years; expected volatility of 35%; and dividend yield of 12%.
During the three months ended June 30, 1999, compensation cost associated with
these options was adjusted to reflect the decline in fair value approximating
$0.39 per share. During the three and six months ended June 30, 1999, the three
months ended June 30, 1998 and the period from February 2, 1998 (date of initial
capitalization) through June 30, 1998, management fees and general and
administrative expenses included the following compensatory option charges (in
thousands):
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS FEBRUARY 2,
ENDED SIX MONTHS 1998
JUNE 30, ENDED THROUGH
------------- JUNE 30, JUNE 30,
1999 1998 1999 1998
----- ---- ---------- -----------
<S> <C> <C> <C> <C>
Management fees.............................. $ (96) $70 $ 45 $70
General and administrative expenses.......... (47) 14 (20) 14
----- --- ---- ---
$(143) $84 $ 25 $84
===== === ==== ===
</TABLE>
In lieu of cash compensation for their services and participation at
regularly scheduled meetings of the Board of Trust Managers, the Company granted
2,250 restricted common shares to each of its four independent trust managers on
May 11, 1999. The associated compensation cost is being recognized over the
one-year service period.
At June 30, 1999, 505,506 shares were available for grant in the form of
restricted common shares or options to purchase common shares.
7. EARNINGS PER SHARE
A reconciliation of the numerator and denominator used in computing basic
earnings per share and diluted earnings per share for the three and six months
ended June 30, 1999, the three months ended June 30,
F-11
<PAGE> 177
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 and the period from February 2, 1998 (date of initial capitalization)
through June 30, 1998, is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 2,
THREE MONTHS ENDED SIX MONTHS 1998
JUNE 30, ENDED THROUGH
------------------- JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Net income available to common
shareholders........................... $ 2,707 $ 757 $ 5,051 $ 757
======= ====== ======= ======
Weighted average common shares
outstanding............................ 10,000 5,495 10,000 3,356
======= ====== ======= ======
Basic earnings per common share.......... $ 0.27 $ 0.14 $ 0.50 $ 0.23
======= ====== ======= ======
Weighted average common shares
outstanding............................ 10,000 5,495 10,000 3,356
Effect of dilutive securities:
Restricted shares...................... 11 3 8 2
Net effect of assumed exercise of stock
options............................. 1 -- 1 --
------- ------ ------- ------
Adjusted weighted average shares
outstanding............................ 10,012 5,498 10,009 3,358
======= ====== ======= ======
Diluted earnings per common share........ $ 0.27 $ 0.14 $ 0.50 $ 0.23
======= ====== ======= ======
</TABLE>
Options and warrants to purchase 1,479,511 and 250,002 shares,
respectively, of common stock were outstanding at June 30, 1999. Options related
to 1,473,511 shares and the warrants were not included in the computation of
diluted earnings per share because the exercise prices related thereto were
greater than the average market price of the Company's common shares. The
Company was initially capitalized on February 2, 1998 with the sale of 100
shares to AMRESCO, INC. The Company had no earnings prior to the commencement of
its operations on May 12, 1998. No options or warrants were outstanding during
the period from February 2, 1998 through May 11, 1998. When calculated for the
period from May 12, 1998 (inception of operations) through June 30, 1998, the
Company's basic and diluted earnings were $0.08 per common share.
8. LEASING ACTIVITIES
As of June 30, 1999, the future minimum lease payments to be received by
the Company (through a majority-owned partnership) under noncancellable
operating leases, which expire on various dates through 2024, are as follows (in
thousands):
<TABLE>
<S> <C>
1999............................................... $ 1,849
2000............................................... 3,736
2001............................................... 3,753
2002............................................... 3,779
2003............................................... 3,752
2004 and thereafter................................ 56,548
-------
$73,417
=======
</TABLE>
Approximately 85% of the future minimum lease payments disclosed above are
due from a regional grocer.
F-12
<PAGE> 178
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
except those resulting from investments by, and distributions to, its owners.
Other comprehensive income includes unrealized gains and losses on marketable
securities classified as available-for-sale. Comprehensive income during the
three and six months ended June 30, 1999, the three months ended June 30, 1998
and the period from February 2, 1998 (date of initial capitalization) through
June 30, 1998, is as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS FEBRUARY 2,
ENDED SIX MONTHS 1998
JUNE 30, ENDED THROUGH
--------------- JUNE 30, JUNE 30,
1999 1998 1999 1998
------- ---- ----------- -----------
<S> <C> <C> <C> <C>
Net income................................ $ 2,707 $757 $ 5,051 $757
Unrealized losses on securities available
for sale................................ (1,918) -- (2,821) --
------- ---- ------- ----
Comprehensive income...................... $ 789 $757 $ 2,230 $757
======= ==== ======= ====
</TABLE>
The unrealized losses on securities available for sale had no impact on the
Company's taxable income or cash flow.
10. SEGMENT INFORMATION
The Company, as an investor in real estate related assets, operates in only
one reportable segment. Within this segment, the Company makes asset allocation
decisions based upon its diversification strategies and changes in market
conditions. The Company does not have, nor does it rely upon, any major
customers. All of the Company's investments are secured directly or indirectly
by real estate properties located in the United States; accordingly, all of its
revenues were derived from U.S. operations.
11. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that
an entity recognize all derivatives as either assets or liabilities in its
balance sheet and that it measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) is dependent upon the intended use of the derivative and the resulting
designation. SFAS No. 133 generally provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of (1) the
changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk or (2) the earnings effect of the hedged forecasted
transaction. In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" ("SFAS
No. 137"). SFAS No. 137 deferred the effective date of SFAS No. 133 such that it
is now effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000, although earlier application is encouraged. The Company has not
yet assessed the impact that SFAS No. 133 will have on its financial condition
or results of operations.
12. SUBSEQUENT EVENTS
On July 22, 1999, the Company declared a dividend of $0.39 per share; the
dividend is payable on August 16, 1999 to shareholders of record on July 31,
1999.
F-13
<PAGE> 179
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 29, 1999, the Company originated a $5,213,000 first lien loan for
the acquisition and conversion of a research and development facility in
Lexington, Massachusetts; the initial advance under this loan totaled
approximately $2,541,000.
Effective as of August 4, 1999, the Company entered into an Agreement and
Plan of Merger (the "Merger Agreement") with Impac Commercial Holdings, Inc.
("ICH"). Pursuant to the Merger Agreement, ICH will be merged with and into the
Company, with the Company as the surviving entity (the "Merger"), and each
outstanding share of common stock of ICH will be converted into 0.66094 of a
common share of the Company. Also pursuant to this agreement, the holder of the
outstanding shares of Series B 8.5% Cumulative Convertible Preferred Stock of
ICH ("ICH Preferred Stock") will convert all of such shares into 1,683,635
shares of common stock of ICH or, if such conversion does not occur prior to the
effective time of the Merger, all of the shares of ICH Preferred Stock will be
converted into 1,112,782 common shares of the Company. The Merger will be
accounted for under the purchase method of accounting. After the Merger, the
Company will have approximately 16.7 million common shares outstanding. The
parties anticipate that the Merger will be completed in the fourth quarter of
1999. The transactions contemplated by the Merger Agreement are subject to
approval by the shareholders of the Company and ICH.
F-14
<PAGE> 180
INDEPENDENT AUDITORS' REPORT
To the Board of Trust Managers and Shareholders
of AMRESCO Capital Trust
We have audited the accompanying consolidated balance sheet of AMRESCO
Capital Trust (the Company) and its subsidiaries as of December 31, 1998 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the period from February 2, 1998 (date of initial capitalization)
through December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of AMRESCO Capital Trust and its
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the period from February 2, 1998 through December 31, 1998,
in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
February 4, 1999
F-15
<PAGE> 181
AMRESCO CAPITAL TRUST
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Mortgage loans, net....................................... $ 96,976
Acquisition, development and construction loan
arrangements accounted for as real estate or
investments in joint ventures.......................... 39,550
--------
Total loan investments.................................... 136,526
Allowance for loan losses................................. (1,368)
--------
Total loan investments, net of allowance for losses....... 135,158
Commercial mortgage-backed securities -- available for
sale (at fair value)................................... 28,754
Real estate, net of accumulated depreciation of $56....... 10,273
Investment in unconsolidated subsidiary................... 3,271
Receivables and other assets.............................. 3,681
Cash and cash equivalents................................. 9,789
--------
TOTAL ASSETS...................................... $190,926
========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and other liabilities.................... $ 941
Amounts due to affiliates................................. 6,268
Line of credit............................................ 39,338
Non-recourse debt on real estate.......................... 7,500
Dividends payable......................................... 4,002
--------
TOTAL LIABILITIES................................. 58,049
--------
Minority interests........................................ 2,611
--------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 50,000,000 shares
authorized, no shares issued........................... --
Common stock, $.01 par value, 200,000,000 shares
authorized, 10,006,111 shares issued and outstanding... 100
Additional paid-in capital................................ 140,941
Unearned stock compensation............................... (848)
Accumulated other comprehensive income (loss)............. (6,475)
Distributions in excess of accumulated earnings........... (3,452)
--------
Total shareholders' equity........................ 130,266
--------
Total liabilities and shareholders' equity........ $190,926
========
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE> 182
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD FROM FEBRUARY 2, 1998 (DATE OF INITIAL CAPITALIZATION) THROUGH
DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
REVENUES:
Interest income on mortgage loans......................... $4,278
Income from commercial mortgage-backed securities......... 1,563
Operating income from real estate......................... 392
Equity in earnings of unconsolidated subsidiary and other
real estate ventures................................... 588
Interest income from short-term investments............... 1,924
------
TOTAL REVENUES.................................... 8,745
------
EXPENSES:
Interest expense.......................................... 567
Management fees........................................... 1,187
General and administrative................................ 1,294
Depreciation.............................................. 100
Participating interest in mortgage loans.................. 277
Provision for loan losses................................. 1,368
------
TOTAL EXPENSES.................................... 4,793
------
NET INCOME.................................................. $3,952
======
EARNINGS PER COMMON SHARE:
Basic..................................................... $ 0.56
======
Diluted................................................... $ 0.56
======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic..................................................... 7,027
======
Diluted................................................... 7,031
======
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE> 183
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 2, 1998 (DATE OF INITIAL CAPITALIZATION) THROUGH
DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
$.01 PAR VALUE ACCUMULATED DISTRIBUTIONS TOTAL
------------------- ADDITIONAL UNEARNED OTHER IN EXCESS OF NONOWNER
NUMBER OF PAID-IN STOCK COMPREHENSIVE ACCUMULATED CHANGES
SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS) EARNINGS IN EQUITY
---------- ------ ---------- ------------ ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization,
February 2, 1998............. 100 -- $ 1
Additional paid-in capital,
February 11, 1998............ -- -- 25
Issuance of common shares
through IPO, net of offering
expenses, May 12, 1998....... 9,000,000 $ 90 124,601
Issuance of common shares
through Private Placement,
May 12, 1998................. 1,000,011 10 14,990
Issuance of trust managers'
restricted shares............ 6,000 -- 90 $ (90)
Total nonowner changes in
equity Net income............ $ 3,952 $ 3,952
Unrealized losses on
securities available for
sale....................... $(6,475) (6,475)
-------
Comprehensive loss............. $(2,523)
=======
Compensatory options granted... 1,234 (1,234)
Amortization of unearned trust
manager compensation......... 56
Amortization of compensatory
options...................... 420
Dividends declared ($0.74 per
common share)................ (7,404)
---------- ---- -------- ------- ------- -------
Balance at December 31, 1998... 10,006,111 $100 $140,941 $ (848) $(6,475) $(3,452)
========== ==== ======== ======= ======= =======
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Initial capitalization,
February 2, 1998............. $ 1
Additional paid-in capital,
February 11, 1998............ 25
Issuance of common shares
through IPO, net of offering
expenses, May 12, 1998....... 124,691
Issuance of common shares
through Private Placement,
May 12, 1998................. 15,000
Issuance of trust managers'
restricted shares............ --
Total nonowner changes in
equity Net income............ 3,952
Unrealized losses on
securities available for
sale....................... (6,475)
Comprehensive loss.............
Compensatory options granted... --
Amortization of unearned trust
manager compensation......... 56
Amortization of compensatory
options...................... 420
Dividends declared ($0.74 per
common share)................ (7,404)
--------
Balance at December 31, 1998... $130,266
========
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE> 184
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 2, 1998 (DATE OF INITIAL CAPITALIZATION) THROUGH
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 3,952
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses.............................. 1,368
Depreciation........................................... 100
Amortization of prepaid assets......................... 162
Discount amortization on commercial mortgage-backed
securities............................................ (173)
Amortization of compensatory stock options and unearned
trust manager compensation............................ 476
Amortization of loan commitment fees................... (180)
Receipt of loan commitment fees........................ 1,507
Increase in receivables and other assets............... (3,659)
Increase in interest receivable related to commercial
mortgage-backed securities............................ (345)
Increase in accounts payable and other liabilities..... 941
Increase in amounts due to affiliates.................. 736
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 4,885
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of mortgage loans............................. (25,807)
Investments in mortgage loans............................. (73,059)
Investments in ADC loan arrangements...................... (37,269)
Principal collected on mortgage loans..................... 563
Purchase of commercial mortgage-backed securities......... (34,480)
Investment in real estate................................. (10,329)
Investment in unconsolidated subsidiary................... (3,501)
Distributions from ADC joint ventures..................... 285
---------
NET CASH USED IN INVESTING ACTIVITIES............. (183,597)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................ 139,717
Proceeds from borrowings under repurchase agreement....... 5,123
Repayment of borrowings under repurchase agreement........ (5,123)
Proceeds from borrowings under line of credit............. 39,338
Proceeds from non-recourse debt on real estate............ 7,500
Deferred financing costs associated with non-recourse debt
on real estate......................................... (184)
Proceeds from other financing provided by affiliate....... 5,532
Dividends paid to common shareholders..................... (3,402)
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 188,501
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 9,789
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. --
---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 9,789
=========
SUPPLEMENTAL INFORMATION:
Interest paid, net of amount capitalized.................. $ 365
=========
Minority interest contributions associated with ADC loan
arrangements........................................... $ 2,611
=========
Dividends declared, paid in 1999.......................... $ 4,002
=========
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE> 185
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND RELATIONSHIPS
AMRESCO Capital Trust (the "Company"), a real estate investment trust
("REIT"), was organized under the laws of the State of Texas. The Company was
formed to take advantage of certain mid- to high-yield lending and investment
opportunities in real estate related assets, including various types of
commercial mortgage loans (including, among others, participating loans,
mezzanine loans, acquisition loans, construction loans, rehabilitation loans and
bridge loans), commercial mortgage-backed securities, commercial real estate,
equity investments in joint ventures and/or partnerships, and certain other real
estate related assets. The Company was initially capitalized on February 2, 1998
and commenced operations on May 12, 1998, concurrent with the completion of its
initial public offering ("IPO") of 9,000,000 common shares and private placement
of 1,000,011 common shares (the "Private Placement").
Pursuant to the terms of a Management Agreement dated as of May 12, 1998
and subject to the direction and oversight of the Board of Trust Managers, the
Company's day-to-day operations are managed by AMREIT Managers, L.P. (the
"Manager"), an affiliate of AMRESCO, INC. ("AMRESCO") (together with its
affiliated entities, the "AMRESCO Group"). For its services, the Manager is
entitled to receive a base management fee equal to 1% per annum of the Company's
Average Invested Non-Investment Grade Assets, as defined, and 0.5% per annum of
the Company's Average Invested Investment Grade Assets, as defined. In addition
to the base management fee, the Manager is entitled to receive incentive
compensation in an amount equal to 25% of the dollar amount by which Funds From
Operations (as defined by the National Association of Real Estate Investment
Trusts), as adjusted, exceeds a certain threshold. The Manager is also entitled
to receive reimbursement for its costs of providing certain services to the
Company. The base management fee, reimbursable expenses and incentive fee, if
any, are payable quarterly in arrears. Immediately after the closing of the IPO,
the Manager was granted options to purchase 1,000,011 common shares; 70% of the
options are exercisable at an option price of $15.00 per share and the remaining
30% of the options are exercisable at an option price of $18.75 per share.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and a majority-owned partnership. The Company
accounts for its investment in AMREIT II, Inc., a taxable subsidiary, using the
equity method of accounting, and thus reports its share of income or loss based
on its ownership interest. The Company uses the equity method of accounting due
to the non-voting nature of its ownership interest in AMREIT II, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
at the date of the financial statements and revenues and expenses for the
reporting period. Significant estimates include the valuation of commercial
mortgage-backed securities, the provision for loan losses and the determination
of the fair value of certain share option awards. Actual results may differ from
those estimates.
Acquisition, Development and Construction (ADC) Loan Arrangements
The Company provides financing through certain real estate loan
arrangements that, because of their nature, qualify as either real estate or
joint venture investments for financial reporting purposes. Using the
F-20
<PAGE> 186
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
guidance set forth in the Third Notice to Practitioners issued by the AICPA in
February 1986 entitled "ADC Arrangements" (the "Third Notice"), the Company
evaluates each investment to determine whether loan, joint venture or real
estate accounting is appropriate; such determination affects the Company's
balance sheet classification of these investments and the recognition of
revenues derived therefrom. The Third Notice was issued to address those real
estate acquisition, development and construction arrangements where a lender has
virtually the same risks and potential rewards as those of real estate owners or
joint venturers. EITF 86-21, "Application of the AICPA Notice to Practitioners
regarding Acquisition, Development, and Construction Arrangements to Acquisition
of an Operating Property" expanded the applicability of the Third Notice to
loans on operating real estate.
The Company accounts for its loan investments classified as real estate in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 67, "Accounting for Costs and Initial Rental Operations of Real
Estate Projects" and SFAS No. 66, "Accounting for Sales of Real Estate",
consistent with its accounting for direct real estate investments. Depreciation
on buildings and improvements is provided under the straight-line method over an
estimated useful life of 39 years for office and industrial buildings and 27.5
years for multi-family projects.
The Company accounts for its loan investments classified as joint ventures
in accordance with the provisions of Statement of Position 78-9, "Accounting for
Investments in Real Estate Ventures" and thus reports its share of income or
loss under the equity method of accounting based on its preferential ownership
interest.
Mortgage Loans
Mortgage loans are stated at face value, net of deferred origination and
commitment fees and associated direct costs, if any. Loan origination and
commitment fees and incremental direct costs, if any, are deferred and
recognized over the life of the loan as an adjustment of yield using the
interest method.
Provision for Loan Losses
The Company provides for estimated loan losses by establishing an allowance
for losses through a charge to earnings. Management performs a periodic
evaluation of the allowance with consideration given to economic conditions and
trends, collateral values and other relevant factors. ADC loan arrangements are
considered in the allowance for loan losses.
Impairment on a loan-by-loan basis is determined by assessing the
probability that a borrower will not be able to fulfill the contractual terms of
its loan agreement. If a loan is determined to be impaired, the amount of the
impairment is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or by the fair value of the
collateral less estimated costs to sell if those costs are expected to reduce
the cash flows available to repay or otherwise satisfy the loan. The allowance
for loan losses is adjusted accordingly. The recognition of income on impaired
loans is dependent upon their classification as either mortgage loans, real
estate or joint venture investments. Interest income on impaired mortgage loans
is recognized using a cash-basis method while income recognition related to ADC
loan arrangements is dependent upon the facts and circumstances specific to each
investment.
Real Estate
Real estate is stated at cost, net of accumulated depreciation. Costs
associated with the acquisition, development and construction of a real estate
project are capitalized as a cost of that project during its construction
period. In accordance with SFAS No. 34, "Capitalization of Interest Cost",
interest on the Company's borrowings is capitalized to the extent such asset
qualifies for capitalization. When a real estate project is substantially
completed and held available for occupancy, rental revenues and operating costs
are
F-21
<PAGE> 187
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized as they accrue. Depreciation on buildings and improvements is
provided under the straight-line method over an estimated useful life of 39
years. Depreciation on land improvements is provided using the 150%
declining-balance method over an estimated useful life of 15 years. Maintenance
and repair costs are charged to operations as incurred, while significant
capital improvements and replacements are capitalized. Leasing commissions and
leasehold improvements are deferred and amortized on a straight-line basis over
the terms of the related leases. Other deferred charges are amortized over terms
applicable to the expenditure.
The Company will record impairment losses on direct real estate investments
when events and circumstances indicate that the assets might be impaired and the
estimated undiscounted cash flows to be generated by those assets are less than
the carrying amounts of those assets. The Company periodically reviews its real
estate holdings to determine if its carrying costs will be recovered from future
operating cash flows. In cases where the Company does not expect to recover its
carrying costs, the Company recognizes an impairment loss. No such impairment
losses have been recognized to date.
Leases
The Company, having retained substantially all of the risks and benefits of
ownership, accounts for its leases as operating leases. Rental income is
recognized over the terms of the leases as it is earned.
Commercial Mortgage-Backed Securities
The Company's investments in commercial mortgage-backed securities ("CMBS")
are classified as available for sale and are carried at estimated fair value as
determined by quoted market rates when available, otherwise by discounting
estimated cash flows at current market rates. Any unrealized gains or losses are
excluded from earnings and reported as a component of accumulated other
comprehensive income (loss) in shareholders' equity. If a decline in fair value
is deemed to be other than temporary, it is charged to earnings during the
period such determination is made. Income from CMBS is recognized based on the
effective interest method using the anticipated yield over the expected life of
the investments.
Cash and Cash Equivalents
Cash and cash equivalents consists of cash on hand and highly liquid
investments with maturities of three months or less at the date of purchase.
Stock-Based Compensation
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for stock option awards
granted to its officers and trust managers. Pro forma disclosures of net income
and earnings per common share as if the fair value based method of accounting
had been applied are included in Note 8.
Stock options awarded to the Manager and certain other members of the
AMRESCO Group are accounted for under the fair value method prescribed by SFAS
No. 123, "Accounting for Stock-Based Compensation" and related Interpretations.
Earnings per Common Share
Basic earnings per common share ("EPS") excludes dilution and is computed
by dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS gives effect to
all dilutive potential common shares that were outstanding during the period.
F-22
<PAGE> 188
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes and Distributions
The Company intends to qualify and will elect to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the
"Code"), commencing with its initial taxable year ended December 31, 1998. As a
result, the Company will generally not be subject to federal income tax on that
portion of its ordinary income or capital gain that is currently distributed to
its shareholders if it distributes at least 95% of its annual REIT taxable
income and it complies with a number of other organizational and operational
requirements. AMREIT II, Inc. is subject to federal income tax on its taxable
income at regular corporate rates.
The Company pays quarterly dividends to its shareholders which are designed
to allow the Company to qualify as a REIT under the Code. Earnings and profits,
which will determine the taxability of distributions to shareholders, differs
from income reported for financial reporting purposes due primarily to
differences in methods of accounting for ADC loan arrangements and stock-based
compensation awards and the nondeductibility, for tax purposes, of the Company's
loan loss reserve. As a result, net income under generally accepted accounting
principles is not necessarily an indicator of distributions to be made by the
Company.
3. LOAN INVESTMENTS
Concurrent with the commencement of its operations on May 12, 1998, the
Company acquired two loans from AMRESCO Funding Corporation, a member of the
AMRESCO Group. Additionally, the Company originated eleven loans during the
period from May 12, 1998 through December 31, 1998. On September 30, 1998, the
Company acquired eight loans from AMRESCO Commercial Finance, Inc. ("ACFI"), a
member of the AMRESCO Group, at an aggregate cash purchase price of $34,292,000,
including accrued interest of $812,000. Immediately following the purchase, the
Company sold to ACFI a contractual right to collect from the Company an amount
equal to the economic equivalent of all amounts collected from five of the loans
in excess of (i) $17,958,000 and (ii) a return on this amount, or so much of it
as is outstanding from time to time, equal to 12% per annum. The aggregate cash
sales price of $5,020,000 had the effect of reducing the Company's credit
exposure with respect to such loans. As additional consideration, ACFI agreed to
immediately reimburse the Company for any additional advances which are required
to be made under the five loan agreements. At December 31, 1998, ACFI's
contingent obligation for these additional advances approximated $1,695,000. The
proceeds received from ACFI are accounted for as a financing. As of December 31,
1998, amounts due to ACFI totaled $5,809,000 and are included in amounts due to
affiliates in
F-23
<PAGE> 189
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the consolidated balance sheet. The Company's loan investments are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING AT
DATE OF INITIAL SCHEDULED COMMITMENT DECEMBER 31,
INVESTMENT MATURITY LOCATION PROPERTY TYPE COLLATERAL POSITION AMOUNT 1998
- ------------------ ------------------ ---------------- ------------------ ------------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
May 12, 1998 March 31, 2001 Columbus, OH Mixed Use Second Lien $ 7,000 $ 6,839
May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien 14,700 10,811
June 1, 1998 June 1, 2001 Houston, TX Office First Lien 11,800 10,033
June 12, 1998 June 30, 2000 Pearland, TX Apartment First Lien 12,827 4,238
June 17, 1998 June 30, 2000 San Diego, CA R&D/Bio-Tech First Lien 5,560 3,994
June 19, 1998 June 18, 2000 Houston, TX Office First Lien 24,000 6,682
June 22, 1998 June 19, 2000 Wayland, MA Office First Lien 45,000 24,962
July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests 10,068 6,459
July 2, 1998 June 30, 2000 Washington, DC Office First Lien 7,000 5,489
July 10, 1998 July 31, 2000 Pasadena, TX Apartment First Lien 3,350 2,614
September 1, 1998 February 28, 2001 Los Angeles, CA Mixed Use First Lien 18,419 17,418
September 30, 1998 October 30, 1999 Richardson, TX Office First Lien 13,001 10,277
September 30, 1998 May 1, 2001 San Antonio, TX Residential Lots First Lien 3,266 2,059
September 30, 1998 Various San Antonio, TX Residential Lots First Lien 8,400 1,637
September 30, 1998 July 15, 1999 Galveston, TX Apartment First Lien 3,664 3,664
September 30, 1998 June 8, 1999 Ft. Worth, TX Apartment Ptrshp Interests 2,650 2,649
September 30, 1998 April 18, 1999 Austin, TX Office First Lien 6,325 6,314
September 30, 1998 June 30, 1999 Dallas, TX Medical Office First Lien 3,015 2,364
September 30, 1998 July 22, 1999 Norwood, MA Industrial/Office First Lien 8,765 7,733
October 1, 1998 April 30, 1999 Richardson, TX Office First Lien 567 300
December 29, 1998 December 9, 1999 San Antonio, TX Residential Lots First Lien 255 255
-------- --------
$209,632 $136,791
======== ========
<CAPTION>
INTEREST INTEREST
DATE OF INITIAL PAY ACCRUAL
INVESTMENT RATE RATE
- ------------------ -------- --------
<S> <C> <C>
May 12, 1998 15.0% 15.0%
May 12, 1998 10.0% 12.0%
June 1, 1998 12.0% 12.0%
June 12, 1998 10.0% 11.5%
June 17, 1998 10.0% 13.5%
June 19, 1998 12.0% 12.0%
June 22, 1998 10.5% 10.5%
July 1, 1998 10.0% 15.0%
July 2, 1998 10.5% 10.5%
July 10, 1998 10.0% 14.0%
September 1, 1998 10.0% 12.0%
September 30, 1998 10.0% 14.0%
September 30, 1998 16.0% 16.0%
September 30, 1998 10.0% 14.0%
September 30, 1998 10.0% 15.0%
September 30, 1998 10.5% 16.0%
September 30, 1998 10.0% 16.0%
September 30, 1998 10.0% 13.0%
September 30, 1998 10.0% 12.5%
October 1, 1998 9.97% 15.0%
December 29, 1998 16.0% 16.0%
</TABLE>
At December 31, 1998, amounts outstanding under construction loans,
acquisition/rehabilitation loans, acquisition loans, land development loans and
bridge loans totaled $34,657,000, $43,912,000, $46,238,000, $4,251,000 and
$7,733,000, respectively. For all loan investments, payments of interest only
are due monthly at the interest pay rate. All principal and all remaining
accrued and unpaid interest are due at the scheduled maturities of the loans.
Eight of the 21 loans provide for profit participation above the
contractual interest accrual rate; four of these eight facilities are included
in the pool of loans in which ACFI has a contractual right to collect certain
excess proceeds, as described above. The loan investments are classified as
follows (in thousands):
<TABLE>
<CAPTION>
LOAN AMOUNT BALANCE SHEET
OUTSTANDING AT AMOUNT AT
DECEMBER 31, DECEMBER 31,
1998 1998
-------------- -------------
<S> <C> <C>
Mortgage loans, net............................... $ 98,303 $ 96,976
Real estate, net.................................. 25,191 26,873
Investments in real estate ventures............... 13,297 12,677
-------- --------
Total ADC loan arrangements....................... 38,488 39,550
-------- --------
Total loan investments............................ $136,791 136,526
========
Allowance for loan losses......................... (1,368)
--------
Total loan investments, net of allowance for
losses.......................................... $135,158
========
</TABLE>
F-24
<PAGE> 190
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the outstanding loan amounts and the balance sheet
amounts are due primarily to loan commitment fees, minority interests and
accumulated depreciation.
ADC loan arrangements accounted for as real estate consisted of the
following at December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Land............................................... $ 6,118
Buildings and improvements......................... 3,196
Construction in progress........................... 17,603
-------
Total.............................................. 26,917
Less: Accumulated depreciation..................... (44)
-------
$26,873
=======
</TABLE>
A summary of activity for mortgage loans and ADC loan arrangements
accounted for as real estate or investments in joint ventures is as follows (in
thousands):
<TABLE>
<S> <C>
Balance at February 2, 1998....................... $ --
Investments in loans.............................. 137,354
Collections of principal.......................... (563)
--------
Balance at December 31, 1998...................... $136,791
========
</TABLE>
The activity in the allowance for loan losses was as follows (in
thousands):
<TABLE>
<S> <C>
Balance at February 2, 1998......................... $ --
Provision for losses................................ 1,368
Charge-offs......................................... --
Recoveries.......................................... --
------
Balance at December 31, 1998........................ $1,368
======
</TABLE>
An ADC loan arrangement with a recorded investment of $6,659,000 was
non-performing as of December 31, 1998. The allowance for loan losses related to
this investment totaled $500,000 at December 31, 1998. The average recorded
investment in this ADC loan arrangement was $5,970,000 during the period from
May 12, 1998 (inception of operations) through December 31, 1998. At December
31, 1998, the amount outstanding under this loan totaled $6,839,000. No income
was recognized after the loan investment became non-performing.
As of December 31, 1998, the Company had outstanding commitments to fund
approximately $72,841,000 under 21 loans, of which $1,695,000 is reimbursable by
ACFI. The Company is obligated to fund these commitments to the extent that the
borrowers are not in violation of any of the conditions established in the loan
agreements. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee if amounts are repaid
to the Company during certain prepayment lock-out periods. A portion of the
commitments could expire without being drawn upon and therefore the total
commitment amounts do not necessarily represent future cash requirements. At
December 31, 1998, approximately 56% of the Company's committed loan investments
were collateralized by properties located in Texas. Additionally, approximately
63% of the Company's loan commitments were secured by office properties.
F-25
<PAGE> 191
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. COMMERCIAL MORTGAGE-BACKED SECURITIES
As of December 31, 1998, the Company holds five commercial mortgage-backed
securities ("CMBS") which were acquired at an aggregate purchase price of
$34,480,000. The Company's CMBS available for sale are carried at estimated fair
value. At December 31, 1998, the aggregate amortized cost and estimated fair
value of CMBS, by underlying credit rating, were as follows (in thousands):
<TABLE>
<CAPTION>
SECURITY AGGREGATE AGGREGATE AGGREGATE
RATING AMORTIZED COST UNREALIZED LOSS FAIR VALUE
-------- -------------- --------------- ----------
<S> <C> <C> <C>
BB-.................. $ 4,233 $ (618) $ 3,615
B.................... 19,489 (2,952) 16,537
B-................... 11,277 (2,675) 8,602
------- ------- -------
$34,999 $(6,245) $28,754
======= ======= =======
</TABLE>
Additionally, the Company has recorded an unrealized loss of $230,000, net
of tax effects, related to CMBS owned by AMREIT II, Inc. The mortgage loans
underlying the Company's CMBS are diverse in nature; no particular
concentrations exist by property type or location. At December 31, 1998, the
weighted average maturity and weighted average duration of the Company's CMBS
was 13 years and 6.3 years, respectively.
5. REAL ESTATE
On October 23, 1998, the Company (through a majority-owned partnership)
acquired an interest in the first of five newly constructed, grocery-anchored
shopping centers in the Dallas/Fort Worth (Texas) area, an 82,730 square foot
facility in Arlington, Texas. In connection with this acquisition and other
partnership formation activities, the Company contributed $3,400,000 of capital
to the partnership; the balance of the acquisition price was financed with a
$7,500,000 non-recourse loan (Note 6). Real estate, which is comprised entirely
of amounts derived from the Company's partnership investment, consisted of the
following at December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Land............................................... $ 2,353
Buildings and improvements......................... 7,976
-------
Total......................................... 10,329
Less: Accumulated depreciation..................... (56)
-------
$10,273
=======
</TABLE>
The acquisitions of the remaining four centers, which are subject to
certain closing conditions, will require an additional equity investment of
approximately $12,500,000. In anticipation of these acquisitions, the
partnership has secured permanent financing commitments aggregating $27,100,000.
In connection with the partnership's procurement of this financing, the Company
was required to post two irrevocable standby letters of credit totaling
$1,084,000. The letters of credit, which expire on July 15, 1999, are
collateralized by certificates of deposit in a like amount. The certificates of
deposit, which mature on August 31, 1999, are included in receivables and other
assets in the consolidated balance sheet.
6. DEBT AND FINANCING FACILITIES
Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $400 million Interim Warehouse and Security Agreement (the "Line
of Credit") with Prudential Securities Credit Corporation ("PSCC"). Subject to
certain limitations, borrowings under the facility can be used to finance the
Company's structured loan and equity real estate investments. Borrowings under
the Line of Credit bear
F-26
<PAGE> 192
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest at rates ranging from LIBOR plus 1% per annum to LIBOR plus 2% per
annum depending upon the type of asset, its loan-to-value ratio and the advance
rate selected by the Company. Advance rates on eligible assets range from 50% to
95% depending upon the asset's characteristics. Borrowings under the facility
are secured by a first lien security interest on all assets funded with proceeds
from the Line of Credit. The Line of Credit contains several covenants; among
others, the more significant covenants include the maintenance of a $100 million
consolidated Tangible Net Worth, as defined and subject to adjustment in
connection with any future equity offerings; maintenance of a Coverage Ratio, as
defined, of not less than 1.4 to 1; and limitation of Total Indebtedness, as
defined, to no more than 400% of shareholders' equity. The Line of Credit
matures on July 1, 2000. The weighted average interest rate at December 31, 1998
was 6.65%. Currently, the Company is negotiating modifications to the Line of
Credit with PSCC in an effort to lessen the borrowing limitations imposed by
PSCC in connection with the existing facility.
To reduce the impact that rising interest rates would have on its floating
rate Line of Credit indebtedness, the Company entered into an interest rate cap
agreement with a major international financial institution. The cap agreement,
which became effective on January 1, 1999, has a notional amount of $33,600,000.
Until its expiration on July 1, 2000, the agreement entitles the Company to
receive from the counterparty the amounts, if any, by which one month LIBOR
exceeds 6.0%. The premium paid for this cap, totaling $52,000, is included in
receivables and other assets in the consolidated balance sheet. The premium is
being amortized on a straight-line basis over the life of the agreement as an
adjustment of interest incurred.
Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $100 million Master Repurchase Agreement (the "Repurchase
Agreement") with PSCC; subsequently, PSCC was replaced by Prudential-Bache
International, Ltd. ("PBI"), an affiliate of PSCC, as lender. Borrowings under
the Repurchase Agreement can be used to finance a portion of the Company's
portfolio of mortgage-backed securities. The Repurchase Agreement provides that
the Company may borrow a varying percentage of the market value of the purchased
mortgage-backed securities, depending on the credit quality of such securities.
Borrowings under the Repurchase Agreement bear interest at rates ranging from
LIBOR plus 0.20% per annum to LIBOR plus 1.5% per annum depending upon the
advance rate and the credit quality of the securities being financed. Borrowings
under the facility are secured by an assignment to PBI of all mortgage-backed
securities funded with proceeds from the Repurchase Agreement. The Repurchase
Agreement matures on June 30, 2000. At December 31, 1998, there were no
borrowings under the Repurchase Agreement.
Under the terms of the Line of Credit and the Repurchase Agreement, PSCC
and PBI, respectively, retain the right to mark the underlying collateral to
market value. A reduction in the value of its pledged assets may require the
Company to provide additional collateral or fund margin calls. From time to
time, the Company may be required to provide such additional collateral or fund
margin calls.
A consolidated partnership is indebted under the terms of a $7,500,000
non-recourse loan from Jackson National Life Insurance Company. The loan bears
interest at 7.28% per annum. The loan requires interest-only payments through
January 1, 2002; thereafter, interest and principal payments are due based upon
a 25-year amortization schedule. The note, which matures on January 1, 2014,
prohibits any prepayment of the outstanding principal prior to January 1, 2006.
Thereafter, prepayment is permitted at any time, in whole or in part, upon
payment of a yield maintenance premium of at least 1% of the then outstanding
principal balance.
Total interest incurred during the period from May 12, 1998 (inception of
operations) through December 31, 1998, was $624,000, of which $57,000 was
capitalized.
F-27
<PAGE> 193
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future scheduled principal repayments on debt and financing facilities at
December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................... $ --
2000............................................... 39,338
2001............................................... --
2002............................................... 100
2003............................................... 118
2004 and thereafter................................ 7,282
-------
$46,838
=======
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Company's day-to-day operations are managed by the Manager, a member of
the AMRESCO Group. During the period from May 12, 1998 (inception of operations)
through December 31, 1998, base management fees and reimbursable expenses
charged to the Company totaled $835,000 and $140,000, respectively. No incentive
fees were charged to the Company during this period. Reimbursable expenses are
included in general and administrative expenses in the Company's consolidated
statement of income. As of December 31, 1998, base management fees and
reimbursable expenses due to the Manager totaled $415,000 and $44,000,
respectively; these amounts are included in amounts due to affiliates in the
consolidated balance sheet.
Subject to certain limited exceptions, AMRESCO has granted to the Company a
right of first refusal with respect to the first $100 million of targeted
mortgage loan investments which are identified by or to any member of the
AMRESCO Group during any calendar quarter and all MBS (other than MBS issued in
securitizations sponsored in whole or in part by any member of the AMRESCO
Group). Additionally, the Company has entered into a Correspondent Agreement
with Holliday Fenoglio Fowler ("HFF"), a member of the AMRESCO Group, pursuant
to which HFF presents to the Company (on a non-exclusive basis) investment
opportunities identified by HFF which meet the investment criteria and
objectives of the Company.
As described more fully in Note 3, the Company acquired certain loans from
members of the AMRESCO Group during the period from May 12, 1998 (inception of
operations) through December 31, 1998.
8. STOCK-BASED COMPENSATION
Under the Company's 1998 Share Option and Award Plan, the Company may grant
restricted common shares and options to purchase common shares in amounts up to
an aggregate of 15% of the Company's outstanding common shares (or 1,500,017
common shares).
On May 12, 1998, the Company granted to its trust managers and officers
non-qualified options to purchase 352,000 common shares at an exercise price of
$15.00 per share (the IPO price). The options vest ratably over a four-year
period beginning one year after the date of grant. The Company applies APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for these awards. As the awards had no intrinsic
value at the grant date, no compensation cost has been recognized. Had the
Company determined compensation cost associated with these options consistent
with the fair value methodology of SFAS No. 123, the Company's net income and
earnings per common share for the period
F-28
<PAGE> 194
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from February 2, 1998 (date of initial capitalization) through December 31, 1998
would have been reduced to the following pro forma amounts (in thousands, except
per share data):
<TABLE>
<S> <C>
Net income:
As reported....................................... $3,952
Pro forma......................................... $3,831
Basic earnings per common share:
As reported....................................... $ 0.56
Pro forma......................................... $ 0.54
Diluted earnings per common share:
As reported....................................... $ 0.56
Pro forma......................................... $ 0.54
</TABLE>
The estimated fair value of the options granted to the Company's officers
and trust managers, approximating $2.20 per share, was measured at the grant
date using the Cox-Ross-Rubinstein option pricing model with the following
assumptions: risk free interest rate of 5.64%; expected life of four years;
expected volatility of 25%; and dividend yield of 8%. Subsequent to the grant
date, the fair value of the options is not adjusted for changes in these
assumptions nor for changes in the price of the Company's stock.
On May 12, 1998, the Company granted to the Manager and certain employees
of the AMRESCO Group non-qualified options to purchase 1,000,011 and 141,500
common shares, respectively. Seventy percent of the Manager's options and those
options awarded to the other members of the AMRESCO Group are exercisable at
$15.00 per share (the IPO price); the remaining thirty percent of the Manager's
options are exercisable at an option price of $18.75 per share. The options vest
in four equal installments on May 12, 1999, May 12, 2000, May 12, 2001 and May
12, 2002. The Company accounts for these options under SFAS No. 123 and the
interpretation thereof provided by EITF 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services"; accordingly, compensation cost is
recognized over the four-year vesting period. For purposes of recognizing
compensation costs during the financial reporting periods prior to the
measurement date, the share option awards are measured as of each financial
reporting date at their then-current fair value. Changes in those fair values
between reporting dates are attributed in accordance with the provisions of FASB
Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans". As of December 31, 1998, the estimated
fair value of the options granted to the Manager and certain employees of the
AMRESCO Group approximated $1.10 per share. The fair value of the options
granted was estimated using the Cox-Ross-Rubinstein option pricing model with
the following assumptions: risk free interest rates ranging from 4.54% to 4.59%;
expected lives ranging from four to seven years; expected volatility of 40%; and
dividend yield of 10%. During the period from May 12, 1998 (inception of
operations) through December 31, 1998, management fees and general and
administrative expenses included compensatory option charges totaling $352,000
and $68,000, respectively.
F-29
<PAGE> 195
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock options as of December 31,
1998 and the changes during the period from May 12, 1998 (inception of
operations) through December 31, 1998 is as follows:
<TABLE>
<CAPTION>
COMPENSATORY NON-COMPENSATORY
OPTIONS OPTIONS
--------------------------- ---------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Granted on May 12, 1998............ 1,141,511 $ 15.99 352,000 $15.00
Granted on November 3, 1998........ 4,000 7.88 -- --
Exercised.......................... -- -- -- --
Forfeited.......................... (21,500) (15.00) -- --
Expired............................ -- -- -- --
--------- ------- ------- ------
Options outstanding at December 31,
1998............................. 1,124,011 $ 15.98 352,000 $15.00
========= ======= ======= ======
</TABLE>
As of December 31, 1998, the 1,476,011 options outstanding have a weighted
average exercise price of $15.74 and a weighted average remaining contractual
life of 9.38 years. No options were exercisable as of December 31, 1998.
In lieu of cash compensation, the Company granted 6,000 restricted common
shares to its four independent trust managers on May 12, 1998. The associated
compensation cost is being recognized over the one-year service period.
At December 31, 1998, 18,006 shares were available for grant in the form of
restricted common shares or options to purchase common shares.
9. COMMON STOCK
The Company was initially capitalized through the sale of 100 of its common
shares to AMRESCO on February 2, 1998 for $1,000. On May 12, 1998, the Company
completed its IPO of 9,000,000 shares of common stock. Concurrently, the Private
Placement of 1,000,011 common shares was completed with AMREIT Holdings, Inc.
("Holdings"), a wholly-owned subsidiary of AMRESCO. The net proceeds from the
IPO and the Private Placement, after the underwriters' discount and offering
expenses, aggregated approximately $139.7 million. The price to the public and
to Holdings was $15.00 per share and the proceeds to the Company from the IPO
and the Private Placement were $14.00 per share (after the underwriter's
discount and advisory fee) and $15.00 per share, respectively. Holdings
currently owns 1,500,011 shares, or approximately 15% of the Company's
outstanding common stock. In addition to the 1,000,011 shares acquired pursuant
to the Private Placement, Holdings purchased 500,000 shares through the IPO.
F-30
<PAGE> 196
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. EARNINGS PER SHARE
A reconciliation of the numerator and denominator used in computing basic
earnings per share and diluted earnings per share for the period from February
2, 1998 (date of initial capitalization) through December 31, 1998, is as
follows (in thousands, except per share data):
<TABLE>
<S> <C>
Net income available to common shareholders................. $3,952
======
Weighted average common shares outstanding.................. 7,027
======
Basic earnings per common share............................. $ 0.56
======
Weighted average common shares outstanding.................. 7,027
Effect of dilutive securities:
Restricted shares......................................... 4
Net effect of assumed exercise of stock options........... --
Adjusted weighted average shares outstanding................ 7,031
======
Diluted earnings per common share........................... $ 0.56
======
</TABLE>
Options to purchase 1,172,008 shares of common stock at $15.00 per share,
300,003 shares of common stock at $18.75 per share and 4,000 shares of common
stock at $7.875 per share were outstanding during the period from May 12, 1998
(inception of operations) through December 31, 1998. The options related to the
1,172,008 shares and the 300,003 shares were not included in the computation of
diluted earnings per share because the options' exercise price was greater than
the average market price of the Company's common shares.
The Company had no earnings prior to the commencement of its operations on
May 12, 1998. When calculated for the period from May 12, 1998 (inception of
operations) through December 31, 1998, the Company's basic and diluted earnings
were $0.39 per common share.
11. DISTRIBUTIONS
The Company has adopted a policy of paying quarterly dividends on its
common shares. During the period from May 12, 1998 (inception of operations)
through December 31, 1998, the Company declared dividends totaling $7,404,000,
or $0.74 per share. For federal income tax purposes, all 1998 dividends were
reported as ordinary income to the Company's shareholders. Information regarding
the declaration and payment of dividends by the Company since its inception of
operations is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
DIVIDEND
PER
DECLARATION RECORD PAYMENT DIVIDEND COMMON
DATE DATE DATE PAID SHARE
----------------- ----------------- ----------------- -------- ------------
<S> <C> <C> <C> <C> <C>
Period from May 12, 1998
through June 30, 1998...... July 23, 1998 July 31, 1998 August 17, 1998 $1,001 $0.10
Third Quarter................ October 22, 1998 October 31, 1998 November 16, 1998 2,401 0.24
Fourth Quarter............... December 15, 1998 December 31, 1998 January 27, 1999 4,002 0.40
------ -----
$7,404 $0.74
====== =====
</TABLE>
F-31
<PAGE> 197
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. LEASING ACTIVITIES
As of December 31, 1998, the future minimum lease payments to be received
by the Company (through a majority-owned partnership) under noncancellable
operating leases, which expire on various dates through 2023, are as follows (in
thousands):
<TABLE>
<S> <C>
1999............................................... $ 983
2000............................................... 983
2001............................................... 996
2002............................................... 999
2003............................................... 966
2004 and thereafter................................ 14,038
-------
$18,965
=======
</TABLE>
Approximately 83% of the future minimum lease payments disclosed above are
due from a regional grocer.
13. RECONCILIATION OF FINANCIAL STATEMENT NET INCOME TO TAX BASIS INCOME
A reconciliation of the Company's financial statement net income to its tax
basis income for the period from February 2, 1998 (date of initial
capitalization) through December 31, 1998 is as follows:
<TABLE>
<S> <C>
Consolidated financial statement net income................. $3,952
Difference attributable to differences in methods of
accounting for ADC loan arrangements...................... 1,713
Interest capitalized under SFAS No. 34...................... (57)
Adjustments for restricted stock and compensatory options... 476
Provision for loan losses................................... 1,368
Other....................................................... 43
------
Tax basis income............................................ $7,495
======
</TABLE>
For the period from May 12, 1998 (inception of operations) through December
31, 1998, the Company retained a portion of its REIT taxable income in excess of
the 95% requirement; as a result, such income is subject to tax at regular
corporate rates. These taxes, totaling approximately $20,000 (of which none was
paid in 1998), are included in general and administrative expenses in the
consolidated statement of income.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
("SFAS No. 107"), requires disclosure of the estimated fair values of financial
instruments whether or not such financial instruments are recognizable in the
balance sheet. For purposes of the statement, fair value is defined as the
amount at which the instrument could be exchanged in a current transaction
between willing parties other than in a forced or liquidation sale. With the
exception of real estate, the Company's unconsolidated investment and minority
interests, substantially all of the Company's assets and liabilities are
considered financial instruments for purposes of SFAS No. 107. The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. The fair value estimates were derived based upon pertinent information
available to management as of December 31, 1998. Although management is not
aware of any factors that would significantly affect the
F-32
<PAGE> 198
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date.
Mortgage loans and ADC loan arrangements accounted for as real estate or
investments in joint ventures have fixed rates which approximate rates that the
Company would quote currently for investments with similar terms and risk
characteristics; accordingly, their estimated fair values approximate their net
carrying values. However, there is not an active secondary trading market for
these types of investments; as a result, the estimates of fair value are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. Furthermore, the Company generally intends to hold these
financial instruments to maturity and realize their recorded values.
Commercial mortgage-backed securities are carried at estimated fair value
based on quoted market prices.
The estimated fair values of cash and cash equivalents, receivables and
other assets, accounts payable and other liabilities, amounts due to affiliates
and dividends payable approximate their carrying values due to the short-term
nature of these financial instruments.
The estimated fair value of the Line of Credit approximates its carrying
value due to the variable rate nature of the facility. The non-recourse loan on
real estate bears interest at a fixed rate which approximates current market
rates; accordingly, its fair value is not materially different from its carrying
value.
15. SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), requires enterprises to report certain financial
and descriptive information about their reportable operating segments. SFAS No.
131 also requires certain enterprise-wide disclosures regarding products and
services, geographic areas and major customers.
The Company, as an investor in real estate related assets, operates in only
one reportable segment. Within this segment, the Company makes asset allocation
decisions based upon its diversification strategies and changes in market
conditions. During the period from May 12, 1998 (inception of operations)
through December 31, 1998, revenues derived from loan investments, CMBS and
direct investments in real estate totaled $4,834,000, $1,563,000 and $181,000,
respectively. Certain of the revenues derived from the Company's loan
investments are included in operating income from real estate and equity in
earnings of other real estate ventures in the consolidated statement of income.
The Company does not have, nor does it rely upon, any major customers. All of
the Company's investments are secured directly or indirectly by real estate
properties located in the United States; accordingly, all of its revenues were
derived from U.S. operations.
16. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 requires that an entity recognize all derivatives as either assets
or liabilities in its balance sheet and that it measure those instruments at
fair value. The accounting for changes in the fair value of a derivative (that
is, gains and losses) is dependent upon the intended use of the derivative and
the resulting designation. SFAS No. 133 generally provides for matching the
timing of gain or loss recognition on the hedging instrument with the
recognition of (1) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (2) the earnings effect of
the hedged forecasted transaction. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999, although earlier
application is encouraged. The Company has not yet assessed the impact that SFAS
No. 133 will have on its financial condition or results of operations.
F-33
<PAGE> 199
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUBSEQUENT EVENTS (UNAUDITED)
On February 25, 1999, the Company's Board of Trust Managers adopted a
shareholder rights plan (the "Plan"). In connection with the adoption of the
Plan, the Board of Trust Managers declared a dividend of one preferred share
purchase right (a "Right") for each outstanding common share of the Company. The
dividend was paid on March 11, 1999 to shareholders of record on March 11, 1999.
The Rights trade with the Company's common shares and are not exercisable until
a triggering event, as defined, occurs.
On February 25, 1999, the Company's unconsolidated taxable subsidiary
assumed control of one of the Company's borrowers through foreclosure of certain
partnership interests.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the period from February 2, 1998 (date of initial capitalization) through
December 31, 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 2,
1998
THROUGH
MARCH 31, SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER
------------ ------- ------- -------
<S> <C> <C> <C> <C>
Revenues..................................... $-- $1,261 $2,992 $4,492
Net income................................... $-- $ 757 $1,272 $1,923
Earnings per common share:
Basic...................................... $-- $ 0.14 $ 0.12 $ 0.19
Diluted.................................... $-- $ 0.14 $ 0.12 $ 0.19
</TABLE>
The Company had no earnings prior to the commencement of its operations on
May 12, 1998. When calculated for the period from May 12, 1998 (inception of
operations) through June 30, 1998, the Company's basic and diluted earnings were
$0.08 per common share during the second quarter.
F-34
<PAGE> 200
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 21,814 $ 14,161
Investment securities available-for-sale.................... 16,481 17,154
Residual interest in securitizations, held-for-trading...... 8,833 8,790
Loan receivables:
CMO collateral............................................ 317,347 326,559
Commercial Mortgages held-for-sale........................ 29,797 --
Commercial Mortgages held-for-investment.................. 7,951 24,569
Finance receivables....................................... -- 40,972
Allowance for loan losses................................. (1,427) (2,110)
-------- --------
Net loan receivables................................. 353,668 389,990
Premises and equipment, net................................. 11,620 9,146
Investment in Impac Commercial Capital Corporation.......... -- (15,016)
Accrued interest receivable................................. 2,588 2,627
Other real estate owned..................................... 1,342 --
Due from affiliates......................................... 101 22,131
Other assets................................................ 1,526 2,236
-------- --------
Total assets...................................... $417,973 $451,219
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CMO borrowings.............................................. $277,834 $285,021
Warehouse line and reverse repurchase agreements............ 18,005 50,523
Due to affiliates........................................... 5,110 11,170
Other liabilities........................................... 2,029 1,168
-------- --------
Total liabilities................................. 302,978 347,882
STOCKHOLDERS' EQUITY:
Preferred Stock; $.01 par value; 9,000,000 shares
authorized; no shares issued or outstanding at June 30,
1999 and December 31, 1998, respectively............... -- --
Series A Junior Participating Preferred Stock; $.01 par
value; 1,000,000 shares authorized; no shares issued or
outstanding as of June 30, 1999 and December 31, 1998,
respectively........................................... -- --
Series B Cumulative Convertible Preferred Stock; $.01 par
value; 479,999 shares authorized; 479,999 and no shares
issued or outstanding as of June 30, 1999 and December
31, 1998, respectively................................. 5 --
Common Stock; $.01 par value; 46,217,295 shares
authorized; 8,418,200 and 8,625,000 shares issued and
outstanding at June 30, 1999 and December 31, 1998,
respectively........................................... 84 86
Class A Common Stock; $.01 par value; 3,782,705 shares
authorized; and no shares issued and outstanding at
June 30, 1999 and December 31, 1998, respectively...... -- --
Additional paid-in-capital................................ 137,521 127,004
Accumulated other comprehensive earnings.................. 682 24
Cumulative dividends declared............................. (15,733) (15,575)
Accumulated deficit....................................... (7,564) (8,202)
-------- --------
Total stockholders' equity........................ 114,995 103,337
-------- --------
$417,973 $451,219
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE> 201
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Commercial Mortgage Assets.......................... $7,974 $7,811 $16,601 $12,849
Cash equivalents and due from affiliates............ 169 893 409 1,629
------ ------ ------- -------
Total interest income....................... 8,143 8,704 17,010 14,478
INTEREST EXPENSE:
CMO borrowings...................................... 5,125 69 10,540 135
Warehouse line and reverse repurchase agreements.... 332 4,716 1,159 7,035
Other borrowings.................................... 238 280 286 611
------ ------ ------- -------
Total interest expense...................... 5,695 5,065 11,985 7,781
------ ------ ------- -------
Net interest income................................. 2,448 3,639 5,025 6,697
Provision for loan losses................... -- 69 -- 118
Provision for repurchases................... 47 -- 47 --
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
AND REPURCHASES.................................. 2,401 3,570 4,978 6,579
NON-INTEREST INCOME:
Equity in net loss of Impac Commercial Capital
Corporation...................................... -- (423) -- (876)
Rental and other income............................. 761 318 222 426
------ ------ ------- -------
TOTAL NON-INTEREST INCOME................... 761 (105) 222 (450)
NON-INTEREST EXPENSE:
Write-down of investment securities................. 500 -- 500 --
Professional services............................... 482 145 897 281
General and administrative and other expense........ 470 430 1,068 620
Personnel expense................................... 397 -- 1,320 --
Occupancy expense................................... 215 -- 383 --
Property expense.................................... 240 -- 394 --
Management advisory fees............................ -- 217 -- 379
------ ------ ------- -------
TOTAL NON-INTEREST EXPENSE.................. 2,304 792 4,562 1,280
------ ------ ------- -------
NET EARNINGS........................................ 858 2,673 638 4,849
Less: Cash dividends on Series B Cumulative
Convertible Preferred Stock...................... 159 -- 159 --
------ ------ ------- -------
Net earnings available to common stockholders....... 699 2,673 479 4,849
Other comprehensive earnings:
Unrealized gains (losses) arising during period..... 930 196 658 (234)
------ ------ ------- -------
Comprehensive earnings.............................. $1,629 $2,869 $ 1,137 $ 4,615
====== ====== ======= =======
Net earnings per share -- basic and diluted......... $ 0.08 $ 0.33 $ 0.06 $ 0.60
====== ====== ======= =======
Weighted average shares outstanding -- basic........ 8,418 8,111 8,503 8,066
Weighted average shares outstanding -- diluted...... 8,418 8,122 8,503 8,089
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE> 202
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 638 $ 4,849
Adjustments to reconcile net earnings to net cash used in
operating activities:
Equity in net loss of Impac Commercial Capital
Corporation........................................... -- 876
Decrease in minority interest in Impac Commercial
Capital Corporation................................... 788 --
Provision for loan losses/repurchases.................. 47 118
Depreciation........................................... 450 201
Net change in accrued interest on receivables.......... 312 591
Net change in other assets and liabilities............. 2,121 (5,095)
Net change in due from affiliates and due to
affiliates............................................ 5,753 (14,430)
Net change in Commercial Mortgages held-for-sale....... 15,057 --
-------- ---------
Net cash provided by (used in) operating
activities...................................... 25,166 (12,890)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in Commercial Mortgages held-for-investment.... 14,593 (304,551)
Net change in finance receivables......................... -- 24,042
Net change in CMO collateral.............................. 1,024 (6,764)
Principal reductions on investment securities
available-for-sale, net of amortization................ 1,331 1,224
Principal reductions on residual interest in
securitizations, net of accretion...................... (43) (386)
Purchase of premises and equipment........................ (2,014) (457)
Net cash acquired through the consolidation of ICCC....... 692 --
-------- ---------
Net cash provided by (used in) investing
activities...................................... 15,583 (286,892)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in warehouse line and reverse repurchase
agreements............................................. (36,428) 268,148
Net change in CMO borrowings.............................. (7,188) 6,550
Issuance of preferred stock............................... 11,592 --
Issuance of common stock.................................. -- 28,388
Repurchase of common stock................................ (1,072) --
Dividends paid............................................ -- (6,255)
-------- ---------
Net cash provided by (used in) financing
activities...................................... (33,096) 296,831
-------- ---------
Net change in cash and cash equivalents..................... 7,653 (2,951)
Cash and cash equivalents at beginning of period............ 14,161 15,908
-------- ---------
Cash and cash equivalents at end of period.................. $ 21,814 $ 12,957
======== =========
SUPPLEMENTARY INFORMATION:
Interest paid............................................. $ 12,157 $ 6,976
NON-CASH TRANSACTIONS:
Increase (decrease) in accumulated other comprehensive
earnings............................................... $ 658 $ (234)
Transfer of loans to other real estate owned.............. 1,342 --
Dividend declared and unpaid.............................. 159 3,609
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE> 203
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless the context otherwise requires, references herein to the "Company"
refer to Impac Commercial Holdings, Inc. (ICH) and its subsidiaries, Impac
Commercial Assets Corp. (ICH Assets), IMH/ICH Dove Street, LLC (Dove) and Impac
Commercial Capital Corporation (together with its wholly owned subsidiary, ICCC
Secured Assets Corp., ICCC), collectively. References to ICH refer to Impac
Commercial Holdings, Inc. as a separate entity from ICH Assets, Dove or ICCC.
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three-month and six-month periods ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. The accompanying consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
The operations of ICH have been presented in the consolidated financial
statements for the three months and six-months ended June 30, 1999 and 1998. The
consolidated financial statements at June 30, 1999 include the financial results
of ICH as a stand-alone entity, the financial results of ICCC as a result of the
purchase of ICCC's outstanding common shares and the financial results of ICH
Assets and Dove. However, the consolidated financial statements at June 30, 1998
include ICH's equity interest in net loss of ICCC, as ICCC was not a
wholly-owned subsidiary of ICH at June 30, 1998.
On March 31, 1999 (the "Purchase Date"), the Board of Directors unanimously
approved the purchase of all the outstanding common shares of ICCC representing
5% of the economic interest, making ICCC a wholly owned subsidiary of ICH. As a
result of this purchase, ICH will file a consolidated tax return that includes
activity of ICCC subsequent to the Purchase Date, and prepare consolidated
financial statements for 1999. Prior to the Purchase Date, the Company was
entitled to 95% of the earnings or losses of ICCC through its ownership of all
of the non-voting preferred stock of ICCC. As such, the Company recorded its
investment in ICCC using the equity method. Under the equity method, original
investments were recorded at cost and adjusted by the Company's share of
earnings or losses. Gain or loss on the sale of loans or securities by ICCC to
ICH were deferred and amortized or accreted over the estimated life of the loans
or securities. Subsequent to the Purchase Date, the effects of all intercompany
transactions were eliminated.
2. ORGANIZATION
ICH was incorporated in Maryland in February 1997 under the name Imperial
Credit Commercial Holdings, Inc., and in June 1997, ICH changed its name to IMH
Commercial Holdings, Inc. By a vote of stockholders on January 28, 1998, a name
change to Impac Commercial Holdings, Inc. was approved. ICH is a specialty
commercial property finance company, which has elected to be taxed at the
corporate level as a real estate investment trust (REIT) for federal income tax
purposes. This generally allows the Company to pass through income to
stockholders without payment of federal income tax at the corporate level
provided that the Company distributes at least 95% of its taxable income to
stockholders. Impac Mortgage Holdings, Inc. (IMH) capitalized ICH with $15.0
million in cash in March of 1997. In October 1998, the Company repurchased from
IMH 937,084 shares of Common Stock and 456,9l6 shares of Class A Common Stock at
an average price of $4.375 for a total purchase price of $6.1 million. During
the six months ended June 30, 1999, the Company repurchased, in the open market,
206,800 shares of its common stock outstanding, at a weighted average price of
$5.18 per share, for a total purchase price of $1.1 million. At June 30, 1999
and December 31, 1998, the Company had 8,418,200 and 8,625,000 shares of Common
Stock outstanding and no shares of Class A Common Stock outstanding,
respectively.
F-38
<PAGE> 204
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Method of Accounting
The consolidated financial statements are prepared on the accrual basis of
accounting in accordance with GAAP. The preparation of financial statements in
conformity with GAAP requires management to make significant estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ materially from
those estimates.
Reclassifications
Certain amounts in the consolidated financial statements as of and for the
three and six months ended June 30, 1998 have been reclassified to conform to
the 1999 presentation.
New Accounting Statements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognizes
all derivatives as either assets or liabilities in the statement of financial
position and measures those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS 133 was amended by SFAS 137, which allows
deferral of SFAS 133 for all fiscal quarters of fiscal years beginning after
July 15, 2000. The Company believes that the adoption of SFAS 133 will not have
a material impact on the Company's financial position or results of operations.
F-39
<PAGE> 205
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. NET EARNINGS PER SHARE
The following tables represent the computation of basic and diluted
earnings per share for the periods presented (in thousands, except per share
data):
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1998
------------ ------------
<S> <C> <C>
NUMERATOR:
Numerator for basic earnings per share --
Net earnings........................................... $ 858 $2,673
Less: Dividends paid to preferred stockholders......... (159) --
------ ------
Net earnings available to common stockholders..... $ 699 $2,673
====== ======
DENOMINATOR:
Denominator for basic earnings per share --
Weighted average number of common shares outstanding
during the period..................................... 8,418 8,111
Net effect of dilutive stock options................... -- 11
------ ------
Weighted average common and common equivalent
shares......................................... 8,418 8,122
====== ======
Net earnings per share -- basic........................... $ 0.08 $ 0.33
====== ======
Net earnings per share -- diluted......................... $ 0.08 $ 0.33
====== ======
</TABLE>
For the three months ended June 30, 1999, the Company had 1,078,579
weighted average shares of Series B Cumulative Convertible Preferred Stock that
were antidilutive.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1998
---------- ----------
<S> <C> <C>
NUMERATOR:
Numerator for basic earnings per share --
Net earnings........................................... $ 638 $4,849
Less: Dividends paid to preferred stockholders......... (159) --
------ ------
Net earnings available to common stockholders..... $ 479 $4,849
====== ======
DENOMINATOR:
Denominator for basic earnings per share --
Weighted average number of common shares outstanding
during the period..................................... 8,503 8,066
Net effect of dilutive stock options................. -- 23
------ ------
Weighted average common and common equivalent
shares.......................................... 8,503 8,089
====== ======
Net earnings per share -- basic........................... $ 0.06 $ 0.60
====== ======
Net earnings per share -- diluted......................... $ 0.06 $ 0.60
====== ======
</TABLE>
For the six months ended June 30, 1999, the Company had 547,849 weighted
average shares of Series B Cumulative Convertible Stock that were antidilutive.
F-40
<PAGE> 206
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVESTMENT IN IMPAC COMMERCIAL CAPITAL CORPORATION
On March 31, 1999 (the "Purchase Date"), the Board of Directors unanimously
approved the purchase of all the outstanding common shares of ICCC representing
5% of the economic interest, making ICCC a wholly owned subsidiary of ICH. As a
result of this purchase, ICH will file a consolidated tax return to include
ICCC, subsequent to the Purchase Date, and prepare consolidated financial
statements for 1999. Prior to the Purchase Date, the Company was entitled to 95%
of the earnings or losses of ICCC through its ownership of all of the non-voting
preferred stock of ICCC. As such, the Company recorded its investment in ICCC
using the equity method. Under the equity method, original investments were
recorded at cost and adjusted by the Company's share of earnings or losses. Gain
or loss on the sale of loans or securities by ICCC to ICH were deferred and
amortized or accreted over the estimated life of the loans or securities.
Subsequent to the Purchase Date, the effects of all intercompany transactions
were eliminated.
6. SEGMENT REPORTING
The Company's basis for segment reporting is to divide the entities into
(a) segments that derive income from long-term assets and (b) segments that
derive income from the origination and sale of mortgage loans.
The Company reviews and analyzes its business into two basic segments:
- The Long-Term Investment Operations, conducted by ICH and ICH Assets,
invests primarily in commercial mortgage loans and commercial
mortgage-backed securities secured by or representing interests in such
loans.
- The Conduit Operations, conducted by ICCC, originates commercial mortgage
loans.
The following table breaks out ICH's segments as of and for the three
months ended June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
LONG-TERM
INVESTMENT CONDUIT ELIMINATIONS
OPERATIONS OPERATIONS (1) CONSOLIDATED
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET ITEMS:
Net loan receivables............... $357,878 $29,797 $(34,007) $353,668
Total assets....................... 468,632 31,824 (82,483) 417,973
Total stockholders' equity......... 161,723 1,748 (48,476) 114,995
STATEMENT OF OPERATIONS ITEMS:
Net interest income (expense)...... $ 2,382 $ (6) $ 72 $ 2,448
Net intersegment interest income
(expense)....................... 577 (577) -- --
Net earnings (loss)................ 1,636 (806) 28 858
</TABLE>
F-41
<PAGE> 207
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table breaks out ICH's segments as of and for the three
months ended June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
LONG-TERM
INVESTMENT CONDUIT
OPERATIONS OPERATIONS(2)
---------- -------------
<S> <C> <C>
BALANCE SHEET ITEMS:
Net loan receivables...................................... $449,347 $79,696
Total assets.............................................. 522,081 92,214
Total stockholders' equity................................ 129,429 3,480
STATEMENT OF OPERATIONS ITEMS:
Net interest income (expense)............................. $ 3,639 $ (264)
Net intersegment interest income (expense)................ 3,163 (3,163)
Equity in net loss in ICCC................................ (423) --
Net earnings (loss)....................................... 2,673 (445)
</TABLE>
The following table breaks out ICH's segments as of and for the six months
ended June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
LONG-TERM
INVESTMENT CONDUIT ELIMINATIONS
OPERATIONS OPERATIONS (1) CONSOLIDATED
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET ITEMS:
Net loan receivables............... $357,878 $29,797 $(34,007) $353,668
Total assets....................... 468,632 31,824 (82,483) 417,973
Total stockholders' equity......... 161,723 1,748 (48,476) 114,995
STATEMENT OF OPERATIONS ITEMS:
Net interest income (expense)...... $ 5,045 $ (297) $ 277 $ 5,025
Net intersegment interest income
(expense)....................... 1,421 (1,421) -- --
Net earnings (loss)................ (16,132) 17,552 (782) 638
</TABLE>
F-42
<PAGE> 208
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table breaks out ICH's segments as of and for the six months
ended June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
LONG-TERM
INVESTMENT CONDUIT
OPERATIONS OPERATIONS(2)
---------- -------------
<S> <C> <C>
BALANCE SHEET ITEMS:
Net loan receivables...................................... $449,347 $79,696
Total assets.............................................. 522,081 92,214
Total stockholders' equity................................ 129,429 3,480
STATEMENT OF OPERATIONS ITEMS:
Net interest income (expense)............................. $ 6,697 $ (337)
Net intersegment interest income (expense)................ 5,689 (5,689)
Equity in net loss in ICCC................................ (876) --
Net earnings (loss)....................................... 4,849 (923)
</TABLE>
- ---------------
(1) Used to eliminate intercompany balances and intercompany operations.
(2) For the three and six months ended June 30, 1998 and as of June 30, 1998 the
Conduit Operations is accounted for based on the equity method and is not
consolidated. See Note 1. Basis of Financial Statement Presentation.
7. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED
JUNE 30,
1999
----------
<S> <C>
Balance, beginning of period...................... $2,110
Provision for loan losses....................... --
Charge-offs..................................... 683
------
Balance, end of period.......................... $1,427
======
</TABLE>
8. STOCKHOLDERS' EQUITY
During the six months ended June 30, 1999, the Company repurchased 206,800
shares of its common stock outstanding at an average price of $5.18 for a total
purchase price of $1.1 million.
On May 5, 1999, the Company executed a stock purchase agreement to issue to
Fortress Partners L.P. ("Fortress") approximately $12.0 million of Series B
Convertible Preferred Stock (the "Series B Preferred Stock") with a coupon of
8.5% paid quarterly in arrears. The preferred stock is initially convertible
into 1,683,635 shares of the Common Stock of ICH, subject to adjustment under
certain circumstances. The Common Stock issuable upon conversion of the Series B
Preferred Stock will have registration rights. In connection with the issuance
of preferred stock, the Company recorded issuance costs of $597,000. At June 30,
1999, the Company accrued $159,000 in preferred stock dividends.
F-43
<PAGE> 209
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUBSEQUENT EVENTS
On July 2, 1999, the Board of Directors declared a second quarter 1999 cash
dividend of $0.125 per common share. The dividend was payable on July 30, 1999
to stockholders of record at the close of business on July 15, 1999.
Effective as of August 4, 1999, the Company entered into an Agreement and
Plan of Merger with AMRESCO Capital Trust ("AMCT"). Pursuant to this agreement,
the Company will be merged with and into AMCT, with AMCT as the surviving entity
(the "Merger"), and each outstanding share of common stock of the Company will
be converted into 0.66094 of a common share of AMCT. Also pursuant to this
agreement, Fortress as the holder of the outstanding shares of Series B
Preferred Stock will convert all of such shares into 1,683,635 shares of common
stock of the Company or, if such conversion does not occur prior to the
effective time of the Merger, all of the shares of the Series B Preferred Stock
will be converted into 1,112,782 common shares of AMCT. The Merger will be
accounted for under the purchase method of accounting. After the Merger, AMCT
will have approximately 16.7 million common shares outstanding. The parties
anticipate that the Merger will be completed in the fourth quarter of 1999. The
transactions contemplated by the Merger Agreement are subject to customary
conditions including approval by the shareholders of the Company and AMCT. The
Merger is more fully described in Part II, Item 5.
F-44
<PAGE> 210
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Impac Commercial Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Impac
Commercial Holdings, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations and comprehensive earnings
(loss), changes in stockholders' equity and cash flows for the year ended
December 31, 1998 and for the period from January 15, 1997 (commencement of
operations) through December 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Impac Commercial Holdings, Inc. and subsidiaries as of December 31, 1998 and
1997 and the results of their operations and their cash flows for the year ended
December 31, 1998 and for the period from January 15, 1997 (commencement of
operations) through December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG LLP
Orange County, California
February 3, 1999
F-45
<PAGE> 211
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 14,161 $ 15,908
Investment securities available-for-sale.................... 17,154 19,353
Residual interest in securitization, held-for-trading....... 8,790 9,936
Loan receivables:
CMO collateral............................................ 326,559 4,255
Finance receivables....................................... 40,972 95,711
Commercial Mortgages held-for-investment.................. 24,569 62,790
Allowance for loan losses................................. (2,110) (564)
-------- --------
Net loan receivables.............................. 389,990 162,192
Investment in Impac Commercial Capital Corporation.......... (15,016) 4,182
Due from affiliates......................................... 22,131 1,592
Premises and equipment, net................................. 9,146 3,857
Accrued interest receivable................................. 2,627 1,361
Other assets................................................ 2,236 458
-------- --------
Total assets...................................... $451,219 $218,839
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CMO borrowings.............................................. $285,021 $ 4,176
Warehouse line agreements................................... 45,654 90,374
Reverse repurchase agreements............................... 4,869 9,841
Due to affiliates........................................... 11,170 8,067
Other liabilities........................................... 1,168 3,139
-------- --------
Total liabilities................................. 347,882 115,597
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred Stock; $.01 par value; 9,000,000 shares
authorized; no shares outstanding at December 31, 1998
and 1997............................................... -- --
Series A Junior Participating Preferred Stock; $.01 par
value; 1,000,000 shares authorized; no shares
outstanding at December 31, 1998 and 1997.............. -- --
Common Stock; $.01 par value; 46,217,295 shares
authorized; 8,625,000 and 7,344,789 shares issued and
outstanding at December 31, 1998 and 1997,
respectively........................................... 86 73
Class A Common Stock; $.01 par value; 3,782,705 shares
authorized; none and 674,211 shares issued and
outstanding at December 31, 1998 and 1997,
respectively........................................... -- 7
Additional paid-in-capital................................ 127,004 104,761
Accumulated other comprehensive earnings (loss)........... 24 (160)
Cumulative dividends declared............................. (15,575) (4,250)
Retained earnings (accumulated deficit)................... (8,202) 2,811
-------- --------
Total stockholders' equity........................ 103,337 103,242
-------- --------
$451,219 $218,839
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-46
<PAGE> 212
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE EARNINGS (LOSS)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
FOR THE (COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -------------------
<S> <C> <C>
INTEREST INCOME:
Commercial Mortgage Assets................................ $ 32,933 $6,720
Cash equivalents and due from affiliates.................. 2,912 739
-------- ------
Total interest income............................. 35,845 7,459
INTEREST EXPENSE:
Warehouse line and reverse repurchase agreements.......... 13,461 1,962
CMO borrowings............................................ 7,203 15
Other borrowings.......................................... 912 373
-------- ------
Total interest expense............................ 21,576 2,350
-------- ------
Net interest income....................................... 14,269 5,109
Provision for loan losses.............................. 1,546 564
-------- ------
Net interest income after provision for loan losses....... 12,723 4,545
NON-INTEREST INCOME:
Equity in net earnings (loss) of Impac Commercial Capital
Corporation............................................ (19,199) 1,694
Other income.............................................. 701 174
-------- ------
Total non-interest income......................... (18,498) 1,868
NON-INTEREST EXPENSE:
Write-down of residual interest in securitization,
held-for-trading....................................... 1,690 --
General and administrative and other expense.............. 1,227 156
Professional services..................................... 797 640
Property expense.......................................... 779 109
Advisory fees............................................. 745 --
Stock compensation expense................................ -- 2,697
-------- ------
Total non-interest expense........................ 5,238 3,602
-------- ------
Net earnings (loss)....................................... (11,013) 2,811
Other comprehensive earnings (loss):
Unrealized gains (losses) arising during period........... 184 (160)
-------- ------
Comprehensive earnings (loss)............................. $(10,829) $2,651
======== ======
Net earnings (loss) per share -- basic and
diluted......................................... $ (1.26) $ 0.61
======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-47
<PAGE> 213
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CLASS A
PREFERRED STOCK COMMON STOCK COMMON STOCK
---------------- ---------------- ---------------- ACCUMULATED
NUMBER NUMBER NUMBER ADDITIONAL OTHER
OF DOLLAR OF DOLLAR OF DOLLAR PAID-IN COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS (LOSS)
------ ------ ------ ------ ------ ------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 15, 1997
(commencement of
operations)................... -- $ -- -- $-- -- $-- $ -- $ --
Sale of Common Stock to IMH and
certain officers and directors
of the Company................ 599 6 -- -- 2,697 --
Conversion of promissory notes
to Preferred Stock............ 3,000 30 -- -- -- -- 14,970 --
Dividends declared ($0.53 per
share)........................ -- -- -- -- -- -- -- --
Net proceeds from public stock
offering...................... -- -- 6,325 63 -- -- 86,961 --
Class A Common Stock issued to
IMH for ICCC Preferred
Stock......................... -- -- -- -- 95 1 113 --
Conversion of ICH Preferred
Stock to Class A Common
Stock......................... (3,000) (30) 720 7 280 3 20 --
Conversion of ICH Common Stock
to Class A Common Stock....... -- -- (299) (3) 299 3 -- --
Other comprehensive loss........ -- -- -- -- -- -- -- (160)
Net earnings from January 15,
1997 (commencement of
operations) through December
31, 1997...................... -- -- -- -- -- -- -- --
------ ---- ----- --- ---- --- -------- -----
Balance, December 31, 1997...... -- -- 7,345 73 674 7 104,761 (160)
Dividends declared ($1.30 per
share)........................ -- -- -- -- -- -- -- --
Net proceeds from public stock
offering...................... -- -- 2,217 22 (217) (2) 28,368 --
Repurchase of capital stock..... -- -- (937) (9) (457) (5) (6,125) --
Other comprehensive earnings.... -- -- -- -- -- -- -- 184
Net loss for the year ended
December 31, 1998............. -- -- -- -- -- -- -- --
------ ---- ----- --- ---- --- -------- -----
Balance, December 31, 1998...... -- $ -- 8,625 $86 -- $-- $127,004 $ 24
====== ==== ===== === ==== === ======== =====
<CAPTION>
RETAINED
CUMULATIVE EARNINGS TOTAL
DIVIDENDS (ACCUMULATED STOCKHOLDERS'
DECLARED DEFICIT) EQUITY
---------- ------------ -------------
<S> <C> <C> <C>
Balance, January 15, 1997
(commencement of
operations)................... $ -- $ -- $ --
Sale of Common Stock to IMH and
certain officers and directors
of the Company................ -- -- 2,703
Conversion of promissory notes
to Preferred Stock............ -- -- 15,000
Dividends declared ($0.53 per
share)........................ (4,250) -- (4,250)
Net proceeds from public stock
offering...................... -- -- 87,024
Class A Common Stock issued to
IMH for ICCC Preferred
Stock......................... -- -- 114
Conversion of ICH Preferred
Stock to Class A Common
Stock......................... -- -- --
Conversion of ICH Common Stock
to Class A Common Stock....... -- -- --
Other comprehensive loss........ -- -- (160)
Net earnings from January 15,
1997 (commencement of
operations) through December
31, 1997...................... -- 2,811 2,811
-------- -------- --------
Balance, December 31, 1997...... (4,250) 2,811 103,242
Dividends declared ($1.30 per
share)........................ (11,325) -- (11,325)
Net proceeds from public stock
offering...................... -- -- 28,388
Repurchase of capital stock..... -- -- (6,139)
Other comprehensive earnings.... -- -- 184
Net loss for the year ended
December 31, 1998............. -- (11,013) (11,013)
-------- -------- --------
Balance, December 31, 1998...... $(15,575) $ (8,202) $103,337
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-48
<PAGE> 214
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
FOR THE (COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)....................................... $ (11,013) $ 2,811
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Equity in net (earnings) loss of Impac Commercial
Capital Corporation................................... 19,199 (1,694)
Stock compensation expense.............................. -- 2,697
Provision for loan losses............................... 1,546 564
Write-down of residual interest in securitization,
held-for-trading...................................... 1,690 --
Depreciation and amortization........................... 499 65
Net change in accrued interest on receivables........... (1,266) (1,361)
Net change in other assets and liabilities.............. 848 (366)
Net change in due from affiliates and due to
affiliates............................................ (29,536) 6,475
--------- ---------
Net cash provided by (used in) operating
activities........................................ (18,033) 9,191
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in Commercial Mortgages held-for-investment.... 38,221 (62,790)
Net change in finance receivables......................... 54,739 (95,711)
Net change in CMO collateral.............................. (322,304) (4,255)
Purchase of investment securities available-for-sale...... -- (20,202)
Principal reductions on investment securities
available-for-sale...................................... 2,383 689
Purchase of residual interest in securitization,
held-for-trading........................................ -- (10,098)
Principal reductions on residual interest in
securitization, held-for-trading........................ (544) 162
Purchase of premises and equipment........................ (1,338) (3,922)
Contributions to Impac Commercial Capital Corporation..... -- (2,375)
--------- ---------
Net cash used in investing activities............... (228,843) (198,502)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in warehouse line agreements................... (44,720) 90,374
Net change in reverse repurchase agreements............... (4,972) 9,841
Proceeds from CMO borrowings.............................. 301,800 4,176
Repayments of CMO borrowings.............................. (20,955) --
Issuance of Common Stock.................................. 28,348 87,024
Issuance of promissory notes.............................. -- 15,000
Issuance of Class A Common Stock.......................... -- 7
Dividends paid............................................ (14,372) (1,203)
--------- ---------
Net cash provided by financing activities........... 245,129 205,219
--------- ---------
Net change in cash and cash equivalents..................... (1,747) 15,908
Cash and cash equivalents at beginning of period............ 15,908 --
--------- ---------
Cash and cash equivalents at end of period.................. $ 14,161 $ 15,908
========= =========
SUPPLEMENTARY INFORMATION:
Interest paid............................................. $ 20,236 $ 1,974
NON-CASH TRANSACTIONS:
Repurchase of Common Stock and Class A Common Stock....... $ 6,099 $ --
Acquisition of Dove St. building and other assets in
exchange for debt....................................... 6,000 --
Increase (decrease) in accumulated other comprehensive
earnings................................................ 184 (160)
Class A Common Stock issued to IMH for ICCC Preferred
Stock................................................... -- 114
Conversion of promissory notes to ICH Preferred Stock..... -- 15,000
Conversion of ICH Preferred Stock to Class A Common
Stock................................................... -- 15,000
Conversion of ICH Common Stock to Class A Common Stock.... -- 3
Dividends declared and unpaid............................. -- (3,047)
</TABLE>
See accompanying notes to consolidated financial statements.
F-49
<PAGE> 215
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. FINANCIAL STATEMENT PRESENTATION
The operations of the Company have been presented in the consolidated
financial statements for the year ended December 31, 1998 and for the period
from January 15, 1997 (commencement of operations) through December 31, 1997 and
include the financial results of Impac Commercial Holdings, Inc. (ICH), Impac
Commercial Assets Corporation (ICH Assets) and ICH/IMH Dove St. LLC (Dove) as
stand-alone entities and the financial results of ICH's equity interest in net
earnings (loss) in Impac Commercial Capital Corporation (ICCC) as a stand-alone
entity, subsequent to the Contribution (the Contribution).
The Company is entitled to 95% of the earnings or losses of ICCC through
its ownership of all of the non-voting preferred stock of ICCC. As such, the
Company records its investment in ICCC using the equity method. Under this
method, original investments are recorded at cost and adjusted by the Company's
share of earnings or losses. Certain officers and directors of the Company and
ICCC own all of the common stock of ICCC and are entitled to 5% of the earnings
or loss of ICCC. Gain on the sale of loans or securities by ICCC to ICH are
deferred and accreted over the estimated life of the loans or securities using
the interest method.
All significant intercompany balances and transactions with ICH's
consolidated subsidiaries have been eliminated in consolidation. Interest income
on affiliated short-term advances, due from affiliates, has been earned at the
rate of 8% per annum. Interest expense on affiliated short-term borrowings, due
to affiliates, has been incurred at the rate of 8% per annum. Costs and expenses
of IMH have been allocated to ICH in proportion to services provided, plus a 15%
service charge. Certain amounts in the prior period's consolidated financial
statements have been reclassified to conform to the current presentation.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements, and the reported amounts of revenues and expenses during the
reporting period to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
2. CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
consist of cash and money market mutual funds. The Company considers investments
with maturities of three months or less at date of purchase to be cash
equivalents.
3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The Company classifies commercial mortgage-backed securities (CMBSs) as
held-to-maturity, available-for-sale, and/or trading securities.
Held-to-maturity securities are reported at amortized cost, available-for-sale
securities are reported at fair value with unrealized gains and losses as a
separate component of stockholders' equity, and trading securities are reported
at fair value with unrealized gains and losses included in earnings. The
Company's investment securities are held as available-for-sale, reported at fair
value with unrealized gains and losses reported as a separate component of
stockholders' equity. As the Company qualifies as a REIT and no income taxes are
paid, the unrealized gains and losses are reported gross in stockholders'
equity. Premiums or discounts obtained on investment securities are accreted or
amortized to interest income over the estimated life of the investment
securities using the interest method. Such investments may subject the Company
to credit, interest rate and/or prepayment risk.
F-50
<PAGE> 216
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. RESIDUAL INTEREST IN SECURITIZATION, HELD-FOR-TRADING
ICH has estimated future cash flows from residual interest in
securitization, held for trading (Residual) utilizing assumptions that they
believe are commensurate with the risk inherent in the investment and consistent
with those that they believe would be utilized by an unaffiliated third-party
purchaser and discounted at a rate commensurate with the risk involved. The
Company has classified the Residual as a held-for-trading security. Unrealized
gains and losses will be included in current operations. To the Company's
knowledge, there is currently no active market for the purchase or sale of the
Residual.
The fair value of the Residual is determined by computing the present value
of the excess of the weighted-average coupon on the Commercial Mortgages sold
(10.6%) over the sum of: (1) the coupon on the senior interest (5.9%), (2) a
base servicing fee paid to servicer of the Commercial Mortgages (0.50%) and
other fees, (3) expected estimated losses (0.60%) to be incurred on the
portfolio of Commercial Mortgages sold over the estimated lives of the
Commercial Mortgages and using an estimated future prepayment assumption (15%).
The prepayment assumption used in estimating the cash flows is based on recent
evaluations of the actual prepayments of the related portfolio and on market
prepayment rates on new portfolios of similar Commercial Mortgages, taking into
consideration the current interest rate environment and its expected impact on
the estimated future prepayment rate. The estimated cash flows expected to be
received by the Company are discounted at an interest rate that the Company
believes an unaffiliated third-party purchaser would require as a rate of return
commensurate with the risk of holding such a financial instrument. The rate used
to discount the cash flows coming out of the trust was approximately 14.9%. To
the extent that actual future excess cash flows are different from estimated
excess cash flows, the fair value of the Company's residual could decline.
Under the terms of the securitization, the Residual is required to build
over-collateralization to specified levels using the excess cash flows described
above until set percentages of the securitized portfolio are attained. Future
cash flows to the residual holder are all held by the real estate mortgage
investment conduit (REMIC) trust until a specific percentage of either the
original or current certificate balance is attained which percentage can be
raised if certain charge-offs and delinquency ratios are exceeded. The
certificate holders' recourse for credit losses is limited to the amount of
over-collateralization held by the Residual in the REMIC trust. Upon maturity of
the certificates or upon exercise of an option ("clean up call") to repurchase
all the remaining Commercial Mortgages once the balance of the Commercial
Mortgages in the trust are reduced to 10% of a specified balance of the original
Commercial Mortgages in the trust, any remaining amounts in the trust are
distributed. The current amount of any over-collateralization balance held by
the trust are recorded as part of the Residual.
5. CMO COLLATERAL AND COMMERCIAL MORTGAGES HELD-FOR-INVESTMENT
The Company purchases Commercial Mortgages to be held as long-term
investments or as CMO collateral. Commercial Mortgages held-for-investment and
CMO collateral are recorded at cost at the date of purchase. Commercial
Mortgages held-for-investment and CMO collateral include various types of loans
secured by mortgages on commercial real property and loans to developers secured
by first liens on converted condominium complexes. Premiums and discounts, which
may result from the purchase or acquisition of Commercial Mortgages in excess of
the outstanding principal balance, are amortized to interest income over their
estimated lives using the interest method as an adjustment to the carrying
amount of the loan. Prepaid securitization costs related to the issuance of CMOs
are amortized to interest expense over their estimated lives using the interest
method as an adjustment to the carrying amount of the loan. Commercial Mortgages
are continually evaluated for collectibility and, if appropriate, the Commercial
Mortgages may be placed on nonaccrual status, generally when the mortgage is 90
days past due, and previously accrued interest reversed from income. Other than
temporary impairment in the carrying value of Commercial Mortgages held-for-
investment, if any, will be recognized as a reduction to current operations.
F-51
<PAGE> 217
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. FINANCE RECEIVABLES
Finance receivables represent transactions with ICCC involving commercial
real estate lending. As a warehouse lender, the Company is a secured creditor
and is subject to the risks inherent in that status, including, the risk of
borrower default and bankruptcy. Any claim of the Company as a secured lender in
a bankruptcy proceeding may be subject to adjustment and delay. The Company's
finance receivables represent warehouse lines of credit with ICCC collateralized
by Commercial Mortgages on commercial real property. Finance receivables are
stated at the principal balance outstanding. Interest income is recorded on the
accrual basis in accordance with the terms of the loans. Finance receivables are
continually evaluated for collectibility and, if appropriate, the receivable is
placed on non-accrual status, generally when the receivable is 90 days past due.
Future collections of interest income are included in interest income or applied
to the loan balance based on an assessment of the likelihood that the loans will
be repaid.
7. ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for losses on Commercial Mortgages
held-for-investment, collateral for CMOs and finance receivables at an amount
which it believes is sufficient to provide adequate protection against future
losses in the Commercial Mortgage portfolio. The allowance for losses is
determined primarily on management's judgment of net loss potential, including
specific allowances for known impaired loans and other factors such as changes
in the nature and volume of the portfolio, value of the collateral and current
economic conditions that may affect the borrower's ability to pay. A provision
is recorded for all loans or portions thereof deemed to be uncollectible thereby
increasing the allowance for loan losses. Subsequent recoveries on Commercial
Mortgages previously charged off are credited back to the allowance.
8. CMO BORROWINGS
The Company issues CMOs, which are secured by Commercial Mortgages as a
means of financing its Long-Term Investment Operations. CMOs are carried at
their outstanding principal balances including accrued interest on such
obligations. For accounting and tax purposes, Commercial Mortgages financed
through the issuance of CMOs are treated as assets of the Company and the CMOs
are treated as debt of the Company. Each issue of CMOs are fully payable from
the principal and interest payments on the underlying mortgage loans
collateralizing such debt and any investment income on such collateral. The
maturity of each class of CMO is directly affected by the rate of principal
prepayments on the related CMO collateral. Each CMO series is also subject to
redemption according to specific terms of the respective indentures. As a
result, the actual maturity of any class of a CMO series is likely to occur
earlier than the stated maturities of the underlying mortgage loans.
9. INCOME TAXES
ICH operates so as to qualify as a real estate investment trust (REIT)
under the requirements of the Internal Revenue Code (the Code). Requirements for
qualification as a REIT include various restrictions on ownership of ICH's
stock, requirements concerning distribution of taxable income and certain
restrictions on the nature of assets and sources of income. A REIT must
distribute at least 95% of its taxable income to its stockholders, of which 85%
must be distributed within the taxable year in order to avoid the imposition of
an excise tax and the remaining balance may extend until timely filing of its
tax return in the subsequent taxable year. Qualifying distributions of its
taxable income are deductible by a REIT in computing its taxable income. If in
any tax year ICH should not qualify as a REIT, it would be taxed as a
corporation and distributions to the stockholders would not be deductible in
computing taxable income. If ICH were to fail to qualify as a REIT in any tax
year, it would not be permitted to qualify for that year and the succeeding four
years. In any year in which the Company qualifies as a REIT, it generally will
not be subject to Federal income tax on that portion of its taxable income or
net capital gain that is distributed to its stockholders. The Company will,
however, be
F-52
<PAGE> 218
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subject to tax at normal corporate rates upon any net income or net capital gain
not distributed. The Company intends to distribute substantially all of its
taxable income to its stockholders.
10. NET EARNINGS (LOSS) PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share" (SFAS 128). SFAS 128
replaces the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earning per share,
basic earnings per share excludes any dilutive effects of stock options. Diluted
earnings per share are very similar to the previously reported fully diluted
earnings per share. Basic net earnings per share are computed on the basis of
the weighted average number of shares outstanding for the period. Diluted net
earnings per share are computed on the basis of the weighted average number of
shares and common equivalent shares outstanding for the period.
The following table represents the computation of basic and diluted
earnings per share for the periods presented (in thousands, except per share
data):
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
FOR THE (COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -------------------
<S> <C> <C>
NUMERATOR:
Numerator for basic earnings per share --
Net earnings (loss).............................. $(11,013) $2,811
======== ======
DENOMINATOR:
Denominator for basic earnings per share --
Weighted average number of common shares
outstanding during the period.................. 8,773 4,631
Net effect of dilutive stock options............. -- 14
-------- ------
Denominator for diluted earnings per share.......... 8,773 4,645
======== ======
Net earnings (loss) per share -- basic.............. $ (1.26) $ 0.61
======== ======
Net earnings (loss) per share -- diluted............ $ (1.26) $ 0.61
======== ======
</TABLE>
11. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). SFAS 131 is effective for fiscal years beginning after December 15,
1997. SFAS 131 establishes standards for reporting financial and descriptive
information about an enterprise's operating segments in its annual financial
statements and selected segment information in interim financial reports.
Reclassification or restatement of comparative financial statements or financial
information for earlier periods is required upon adoption of SFAS 131. The
Company recognizes the Long-Term Investment Operations and the Conduit
Operations as two distinct reporting segments. The consolidated financial
statements of Impac Commercial Holdings, Inc. is considered the Long-Term
Investment Operations while the financial statements of Impac Commercial Capital
Corporation is considered the Conduit Operations.
F-53
<PAGE> 219
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognizes
all derivatives as either assets or liabilities in the statement of financial
position and measures those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 is an amendment to
SFAS 65, which required that after the securitization of a mortgage loan held
for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed security as a trading security. SFAS No. 134 further
amends SFAS No. 65 and requires that after the securitization of mortgage loans
held for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based on its
ability and intent to sell or to hold those investments. SFAS 134 conforms the
subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the subsequent accounting
for securities retained after the securitization of other types of assets by
non-mortgage banking enterprises. SFAS 134 is effective for the first fiscal
quarter beginning first quarter 1999. The Company believes that the adoption of
SFAS No. 134 will not have a material impact on the Company's financial position
or results of operations.
NOTE B -- INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The Company's mortgage-backed securities are primarily secured by
commercial real property. The yield to maturity on each security depends on,
among other things, the rate and timing of principal payments (including
prepayments, repurchases, defaults and liquidations), the pass-through rate, and
interest rate fluctuations. The Company's interest in these securities is
subordinated so that, in the event of a loss, payments to senior certificate
holders will be made before the Company receives its payments.
The amortized cost and estimated fair value of investment securities
available-for-sale are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1998:
Commercial mortgage-backed
securities......................... $ 6,515 $ -- $ -- $ 6,515
Interest only securities.............. 10,615 24 -- 10,639
------- ---- ---- -------
Total investment securities
available-for-sale.......... $17,130 $ 24 $ -- $17,154
======= ==== ==== =======
At December 31, 1997:
Commercial mortgage-backed
securities......................... $ 6,363 $ -- $ -- $ 6,363
Interest only securities.............. 13,150 -- 160 12,990
------- ---- ---- -------
Total investment securities
available-for-sale.......... $19,513 $ -- $160 $19,353
======= ==== ==== =======
</TABLE>
F-54
<PAGE> 220
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- RESIDUAL INTEREST IN SECURITIZATION, HELD-FOR-TRADING
The accompanying 1998 and 1997 balance sheets include one Residual which
was recorded as a result of a 1995 securitization by Imperial Credit Industries,
Inc. (ICII) of commercial loans issued through a special purpose trust vehicle.
As of December 31, 1998 and 1997, the carrying amount of the residual was $8.8
million and $9.9 million, respectively.
NOTE D -- COMMERCIAL MORTGAGES HELD-FOR-INVESTMENT
The Company purchases Commercial Mortgages to be held as long-term
investment. Commercial Mortgages held-for-investment include various types of
loans secured by mortgages on commercial real property and loans to developers
secured by first liens on condominium complexes. Approximately 47% and 65%,
respectively, of the principal amount of Commercial Mortgages
held-for-investment at December 31, 1998 and 1997 were collateralized by
properties located in Arizona. During 1998 and 1997, the Long-Term Investment
Operations purchased $522.1 million and $41.2 million, respectively, of
Commercial Mortgages. As of December 31, 1998 and 1997, Commercial Mortgages
held-for-investment were $24.6 million and $62.8 million, respectively, which
include premiums of $42,000 and $111,000, respectively.
NOTE E -- CMO COLLATERAL
CMO collateral includes various types of loans secured by mortgages on
commercial real property and loans to developers secured by first liens on
condominium complexes. Approximately 50% of the principal amount of CMO
collateral at December 31, 1998 were collateralized by properties located in
California. During 1998 and 1997, the Long-Term Investment Operations originally
issued $301.8 million and $4.2 million, respectively, of CMOs which were
collateralized by $325.0 million and $4.3 million, respectively, of Commercial
Mortgages. The following table represents the outstanding amounts for the
periods shown:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1998 1997
-------- ------
(IN THOUSANDS)
<S> <C> <C>
CMO collateral........................................... $313,211 $4,255
Unamortized net premiums on Commercial Mortgages......... 6,134 --
Prepaid securitization costs............................. 7,214 --
-------- ------
$326,559 $4,255
======== ======
</TABLE>
NOTE F -- FINANCE RECEIVABLES
Terms of the Company's warehouse lines to ICCC are at Bank of America's
prime rate, which was 7.75% at December 31, 1998, with advance rates to 90% of
the fair value of the Commercial Mortgages outstanding. The maximum available on
ICCC's warehouse line agreements as of December 31, 1998 and 1997 was $900.0
million and $900.0 million, respectively, of which $41.0 million and $95.7
million, respectively, was outstanding.
F-55
<PAGE> 221
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
FOR THE (COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -------------------
(IN THOUSANDS)
<S> <C> <C>
Balance, beginning of period.................. $ 564 $ --
Provision for loan losses..................... 1,546 564
Charge-offs................................... -- --
------ ----
Balance, end of period........................ $2,110 $564
====== ====
</TABLE>
NOTE H -- PREMISES AND EQUIPMENT, NET
Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation on premises and equipment is recorded using the
straight-line method over the estimated useful lives of individual assets (three
to twenty years).
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Premises and equipment..................................... $9,710 $3,922
Less accumulated depreciation.............................. (564) (65)
------ ------
$9,146 $3,857
====== ======
</TABLE>
NOTE I -- CMO BORROWINGS
The following table sets forth CMOs issued by the Company, CMOs outstanding
as of December 31, 1998, and certain interest rate information:
<TABLE>
<CAPTION>
RANGE OF
RANGE OF INTEREST RATE
RANGE OF INTEREST RATE INTEREST RATE MARGINS
FIXED MARGINS OVER MARGIN AFTER
ISSUE ISSUANCE CMOS INTEREST ONE-MONTH ADJUSTMENT ADJUSTMENT
DATE ISSUANCE NAME AMOUNT OUTSTANDING RATES LIBOR DATE DATE
- ----- --------------------- -------- ----------- ---------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
12/10/97 Imperial CMB Trust $ 4,255 $ 738 N/A 0.26-1.30% 2/2004 0.52-2.60%
Series 1997-2........
6/23/98 Impac CMB Trust 7,069 1,275 N/A 0.18-1.24% 7/2005 0.36-2.48%
Series 1998-3........
8/20/98 Impac CMB Trust 1998 294,731 283,008 6.06-7.58% 0.28% N/A N/A
C-1(1)...............
--------
$285,021
========
</TABLE>
- ---------------
(1) The variable rate portion of CMOs outstanding as of December 31, 1998 were
$31.3 million. The issuance amount includes an additional bond class of
$18.3 million, which was subsequently issued in December 1998.
F-56
<PAGE> 222
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average coupon on CMOs was 8.32% and 6.58% at December 31,
1998 and December 31, 1997. At December 31, 1998 and 1997, CMO borrowings
include accrued interest payable of $1.5 million and $4,000, respectively.
NOTE J -- WAREHOUSE LINE AGREEMENTS
ICH entered into warehouse line agreements with investment banks to fund
the purchase of Commercial Mortgages. Terms of the warehouse line agreements
require that the Commercial Mortgages be held by an independent third party
custodian, which gives the Company the ability to borrow against the collateral
as a percentage of the fair market value of the Commercial Mortgages. The
interest rates on the loans are based on one-month LIBOR or Eurodollar Rate plus
a margin depending on the type of mortgage collateral provided. The loan amounts
generally range from 75% to 92% of the fair market value of the collateral.
The following tables set forth information regarding warehouse line
agreements (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-----------------------------------------------------------------------------
MAXIMUM MAXIMUM WAREHOUSE UNDERLYING
TYPE OF COMMITTED UNCOMMITTED LINE COLLATERAL MATURITY
COLLATERAL AMOUNT AMOUNT LIABILITY (1) DATE
---------- --------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Lender 1............. Mortgages $200,000 $100,000 $45,208 $59,322 5/1999
Lender 2............. Mortgages 446(2) N/A 446 459 N/A
------- -------
$45,654 $59,781
======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-----------------------------------------------------------------------------
MAXIMUM MAXIMUM WAREHOUSE UNDERLYING
TYPE OF COMMITTED UNCOMMITTED LINE COLLATERAL MATURITY
COLLATERAL AMOUNT AMOUNT LIABILITY (1) DATE
---------- --------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Lender 1............. Mortgages $200,000 N/A $ 8,529 $ 9,458 4/1998
Lender 2............. Mortgages 200,000 N/A 81,845 98,750 2/1999
------- --------
$90,374 $108,208
======= ========
</TABLE>
- ---------------
(1) The amount of underlying collateral represents the unpaid principal balance
of Commercial Mortgages provided as collateral for the warehouse lines.
(2) There is no formal warehouse line agreement with Lender 2. Advances are
provided to the Company at the discretion of the lender. During 1998, the
warehouse line agreement was modified from a committed to an uncommitted
warehouse line.
At December 31, 1998 and 1997, warehouse line agreements include accrued
interest payable of $244,000 and $309,000, respectively. The following table
presents certain information on warehouse line agreements, excluding accrued
interest payable:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
FOR THE (COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Maximum Month-End Outstanding Balance......... $376,247 $90,374
Average Balance Outstanding................... $193,370 $25,463
Weighted Average Rate......................... 6.70% 7.25%
</TABLE>
F-57
<PAGE> 223
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- REVERSE REPURCHASE AGREEMENTS
ICH entered into reverse repurchase agreements whereby ICH pledged specific
CMBSs as collateral to secure short-term loans. Interest is payable upon the
maturity of the loans. The interest rates on the loans are based on one-month
LIBOR plus a margin depending on the type of collateral provided by the Company.
The following table sets forth information regarding reverse repurchase
agreements (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
--------------------------------------------------
REVERSE
TYPE OF REPURCHASE UNDERLYING MATURITY
COLLATERAL LIABILITY COLLATERAL DATE
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Lender 1............................... Securities $2,322 $ 5,316 1/20/99
Lender 2............................... Securities 1,953 6,515 1/5/99
Lender 3............................... Securities 594 1,008 1/20/99
------ -------
$4,869 $12,839
====== =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------------------------
REVERSE
TYPE OF REPURCHASE UNDERLYING MATURITY
COLLATERAL LIABILITY COLLATERAL DATE
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Lender 1............................... Securities $6,185 $ 7,137 1/21/98
Lender 2............................... Securities 831 1,037 1/2/98
Lender 3............................... Securities 2,825 4,708 1/30/98
------ -------
$9,841 $12,882
====== =======
</TABLE>
At December 31, 1998 and 1997, reverse repurchase agreements included
accrued interest payable of $15,000 and $48,000, respectively.
NOTE L -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments have been determined by
ICH using available market information and appropriate valuation methodologies;
however, considerable judgment is necessarily required to interpret market data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts ICH could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
F-58
<PAGE> 224
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........................ $ 14,161 $ 14,161 $15,908 $15,908
Investment securities available-for-sale......... 17,154 17,154 19,353 19,353
Residual interest in securitization,
held-for-trading............................... 8,790 8,790 9,936 9,936
Commercial Mortgages held-for-investment......... 24,569 23,941 62,790 62,867
Finance receivables.............................. 40,972 40,972 95,711 95,711
CMO collateral................................... 326,559 324,923 4,255 4,298
Due from affiliates.............................. 22,131 22,131 1,592 1,592
LIABILITIES
Warehouse line agreements........................ 45,654 45,654 90,374 90,374
Reverse repurchase agreements.................... 4,869 4,869 9,841 9,841
CMO borrowings................................... 285,021 286,637 4,176 4,176
Due to affiliates................................ 11,170 11,170 8,067 8,067
Short-term commitments to extend credit.......... -- -- -- --
</TABLE>
The fair value estimates as of December 31, 1998 and 1997 are based on
pertinent information available to management as of that date. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these consolidated financial statements since those
dates and, therefore, current estimates of fair value may differ significantly
from the amounts presented herein.
The following describes the methods and assumptions used by ICH in
estimating fair values:
Cash and Cash Equivalents
Fair value approximates carrying amount as these instruments are demand
deposits and money market mutual funds and do not present unanticipated interest
rate or credit concerns.
Investment Securities Available-for-Sale
Fair value is estimated using a bond model, which incorporates certain
assumptions such as prepayment, yield and losses.
Residual Interest in Securitization, Held-for-Trading
Fair value approximates carrying amount as the fair value was estimated by
discounting future cash flows using rates that the Company believes are
commensurate with the risk inherent in these investments, and consistent with
those that the Company believes would be utilized by an unaffiliated third party
for financial instruments with similar terms and remaining maturities.
Commercial Mortgages Held-for-Investment
Fair value is determined based upon the Company's estimate of the proceeds
that would be realized on a whole loan sale.
F-59
<PAGE> 225
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Finance Receivables
Fair value is determined based upon current market conditions and estimated
interest rates associated with similar financial instruments.
CMO Collateral
Fair value is based on estimated quoted market prices from dealers and
brokers for similar types of mortgage loans.
Due From/To Affiliates
Fair value approximates carrying amount because of the short-term maturity
of the liabilities and does not present unanticipated interest rate or credit
concerns.
Warehouse Line Agreements
Fair value approximates carrying amount because of the short-term maturity
of the liabilities and does not present unanticipated interest rate or credit
concerns.
Reverse Repurchase Agreements
Fair value approximates carrying amount because of the short-term maturity
of the liabilities and does not present unanticipated interest rate or credit
concerns.
CMO Borrowings
Fair value of fixed rate borrowings is estimated based on the use of a bond
model, which incorporates certain assumptions such as yield, prepayment and
losses. Fair value of variable rate borrowings approximate carrying amount
because of the variable interest rate nature of the borrowings.
Short-term Commitments to Extend Credit
The Company does not collect fees associated with its warehouse lines of
credit. Accordingly, these commitments do not have an estimated fair value.
NOTE M -- LIQUIDITY
Management of ICH is committed to funding any potential operating cash flow
deficiencies of ICCC to the extent necessary through December 31, 1999. ICCC
recorded a net loss for the year ended December 31, 1998 of $20.2 million
resulting in negative net worth of $15.8 million as of December 31, 1998. The
loss was primarily due to the deterioration of the commercial mortgage-backed
securitization market in the third and fourth quarters of 1998. During the first
quarter of 1999, ICCC anticipates selling a significant portion of its
Commercial Mortgage portfolio thus eliminating related net interest expense. In
addition, ICCC may pursue opportunities in retail loan originations operations,
which could generate loan origination fees. Management is also exploring
opportunities to form an alliance with one or more strategic partners which
allow ICCC to fund the growth its operations. Management anticipates the
alliance will also enable ICCC to access the securitization marketplace and
achieve better sale execution.
F-60
<PAGE> 226
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- RELATED PARTY TRANSACTIONS
Credit Arrangements
ICCC has uncommitted warehouse financing facilities with ICH up to a
maximum aggregate amount of $900.0 million. Advances under such warehouse
facilities bear interest at Bank of America's prime rate, which was 7.75% at
December 31, 1998. As of December 31, 1998 and 1997, amounts outstanding on
ICH's warehouse line agreements to ICCC were $41.0 million and $95.7 million,
respectively. Interest income recorded by ICH related to warehouse line
agreements to ICCC for the year ended December 31, 1998 and for the period from
January 15, 1997 (commencement of operations) through December 31, 1997 was $9.1
million and $2.4 million, respectively.
During 1997 and 1998, ICH had a credit arrangement with IMH whereby ICH
advanced to IMH up to maximum amount of $15.0 million for general working
capital needs. Subsequent to 1998, the credit agreement was terminated and will
no longer be used by ICH. Advances under the credit arrangement were at an
interest rate and maturity determined at the time of each advance with interest
and principal paid monthly. As of December 31, 1998 and 1997, IMH had no
outstanding borrowings under the credit arrangement. Interest income recorded by
ICH for the year ended December 31, 1998 and for the period from January 15,
1997 (commencement of operations) through December 31, 1997 was $295,000 and
$68,000, respectively.
During 1997 and 1998, ICH had a credit arrangement with IMH whereby IMH
advanced to ICH up to maximum amount of $15.0 million for general working
capital needs. Subsequent to 1998, the credit agreement was terminated and will
no longer be used by ICH. Advances under the credit arrangement were at an
interest rate and maturity determined at the time of each advance with interest
and principal paid monthly. As of December 31, 1998 and 1997, ICH's outstanding
borrowings under the credit arrangement were none and $9.1 million,
respectively. Interest expense recorded by ICH for the year ended December 31,
1998 and for the period from January 15, 1997 (commencement of operations)
through December 31, 1997 was $43,000 and $55,000, respectively.
On November 9, 1998, IFC borrowed $5.0 million from ICH on a demand note
secured by mortgage servicing rights of $1.1 billion at an interest rate of 10%.
This rate was adjusted to 15% on December 15, 1998. On December 22, 1998, this
note was paid in full. Interest income recorded by ICH for 1998 was $66,000.
ICH entered into a credit arrangement with IFC whereby ICH would advance to
IFC up to a maximum amount of $15.0 million. Advances under the revolving credit
arrangement are at an interest rate and maturity to be determined at the time of
each advance with interest and principal paid monthly. The revolving credit
arrangement expired in December 1997. Interest income recorded by ICH for 1997
was $66,000.
On December 31, 1997, ICH financed its 50% interest in a commercial office
building located in Newport Beach, California with a loan for $5.2 million from
ICCC. The loan was repaid by ICH in the fourth quarter of 1998 with proceeds
from the sale of Commercial Mortgages. ICCC received loan fees of $71,000 upon
origination of the loan.
During the normal course of business, ICH may advance or borrow funds on a
short-term basis with affiliated companies. Advances to affiliates are reflected
as "Due from affiliates" while borrowings are reflected as "Due to affiliates"
on the Company's balance sheet. These short-term advances and borrowings bear
interest at a fixed rate of 8.00% per annum. Interest income recorded by ICH
related to short-term advances due from affiliates for the year ended December
31, 1998 and for the period from January 15, 1997 (commencement of operations)
through December 31, 1997 was $2.1 million and $268,000, respectively. Interest
expense recorded by ICH related to short-term advances due to affiliates for the
year ended December 31, 1998 and for the period from January 15, 1997
(commencement of operations) through December 31, 1997 was $825,000 and $45,000,
respectively.
F-61
<PAGE> 227
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Lease Agreement
During 1998, ICH entered into a premises operating lease with IMH and IFC
to rent approximately 74,000 square feet of office space. The lease agreement is
for a term of ten years expiring in May 2008 with monthly lease payments of
$145,000 per month.
Purchase of Commercial Mortgages
During the year ended December 31, 1998 and for the period from January 15,
1997 (commencement of operations) through December 31, 1997, ICH purchased
$525.2 million and $23.7 million, respectively, of Commercial Mortgages from
ICCC at net discounts of $3.1 million and net premiums of $111,000,
respectively.
Purchase of Commercial Office Building
On October 27, 1998, the Company purchased from IMH its remaining 50%
ownership interest in a commercial office building located in Newport Beach,
California for $6.0 million. After the purchase of the 50% ownership interest
from IMH, the Company has a 100% ownership interest in the building.
Repurchase of Capital Stock
On October 21, 1998, the Company repurchased from IMH 937,084 shares of
Common Stock and 456,916 shares of Class A Common Stock at a per share price of
$4.375, based upon the closing price of the Common Stock on AMEX on October 19,
1998, for a total repurchase of $6.1 million.
Sale of Commercial Mortgages
During the year ended December 31, 1998, ICH sold $43.2 million of
Commercial Mortgages to ICCC at no gain or loss.
Stock Compensation Expense
Stock compensation expense of $2.7 million represents the difference
between the price at which ICH issued 300,000 shares of common stock to
directors and officers of IMH and ICH on February 3, 1997 ($.01 per share) and
the estimated fair value for financial reporting purposes of such shares as
determined by the Company's management, as of February 3, 1997 ($9.00 per
share). Fair value was based primarily on management's projection of the
Company's future cash flow and net income, as well as the lack of liquidity of
the shares at the date of issuance and the uncertainty of certain future events
regarding the development of the Company's business and organization structure
including, but not limited to, obtaining independent financing for the
organization and purchase of Commercial Mortgages, funding and closing
Commercial Loans, and developing a pipeline of future Commercial Loan
originations.
Submanagement Agreement
IFC entered into a submanagement agreement with RAI under which IMH and IFC
provide various services to ICH as RAI deems necessary, including facilities and
costs associated therewith, technology, human resources, management information
systems, general ledger accounts, check processing and accounts payable, plus a
15% service charge. RAI charges ICH for these services based upon usage. Total
cost allocations RAI charged to ICH for the year ended December 31, 1998 and the
period from January 15, 1997 (commencement of operations) through December 31,
1997 were $521,000 and $525,000, respectively.
F-62
<PAGE> 228
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unsecured Promissory Note
In July 1998, William D. Endresen and Rae Ann Endresen, the makers, signed
an unsecured promissory note for $100,000 with ICH, the holder, which was
modified in November 1998 and states that the makers are to repay the note and
accrued interest at a rate of nine percent (9%) per annum with 50% of the after
tax dividend equivalent payments made to Mr. Endresen in accordance with the
Stock Options and Awards Plan. As of December 31, 1998, the balance outstanding
on the note was $101,000.
Non-Compete Agreement and Right of First Refusal Agreement
Pursuant to the Non-Compete Agreement executed on the date of the ICH
initial public offering, IFC will not acquire any commercial mortgages for a
period of the earlier of nine months from the closing of the ICH initial public
offering or the date upon which ICH and/or ICCC accumulates (for investment or
sale) $300.0 million of commercial mortgages or commercial mortgage-backed
securities. This agreement expired in March 1998.
Pursuant to the Right of First Refusal Agreement by and among ICH, IMH,
IFC, ICCC and RAI, pursuant to which, in part, RAI will agree that any mortgage
loan or mortgage-backed security investment opportunity which is offered to it
on behalf of either ICH, IMH any affiliated REIT will first be offered to that
entity whose initial primary business as described in its initial public
offering documentation most closely aligns with such investment opportunity.
NOTE O -- COMMITMENTS AND CONTINGENCIES
ICH is a party to financial instruments with off-balance sheet risk in the
normal course of business. Such instruments include short-term commitments to
extend credit to borrowers under warehouse lines of credit which involve
elements of credit risk. In addition, ICH is exposed to credit loss in the event
of non-performance by the counterparties to the various agreements associated
with loan purchases. However, ICH does not anticipate non-performance by such
borrowers or counterparties. Unless noted otherwise, ICH does not require
collateral or other security to support such commitments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. The contract or notional amounts of
forward contracts do not represent exposure to credit loss. The Company controls
the credit risk of its forward contracts through credit approvals, limits and
monitoring procedures.
Commercial Mortgage Loan Sales Commitments
In the ordinary course of business, ICCC is exposed to liability under
representations and warranties made to purchasers and insurers of mortgage loans
and the purchasers of servicing rights. Under certain circumstances, ICCC is
required to repurchase mortgage loans if there had been a breach of
representations or warranties. ICH has guaranteed the performance obligation of
ICCC under such representation and warranties related to loans included in
securitizations.
Lease Commitments
ICH and ICCC, as tenants in common, lease approximately 18,000 square feet
of office space in Irvine, California, approximately 3,600 square feet in
Sherman Oaks, California and approximately 4,300 square feet
F-63
<PAGE> 229
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in Dallas, Texas under premises operating leases expiring in November 2000, May
2001 and August 2003, respectively. Minimum premises rental commitments are as
follows (in thousands):
<TABLE>
<S> <C>
1999.............................................. $ 734
2000.............................................. 691
2001.............................................. 166
2002.............................................. 126
2003.............................................. 84
------
Total................................... $1,801
======
</TABLE>
All rent expense associated with the lease is charged to ICCC as ICCC's
employees occupy 100% of the office space.
Loan Commitments
ICH provides secured short-term non-recourse revolving financing to ICCC to
a maximum of $900.0 million to finance the acquisition of Commercial Mortgages
from the closing of the loans until sold to permanent investors. As of December
31, 1998 and 1997, ICH's outstanding balances on warehouse lines to ICCC was
$41.2 million and $95.7 million, respectively.
Litigation
SPI Danvers, LLC v. Impac Commercial Capital Corporation, William D.
Endresen and Lawrence R. Goswiller, Orange County Superior Court Case No. 802070
On November 13, 1998, SPI Danvers, LLC (Danvers) filed a complaint against
the above defendants alleging 13 causes of action including breach of contract
and numerous tort causes of action, including fraud. Danvers seeks approximately
$312,000 against all defendants, which allegedly represents its deposits, plus
10% lost opportunity costs, $840,000 in alternative financing costs, lost
profits in an unspecified amount, and punitive damages and attorneys fees
according to proof.
Danvers' allegations set forth generally that it sought refinancing of an
existing loan as well as obtaining a new loan in the amount of $4.2 million, and
thus entered into certain discussions and negotiations with ICCC. The purpose of
the loan was to conclude the purchase of property. Danvers alleges that it paid
ICCC certain "good faith" and "rate lock deposits" totaling an aggregate of
approximately $312,000. It is alleged that ICCC entered into a loan agreement,
defined as the letter of interest, rate lock agreement, and loan commitment
letter, with Danvers. Following plaintiff's alleged continual compliance with
requests for information and other loan conditions from ICCC, ICCC did not close
and fund the loan.
In February 1999, the court granted ICCC's and the other defendant's
demurrer to most of the tort causes of action and granted a motion to strike the
punitive damages and attorney fees allegation. However, the court also granted
Danvers an opportunity to file an amended complaint to attempt to reassert all
the claims and damages in a proper pleading. The Company believes that this case
is without merit and intends to vigorously defend the action.
NOTE P -- MANAGEMENT CONTRACT
As Manager of the Company, RAI, is entitled to receive for each fiscal
quarter, an amount equal to 25% of the net income of the Company, before
deduction of such compensation, in excess of the amount that would produce an
annualized return on equity equal to the daily average ten year U.S. Treasury
rate plus 2% (the 25% Payment). The term "return on equity" is calculated for
any quarter by dividing the Company's net
F-64
<PAGE> 230
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income for the quarter by its average net worth for the quarter. For such
calculations, the "net income" of the Company means the net income of the
Company determined in accordance with the Code before the Manager's
compensation, the deduction for dividends paid and any net operating loss
deductions arising from losses in prior periods. A deduction for all of the
Company's interest expenses for borrowed money is also taken in calculating net
income. "Average net worth" for any period means the arithmetic average of the
sum of the gross proceeds from any offering of its equity securities by the
Company, before deducting any underwriting discounts and commissions and other
expenses and costs relating to the offering, plus the Company's retained
earnings less dividends declared (without taking into account any losses
incurred in prior periods) computed by taking the daily average of such values
during such period. The 25% payment to the Manager will be calculated quarterly
in arrears before any income distributions are made to stockholders for the
corresponding period.
The Manager's fees will be calculated by the Manager within 60 days after
the end of each calendar quarter, with the exception of the fourth quarter for
which compensation will be computed within 30 days, and such calculation shall
be promptly delivered to the Company. The Company will be obligated to pay the
fee within 90 days after the end of each calendar quarter. Management fees paid
to RAI during the year ended December 31, 1998 and for the period from January
15, 1997 (commencement of operations) through December 31, 1997 were $745,000
and none, respectively.
In order to utilize the IMH infrastructure, RAI entered into a
submanagement agreement with IFC to provide substantially all of the
administrative services required by the Company including facilities and costs
associated therewith, technology, human resources, management information
systems, general ledger accounts, check processing and accounts payable as RAI
deems necessary. The Manager may also enter into additional contracts with other
parties, which may include IMH or its affiliates, to provide any such services
for the Manager, which third party shall be approved by the Company's Board of
Directors. RAI currently has a total of four officers and three managers who
participate in the oversight of the Company's operations.
NOTE Q -- STOCK OPTION AND AWARDS PLAN
The Company adopted a Stock Option and Awards Plan (the Stock Option and
Awards Plan) which provides for the grant of qualified incentive stock options
(ISOs), options not qualified (NQSOs) and deferred stock, restricted stock,
stock appreciation, and limited stock appreciation rights awards (Awards) and
dividend equivalent rights. The Stock Option and Awards Plan is administered by
the Board of Directors or a committee of directors appointed by the Board of
Directors. ISOs may be granted to the officers and key employees of the Company.
NQSOs and Awards may be granted to the directors, officers and key employees of
the Company or its subsidiaries, and to the directors, officers and key
employees of ICCC. The exercise price for any NQSO or ISO granted under the
Stock Option and Awards Plan may not be less than 100% (or 110% in the case of
ISOs granted to an employee who is deemed to own in excess of 10% of the
outstanding Common Stock) of the fair market value of the shares of Common Stock
at the time the NQSO or ISO is granted.
Under the Stock Option and Awards Plan, the Company may make loans
available to stock option holders in connection with the exercise of stock
options granted under the Stock Option and Awards Plan. If shares of Common
Stock are pledged as collateral for such indebtedness, the shares may be
returned to the Company in satisfaction of the indebtedness. If returned, the
shares become available for issuance in connection with future stock options and
awards under the Stock Option and Awards Plan.
Unless previously terminated by the Board of Directors, the Stock Option
and Awards Plan will terminate in April of 2007. Options granted under the Stock
Option and Awards Plan will become exercisable as directed by the administrator.
As of December 31, 1998 and 1997, options to purchase 65,663 shares and none,
respectively, were exercisable and 214,078 shares and 420,250 shares,
respectively, were available for future grants under the Stock Option and Awards
Plan.
F-65
<PAGE> 231
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option transactions for the periods shown are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
WEIGHTED- WEIGHTED-
NUMBER AVERAGE RANGE OF NUMBER AVERAGE RANGE OF
OF EXERCISE EXERCISE OF EXERCISE EXERCISE
SHARES PRICE PRICES SHARES PRICE PRICES
------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year...... 212,250 $15.41 $15.0-18.8 -- $ -- $ --
Options granted.......... 293,510 9.77 6.0-17.6 222,250 15.41 15.0-18.8
Options forfeited or
cancelled.............. (87,338) 16.76 6.0-18.8 (10,000) 15.41 15.0-18.8
------- -------
Options outstanding at
end of year............ 418,422 11.17 6.0-18.8 212,250 15.41 15.0-18.8
======= =======
</TABLE>
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 permits the Company to either recognize as
expense over the vesting period, the fair market value of all stock based
compensation awards on the date of grant, or continue to apply the provisions of
APB Opinion No. 25 and provide pro forma disclosures of net earnings (loss)
computed as if the fair value based method as defined in SFAS 123 had been
applied.
The Company elected to continue to apply APB Opinion No. 25 in accounting
for its Stock Options and Awards Plan and, accordingly, no compensation cost has
been recognized for its stock options in the financial statements. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options exercisable under SFAS No. 123, the Company's net earnings
and earnings per share would have decreased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM JANUARY 15, 1997
FOR THE (COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ---------------------
(IN THOUSANDS)
<S> <C> <C>
Net earnings (loss) as reported.............. $(11,013) $2,811
Pro forma net earnings (loss)................ (12,010) 2,280
Basic earnings (loss) per share as
reported................................... (1.26) 0.61
Diluted earnings (loss) per share as
reported................................... (1.26) 0.61
Basic pro forma earnings (loss) per share.... (1.37) 0.49
Diluted pro forma earnings (loss) per
share...................................... (1.37) 0.49
</TABLE>
The derived fair value of the options granted during 1998 and 1997 was
approximately $3.90 and $2.39 per share, respectively, using the Black-Scholes
option pricing model with the following assumptions: risk-free interest rate of
5.10% and 5.84%, respectively, dividend yield of 8.1% and 8.7%, respectively,
expected lives of 3.9 and 9.3 years and expected volatility of 92.7% and 37.2%,
respectively.
NOTE R -- STOCKHOLDERS' EQUITY
On November 6, 1998, the Company paid the previously announced third
quarter dividend of $0.45 per share to stockholders of record on October 9,
1998. The Company paid interest in the form of an additional cash dividend at an
interest rate of 4% per annum for the period from the previously announced
payment date of October 26, 1998 through November 6, 1998. The total amount of
the interest the Company paid as a result of the dividend payment delay was
$6,000 or $0.0006 per common share outstanding.
F-66
<PAGE> 232
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 21, 1998, the Company repurchased from IMH 937,084 shares of
Common Stock and 456,916 shares of Class A Common Stock at a per share price of
$4.375, which was based upon the closing price of the Common Stock on AMEX on
October 19, 1998, for a total repurchase of $6.1 million.
On October 7, 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan in which Preferred Stock Purchase Rights were distributed as a
dividend at the rate of one Right for each outstanding share of common stock.
The dividend distribution was made on October 19, 1998, payable to stockholders
of record on that date. The Rights are attached to the Company's common stock.
The Rights will be exercisable and trade separately only in the event that a
person or group acquires or announces the intent to acquire 10 percent or more
of the Company's common stock. Each Right will entitle stockholders to buy one
one-hundredth of a share of a new series of Series A junior participating
preferred stock at an exercise price of $16.25. If the Company is acquired in a
merger or other transaction after a person has acquired 10 percent or more of
the Company's outstanding common stock, each Right will entitle the stockholder
to purchase, at the Right's then-current exercise price, a number of the
acquiring Company's common shares having a market value of twice such price. In
addition, if a person or group acquires 10 percent or more of the Company's
common stock, each Right will entitle the stockholder (other than the acquiring
person) to purchase, at the Right's then-current exercise price, a number of
shares of the Company's common stock having a market value of twice such price.
Following the acquisition by a person of 10 percent or more of the Company's
common stock and before an acquisition of 50 percent or more of the common
stock, the Board of Directors may exchange the Rights (other than the Rights
owned by such person) at an exchange ratio of one share of common stock per
Right. Before a person or group acquires beneficial ownership of 10 percent or
more of the Company's common stock, the Rights are redeemable for $.0001 per
right at the option of the Board of Directors. The Rights will expire on October
19, 2008. The Rights distribution is not taxable to stockholders. The Rights are
intended to enable all the Company stockholders to realize the long-term value
of their investment in the Company.
On September 28, 1998, the Company declared a third quarter dividend of
$4.5 million, or $0.45 per share. The original payment date of this dividend was
set for October 26, 1998 to stockholders of record on October 9, 1998 but was
delayed until November 6, 1998.
On September 25, 1998, the Company's Board of Directors authorized the
Company to repurchase up to $5.0 million of the Company's common stock, $.01 par
value, in open market purchases from time to time at the discretion of the
Company's management; the timing and extent of the repurchases will depend on
market conditions. The Company intends to effect such repurchases, if any, in
compliance with the Rule 10b-18 under the Securities Exchange Act of 1934. Any
acquired shares will be canceled. Through February 16, 1999, the Company had not
repurchased any shares under this program.
On June 22, 1998, the Company completed a common stock offering. The
Company raised additional capital of $28.4 million, net of underwriting
discounts and other expenses, as stockholders purchased 2,000,000 shares of
common stock at a price of $15.3125 per share.
On June 8, 1998, the Company declared a second quarter dividend of $3.6
million, or $0.45 per share. This dividend was paid on July 15, 1998 to
stockholders of record on June 19, 1998.
On April 1, 1998, the Company declared a first quarter dividend of $3.2
million, or $0.40 per share. This dividend was paid on April 24, 1998 to
stockholders of record on April 9, 1998.
F-67
<PAGE> 233
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE S -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the year ended December 31, 1998
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED,
------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Net interest income after provision
for loan losses(1).................. $ 2,837 $ 3,306 $3,570 $3,010
Non-interest income(1)................ (3,805) (14,243) (105) (345)
Non-interest expense(1)............... 1,670 2,288 792 488
Net earnings(loss).................... (2,638) (13,225) 2,673 2,177
Net earnings(loss) per share -- basic
and diluted(2)...................... (0.30) (1.32) 0.33 0.27
Dividends declared per share.......... -- 0.45 0.45 0.40
</TABLE>
Selected quarterly financial data for the period from January 15, 1997
(commencement of operations) through December 31, 1997 follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED,
------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Net interest income after provision
for loan losses(1).................. $2,338 $1,690 $443 $ 74
Non-interest income(1)................ 1,183 685 -- --
Non-interest expense(1)............... 440 278 124 2,760
Net earnings(loss).................... 3,081 2,097 319 (2,686)
Net earnings(loss) per share -- basic
and diluted(2)...................... 0.38 0.38 N/A N/A
Dividends declared per share(3)....... 0.38 0.15 N/A N/A
</TABLE>
- ---------------
(1) Conforms to current year presentation.
(2) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
equal the total for the year.
(3) ICH became a public company on August 5, 1997, therefore per share amounts
for the quarters ended June 30, 1997 and March 31, 1997 are not applicable.
F-68
<PAGE> 234
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE T -- IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
The following condensed consolidated financial information summarizes the
consolidated financial position and consolidated results of operations of Impac
Commercial Capital Corporation (in thousands):
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
1998 1997
------- --------
<S> <C> <C>
ASSETS
Cash........................................................ $ 692 $ 2,273
Commercial Mortgages held-for-sale.......................... 44,854 106,654
Due from affiliates......................................... 5,740 1,538
Premises and equipment, net................................. 909 381
Other assets................................................ 2,005 1,789
------- --------
Total assets...................................... $54,200 $112,635
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Warehouse line agreements................................... $44,881 $104,219
Due to affiliates........................................... 21,101 758
Other liabilities........................................... 4,022 3,255
------- --------
Total liabilities................................. 70,004 108,232
------- --------
Shareholders' Equity:
Preferred Stock........................................... 2,875 2,875
Common Stock.............................................. 1 1
Contributed capital....................................... 150 150
Retained earnings (accumulated deficit)................... (18,830) 1,377
------- --------
Total shareholders' equity........................ (15,804) 4,403
------- --------
$54,200 $112,635
======= ========
</TABLE>
F-69
<PAGE> 235
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
FOR THE (COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -------------------
<S> <C> <C>
Net interest income:
Total interest income..................................... $ 9,778 $2,804
Total interest expense.................................... 10,803 2,747
-------- ------
Net interest income (expense)..................... (1,025) 57
Non-interest income:
Gain (loss) on sale of loans.............................. (14,345) 3,657
Other income.............................................. 24 62
-------- ------
Total non-interest income......................... (14,321) 3,719
Non-interest expense:
Other operating expense................................... 5,365 1,176
Provision for repurchases................................. 176 201
-------- ------
Total non-interest expense........................ 5,541 1,377
-------- ------
Net earnings (loss) before income taxes................... (20,887) 2,399
Income taxes (benefit).................................... (680) 1,022
-------- ------
Net earnings (loss)....................................... $(20,207) $1,377
======== ======
</TABLE>
F-70
<PAGE> 236
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Impac Commercial Capital Corporation:
We have audited the accompanying consolidated balance sheets of Impac
Commercial Capital Corporation and subsidiary as of December 31, 1998 and 1997,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the year ended December 31, 1998 and for the period
from January 15, 1997 (commencement of operations) through December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Impac Commercial Capital Corporation and subsidiary as of December 31, 1998 and
1997, and the results of their operations and their cash flows for the year
ended December 31, 1998 and for the period from January 15, 1997 (commencement
of operations) through December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG LLP
Orange County, California
February 3, 1999
F-71
<PAGE> 237
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
1998 1997
------- --------
<S> <C> <C>
ASSETS
Cash........................................................ $ 692 $ 2,273
Commercial Mortgages held-for-sale.......................... 44,854 106,654
Due from affiliates......................................... 5,740 1,538
Premises and equipment, net................................. 909 381
Accrued interest receivable................................. 272 337
Deferred tax asset.......................................... -- 924
Other assets................................................ 1,733 528
------- --------
Total assets...................................... $54,200 $112,635
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Warehouse line agreements................................... $44,881 $104,219
Due to affiliates........................................... 21,101 758
Other liabilities........................................... 4,022 3,255
------- --------
Total liabilities................................. 70,004 108,232
------- --------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock; no par value; 50,000 shares authorized;
9,500 shares issued and outstanding at December 31,
1998 and 1997.......................................... 2,875 2,875
Common stock; no par value; 50,000 shares authorized; 500
shares issued and outstanding at December 31, 1998 and
1997................................................... 1 1
Contributed capital....................................... 150 150
Retained earnings (accumulated deficit)................... (18,830) 1,377
------- --------
Total shareholders' equity........................ (15,804) 4,403
------- --------
$54,200 $112,635
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-72
<PAGE> 238
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
FOR THE (COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -------------------
<S> <C> <C>
INTEREST INCOME:
Commercial Mortgages held-for-sale........................ $ 9,573 $2,787
Cash and due from affiliates.............................. 205 17
-------- ------
Total interest income............................. 9,778 2,804
INTEREST EXPENSE:
Borrowings from ICH....................................... 9,064 2,372
Other affiliated borrowings............................... 1,739 375
-------- ------
Total interest expense............................ 10,803 2,747
-------- ------
Net interest income (expense)............................. (1,025) 57
NON-INTEREST INCOME:
Gain (loss) on sale of loans.............................. (14,345) 3,657
Other income.............................................. 24 62
-------- ------
Total non-interest income......................... (14,321) 3,719
NON-INTEREST EXPENSE:
Personnel expense......................................... 2,507 38
General and administrative and other expense.............. 1,070 288
Occupancy expense......................................... 1,036 160
Professional services..................................... 752 540
Provision for repurchases................................. 176 201
Stock compensation expense................................ -- 150
-------- ------
Total non-interest expense........................ 5,541 1,377
-------- ------
Net earnings (loss) before income taxes................... (20,887) 2,399
Income taxes (benefit).................................... (680) 1,022
-------- ------
Net earnings (loss)....................................... $(20,207) $1,377
======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-73
<PAGE> 239
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- --------------- RETAINED
NUMBER NUMBER EARNINGS TOTAL
OF DOLLAR OF DOLLAR CONTRIBUTED (ACCUMULATED SHAREHOLDERS
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) EQUITY
------ ------ ------ ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 15, 1997
(commencement of operations).... -- $ -- -- $-- $ -- $ -- $ --
Issuance of common stock.......... -- -- 500 1 25 -- 26
Issuance of preferred stock....... 9,500 500 -- -- -- -- 500
Capital contribution.............. -- 2,375 -- -- 125 -- 2,500
Net earnings for the period from
January 15, 1997 (commencement
of operations) through December
31, 1997........................ -- -- -- -- -- 1,377 1,377
----- ------ --- -- ---- -------- --------
Balance, December 31, 1997........ 9,500 2,875 500 1 150 1,377 4,403
----- ------ --- -- ---- -------- --------
Net loss for the year ended
December 31, 1998............... -- -- -- -- -- (20,207) (20,207)
----- ------ --- -- ---- -------- --------
Balance, December 31, 1998........ 9,500 $2,875 500 $1 $150 $(18,830) $(15,804)
===== ====== === == ==== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-74
<PAGE> 240
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
FOR THE (COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)....................................... $(20,207) $ 1,377
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................... 226 50
Deferred income taxes.................................. 924 (924)
Stock compensation expense............................. -- 150
Provision for repurchases.............................. 176 201
Net change in accrued interest receivable.............. 65 (337)
Net change in due from affiliates and due to
affiliates........................................... 16,141 (780)
Net change in other assets and liabilities............. (614) 2,526
-------- ---------
Net cash provided by (used in) operating
activities...................................... (3,289) 2,263
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Originations of Commercial Mortgages held-for-sale........ (425,096) (233,545)
Sale of Commercial Mortgages held-for-sale................ 486,896 126,891
Purchases of premises and equipment....................... (754) (431)
-------- ---------
Net cash provided by (used) in investing
activities...................................... 61,046 (107,085)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in warehouse line agreements................... (59,338) 104,219
Issuance of preferred stock............................... -- 500
Issuance of common stock.................................. -- 1
Contributions from ICH.................................... -- 2,375
-------- ---------
Net cash provided by (used in) financing
activities...................................... (59,338) 107,095
-------- ---------
Net change in cash and cash equivalents..................... (1,581) 2,273
Cash and cash equivalents at beginning of period............ 2,273 --
-------- ---------
Cash and cash equivalents at end of period.................. $ 692 $ 2,273
======== =========
SUPPLEMENTARY INFORMATION:
Interest paid............................................. $ 11,779 $ 2,276
Taxes paid................................................ 486 422
NON-CASH TRANSACTIONS:
Issuance of Common Stock.................................. $ -- $ 25
Capital contribution of common stockholders............... -- 125
</TABLE>
See accompanying notes to consolidated financial statements.
F-75
<PAGE> 241
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The operations of the Company have been presented in the consolidated
financial statements for the year ended December 31, 1998 and for the period
from January 15, 1997 (commencement of operations) through December 31, 1997 and
include the financial results of Impac Commercial Capital Corporation (ICCC) as
a stand-alone company.
Interest income on affiliated short-term advances (Due from affiliates) has
been earned at the rate of 8% per annum. Interest expense on affiliated
short-term borrowings (Due to affiliates), has been incurred at the rate of 8%
per annum. Costs and expenses of IMH have been allocated to ICCC in proportion
to services provided, plus a 15% service charge. Certain amounts in the prior
period's consolidated financial statements have been reclassified to conform to
the current presentation.
Management of ICCC has made a number of estimates and assumptions relating
to the reporting of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
2. CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
consist of cash and money market mutual funds. The Company considers investments
with maturities of three months or less at date of purchase to be cash
equivalents.
3. COMMERCIAL MORTGAGES HELD-FOR-SALE
Commercial Mortgages held-for-sale are stated at the lower of cost or
market in the aggregate as determined by outstanding commitments from investors
or current investor yield requirements. Interest is recognized as revenue when
earned according to the terms of the Commercial Mortgages and when, in the
opinion of management, it is collectible. Nonrefundable fees and direct costs
associated with the origination or purchase of loans are deferred and recognized
when the loans are sold as gain or loss on sale of mortgage loans, except
related to loans sold to ICH, which nonrefundable fees and costs fees are
deferred and recognized over the life of the loans using the interest method.
4. GAIN ON SALE OF LOANS
ICCC recognizes gains or losses on sale of loans when the sales transaction
settles and the risks and rewards of ownership are determined to have passed to
the purchasing party. Gains on sale of loans or securities to ICH are deferred
and accreted over the estimated life of the loans or securities using the
interest method.
5. INCOME TAXES
Income taxes are accounted for under the asset and liability method of
accounting for income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-76
<PAGE> 242
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMERCIAL MORTGAGE SERVICING INCOME
Servicing income is reported as earned, principally on a cash basis when
the majority of the service process is completed.
NOTE B -- COMMERCIAL MORTGAGES HELD-FOR-SALE
Substantially all Commercial Mortgages originated by ICCC are fixed-rate or
adjustable-rate commercial mortgage loans secured by first liens on commercial
properties. Approximately 32% and 51%, respectively, of Commercial Mortgages
held-for-sale at December 31, 1998 and 1997, respectively, are collateralized by
commercial real properties located in California. During the year ended December
31, 1998 and for the period from January 15, 1997 (commencement of operations)
through December 31, 1997, ICCC originated $425.1 million and $233.5 million,
respectively, of Commercial Mortgages and sold none and $73.4 million,
respectively, of Commercial Mortgages to third party investors. In addition,
ICCC sold $525.2 million and $23.7 million, respectively, of Commercial
Mortgages to ICH during the year ended December 31, 1998 and for the period from
January 15, 1997 (commencement of operations) through December 31, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
1998 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
Commercial Mortgages.................................... $45,524 $106,346
Unamortized net discounts on Commercial Mortgages....... (721) --
Deferred loan fees...................................... 77 308
Deferred hedging........................................ (26) --
------- --------
$44,854 $106,654
======= ========
</TABLE>
At December 31, 1998 and 1997, other liabilities includes an allowance for
repurchases of $377,000 and $201,000, respectively.
NOTE C -- PREMISES AND EQUIPMENT, NET
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation on premises and equipment is recorded using the straight-line
method over the estimated useful lives of individual assets (three to seven
years).
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1998 1997
------ -----
(IN THOUSANDS)
<S> <C> <C>
Premises and equipment..................................... $1,185 $ 431
Less accumulated depreciation.............................. (276) (50)
------ -----
$ 909 $ 381
====== =====
</TABLE>
NOTE D -- WAREHOUSE LINE AGREEMENTS
ICCC enters into warehouse line agreements with ICH and IMH to fund the
origination and purchase of Commercial Mortgages. Terms of the warehouse line
agreements require that the Commercial Mortgages be held by an independent third
party custodian, which gives the Company the ability to borrow against the
collateral as a percentage of the fair market value of the Commercial Mortgages.
ICCC has entered into warehouse facilities with ICH to obtain financing up
to an aggregate of $900.0 million. The margins on the warehouse facility are at
90% of the fair market value of the collateral. The interest rates on the
borrowings are at Bank of America's prime rate. ICCC has entered into a
warehouse
F-77
<PAGE> 243
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
facility with IMH to provide financing as needed. The margins on the warehouse
line agreement are at 8% of the fair market value of the collateral. The
interest rates on the borrowings are Bank of America's prime rate.
The following tables set forth information regarding warehouse line
agreements (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
------------------------------------------------------------
MAXIMUM WAREHOUSE UNDERLYING
TYPE OF UNCOMMITTED LINE COLLATERAL MATURITY
COLLATERAL AMOUNT LIABILITY (1) DATE
---------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Impac Commercial Holdings, Inc.... Mortgages $900,000 $41,217 $41,963 N/A
Impac Mortgage Holdings, Inc...... Mortgages N/A 3,664 3,730 N/A
------- -------
Total................... $44,881 $45,693
======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
------------------------------------------------------------
MAXIMUM WAREHOUSE UNDERLYING
TYPE OF UNCOMMITTED LINE COLLATERAL MATURITY
COLLATERAL AMOUNT LIABILITY (1) DATE
---------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Impac Commercial Holdings, Inc.... Mortgages $900,000 $ 95,711 $103,280 N/A
Impac Mortgage Holdings, Inc...... Mortgages N/A 8,508 9,181 N/A
-------- --------
Total................... $104,219 $112,461
======== ========
</TABLE>
- ---------------
(1) The amount of underlying collateral represents the unpaid principal balance
of Commercial Mortgages provided as collateral for the warehouse lines.
NOTE E -- INCOME TAXES
The components of income taxes consist of the following:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE JANUARY 15, 1997
YEAR ENDED (COMMENCEMENT OF
DECEMBER 31, OPERATIONS) THROUGH
1998 DECEMBER 31, 1997
------------ -------------------
(IN THOUSANDS)
<S> <C> <C>
Current income taxes:
Federal..................................... $(1,604) $1,483
State....................................... -- 463
------- ------
Total current income taxes.......... (1,604) 1,946
------- ------
Deferred income taxes:
Federal..................................... 724 (723)
State....................................... 200 (201)
------- ------
Total deferred income taxes......... 924 (924)
------- ------
Total income taxes.................. $ (680) $1,022
======= ======
</TABLE>
F-78
<PAGE> 244
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective income taxes differ from the amount computed by
applying the federal income tax rate of 34% to income before income taxes as a
result of the following:
<TABLE>
<CAPTION>
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Computed "expected" income tax (benefit) at federal
rate.................................................... $(7,102) $ 816
California franchise tax, net of federal income tax
(benefit)............................................... (727) 173
Valuation allowance....................................... 7,779 --
Effect of change in state valuation allowance............. (443) --
Other..................................................... (187) 33
------- ------
$ (680) $1,022
======= ======
</TABLE>
The tax effects that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 31, 1998 and 1997 are presented
below:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX ASSETS:
Deferred revenue........................................... $1,346 $ 551
Future state tax benefit................................... -- 89
Loan mark-to-market........................................ -- 844
Provision for repurchases.................................. 167 90
Non-accrual loan........................................... 96 --
Accrued vacation........................................... 31 --
Minimum tax credit......................................... 86 --
Net operating losses....................................... 7,045 --
------ ------
Total gross deferred tax assets.................. 8,771 1,574
Valuation allowance.............................. 7,779 --
DEFERRED TAX LIABILITIES:
Mortgage servicing rights.................................. 985 (650)
Depreciation............................................... 7 --
------ ------
Net deferred tax asset........................... $ -- $ 924
====== ======
</TABLE>
As of December 31, 1998, the Company has net operating loss carry-forwards
for federal and state income tax purposes of $17.5 million and $10.7 million,
respectively, which are available to offset future taxable income, if any,
through 2018 and 2003, respectively. In addition, the Company has an alternative
minimum tax credit carry-forward of approximately $86,000 which is available to
reduce future federal regular income taxes, if any, over an indefinite period.
The Company believes that the deferred tax asset will not be realized with
the reversal of the deferred tax liability and expected future taxable income,
and therefore, the Company has established a valuation allowance of $7.8
million. ICCC does not have a current tax payable as of December 31, 1998.
NOTE F -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments have been determined by
ICCC using available market information and appropriate valuation methodologies,
however, considerable judgment is necessarily required to interpret market data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are
F-79
<PAGE> 245
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not necessarily indicative of the amounts ICCC could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------
1998 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.............. $ 692 $ 692 $ 2,273 $ 2,273
Commercial Mortgages held-for-sale..... 44,854 46,625 106,654 112,461
Due from affiliates.................... 5,740 5,740 1,538 1,538
LIABILITIES:
Warehouse line agreements.............. 44,881 44,881 104,219 104,219
Due to affiliates...................... 21,101 21,101 758 758
Futures contracts...................... -- 97 -- 510
Off balance-sheet loan commitments..... -- -- -- --
</TABLE>
The fair value estimates as of December 31, 1998 and 1997 are based on
pertinent information available to management as of that date. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
The following describes the methods and assumptions used by ICCC in
estimating fair values:
Cash and Cash Equivalents
Fair value approximates carrying amount as these instruments are demand
deposits and do not present unanticipated interest rate or credit concerns.
Commercial Mortgages Held-for-Sale
Fair value is based on estimated quoted market prices from dealers and
brokers for similar types of mortgage loans.
Due From/To Affiliates
Fair value approximates carrying amount because of the short-term maturity
of the liabilities and does not present unanticipated interest rate or credit
concerns.
Warehouse Line Agreements
Fair value approximates carrying amount because of the short-term maturity
of the liabilities.
Futures Contracts
Fair value is based on estimated quoted market prices from dealers and
brokers for similar types of instruments.
F-80
<PAGE> 246
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Off Balance-Sheet Loan Commitments
Fair value of commitments, including hedging position, is determined in the
aggregate on current investor yield requirements.
NOTE G -- EMPLOYEE BENEFIT PLANS
Profit Sharing and 401(k) Plan
ICCC does not have its own 401(k) or profit sharing plan. As such,
employees of ICCC participate in ICII's 401(k) plan. The 401(k) plan provides
that each participant may contribute from 2% to 14% of his or her salary and the
Company will contribute to the participant's plan account at the end of each
plan year 50% of the first 4% of salary contributed by a participant. Under the
401(k) plan, employees may elect to enroll on the first day of any month,
provided that they have been employed for at least six months.
Subject to the rules for maintaining the tax status of the 401(k) plan, an
additional Company contribution may be made at the discretion of the Company, as
determined by the Unaffiliated Directors. Should a discretionary contribution be
made, the contribution would first be allocated to those employees deferring
salaries in excess of 4%. The matching contribution would be 50% of any deferral
in excess of 4% up to a maximum deferral of 8%. If discretionary contribution
funds remain following the allocation outlined above, any remaining Company
matching funds would be allocated as a 50% match of employee contributions on
the first 4% of the employee's deferrals. Company matching contributions will be
made as of December 31st of each year in the form of Company Common Stock. The
Company contributed matching and discretionary amounts to the 401(k) plan for
the year ended December 31, 1998 and for the period from January 15, 1997
(commencement of operations) through December 31, 1997 of $63,000 and $17,000,
respectively.
NOTE H -- LIQUIDITY
ICCC recorded a net loss for the year ended December 31, 1998 of $20.2
million resulting in negative net worth of $15.8 million as of December 31,
1998. The loss for 1998 was primarily due to the deterioration of the commercial
mortgage backed securitization market in the third and fourth quarters of 1998.
To the extent necessary, ICH intends to support and fund the cash flow
requirements of ICCC for the next twelve months through December 31, 1999.
During the first quarter of 1999, ICCC anticipates selling a significant portion
of its Commercial Mortgage portfolio thus eliminating related net interest
expense. In addition, ICCC may pursue opportunities in retail loan originations
operations, which could generate loan origination fees. Management is also
exploring opportunities to form an alliance with one or more strategic partners
which will allow ICCC to fund the growth its operations. Management anticipates
the alliance will also enable ICCC to access the securitization marketplace and
achieve better sale execution.
NOTE I -- RELATED PARTY TRANSACTIONS
Credit Arrangements
ICCC has entered into warehouse line agreements with ICH which provide up
to an aggregate of $900.0 million to finance ICCC's operations as needed. The
interest rates on the borrowings are at Bank of America's prime rate, which was
7.75% at December 31, 1998. The margins on the warehouse line agreements are up
to 90% of the fair market value of the collateral provided. As of December 31,
1998 and 1997, amounts outstanding on ICCC's warehouse line agreements with ICH
were $41.2 million and $95.7 million, respectively. Interest expense recorded by
ICCC for the year ended December 31, 1998 and for the period from January 15,
1997 (commencement of operations) through December 31, 1997 was $9.1 million and
$2.4 million, respectively.
F-81
<PAGE> 247
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ICCC has entered into an uncommitted warehouse line agreement with IMH to
provide financing as needed. The margins on the warehouse line agreement are at
8% of the fair market value of the collateral provided. The interest rates on
the borrowings are at Bank of America's prime rate. As of December 31, 1998 and
1997, outstanding amounts on the warehouse line agreement were $3.7 million and
$8.5 million, respectively. Interest expense recorded by ICCC for the year ended
December 31, 1998 and for the period from January 15, 1997 (commencement of
operations) through December 31, 1997 was $785,000 and $262,000, respectively.
During the normal course of business, ICCC may advance or borrow funds on a
short-term basis with affiliated companies. Advances to affiliates are reflected
as "Due from affiliates" while borrowings are reflected as "Due to affiliates"
on ICCC's balance sheet. These short-term advances and borrowings bear interest
at a fixed rate of 8.00% per annum. Interest income recorded by ICCC for the
year ended December 31, 1998 and for the period from January 15, 1997
(commencement of operations) through December 31, 1997 related to short-term
advances due from affiliates was $204,000 and $16,000, respectively. Interest
expense recorded by ICCC for the year ended December 31, 1998 and for the period
from January 15, 1997 (commencement of operations) through December 31, 1997
related to short-term advances due to affiliates was $954,000 and $113,000,
respectively.
Repurchase of Commercial Mortgages
During the year ended December 31, 1998, ICCC purchased $43.2 million of
Commercial Mortgages from ICH at no gain or loss.
Sale of Commercial Mortgages
During the year ended December 31, 1998 and for the period from January 15,
1997 (commencement of operations) through December 31, 1997, ICCC sold $525.2
million and $23.7 million, respectively, in principal balance of Commercial
Mortgages to ICH at a net discount of $3.1 million and a net premium of
$111,000, respectively.
Stock Compensation Expense
Stock compensation expense of $25,000 represents the difference between the
price at which ICCC issued 500 shares of Common Stock to directors and officers
of IMH and ICH on February 10, 1997, and the net book value, which the Company's
management believes approximated the difference between fair value and the
amount of the 5% economic interest in ICCC purchased by the common shareholders.
Submanagement Agreement
IFC entered into a submanagement agreement with RAI under which, IMH and
IFC provide various services to ICCC as RAI deems necessary, including
facilities and costs associated therewith, technology, human resources,
management information systems, general ledger accounts, check processing and
accounts payable, plus a 15% service charge. RAI charges ICCC for these services
based upon usage. Total cost allocations IFC charged to ICCC for the year ended
December 31, 1998 and for the period from January 15, 1997 (commencement of
operations) through December 31, 1997 were $574,000 and $456,000, respectively.
Non-Compete Agreement and Right of First Refusal Agreement
Pursuant to the Non-Compete Agreement executed on the date of the ICH
initial public offering, IFC will not acquire any commercial mortgages for a
period of the earlier of nine months from the closing of the ICH initial public
offering or the date upon which ICH and/or ICCC accumulates (for investment or
sale)
F-82
<PAGE> 248
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$300.0 million of commercial mortgages or commercial mortgage-backed securities.
This agreement expired in March 1998.
Pursuant to the Right of First Refusal Agreement by and among ICH, IMH,
IFC, ICCC and RAI, pursuant to which, in part, RAI will agree that any mortgage
loan or mortgage-backed security investment opportunity which is offered to it
on behalf of either ICH, IMH any affiliated REIT will first be offered to that
entity whose initial primary business as described in its initial public
offering documentation most closely aligns with such investment opportunity.
NOTE J -- COMMITMENTS AND CONTINGENCIES
Commercial Mortgage Loan Sales Commitments
In the ordinary course of business, ICCC is exposed to liability under
representations and warranties made to purchasers and insurers of mortgage loans
and the purchasers of servicing rights. Under certain circumstances, ICCC is
required to repurchase mortgage loans if there had been a breach of
representations or warranties. ICH has guaranteed the performance obligation of
ICCC under such representation and warranties related to loans included in
securitizations.
Futures Contracts
To remain competitive and control risk, ICCC uses futures and options on
futures. The use of these instruments provides for increased liquidity, lower
transaction costs and more effective short-term coverage than cash and
mortgage-backed securities. However, ICCC is vulnerable to the basis risk that
is inherent in cross-hedging. ICCC uses the buying and selling of futures
contracts on Treasury bonds and Treasury notes when the market is vulnerable to
day-to-day corrections. Executing hedges with these instruments allows ICCC to
more effectively hedge the risks of corrections or reverses in the market
without committing mandatory sales on mortgage-backed securities or cash. ICCC
utilizes these instruments on a short-term basis to fine tune its overall hedge
position at a lower cost. The unrealized gains and losses on the hedging
transactions are recorded as an adjustment to the basis of the loans. Gains and
losses are recognized upon the sale of loans.
The Company sells future contracts against five- and ten-year Treasury
notes with major dealers in such securities. At December 31, 1998 and 1997, the
Company had $20.0 million and $105.1 million, respectively, in outstanding
commitments to sell U.S. Treasury notes.
Lease Commitments
ICH and ICCC, as tenants in common, lease approximately 18,000 square feet
of office space in Irvine, California,, approximately 3,600 square feet in
Sherman Oaks, California and approximately 4,300 square feet in Dallas, Texas
under premises operating leases expiring in November 2000, May 2001 and August
2003, respectively. Minimum premises rental commitments are as follows (in
thousands):
<TABLE>
<S> <C>
1999................................................ $ 734
2000................................................ 691
2001................................................ 166
2002................................................ 126
2003................................................ 84
------
Total..................................... $1,801
======
</TABLE>
All rent expense associated with the lease is charged to ICCC as ICCC's
employees occupy 100% of office space.
F-83
<PAGE> 249
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the year ended December 31, 1998
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED,
------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Net interest expense(1)............... $ (319) $ (369) $(264) $ (73)
Non-interest income(1)................ 264 (14,932) 263 84
Non-interest expense(1)............... 3,613 315 444 489
Net loss.............................. (3,668) (15,616) (445) (478)
</TABLE>
Selected quarterly financial data for the period from January 15, 1997
(commencement of operations) through December 31, 1997 follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED,
------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Net interest income(1)................ $ 27 $ 14 $ 15 $ 1
Non-interest income(1)................ 2,156 1,524 37 2
Non-interest expense(1)............... 1,059 1,009 142 189
Net earnings (loss)................... 1,124 529 (90) (186)
</TABLE>
- ---------------
(1) Conforms to current year presentation.
F-84
<PAGE> 250
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF AUGUST 4, 1999
BY AND BETWEEN
IMPAC COMMERCIAL HOLDINGS, INC.
AND
AMRESCO CAPITAL TRUST
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I THE MERGER........................................................ A-10
SECTION 1.1 The Merger.................................................. A-10
SECTION 1.2 Closing..................................................... A-10
SECTION 1.3 Effective Time.............................................. A-10
SECTION 1.4 Effects of the Merger....................................... A-11
SECTION 1.5 Declaration of Trust and Bylaws............................. A-11
SECTION 1.6 Board of Trust Managers..................................... A-11
SECTION 1.7 Officers.................................................... A-11
ARTICLE II TREATMENT OF SHARES.............................................. A-11
SECTION 2.1 Effect on Outstanding Shares................................ A-11
SECTION 2.2 Exchange of Certificates.................................... A-12
SECTION 2.3 Options..................................................... A-12
SECTION 2.4 Dividends................................................... A-13
SECTION 2.5 No Fractional Shares........................................ A-14
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACT........................... A-14
SECTION 3.1 Organization, Standing and Corporate Power.................. A-14
SECTION 3.2 Subsidiaries................................................ A-14
SECTION 3.3 Capital Structure........................................... A-14
SECTION 3.4 Authority; Noncontravention; Consents....................... A-15
SECTION 3.5 SEC Documents............................................... A-16
SECTION 3.6 Financial Statements........................................ A-16
SECTION 3.7 Absence of Certain Changes or Events........................ A-16
SECTION 3.8 No Undisclosed Liabilities.................................. A-16
SECTION 3.9 No Defaults................................................. A-17
SECTION 3.10 Taxes....................................................... A-17
SECTION 3.11 Employee Matters............................................ A-18
SECTION 3.12 Affiliate Transactions...................................... A-19
SECTION 3.13 Financial Advisors.......................................... A-19
SECTION 3.14 Registration Statement and Proxy Statement.................. A-19
SECTION 3.15 Vote Required............................................... A-19
SECTION 3.16 Anti-Takeover Statutes...................................... A-19
SECTION 3.17 Full Disclosure............................................. A-19
SECTION 3.18 Litigation.................................................. A-19
SECTION 3.19 Compliance with Laws........................................ A-20
SECTION 3.20 Indebtedness................................................ A-20
SECTION 3.21 Insurance................................................... A-20
SECTION 3.22 Investment Company Act...................................... A-20
SECTION 3.23 Material Contracts.......................................... A-20
SECTION 3.24 Mortgage Backed Securities.................................. A-21
SECTION 3.25 Environmental Laws and Regulations.......................... A-21
SECTION 3.26 Properties.................................................. A-22
SECTION 3.27 Mortgage Loans.............................................. A-23
SECTION 3.28 Actions Taken Regarding the ACT Rights Plan................. A-24
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ICH............................ A-24
SECTION 4.1 Organization, Standing and Corporate Power.................. A-24
SECTION 4.2 Subsidiaries................................................ A-24
</TABLE>
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<S> <C> <C>
SECTION 4.3 Capital Structure........................................... A-25
SECTION 4.4 Authority; Noncontravention; Consents....................... A-25
SECTION 4.5 SEC Documents............................................... A-26
SECTION 4.6 Financial Statements........................................ A-26
SECTION 4.7 Absence of Certain Changes or Events........................ A-26
SECTION 4.8 No Undisclosed Liabilities.................................. A-26
SECTION 4.9 No Defaults................................................. A-27
SECTION 4.10 Taxes....................................................... A-27
SECTION 4.11 Employee Matters............................................ A-28
SECTION 4.12 Affiliate Transactions...................................... A-29
SECTION 4.13 Financial Advisors.......................................... A-29
SECTION 4.14 Registration Statement and Proxy Statement.................. A-29
SECTION 4.15 Vote Required............................................... A-29
SECTION 4.16 Anti-Takeover Statutes...................................... A-29
SECTION 4.17 Full Disclosure............................................. A-29
SECTION 4.18 Litigation.................................................. A-29
SECTION 4.19 Compliance with Laws........................................ A-30
SECTION 4.20 Indebtedness................................................ A-30
SECTION 4.21 Insurance................................................... A-30
SECTION 4.22 Investment Company Act...................................... A-30
SECTION 4.23 Material Contracts.......................................... A-30
SECTION 4.24 Mortgage Backed Securities.................................. A-30
SECTION 4.25 Environmental Laws and Regulations.......................... A-31
SECTION 4.26 Properties.................................................. A-31
SECTION 4.27 Mortgage Loans.............................................. A-32
SECTION 4.28 Actions Taken Regarding the ICH Rights Plan................. A-33
ARTICLE V COVENANTS......................................................... A-33
SECTION 5.1 Conduct of Business by ACT.................................. A-33
SECTION 5.2 Conduct of Business by ICH.................................. A-35
SECTION 5.3 Other Actions............................................... A-35
ARTICLE VI ADDITIONAL COVENANTS............................................. A-36
SECTION 6.1 Preparation of the Registration Statement and the Proxy
Statement;
Shareholder Meetings........................................ A-36
SECTION 6.2 Access to Information; Confidentiality...................... A-37
SECTION 6.3 Commercially Reasonable Efforts; Notification............... A-38
SECTION 6.4 Affiliates.................................................. A-38
SECTION 6.5 Tax Treatment............................................... A-38
SECTION 6.6 Board of Trust Managers..................................... A-38
SECTION 6.7 Board Recommendations....................................... A-38
SECTION 6.8 Acquisition Proposals....................................... A-39
SECTION 6.9 Public Announcements........................................ A-40
SECTION 6.10 Letters of Accountants...................................... A-40
SECTION 6.11 Indemnification............................................. A-40
SECTION 6.12 Transfer and Gains Taxes.................................... A-42
SECTION 6.13 Coordination of Dividends................................... A-42
</TABLE>
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<S> <C> <C>
ARTICLE VII CONDITIONS PRECEDENT............................................ A-42
SECTION 7.1 Conditions to Each Party's Obligation To Effect the
Merger...................................................... A-42
SECTION 7.2 Conditions to Obligations of ICH............................ A-43
SECTION 7.3 Conditions to Obligations of ACT............................ A-43
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER.............................. A-45
SECTION 8.1 Termination................................................. A-45
SECTION 8.2 Expenses; Termination Fee................................... A-46
SECTION 8.3 Effect of Termination....................................... A-46
SECTION 8.4 Amendment................................................... A-47
SECTION 8.5 Extension; Waiver........................................... A-47
ARTICLE IX GENERAL PROVISIONS............................................... A-48
SECTION 9.1 Nonsurvival of Representations and Warranties............... A-48
SECTION 9.2 Notices..................................................... A-48
SECTION 9.3 Certain Definitions......................................... A-48
SECTION 9.4 Interpretation.............................................. A-49
SECTION 9.5 Counterparts................................................ A-49
SECTION 9.6 Entire Agreement; No Third-Party Beneficiaries.............. A-49
SECTION 9.7 Governing Law............................................... A-49
SECTION 9.8 Assignment.................................................. A-49
SECTION 9.9 Severability................................................ A-49
SECTION 9.10 Attorneys' Fees............................................. A-50
</TABLE>
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EXHIBITS:
Exhibit A Trust Managers of the Surviving Entity
Exhibit B Officers of the Surviving Entity
Exhibit C Form of Affiliate Letter
Exhibit D Form of Amended and Restated Management Agreement
Exhibit E Form of ACT Legal Opinion
Exhibit F Form of ICH Legal Opinion
SCHEDULES:
Schedule 3.2 Subsidiaries
Schedule 3.3 Capitalization
Schedule 3.4 Noncontravention; Consents
Schedule 3.7 Absence of Certain Changes or Events
Schedule 3.8 Undisclosed Liabilities
Schedule 3.9 Defaults
Schedule 3.10(a)-(b) Taxes
Schedule 3.11 Employee Matters
Schedule 3.11(a) Benefit Plans
Schedule 3.12 Affiliate Transactions
Schedule 3.18 Litigation
Schedule 3.19 Compliance with Laws
Schedule 3.20 Indebtedness
Schedule 3.23 Material Contracts
Schedule 3.24(a)-(g) Mortgage Backed Securities
Schedule 3.25(a)-(b) Environmental Matters
Schedule 3.26(a)-(b) Properties
Schedule 3.27(a)-(c) Mortgage Loans
Schedule 4.2 Subsidiaries
Schedule 4.4 Noncontravention; Consents
Schedule 4.7 Absence of Certain Changes or Events
Schedule 4.8 Undisclosed Liabilities
Schedule 4.9 Defaults
Schedule 4.10(a)-(b) Taxes
Schedule 4.11 Employee Matters
Schedule 4.11(a) Benefit Plans
Schedule 4.12 Affiliate Transactions
Schedule 4.18 Litigation
Schedule 4.19 Compliance with Laws
Schedule 4.20 Indebtedness
Schedule 4.23 Material Contracts
Schedule 4.24(a)-(g) Mortgage Backed Securities
Schedule 4.25(a)-(b) Environmental Matters
Schedule 4.26(a)-(b) Properties
</TABLE>
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Schedule 4.27(a)-(b) Mortgage Loans
Schedule 5.1 Conduct of Business by ACT
Schedule 5.2 Conduct of Business by ICH
Schedule 9.3 Persons with 'Knowledge' of ACT or ICH
</TABLE>
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM SECTION
- ---- -------
<S> <C>
Acquisition Agreement....................................... 6.7(b)
Acquisition Proposal........................................ 6.8
Affiliate................................................... 9.3
Agreement................................................... Preamble
ACT......................................................... Preamble
ACT Benefit Plans........................................... 3.11(a)
ACT Common Shares........................................... Recitals
ACT Disclosure Letter....................................... 9.3
ACT ERISA Affiliate......................................... 3.11(a)
ACT Financial Advisors...................................... 3.13
ACT First Quarter 10-Q...................................... 3.11(c)
ACT Material Contracts...................................... 3.23(a)
ACT MBS..................................................... 3.24(a)
ACT MBS Certificates........................................ 3.24(a)
ACT Mortgage Files.......................................... 3.27(a)
ACT Mortgage Loans.......................................... 3.27(a)
ACT Mortgage Notes.......................................... 3.27(a)
ACT 1998 Form 10-K.......................................... 3.20(e)
ACT Option Plan............................................. 3.3
ACT Options................................................. 3.3
ACT Permitted Liens......................................... 3.26(a)
ACT Preferred Shares........................................ 3.3
ACT Principal MBS Agreements................................ 3.24(b)
ACT Properties.............................................. 3.26(a)
ACT Rights Plan............................................. 3.3
ACT SEC Documents........................................... 3.5
ACT Shareholder Approval.................................... 3.4(a)
ACT Shareholder Meeting..................................... 6.1(b)
ACT Warrants................................................ 3.3
Alternative Transaction..................................... 6.7(b)
Anti-Takeover Statutes...................................... 3.16
Average Closing Price....................................... 7.3(h)
Base Amount................................................. 8.2(e)
Certificates................................................ 2.2(b)
Code........................................................ Recitals
Closing Balance Sheet....................................... 7.3(h)
Closing Cash Amount......................................... 7.3(h)
Closing Date................................................ 1.2
Confidentiality Agreements.................................. 6.2
Effective Time.............................................. 1.3
Environmental Claim......................................... 3.25(c)
Environmental Laws.......................................... 3.25(c)
ERISA....................................................... 3.11(a)
Exchange Act................................................ 3.4(c)
Exchange Agent.............................................. 2.2(a)
Exchange Ratio.............................................. 2.1(b)
</TABLE>
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<TABLE>
<CAPTION>
TERM SECTION
- ---- -------
<S> <C>
Expense Fee Base Amount..................................... 8.2(e)
Final ICH Dividend.......................................... 2.4(a)
GAAP........................................................ 3.6
Governmental Entity......................................... 3.4(c)
Hazardous Materials......................................... 3.25(c)
HSR Act..................................................... 3.4(c)
ICH......................................................... Preamble
ICH Benefit Plans........................................... 4.11(a)
ICH Common Stock............................................ 2.1(a)
ICH Disclosure Letter....................................... 9.3
ICH ERISA Affiliate......................................... 4.11(a)
ICH First Quarter 10-Q...................................... 4.11(c)
ICH Material Contracts...................................... 4.23(a)
ICH MBS..................................................... 4.24(a)
ICH MBS Certificates........................................ 4.24(a)
ICH 1998 Form 10-K.......................................... 3.20
ICH Mortgage Files.......................................... 4.27(a)
ICH Mortgage Loans.......................................... 4.27(a)
ICH Mortgage Notes.......................................... 4.27(a)
ICH Option Plan............................................. 2.3
ICH Options................................................. 2.3
ICH Permitted Liens......................................... 4.26(a)
mCH Principal MBS Agreements................................ 4.24(b)
ICH Properties.............................................. 4.26(a)
ICH Rights Plan............................................. 4.3
ICH SEC Documents........................................... 4.5
ICH Series A Common Stock................................... 4.3
ICH Series A Preferred Stock................................ 4.3
ICH Series B Preferred Stock................................ 2.1(a)
ICH Stock................................................... 2.1(a)
ICH Stockholder Approval.................................... 4.4(a)
ICH Stockholder Meeting..................................... 6.1(c)
Indebtedness................................................ 3.20
Indemnified Liabilities..................................... 6.11(a)
Indemnified Parties......................................... 6.11(a)
IRS......................................................... 3.10(b)
Knowledge................................................... 9.3
Laws........................................................ 3.4(b)
Liabilities................................................. 3.8
Liens....................................................... 3.2
Maryland Articles of Merger................................. 1.3
Material Adverse Effect..................................... 9.3
Maximum Premium............................................. 6.11(c)
MBS......................................................... 3.24(a)
Merger...................................................... Recitals
MGCL........................................................ 1.1
Person...................................................... 9.3
Property Restrictions....................................... 3.26(a)
</TABLE>
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<TABLE>
<CAPTION>
TERM SECTION
- ---- -------
<S> <C>
Proxy Statement............................................. 3.4(c)
Purchase Agreement.......................................... Recitals
Qualifying Income........................................... 8.2(e)
Registration Statement...................................... 3.4
Regulatory Entity........................................... 3.25(c)
REIT........................................................ Recitals
REIT Requirements........................................... 8.2(e)
SEC......................................................... 3.4(c)
Securities Act.............................................. 3.5
Shareholder Approvals....................................... 4.4(a)
Subsequent Determination.................................... 6.7(b)
Subsidiary.................................................. 9.3
Superior Proposal........................................... 6.7(b)
Surviving Entity............................................ 1.1
Taxes....................................................... 3.10(a)
Termination Expenses........................................ 8.2(e)
Termination Fee............................................. 8.2(e)
Termination Fee Tax Opinion................................. 8.2(e)
Texas Articles of Merger.................................... 1.3
Trading Day................................................. 7.3(h)
Transfer and Gains Tax...................................... 6.12
TREITA...................................................... 1.1
</TABLE>
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of August 4,
1999 is made and entered into by and between Impac Commercial Holdings, Inc., a
Maryland corporation ("ICH"), and AMRESCO Capital Trust, a Texas real estate
investment trust ("ACT").
WHEREAS, the Board of Directors of ICH and the Board of Trust Managers of
ACT have approved the merger of ICH with and into ACT, with ACT being the
surviving entity (the "Merger"), upon the terms and subject to the conditions
set forth in this Agreement;
WHEREAS, it is intended that, for federal income tax purposes, the Merger
will qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, pursuant to a Purchase Agreement, dated as of the date hereof (the
"Purchase Agreement"), FIC Management, Inc., a Delaware corporation, agreed,
among other things, that it or its designee will purchase (i) 1,500,011 and 100
common shares of beneficial interest, par value $.01 per share (the "ACT Common
Shares"), of ACT from AMREIT Holdings, Inc. and AMRESCO, INC., respectively, and
(ii) the Management Agreement, dated as of May 12, 1998, between ACT and AMREIT
Managers, L.P. and the Management Agreement, dated as of February 2, 1998,
between AMREIT Managers, L.P. and OLY/ACT L.P.;
WHEREAS, ACT, as the surviving entity in the Merger, intends that,
following the Merger, ACT will continue to be subject to taxation as a real
estate investment trust (a "REIT") within the meaning of the Code; and
WHEREAS, each of the parties hereto desires to make certain
representations, warranties, covenants and agreements in connection with this
Agreement.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties hereto,
intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, at the Effective Time (as defined below), ICH shall be
merged with and into ACT in accordance with the Maryland General Corporation Law
(the "MGCL") and the Texas Real Estate Investment Trust Act, as amended (the
"TREITA"). ACT shall be the surviving entity in the Merger and shall continue
its existence under the TREITA. ACT after the Effective Time is sometimes
referred to herein as the "Surviving Entity." From and after the Effective Time,
the identity and separate corporate existence of ICH shall cease and the
Surviving Entity shall succeed to and assume all the rights and obligations of
ICH.
SECTION 1.2 Closing. The closing of the Merger will take place as soon as
practicable following the satisfaction or waiver of the conditions set forth in
Article VII (the "Closing Date") at such time, date and place as is agreed to by
the parties hereto.
SECTION 1.3 Effective Time. As soon as practicable following the
satisfaction or waiver of the conditions set forth in Article VII, the parties
shall file articles of merger or other appropriate documents (the "Maryland
Articles of Merger") executed in accordance with the MGCL and articles of merger
or other appropriate documents (the "Texas Articles of Merger") executed in
accordance with the TREITA and shall make all other filings or recordings
required under the MGCL or the TREITA. The Merger shall become effective upon
the later of (i) the filing of the Maryland Articles of Merger with the State
Department of Assessments and Taxation of Maryland in accordance with the MGCL
and (ii) the filing of the Texas Articles of Merger with the County Clerk of the
County of Dallas, Texas, or at such later time that the parties hereto have
agreed upon and designated in such filings in accordance with applicable law
(the date and time the
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Merger becomes effective being the "Effective Time"), it being understood that
the parties shall cause the Effective Time to occur on the Closing Date.
SECTION 1.4 Effects of the Merger. The Merger shall have the effects set
forth in the MGCL and the TREITA. Among other effects of the Merger, upon
consummation of the Merger, the Surviving Entity shall succeed to all powers and
rights of ICH and shall be liable for all obligations and responsibilities of
ICH.
SECTION 1.5 Declaration of Trust and Bylaws. At the Effective Time, the
declaration of trust and the bylaws of ACT shall be the declaration of trust and
the bylaws of the Surviving Entity, respectively, except that, if approved by
the separate vote of at least two-thirds of the outstanding ACT Common Shares,
the name of the entity specified therein shall be "Hilltop Investment Trust"
and, if not so approved, the name of the entity specified therein shall be
"AMRESCO Capital Trust."
SECTION 1.6 Board of Trust Managers. ACT shall take all actions necessary
to cause the trust managers comprising its Board of Trust Managers at the
Effective Time to be comprised of eight trust managers. The trust managers of
the Surviving Entity immediately following the Effective Time shall be the
persons named on Exhibit A hereto, all of whom shall serve in such classes as
are noted on Exhibit A and shall serve in accordance with the TREITA and the
Surviving Entity's bylaws. If, prior to the Effective Time, any of the persons
named on Exhibit A shall decline or be unable to serve as a trust manager, ACT
(if the person is a current trust manager of ACT) or ICH (if such person is a
current director of ICH) shall designate another person to serve in such
person's stead, which person shall be reasonably acceptable to the other party.
SECTION 1.7 Officers. The officers of ACT immediately following the
Effective Time shall be the persons named on Exhibit B hereto, all of whom shall
serve until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
ARTICLE II
TREATMENT OF SHARES
SECTION 2.1 Effect on Outstanding Shares. By virtue of the Merger and
without any action on the part of the holder of any shares of capital stock of
ICH or ACT:
(a) At the Effective Time, each share of common stock, par value $.01
per share ("ICH Common Stock"), of ICH and each share of Series B 8 1/2%
Cumulative Convertible Preferred Stock, par value $.01 per share ("ICH
Series B Preferred Stock" and, together with ICH Common Stock, "ICH
Stock"), of ICH owned by any of its Subsidiaries (as defined below) shall,
automatically and without any action on the part of the holder thereof, be
canceled and retired and all rights in respect thereof shall cease to exist
without any conversion thereof or payment therefor.
(b) At the Effective Time, each share of ICH Common Stock outstanding
immediately prior to the Effective Time (other than as provided in Section
2.1(a) or any shares of ICH Common Stock owned by ACT or any of its
Subsidiaries) shall, automatically and without any action on the part of
the holder thereof, cease to be outstanding and be converted into 0.66094
(the "Exchange Ratio") of an ACT Common Share, plus cash for any fractional
ACT Common Share as provided in Section 2.5. If prior to the Effective Time
the outstanding shares of ICH Common Stock shall have been increased,
decreased, changed into or exchanged for a different number or kind of
shares or securities as a result of a reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split or other
similar change in ICH's capitalization, then an appropriate and
proportionate adjustment shall be made in the Exchange Ratio.
(c) Prior to the Effective Time, the holder of the outstanding shares
of ICH Series B Preferred Stock shall convert all of such shares into
1,683,635 shares of ICH Common Stock; provided, however, that if such
conversion does not occur prior to the Effective Time, each share of ICH
Series B Preferred Stock outstanding immediately prior to the Effective
Time (other than as provided in Section 2.1(a) or any shares of ICH Series
B Preferred Stock owned by ACT or any of its Subsidiaries) shall,
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automatically and without any action on the part of the holder thereof,
cease to be outstanding and be converted into 1,112,782 ACT Common Shares.
SECTION 2.2 Exchange of Certificates.
(a) Prior to the Effective Time, ACT shall appoint The Bank of New York or
another exchange agent mutually acceptable to ACT and ICH to act as exchange
agent (the "Exchange Agent") in the Merger.
(b) At or prior to the Effective Time, ACT shall provide to the Exchange
Agent, for the benefit of the holders of shares of ICH Stock, certificates
representing ACT Common Shares issuable in exchange for certificates
representing outstanding shares of ICH Stock pursuant to Section 2.1
("Certificates") and an estimated amount in cash sufficient to satisfy ACT's
obligations under Section 2.5.
(c) As soon as reasonably practicable after the Effective Time and in no
event later than ten business days thereafter, the Exchange Agent shall mail to
each holder of record of shares of ICH Stock whose shares were converted into
ACT Common Shares pursuant to Section 2.1 (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in a form and have such other provisions as ACT may
reasonably specify) and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for certificates evidencing ACT Common Shares. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by ACT, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Certificate shall be entitled
to receive in exchange therefor a certificate representing the number of whole
ACT Common Shares to which the holder is entitled and an amount of cash in lieu
of any fractional ACT Common Share in accordance with Section 2.5, and the
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of shares of ICH Stock that is not registered in the
transfer records of ICH, payment may be made to a Person (as defined below)
other than the Person in whose name the Certificate so surrendered is registered
if such Certificate shall be properly endorsed or otherwise be in proper form
for transfer and the Person requesting such payment either shall pay any
transfer or other taxes required by reason of such payment being made to a
Person other than the registered holder of such Certificate or establish to the
satisfaction of ACT that such tax or taxes have been paid or are not applicable.
Until surrendered as contemplated by this Section 2.2, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender such whole number of ACT Common Shares provided by
Section 2.1 and an amount in cash in lieu of any fractional ACT Common Share in
accordance with Section 2.5. No interest will be paid or will accrue on the
consideration payable upon the surrender of any Certificate or on any cash
payable pursuant to Section 2.4 or Section 2.5.
(d) All ACT Common Shares delivered, and cash in lieu of any fractional
shares thereof paid, upon the surrender of Certificates in accordance with the
terms of this Article II shall be deemed to have been paid in full satisfaction
of all rights pertaining to such shares. There shall be no further registration
of transfers on the stock transfer books of ICH or its transfer agent of the
shares of ICH Stock that were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates are presented to the Surviving
Entity for any reason, they shall be canceled and exchanged as provided in this
Article II.
(e) None of ICH, ACT or the Exchange Agent shall be liable to any Person in
respect of any shares or funds delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. All Certificates and
funds held by the Exchange Agent for payment to the holders of unsurrendered
Certificates that remain unclaimed for six months after the Effective Time shall
be redelivered by the Exchange Agent to ACT, upon demand, and any holders of
Certificates who have not theretofore complied with Section 2.2(c) shall
thereafter look only to the Surviving Entity for delivery of any shares or
funds, subject to applicable escheat and other similar laws.
SECTION 2.3 Options. To the extent that acceleration by ICH of the
exercisability of any outstanding option to purchase shares of ICH Common Stock
("ICH Options") is permitted but not required by the applicable governing
instrument, then ICH shall not elect to cause such acceleration to occur. In
connection therewith, at the Effective Time, to the extent not prohibited by the
terms of the relevant
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governing instrument, each ICH Option that is outstanding and unexercised
immediately prior thereto shall cease to represent a right to acquire shares of
ICH Common Stock and shall be converted automatically into an option to purchase
ACT Common Shares in an amount and at an exercise price determined as provided
below (and otherwise subject to the terms of ICH's Stock Option and Awards Plan
(the "ICH Option Plan"), and the agreements evidencing grants thereunder,
including, subject to the provisions of the first sentence of this Section 2.3,
the accelerated vesting of ICH Options that shall occur in connection with and
by virtue of the Merger as and to the extent required by the ICH Option Plan or
such agreements):
(a) the number of shares of ICH Common Stock to be subject to the
option shall be equal to the product of the number of shares of ICH Common
Stock subject to the original option and the Exchange Ratio, provided that
any fraction of an ACT Common Share resulting from such multiplication
shall be rounded down to the nearest whole share; and
(b) the exercise price per share of ICH Common Stock under the option
shall be equal to the exercise price per share of ICH Common Stock under
the original option divided by the Exchange Ratio, provided that such
exercise price shall be rounded up to the nearest whole cent.
The adjustment provided herein with respect to ICH Options that are "incentive
stock options" (as defined in Section 422 of the Code) shall be and is intended
to be effected in a manner that is consistent with Section 424(a) of the Code
and, to the extent it is not so consistent, Section 424(a) shall override
anything to the contrary contained herein. The duration and other terms of the
new option shall be the same as the original option except that all references
to ICH shall be deemed to be references to the Surviving Entity.
SECTION 2.4 Dividends.
(a) To the extent necessary to satisfy the requirements of Section
857(a)(1) of the Code for the taxable year of ICH ending at the Effective Time,
ICH shall declare and pay a dividend (the "Final ICH Dividend") to holders of
shares of ICH Stock, the record and payment dates for which shall be on or
before the close of business on the last business day prior to the Effective
Time, in an amount sufficient to permit ICH to satisfy such requirements. If ICH
determines it necessary to declare the Final ICH Dividend, and such Final ICH
Dividend is not paid in the ordinary course of business, consistent with past
practice, as provided in Section 5.2(a)(i) hereof, it shall notify ACT at least
ten days prior to the date for the ICH Stockholder Meeting (as defined below),
and ACT shall declare a dividend per ACT Common Share, the record date for which
shall be the close of business on the last business day prior to the Effective
Time, in an amount per share equal to the quotient obtained by dividing (x) the
Final ICH Dividend per share of ICH Stock paid by ICH by (y) the Exchange Ratio.
(b) No dividends or other distributions with respect to ACT Common Shares
with a record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the ACT Common Shares represented
thereby, and no cash payment in lieu of fractional shares shall be paid to any
such holder pursuant to Section 2.5, in each case until the surrender of such
Certificate in accordance with this Article II. Subject to the effect of
applicable escheat laws, as soon as reasonably practicable following surrender
of any such Certificate there shall be paid to the holder of such Certificate,
without interest, (i) at the time of such surrender, the amount of any cash
payable in lieu of any fractional ACT Common Share to which such holder is
entitled pursuant to Section 2.5 and (ii) if such Certificate is exchangeable
for one or more whole ACT Common Shares, (x) at the time of such surrender the
amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole ACT Common Shares and
(y) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and with a payment date subsequent to such surrender payable with
respect to such whole ACT Common Shares.
(c) Notwithstanding any provision of this Article II to the contrary,
dividends shall be paid by ICH pro rata with respect to each outstanding share
of beneficial interest within a particular class of ICH Stock and dividends
shall be paid by ACT pro rata with respect to each outstanding share of
beneficial interest of ACT within a particular class in accordance with the
requirements of Section 562(c) of the Code (including, as necessary, by
transferring cash to an appropriate paying agent), and no dividend payments
shall accrue to the
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benefit of ACT or ICH for failure of a former holder of ICH Stock to surrender
any certificate representing any share of ICH Stock.
SECTION 2.5 No Fractional Shares. Notwithstanding any other provision of
this Agreement, no certificates or scrip for fractional ACT Common Shares shall
be issued upon the surrender for exchange of Certificates and no dividend or
distribution or any other right with respect to ACT Common Shares shall relate
to any fractional security, and such fractional interests shall not entitle the
holder thereof to vote or to any other rights of a shareholder. In lieu of any
such fractional shares, each holder of shares of ICH Stock who would otherwise
have been entitled to a fraction of an ACT Common Share upon surrender of
Certificates for exchange pursuant to this Article II shall be entitled to
receive from the Exchange Agent a cash payment (without interest) in lieu of
such fractional share equal to such fraction multiplied by the average closing
price per ACT Common Share on The Nasdaq Stock Market during the five trading
days immediately following the Effective Time.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACT
ACT represents and warrants to ICH as follows:
SECTION 3.1 Organization, Standing and Corporate Power. ACT is duly
organized under the TREITA and has the requisite power and authority to carry on
its business as now being conducted. ACT is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such qualification
or licensing necessary, other than in such jurisdictions where the failure to be
so qualified or licensed, individually or in the aggregate, would not have a
Material Adverse Effect (as defined below) on ACT.
SECTION 3.2 Subsidiaries. Schedule 3.2 to the ACT Disclosure Letter (as
defined below) sets forth each Subsidiary of ACT and the direct and/or indirect
ownership interest therein of ACT and (A) all the outstanding shares of capital
stock of each Subsidiary of ACT that is a corporation have been validly issued
and are fully paid and nonassessable, are owned by ACT or one of its
Subsidiaries free and clear of all pledges, claims, liens, charges, encumbrances
and security interests of any kind or nature whatsoever (collectively, "Liens")
and (B) all equity interests in each of ACT's Subsidiaries that is a
partnership, joint venture, limited liability company or trust are owned by ACT
or one or more of its Subsidiaries free and clear of all Liens. Except for the
capital stock of or other equity or ownership interests in ACT's Subsidiaries,
and except as set forth on Schedule 3.2 to the ACT Disclosure Letter, ACT does
not own, directly or indirectly, any capital stock or other ownership interest
in any Person. Each Subsidiary of ACT that is a corporation is duly incorporated
and validly existing under the laws of its jurisdiction of incorporation and has
the requisite corporate power and authority to carry on its business as now
being conducted, and each such Subsidiary that is a partnership, limited
liability company or trust is duly organized and validly existing under the laws
of its jurisdiction of organization and has the requisite power and authority to
carry on its business as now being conducted. Each Subsidiary of ACT is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed,
individually or in the aggregate, would not have a Material Adverse Effect on
ACT.
SECTION 3.3 Capital Structure. The authorized capital stock of ACT
consists of 200,000,000 ACT Common Shares and 50,000,000 preferred shares of
beneficial interest, par value $.01 per share ("ACT Preferred Shares"), of which
350,000 are designated as Series A Junior Participating Preferred Shares, par
value $.01 per share. On the date hereof, (i) 10,015,111 ACT Common Shares and
no ACT Preferred Shares were issued and outstanding, (ii) no ACT Common Shares
or ACT Preferred Shares were held by ACT in its treasury, (iii) 505,506 ACT
Common Shares were reserved for issuance in connection with the AMRESCO Capital
Trust 1998 Share Option and Award Plan (the "ACT Option Plan"), (iv) 1,479,511
ACT Common Shares were issuable upon exercise of outstanding options to purchase
ACT Common Shares ("ACT Options") and (v) 250,002 ACT Common Shares were
issuable upon exercise of outstanding warrants to
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purchase ACT Common Shares ("ACT Warrants"). On the date hereof, except as set
forth above in this Section 3.3, no capital shares or other voting securities of
ACT were issued, reserved for issuance or outstanding. There are no outstanding
share appreciation rights relating to the capital shares of ACT. All outstanding
capital shares of ACT are duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. The ACT Common Shares to be
issued pursuant hereto have been duly authorized by ACT and, when issued, sold
and delivered in accordance with this Agreement, will be validly issued, fully
paid and nonassessable and not subject to preemptive rights. There are no bonds,
debentures, notes or other indebtedness of ACT having the right to vote (or
convertible into, or exchangeable for, securities having the right to vote) on
any matter on which shareholders of ACT may vote. Except for the ACT Options,
ACT Warrants and the rights issuable under the Rights Agreement, dated as of
February 25, 1999, between ACT and The Bank of New York, as rights agent (the
"ACT Rights Plan"), and for the transactions contemplated hereby, there are no
outstanding securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which ACT or any of its
Subsidiaries is a party or by which such entity is bound, obligating ACT or any
of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, additional capital shares, voting securities or other ownership
interests of ACT or any of its Subsidiaries or obligating ACT or any of its
Subsidiaries to issue, grant, extend or enter into any such security, option,
warrant, call, right, commitment, agreement, arrangement or undertaking. Except
as set forth on Schedule 3.3 to the ACT Disclosure Letter, there are no
outstanding contractual obligations of ACT or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any capital shares of ACT or any capital
shares, voting securities or other ownership interests in any Subsidiary of ACT
or make any material investment (in the form of a loan, capital contribution or
otherwise) to any Person.
SECTION 3.4 Authority; Noncontravention; Consents.
(a) ACT has the requisite power and authority to enter into this Agreement
and, subject to approval of this Agreement by the vote of the holders of the ACT
Common Shares required to approve this Agreement and the transactions
contemplated hereby (the "ACT Shareholder Approval"), to consummate the
transactions contemplated hereby to which ACT is a party. The execution and
delivery of this Agreement by ACT and the consummation by ACT of the
transactions contemplated hereby to which ACT is a party have been duly
authorized by all necessary action on the part of ACT, subject to approval of
this Agreement pursuant to the ACT Shareholder Approval. This Agreement has been
duly executed and delivered by ACT and, assuming the due authorization,
execution and delivery hereof by ICH, constitutes valid and binding obligations
of ACT, enforceable against ACT in accordance with its terms, except that such
enforceability may be limited by (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or (ii) general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
(b) Except as set forth in Schedule 3.4 to the ACT Disclosure Letter, the
execution and delivery of this Agreement by ACT do not, and the consummation of
the transactions contemplated hereby to which ACT is a party and compliance by
ACT with the provisions of this Agreement will not, conflict with, or result in
any violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or to loss of a material benefit under, or result in the creation
of any Lien upon any of the properties or assets of ACT or any of its
Subsidiaries under, (i) the declaration of trust or the bylaws of ACT or the
comparable charter or organizational documents or partnership or similar
agreement (as the case may be) of any of its Subsidiaries, each as amended or
supplemented as of the date of this Agreement, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, reciprocal easement agreement, lease
or other agreement, instrument, permit, concession, contract, franchise or
license applicable to ACT or any of its Subsidiaries or their respective
properties or assets or (iii) subject to the governmental filings and other
matters referred to in the following sentence, any judgment, order, decree,
statute, law, ordinance, rule or regulation (collectively, "Laws") applicable to
ACT or any of its Subsidiaries, their respective properties or assets, other
than, in the case of clause (ii) or (iii), any such conflicts, violations,
defaults, rights or Liens that individually or in the aggregate would not (x)
have a Material Adverse Effect on ACT or (y) prevent the consummation of the
Merger.
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(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any federal, state or local government or any court,
administrative or regulatory agency or commission or other governmental
authority or agency, domestic or foreign (a "Governmental Entity"), is required
by or with respect to ACT or any of its Subsidiaries in connection with the
execution and delivery of this Agreement by ACT or the consummation by ACT of
the transactions contemplated hereby, except for (i) the filing by any Person in
connection with any of the transactions contemplated hereby of a pre-merger
notification and report form under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), to the extent applicable, (ii) the
filing with the Securities and Exchange Commission (the "SEC") of (x) a joint
proxy statement relating to the approval by ACT's and ICH's shareholders of the
transactions contemplated by this Agreement (as amended or supplemented from
time to time, the "Proxy Statement"), (y) a registration statement on Form S-4
(or other appropriate form) in connection with the registration of the ACT
Common Shares to be issued in the Merger (as amended or supplemented from time
to time, the "Registration Statement") and (z) such reports under Section 13(a)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as may
be required in connection with this Agreement and the transactions contemplated
hereby, (iii) the filing of Maryland Articles of Merger with the State
Department of Assessments and Taxation of Maryland and the Texas Articles of
Merger with the County Clerk of the County of Dallas, Texas and (iv) such other
consents, approvals, orders, authorizations, registrations, declarations,
licenses and filings (A) as are set forth in Schedule 3.4 to the ACT Disclosure
Letter, (B) as may be required under (x) federal, state or local environmental
laws or (y) the "blue sky" laws of various states or (C) which, if not obtained
or made, would not prevent or delay in any material respect the consummation of
any of the transactions contemplated hereby or otherwise prevent ACT from
performing its obligations under this Agreement in any material respect or have,
individually or in the aggregate, a Material Adverse Effect on ACT.
SECTION 3.5 SEC Documents. ACT has timely filed all required reports,
schedules, forms, statements and other documents (collectively, including all
exhibits and schedules thereto and documents incorporated therein by reference,
the "ACT SEC Documents") with the SEC. All of the ACT SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act of
1933, as amended (the "Securities Act"), and the Exchange Act and, in each case,
the rules and regulations promulgated thereunder applicable to such ACT SEC
Documents. None of the ACT SEC Documents at the time of filing and effectiveness
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except to the extent such statements have been modified or
superseded by later ACT SEC Documents.
SECTION 3.6 Financial Statements. The consolidated financial statements
of ACT included in the ACT SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles ("GAAP") (except, in the case of
unaudited statements, as permitted by Form 10-Q of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly presented, in accordance with the applicable
requirements of GAAP, the consolidated financial position of ACT as of the dates
thereof and the consolidated results of operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).
SECTION 3.7 Absence of Certain Changes or Events. Except as disclosed in
the ACT SEC Documents or in Schedule 3.7 to the ACT Disclosure Letter, since the
date of the most recent financial statements included in the ACT SEC Documents
and to the date of this Agreement, there has not been any change that would have
a Material Adverse Effect on ACT, nor has there been any occurrence or
circumstance that with the passage of time would reasonably be expected to
result in such a change, whether or not arising from transactions in the
ordinary course of business.
SECTION 3.8 No Undisclosed Liabilities. Except (a) as set forth in the
ACT SEC Documents filed prior to the date of this Agreement, (b) as set forth in
Schedule 3.8 to the ACT Disclosure Letter, (c) as
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incurred in the ordinary course of the business of ACT, (d) for the expenses
incurred in connection with the transactions contemplated hereby or (e) for
liabilities or obligations relating to contractual obligations, indebtedness,
litigation or other matters that are covered by other representations and
warranties in this Agreement or otherwise identified in the ACT Disclosure
Letter, neither ACT nor any of its Subsidiaries has any liabilities or
obligations, whether arising out of contract, tort, statute or otherwise
("Liabilities"). The reserves reflected on ACT's balance sheet dated March 31,
1999 and the balance sheet dated December 31, 1998, as included, in each case,
in the ACT SEC Documents, are appropriate and reasonable and have been
calculated in a manner consistent with past practice.
SECTION 3.9 No Defaults. Except as disclosed in Schedule 3.9 to the ACT
Disclosure Letter, neither ACT nor any of its Subsidiaries is in violation or
default under any provision of its declaration of trust, certificate of
incorporation, bylaws, partnership agreement or other organizational documents,
as applicable, or is in breach of or default with respect to any provision of
any agreement, judgment, decree, order, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which it is a party
or by which it or any of its properties are bound; and there does not exist any
state of facts that would constitute an event of default on the part of any of
ACT or its Subsidiaries as defined in such documents that, with notice or lapse
of time or both, would constitute a default, other than such violations or
defaults that in the aggregate would not have a Material Adverse Effect on ACT.
SECTION 3.10 Taxes.
(a) ACT and each of its Subsidiaries has (A) filed all Tax returns and
reports required to be filed by it (after giving effect to any filing extension
properly granted by a Governmental Entity having authority to do so) and all
such returns and reports are accurate and complete in all material respects; and
(B) paid (or ACT has paid on its behalf) all Taxes shown on such returns and
reports as required to be paid by it, and, except as disclosed in the ACT SEC
Documents or in Schedule 3.10(a) to the ACT Disclosure Letter, the most recent
financial statements contained in the ACT SEC Documents reflect an adequate
reserve for all material Taxes payable by ACT (and by those Subsidiaries of ACT
whose financial statements are contained therein) for all taxable periods and
portions thereof through the date of such financial statements. True, correct
and complete copies of all federal, state and local Tax returns and reports for
ACT and each of its Subsidiaries, and all written communications relating
thereto, have been delivered or made available to representatives of ICH. Since
the date of the most recent financial statements included in the ACT SEC
Documents, ACT has incurred no liability for taxes under Sections 857(b), 860(c)
or 4981 of the Code, and neither ACT nor any of its Subsidiaries has incurred
any material liability for Taxes other than in the ordinary course of business.
To the Knowledge of ACT, no event has occurred, and no condition or circumstance
exists, which presents a material risk that any material Tax described in the
preceding sentence will be imposed upon ACT. Except as set forth on Schedule
3.10(a) to the ACT Disclosure Letter, to the Knowledge of ACT, no deficiencies
for any Taxes have been proposed, asserted or assessed against ACT or any of its
Subsidiaries, and no requests for waivers of the time to assess any such Taxes
are pending. As used in this Agreement, "Taxes" shall include all federal,
state, local and foreign income, property, sales, excise and other taxes,
tariffs or governmental charges of any nature whatsoever, together with
penalties, interest or additions to Tax with respect thereto.
(b) ACT (A) for all taxable years commencing with December 31, 1998 has
been subject to taxation as a REIT within the meaning of the Code and has
satisfied all requirements to qualify as a REIT for such years, (B) has
operated, and intends to continue to operate, in such a manner as to qualify as
a REIT for the tax year ending on December 31, 1999, and (C) has not taken or
omitted to take any action which would reasonably be expected to result in a
challenge to its status as a REIT, and to ACT's Knowledge, no such challenge is
pending or threatened. Each Subsidiary of ACT that is a partnership, joint
venture or limited liability company has been since its formation and continues
to be treated for federal income tax purposes as a partnership and not as a
corporation or an association taxable as a corporation. Except as set forth on
Schedule 3.10(b) to the ACT Disclosure Letter, each Subsidiary of ACT that is a
corporation for federal income tax purposes has been since its formation, and
continues to be treated for federal income tax purposes as, a "qualified REIT
subsidiary" as defined in Section 856(i) of the Code. Except as set forth on
Schedule 3.10(b) to the ACT Disclosure Letter, neither ACT nor any of its
Subsidiaries holds any asset (x) the disposition of which would be subject to
rules similar to Section 1374 of the Code as a result of an election
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under Internal Revenue Service ("IRS") Notice 88-19 or (y) that is subject to a
consent filed pursuant to Section 341(f) of the Code and the regulations
thereunder.
SECTION 3.11 Employee Matters. Except as set forth in Schedule 3.11 to
the ACT Disclosure Letter:
(a) Schedule 3.11(a) to the ACT Disclosure Letter contains a true and
complete list of each employee benefit plan, policy or agreement covering
employees, former employees or directors of any of ACT or its Subsidiaries or
their beneficiaries, or providing benefits to such persons in respect of
services provided to any such entity, including without limitation any employee
benefit plans within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and any employment,
retention, severance or change in control agreement, in each case that is
sponsored, maintained or contributed to or required to be contributed to by ACT
or its Subsidiaries or by any trade or business, whether or not incorporated (an
"ACT ERISA Affiliate") that, together with any of such Subsidiaries, would be
deemed a "single employer" within the meaning of Section 4001(b) of ERISA
(collectively, the "ACT Benefit Plans"). Other than as set forth in Schedule
3.11(a) to the ACT Disclosure Letter, since December 31, 1998, there have been
no new plans adopted, nor changes, additions or modification to any ACT Benefit
Plan. As of the date hereof, neither ACT nor any of its Subsidiaries has any
plans to adopt, change, add or modify any ACT Benefit Plan, nor has any such
entity communicated with any current or former employer with respect thereto.
(b) With respect to each ACT Benefit Plan, ACT has previously delivered or
made available to ICH or its representatives true and complete copies of the
following: (i) the plan document and all amendments thereto (or, if such plan is
unwritten, a true and complete summary of its terms); (ii) any related trust or
other funding vehicle; (iii) if applicable, the two most recent IRS Forms 5500
and related attachments; (iv) if applicable, the most recent IRS determination
letter; and (v) any material correspondence or employee communications.
(c) All contributions and other payments required to have been made by ACT
or one of its Subsidiaries to any ACT Benefit Plan (or to any Person pursuant to
the terms thereof) have been made or the amount of such payment or contribution
obligation has been reflected in the financial statements in ACT's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999 (the "ACT First Quarter
10-Q").
(d) Each of the ACT Benefit Plans intended to be "qualified" within the
meaning of Section 401(a) or Section 501(c)(9) of the Code has been determined
by the IRS to be so qualified, and no circumstances exist that could reasonably
be expected to result in the revocation of any such determination. Each of the
ACT Benefit Plans is and has been operated in all material respects in
compliance with its terms and all applicable laws, rules and regulations
governing such plan, including, without limitation, ERISA and the Code.
(e) With respect to the ACT Benefit Plans, individually and in the
aggregate, no event has occurred, there does not now exist any condition or set
of circumstances, that could reasonably be expected to subject ACT, any of its
Subsidiaries or any ACT ERISA Affiliate to any material liability arising under
the Code, ERISA or any other applicable law, or under any indemnity agreement to
which ACT, any of its Subsidiaries or any ACT ERISA Affiliate is a party,
excluding liability relating to benefit claims and funding obligations payable
in the ordinary course.
(f) Other than continuation coverage required to be provided under Section
4980B of the Code or Part 6 of Title I of ERISA or otherwise as provided by
state law, none of the ACT Benefit Plans that are "welfare plans," within the
meaning of Section 3(1) of ERISA, provides for any benefits with respect to
current or former employees for periods extending beyond their retirement or
other termination of service, other than benefits the full cost of which is
borne by such former employees.
(g) Except as otherwise disclosed to ICH, the consummation of the Merger
will not, either alone or in combination with another event undertaken by ACT or
any of its Subsidiaries prior to the date hereof, (i) entitle any current or
former employee, agent, independent contractor or officer of ACT or its
Subsidiaries to severance pay, unemployment compensation or any other payment,
(ii) accelerate the time of payment or vesting or increase the amount of
compensation due any such employee, officer, agent or independent contractor or
(iii) constitute a "change in control" under any ACT Benefit Plan.
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SECTION 3.12 Affiliate Transactions. Except as set forth in the ACT SEC
Documents or in Schedule 3.12 to the ACT Disclosure Letter, there is no
transaction and no transaction is now proposed, to which ACT or its Subsidiaries
is or is to be a party in which any current shareholder (holding in excess of 5%
of the ACT Common Shares or any securities convertible into or exchangeable for
such shares), trust manager, director or executive officer of ACT or its
Subsidiaries has a direct or indirect interest.
SECTION 3.13 Financial Advisors. No broker, investment banker, financial
advisor or other Person, other than Prudential Securities Incorporated and
Deutsche Banc Alex. Brown (collectively, the "ACT Financial Advisors"), the fees
and expenses of which have previously been disclosed to ICH and will be paid by
ACT, is entitled to any broker's, finder's, financial advisor's or other similar
fee or commission in connection with the transactions contemplated hereby based
upon arrangements made by or on behalf of ACT or any of its Affiliates.
Substantially concurrently herewith, ACT's Board of Trust Managers has received
the opinion of each of the ACT Financial Advisors to the effect that, as of the
date thereof, the Exchange Ratio is fair from a financial point of view.
SECTION 3.14 Registration Statement and Proxy Statement. The information
supplied or to be supplied by ACT or its Subsidiaries for inclusion in (a) the
Registration Statement will not, either at the time it is filed with the SEC or
at the time it becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading or (b)
the Proxy Statement, including any amendment and supplement thereto, will not,
either at the date mailed to shareholders of ACT or at the time of the ACT
Shareholder Meeting, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The Registration Statement and the Proxy Statement will
each comply as to form in all material respects with all applicable laws,
including the provisions of the Securities Act and the Exchange Act and the
rules and regulations promulgated thereunder, except that no representation is
made by ACT with respect to information supplied by ICH for inclusion therein.
SECTION 3.15 Vote Required. The affirmative vote of at least a majority
of the outstanding ACT Common Shares is the only vote of the holders of any
class or series of ACT's capital shares necessary (under applicable law or
otherwise) to approve this Agreement and the transactions contemplated hereby;
provided, however, that the amendment to ACT's Declaration of Trust to change
the name of the Surviving Entity shall require the affirmative vote of at least
two-thirds of the outstanding ACT Common Shares.
SECTION 3.16 Anti-Takeover Statutes. ACT has taken all action necessary,
if any, to exempt the transactions contemplated hereby from the operation of any
"fair price," "moratorium," "control share acquisition" or any other
anti-takeover statute or similar statute enacted under state or federal laws or
similar statutes or regulations ("Anti-Takeover Statutes").
SECTION 3.17 Full Disclosure. To the Knowledge of ACT, ACT has not failed
to disclose to ICH any fact material to the business, properties, prospects,
operations, financial condition or results of operations of ICH and its
Subsidiaries, taken as a whole. To the Knowledge of ACT, no representation or
warranty by ACT contained in this Agreement and no statement contained in any
document (including historical financial statements and the ACT Disclosure
Letter), certificate or other writing furnished or to be furnished by ACT to ICH
or any of its representatives pursuant to the provisions hereof or in connection
with the transactions contemplated hereby, contains or will contain any untrue
statement of material fact or omits or will omit to state any material fact
necessary, in light of the circumstances under which it was made, in order to
make the statements herein or therein not misleading. Notwithstanding the
foregoing or any other provision herein, ACT has made no representation or
warranty with respect to any financial or other projections made by ACT.
SECTION 3.18 Litigation. Except as disclosed in ACT SEC Documents filed
with the SEC prior to the date hereof or in Schedule 3.18 to the ACT Disclosure
Letter, there is no suit, action or proceeding pending, threatened in writing
or, to ACT's Knowledge, otherwise threatened against or affecting ACT or any
Subsidiary of ACT that, individually or in the aggregate, could reasonably be
expected to (A) have a Material Adverse Effect on ACT or (B) materially delay or
prevent the consummation of any of the transactions contemplated hereby, nor is
there any judgment, decree, injunction, rule or order of any Governmental Entity
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or arbitrator outstanding against ACT or any Subsidiary of ACT or any of their
respective properties or assets having, or which, insofar as reasonably can be
foreseen, in the future would have, any such effect.
SECTION 3.19 Compliance with Laws. Except as disclosed in ACT SEC
Documents filed with the SEC prior to the date hereof or as set forth in
Schedule 3.19 to the ACT Disclosure Letter, to the knowledge of ACT, neither ACT
nor any of its Subsidiaries has violated or failed to comply with any statute,
law, ordinance, regulation, rule, judgment, decree or order of any Governmental
Entity applicable to its business, properties or operations, and neither ACT nor
any of its Subsidiaries has received notification of asserted present or past
violation or failure to comply, except for violations and failures to comply
that would not, individually or in the aggregate, be reasonably likely to result
in a Material Adverse Effect on ACT.
SECTION 3.20 Indebtedness. Except as filed (or incorporated by reference)
as an exhibit to ACT's Annual Report on Form 10-K for the year ended December
31, 1998 (the "ACT 1998 Form 10-K"), Schedule 3.20 to the ACT Disclosure Letter
sets forth (x) a list of all loan or credit agreements, notes, bonds, mortgages,
indentures and other agreements and instruments pursuant to which any
indebtedness of ACT or any of its Subsidiaries, other than indebtedness payable
to ACT or one of its Subsidiaries, in an aggregate principal amount in excess of
$100,000 per item is outstanding or may be incurred and (y) the respective
principal amounts outstanding thereunder on July 1, 1999. For purposes of this
Section 3.20 and Section 4.20, "Indebtedness" shall mean, with respect to any
Person, without duplication, (A) all indebtedness of such Person for borrowed
money, whether secured or unsecured, (B) all obligations of such Person under
conditional sale or other title retention agreements relating to property
purchased by such Person, (C) all capitalized lease obligations of such Person,
(D) all obligations of such Person under interest rate or currency hedging
transactions (valued at the termination value thereof) and (E) all guarantees of
such Person of any such indebtedness of any other Person.
SECTION 3.21 Insurance. ACT and its Subsidiaries maintain fire and
casualty, general liability, business interruption, product liability,
professional liability and sprinkler and water damage insurance policies with
reputable insurance carriers, which ACT reasonably believes provide full and
adequate coverage for all normal risks incident to the business of ACT and its
Subsidiaries and their respective properties and assets.
SECTION 3.22 Investment Company Act. Neither ACT nor any of its
Subsidiaries is (i) except as disclosed in the ACT SEC Documents, an "investment
company" or a company "controlled" by an investment company within the meaning
of the Investment Company Act of 1940, as amended, (ii) a "holding company" or a
"subsidiary company" of a holding company or an "affiliate" thereof within the
meaning of the Public Utility Holding Company Act of 1935, as amended, or (iii)
subject to regulation under the Federal Power Act or the Interstate Commerce
Act.
SECTION 3.23 Material Contracts.
(a) Except as set forth in Schedule 3.23 to the ACT Disclosure Letter and
other than contracts or agreements that are required to be filed and have been
filed (or incorporated by reference) as an exhibit to the ACT 1998 Form 10-K
(the "ACT Material Contracts"), there are no contracts or agreements that would
have been required to be filed as an exhibit to an Annual Report on Form 10-K
that are material to the business, properties, assets, financial position or
results of operations of ACT and its Subsidiaries.
(b) The ACT Material Contracts are in full force and effect and are valid
and enforceable, in accordance with their terms, obligations of ACT or its
Subsidiaries, as the case may be, except that such enforceability may be limited
by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or (ii) general principles
of equity (regardless of whether enforcement is sought in a proceeding in equity
or at law), and there are no breaches or defaults thereunder by ACT or its
Subsidiaries which, individually or in the aggregate, would be reasonably likely
to have a Material Adverse Effect on ACT, and no event has occurred that with
the lapse of time or the giving of notice or both would constitute a breach or
default thereunder by ACT or its Subsidiaries which would reasonably be expected
to have a Material Adverse Effect on ACT.
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SECTION 3.24 Mortgage Backed Securities.
(a) Except as set forth on Schedule 3.24(a) to the ACT Disclosure Letter,
ACT or one of its Subsidiaries is and shall be the sole owner of each of the
mortgage backed securities ("MBS") identified in Schedule 3.24(a) to the ACT
Disclosure Letter ("ACT MBS") and the related certificates and other instruments
evidencing ownership of the ACT MBS (the "ACT MBS Certificates"), free and clear
of any adverse claims, Liens, pledges, assignments, charges or security
interests of any nature (including, without limitation, Liens arising under the
federal tax laws or ERISA), other than Liens pursuant to repurchase agreements
or other warehouse financing.
(b) Except as set forth in Schedule 3.24(b) to the ACT Disclosure Letter,
neither ACT or any of its Subsidiaries is in default in the performance of any
of its obligations, whether as special servicer or otherwise, under any pooling
and servicing agreements, trust and servicing agreements, trust agreements,
servicing agreements or other similar documents providing for the creation of
the MBS or the servicing of the mortgage loans underlying the MBS (the "ACT
Principal MBS Agreements") and has not received any notice of any default by any
master or special servicer of any ACT MBS.
(c) Except as set forth in Schedule 3.24(c) to the ACT Disclosure Letter,
for all ACT MBS, ACT has delivered to ICH a copy of each prospectus, offering
circular or private placement memorandum relating to such ACT MBS.
(d) Except as set forth in Schedule 3.24(d) to the ACT Disclosure Letter,
there are no agreements (other than the ACT Principal MBS Agreements) between
ACT or any of its Subsidiaries and the master servicer or any special servicer
with respect to any series of ACT MBS.
(e) Except as set forth in Schedule 3.24(e) to the ACT Disclosure Letter,
there are no agreements between ACT or any of its Subsidiaries and other holders
of any below investment grade ACT MBS.
(f) Except as set forth in Schedule 3.24(f) to the ACT Disclosure Letter
with respect to each issue of the ACT MBS, ACT or one of its Subsidiaries, as
the holder of the majority of the controlling class, has not waived any rights
as to any specially serviced mortgage loan.
(g) Except as set forth in Schedule 3.24(g) to the ACT Disclosure Letter,
with respect to each issue of the ACT MBS, ACT has not determined that any
specially serviced assets have become corrected assets and has not received any
written notice of any specially serviced assets which have become corrected
assets.
SECTION 3.25 Environmental Laws and Regulations.
(a) Except as set forth in Schedule 3.25(a) to the ACT Disclosure Letter or
disclosed by ACT in the ACT SEC Documents filed prior to the date hereof, ACT
and ACT's Subsidiaries are in compliance with all applicable Environmental Laws
(which compliance includes, but is not limited to, the possession by ACT and
ACT's Subsidiaries of all permits and other governmental authorizations required
under applicable Environmental Laws, and compliance with the terms and
conditions thereof), except where the failure to be in compliance, individually
or in the aggregate, would not reasonably be expected to have a Material Adverse
Effect on ACT. Except as set forth in Schedule 3.25(a) to the ACT Disclosure
Letter or disclosed by ACT in the ACT SEC Documents, since January 1, 1998 and
prior to the date of this Agreement, neither ACT nor any of its Subsidiaries has
received any written communication, whether from a Governmental Entity,
citizens' group, employee or otherwise, alleging that ACT or any of ACT's
Subsidiaries is not in such compliance, except where failures to be in
compliance, individually or in the aggregate, would not reasonably be expected
to have a Material Adverse Effect on ACT.
(b) Except as set forth in Schedule 3.25(b) to the ACT Disclosure Letter or
disclosed by ACT in the ACT SEC Documents, there is no Environmental Claim
pending or threatened in writing against ACT or any of ACT's Subsidiaries.
(c) As used in this Section 3.25 and Section 4.25:
(i) "Environmental Claim" means any and all administrative, regulatory
or judicial actions, suits, demands, demand letters, directives, orders,
claims, Liens, investigations, proceedings or notices of
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noncompliance or violation by any person or entity (including any
governmental authority) alleging potential liability (including, without
limitation, potential responsibility for or liability for enforcement,
investigatory costs, cleanup costs, governmental response costs, removal
costs, remediation costs, natural resources damages, property damages,
personal injury, bodily injury, wrongful death or penalties) arising our
of, based on or resulting from (A) the presence, Release or threatened
Release of any Hazardous Materials at any location, whether or not owned,
leased or managed by ACT or ICH or any of their Subsidiaries, as the case
may be; or (B) circumstances that form the basis of any violation or
alleged violation of any Environmental Law;
(ii) "Environmental Laws" means all federal, state and local laws,
rules and regulations relating to pollution, the environment (including,
without limitation, ambient air, surface water, groundwater, land surface
or subsurface strata) or protection of human health and safety, including,
without limitation, laws and regulations relating to Releases or threatened
Releases of Hazardous Materials, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Materials;
(iii) "Regulatory Entity" means any court or tribunal of competent
jurisdiction in any jurisdiction or any foreign, Federal, state or
municipal governmental, regulatory or other administrative agency,
department, commission, board, bureau, political subdivision or other
authority or instrumentality; and
(iv) "Hazardous Materials" means (A) any petroleum or petroleum
products, radioactive materials, asbestos in any form that is or could
become friable, urea formaldehyde foam insulation and transformers or other
equipment that contain dielectric fluid containing polychlorinated
biphenyls ("PCBs"); (B) any chemicals, materials or substances which are
now defined as or included in the definition of "hazardous substances,"
"hazardous wastes," "hazardous materials," "extremely hazardous wastes,"
"restricted hazardous wastes," "toxic substances," "toxic pollutants," or
words of similar import under any Environmental Law and (C) any other
chemical, material, substance or waste, exposure to which is now
prohibited, limited or regulated under any Environmental Law in a
jurisdiction in which ACT or ICH or any of their Subsidiaries, as the case
may be, operate.
SECTION 3.26 Properties.
(a) ACT or one of its Subsidiaries owns fee simple title (or where
indicated, leasehold estates) to each of the real properties identified in the
ACT SEC Documents or in Schedule 3.26 to the ACT Disclosure Letter (the "ACT
Properties"), which are all of the real estate properties owned by them, in each
case (except as provided below or as set forth on Schedule 3.26 to the ACT
Disclosure Letter) free and clear of Liens. The ACT Properties are not subject
to any rights of way, written agreements, laws, ordinances and regulations
affecting building use or occupancy in the applicable jurisdiction
(collectively, "Property Restrictions") or Liens, except for ACT Permitted
Liens. For purposes of this Agreement, "ACT Permitted Liens" means (i) Liens and
Property Restrictions set forth in the ACT SEC Documents, (ii) Liens and
Property Restrictions set forth in the ACT Disclosure Letter, (iii) Property
Restrictions imposed or promulgated by law or any governmental body or authority
generally with respect to real property, including zoning regulations, and
listed in the ACT Disclosure Letter, (iv) Liens and Property Restrictions
disclosed on existing title reports or existing surveys (in either case copies
of which title reports and surveys have been delivered or made available to ICH
and listed in the ACT Disclosure Letter), and (v) mechanics', carriers',
workmen's, repairmen's and materialmens' liens and other Liens, Property
Restrictions and other limitations of any kind, if any, which, individually or
in the aggregate, are not substantial in amount and do not materially detract
from the value of or materially interfere with the use of any of the ACT
Properties as currently contemplated subject thereto or affected thereby. Except
as provided in Schedule 3.26 to the ACT Disclosure Letter, valid policies of
title insurance have been issued insuring ACT's or its Subsidiary's fee simple
title or leasehold estate to the ACT Properties in amounts at least equal to the
fair market value of such ACT Properties at the time of the issuance of such
policy, subject only to the matters disclosed above or in the ACT Disclosure
Letter, and such policies are, at the date hereof, in full force and effect and
no material claim has been made against any such policy. Except as provided in
Schedule 3.26 to the ACT Disclosure Letter, ACT has no Knowledge (i) that any
certificate, permit or license from any Governmental Entity having jurisdiction
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over any of the ACT Properties or any agreement, easement or other right which
is necessary to permit the lawful use and operation of the buildings and
improvements on any of the ACT Properties as currently contemplated or which is
necessary to permit the lawful use and operation of all driveways, roads and
other means of egress and ingress to and from any of the ACT Properties has not
been obtained and is not in full force and effect, or of any pending threat of
modification or cancellation of any of same; (ii) of any written notice of any
violation of any federal, state or municipal law, ordinance, order, regulation
or requirement materially and adversely affecting any of the ACT Properties
issued by any Governmental Entity; (iii) of any material structural defects
relating to any ACT Property; (iv) of any ACT Property whose building systems
are not in working order in any material respect; (v) of any physical damage to
any ACT Property for which there is no insurance in effect covering the cost of
the restoration; (vi) of any current renovation or uninsured restoration to any
ACT Property the cost of which exceeds $50,000 or (vii) of items referred to in
the foregoing clauses (iii), (iv), (v) and (vi) which in the aggregate for ACT
and its Subsidiaries would not be reasonably likely to result in a Material
Adverse Effect on ACT. Except as provided in Schedule 3.26 to the ACT Disclosure
Letter, neither ACT nor any of its Subsidiaries has received any notice to the
effect that (A) any condemnation or rezoning proceedings are pending or
threatened with respect to any of the ACT Properties, (B) any zoning, building
or similar law, code, ordinance, order or regulation is or will be violated by
the continued maintenance, operation or use of any buildings or other
improvements on any of the ACT Properties or (C) a default exists or, with
notice or lapse of time, or both, will exist under any lease (including any
ground lease), mortgage, deed of trust or related document regarding an ACT
Property or that any ACT Property is being foreclosed upon.
(b) All material leases and subleases for which ACT or any of its
Subsidiaries is lessor or lessee (or sublessee) are identified in the ACT SEC
Documents or in Schedule 3.26(b) to the ACT Disclosure Letter. Except as
disclosed on Schedule 3.26(b) to the ACT Disclosure Letter, each such lease is
in full force and effect and neither ACT nor any of its Subsidiaries has notice
of any defense to the obligations of the lessor or lessee (or sublessee), as the
case may be, thereunder or any material claim asserted or threatened by any
person or entity, and except as disclosed on Schedule 3.26(b) to the ACT
Disclosure Letter, the lessor or lessee (or sublessee), as the case may be,
under each such lease or sublease has complied with its obligations under such
lease or sublease in all material respects and neither ACT nor any of its
Subsidiaries has Knowledge that a material default exists, or with notice or
lapse of time or both, will exist by the lessee (or sublessee) or lessor under
such lease.
SECTION 3.27 Mortgage Loans.
(a) Except as set forth in Schedule 3.27(a) to the ACT Disclosure Letter,
ACT or one of its Subsidiaries is the sole owner of each of the mortgage loans
reflected in the most recent financial statements included in the ACT SEC
Documents or made or acquired since such date (the "ACT Mortgage Loans") and is
the sole owner or beneficiary of or under the related notes (the "ACT Mortgage
Notes"), deeds of trust, mortgages, security agreements, guaranties,
indemnities, financing statements, assignments, endorsement, bonds, letters of
credit, accounts, insurance contracts and policies, credit reports, tax returns,
appraisals, environmental reports, escrow documents, participation agreements
(if applicable), loan files, servicing files and all other documents evidencing
or securing the ACT Mortgage Loans (the "ACT Mortgage Files"), except (i) any
ACT Mortgage Loans disposed of in the ordinary course since the date of such
financial statements, and (ii) to the extent any ACT Mortgage Loan is prepaid in
full or subject to a completed foreclosure action (or non-judicial proceeding or
deed in lieu of foreclosure) in which case ACT or one of its Subsidiaries shall
be the sole owner of the real property securing such foreclosed loan or shall
have received the proceeds of such action to which ACT or such Subsidiary was
entitled, in each case free and clear of any adverse claims or Liens.
(b) Except as set forth in Schedule 3.27(b) to the ACT Disclosure Letter,
to the Knowledge of ACT, (i) the lien of each ACT Mortgage is subject only to
"Permitted Exceptions" which consist of the following: (A) ACT Permitted Liens;
(B) covenants, conditions, restrictions, reservations, rights, Liens, easements,
encumbrances, encroachments, and other matters affecting title acceptable to
prudent mortgage lending institutions generally; (C) rights of tenants with no
options to purchase or rights of first refusal to purchase, except as disclosed
in the ACT Mortgage File; and (D) other matters which, in the aggregate, would
not be
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reasonably likely to result in a Material Adverse Effect on ACT; (ii) each ACT
Mortgage Loan has generally been serviced in accordance with the terms of the
related mortgage note and pooling and servicing agreements and otherwise in
accordance with industry accepted servicing practices except for events that,
individually or in the aggregate, would not be reasonably likely to result in a
Material Adverse Effect on ACT; and (iii) there is no delinquency in the
payments of principal and interest required to be made under the terms of any
ACT Mortgage Loan in excess of 30 days beyond the applicable due date that has
occurred since origination or in any other payments required to be made under
the terms of any ACT Mortgage Loan (inclusive of any applicable grace or cure
period) that would be reasonably likely to result in a Material Adverse Effect
on ACT.
(c) Except as set forth in Schedule 3.27(c) to the ACT Disclosure Letter or
in the applicable ACT Mortgage File, ACT has no Knowledge of (i) any written
notice asserting any offset, defense (including the defense of usury), claim
(including claims of lender liability), counterclaim, or right to rescission
with respect to any ACT Mortgage Loan, ACT Mortgage Note or other related
agreements, (ii) any uncured monetary default in excess of 30 days or event of
acceleration existing under any ACT Mortgage or the related ACT Mortgage Note or
(iii) any uncured non-monetary default, breach, violation or event of
acceleration existing beyond the applicable grace or cure period under any ACT
Mortgage or the related ACT Mortgage Note, except for notices, violations,
breaches, defaults or events of acceleration that would not, individually or in
the aggregate, be reasonably likely to result in a Material Adverse Effect on
ACT.
SECTION 3.28 Actions Taken Regarding the ACT Rights Plan. ACT has taken,
or shall take prior to the Closing Date, all action necessary to amend the ACT
Rights Plan to ensure that the execution and delivery of this Agreement and the
Purchase Agreement, the taking of any other action or combination of actions or
the consummation of the transactions contemplated hereby or thereby do not and
will not result in the grant of any rights to any Person to exercise or receive
a distribution of rights certificates thereunder or acquire any property in
respect of rights thereunder.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ICH
ICH represents and warrants to ACT as follows:
SECTION 4.1 Organization, Standing and Corporate Power. ICH is a
corporation, duly organized and validly existing under the MGCL and has the
requisite power and authority to carry on its business as now being conducted.
ICH is duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed,
individually or in the aggregate, would not have a Material Adverse Effect (as
defined below) on ICH.
SECTION 4.2 Subsidiaries. Schedule 4.2 to the ICH Disclosure Letter (as
defined below) sets forth each Subsidiary of ICH and the direct and/or indirect
ownership interest therein of ICH and (A) all the outstanding shares of capital
stock of each Subsidiary of ICH that is a corporation have been validly issued
and are fully paid and nonassessable, are owned by ICH or one of its
Subsidiaries free and clear of all Liens and (B) all equity interests in each of
ICH's Subsidiaries that is a partnership, joint venture, limited liability
company or trust are owned by ICH or one or more of its Subsidiaries free and
clear of all Liens. Except for the capital stock of or other equity or ownership
interests in ICH's Subsidiaries, and except as set forth on Schedule 4.2 to the
ICH Disclosure Letter, ICH does not own, directly or indirectly, any capital
stock or other ownership interest in any Person. Each Subsidiary of ICH that is
a corporation is duly incorporated and validly existing under the laws of its
jurisdiction of incorporation and has the requisite corporate power and
authority to carry on its business as now being conducted, and each such
Subsidiary that is a partnership, limited liability company or trust is duly
organized and validly existing under the laws of its jurisdiction of
organization and has the requisite power and authority to carry on its business
as now being conducted. Each Subsidiary of ICH is duly qualified or licensed to
do business and is in good standing in each jurisdiction in which the nature of
its business or the ownership or leasing of its properties makes such
qualification or
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licensing necessary, other than in such jurisdictions where the failure to be so
qualified or licensed, individually or in the aggregate, would not have a
Material Adverse Effect on ICH.
SECTION 4.3 Capital Structure. The authorized capital stock of ICH
consists of 46,217,295 shares of ICH Common Stock of which 3,782,705 shares are
designated as Class A Common Stock, par value $.01 per share ("ICH Series A
Common Stock"), and 10,000,000 shares of preferred stock, par value $.01 per
share, of which 1,000,000 shares are designated as Series A Junior Participating
Preferred Stock, par value $.01 per share ("ICH Series A Preferred Stock"), and
479,999 shares are designated as ICH Series B Preferred Stock. On the date
hereof, (i) 8,418,200 shares of ICH Common, no shares of ICH Series A Common
Stock, 479,999 shares of ICH Series B Preferred Stock and no shares of ICH
Series A Preferred Stock were issued and outstanding, (ii) no shares of ICH
Common Stock, ICH Series A Common Stock, ICH Series B Preferred Stock, ICH
Series A Preferred Stock or ICH Preferred Stock were held by ICH in its
treasury, (iii) 632,500 shares of ICH Common Stock were reserved for issuance in
connection with the ICH Option Plan, (iv) 1,683,635 shares of ICH Common Stock
were reserved for issuance in connection with the conversion of ICH Series B
Preferred Stock and (v) 328,831 shares of ICH Common Stock were issuable upon
exercise of outstanding ICH Options. On the date hereof, except as set forth
above in this Section 4.3, no capital shares or other voting securities of ICH
were issued, reserved for issuance or outstanding. There are no outstanding
share appreciation rights relating to the capital shares of ICH. All outstanding
capital shares of ICH are duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. There are no bonds,
debentures, notes or other indebtedness of ICH having the right to vote (or
convertible into, or exchangeable for, securities having the right to vote) on
any matter on which shareholders of ICH may vote. Except for the ICH Options and
the rights issuable under the Rights Plan, dated as of October 7, 1998, between
ICH and BankBoston, N.A., as rights agent (the "ICH Rights Plan"), there are no
outstanding securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which ICH or any of its
Subsidiaries is a party or by which such entity is bound, obligating ICH or any
of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, additional capital shares, voting securities or other ownership
interests of ICH or any of its Subsidiaries or obligating ICH or any of its
Subsidiaries to issue, grant, extend or enter into any such security, option,
warrant, call, right, commitment, agreement, arrangement or undertaking. There
are no outstanding contractual obligations of ICH or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any capital shares of ICH or any capital
shares, voting securities or other ownership interests in any Subsidiary of ICH
or make any material investment (in the form of a loan, capital contribution or
otherwise) to any Person.
SECTION 4.4 Authority; Noncontravention; Consents.
(a) ICH has the requisite power and authority to enter into this Agreement
and, subject to approval of this Agreement by the votes of the holders of shares
of ICH Common Stock and, if not previously converted, ICH Series B Preferred
Stock required to approve this Agreement and the transactions contemplated
hereby (the "ICH Stockholder Approval" and, together with the ACT Shareholder
Approval, the "Shareholder Approvals"), to consummate the transactions
contemplated hereby to which ICH is a party. The execution and delivery of this
Agreement by ICH and the consummation by ICH of the transactions contemplated
hereby to which ICH is a party have been duly authorized by all necessary action
on the part of ICH, subject to approval of this Agreement pursuant to the ICH
Stockholder Approval. This Agreement has been duly executed and delivered by ICH
and, assuming the due authorization, execution and delivery hereof by ACT,
constitutes valid and binding obligations of ICH, enforceable against ICH in
accordance with its terms, except that such enforceability may be limited by (i)
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or (ii) general principles
of equity (regardless of whether enforcement is sought in a proceeding in equity
or at law).
(b) Except as set forth in Schedule 4.4 to the ICH Disclosure Letter, the
execution and delivery of this Agreement by ICH do not, and the consummation of
the transactions contemplated hereby to which ICH is a party and compliance by
ICH with the provisions of this Agreement will not, conflict with, or result in
any violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or to loss of a material benefit under, or result in the creation
of any Lien upon any of the properties or assets of ICH or any of its Subsidiary
under, (i) articles of
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incorporation or bylaws of ICH or the comparable charter or organizational
documents or partnership or similar agreement (as the case may be) of any other
of ICH's Subsidiaries, each as amended or supplemented to the date of this
Agreement, (ii) any loan or credit agreement, note, bond, mortgage, indenture,
reciprocal easement agreement, lease or other agreement, instrument, permit,
concession, franchise or license applicable to ICH or any other of ICH's
Subsidiaries or their respective properties or assets or (iii) subject to the
governmental filings and other matters referred to in the following sentence,
any Laws applicable to ICH or any of ICH's Subsidiaries or their respective
properties or assets, other than, in the case of clause (ii) or (iii), any such
conflicts, violations, defaults, rights or Liens that individually or in the
aggregate would not (x) have a Material Adverse Effect on ICH or (y) prevent the
consummation of the Merger.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to ICH or any of ICH's Subsidiaries in connection with the execution and
delivery of this Agreement or the consummation by ICH of any of the transactions
contemplated hereby, except for (i) the filing by any Person in connection with
any of the transactions contemplated hereby of a pre-merger notification and
report form under the HSR Act to the extent applicable, (ii) the filing with the
SEC of (x) the Proxy Statement and (y) such reports under Section 13 (a) of the
Exchange Act as may be required in connection with this Agreement and the
transactions contemplated by this Agreement, (iii) the filing of the Maryland
Articles of Merger with the State Department of Assessments and Taxation of
Maryland and the Texas Articles of Merger with the County Clerk of the County of
Dallas, Texas and (iv) such other consents, approvals, orders, authorizations,
registrations, declarations, licenses and filings as are set forth in Schedule
4.4 to the ICH Disclosure Letter or (A) as may be required under (x) federal,
state or local environmental laws or (y) the "blue sky" laws of various states
or (B) which, if not obtained or made, would not prevent or delay in any
material respect the consummation of any of the Merger or otherwise prevent ICH
from performing its obligations under this Agreement in any material respect or
have, individually or in the aggregate, a Material Adverse Effect on ICH.
SECTION 4.5 SEC Documents. ICH has timely filed all required reports,
schedules, forms, statements and other documents (collectively, including all
exhibits and schedules thereto and documents incorporated therein by reference,
the "ICH SEC Documents") with the SEC. All of the ICH SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated thereunder
applicable to such ICH SEC Documents. None of the ICH SEC Documents at the time
of filing and effectiveness contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading, except to the extent such statements have been
modified or superseded by later ICH SEC Documents.
SECTION 4.6 Financial Statements. The consolidated financial statements
of ICH included in the ICH SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with GAAP (except, in the case of unaudited statements, as permitted by Form
10-Q of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the consolidated financial
position of ICH as of the dates thereof and the consolidated results of
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).
SECTION 4.7 Absence of Certain Changes or Events. Except as disclosed in
the ICH SEC Documents or in Schedule 4.7 to the ICH Disclosure Letter, since the
date of the most recent financial statements included in the ICH SEC Documents
and to the date of this Agreement, there has not been any change that would have
a Material Adverse Effect on ICH, nor has there been any occurrence or
circumstance that with the passage of time would reasonably be expected to
result in such a change, whether or not arising from transactions in the
ordinary course of business.
SECTION 4.8 No Undisclosed Liabilities. Except (a) as set forth in the
ICH SEC Documents filed prior to the date of this Agreement, (b) as set forth in
Schedule 4.8 to the ICH Disclosure Letter, (c) as
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incurred in the ordinary course of the business of ICH, (d) for the expenses
incurred in connection with the transactions contemplated hereby or (e) for
liabilities or obligations relating to contractual obligations, indebtedness,
litigation or other matters that are covered by other representations and
warranties in this Agreement or otherwise identified in the ICH Disclosure
Letter, neither ICH nor any of its Subsidiaries has any Liabilities. The
reserves reflected on ICH's balance sheet dated March 31, 1999 and the balance
sheet dated December 31, 1998, as included, in each case, in the ICH SEC
Documents, are appropriate and reasonable and have been calculated in a manner
consistent with past practice.
SECTION 4.9 No Defaults. Except as disclosed in Schedule 4.9 to the ICH
Disclosure Letter, neither ICH nor any of its Subsidiaries is in violation or
default under any provision of its declaration of trust, certificate of
incorporation, bylaws, partnership agreement or other organizational documents,
as applicable, or is in breach of or default with respect to any provision of
any agreement, judgment, decree, order, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which it is a party
or by which it or any of its properties are bound; and there does not exist any
state of facts that would constitute an event of default on the part of any of
ICH or its Subsidiaries as defined in such documents that, with notice or lapse
of time or both, would constitute a default, other than such violations or
defaults that in the aggregate would not have a Material Adverse Effect on ICH.
SECTION 4.10 Taxes.
(a) ICH and each of its Subsidiaries has (A) filed all Tax returns and
reports required to be filed by it (after giving effect to any filing extension
properly granted by a Governmental Entity having authority to do so) and all
such returns and reports are accurate and complete in all material respects; and
(B) paid (or ICH has paid on its behalf) all Taxes shown on such returns and
reports as required to be paid by it, and, except as disclosed in the ICH SEC
Documents or in Schedule 4.10(a) to the ICH Disclosure Letter, the most recent
financial statements contained in the ICH SEC Documents reflect an adequate
reserve for all material Taxes payable by ICH (and by those Subsidiaries of ICH
whose financial statements are contained therein) for all taxable periods and
portions thereof through the date of such financial statements. True, correct
and complete copies of all federal, state and local Tax returns and reports for
ICH and each of its Subsidiaries, and all written communications relating
thereto, have been delivered or made available to representatives of ACT. Since
the date of the most recent financial statements included in the ICH SEC
Documents, ICH has incurred no liability for taxes under Sections 857(b), 860(c)
or 4981 of the Code, and neither ICH nor any of its Subsidiaries has incurred
any material liability for Taxes other than in the ordinary course of business.
To the Knowledge of ICH, no event has occurred, and no condition or circumstance
exists, which presents a material risk that any material Tax described in the
preceding sentence will be imposed upon ICH. Except as set forth on Schedule
4.10(a) to the ICH Disclosure Letter, to the Knowledge of ICH, no deficiencies
for any Taxes have been proposed, asserted or assessed against ICH or any of its
Subsidiaries, and no requests for waivers of the time to assess any such Taxes
are pending.
(b) ICH (A) for all taxable years commencing with December 31, 1997 has
been subject to taxation as a REIT within the meaning of the Code and has
satisfied all requirements to qualify as a REIT for such years, (B) has
operated, and intends to continue to operate, in such a manner as to qualify as
a REIT for the tax year ending upon the Closing Date, and (C) has not taken or
omitted to take any action which would reasonably be expected to result in a
challenge to its status as a REIT, and to ICH's Knowledge, no such challenge is
pending or threatened. Each Subsidiary of ICH that is a partnership, joint
venture or limited liability company has been since its formation and continues
to be treated for federal income tax purposes as a partnership and not as a
corporation or an association taxable as a corporation. Except as set forth on
Schedule 4.10(b) to the ICH Disclosure Letter, each Subsidiary of ICH that is a
corporation for federal income tax purposes has been since its formation, and
continues to be treated for federal income tax purposes as, a "qualified REIT
subsidiary" as defined in Section 856(i) of the Code. Except as set forth on
Schedule 4.10(b) to the ICH Disclosure Letter, neither ICH nor any of its
Subsidiaries holds any asset (x) the disposition of which would be subject to
rules similar to Section 1374 of the Code as a result of an election under IRS
Notice 88-19 or (y) that is subject to a consent filed pursuant to Section
341(f) of the Code and the regulations thereunder.
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SECTION 4.11 Employee Matters. Except as set forth in Schedule 4.11 to
the ICH Disclosure Letter:
(a) Schedule 4.11(a) to the ICH Disclosure Letter contains a true and
complete list of each employee benefit plan, policy or agreement covering
employees, former employees or directors of any of ICH or its Subsidiaries
or their beneficiaries, or providing benefits to such persons in respect of
services provided to any such entity, including without limitation any
employee benefit plans within the meaning of Section 3(3) of ERISA and any
employment, retention, severance or change in control agreement, in each
case that is sponsored, maintained or contributed to or required to be
contributed to by ICH or its Subsidiaries or by any trade or business,
whether or not incorporated (an "ICH ERISA Affiliate") that, together with
any of such Subsidiaries, would be deemed a "single employer" within the
meaning of Section 4001(b) of ERISA (collectively, the "ICH Benefit
Plans"). Other than as set forth in Schedule 4.11(a) to the ICH Disclosure
Letter, since December 31, 1998, there have been no new plans adopted, nor
changes, additions or modification to any ICH Benefit Plan. As of the date
hereof, neither ICH nor any of its Subsidiaries has any plans to adopt,
change, add or modify any ICH Benefit Plan, nor has any such entity
communicated with any current or former employee with respect thereto.
(b) With respect to each ICH Benefit Plan, ICH has previously
delivered or made available to ACT or its representatives true and complete
copies of the following: (i) the plan document and all amendments thereto
(or, if such plan is unwritten, a true and complete summary of its terms);
(ii) any related trust or other funding vehicle; (iii) if applicable, the
two most recent IRS Forms 5500 and related attachments; (iv) if applicable,
the most recent IRS determination letter; and (v) any material
correspondence or employee communications.
(c) All material contributions and other payments required to have
been made by ICH or one of its Subsidiaries to any ICH Benefit Plan (or to
any Person pursuant to the terms thereof) have been made or the amount of
such payment or contribution obligation has been reflected in the financial
statements in ICH's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 (the "ICH First Quarter 10-Q").
(d) Each of the ICH Benefit Plans intended to be "qualified" within
the meaning of Section 401(a) or Section 501(c)(9) of the Code has been
determined by the IRS to be so qualified, and no circumstances exist that
could reasonably be expected to result in the revocation of any such
determination. Each of the ICH Benefit Plans is and has been operated in
all material respects in compliance with its terms and all applicable laws,
rules and regulations governing such plan, including, without limitation,
ERISA and the Code.
(e) With respect to the ICH Benefit Plans, individually and in the
aggregate, no event has occurred, there does not now exist any condition or
set of circumstances, that could reasonably be expected to subject ICH, any
of its Subsidiaries or any ICH ERISA Affiliate to any material liability
arising under the Code, ERISA or any other applicable law, or under any
indemnity agreement to which ICH, any of its Subsidiaries or any ICH ERISA
Affiliate is a party, excluding liability relating to benefit claims and
funding obligations payable in the ordinary course.
(f) Other than continuation coverage required to be provided under
Section 4980B of the Code or Part 6 of Title I of ERISA or otherwise as
provided by state law, none of the ICH Benefit Plans that are "welfare
plans," within the meaning of Section 3(1) of ERISA, provides for any
benefits with respect to current or former employees for periods extending
beyond their retirement or other termination of service, other than
benefits the full cost of which is borne by such former employees.
(g) Except as otherwise disclosed to ACT, the consummation of the
Merger will not, either alone or in combination with another event
undertaken by ICH or any of its Subsidiaries prior to the date hereof, (i)
entitle any current or former employee, agent, independent contractor or
officer of ICH or its Subsidiaries to severance pay, unemployment
compensation or any other payment, (ii) accelerate the time of payment or
vesting or increase the amount of compensation due any such employee,
officer, agent or independent contractor or (iii) constitute a "change in
control" under any ICH Benefit Plan.
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SECTION 4.12 Affiliate Transactions. Except as set forth in the ICH SEC
Documents or in Schedule 4.12 to the ICH Disclosure Letter, there is no
transaction and no transaction is now proposed, to which ICH or its Subsidiaries
is or is to be a party in which any current shareholder (holding in excess of 5%
of the shares of ICH Common Stock or any securities convertible into or
exchangeable for such shares), director or executive officer of ICH or its
Subsidiaries has a direct or indirect interest.
SECTION 4.13 Financial Advisors. No broker, investment banker, financial
advisor or other Person, other than Banc of America Securities LLC and Jolson
Merchant Partners, LLC, the fees and expenses of which have previously been
disclosed to ACT and will be paid by ICH, is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on behalf of
ICH or any of its Affiliates. Substantially concurrently herewith, the ICH Board
of Directors has received the opinion of Banc of America Securities LLC to the
effect that, on the date thereof, the consideration to be received by holders
(other than Fortress Investment Group and its affiliates) of shares of ICH
Common Stock pursuant to this Agreement is fair from a financial point of view
to such holders.
SECTION 4.14 Registration Statement and Proxy Statement. The information
supplied or to be supplied by ICH or its Subsidiaries for inclusion in (a) the
Registration Statement will not, either at the time it is filed with the SEC or
at the time it becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading or (b)
the Proxy Statement, including any amendment and supplement thereto, will not,
either at the date mailed to shareholders of ICH or at the time of the ICH
Stockholder Meeting (as defined below), contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Registration
Statement and the Proxy Statement will each comply as to form in all material
respects with all applicable laws, including the provisions of the Securities
Act and the Exchange Act and the rules and regulations promulgated thereunder,
except that no representation is made by ICH with respect to information
supplied by ACT for inclusion therein.
SECTION 4.15 Vote Required. The (i) affirmative vote of at least a
majority of the outstanding shares of ICH Common Stock and, if not previously
converted, ICH Series B Preferred Stock, voting together as a single class (with
each share of ICH Series B Preferred Stock entitled to the number of votes equal
to the number of shares of ICH Common Stock into which it is convertible as of
the record date for the ICH Stockholder Meeting), and (ii) if not previously
converted, the affirmative vote of two-thirds of the outstanding shares of ICH
Series B Preferred Stock, voting separately as a class are the only votes of the
holders of any class or series of ICH's capital shares necessary (under
applicable law or otherwise) to approve this Agreement and the transactions
contemplated hereby.
SECTION 4.16 Anti-Takeover Statutes. ICH has taken all action necessary,
if any, to exempt the transactions contemplated hereby from the operation of any
Anti-Takeover Statutes.
SECTION 4.17 Full Disclosure. To the Knowledge of ICH, ICH has not failed
to disclose to ACT any fact material to the business, properties, prospects,
operations, financial condition or results of operations of ICH and its
Subsidiaries, taken as a whole. To the Knowledge of ICH, no representation or
warranty by ICH contained in this Agreement and no statement contained in any
document (including historical financial statements and the ICH Disclosure
Letter), certificate or other writing furnished or to be furnished by ICH to ACT
or any of its representatives pursuant to the provisions hereof or in connection
with the transactions contemplated hereby, contains or will contain any untrue
statement of material fact or omits or will omit to state any material fact
necessary, in light of the circumstances under which it was made, in order to
make the statements herein or therein not misleading. Notwithstanding the
foregoing or any other provision herein, ICH has made no representation or
warranty with respect to any financial or other projections made by ICH.
SECTION 4.18 Litigation. Except as disclosed in ICH SEC Documents filed
with the SEC prior to the date hereof or in Schedule 4.18 to the ICH Disclosure
Letter, there is no suit, action or proceeding pending, threatened in writing
or, to ICH's Knowledge, otherwise threatened against or affecting ICH or any
Subsidiary of ICH that, individually or in the aggregate, could reasonably be
expected to (A) have a Material
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Adverse Effect on ICH or (B) materially delay or prevent the consummation of any
of the transactions contemplated hereby, nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against ICH or any Subsidiary of ICH or any of their respective properties or
assets having, or which, insofar as reasonably can be foreseen, in the future
would have, any such effect.
SECTION 4.19 Compliance with Laws. Except as disclosed in the ICH SEC
Documents filed with the SEC prior to the date hereof or as set forth in
Schedule 4.19 to the ICH Disclosure Letter, to the Knowledge of ICH, neither ICH
nor any of its Subsidiaries has violated or failed to comply with any statute,
law, ordinance, regulation, rule, judgment, decree or order of any Governmental
Entity applicable to its business, properties or operations, and neither ICH nor
any of its Subsidiaries has received notification of asserted present or past
violation or failure to comply, except for violations and failures to comply
that would not, individually or in the aggregate, be reasonably likely to result
in a Material Adverse Effect on ICH.
SECTION 4.20 Indebtedness. Except as filed (or incorporated by reference)
as an Exhibit to ICH's Annual Report on Form 10-K for the year ended December
31, 1998 (the "ICH 1998 Form 10-K"), Schedule 4.20 to the ICH Disclosure Letter
sets forth (x) a list of all loan or credit agreements, notes, bonds, mortgages,
indentures and other agreements and instruments pursuant to which any
indebtedness of ICH or any of its Subsidiaries, other than indebtedness payable
to ICH or one of its Subsidiaries, in an aggregate principal amount in excess of
$100,000 per item is outstanding or may be incurred and (y) the respective
principal amounts outstanding thereunder on July 1, 1999.
SECTION 4.21 Insurance. ICH and its Subsidiaries maintain fire and
casualty, general liability, business interruption, product liability,
professional liability and sprinkler and water damage insurance policies with
reputable insurance carriers, which ICH reasonably believes provide full and
adequate coverage for all normal risks incident to the business of ICH and its
Subsidiaries and their respective properties and assets.
SECTION 4.22 Investment Company Act. Neither ICH nor any of its
Subsidiaries is (i) except as disclosed in the ICH SEC Documents, an "investment
company" or a company "controlled" by an investment company within the meaning
of the Investment Company ACT of 1940, as amended, (ii) a "holding company" or a
"subsidiary company" of a holding company or an "affiliate" thereof within the
meaning of the Public Utility Holding Company Act of 1935, as amended, or (iii)
subject to regulation under the Federal Power Act or the Interstate Commerce
Act.
SECTION 4.23 Material Contracts.
(a) Except as set forth in Schedule 4.23(a) to the ICH Disclosure Letter
and other than contracts or agreements that are required to be filed and have
been filed (or incorporated by reference) as an exhibit to the ICH 1998 Form
10-K (the "ICH Material Contracts"), there are no contracts or agreements that
would have been required to be filed as an exhibit to an Annual Report on Form
10-K that are material to the business, properties, assets, financial position
or results of operations of ICH and its Subsidiaries.
(b) The ICH Material Contracts are in full force and effect and are valid
and enforceable, in accordance with their terms, obligations of ICH or its
Subsidiaries, as the case may be, enforceable against ICH in accordance with its
terms, except that such enforceability may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or (ii) general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law), and there are no breaches or defaults thereunder by ICH which,
individually or in the aggregate, would be reasonably likely to have a Material
Adverse Effect on ICH, and no event has occurred that with the lapse of time or
the giving of notice or both would constitute a breach or default thereunder by
the ICH which constitutes a Material Adverse Effect on ICH.
SECTION 4.24 Mortgage Backed Securities.
(a) Except as set forth on Schedule 3.24(a) to the ICH Disclosure Letter,
ICH or one of its Subsidiaries is and shall be the sole owner of each of the MBS
identified in Schedule 4.24(a) to the ICH Disclosure Letter ("ICH MBS") and the
related certificates and other instruments evidencing ownership of the ICH MBS
(the "ICH MBS Certificates"), free and clear of any adverse claims, Liens,
pledges, assignments, charges or
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security interests of any nature (including, without limitation, Liens arising
under the federal tax laws or ERISA), other than Liens pursuant to repurchase
agreements or other warehouse financing.
(b) Except as set forth in Schedule 4.24(b) to the ICH Disclosure Letter,
neither ICH nor any of its Subsidiaries is in default in the performance of any
of its obligations, whether as special servicer or otherwise, under any pooling
and servicing agreements, trust and servicing agreements, trust agreements,
servicing agreements or other similar documents providing for the creation of
the ICH MBS or the servicing of the mortgage loans underlying the ICH MBS (the
"ICH Principal MBS Agreements") and has not received any notice of any default
by any master or special servicer of any ICH MBS.
(c) Except as set forth in Schedule 4.24(c) to the ICH Disclosure Letter,
for all ICH MBS, ICH has delivered or made available to ACT a copy of each
prospectus, offering circular or private placement memorandum relating to such
ICH MBS.
(d) Except as set forth in Schedule 4.24(d) to the ICH Disclosure Letter,
there are no agreements (other than the ICH Principal MBS Agreements) between
ICH or any of its Subsidiaries and the master servicer or any special servicer
with respect to any series of ICH MBS.
(e) Except as set forth in Schedule 4.24(e) to the ICH Disclosure Letter,
there are no agreements between the ICH or any of its Subsidiaries and other
holders of any below investment grade ICH MBS.
(f) Except as set forth in Schedule 4.24(f) to the ICH Disclosure Letter
with respect to each issue of the ICH MBS, ICH or one of its Subsidiaries, as
the holder of the majority of the controlling class, has not waived any rights
as to any specially serviced mortgage loan.
(g) Except as set forth in Schedule 4.24(g) to the ICH Disclosure Letter,
with respect to each issue of the ICH MBS, ICH has not determined that any
specially serviced assets have become corrected assets and has not received any
written notice of any specially serviced assets which have become corrected
assets.
SECTION 4.25 Environmental Laws and Regulations.
(a) Except as set forth in Schedule 4.25(a) to the ICH Disclosure Letter or
disclosed by ICH in the ICH SEC Documents filed prior to the date hereof, ICH
and ICH's Subsidiaries are in compliance with all applicable Environmental Laws
(which compliance includes, but is not limited to, the possession by ICH and
ICH's Subsidiaries of all permits and other governmental authorizations required
under applicable Environmental Laws, and compliance with the terms and
conditions thereof), except where failures to be in compliance, individually or
in the aggregate, would not reasonably be expected have a Material Adverse
Effect on ICH. Except as set forth in Schedule 4.25(a) to the ICH Disclosure
Letter or disclosed by ICH in the ICH SEC Documents, since January 1, 1998 and
prior to the date of this Agreement, neither ICH nor any of the Subsidiaries has
received any written communication, whether from a Governmental Entity,
citizens' group, employee or otherwise, alleging that ICH or any of its
Subsidiaries is not in such compliance, except where failures to be in
compliance, individually or in the aggregate, would not reasonably be expected
to have a Material Adverse Effect on ICH.
(b) Except as set forth in Schedule 4.25(b) to the ICH Disclosure Letter or
disclosed by ICH in the ICH SEC Documents, there is no Environmental Claim
pending or threatened in writing against ICH or any of ICH's Subsidiaries.
SECTION 4.26 Properties.
(a) ICH or one of its Subsidiaries owns fee simple title (or where
indicated, leasehold estates) to each of the real properties identified in the
ICH SEC Documents or in Schedule 4.26(a) of the ICH Disclosure Letter (the "ICH
Properties"), which are all of the real estate properties owned by them, in each
case (except as provided below or as set forth on Schedule 4.26(a) of the ICH
Disclosure Letter) free and clear of Liens. The ICH Properties are not subject
to any Property Restrictions or Liens, except for ICH Permitted Liens. For
purposes of this Agreement, "ICH Permitted Liens" means (i) Liens and Property
Restrictions as set forth in the ICH SEC Documents, (ii) Liens and Property
Restrictions set forth in the ICH Disclosure Letter, (iii) Property Restrictions
imposed or promulgated by law or any governmental body or authority
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generally with respect to real property, including zoning regulations, and
listed in the ICH Disclosure Letter, (iv) Liens and Property Restrictions
disclosed on existing title reports or existing surveys (in either case copies
of which title reports and surveys have been delivered or made available to ACT
and listed in the ICH Disclosure Letter), and (v) mechanics', carriers',
workmen's, repairmen's and materialmens' liens and other Liens, Property
Restrictions and other limitations of any kind, if any, which, individually or
in the aggregate, are not substantial in amount and do not materially detract
from the value of or materially interfere with the use of any of the ICH
Properties as currently contemplated subject thereto or affected thereby. Except
as provided in Schedule 4.26(a) of the ICH Disclosure Letter, valid policies of
title insurance have been issued insuring ICH's or its applicable Subsidiary's
fee simple title or leasehold estate to the ICH Properties in amounts at least
equal to the fair market value of such ICH Properties at the time of the
issuance of such policy, subject only to the matters disclosed above or in the
ICH Disclosure Letter, and such policies are, at the date hereof, in full force
and effect and no material claim has been made against any such policy. Except
as provided in Schedule 4.26(a) of the ICH Disclosure Letter, ICH has no
Knowledge (i) that any certificate, permit or license from any Governmental
Entity having jurisdiction over any of the ICH Properties or any agreement,
easement or other right which is necessary to permit the lawful use and
operation of the buildings and improvements on any of the ICH Properties as
currently contemplated or which is necessary to permit the lawful use and
operation of all driveways, roads and other means of egress and ingress to and
from any of the ICH Properties has not been obtained and is not in full force
and effect, or of any pending threat of modification or cancellation of any of
same; (ii) of any written notice of any violation of any federal, state or
municipal law, ordinance, order, regulation or requirement materially and
adversely affecting any of the ICH Properties issued by any Governmental Entity;
(iii) of any material structural defects relating to any ICH Property; (iv) of
any ICH Property whose building systems are not in working order in any material
respect; (v) of any physical damage to any ICH Property for which there is no
insurance in effect covering the cost of the restoration; (vi) of any current
renovation or uninsured restoration to any ICH Property the cost of which
exceeds $50,000; or (vii) of items referred to in the foregoing clauses (iii),
(iv), (v) and (vi) which in the aggregate for ICH and its Subsidiaries would not
be reasonably likely to result in a Material Adverse Effect on ICH. Except as
provided in Schedule 4.27(a) of ICH's Disclosure Letter, neither ICH nor any of
its Subsidiaries has received any notice to the effect that (A) any condemnation
or rezoning proceedings are pending or threatened with respect to any of the ICH
Properties, (B) any zoning, building or similar law, code, ordinance, order or
regulation is or will be violated by the continued maintenance, operation or use
of any buildings or other improvements on any of the ICH Properties or (C) a
default exists or, with notice or lapse of time, or both, will exist under any
lease (including any ground lease), mortgage, deed of trust or related document
regarding an ICH Property or that any ICH Property is being foreclosed upon.
(b) All material leases and subleases for which ICH or any of its
Subsidiaries is lessor or lessee (or sublessee) are identified in the ICH SEC
Documents or in Schedule 4.26(b) to the ICH Disclosure Letter. Except as
disclosed on Schedule 4.26(b) of the ICH Disclosure Letter, each such lease is
in full force and effect and neither ICH nor any of its Subsidiaries has notice
of any defense to the obligations of the lessor or lessee (or sublessee), as the
case may be, thereunder or any material claim asserted or threatened by any
person or entity, and except as disclosed on Schedule 4.26(b) of the ICH
Disclosure Letter, the lessor or lessee (or sublessee), as the case may be,
under each such lease or sublease has complied with its obligations under such
lease or sublease in all material respects and neither ICH nor any of its
Subsidiaries has Knowledge that a material default exists, or with notice or
lapse of time or both, will exist by the lessee (or sublessee) under such lease.
SECTION 4.27 Mortgage Loans.
(a) Except as set forth in Schedule 4.27(a) of the ICH Disclosure Letter,
ICH or one of its Subsidiaries is the sole owner of each of the mortgage loans
reflected in the most recent financial statements included in the ICH SEC
Documents or made or acquired since such date (the "ICH Mortgage Loans") and is
the sole owner or beneficiary of or under the related notes (the "ICH Mortgage
Notes"), deeds of trust, mortgages, security agreements, guaranties,
indemnities, financing statements, assignments, endorsement, bonds, letters of
credit, accounts, insurance contracts and policies, credit reports, tax returns,
appraisals, environmental reports, escrow documents, participation agreements
(if applicable), loan files, servicing files and all other
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documents evidencing or securing the ICH Mortgage Loans (the "ICH Mortgage
Files"), except (i) any ICH Mortgage Loans disposed of in the ordinary course
since the date of such financial statements, and (ii) to the extent any ICH
Mortgage Loan is prepaid in full or subject to a completed foreclosure action
(or non-judicial proceeding or deed in lieu of foreclosure) in which case ICH or
one of its Subsidiaries shall be the sole owner of the real property securing
such foreclosed loan or shall have received the proceeds of such action to which
ICH or such Subsidiary was entitled, in each case free and clear of any adverse
claims or Liens.
(b) Except as set forth in Schedule 4.27(b) of the ICH Disclosure Letter,
to the Knowledge of ICH, (i) the lien of each ICH Mortgage is subject only to
"Permitted Exceptions" which consist of the following: (A) ICH Permitted Liens;
(B) covenants, conditions, restrictions, reservations, rights, Liens, easements,
encumbrances, encroachments, and other matters affecting title acceptable to
prudent mortgage lending institutions generally; (C) rights of tenants with no
options to purchase or rights of first refusal to purchase, except as disclosed
in the ICH Mortgage File; and (D) other matters which, in the aggregate, would
not be reasonably likely to result in a Material Adverse Effect on ICH; (ii)
each ICH Mortgage Loan has generally been serviced in accordance with the terms
of the related mortgage note and pooling and servicing agreements and otherwise
in accordance with industry accepted servicing practices except for events that,
individually or in the aggregate, would not be reasonably likely to result in a
Material Adverse Effect on ICH; and (iii) there is no delinquency in the
payments of principal and interest required to be made under the terms of any
ICH Mortgage Loan in excess of 30 days beyond the applicable due date that has
occurred since origination or in any other payments required to be made under
the terms of any ICH Mortgage Loan (inclusive of any applicable grace or cure
period) that would be reasonably likely to result in a Material Adverse Effect
on ICH.
(c) Except as set forth in Schedule 4.27(c) of the ICH Disclosure Letter or
in the applicable ICH Mortgage File, ICH has no Knowledge of (i) any written
notice asserting any offset, defense (including the defense of usury), claim
(including claims of lender liability), counterclaim, or right to rescission
with respect to any ICH Mortgage Loan, ICH Mortgage Note or other related
agreements, (ii) any uncured monetary default in excess of 30 days or event of
acceleration existing under any ICH Mortgage or the related ICH Mortgage Note or
(iii) any uncured non-monetary default, breach, violation or event of
acceleration existing beyond the applicable grace or cure period under any ICH
Mortgage or the related ICH Mortgage Note, except for notices, violations,
breaches, defaults or events of acceleration that would not, individually or in
the aggregate, be reasonably likely to result in a Material Adverse Effect on
ICH.
SECTION 4.28 Actions Taken Regarding the ICH Rights Plan. ICH has taken,
or shall take prior to the Closing Date, all action necessary to amend the ICH
Rights Plan to ensure that the execution and delivery of this Agreement and the
Purchase Agreement, the taking of any other action or combination of actions or
the consummation of the transactions contemplated hereby or thereby do not and
will not result in the grant of any rights to any Person to exercise or receive
a distribution of rights certificates thereunder or acquire any property in
respect of rights thereunder.
ARTICLE V
COVENANTS
SECTION 5.1 Conduct of Business by ACT. During the period from the date
of this Agreement to the Effective Time, ACT shall, and shall cause (or, in the
case of its Subsidiaries that ACT does not control, shall use commercially
reasonable efforts to cause) its Subsidiaries each to, carry on its businesses
in the usual, regular and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent therewith, use commercially
reasonable efforts to preserve intact its current business organization,
goodwill and ongoing businesses. Without limiting the generality of the
foregoing, the following additional restrictions shall apply. During the period
from the date of this Agreement to the Effective Time, except as expressly
permitted or contemplated by this Agreement, as shall be consented by ICH (which
consent shall not be unreasonably withheld) or as set forth in Schedule 5.1 to
the ACT Disclosure Letter, ACT shall not
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and shall cause (or, in the case of its Subsidiaries that it does not control,
shall use commercially reasonable efforts to cause) its Subsidiaries not to (and
not to authorize or commit or agree to):
(a) (i) except for dividends paid on ACT Common Shares in the ordinary
course of ACT's business, consistent with past practice, declare, set aside
or pay any dividends on, or make any other distributions in respect of any
of ACT's capital shares, (ii) split, combine or reclassify any capital
stock or other partnership interests or issue or authorize the issuance of
any other securities in respect of, in lieu of or in substitution for
shares of such capital shares or partnership interests or (iii) purchase,
redeem or otherwise acquire any capital shares of ACT or any options,
warrants or rights to acquire, or security convertible into, such capital
shares or partnership interests;
(b) except in connection with the exercise of stock options or
issuance of shares pursuant to stock rights outstanding on the date of this
Agreement, issue, deliver or sell, or grant any option or other right in
respect of, any capital shares, any other voting securities (including
partnership interests) of ACT or any of its Subsidiaries or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities except to ACT or one of
its Subsidiaries;
(c) except as otherwise contemplated by this Agreement, amend the
declaration of trust or articles or certificate of incorporation, bylaws,
partnership agreement or other comparable charter or organizational
documents of ACT or any of its Subsidiaries;
(d) merge or consolidate with any Person;
(e) except as contractually required pursuant to the terms of
agreements existing on the date hereof, in any transaction or series of
related transactions involving capital, securities or other assets or
indebtedness of ACT, its Subsidiaries, or any combination thereof in excess
of $100,000: (i) acquire or agree to acquire by merging or consolidating
with, or by purchasing all or a substantial portion of the equity
securities or all or substantially all of the assets of, or by any other
manner, any business or any corporation, partnership, limited liability
company, joint venture, association, business trust or other business
organization or division thereof or interest therein; (ii) subject to any
Lien or sell, lease or otherwise dispose of any material assets or assign
or encumber the right to receive income, dividends, distributions and the
like except pursuant to contracts or agreements in effect at the date of
this Agreement and set forth on Schedule 5.1 to the ACT Disclosure Letter;
(iii) make or agree to make any new capital expenditures, except in
accordance with budgets relating to ACT or its Subsidiaries that have been
previously delivered to ICH; or (iv) incur any indebtedness for borrowed
money or guarantee any such indebtedness of another Person, issue or sell
any debt securities or warrants or other rights to acquire any debt
securities of ACT, guarantee any debt securities of another Person, enter
into any "keep well" or other agreement to maintain any financial statement
condition of another person or enter into any arrangement having the
economic effect of any of the foregoing, prepay or refinance any
indebtedness or make any loans, advances or capital contributions to, or
investments in, any other Person;
(f) make or rescind any Tax election (unless required by law or
necessary to preserve ACT's status as a REIT or the status of any of its
Subsidiary as a partnership for federal income tax purposes or as a
"qualified REIT subsidiary" under Section 856(i) of the Code, as the case
may be);
(g) (i) change in any material manner any of its methods, principles
or practices of accounting or (ii) settle or compromise any claim, action,
suit, litigation, proceeding, arbitration, investigation, audit or
controversy relating to Taxes, except in the case of settlements or
compromises relating to Taxes on real property in an amount not to exceed,
individually or in the aggregate, $100,000, or change any of its methods of
reporting income or deductions for federal income Tax purposes from those
employed in the preparation of its federal income Tax return for the most
recently completed taxable year except, in the case of clause (i), as may
be required by the SEC, applicable law or GAAP;
(h) adopt any new employee benefit plan, incentive plan, severance
plan, stock option or similar plan, grant new stock appreciation rights or
amend any existing plan or rights, except such changes as are required by
law or which are not more favorable to participants than provisions
presently in effect;
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(i) except as contractually required pursuant to the terms of
agreements existing on the date hereof, pay, discharge, settle or satisfy
any claims, liabilities or objections (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business consistent with past
practice or in accordance with their terms, of liabilities reflected or
reserved against in, or contemplated by, the most recent consolidated
financial statements (or the notes thereto) of ACT included in the ACT SEC
Documents or incurred in the ordinary course of business consistent with
past practice;
(j) settle any shareholder derivative or class action claims arising
out of or in connection with any of the transactions contemplated hereby;
and
(k) enter into any new agreements or arrangements with Persons that
are Affiliates or, as of the date hereof, are executive officers, directors
or trust managers of ACT or any of its Subsidiaries.
SECTION 5.2 Conduct of Business by ICH. During the period from the date
of this Agreement to the Effective Time, ICH shall, and shall cause (or, in the
case of its Subsidiaries that ICH does not control, shall use commercially
reasonable efforts to cause) its Subsidiaries each to, carry on its businesses
in the usual, regular and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent therewith, use commercially
reasonable efforts to preserve intact its current business organization,
goodwill and ongoing businesses. Without limiting the generality of the
foregoing, the following additional restrictions shall apply. During the period
from the date of this Agreement to the Effective Time, except as expressly
permitted or contemplated by this Agreement, as shall be consented by ACT (which
consent shall not be unreasonably withheld) or as set forth in Schedule 5.2 to
the ICH Disclosure Letter, ICH shall not and shall cause (or, in the case of its
Subsidiaries that it does not control, shall use commercially reasonable efforts
to cause) its Subsidiaries not to (and not to authorize or commit or agree to):
(a) (i) except for dividends paid on ICH Common Stock or ICH Series B
Preferred Stock in the ordinary course of ICH's business, consistent with
past practice, declare, set aside or pay any dividends on, or make any
other distributions in respect of any of ICH's capital shares other than
the dividend required to be paid pursuant to Section 2.4(a), (ii) split,
combine or reclassify any capital stock or other partnership interests or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of such capital shares or partnership
interests or (iii) purchase, redeem or otherwise acquire any capital shares
of ICH or any options, warrants or rights to acquire, or security
convertible into, such capital shares or partnership interests;
(b) except in connection with the exercise of stock options or
issuance of shares pursuant to stock rights outstanding on the date of this
Agreement, issue, deliver or sell, or grant any option or other right in
respect of, any capital shares, any other voting securities (including
partnership interests) of ICH or any of its Subsidiaries or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities except to ICH or one of
its Subsidiaries;
(c) except as otherwise contemplated by this Agreement, amend the
declaration of trust or articles or certificate of incorporation, bylaws,
partnership agreement or other comparable charter or organizational
documents of ICH or any of its Subsidiaries;
(d) merge or consolidate with any Person;
(e) except as contractually required pursuant to the terms of
agreements existing on the date hereof, or as otherwise contemplated by
Section 7.3(h) hereof, in any transaction or series of related transactions
involving capital, securities or other assets or indebtedness of ICH, its
Subsidiaries, or any combination thereof in excess of $100,000: (i) acquire
or agree to acquire by merging or consolidating with, or by purchasing all
or a substantial portion of the equity securities or all or substantially
all of the assets of, or by any other manner, any business or any
corporation, partnership, limited liability company, joint venture,
association, business trust or other business organization or division
thereof or interest therein; (ii) subject to any Lien or sell, lease or
otherwise dispose of any material assets or assign or encumber the right to
receive income, dividends, distributions and the like except pursuant to
contracts or agreements in effect at the date of this Agreement and set
forth on Schedule 5.2 to the ICH Disclosure
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Letter; (iii) make or agree to make any new capital expenditures, except in
accordance with budgets relating to ICH or its Subsidiaries that have been
previously delivered to ICH; or (iv) incur any indebtedness for borrowed
money or guarantee any such indebtedness of another Person, issue or sell
any debt securities or warrants or other rights to acquire any debt
securities of ICH, guarantee any debt securities of another Person, enter
into any "keep well" or other agreement to maintain any financial statement
condition of another person or enter into any arrangement having the
economic effect of any of the foregoing, prepay or refinance any
indebtedness or make any loans, advances or capital contributions to, or
investments in, any other Person;
(f) make or rescind any Tax election (unless required by law or
necessary to preserve ICH's status as a REIT or the status of any of its
Subsidiary as a partnership for federal income tax purposes or as a
"qualified REIT subsidiary" under Section 856(i) of the Code, as the case
may be);
(g) (i) change in any material manner any of its methods, principles
or practices of accounting or (ii) settle or compromise any claim, action,
suit, litigation, proceeding, arbitration, investigation, audit or
controversy relating to Taxes, except in the case of settlements or
compromises relating to Taxes on real property in an amount not to exceed,
individually or in the aggregate, $100,000, or change any of its methods of
reporting income or deductions for federal income Tax purposes from those
employed in the preparation of its federal income Tax return for the most
recently completed taxable year except, in the case of clause (i), as may
be required by the SEC, applicable law or GAAP;
(h) adopt any new employee benefit plan, incentive plan, severance
plan, stock option or similar plan, grant new stock appreciation rights or
amend any existing plan or rights, except such changes as are required by
law or which are not more favorable to participants than provisions
presently in effect;
(i) except as contractually required pursuant to the terms of
agreements existing on the date hereof, pay, discharge, settle or satisfy
any claims, liabilities or objections (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business consistent with past
practice in accordance with their terms, of liabilities reflected or
reserved against in, or contemplated by, the most recent consolidated
financial statements (or the notes thereto) of ICH included in the ICH SEC
Documents or incurred in the ordinary course of business consistent with
past practice;
(j) settle any shareholder derivative or class action claims arising
out of or in connection with any of the transactions contemplated hereby;
and
(k) enter into any new agreements or arrangements with Persons that
are Affiliates or, as of the date hereof, are executive officers or
directors of ICH or any of its Subsidiaries.
SECTION 5.3 Other Actions. Each of ACT and ICH shall not, and shall use
commercially reasonable efforts to cause its respective Subsidiaries and joint
ventures not to, take any action that would result in (i) any of the
representations and warranties of such party (without giving effect to any
"Knowledge" qualification) set forth in this Agreement that are qualified as to
materiality becoming untrue, (ii) any of such representations and warranties
(without giving effect to any "Knowledge" qualification) that are not so
qualified becoming untrue in any material respect or (iii) any of the conditions
to the Merger set forth in Article VII not being satisfied.
ARTICLE VI
ADDITIONAL COVENANTS
SECTION 6.1 Preparation of the Registration Statement and the Proxy
Statement; Shareholder Meetings.
(a) As soon as practicable following the date of this Agreement, ACT and
ICH shall prepare and file with the SEC a preliminary Proxy Statement in form
and substance reasonably satisfactory to each of ICH and ACT, and ACT shall
prepare and file with the SEC the Registration Statement, in which the Proxy
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Statement will be included as a prospectus. Each of ACT and ICH shall use its
reasonable commercial efforts to (i) respond to any comments of the SEC and (ii)
have the Registration Statement declared effective under the Securities Act and
the rules and regulations promulgated thereunder as promptly as practicable
after such filing and to keep the Registration Statement effective as long as is
reasonably necessary to consummate the Merger. Each of ACT and ICH will use its
reasonable commercial efforts to cause the Proxy Statement to be mailed to its
respective shareholders as promptly as practicable after the Registration
Statement is declared effective under the Securities Act. Each party will notify
the other promptly of the receipt of any comments from the SEC and of any
request by the SEC for amendments or supplements to the Registration Statement
or the Proxy Statement or for additional information and will supply the other
with copies of all correspondence between such party or any of its
representatives and the SEC, with respect to the Registration Statement or the
Proxy Statement. Whenever any event occurs which is required to be set forth in
an amendment or supplement to the Registration Statement or the Proxy Statement,
ICH or ACT, as the case may be, shall promptly inform the other of such
occurrences and cooperate in filing with the SEC and/or mailing to the
shareholders of ICH and ACT such amendment or supplement. The Proxy Statement
shall, subject to Section 6.7(b), include the recommendations of the Board of
Directors of ICH and the Board of Trust Managers of ACT in favor of approval of
this Agreement and the transactions contemplated hereby. ACT also shall take any
action required to be taken under any applicable state securities or "blue sky"
laws in connection with the issuance of the ACT Common Shares pursuant to the
Merger, and ICH shall furnish all information concerning ICH and the holders of
shares of ICH Common Stock and rights to acquire such shares pursuant to the ICH
Option Plan as may be reasonably requested in connection with any such action.
ACT will use its reasonable commercial efforts to obtain, prior to the effective
date of the Registration Statement, all necessary state securities or "blue sky"
permits or approvals required to carry out the transactions contemplated hereby.
(b) ACT will, as soon as practicable following the date of this Agreement
(but in no event sooner than 30 days following the date the Proxy Statement is
mailed to the shareholders of ACT), duly call, give notice of, convene and hold
a meeting of its shareholders (the "ACT Shareholder Meeting") for the purpose of
obtaining the ACT Shareholder Approval. Subject to Sections 6.1(a) and 6.7, ACT
will, through its Board of Trust Managers, recommend to its shareholders
approval of this Agreement and the transactions contemplated hereby.
(c) ICH will, as soon as practicable following the date of this Agreement
(but in no event sooner than 30 days following the date the Proxy Statement is
mailed to the stockholders of ICH), duly call, give notice of, convene and hold
a meeting of its stockholders (the "ICH Stockholder Meeting") for the purpose of
obtaining the ICH Stockholder Approval. Subject to Sections 6.1(a) and 6.7, ICH
will, through its Board of Directors, recommend to its stockholders approval of
this Agreement and the transactions contemplated hereby.
SECTION 6.2 Access to Information; Confidentiality. Subject to the
requirements of confidentiality agreements with third parties, each of ACT and
ICH shall, and shall cause each of its respective Subsidiaries and joint
ventures to, afford to the other party and to the officers, employees,
accountants, counsel, financial advisors and other representatives of such other
party, reasonable access during normal business hours during the period prior to
the Effective Time to all their respective properties, books, contracts,
commitments, personnel and records and, during such period, each of ACT and ICH
shall, and shall cause each of its respective Subsidiaries to, furnish promptly
to the other party (a) a copy of each report, schedule, registration statement
and other document filed by it during such period pursuant to the requirements
of federal or state securities laws and (b) all other information concerning its
business, properties and personnel as such other party may reasonably request.
Each of ACT and ICH will hold, and will use commercially reasonable efforts to
cause its and its respective Subsidiaries and joint ventures' officers,
employees, accountants, counsel, financial advisors and other representatives
and Affiliates to hold, any nonpublic information in confidence to the extent
required by, and in accordance with, and will comply with the provisions of the
letter agreements between ACT and ICH (the "Confidentiality Agreements").
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SECTION 6.3 Commercially Reasonable Efforts; Notification.
(a) Subject to the terms and conditions herein provided, ACT and ICH shall:
(i) to the extent required, promptly make their respective filings and
thereafter make any other required submissions under the HSR Act with respect to
the Merger; (ii) use commercially reasonable efforts to cooperate with one
another in (A) determining which filings are required to be made prior to the
Effective Time with, and which consents, approvals, permits or authorizations
are required to be obtained prior to the Effective Time from, governmental or
regulatory authorities of the United States, the several states and foreign
jurisdictions and any third parties in connection with the execution and
delivery of this Agreement, and the consummation of the transactions
contemplated by such agreements and (B) timely making all such filings and
timely seeking all such consents, approvals, permits and authorizations; (iii)
use commercially reasonable efforts to obtain in writing any consents required
from third parties to effectuate the Merger, such consents to be in reasonably
satisfactory form to ACT and ICH; and (iv) use commercially reasonable efforts
to take, or cause to be taken, all other action and do, or cause to be done, all
other things necessary, proper or appropriate to consummate and make effective
the transactions contemplated by this Agreement. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purpose of this Agreement, the proper officers and directors or trust managers,
as the case may be, of ACT and ICH shall use commercially reasonable efforts to
take all such necessary action.
(b) ACT shall give prompt notice to ICH, and ICH shall give prompt notice
to ACT, if (i) any representation or warranty made by it contained in this
Agreement that is qualified as to materiality becoming untrue or inaccurate in
any respect or any such representation or warranty that is not so qualified
becoming untrue or inaccurate in any material respect or (ii) the failure by it
to comply with or satisfy in any material respect any covenant, condition or
agreement to be complied with or satisfied by it under this Agreement; provided,
however, that no such notification shall affect the representations, warranties,
covenants or agreements of the parties or the conditions to the obligations of
the parties under this Agreement.
SECTION 6.4 Affiliates. Prior to the Closing Date, ICH shall deliver to
ACT a letter identifying all Persons who are, at the time this Agreement is
submitted for approval to the stockholders of ICH, "affiliates" of ICH for
purposes of Rule 145 under the Securities Act. ICH shall use its commercially
reasonable efforts to cause each such Person to deliver to ACT on or prior to
the Closing Date a written agreement substantially in the form attached as
Exhibit C hereto.
SECTION 6.5 Tax Treatment. Each of ICH and ACT shall use its commercially
reasonable efforts to cause the Merger to qualify as a reorganization under the
provisions of Sections 368(a) of the Code and to obtain the opinions of counsel
referred to in Sections 7.2(e) and 7.3(e).
SECTION 6.6 Board of Trust Managers. ACT shall take all steps necessary
to change the number of trust managers of ACT from seven trust managers to eight
trust managers effective as of the Effective Time and to fill the vacancies in
accordance with Section 1.6.
SECTION 6.7 Board Recommendations.
(a) In connection with the Merger and the Shareholder Approvals, the Board
of Trust Managers of ACT and the Board of Directors of ICH shall (i) subject to
Section 6.7(b) hereof, recommend to the holders of ACT Common Shares and ICH
Stock, respectively, to vote in favor of the Merger and use all commercially
reasonable efforts to obtain the necessary approvals by the shareholders of ACT
and the stockholders of ICH, as the case may be, of this Agreement and (ii)
otherwise comply with all legal requirements applicable to such approval.
(b) Neither the Board of Trust Managers of ACT nor the Board of Directors
of ICH nor any committee thereof shall, except as expressly permitted by this
Section 6.7 (b), (i) withdraw, qualify or modify, or propose publicly to
withdraw, qualify or modify, in a manner adverse to the other party to this
Agreement, the approval or recommendation of their respective Boards or such
committees of the Merger or this Agreement, (ii) approve or recommend, or
propose publicly to approve or recommend, any transaction involving an
Acquisition Proposal (as defined below) from a third party (an "Alternative
Transaction"), or (iii) cause ACT or ICH, as the case may be, to enter into any
letter of intent, agreement in principle, acquisition
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agreement or other similar agreement (each, an "Acquisition Agreement") related
to any Alternative Transaction. Notwithstanding the foregoing, if the Board of
Trust Managers of ACT or the Board of Directors of ICH, as the case may be,
determines in good faith, after such Board has received a Superior Proposal (as
defined below), in compliance with Section 6.8, and after receiving advice from
outside counsel as to its fiduciary duties to its respective shareholders or
stockholders, as the case may be, under applicable law, such Board may (subject
to this Section 6.7(b)) inform its shareholders or stockholders, as the case may
be, that it no longer believes that the Merger is advisable and no longer
recommends approval of the Merger (a "Subsequent Determination") and enter into
an Acquisition Agreement with respect to a Superior Proposal, but only at a time
that is after the third business day following receipt by the other party to
this Agreement of written notice advising such other party that such Board has
received a Superior Proposal. Such written notice shall specify the material
terms and conditions of such Superior Proposal, identify the person making such
Superior Proposal and state that such Board intends to make a Subsequent
Determination. During such three-business day period, the party intending to
make such Subsequent Determination shall provide an opportunity for the other
party hereto to propose such adjustments to the terms and conditions of this
Agreement as would enable the party intending to make such Subsequent
Determination to proceed with its recommendation to its shareholders or
stockholders, as the case may be, without a Subsequent Determination; provided,
however, that the acceptance of any such proposed adjustment shall be at the
sole discretion of the Board that has received a Superior Proposal, exercised in
good faith, and this Agreement shall be amended to reflect any such accepted
adjustments. ACT and ICH hereby acknowledge and agree that the other party
hereto may enter into an Acquisition Agreement with respect to a Superior
Proposal in accordance with this Section 6.7, whether or not this Agreement is
terminated, and that, in the event that either ACT or ICH enters into an
Acquisition Agreement with respect to a Superior Proposal in accordance with
this Section 6.7(b), neither the other party hereto nor the parties to such
Acquisition Agreement may propose or enter into any adjustments to the terms and
conditions of this Agreement or such Acquisition Agreement, respectively.
Notwithstanding the foregoing, unless this Agreement is earlier terminated in
accordance with its terms, this Agreement and the Merger shall be submitted to
the shareholders of ACT and the stockholders of ICH whether or not the their
respective Boards have made a Subsequent Determination. For purposes of this
Agreement, a "Superior Proposal" means any proposal (on its most recently
amended or modified terms, if amended or modified) made by a third party to
enter into an Alternative Transaction that the Board of Trust Managers of ACT or
the Board of Directors of ICH, as the case may be, determines in its good faith
judgment (based on, among other things, the written advice of an independent
financial advisor) to be more favorable to its respective shareholders or
stockholders, as the case may be, than the Merger, taking into account all
relevant factors (including whether, in the good faith judgment of such Board,
after obtaining the advice of such independent financial advisor, the third
party is reasonably able to finance the transaction, and any proposed changes to
this Agreement that may be proposed by the other party hereto in response to
such Alternative Transaction). Nothing contained in this Section 6.7 or any
other provision hereof shall prohibit either ACT or ICH or their respective
Boards from (x) taking and disclosing to their shareholders or stockholders, as
the case may be, pursuant to Rules 14d-9 and 14e-2 promulgated under the
Exchange Act a position with respect to a tender or exchange offer by a third
party, which is consistent with its obligations hereunder, or (y) making such
disclosure to their shareholders or stockholders, as the case may be, as, in the
good faith judgment of the applicable Board after receiving advice from outside
counsel, is consistent with its obligations hereunder and is required by
applicable law; provided that ACT and ICH may not, except as provided by this
Section 6.7, withdraw, qualify or modify, in a manner adverse to the other party
hereto, the approval or recommendation of its board of trust managers or board
of directors, respectively, of the Merger or this Agreement.
SECTION 6.8 Acquisition Proposals. Each of ACT and ICH shall not, nor
shall it authorize or permit any of its Subsidiaries or agents, affiliates,
employees, advisors or representatives to, directly or indirectly, (a) solicit,
initiate or encourage the submission of any Acquisition Proposal or (b)
participate in or encourage any discussion or negotiations regarding, or furnish
to any person any non-public information with respect to, or take any other
action to facilitate any inquiries or the making of, any proposal that
constitutes, or may reasonably be expected to lead to, any Acquisition Proposal;
provided, however, that the foregoing shall not prohibit the ACT Board of Trust
Managers or the ICH Board of Directors, as the case may be, from furnishing
information to, or entering into discussions or negotiations with, any person or
entity that makes an
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unsolicited Acquisition Proposal to the extent that (A) the ACT Board of Trust
Managers or the ICH Board of Directors, as the case may be, based upon the
advice of outside legal counsel, determines in good faith that such action is
required for it to comply with its fiduciary obligations to its shareholders or
stockholders, as the case may be, under applicable Texas or Maryland law, as the
case may be, (B) prior to taking such action, ACT or ICH, as the case may be,
receives from such person or entity an executed agreement in reasonably
customary form relating to the confidentiality of information to be provided to
such person or entity and (C) the applicable Board concludes in good faith,
after receiving advice from its independent financial advisor, that the
Acquisition Proposal is a Superior Proposal. The party hereto receiving such
unsolicited Acquisition Proposal shall provide immediate oral and written notice
to the other party hereto of (a) the receipt of any such Acquisition Proposal or
any inquiry which could reasonably be expected to lead to any Acquisition
Proposal, (b) the material terms and conditions of such Acquisition Proposal or
inquiry, (c) the identity of such person or entity making any such Acquisition
Proposal or inquiry, (d) its intention to furnish information to, or enter into
discussions or negotiations with, such person or entity and (e) subject to the
fiduciary duties of its Board under applicable law, shall continue to keep such
other party informed of the status and details of any such Acquisition Proposal
or inquiry. For purposes of this Agreement, "Acquisition Proposal" means any
bona fide proposal with respect to a merger, consolidation, share exchange,
tender offer or similar transaction involving ACT or ICH, as the case may be, or
any purchase or other acquisition of all or any significant portion of the
assets of such party or any equity interest in such party.
SECTION 6.9 Public Announcements. ICH and ACT will consult with each
other before issuing, and provide each other the opportunity to review and
comment upon, any press release or other public statement with respect to the
transactions contemplated hereby and shall not issue any such press release or
make any such public statement prior to such consultation, except as may be
required by applicable law, court process or by obligations pursuant to any
listing agreement with any national securities exchange. The parties agree that
the initial press release to be issued with respect to the transactions
contemplated hereby will be in the form agreed to by the parties hereto prior to
the execution of this Agreement.
SECTION 6.10 Letters of Accountants.
(a) ACT shall use its commercially reasonable efforts to cause to be
delivered to ICH "comfort" letters of Deloitte & Touche LLP, ACT's independent
public accountants, dated and delivered the date on which the Registration
Statement shall become effective and as of the Effective Time, and addressed to
ICH, in form and substance reasonably satisfactory to ICH and reasonably
customary in scope and substance for letters delivered by independent public
accountants in connection with transactions such as those contemplated by this
Agreement.
(b) ICH shall use its commercially reasonable efforts to cause to be
delivered to ACT "comfort" letters of KPMG LLP, ICH's independent public
accountants, dated the date on which the Registration Statement shall become
effective and as of the Effective Time, and addressed to ACT, in form and
substance reasonably satisfactory to ACT and reasonably customary in scope and
substance for letters delivered by independent public accountants in connection
with transactions such as those contemplated by this Agreement.
SECTION 6.11 Indemnification.
(a) To the extent, if any, not provided by an existing right of
indemnification or other agreement or policy, ACT shall indemnify, defend and
hold harmless each person who is now or has been at any time prior to the date
hereof or who becomes prior to the Effective Time, an officer, trust manager or
director of ICH or any of its Subsidiaries (the "Indemnified Parties") against
all losses, claims, damages, costs, expenses (including reasonable attorneys'
fees and expenses), liabilities or judgments or amounts that are paid in
settlement of, with the approval of the indemnifying party (which approval shall
not be unreasonably withheld), or otherwise in connection with any threatened or
actual claim, action, suit proceeding or investigation based on or arising out
of the fact that such person is or was a director or officer of ICH or any of
its Subsidiaries at or prior to the Effective Time, including matters based on
or arising out of or pertaining to this Agreement or the transactions
contemplated hereby ("Indemnified Liabilities"), in each case to the full extent
ICH would have been permitted under applicable law and its charter documents to
indemnify the Indemnified Parties (and ACT shall pay expenses in advance of the
final disposition of any such action or
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proceeding to each Indemnified Party to the full extent permitted by law subject
to the limitations set forth in the fourth sentence of this Section 6.11 (a)).
Any Indemnified Parties proposing to assert the right to be indemnified under
this Section 6.11 shall, promptly after receipt of notice of commencement of any
action against such Indemnified Parties in respect of which a claim is to be
made under this Section 6.11 against ACT, notify ACT of the commencement of such
action, enclosing a copy of all papers served. If any such action is brought
against any of the Indemnified Parties and such Indemnified Parties notify ACT
of its commencement, ACT will be entitled to participate in and, to the extent
that ACT elects by delivering written notice to such Indemnified Parties
promptly after receiving notice of the commencement of the action from the
Indemnified Parties, to assume the defense of the action and after notice from
it to the Indemnified Parties of its election to assume the defense, ACT will
not be liable to the Indemnified Parties for any legal or other expenses except
as provided below. If ACT assumes the defense, ACT shall have the right to
settle such action without the consent of the Indemnified Parties; provided,
however, that ACT shall be required to obtain such consent (which consent shall
not be unreasonably withheld) if the settlement includes any admission of
wrongdoing on the part of the Indemnified Parties or any decree or restriction
on the Indemnified Parties; provided, further, that ACT, in the defense of any
such action shall not, except with the consent of the Indemnified Parties (which
consent shall not be unreasonably withheld), consent to entry of any judgment or
enter into any settlement that does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such Indemnified Parties of a release
from all liability with respect to such action. The Indemnified Parties will
have the right to employ their own counsel in any such action, but the fees,
expenses and other charges of such counsel will be at the expense of such
Indemnified Parties unless (i) the employment of counsel by the Indemnified
Parties has been authorized in writing by ACT, (ii) the Indemnified Parties have
reasonably concluded (based on written advice of counsel) that there may be
legal defenses available to them that are different from or in addition to those
available to ACT, (iii) a conflict or potential conflict exists (based on
written advice of counsel to the Indemnified Parties) between the Indemnified
Parties and ACT (in which case ACT will not have the right to direct the defense
of such action on behalf of the Indemnified Parties) or (iv) ACT has not in fact
employed counsel to assume the defense of such action within a reasonable time
after receiving notice of the commencement of the action, in each of which cases
the reasonable fees, disbursements and other charges of counsel will be at the
expense of ACT. It is understood that ACT shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for the
reasonable fees, disbursements and other charges of more than one separate firm
admitted to practice in such jurisdiction at any one time from all such
Indemnified Parties unless (a) the employment of more than one counsel has been
authorized in writing by ACT, (b) any of the Indemnified Parties have reasonably
concluded (based on advice of counsel) that there may be legal defenses
available to them that are different from or in addition to those available to
other Indemnified Parties or (c) a conflict or potential conflict exists (based
on advice of counsel to the Indemnified Parties) between any of the Indemnified
Parties and the other Indemnified Parties, in each case of which ACT shall be
obligated to pay the reasonable and appropriate fees and expenses of such
additional counsel or counsels. ACT will not be liable for any settlement of any
action or claim effected without its written consent (which consent shall not be
unreasonably withheld).
(b) In the event that ACT or any of it respective successors or assigns (i)
consolidates with or merges into any other Person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
Person, then, and in each such case the successors and assigns of such entity
shall assume the obligations set forth in this Section 6.11, which obligations
are expressly intended to be for the irreversible benefit of, and shall be
enforceable by, each Indemnified Party covered hereby.
(c) For a period of six years from the Effective Date, ACT shall use
its commercially reasonable efforts to provide that portion of directors'
and officers' liability insurance that serves to reimburse the persons
currently covered by either ACT's or ICH's directors' and officers'
liability insurance policy with respect to claims against such officers,
trust managers and directors arising from facts or events which occurred
before the Effective Time, which insurance shall contain at least the same
coverage, and contain terms and conditions that in all material respects
are no less advantageous, as that coverage currently provided by ICH;
provided, however, that (i) such officers, trust managers and directors may
be required to make application and provide customary representations and
warranties to ACT's insurance carrier for
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the purpose of obtaining such insurance; (ii) such coverage will have a
single aggregate limit of liability for such six-year period in an amount
not less than the annual aggregate limit of liability of such coverage
currently provided by ICH and (iii) in no event shall ACT be required to
expend or maintain or procure insurance coverage pursuant to this Section
6.11(c) in any amount per annum in excess of 150% of its annual premiums
for the twelve-month period ended December 31, 1998 (the "Maximum Premium")
with respect to such insurance, or, if the cost of such coverage exceeds
the Maximum Premium, the maximum amount of coverage that can be purchased
for the Maximum Premium.
(d) The provisions of this Section 6.11 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his or her
heirs and his or her personal representatives and shall be binding on all
successors and assigns of ACT.
SECTION 6.12 Transfer and Gains Taxes. ACT and ICH shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any transfer, recording,
registration and other fees and any similar taxes which become payable in
connection with, and are solely and directly related to, the transactions
contemplated hereby (together with any related interest, penalties or additions
to tax, "Transfer and Gains Taxes"). From and after the Effective Time, ACT or
ICH shall cause the Surviving Entity to pay or cause to be paid, without
deduction or withholding from any amounts payable to the holders of ICH Stock,
all Transfer and Gains Taxes (other than any such taxes that are solely the
liability of the holders of ICH Stock under applicable state law).
SECTION 6.13 Coordination of Dividends. Each of ACT and ICH shall
coordinate with the other regarding the declaration and payment of dividends in
respect of ACT Common Shares and ICH Stock and the record dates and payment
dates relating thereto, it being the intention of ACT and ICH that any holder of
ACT Common Shares or ICH Stock, as the case may be, shall not receive two
dividends, or fail to receive one dividend, for any single calender quarter with
respect to such holder's ACT Common Shares or ICH Stock.
ARTICLE VII
CONDITIONS PRECEDENT
SECTION 7.1 Conditions to Each Party's Obligation To Effect the
Merger. The respective obligation of each party to effect the Merger and to
consummate the other transactions contemplated hereby contemplated to occur on
the Closing Date is subject to the satisfaction or waiver on or prior to the
Effective Time of the following conditions:
(a) The Merger set forth in this Agreement shall have been approved
and adopted by the Shareholder Approvals.
(b) The New York Stock Exchange or The Nasdaq Stock Market shall have
approved for listing the ACT Common Shares to be issued in the Merger,
subject to official notice of issuance.
(c) The Registration Statement shall have become effective under the
Securities Act and shall not be the subject of any stop order or
proceedings by the SEC seeking a stop order.
(d) No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or
other legal restraint or prohibition preventing the consummation of the
Merger or any of the other transactions contemplated hereby shall be in
effect.
(e) ACT shall have received all state securities or "blue sky" permits
and other authorizations necessary to issue the ACT Common Shares pursuant
to this Agreement.
(f) The transactions contemplated by the Purchase Agreement shall have
been consummated prior to, or are being consummated simultaneously with,
the Merger.
(g) All material actions by or in respect of or filings with any
Governmental Entity required for the consummation of the transactions
contemplated hereby shall have been obtained or made.
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(h) The management agreement of ACT with FIC Management, Inc. to be
effective at the Effective Time shall be amended and restated to read
substantially in the form of Exhibit D hereto.
SECTION 7.2 Conditions to Obligations of ICH. The obligations of ICH to
effect the Merger and to consummate the other transactions contemplated hereby
contemplated to occur on the Closing Date are further subject to the following
conditions, any one or more of which may be waived by ICH:
(a) The representations and warranties of ACT set forth in this
Agreement shall be true and correct as of the Closing Date, as though made
on and as of the Closing Date, except to the extent the representation or
warranty is expressly limited by its terms to another date, and ICH shall
have received a certificate (which certificate may be qualified by
Knowledge to the same extent as such representations and warranties of ACT
contained herein are so qualified) signed on behalf of ACT by its chief
executive officer or chief financial officer to such effect. This condition
shall be deemed satisfied unless any or all breaches of ACT's
representations and warranties in this Agreement (without giving effect to
any materiality qualification or limitation) could reasonably be expected
to have a Material Adverse Effect on ACT.
(b) ACT shall have performed in all material respects all obligations
required to be performed by it under this Agreement at or prior to the
Effective Time, and ICH shall have received a certificate signed on behalf
of ACT by its chief executive officer or its chief financial officer to
such effect.
(c) Since the date of this Agreement, there shall have been no change
that could reasonably be expected to have a Material Adverse Effect on ACT,
and ICH shall have received a certificate signed on behalf of ACT by its
chief executive officer or chief financial officer to such effect.
(d) ICH shall have received an opinion of Locke Liddell & Sapp LLP,
counsel to ACT, dated as of the Closing Date, reasonably satisfactory to
ICH, that, commencing with its taxable year ended December 31, 1998 through
the Closing Date, ACT was organized in conformity with the requirements for
qualification as a REIT under the Code and has so qualified during such
period, and that, after giving effect to the transactions contemplated
hereby, ACT's proposed method of operation will enable it to continue to
meet the requirements for qualification and taxation as a REIT under the
Code during such period (with customary exceptions, assumptions and
qualifications and based upon customary representations).
(e) ICH shall have received an opinion dated as of the Closing Date
from Skadden, Arps, Slate, Meagher & Flom LLP, counsel to ICH, to the
effect that the Merger will qualify as a reorganization under the
provisions of Section 368(a) of the Code (with customary exceptions,
assumptions, qualifications and based upon customary representations).
(f) All consents and waivers (including, without limitation, waivers
of rights of first refusal) from third parties necessary in connection with
the consummation of the transactions contemplated hereby shall have been
obtained, other than such consents and waivers from third parties, which,
if not obtained, would not result, individually or in the aggregate, in a
Material Adverse Effect on ICH or ACT.
(g) ICH shall have received an opinion from Locke Liddell & Sapp LLP,
legal counsel to ACT, substantially in the form attached hereto as Exhibit
E (with customary exceptions, assumptions, qualifications and based upon
customary representations).
SECTION 7.3 Conditions to Obligations of ACT. The obligation of ACT to
effect the Merger and to consummate the other transactions contemplated thereby
contemplated to occur on the Closing Date is further subject to the following
conditions, any one or more of which may be waived by ACT:
(a) The representations and warranties of ICH set forth in this
Agreement shall be true and correct as of the Closing Date, as though made
on and as of the Closing Date, except to the extent the representation or
warranty is expressly limited by its terms to another date, and ACT shall
have received a certificate (which certificate may be qualified by
Knowledge to the same extent as the representations and warranties of ICH
contained herein are so qualified) signed on behalf of ICH by its chief
executive officer or chief financial officer to such effect. This condition
shall be deemed satisfied unless any or all
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breaches of ICH's representations and warranties in this Agreement (without
giving effect to any materiality qualification or limitation) could
reasonably be expected to have a Material Adverse Effect on ICH.
(b) ICH shall have performed in all material respects all obligations
required to be performed by it under this Agreement at or prior to the
Effective Time, and ACT shall have received a certificate signed on behalf
of ICH by its chief executive officer or chief financial officer to such
effect.
(c) Since the date of this Agreement, there shall have been no change
that could reasonably be expected to have a Material Adverse Effect on ICH,
and ACT shall have received a certificate signed on behalf of ICH by its
chief executive officer or chief financial officer to such effect.
(d) ACT shall have received an opinion of Brown & Wood LLP, tax
counsel to ICH, dated as of the Closing Date, reasonably satisfactory to
ACT, that, commencing with its taxable year ended December 31, 1997 through
the Closing Date, ICH was organized in conformity with the requirements for
qualification as a REIT under the Code and has so qualified during such
period (with customary exceptions, assumptions and qualifications and based
upon customary representations). Locke Liddell & Sapp LLP will be entitled
to rely upon such opinion in connection with its opinion to be delivered
pursuant to Section 7.2(d).
(e) ACT shall have received an opinion dated as of the Closing Date
from Locke Liddell & Sapp LLP, counsel to ACT, to the effect that the
Merger will qualify as a reorganization under the provisions of Section
368(a) of the Code (with customary exceptions, assumptions, qualifications
and based upon customary representations).
(f) All consents and waivers (including, without limitation, waivers
or rights of first refusal) from third parties necessary in connection with
the consummation of the transactions contemplated hereby shall have been
obtained, other than such consents and waivers from third parties, which,
if not obtained, would not result, individually or in the aggregate, in a
Material Adverse Effect on ICH or ACT.
(g) ACT shall have received an opinion from Skadden, Arps, Slate,
Meagher & Flom LLP, legal counsel to ICH, or local Maryland counsel to ICH
acceptable to ACT, substantially in the form attached hereto as Exhibit F
(with customary exceptions, assumptions, qualifications and based upon
customary representations).
(h) Either (x) the Average Closing Price shall be equal to or greater
than $7.40 or (y) ICH Aggregate Cash shall be not less than $75,000,000.
For purposes of this condition, "ICH Aggregate Cash" shall mean the
aggregate of the cash and cash equivalents as shown on the consolidated
balance sheet of ICH prepared in accordance with GAAP and certified by the
chief financial officer of ICH (the "Closing Balance Sheet"), dated as of
the fifth Trading Day prior to the Closing Date (the "Closing Cash
Amount"), and shall (i) include $25,000,000 attributable to the Impac CMB
Trust 1998-C1 asset and the net value (after deducting related debt) from
the Interest Only Securities (as defined therein), (ii) exclude cash or
cash equivalents obtained by ICH from sales of SPSA 1995-2 or USGI 1992-1
or as a result of a transaction that results in a Lien being placed on any
asset of ICH or its Subsidiaries (other than Liens existing on the date of
this Agreement in respect of (A) up to $2,710,000 of repo financing
relating to Interest Only Securities and (B) up to $1,944,000 of repo
financing relating to the USGI 1992-1) without ACT's prior written consent
(which consent may be withheld in ACT's sole discretion) and (iii) include
the cost of any future investments made by ICH after the date hereof that
have been specifically approved by ACT. Also for purposes of this
condition, "Average Closing Price" shall mean the average of the closing
prices per share of ICH Common Stock on the American Stock Exchange as
reported by the Wall Street Journal for the 20 consecutive Trading Days
ending on the fifth Trading Day prior to the Closing Date; and "Trading
Day" shall mean any day on which shares of ICH Common Stock are traded on
the American Stock Exchange.
(i) The Closing Cash Amount as of the Effective Time shall be equal to
or greater than the amount shown on the Closing Balance Sheet, and ACT
shall have received a certificate signed on behalf of ICH by its chief
financial officer to such effect.
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(j) The optional termination described in the Impac CMB Trust 1998-C1
documents owned by ICH shall have been sold.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1 Termination. This Agreement may be terminated at any time
prior to the filing of the Maryland Articles of Merger with the State Department
of Assessments and Taxation of Maryland and the filing of the Texas Articles of
Merger with the County Clerk of the County of Dallas, Texas, whether before or
after either of the Shareholder Approvals are obtained:
(a) by the mutual written consent of the Boards of Directors or Trust
Managers, as the case may be, of ICH and ACT;
(b) by ICH or ACT, if (i) the Effective Time shall not have occurred
before December 31, 1999, (ii) any Governmental Entity, the consent of
which is a condition to the obligations of ICH and ACT to consummate the
transactions contemplated hereby shall have determined not to grant its
consent and all appeals of such determination shall have been taken and
have been unsuccessful or (iii) any court of competent jurisdiction shall
have issued a judgment, order or decree (other than a temporary restraining
order) restraining, enjoining or otherwise prohibiting the transactions
contemplated hereby and such judgment, order or decree shall have become
final and nonappealable; provided, however, that the right to terminate
this Agreement pursuant to clause (i) shall not be available to any party
whose failure to fulfill any obligation under this Agreement has been the
cause of, or resulted in, the failure of the Effective Time to occur on or
before such date;
(c) by ICH or ACT, if at the ACT Shareholder Meeting (including any
adjournment or postponement thereof) called pursuant to Section 6.1(b), the
requisite vote of the holders of ACT Common Shares with respect to the
Merger shall not have been obtained;
(d) by ICH or ACT, if at the ICH Stockholder Meeting (including any
adjournment or postponement thereof) called pursuant to Section 6.1(c), the
requisite vote of the holders of shares of ICH Stock shall not have been
obtained;
(e) by ICH, if (i) there has been a material breach by ACT of any
representation, warranty, covenant, obligation or agreement set forth in
this Agreement, which breach has not been cured within ten business days
following receipt by ACT of notice of such breach, except for Sections 6.7
and 6.8 hereof as to which any breach thereof by ACT, without regard to
materiality, shall allow ICH to terminate this Agreement, or if any
representation or warranty of ACT shall have become untrue, in either case
such that the conditions set forth in Sections 7.2(a) or 7.2(b), as the
case may be, would be incapable of being satisfied by December 31, 1999 (as
otherwise extended in accordance with this Agreement); (ii) upon a failure
of the condition set forth in Section 7.2(c); (iii) the Board of Trust
Managers of ACT shall have withdrawn or modified in a manner adverse to ICH
its approval or recommendation of the Merger or this Agreement in order to
permit ACT to execute a definitive agreement providing for the transactions
contemplated by a Superior Proposal; or (iv) the Board of Directors of ICH
shall have withdrawn or modified in a manner adverse to ACT its approval or
recommendation of the transactions contemplated by this Agreement in order
to permit ICH to execute a definitive agreement providing for the
transactions contemplated by a Superior Proposal; provided, however, that
the right to terminate this Agreement pursuant to this Section 8.1(e) shall
not be available to ICH if it, at such time, is in material breach of any
representation, warranty, covenant or agreement set forth herein; or
(f) by ACT, if (i) there has been a material breach by ICH of any
representation, warranty, covenant, obligation or agreement set forth in
this Agreement, which breach has not been cured within ten business days
following receipt by ICH of notice of such breach, except for Sections 6.7
and 6.8 hereof as to which any breach thereof by ICH, without regard to
materiality, shall allow ACT to
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terminate this Agreement, or if any representation or warranty of ICH shall
have become untrue, in either case such that the conditions set forth in
Sections 7.3(a) or 7.3(b), as the case may be, would be incapable of being
satisfied by December 31, 1999 (as otherwise extended in accordance with
this Agreement); (ii) upon a failure of the condition set forth in Sections
7.3(c) or 7.3(h); (iii) the Board of Directors of ICH shall have withdrawn
or modified in a manner adverse to ACT its approval or recommendation of
the Merger or this Agreement in order to permit ICH to execute a definitive
agreement providing for the transactions contemplated by a Superior
Proposal; or (iv) the Board of Trust Managers of ACT shall have withdrawn
or modified in a manner adverse to ICH its approval or recommendation of
the transactions contemplated by this Agreement in order to permit ACT to
execute a definitive agreement providing for the transactions contemplated
by a Superior Proposal; provided, however, that the right to terminate this
Agreement pursuant to this Section 8.1(f) shall not be available to ACT if
it, at such time, is in material breach of any representation, warranty,
covenant or agreement set forth herein.
SECTION 8.2 Expenses; Termination Fee.
(a) Except as otherwise specified in this Section 8.2 or agreed in writing
by the parties, all out-of-pocket costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such cost or expense, except that those expenses incurred in
connection with the printing and mailing of the Proxy Statement and the
Registration Statement, as well as the filing fee related thereto, shall be
shared equally by ACT and ICH.
(b) If this Agreement is terminated pursuant to Sections 8.1(c), 8.1(e)(i),
8.1(e)(ii), 8.1(e)(iii) or 8.1(f)(iv), and if ACT is not entitled to terminate
this Agreement by reason of Sections 8.1(b), 8.1(d), 8.1(f)(i), 8.1(f)(ii) or
8.1(f)(iii), then, in addition to any other rights or remedies that may be
available, ACT shall promptly (and in any event within two business days of
receipt by ACT of written notice from ICH) pay to ICH (by wire transfer of
immediately available funds to an account designated by ICH) the Termination Fee
and the Termination Expenses (as each such term is defined below). No
termination of this Agreement pursuant to this Section 8.2 (b) shall be
effective until receipt by ICH of the Termination Fee and the Termination
Expenses.
(c) If this Agreement terminated pursuant to Sections 8.1(d), 8.1(f)(i),
8.1(f)(ii), 8.1(f)(iii) or 8.1(e)(iv), and if ICH is not entitled to terminate
this Agreement by reason of Sections 8.1(b), 8.1(c), 8.1(e)(i), 8.1(e)(ii) or
8.1(e)(iii), then, in addition to any other rights or remedies that may be
available, ICH shall promptly (and in any event within two business days of
receipt by ICH of written notice from ACT) pay to ACT (by wire transfer of
immediately available funds to an account designated by ACT) the Termination Fee
and the Termination Expenses. No termination of this Agreement pursuant to this
Section 8.2(c) shall be effective until receipt by ACT of the Termination Fee
and the Termination Expenses.
(d) The payment of the Termination Fee shall be compensation and liquidated
damages for the loss suffered by ACT or ICH, as the case may be, as the result
of the failure of the Merger to be consummated and to avoid the difficulty of
determining damages under the circumstances and neither ACT nor ICH shall have
any other liability to the other, other than as specified in this Section 8.2.
(e) As used herein:
(i) The "Termination Fee" shall be an amount equal to the lesser of
(x) $5,000,000 (the "Base Amount") and (y) the sum of (A) the maximum
amount that can be paid to ICH or ACT without causing it to fail to meet
the requirements of Sections 856(c) (2) and (3) of the Code determined as
if the payment of such amount did not constitute income described in
Sections 856(c) (2) (A)-(H) and 856(c) (3) (A)-(I) of the Code ("Qualifying
Income"), as determined by independent accountants to ICH or ACT, as the
case may be, and (B) in the event that ICH or ACT, as the case may be,
receives an opinion from outside counsel (the "Termination Tax Opinion") to
the effect that receipt of the Base Amount would either constitute
Qualifying Income or would be excluded from gross income within the meaning
of Sections 856(c) (2) and (3) of the Code (the "REIT Requirements") or
that the receipt of the remaining balance of the Base Amount following the
receipt of and pursuant to such opinion would
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not be deemed constructively received prior thereto, the Base Amount less
the amount payable under clause (A) above. A party's obligation to pay any
unpaid portion of the Termination Fee shall terminate five years from the
date of this Agreement. In the event that ICH or ACT, as the case may be,
is not able to receive the full Base Amount, the other party shall place
the unpaid amount in escrow and shall not release any portion thereof
unless and until ICH or ACT, as the case may be, receives any one or
combination of the following: (i) a letter from its independent accountants
indicating the maximum amount that can be paid at that time without causing
it to fail to meet the REIT Requirements or (ii) a Termination Tax Opinion,
in which event ICH or ACT, as the case may be, shall pay to the other party
the lesser of the unpaid Base Amount or the maximum amount stated in the
letter referred to in (i) above or, as applicable, the Termination Tax
Opinion.
(ii) The "Termination Expenses" shall be an amount equal to the lesser
of (x) out-of-pocket expenses incurred by the recipient thereof in
connection with this Agreement and the transactions contemplated hereby
(including, without limitation, all attorneys', accountants' and investment
bankers' fees and expenses) but in no event in an amount greater than
$250,000 (the "Expense Fee Base Amount") and (y) the sum of (A) the maximum
amount that can be paid to ICH or ACT, as the case may be, without causing
it to fail to meet the requirements of Sections 856(c) (2) and (3) of the
Code determined as if the payment of such amount did not constitute
Qualifying Income, as determined by independent accountants to ICH or ACT,
as the case may be, and (B) in the event ICH or ACT, as the case may be,
receives a Termination Tax Opinion to the effect that the receipt by ICH or
ACT, as the case may be, of the Expense Fee Base Amount would either
constitute Qualifying Income or would be excluded from gross income within
the meaning of the REIT Requirements or that receipt by ICH or ACT, as the
case may be, of the remaining balance of the Expense Fee Base Amount
following the receipt of and pursuant to such opinion would not be deemed
constructively received prior thereto, the Expense Fee Base Amount less the
amount payable under clause (A) above. In the event that ICH or ACT, as the
case may be, is not able to receive the full Expense Fee Base Amount, such
party shall place the unpaid amount in escrow and shall not release any
portion thereof to the other party unless and until ICH or ACT, as the case
may be, receives any one or combination of the following: (i) a letter from
its independent accountants indicating the maximum amount that can be paid
at that time without causing it to fail to meet the REIT Requirements or
(ii) a Termination Tax Opinion, in which event ICH or ACT, as the case may
be, shall pay to the other party the lesser of the unpaid Expense Fee Base
Amount or the maximum amount stated in the letter referred to in the
immediately preceding clause (i) above or, as applicable, the Termination
Tax Opinion.
SECTION 8.3 Effect of Termination. In the event of termination of this
Agreement by either ACT or ICH as provided in Section 8.1, this Agreement shall
forthwith become void and have no effect, without any liability or obligation on
the part of ICH or ACT, other than the last sentence of Section 6.2, Section 8.2
and this Section 8.3. Notwithstanding the foregoing, no party shall be relieved
from liability for any willful, material breach of this Agreement.
SECTION 8.4 Amendment. This Agreement may be amended by the parties in
writing by action of their respective Boards of Directors or Trust Managers, as
the case may be, at any time before or after any Shareholder Approvals are
obtained and prior to the filing of the Maryland Articles of Merger with the
State Department of Assessments and Taxation of Maryland and the filing of the
Texas Articles of Merger with the County Clerk of the County of Dallas, Texas;
provided, however, that, after the Shareholder Approvals are obtained, no such
amendment, modification or supplement shall alter the amount or change the form
of the consideration to be delivered to ACT's shareholders or alter or change
any of the terms or conditions of this Agreement if such alteration or change
would adversely affect ACT's shareholders or ICH's stockholders, in each case
without further approval of such affected Persons.
SECTION 8.5 Extension; Waiver. At any time prior to the Effective Time,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other party, (b) waive any inaccuracies in the
representations and warranties of the other party contained in this Agreement or
in any document delivered pursuant to this Agreement or (c) subject to the
proviso of Section 8.4, waive compliance with any of the agreements or
conditions of the other party contained in this Agreement. Any agreement on
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the part of a party to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party. The failure of
any party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of those rights.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 9.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
SECTION 9.2 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, sent by overnight courier (providing proof of
delivery) to the parties or sent by telecopy (providing confirmation of
transmission) at the following addresses or telecopy numbers (or at such other
address or telecopy number for a party as shall be specified by like notice):
(a) if to ICH, to
Impac Commercial Holdings
c/o FIC Management, Inc.
1301 Avenue of the Americas
New York, NY 10019
Attention: Randal A. Nardone
Telecopy: (212) 798-6120
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
Attention: J. Gregory Milmoe
Telecopy: (212) 735-2000
(b) if to ACT, to
AMRESCO Capital Trust
700 North Pearl Street, Suite 2400
Dallas, Texas 75201
Attention: Jonathan S. Pettee
Telecopy: (214) 953-7817
with a copy to:
Locke Liddell & Sapp LLP
2001 Ross Avenue, Suite 2300
Dallas, Texas 75201
Attention: Bryan L. Goolsby
Telecopy: (214) 740-8800
SECTION 9.3 Certain Definitions. For purposes of this Agreement:
An "Affiliate" of any Person means another Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first Person.
"ACT Disclosure Letter" means the letter previously delivered to ICH by ACT
disclosing certain information in connection with this Agreement.
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"ICH Disclosure Letter" means the letter previously delivered to ACT by ICH
disclosing certain information in connection with this Agreement.
"Knowledge" where used herein with respect to ACT shall mean the actual
knowledge of the persons named in Schedule 9.3 to the ACT Disclosure Letter and
where used with respect to ICH shall mean the actual knowledge of the persons
named in Schedule 9.3 to the ICH Disclosure Letter.
"Material Adverse Effect," with respect to any Person, shall mean a
material adverse effect (or any development that, insofar as reasonably can be
foreseen, in the future is reasonably likely to have a material adverse effect)
on the business, assets, financial or other condition, results of operations or
prospects of such Person and its Subsidiaries, taken as a whole.
"Person" means an individual, corporation, partnership, limited liability
company, joint venture, association, trust, unincorporated organization or other
entity.
"Subsidiary" of any Person means any Affiliate controlled by such Person
directly or indirectly through one or more intermediaries.
SECTION 9.4 Interpretation. When a reference is made in this Agreement to
a Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."
SECTION 9.5 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
SECTION 9.6 Entire Agreement; No Third-Party Beneficiaries. This
Agreement, the Confidentiality Agreements and the other agreements entered into
in connection with the transactions contemplated hereby (a) constitute the
entire agreement and supersede all prior agreements and understandings, both
written and oral, between the parties with respect to the subject matter of this
Agreement and (b) except for the provisions of Article II and Section 6.11, are
not intended to confer upon any Person other than the parties hereto any rights
or remedies.
SECTION 9.7 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflict of
laws thereof.
SECTION 9.8 Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned or delegated, in
whole or in part, by operation of law or otherwise by either of the parties
without the prior written consent of the other party. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
SECTION 9.9 Severability. If any provision of this Agreement is held to
be illegal, invalid or unenforceable under any current or future law, and if the
rights or obligations of the parties under this Agreement would not be
materially and adversely affected thereby, such provision shall be fully
separable, and this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part thereof,
the remaining provisions of this Agreement shall remain in full force and effect
and shall not be affected by the illegal, invalid or unenforceable provision or
by its severance therefrom. In lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as a part of this Agreement, a
legal, valid and enforceable provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible, and the parties hereto
request the court or any arbitrator to whom disputes relating to this Agreement
are submitted to reform the otherwise illegal, invalid or unenforceable
provision in accordance with this Section 9.9.
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SECTION 9.10 Attorneys' Fees. If any action at law or equity, including
an action for declaratory judgement, is brought to enforce or interpret any
provision of this Agreement, the prevailing party shall be entitled to recover
reasonable attorneys' fees and expenses from the other party, which fees and
expenses shall be in addition to any other relief that may be rewarded.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
IMPAC COMMERCIAL HOLDINGS, INC.
By: /s/ RANDAL A. NARDONE
------------------------------------
Name: Randal A. Nardone
Title: Chief Operating Officer
AMRESCO CAPITAL TRUST
By: /s/ JONATHAN S. PETTEE
------------------------------------
Name: Jonathan S. Pettee
Title: President
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ANNEX B
August 4, 1999
The Board of Trust Managers
AMRESCO Capital Trust
700 North Pearl Street
Dallas, TX 75201
Members of the Board of Trust Managers:
We understand that AMRESCO Capital Trust, a Texas real estate investment
trust (the "Company"), and Impac Commercial Holdings, Inc., a Maryland
corporation ("ICH"), propose to enter into an Agreement and Plan of Merger (the
"Agreement"), pursuant to which ICH will merge with and into the Company (the
"Merger"). At the effective time of the Merger, each share of ICH common stock,
par value $.01 per share ("ICH Common Stock") outstanding immediately prior to
the effective time shall be converted into the right to receive 0.66094 (the
"Exchange Ratio") of a common share of beneficial interest, par value $.01 per
share, of the Company (the "Company Common Stock") and the outstanding shares of
Series B 8 1/2% Cumulative Convertible Preferred Stock, par value $.01 per
share, outstanding prior to the effective time, and if not previously converted
into ICH Common Stock in accordance with its terms, will be converted into
1,112,782 shares of Company Common Stock.
You have requested our opinion as to the fairness from a financial point of
view of the Exchange Ratio to the Company and the holders of the Company Common
Stock, other than affiliates of the Company.
In conducting our analysis and arriving at the opinion expressed herein, we
have reviewed such materials and considered such financial and other factors as
we deemed relevant under the circumstances, including:
(1) a draft, dated August 3, 1999, of the Agreement;
(2) certain publicly available historical, financial and operating
data for the Company including, but not limited to, (a) the annual report
to shareholders and annual report on Form 10-K for the fiscal year ended
December 31, 1998 and (b) the quarterly reports on Form 10-Q for the fiscal
quarters ended June 30, 1998, September 30, 1998 and March 31, 1999;
(3) certain publicly available historical, financial and operating
data concerning ICH including, but not limited to, (a) the annual report to
shareholders and annual report on Form 10-K for the fiscal year ended
December 31, 1998 and (b) the quarterly reports on Form 10-Q for the fiscal
quarters ended March 31, 1998, June 30, 1998, September 30, 1998 and March
31, 1999;
(4) historical stock market prices and trading volumes for the Company
Common Stock and ICH Common Stock;
(5) certain information relating to the Company, including financial
forecasts, prepared by the management of the Company;
(6) certain information relating to the combined entity, including
financial forecasts, prepared by the management of the Company;
(7) publicly available financial, operating and stock market data
concerning certain companies engaged in businesses we deemed comparable to
the Company or otherwise relevant to our inquiry; and
(8) such other financial studies, analyses and investigations we
deemed appropriate.
We have assumed, with your consent, that the draft of the Agreement we
reviewed will conform in all material respects to the Agreement when in final
form.
We have met with the senior management of the Company and ICH to discuss
(i) the historical and current operating and financial condition of their
respective businesses, (ii) the prospects for their respective
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businesses, (iii) their estimates of such businesses' future financial
performance and (iv) such other matters we deemed relevant.
In connection with our review and analysis and in arriving at our opinion,
we have relied upon the accuracy and completeness of the financial and other
information provided to us by the Company and ICH and have not undertaken any
independent verification of such information or any independent valuation or
appraisal of any of the assets or liabilities of the Company and ICH, nor have
we been furnished any such valuation or appraisal. With respect to certain
financial forecasts provided to us by the Company, we have assumed that such
information (and the assumptions and bases therefor) has been reasonably
prepared and represents the Company's best currently available estimate as to
the future financial performance of the Company on a stand-alone basis and after
giving effect to the Merger. Our opinion is predicated on the Merger qualifying
as a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended. Further, our opinion is necessarily based on economic,
financial and market conditions as they currently exist and can only be
evaluated as of the date hereof and we assume no responsibility to update or
revise our opinion based upon events or circumstances occurring after the date
hereof.
Our opinion does not address nor should it be construed to address the
relative merits of the Merger or alternative business strategies that may be
available to the Company. In addition, our opinion does not in any manner
address the prices at which the Company Common Stock will trade following
consummation of the Merger.
As you know, we have been retained by the Company to act as financial
advisor in connection with the Merger and will receive a fee for such services,
a portion of which is contingent upon the consummation of the Merger. We have in
the past provided, and are currently providing, financing services to the
Company and have received fees for such services. Currently we provide a $300
million line of credit to the Company of which $61.3 million is outstanding.
Additionally, we were the lead manager for the Company's $135 million initial
public offering in May 1998. Prudential Securities Incorporated also currently
owns 250,002 warrants to purchase Company Common Stock. With respect to AMRESCO,
Inc., which is the beneficial owner of the Company's external manager, we are
currently a participant in a syndicated line of credit to AMRESCO, Inc.
Additionally, we provide a $350 million line of credit to AMRESCO Commercial
Finance Inc., of which $132 million is currently outstanding and a $250 million
line of credit to both AMRESCO Residential Mortgage Corporation and AMRESCO
Residential Capital Markets Inc., of which $0 is outstanding. We also served as
a co-manager for a $125 million follow-on offering of common stock for AMRESCO,
Inc. in February 1998. In the ordinary course of business we may actively trade
shares of Company Common Stock and ICH Common Stock for our own account and for
the accounts of customers and, accordingly, may at any time hold a long or short
position in such securities. We also provide equity research coverage regarding
the Company and AMRESCO, Inc.
This letter and the opinion expressed herein are for the use of Board of
Trust Managers of the Company. This opinion does not constitute a recommendation
to the shareholders of the Company as to how such shareholders should vote in
connection with the Merger or as to any other action such stockholders should
take regarding the Merger. This opinion may not be reproduced, summarized,
excerpted from or otherwise publicly referred to or disclosed in any manner
without our prior written consent; except that the Company may include this
opinion in its entirety in any proxy statement relating to the Merger sent to
the Company's shareholders and filed with the Securities and Exchange
Commission.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Exchange Ratio is fair to the Company and the holders of
Company Common Stock, other than affiliates of the Company, from a financial
point of view.
Very truly yours,
/s/ Prudential Securities
Incorporated
--------------------------------------
Prudential Securities Incorporated
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ANNEX C
DEUTSCHE BANK SECURITIES INC.
GLOBAL INVESTMENT BANKING
130 LIBERTY STREET -- 25TH FLOOR
NEW YORK, NEW YORK 10006
AUGUST 4, 1999
Independent Committee of Trust Managers
Mr. John C. Deterding
Mr. Bruce W. Duncan
Mr. Christopher B. Leinberger
Mr. James C. Leslie
AMRESCO Capital Trust
700 North Pearl Street
Suite 2400
Dallas, Texas 75201-7424
Gentlemen:
Deutsche Bank Securities Inc. ("Deutsche Bank") has acted as financial
advisor to the committee of Independent Trust Managers of AMRESCO Capital Trust
("ACT") in connection with the proposed merger of ACT and Impac Commercial
Holdings, Inc. (the "Company") pursuant to the Agreement and Plan of Merger,
dated as of August 4, 1999, among the Company and ACT (the "Merger Agreement"),
which provides, among other things, for the merger of the Company with and into
ACT (the "Transaction"). As set forth more fully in the Merger Agreement, as a
result of the Transaction, each share of the Common Stock, par value $.01 per
share, of the Company ("Company Common Stock") not owned directly or indirectly
by the Company or ACT will be converted into the right to receive 0.66094 shares
(the "Exchange Ratio") of common shares of beneficial interest, par value $.01
per share, of ACT ("ACT Common Stock") and the outstanding shares of Series B
8 1/2% Cumulative Convertible Preferred Stock, par value $.01 per share, if not
previously converted into Company Common Stock, will be converted into 1,112,782
shares of ACT Common Stock. The terms and conditions of the Transaction are more
fully set forth in the Merger Agreement. In connection with the Merger Agreement
and pursuant to the terms of a Purchase Agreement, dated August 4, 1999, FIC
Management, Inc. ("FIC") has agreed to effect certain transactions (the "Related
Transactions") that are separate from, but related to, the Transaction, such
Related Transactions include (i) the purchase by FIC of approximately 1,500,000
shares of ACT Common Stock from AMREIT Holdings, Inc. and AMRESCO, Inc., (ii)
the assumption by FIC of the Management Agreement, dated as of May 12, 1998,
between ACT and AMREIT Managers L.P., and (iii) the acquisition by FIC of all of
the options to purchase ACT Common Shares held by AMREIT Managers, L.P.
You have requested Deutsche Bank's opinion, as investment bankers, as to
the fairness, from a financial point of view, to ACT of the Exchange Ratio.
In connection with Deutsche Bank's role as financial advisor to ACT, and in
arriving at its opinion, Deutsche Bank has reviewed certain publicly available
financial and other information concerning the Company and ACT and certain
internal analyses and other information furnished to it by the Company and ACT.
Deutsche Bank has also held discussions with members of the senior managements
of the Company and ACT regarding the businesses and prospects of their
respective companies and the joint prospects of a combined company. In addition,
Deutsche Bank has (i) reviewed the reported prices and trading activity for
Company Common Stock and ACT Common Stock, (ii) compared certain financial and
stock market information for the Company and ACT with similar information for
certain other companies whose securities are publicly traded, (iii) reviewed the
terms of the Merger Agreement and certain related documents, and (iv) performed
such other studies and analyses and considered such other factors as it deemed
appropriate.
Deutsche Bank has not assumed responsibility for independent verification
of, and has not independently verified, any information, whether publicly
available or furnished to it, concerning the Company or ACT,
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including, without limitation, any financial information, forecasts or
projections considered in connection with the rendering of its opinion.
Accordingly, for purposes of its opinion, Deutsche Bank has assumed and relied
upon the accuracy and completeness of all such information and Deutsche Bank has
not conducted a physical inspection of any of the properties or assets, and has
not prepared or obtained any independent evaluation or appraisal of any of the
assets or liabilities, of the Company or ACT. With respect to the financial
forecasts and projections, including the analyses and forecasts made available
to Deutsche Bank and used in its analyses, Deutsche Bank has assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the management of the Company or ACT, as the case may
be, as to the matters covered thereby. In rendering its opinion, Deutsche Bank
expresses no view as to the reasonableness of such forecasts and projections,
including the Synergies, or the assumptions on which they are based. Deutsche
Bank's opinion is necessarily based upon economic, market and other conditions
as in effect on, and the information made available to it as of, the date
hereof.
For purposes of rendering its opinion, Deutsche Bank has assumed that, in
all respects material to its analysis, the representations and warranties of ACT
and the Company contained in the Merger Agreement are true and correct, ACT and
the Company will each perform all of the covenants and agreements to be
performed by it under the Merger Agreement and all conditions to the obligations
of each of ACT and the Company to consummate the Transaction will be satisfied
without any waiver thereof. Deutsche Bank has also assumed that all material
governmental, regulatory or other approvals and consents required in connection
with the consummation of the Transaction will be obtained and that in connection
with obtaining any necessary governmental, regulatory or other approvals and
consents, or any amendments, modifications or waivers to any agreements,
instruments or orders to which either ACT or the Company is a party or is
subject or by which it is bound, no limitations, restrictions or conditions will
be imposed or amendments, modifications or waivers made that would have a
material adverse effect on ACT or the Company or materially reduce the
contemplated benefits of the Transaction to ACT. Deutsche Bank has also assumed
that the Related Transaction is commercially reasonable, and accordingly, does
not express an opinion as to its fairness. In addition, you have informed
Deutsche Bank, and accordingly for purposes of rendering its opinion Deutsche
Bank has assumed, that the Transaction will be tax-free to each of ACT and the
Company and their respective stockholders and that the Transaction will be
accounted for as a purchase.
This opinion is addressed to, and for the use and benefit of, the
Independent Trust Managers of ACT and is not a recommendation to the
stockholders of ACT to approve the issuance of shares of ACT Common Stock in the
Transaction. In connection with Deutsche Bank's role as financial advisor to the
Independent Trust Managers of ACT and in arriving at its opinion, Deutsche Bank
was not requested to or authorized to solicit or evaluate, and did not solicit
or evaluate, any alternative transactions to the Transaction. This opinion is
limited to the fairness, from a financial point of view, to ACT and accordingly
to its shareholders, other than affiliates of ACT, of the Exchange Ratio, and
Deutsche Bank expresses no opinion as to the merits of the underlying decision
by ACT to engage in the Transaction.
Deutsche Bank will be paid a fee for its services as financial advisor to
ACT in connection with the Transaction. We are an affiliate of Deutsche Bank AG
(together with its affiliates, the "DB Group"). One or more members of the DB
Group have, from time to time, provided investment banking, commercial banking
and other financial services to affiliates of ACT for which it has received
compensation. In the ordinary course of business, members of the DB Group may
actively trade in the securities and other instruments and obligations of ACT
and the Company for their own accounts and for the accounts of their customers.
Accordingly, the DB Group may at any time hold a long or short position in such
securities, instruments and obligations.
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Based upon and subject to the foregoing, it is Deutsche Bank's opinion as
investment bankers that the Exchange Ratio is fair, from a financial point of
view, to ACT and accordingly to its shareholders, other than affiliates of ACT.
Very truly yours,
/s/ DEUTSCHE BANK SECURITIES INC.
--------------------------------------
DEUTSCHE BANK SECURITIES INC.
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ANNEX D
August 4, 1999
Board of Directors
Impac Commercial Holdings, Inc.
1401 Dove Street
Newport Beach, California 92660
Members of the Board:
We understand that Impac Commercial Holdings, Inc. (the "Company") and
AMRESCO Capital Trust ("Amresco") propose to enter into an Agreement and Plan of
Merger, dated as of August 4, 1999 (the "Merger Agreement"), which provides for
among other things, the merger (the "Merger") of the Company with and into
Amresco with Amresco as the surviving entity. Pursuant to the Merger, each
outstanding share of common stock, par value $0.01 per share, of the Company
(the "Company Common Stock"), other than the Company Common Stock held by
Amresco or any subsidiary of the Company, will be converted into the right to
receive 0.66094 shares (the "Exchange Ratio") of common stock, par value $0.01
per share, of Amresco (the "Amresco Common Shares"), subject to adjustment in
certain circumstances. We further understand that (i) all of the outstanding
shares of the Series B 8 1/2% cumulative convertible preferred stock (the
"Series B Preferred Stock") of the Company is owned by Fortress Investment Group
("Fortress") and (ii) Fortress intends, prior to the effective time of the
Merger, to convert the Series B Preferred Stock into 1,683,635 shares of newly
issued Company Common Stock or, if such Series B Preferred Stock is not so
converted prior to the effective time of the Merger, such stock shall be
converted in the Merger into 1,112,782 Amresco Common Shares. The terms and
conditions of the Merger are more fully set forth in the Merger Agreement.
Contemporaneously with the consummation of the Merger, FIC Management,
Inc., the Company's external advisor ("FIC"), will complete certain
transactions, more fully set forth in the Purchase Agreement, among FIC,
AMRESCO, Inc., AMREIT Managers, L.P. (the "Manager"), AMREIT Holdings, Inc. and
MLM Holdings, Inc. substantially in the form of the draft dated as of August 4,
1999 (the "Purchase Agreement"), including (i) the purchase by FIC of Amresco
Common Shares from AMREIT Holdings, Inc. and AMRESCO, Inc. and (ii) the purchase
of the rights of the Manager and the assumption of the Manager's obligations
under (A) the Management Agreement, dated as of May 12, 1998, between Amresco
and the Manager and (B) the Management Agreement, dated as of February 2, 1998
between the Manager and OLY/ACT L.P. In addition, we understand that in
conjunction with and contingent upon the Merger, Amresco and the Company intend
to enter into a new management agreement with respect to the management of the
combined entity.
You have asked for our opinion as to whether on the date hereof the
consideration to be received by holders (other than Fortress and its affiliates)
of shares of Company Common Stock pursuant to the Merger Agreement is fair from
a financial point of view to such holders.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and
other business and financial information of the Company and
Amresco, respectively;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company and Amresco
prepared by the managements of the Company and FIC and Amresco
and the Manager, respectively;
(iii) analyzed certain financial forecasts and net asset value
calculations with senior executives of the Company and FIC
prepared by the managements of the Company and FIC and Amresco
and the Manager respectively;
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(iv) reviewed and discussed with senior executives of the Company, FIC,
Amresco and the Manager the strategic rationale for the Merger and
information relating to certain strategic, financial and
operational benefits anticipated from the transactions
contemplated by the Merger Agreement, including anticipated cost
savings and operational synergies, prepared by the managements of
the Company and FIC and Amresco and the Manager, respectively;
(v) discussed the past and current operations, financial condition and
prospects of the Company with senior executives of the Company and
FIC and discussed the past and current operations, financial
condition and prospects of Amresco with senior executives of
Amresco and the Manager;
(vi) reviewed the pro forma impact of the Merger on Amresco's earnings
per share, cash flow, consolidated capitalization and financial
ratios;
(vii) reviewed information prepared by members of senior managements of
the Company, FIC, Amresco and the Manager relating to the
relative contributions of the Company and Amresco to the combined
company;
(viii) reviewed the reported prices and trading activity for the
Company Common Stock and the Amresco Common Shares;
(ix) compared the financial performance of the Company and Amresco and
the prices and trading activity of the Company Common Stock and
the Amresco Common Shares with those of certain other publicly
traded companies comparable with the Company and Amresco,
respectively, and with their securities
(x) reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions which we deemed relevant;
(xi) participated in discussions among representatives of the Company,
FIC, Amresco and the Manager and their financial and legal
advisors;
(xii) reviewed the draft of the Merger Agreement dated August 4, 1999,
the definitive Merger Agreement dated as of August 4, 1999, the
draft of the Purchase Agreement dated August 4, 1999 and certain
related documents; and
(xiii) performed such other analyses and considered such other factors
as we have deemed necessary or appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information supplied or otherwise made
available to us for the purposes of this opinion. With respect to the financial
forecasts (including but not limited to the availability and pricing of
warehouse and repurchase agreements and levels and yield on loan originations)
and net asset valuations, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and good
faith judgments of the future financial performance of the Company and Amresco.
In arriving at our opinion, we have relied upon, without independent
verification, the assessments of the managements of the Company and FIC and
Amresco and the Manager of the amount and timing of the potential synergies and
cost savings that Amresco expects to realize from the Merger and of the
strategic, financial and operational benefits anticipated from the Merger. We
have not made any independent valuation or appraisal of the assets or
liabilities of the Company or Amresco, nor have we been furnished with any such
appraisals.
We were not requested to and did not provide advice concerning the
structure, the specific amount of the consideration, or any other aspects of the
transactions contemplated by the Merger Agreement. We were not authorized to and
did not solicit any expressions of interest from any other parties with respect
to the sale of all or any part of the Company or any other alternative
transaction. We did not participate in negotiations with respect to the terms of
the Merger. Consequently, no opinion is expressed as to whether any alternative
transaction might produce consideration for the Company's stockholders in an
amount in excess of that contemplated in the Merger.
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We have acted as financial advisor to the Board of Directors of the Company
in connection with the Merger and will receive a fee for our services, a
significant portion of which is contingent upon the consummation of the Merger.
In addition, the Company has agreed to indemnify us for certain liabilities
arising out of our engagement. In the past, Banc of America Securities LLC has
provided financial advisory services to the Company and to Amresco and has
received fees for the rendering of these services. In addition, in the ordinary
course of our trading, brokerage, investment banking, principal investing,
investment management and financing activities, Banc of America Securities LLC
or its affiliates may at any time hold long or short positions or other
investments, and may trade or otherwise effect transactions, for our own account
or the accounts of customers, in debt or equity securities or senior loans of
the Company, Amresco or Fortress or their affiliates. Without limiting the
foregoing, we note that our affiliates have certain lending relationships with
Fortress and its affiliates and hold equity investments in a Fortress affiliate.
It is understood that this opinion is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company in respect of the Merger with the Securities
and Exchange Commission, so long as this opinion is reproduced in such filing in
full and any description of or reference to us or summary of this opinion and
the related analysis in such filing is in a form reasonably acceptable to us and
our counsel. Our opinion is necessarily based on economic, market and other
conditions (including prevailing interest rates) as in effect on, and the
information made available to us as of, the date hereof. It should be understood
that subsequent developments may affect this opinion, and we do not have any
obligation to update, revise, or reaffirm this opinion. This opinion does not in
any manner address the prices at which the Amresco Common Shares will trade
following consummation of the Merger. In addition, we express no opinion or
recommendation as to how the stockholders of the Company or Amresco should vote
at their respective stockholders' meetings held in connection with the Merger.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the consideration to be received by holders (other than Fortress and
its affiliates) of shares of Company Common Stock pursuant to the Merger
Agreement is fair from a financial point of view to such holders.
Very truly yours,
/s/ BANC OF AMERICA SECURITIES
LLC
--------------------------------------
BANC OF AMERICA SECURITIES LLC
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AMRESCO CAPITAL TRUST
700 NORTH PEARL STREET, SUITE 2400
DALLAS, TEXAS 75201
FORM OF PROXY FOR SPECIAL MEETING
TO BE HELD ON __________, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUST
MANAGERS.
The undersigned hereby appoints each of Robert L. Adair III and
Jonathan S. Pettee as Proxies, each of them with the power to appoint his or her
substitute, and hereby authorizes them to represent and to vote, as indicated
below, all the common shares of AMRESCO Capital Trust held of record by the
undersigned on _________, 1999 at the special meeting of shareholders to be held
on _______________, 1999 and at any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1, 2 AND 3.
THE BOARD OF TRUST MANAGERS RECOMMENDS A VOTE FOR PROPOSALS 1, 2 AND 3.
IMPORTANT - THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
<PAGE> 309
1. To approve the merger of Impac Commercial FOR AGAINST ABSTAIN
Holdings, Inc. with and into AMRESCO Capital |_| |_| |_|
Trust pursuant to the Agreement and Plan of
Merger by and between Impac Commercial Holdings,
Inc. and AMRESCO Capital Trust dated as of
August 4, 1999, including the other transactions
contemplated thereby.
2. To approve the amendment of AMRESCO Capital FOR AGAINST ABSTAIN
Trust's declaration of trust to change its |_| |_| |_|
name to "Garrison Investment Trust" if the
merger is approved and consummated.
3. To approve the adjournment of the special FOR AGAINST ABSTAIN
meeting, if necessary, to permit further |_| |_| |_|
solicitation of proxies.
In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the special meeting or any
adjournment or postponement thereof.
Please sign exactly as name
appears. When shares are
held by joint tenants, both
should sign. When signing
as attorney, executor,
administrator, trustee or
guardian, please give full
title as such. If a
corporation, please sign in
full corporate name by the
President or other
authorized officer. If a
partnership, please sign in
partnership name by an
authorized person.
______________________________
______________________________
Dated:__________________, 1999
<PAGE> 310
IMPAC COMMERCIAL HOLDINGS, INC.
C/O FORTRESS INVESTMENT GROUP LLC
1301 AVENUE OF THE AMERICAS, 42ND FLOOR
NEW YORK, NEW YORK 10019
FORM OF PROXY FOR SPECIAL MEETING
TO BE HELD ON __________, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints each of Wesley R. Edens and Randal A.
Nardone as Proxies, each of them with the power to appoint his or her
substitute, and hereby authorizes them to represent and to vote, as indicated
below, all the shares of Common Stock, $0.01 per share, of Impac Commercial
Holdings, Inc. and Series B Cumulative Convertible Preferred Stock of Impac
Commercial Holdings, Inc. held of record by the undersigned on _________, 1999
at the special meeting of shareholders to be held on _______________, 1999 and
at any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1 AND 2.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2.
IMPORTANT - THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
<PAGE> 311
1. To approve the merger of Impac Commercial FOR AGAINST ABSTAIN
Holdings, Inc. with and into AMRESCO Capital |_| |_| |_|
Trust pursuant to the Agreement and Plan
of Merger by and between Impac Commercial
Holdings, Inc. and AMRESCO Capital Trust
dated as of August 4, 1999, including the
other transactions contemplated thereby.
2. To approve the adjournment of the special FOR AGAINST ABSTAIN
meeting, if necessary, to permit further |_| |_| |_|
solicitation of proxies.
In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the special meeting or any
adjournment or postponement thereof.
Please sign exactly as name
appears. When shares are
held by joint tenants, both
should sign. When signing
as attorney, executor,
administrator, trustee or
guardian, please give full
title as such. If a
corporation, please sign in
full corporate name by the
president or other
authorized officer. If a
partnership, please sign in
partnership name by an
authorized person.
______________________________
______________________________
Dated:__________________, 1999
