<PAGE> 1
As filed with the Securities and Exchange Commission on April 1, 1998
Registration No. 333-45543
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM S-11
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------------
AMRESCO CAPITAL TRUST
(Exact Name of Registrant as Specified in its Governing Instruments)
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700 NORTH PEARL STREET, SUITE 2400, DALLAS, TEXAS 75201
(214) 953-7700
(Address, Including Zip Code, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
MARK D. GIBSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AMRESCO CAPITAL TRUST
700 NORTH PEARL STREET, SUITE 2400
DALLAS, TEXAS 75201
(214) 953-7700
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------------
COPIES TO:
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<S> <C> <C>
Michelle P. Goolsby, Esq. L. Keith Blackwell, Esq. Peter T. Healy, Esq.
Winstead Sechrest & Minick P.C. AMRESCO, INC. O'Melveny & Myers LLP
5400 Renaissance Tower 700 North Pearl Street Embarcadero Center West
1201 Elm Street Suite 2400, LB 342 275 Battery Street, 26th Floor
Dallas, Texas 75270 Dallas, Texas 75201 San Francisco, California 94111
(214) 745-5400 (214) 953-7700 (415) 984-8833
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]__________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [ ]__________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]__________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
==============================================================================================================================
Proposed Maximum
Title of Securities Amount Being Proposed Maximum Aggregate Offering Amount of
Being Registered Registered (1) Offering Price Per Price (2) Registration Fee
Share (3)
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<S> <C> <C> <C> <C>
Common Shares of Beneficial
Interest, par value $0.01 per share 23,000,000 shares $16.00 $368,000,000 $108,560
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(1) Includes 3,000,000 shares which may be purchased by the Underwriters to
cover over-allotments, if any.
(2) Estimated based on a bona fide estimate of the proposed maximum offering
price solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) of the Securities Act of 1933, as amended.
(3) A portion of the required filing fee, in the amount of $106,864, was
paid on February 3, 1998.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PROSPECTUS SUBJECT TO COMPLETION - DATED __________, 1998
- --------------------------------------------------------------------------------
20,000,000 Shares
AMRESCO CAPITAL TRUST
Common Shares of Beneficial Interest
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All of the 20,000,000 common shares of beneficial interest, par value
$.01 per share ("Common Shares"), of AMRESCO Capital Trust (the "Company")
offered hereby (the "Offering") are being offered by the Company. The Company
is a newly organized Texas real estate investment trust 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, mortgage-backed securities and commercial real properties. The Company
will elect to be taxed as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended (the "Code"), and generally will not
be subject to federal taxation on its income to the extent that it distributes
its net income to its shareholders and maintains its qualification as a REIT.
The Company's operations will be managed by AMREIT Managers, L.P. (the
"Manager"), an affiliate of AMRESCO, INC. ("AMRESCO"). AMRESCO (together with
its affiliated entities, the "AMRESCO Group"), is a publicly-traded diversified
financial services company specializing in real estate lending, specialized
commercial finance, and the acquisition, resolution and servicing of
nonperforming and underperforming commercial real estate loans.
SEE "RISK FACTORS" ON PAGES ___ TO ___ FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE COMMON SHARES OFFERED HEREBY, INCLUDING AMONG OTHERS:
o Conflicts of interest between the Company and one or more members of the
AMRESCO Group could result in decisions not in the best interest of the
Company's shareholders.
o The Management Agreement provides for base management fees payable to
the Manager without consideration of the performance of the Company's
portfolio and also provides for incentive fees based on certain
performance criteria, which could result in the Manager recommending for
investment by the Company riskier or more speculative investments.
o The Company will be wholly dependent upon the Manager and other members
of the AMRESCO Group for its operations.
o The Company and the Manager were organized in January 1998 and March
1998, respectively, and, therefore, neither the Company nor the Manager
has any operating history, any substantial assets or any prior
experience in managing and operating a REIT, which could adversely
affect the Company's results of operations.
o The Company has issued non-binding commitments to purchase only
approximately $74.5 million of real estate related assets using the
proceeds of the Offering. The Company will have broad discretion in the
allocation of the net proceeds of the Offering. Delays in investing the
net proceeds of the Offering in real estate related assets will
adversely affect operations of the Company.
o The Company intends to invest in various types of commercial mortgage
loans (including construction loans, bridge loans, participating loans
and second-lien loans) which may be subject to significant credit risk,
resulting in possible loss of principal and non-payment of interest.
o The Company intends to invest in commercial and residential
mortgage-backed securities, including some non-investment grade
mortgage-backed securities, which may be subject to a greater risk of
loss of principal and interest than investments in senior, investment
grade securities.
(Continued on next page)
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Underwriting Discounts and Proceeds to
Public Commissions(1) Company (2)
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<S> <C> <C> <C>
Per Common Share . . . . . . . . . . . . $ $ $
Total(3) . . . . . . . . . . . . . . . . $ $ $
====================================================================================================================================
</TABLE>
(1) The Company and AMRESCO have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
approximately $1,300,000.
(3) The Company has granted the Underwriters a 30-day over-allotment option
to purchase up to 3,000,000 additional Common Shares on the same terms
and conditions as set forth above. If all such additional Common Shares
are purchased, the total Price to Public will be $________, the total
Underwriting Discounts and Commissions will be $________ and the total
Proceeds to Company will be $_______. See "Underwriting."
- --------------------------------------------------------------------------------
The Common Shares are being offered by the several Underwriters, subject
to delivery by the Company and acceptance by the Underwriters, to prior sale
and to withdrawal, cancellation or modification of the offer without notice.
Delivery of the Common Shares to the Underwriters is expected to be made
through the facilities of The Depository Trust Company, New York, New York, on
or about____, 1998.
PRUDENTIAL SECURITIES INCORPORATED
CREDIT SUISSE FIRST BOSTON
J.C. BRADFORD & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
___________, 1998 PIPER JAFFRAY INC.
<PAGE> 3
(Continued from previous page)
o The Company intends to invest in various types of commercial real
properties, including net leased properties which may be subject to
credit risk of non-payment by the applicable tenant, particularly in the
event of an economic downturn, and sub-performing and non-performing
properties, which may not generate sufficient revenues to meet operating
expenses and debt service obligations.
o The yield on the Company's investments will be sensitive to changes in
prevailing medium-term and long-term interest rates and, in some cases,
changes in prepayment rates, which could result in a mismatch between
the Company's borrowing rates (which will typically be shorter-term
rates) and asset yields and consequently reduce or eliminate net income
from the Company's investments.
o The Company's operations are expected to be highly leveraged (and the
Company's Declaration of Trust does not limit the amount of indebtedness
the Company can incur), which is likely to increase the volatility of
the Company's income and net asset value and could result in operating
or capital losses.
o The Company intends to use hedging strategies, including interest rate
swaps, interest rate collars, caps or floors, forward contracts and U.S.
Treasury and Eurodollar futures and options, which have significant
transaction costs (and therefore will reduce the Company's overall
returns on its investments) and may not be effective in mitigating
interest rate and prepayment risks.
o The Manager may be entitled to a significant termination fee upon
termination of the Management Agreement which, if paid, could
substantially reduce cash available for distribution to shareholders.
o The Company's investment and operating policies and strategies
(including the Company's policies regarding the incurrence of debt) may
be changed at any time without the consent of the shareholders of the
Company.
o The Company may be taxed as a corporation if it fails to qualify as a
REIT, which would substantially reduce the amount of cash available for
distribution to shareholders.
o Shareholders may, under certain circumstances, be subject to significant
potential dilution from future equity offerings, including offerings of
preferred shares.
o Ownership of Common Shares by any shareholder (other than AMRESCO
Holdings, Inc. or any other member of the AMRESCO Group) is limited to
9.8% of the total outstanding shares of beneficial interest of the
Company, which may make it more difficult to change control of the
Company even where such change may be in the best interest of the
Company's shareholders.
o The Company's activities, structure and operations may be adversely
affected by changes in the tax laws applicable to REITs.
Simultaneously with the closing of, and in addition to, the Offering,
the Company will sell 2,222,233 Common Shares (2,555,567 if the Underwriters'
over-allotment option is separately exercised in full) to AMREIT Holdings, Inc.
("Holdings"), a member of the AMRESCO Group, at the initial public offering
price pursuant to a private placement. See "Private Placement." After such
sale, Holdings will own 10% of the then outstanding Common Shares. In
addition, at the request of the Company, the Underwriters have reserved an
aggregate of up to 1,000,000 of the Common Shares offered hereby for sale at
the initial public offering price to trust managers, directors, officers and
employees of the Company and members of the AMRESCO Group.
Prior to the Offering, there has been no public market for the Common
Shares. It is currently anticipated that the initial public offering price for
the Common Shares offered hereby will be between $14 and $16 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. An application has been submitted to have
the Common Shares approved for inclusion in The Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "AMCT."
<PAGE> 4
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING PURCHASES OF COMMON SHARES TO STABILIZE THE MARKET PRICE, PURCHASES
OF COMMON SHARES TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON SHARES
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 5
TABLE OF CONTENTS
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PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Business and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Targeted Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Summary Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Initial Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Management Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Industry Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Dividend Policy and Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Organization and Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Conflicts of Interest May Result in Decisions That do Not Fully Reflect the Shareholders' Best Interest . . . 17
Terms of Transactions With Members of the AMRESCO Group May Not be Fair . . . . . . . . . . . . . . . 17
Investment Opportunities May Be Limited if Such Opportunities Are Also Attractive to the AMRESCO Group 17
Competition by the AMRESCO Group May Adversely Affect the Company . . . . . . . . . . . . . . . . . . 17
Conflicts of the Officers and Employees of the Manager May Cause Them Not to Act in the Company's Best
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Structure of Management Compensation Could Jeopardize the Invested Portfolio . . . . . . . . . . . . . 18
Agreements and Transactions May Not be Favorable to the Company . . . . . . . . . . . . . . . . . . . 18
Dependence on the Manager and the AMRESCO Group for Operations and the Lack of Experience of the Manager May
Adversely Affect Operating Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Inability to Acquire or Delays in Acquiring Targeted Investments Will Reduce Income to the Company . . . . . 19
Competition for Targeted Investments Could Reduce Income to the Company . . . . . . . . . . . . . . . . . . . 19
Co-Investments May be Riskier Than Investments Made Solely by the Company . . . . . . . . . . . . . . . . . . 19
Risks of Loss on Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Foreclosure May Not be Sufficient to Prevent Losses . . . . . . . . . . . . . . . . . . . . . . . . . 20
Commercial Mortgage Loans May Involve a Greater Risk of Loss Than Single-Family Mortgage Loans . . . . 20
Mezzanine, Construction and Bridge Loans Involve Greater Risks of Loss . . . . . . . . . . . . . . . . 20
Participating Loans, Mezzanine Loans, Construction Loans and Bridge Loans Involve Higher Administrative
Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Distressed Mortgage Loans May Have Greater Default Risks Than Performing Loans . . . . . . . . . . . . 21
Limited Recourse Loans May Limit the Company's Recovery to the Value of the Mortgaged Property . . . . 21
Volatility of Values of Mortgaged Properties May Affect Adversely the Company's Mortgage Loans . . . . 21
One Action Rules May Limit the Company's Rights Following Defaults . . . . . . . . . . . . . . . . . . 21
Risks of Loss on the Initial Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Repayment May Depend on Successful Completion of the Project . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
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TABLE OF CONTENTS
(Continued)
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Decrease in Property Values May Adversely Affect the Borrower's Ability to Repay the Loan or Result
in Reduced Profits to the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Returns on Loan One and Loan Four May be Reduced due to Second Lien Status . . . . . . . . . . . . . . 22
Potential Environmental Problems Associated With Loan Three May Adversely Affect the Company . . . . . 22
Risks Related to Investments in MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Subordinated Interests are Subject to Greater Credit Risks Than More Senior Classes . . . . . . . . . 23
Yields on Subordinated Interests May Be Affected Adversely By Prepayments and Interest Rate Changes . 24
Certain Investments May Generate Taxable Income Exceeding Cash Flow . . . . . . . . . . . . . . . . . 24
Risks Related to Investments in Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Tenant Defaults and Bankruptcy May Cause Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Reliance on Third Party Operators May Adversely Affect Results . . . . . . . . . . . . . . . . . . . . 24
Conditions Beyond the Company's Control May Affect Adversely the Value of Real Estate . . . . . . . . 24
Real Estate is Illiquid and its Value May Decrease . . . . . . . . . . . . . . . . . . . . . . . . . . 25
The Company's Insurance Will Not Cover All Losses . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Property Taxes Decrease Returns on Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Compliance With Americans with Disabilities Act and Other Changes in Governmental Rules and
Regulations May Be Costly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Real Estate with Hidden Environmental Problems Will Increase Costs and May Create Liability for the
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Real Estate With Known Environmental Problems May Create Liability for the Company . . . . . . . . . . 26
Foreign Real Estate is Subject to Currency Conversion Risks and Uncertainty of Foreign Laws . . . . . 26
Interest Rate Fluctuations May Adversely Affect the Company's Investments and Operating Results . . . . . . . 26
Interest Rate Mismatch Could Occur Between Invested Portfolio Yield and Borrowing Rates Resulting in
Decreased Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Inverted Yield Curve Adversely Affects Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Increased Interest Rates Could Decrease Demand for Mortgage Loans . . . . . . . . . . . . . . . . . . 26
Increased Prepayment Rates Could Adversely Affect Yields . . . . . . . . . . . . . . . . . . . . . . . 27
Leverage Increases Exposure to Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Inability to Implement Leveraging Strategy May Reduce Profits . . . . . . . . . . . . . . . . . . . . . . . . 27
Hedging Transactions Can Limit Gains and May Increase Exposure to Losses . . . . . . . . . . . . . . . . . . 28
Termination of the Management Agreement Could Adversely Affect the Company's Investments and Operating
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
The Company's Ability to Revise its Policies and Strategies Without Shareholder Consent May Create
Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Failure to Maintain REIT Status Would Have Adverse Tax Consequences . . . . . . . . . . . . . . . . . . . . . 29
Sales by Shareholders Could Adversely Affect the Market Price of the Common Shares . . . . . . . . . . . . . 30
Future Offerings by the Company of Debt and Equity Could Dilute the Interests of Holders of Common Shares . . 31
Restrictions on Ownership of the Common Shares Could Discourage a Change of Control . . . . . . . . . . . . . 31
Restrictions on or Impediments to Change of Control Could Adversely Affect the Value of the Common Shares . . 31
Changes in Tax Laws Applicable to REITs May Adversely Affect the Company . . . . . . . . . . . . . . . . . . 32
</TABLE>
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TABLE OF CONTENTS
(Continued)
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Failure to Develop a Stable Market May Result in Depressed Market Price . . . . . . . . . . . . . . . . . . . 32
Software Deficiencies Could Adversely Affect the Company . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Failure to Maintain Exclusion From the Investment Company Act Would Restrict the Company's Operating
Flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Adverse Tax Treatment of Excess Inclusion Income Could Adversely Affect Shareholders . . . . . . . . . . . . 33
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
DIVIDEND POLICY AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES . . . . . . . . . . . . . . . . . . . . . . . 36
Warehouse Line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Repurchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
BUSINESS AND STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Objective and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Operating Policies and Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Capital and Leverage Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Warehouse Line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Repurchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Securitizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Unsecured Financings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Credit Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Financial Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Relationship With AMRESCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Right of First Refusal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Correspondent Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Acquisition or Co-Investment Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Compliance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Future Revisions in Policies and Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Description of Targeted Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Participating Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Construction Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Mezzanine Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Bridge Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Distressed Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Real Estate Pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Commercial Real Estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Net Leased Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
REO Properties and Other Distressed Real Estate . . . . . . . . . . . . . . . . . . . . . . . . 54
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Other Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Investment in Other Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Foreign Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
The Initial Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Loan One . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Loan Two . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Loan Three . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Loan Four . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
MANAGEMENT OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Executive Officers and Trust Managers of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Share Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Share Options Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
THE MANAGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Description of the AMRESCO Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Commercial Mortgage Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Real Estate Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Commercial Real Estate Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Commercial Loan Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Commercial Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Franchise Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Specialty Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Single-Family Residential Construction Lending . . . . . . . . . . . . . . . . . . . . . . . . 71
Asset Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Asset Portfolio Management and Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Special Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
The Management Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Management Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Certain Relationships; Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Limits of Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Taxation of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Requirements For Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Organizational Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
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Qualified REIT Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Ownership of a Partnership Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Income Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Asset Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Annual Distribution Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Failure to Qualify . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Taxation of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Taxation of Taxable U.S. Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Taxation of Tax-Exempt Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Taxation of Non-U.S. Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Information Reporting Requirements and Backup Withholding Tax . . . . . . . . . . . . . . . . . . . . . . . . 96
Proposed Tax Legislation and Possible Other Legislative Actions Affecting Tax Consequences . . . . . . . . . 96
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Employee Benefit Plans, Tax-Qualified Retirement Plans, and IRAs . . . . . . . . . . . . . . . . . . . . . . 97
Status of the Company Under ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Liquidation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Other Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Meetings of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Restrictions on Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Dividend Reinvestment and Share Purchase Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
CERTAIN PROVISIONS OF TEXAS LAW AND OF THE DECLARATION OF TRUST AND BYLAWS . . . . . . . . . . . . . . . . . . . . . 104
Board of Trust Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Removal of Trust Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Staggered Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Business Combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Amendment to the Declaration of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Amendment of Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Termination of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Special Meetings of the Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Advance Notice of Trust Manager Nominations and New Business . . . . . . . . . . . . . . . . . . . . . . . . 107
Possible Anti-Takeover Effect of Certain Provisions of Texas Law and of the Declaration of Trust
and Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
Reports to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
SHARES ELIGIBLE FOR FUTURE SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
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PRIVATE PLACEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
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PROSPECTUS SUMMARY
The following summary should be read in conjunction with and is
qualified in its entirety by the more detailed information appearing elsewhere
in this Prospectus. Capitalized and other terms used herein shall have the
meanings assigned to them in the Glossary, which starts at page ___. Unless
otherwise indicated, the information in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised. As used in this
Prospectus, the "Company" means either (i) AMRESCO Capital Trust, a Texas real
estate investment trust, or (ii) AMRESCO Capital Trust, a Texas real estate
investment trust, collectively with its affiliated entities (which does not
include the Manager or any other member of the AMRESCO Group), as the context
may require.
THE COMPANY
The Company is a newly organized Texas real estate investment trust
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, Construction Loans and Bridge Loans), mortgage-backed
securities ("MBS"), commercial real estate (including Net Leased Real Estate,
real estate acquired at foreclosure or by deed-in-lieu of foreclosure or other
underperforming or otherwise distressed real estate) and certain other real
estate related assets. The Company will elect to be taxed as a REIT. The
Company generally will not be subject to federal income taxation to the extent
that it distributes its net income to its shareholders and maintains its
qualification as a REIT. See "Federal Income Tax Consequences--Requirements
For Qualification."
The Company was formed to pursue and capitalize upon certain investment
opportunities arising within the AMRESCO Group which are currently referred to
entities unaffiliated with AMRESCO. Such investment opportunities (which may
include co-investment opportunities with members of the AMRESCO Group) arise
from the existing business and operations of the AMRESCO Group, including
primarily the commercial mortgage brokerage operations conducted through
Holliday Fenoglio Fowler and the commercial mortgage lending business conducted
by AMRESCO Funding. Holliday Fenoglio Fowler, which was the fifth largest
commercial mortgage banking company in the United States in 1996 based on
origination volume (according to the National Real Estate Investor's Top Lender
Survey), is engaged in three primary lines of business: real estate related
debt placement, real estate investment banking and real estate dispositions.
AMRESCO Funding provides mid- to high-yield commercial Mortgage Loans
(including Participating Loans, Mezzanine Loans and Bridge Loans) the
structures of which typically do not meet the underwriting criteria of
traditional institutional lenders. See "The Manager--Description of the
AMRESCO Group."
Upon closing of the Offering, the Company will enter into the
Correspondent Agreement with Holliday Fenoglio Fowler pursuant to which Holliday
Fenoglio Fowler will agree to present to the Company (on a non-exclusive basis)
Mortgage Loan origination and other real estate related investment opportunities
identified by Holliday Fenoglio Fowler which meet the investment criteria and
objectives of the Company. Also upon closing of the Offering, AMRESCO will
grant to the Company the Right of First Refusal with respect to the first $100
million of Targeted Mortgage Loans 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). The Company believes that a substantial portion of the real estate
related assets in which it invests (the "Invested Portfolio") will be identified
through the AMRESCO Group pursuant to the Right of First Refusal and the
Correspondent Agreement. The Company believes the Right of First Refusal will
minimize conflicts and potential competition for Targeted Investments between
the Company and the AMRESCO Group. See "Business and Strategy--Operating
Policies and Guidelines--Relationship With AMRESCO," "The Manager--Description
of the AMRESCO Group" and "Risk Factors--Termination of the Management Agreement
Could Adversely Affect the Company's Investments and Operating Results."
<PAGE> 12
The day-to-day operations of the Company will be managed by
AMREIT Managers, L.P. (the "Manager"), a newly formed member of the AMRESCO
Group, subject to the direction and oversight of the Board of Trust Managers
which, upon closing of the Offering, will consist of seven members, four of
whom will be unaffiliated with the AMRESCO Group. The Manager will rely on the
employees and other resources of the AMRESCO Group for a significant portion of
its operations. See "Risk Factors--Dependence on the Manager and the AMRESCO
Group for Operations and the Lack of Experience of the Manager May Adversely
Affect Operating Results" and "The Manager."
BUSINESS AND STRATEGY
The Company's principal business objective is to maximize
shareholder value by producing cash flow for distribution to its shareholders
through investment in mid- to high-yield real estate related assets which earn
an attractive spread over the Company's cost of funds.
To achieve its principal business objective, the Company's
strategy is to:
o invest in certain types of assets, such as Participating
Loans, Mezzanine Loans, Construction Loans, Bridge Loans,
Subordinated Interests in MBS, Net Leased Real Estate and
Distressed Real Estate, which the Company expects to
generate the highest risk-adjusted returns on capital
invested, after considering all material relevant factors;
o take advantage of expertise existing within, and
investment and co-investment opportunities arising from
the business and operations of, the AMRESCO Group by
engaging the Manager, a member of the AMRESCO Group, to
manage the day-to-day operations of the Company, and
pursuant to the Right of First Refusal and the
Correspondent Agreement;
o utilize the expertise and resources of Holliday Fenoglio
Fowler to monitor trends and demands in the Mortgage Loan
and real estate markets and to adjust its Mortgage Loan
products in response thereto in order to increase its
ability to successfully compete for Targeted Investments;
o through the Manager, capitalize upon the market research
capabilities of the AMRESCO Group to analyze the Company's
investment opportunities and the economic conditions in
the Company's proposed geographic markets to assist the
Company in selecting investments which satisfy the
Company's investment criteria and targeted returns;
o through the Manager, utilize the expertise of the AMRESCO
Group in the underwriting, origination and closing of
Mortgage Loans and in the acquisition, management and
servicing of Mortgage Loans, Mortgage Loan portfolios and
MBS;
o borrow against or leverage its Invested Portfolio
(initially through the Warehouse Line and the Repurchase
Agreement), to the extent consistent with the Company's
leverage policies, in order to increase the size of the
Invested Portfolio and increase potential returns to the
Company's shareholders;
o attempt to offset the potential interest rate mismatch
resulting from the differences between fixed rates or
other limitations on coupon rate adjustments associated
with its Invested Portfolio and the shorter-term variable
nature of the Company's borrowings by structuring the key
terms of its borrowings to generally correspond (in the
aggregate for the entire Invested Portfolio, and not on an
asset-by-asset basis) to the interest rate and maturity
parameters of its Invested Portfolio;
o implement various hedging strategies, including interest
rate swaps, interest rate collars, caps or floors, forward
contracts and U.S. Treasury and Eurodollar futures and
options (to the extent
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<PAGE> 13
permitted by the REIT Provisions of the Code), to minimize
the effects of interest rate fluctuations on its Invested
Portfolio or its borrowings if, given the cost of such
hedges and the Company's desire not to jeopardize its
status as a REIT, the Manager determines such strategies
are in the best interest of the Company's shareholders;
and
o manage the credit risk of its Invested Portfolio by (i)
underwriting its investments utilizing the processes
developed and utilized by the AMRESCO Group, (ii) choosing
its investments for origination or acquisition in
compliance with the Company's investment policies, (iii)
monitoring (through the servicing and asset management
capabilities of the AMRESCO Group) the credit quality of
the Invested Portfolio, and (iv) maintaining appropriate
capital levels and allowances for credit losses.
TARGETED INVESTMENTS
The Company intends to originate or purchase primarily the
following types of assets (the "Targeted Investments"):
SENIOR MORTGAGE LOANS. The senior Mortgage Loans in which the
Company intends to invest will include primarily Mortgage Loans
that entitle the lender to receive a stated interest rate plus
contingent interest based on a percentage of the mortgaged
property's revenues or cash flow, and/or a portion of the
pledged real estate's revenues or cash flow, or a percentage of
or a fixed amount of the net proceeds from any sale of the
property ("Participating Loans") and may also include Mortgage
Loans used to finance the construction or rehabilitation of real
property ("Construction Loans"), Mortgage Loans used as temporary
financing ("Bridge Loans"), and/or Permanent Mortgage Loans. See
"Risk Factors--Risks of Loss on Mortgage Loans." The Company may
also invest in Mortgage Loans that are in default or for which
default is likely or imminent or for which the borrower is making
monthly payments in accordance with a forbearance plan.
MEZZANINE LOANS. The Company intends to originate commercial
Mortgage Loans, the repayment of which is subordinated to senior
Mortgage Loans, and which are secured by either a second lien
mortgage or a pledge of the ownership interests of the borrower.
Alternatively, such Mortgage Loans can take the form of a joint
venture interest or equity investment in the borrower
(collectively, "Mezzanine Loans"). Mezzanine Loans generally
afford a relatively higher yield and entail greater risks than
senior Mortgage Loans. See "Risk Factors--Risks of Loss on
Mortgage Loans."
MORTGAGE-BACKED SECURITIES. The Company intends to invest in
interests in commercial and multifamily MBS, including primarily
classes of MBS that are subordinated in right of payments of
principal and interest to more senior classes ("Subordinated
Interests"). Subordinated Interests generally afford a higher
yield than more senior investment grade securities because they
entail greater risk. The Company may also invest in various
classes, including rated or unrated Subordinated Interests, of
residential MBS. The Company does not currently intend to invest
in Mortgage Derivative Securities such as IOs and POs, but is not
prohibited from doing so in the future. See "Risk Factors--Risks
Related to Investments in MBS."
EQUITY INVESTMENTS IN REAL ESTATE. The Company intends to invest
in commercial real estate, including properties which are newly
developed, to be built or leased on a long-term basis (ten years
or more) to tenants who are typically responsible for paying a
majority of the costs of owning, operating and maintaining the
leased property during the term of the lease, in addition to the
payment of a monthly rent to the landlord for the use and
occupancy of the premises ("Net Leased Real Estate"). The
Company expects to acquire Net Leased Real Estate on a leveraged
basis that will provide sufficient cash flow to provide a return
on its investment after debt service within the Company's target
parameters. The Company also intends to participate with others
(including members of the AMRESCO Group) in real property
ownership through joint ventures, partnerships or limited
liability companies. The Company may also
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acquire real estate at foreclosure sales or by deed-in-lieu of
foreclosure and other Distressed Real Estate. The Company does
not intend to directly operate any of the real estate owned by
it, but rather intends to rely upon qualified and experienced
real estate operators unaffiliated with the Company. See "Risk
Factors--Risks Related to Investments in Real Estate."
OTHER INVESTMENTS. The Company will take an opportunistic
approach toward its investments and, therefore, depending upon
market conditions, the Company may invest from time to time in
other real estate related assets, including, without limitation,
foreign real estate and Mortgage Loans to borrowers in foreign
countries or secured by foreign real estate (principally in the
markets in which the AMRESCO Group conducts business or has
invested or made Mortgage Loans in the past, currently including
Canada, the United Kingdom and Mexico). The Company may also
invest in interests in other REITs, registered investment
companies, partnerships and other investment funds and real
estate operating companies.
The Company has no policy requiring any specific percentage of
the Invested Portfolio to consist of any particular type of Targeted
Investment. Rather, the Company's business decisions and investment strategies
will depend on changing market factors. The types of assets which constitute
Targeted Investments and the percentage of the Company's Invested Portfolio
that will be invested in a particular category of assets will vary from time to
time.
SUMMARY RISK FACTORS
Set forth below is a brief summary of certain material risks involved in
an investment in the Company. The following summary should be read in
conjunction with, and is qualified in its entirety by, the more detailed
information set forth in this Prospectus under the heading "Risk Factors."
o Conflicts of Interest With the AMRESCO Group May Result in Decisions
That do Not Fully Reflect the Shareholders' Best Interest. The Company
and the Manager have common officers and directors, which may present
conflicts of interest between members of the AMRESCO Group and the
Company, including conflicts relating to the price and terms of
potential purchases by the Company from the AMRESCO Group of Targeted
Investments and conflicts relating to competition between the Company
and members of the AMRESCO Group for Targeted Investments. These
conflicts of interest could result in decisions by the Manager or the
Company that do not fully reflect the interests of the Company's
shareholders. In addition, since the Management Agreement provides for
Incentive Compensation to be paid to the Manager based on certain
performance criteria, the Manager could have incentive to recommend
riskier or more speculative investments for purchase by the Company,
which could result in greater risk of loss to the Company. The
Management Agreement was not negotiated at arm's length and, therefore,
may be on terms that are less favorable to the Company than if such
agreement had been negotiated with a third party. Likewise, the sale of
the Initial Assets from AMRESCO Funding to the Company was not
negotiated at arm's length and, therefore, the purchase price for such
assets (which is equal to the outstanding principal and accrued interest
thereon) may not represent the fair market value of such assets.
o Dependence on the Manager and the AMRESCO Group for Operations and the
Lack of Experience of the Manager May Adversely Affect Operating
Results. The Company will contract with the Manager pursuant to the
Management Agreement to advise the Board of Trust Managers and direct
the day-to-day business affairs of the Company. The Manager will rely
on the employees and other resources of the AMRESCO Group for a
significant portion of its operations. Thus, the Company's success will
depend to a large degree on the skill of the officers and employees of
the Manager and the other members of the AMRESCO Group. Neither the
Manager, which was formed in March 1998 and has no operating history and
no significant assets, nor any other member of the AMRESCO Group, nor
the Company, which was formed in January 1998 and has no operating
history, has any prior experience in managing and operating a REIT,
which could adversely affect the Company's business, financial condition
and results of operations. Further, there can be no assurance that the
past experience of the members of the AMRESCO Group upon which the
Manager
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will rely for a significant portion of its operations will be sufficient
to successfully manage the business of the Company. The past
performance of the AMRESCO Group (or any member thereof) is not
indicative of future results of the Company.
o Failure to Acquire Targeted Investments Will Reduce Income to the
Company. The Company has issued non-binding commitments to purchase or
originate approximately $74.5 million in purchase price of Targeted
Investments. There is no assurance that the Company will purchase any
of such Targeted Investments. The Company will have broad discretion in
the allocation of the net proceeds of the Offering. If the Manager
fails to originate or acquire Targeted Investments on favorable terms
and conditions and on a timely basis, the Company's income, and
therefore its ability to make distributions to shareholders, will be
adversely affected.
o Competition for Targeted Investments Could Reduce Income to the Company.
The Company will face significant competition for Targeted Investments.
Some of its competitors will have greater financial resources than the
Company. Such competition could result in lowered underwriting
standards on Targeted Investments, which could result in higher risk of
loss to the Company, or higher prices on Targeted Investments and,
therefore, lower yields on such investments and lower income to the
Company.
o Co-Investments May be Riskier Than Investments Made Solely by the
Company. The Company may co-invest in Targeted Investments from time to
time, which co-investments may be with members of the AMRESCO Group or
with entities not affiliated with AMRESCO. Such investments may involve
risks not present in investments made solely by the Company, such as
risks that the co-investors will become bankrupt or have economic or
business interests or goals that are inconsistent with those of the
Company, or that such co-investors will take action contrary to the
Company's investment policies or objectives, including the Company's
policies with respect to maintaining its qualification as a REIT, or
inconsistent with the Company's interests.
o Investments in Higher-Risk Mortgage Loans Could Result in Losses to the
Company. The Targeted Investments include Participating Loans
(including Mezzanine Loans, Construction Loans and Bridge Loans),
Distressed Mortgage Loans and other types of non-traditional Mortgage
Loans which involve a higher degree of risk than Mortgage Loans meeting
the traditional underwriting criteria of institutional lenders, and thus
could result in reduced income or losses to the Company.
o Repayment of Initial Assets May Depend Upon Successful Completion of
Financed Projects. The Initial Assets consist of Mortgage Loans for the
financing of the initial construction of real property or the renovation
or rehabilitation of existing real property. The repayment of such
Mortgage Loans may be dependent upon the successful and timely
completion of the financed rehabilitation or construction. If the
applicable borrower is unable to successfully complete the proposed
rehabilitation or construction in accordance with the proposed budget
and timeline or if the actual value of the completed project is less than
estimated because of any change in market conditions or otherwise, the
borrower may not have adequate funds to repay the loan on a timely
basis.
o Decrease in Values of Properties Underlying Initial Assets May Adversely
Affect the Company. If the value of the property underlying any Initial
Asset decreases, the borrower may not be able to secure take-out
financing, which may adversely affect the borrower's ability to repay
the Mortgage Loan in a timely manner or at all. Moreover, if such
Mortgage Loan is a Participating Loan, the Company's expected return on
such Mortgage Loan will be decreased if the value of the property
underlying such Mortgage Loan decreases.
o Ability to Foreclose on Certain Initial Assets May be Impaired. Since
two of the four Initial Assets are Mezzanine Loans, the Company's
ability to foreclose on such loans may be impaired, which could
adversely affect the Company's ability to recover its investments in
such Mezzanine Loans.
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o Economic Downturn or Recession Could Result in Losses on Mortgage Loans.
The Company expects that a significant portion of its Invested Portfolio
will consist of Mortgage Loans, which, particularly if economic
conditions deteriorate, could subject the Company to risks of borrower
defaults and bankruptcies, as well as other events and circumstances
which could result in losses on the Company's investments. Moreover,
the Company expects that a significant portion of the Invested Portfolio
will consist of Participating Loans (including Mezzanine Loans,
Construction Loans and Bridge Loans), which typically entitle the
Company to share in appreciation or cash flows from the underlying real
estate, as well as direct ownership of real estate. The returns to the
Company on these types of Mortgage Loans will likely be significantly
reduced in the event of any economic downturn or recession in the
markets in which the real estate owned or the real estate underlying
such Mortgage Loans is located.
o Investments in Subordinated Interests Will Subject the Company to
Greater Risk of Loss. The Company expects that a significant portion of
the Invested Portfolio will consist of Subordinated Interests in MBS
which are subject to greater risk of loss of principal and interest than
more senior, investment grade securities.
o Investments in Net Leased Real Estate Will Subject the Company to Credit
Risk. The Company intends to purchase Net Leased Real Estate on a
highly leveraged basis. If the tenant of a net leased property owned by
the Company experiences a downturn in its business, such tenant may be
unable to make its lease payments when due, which in turn could render
the Company unable to make timely payments on its related debt.
o Reliance on Third Party Operators May Adversely Affect Results. The
Company will engage experienced real estate operators to operate any
properties in which it invests and will be dependent upon the abilities
of such third parties to operate such real estate. The failure of any
such operator to operate the Company's real estate successfully could
have a material adverse effect on the results of operations of the
Company.
o Investments in Distressed Real Estate Will Subject the Company to
Greater Risk. The Company also may invest in Distressed Real Estate,
which may not generate sufficient revenues to meet operating expenses
and debt service and could result in reduced income or losses to the
Company.
o Interest Rate Fluctuations May Adversely Affect the Company's
Investments and Operating Results. The yield on the Company's Invested
Portfolio will be sensitive to changes in prevailing medium-term to
long-term interest rates and reshaping of the yield curve which could
result in a mismatch between the Company's borrowing rates (which will
typically be shorter-term rates) and the yield on its Invested Portfolio
and consequently reduce or eliminate net income from the Company's
investments. In addition, a significant increase in interest rates
would likely reduce the demand for the Company's Mortgage Loans which
would restrict the Company's ability to originate Mortgage Loans and
could reduce the amount of cash available for distribution to the
Company's shareholders.
o Leverage Increases Exposure to Loss. The Company expects to increase
the size of its Invested Portfolio by employing a significant amount of
leverage, which is likely to increase the volatility of the Company's
income and net value of its Invested Portfolio and could result in
operating or capital losses larger than would occur if such leverage
were not employed. There are no limitations on the amount the Company
can borrow.
o Hedging Transactions Limit Gains and May Increase Exposure to Losses.
The Company intends to use hedging strategies, including interest rate
swaps, interest rate collars, caps or floors, forward contracts and U.S.
Treasury and Eurodollar futures and options, which may have significant
transaction costs (and therefore will reduce the Company's overall
returns on its investments) and may not be effective in mitigating
interest rate and prepayment risks.
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<PAGE> 17
o Termination of Agreements Could Adversely Affect the Company's
Investments and Operating Results. The Company expects that a
significant portion of its Invested Portfolio will be identified,
originated or otherwise made available to it through the AMRESCO Group.
If the Management Agreement is terminated (and no member of the AMRESCO
Group is serving as manager of the Company), the Right of First Refusal
and the Correspondent Agreement may be terminated by the AMRESCO Group,
in which case, the AMRESCO Group may not continue to offer Targeted
Investments to the Company, which could have a material adverse effect on
the results of operations of the Company. Further, the Manager may be
entitled to a significant termination fee if the Company does not renew,
or elects to terminate, the Management Agreement which, if paid, could
materially adversely affect the cash available for distribution to the
Company's shareholders and may result in material net operating losses.
o The Company's Ability to Revise its Policies and Strategies Without
Shareholder Consent May Create Uncertainty. Future revisions in
policies and strategies may be made at the discretion of the Board of
Trust Managers without the consent of the shareholders, which creates
uncertainty for shareholders and which could cause losses to the Company.
o Failure to Maintain REIT Status Would Have Adverse Tax Consequences.
The Company will be taxed as a regular corporation if it fails to
maintain its qualification as a REIT, which would reduce earnings and
cash available for distribution to shareholders.
o Future Offerings Could Dilute the Interests of Holders of Common Shares.
Shareholders will be subject to significant potential dilution from
future equity offerings, including offerings of preferred shares, which
may have an adverse effect on the market price of the Common Shares.
o Restrictions on Ownership of Common Shares Could Discourage a Change of
Control. In order for the Company to meet the requirements for
qualification as a REIT at all times, the Declaration of Trust prohibits
any Person (other than Holdings or any other member of the AMRESCO
Group) from acquiring or holding, directly or indirectly, shares of
beneficial interest of the Company in excess of 9.8% (in value or
number) of the aggregate of the outstanding shares of beneficial
interest of the Company, without the approval of the Board of Trust
Managers. Such restrictions may make it more difficult to change
control of the Company even where such change may be in the best
interest of the Company's shareholders.
o Changes in Tax Laws Applicable to REITs May Adversely Affect the
Company. The Company's activities, structure and operations may be
adversely affected by changes in the tax laws applicable to REITs.
o Failure to Develop a Public Market May Result in Depressed Market Price.
Prior to the Offering, there has been no public market for the Common
Shares, and there can be no assurance that an active trading market for
the Common Shares offered will develop or, if developed, be sustained.
In the absence of a public trading market, the market price of the
Common Shares would be substantially impaired and an investor may be
unable to liquidate his investment in the Company.
THE INITIAL ASSETS
To date, the Company has identified four Mortgage Loans to purchase or
originate with the proceeds of the Offering (the "Initial Assets"), subject to,
among other things, the review and approval of the Board of Trust Managers,
including a majority of the Independent Trust Managers. There can be no
assurance that any of such Mortgage Loans will be purchased or originated by
the Company. See "Risk Factors--Risks of Loss on the Initial Assets."
The first Mortgage Loan identified for purchase by the Company with the
net proceeds of the Offering ("Loan One") is a $6 million acquisition and
rehabilitation Mezzanine Loan secured by a second lien on a 956,114
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(approximate) square foot mixed-use development located in Columbus, Ohio.
Loan One was closed on February 20, 1998 and is currently owned, and was
originated, by AMRESCO Funding. Proceeds of Loan One were used by the borrower
to fund a portion of the purchase price of the mortgaged property. The
remaining $17 million of the acquisition price for the mortgaged property was
furnished by Credit Suisse First Boston Mortgage Capital LLC, which has a first
lien on the mortgaged property. Loan One bears interest at 15% per annum.
Payments of interest only are due monthly commencing April 1, 1998, until the
loan is paid in full. All principal, and all remaining accrued and unpaid
interest on the loan, are due on March 31, 2001. AMRESCO Funding has committed
to fund an additional $1 million to the borrower on May 1, 1998 for renovations
to the mortgaged property, subject to certain conditions. In addition, AMRESCO
Funding has a right of first refusal to fund an additional redevelopment loan
for the mortgaged property expected to be sought by the borrower in April 1998
in the amount of approximately $10 to $15 million. See "Business and
Strategy--The Initial Assets" for further information about Loan One. The
Company has issued a non-binding commitment to purchase Loan One from AMRESCO
Funding, and AMRESCO Funding has agreed to sell the loan to the Company, for an
amount equal to the aggregate outstanding principal balance thereof as of the
date of purchase, plus accrued and unpaid interest to the date of purchase.
The second Mortgage Loan which the Company has identified for purchase
or origination with the net proceeds of the Offering ("Loan Two") is a proposed
$12.8 million Participating Construction Loan for the acquisition of
approximately 10.2 acres of land located in a master planned residential
community near Houston, Texas and construction thereon of a 236 unit
multi-family apartment property. AMRESCO Funding has issued a proposal (the
"Loan Two Proposal") to originate Loan Two, and AMRESCO Funding and the
proposed borrower are currently negotiating loan documents. Loan Two is
proposed to bear interest at an accrual rate of 11.5% per annum and be due and
payable monthly at a pay rate of 10% per annum. All principal, and all accrued
and unpaid interest, would be due 24 months after the closing of the loan. In
addition, the Company would be entitled to 60% of the net profits, if any, from
the sale or refinancing of the mortgaged property (calculated after the loan
has been paid in full). The Loan Two Proposal also provides that the Company
would have a first right of refusal on long-term take-out financing for the
mortgaged property. See "Business and Strategy--The Initial Assets" for
further information about Loan Two. The Company has issued a non-binding
commitment to purchase Loan Two from AMRESCO Funding, and AMRESCO Funding has
agreed to sell the loan to the Company, for an amount equal to the aggregate
outstanding principal balance thereof as of the date of purchase, plus accrued
and unpaid interest to the date of purchase, if the proposed loan is closed
prior to the closing of the Offering. If Loan Two is not closed prior to the
closing of the Offering, AMRESCO Funding has agreed to transfer its rights
under the Loan Two Proposal to the Company after the closing of the Offering,
without charge.
The third Mortgage Loan which the Company has identified for purchase or
origination with the net proceeds of the Offering ("Loan Three") is a proposed
$40 million Construction Loan to refinance the acquisition, and finance the
renovation, of a 403,000 (approximate) square foot office/research and
development building located in Massachusetts. AMRESCO Funding has issued a
quote for Loan Three (the "Loan Three Quote"), and AMRESCO Funding and the
proposed borrower are currently negotiating terms while AMRESCO Funding
completes the underwriting process. The Loan Three Quote provides that the
proposed Loan Three would bear interest at a rate of 10.5% per annum and have
an initial term of 24 months. See "Business and Strategy--The Initial Assets"
for further information about Loan Three. The Company has issued a non-binding
commitment to purchase Loan Three from AMRESCO Funding, and AMRESCO Funding has
agreed to sell the loan to the Company, if it is closed prior to the closing of
the Offering, for a purchase price equal to the amount of the aggregate
outstanding principal balance thereof as of the date of purchase, plus accrued
and unpaid interest to the date of purchase. If Loan Three is not closed prior
to the closing of the Offering, AMRESCO Funding has agreed to transfer its
rights to the proposed Loan Three (under the Loan Three Quote or otherwise) to
the Company after the closing of the Offering, without charge.
The fourth Mortgage Loan which the Company has identified for purchase
or origination with the net proceeds of the Offering ("Loan Four") is a $14.7
million Participating Mezzanine Construction Loan for the construction of an 11
story multi-tenant office building and an adjoining five level parking
structure. Loan Four was closed on March 30, 1998 and is currently owned, and
was originated, by AMRESCO Funding. Loan Four bears
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interest at an accrual rate of 12% per annum. Accrued interest is due and
payable monthly at a pay rate of 10% per annum. All principal, and all accrued
and unpaid interest, are due and payable on March 30, 2001. In addition, the
Company is entitled to receive a shared appreciation interest in the property,
with a maximum of 25% per annum return to the Company. See "Business and
Strategy--The Initial Assets" for further information about Loan Four. The
Company has issued a non-binding commitment to purchase Loan Four from AMRESCO
Funding, and AMRESCO Funding has agreed to sell the loan to the Company, for an
amount equal to the aggregate outstanding principal balance thereof as of the
date of purchase, plus accrued and unpaid interest to the date of purchase.
THE MANAGER
The Manager is a newly formed member of the AMRESCO Group. The AMRESCO
Group is a publicly-traded diversified financial services company with
approximately 1,600 employees and offices located throughout the United States
and in Canada and England. The AMRESCO Group is currently engaged in four
principal lines of business including commercial mortgage banking, asset
management, commercial finance and residential mortgage banking. See "The
Manager--Description of the AMRESCO Group."
As a result of the Manager's relationship with the AMRESCO Group and the
AMRESCO Group's investment in the Company, and pursuant to the Right of First
Refusal and the Correspondent Agreement, the Company expects to benefit from
(i) the market reputation and expertise of the AMRESCO Group in the
underwriting, origination and closing of Mortgage Loans and in the acquisition,
management and servicing of both performing and nonperforming Mortgage Loans,
Mortgage Loan portfolios and MBS, (ii) the significant number of Targeted
Investments expected to be identified to it by the AMRESCO Group, (iii) the
relationships of Holliday Fenoglio Fowler with potential borrowers and other
institutional investors, and (iv) opportunities to co-invest with members of
the AMRESCO Group. See "Risk Factors--Conflicts of Interest May Result in
Decisions That do Not Fully Reflect the Shareholders' Best Interest," "Risk
Factors--Dependence on the Manager and the AMRESCO Group for Operations and the
Lack of Experience of the Manager May Adversely Affect Operating Results,"
"Risk Factors--Co-Investments May be Riskier Than Investments Made Solely by
the Company" and "Risk Factors--Termination of the Management Agreement Could
Adversely Affect the Company's Investments and Operating Results."
THE MANAGEMENT AGREEMENT
Upon the closing of the Offering, the Company will enter into the
Management Agreement with the Manager pursuant to which, subject to the
direction and oversight of the Board of Trust Managers, the Manager will be
responsible for the day-to-day operations of the Company. The Manager will be
required to perform such services and activities relating to the assets and
operations of the Company as may be required or appropriate in accordance with
the Company's policies and Guidelines that are approved from time to time and
monitored by the Board of Trust Managers. Such responsibilities will include:
(i) underwriting, originating and acquiring Targeted Investments; (ii)
servicing and managing the Invested Portfolio; (iii) asset/liability and risk
management, hedging of floating rate liabilities, and financing, management and
disposition of the Invested Portfolio, including credit and prepayment risk
management; (iv) capital management, structuring and analysis, capital raising
and investor relations activities; and (v) the provision of certain
administrative and managerial services such as accounting, legal, market
research and information technology services.
The Manager will receive a base management fee (the "Base Management
Fee") payable and calculated quarterly in an amount equal to (i) 1% per annum
of the Average Invested Non-Investment Grade Assets for such calendar quarter,
and (ii) 0.50% per annum of the Average Invested Investment Grade Assets for
such calendar quarter. The term "Average Invested Non-Investment Grade Assets"
for any quarter means the average of the aggregate book value of (i) all assets
of the Company on a consolidated basis (as reflected on the Company's balance
sheet), excluding the Company's investment in its nonconsolidated taxable
subsidiaries and (ii) all assets of the Company's nonconsolidated taxable
subsidiaries, excluding from (i) and (ii) all Average Invested Investment Grade
Assets, before reserves for depreciation or bad debts or other similar noncash
reserves, computed by dividing (a) the sum of such values for each of the three
months during such quarter (based on the book value of such assets as of
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the last day of each month) by (b) three. The term "Average Invested
Investment Grade Assets" means, for any quarter, the average of the aggregate
book value of (i) all assets of the Company on a consolidated basis (as
reflected on the Company's balance sheet), excluding the Company's investment
in its nonconsolidated taxable subsidiaries and (ii) all assets of the
Company's nonconsolidated taxable subsidiaries, which either (a) have received
an Investment Grade Rating from all Rating Agencies which have rated such
asset, or (b) are unrated but are guaranteed by the U.S. government or any
agency or instrumentality thereof, before reserves for depreciation or bad
debts or other similar noncash reserves, computed by dividing (A) the sum of
such values for each of the three months during such quarter (based on the book
value of such assets as of the last day of each month) by (B) three. For
example, if the Company had $650 million of Average Invested Non-Investment
Grade Assets and $100 million of Average Invested Investment Grade Assets
consistently during each calendar quarter of any one year period, the Manager
would be entitled to a Base Management Fee for such year of $7 million. The
Manager will not receive any management fee for the period prior to the sale to
the public of the Common Shares offered hereby.
In addition to the Base Management Fee, the Manager will be entitled to
receive Incentive Compensation for each fiscal quarter in an amount equal to
the product of (A) 25% of the dollar amount by which (1)(a) Funds From
Operations of the Company (before the Incentive Compensation) per Common Share
(based on the weighted average number of shares outstanding) for such quarter
plus (b) gains (or minus losses) from debt restructuring and sales of property
per Common Share (based on the weighted average number of shares outstanding),
exceeds (2) an amount equal to (a) the weighted average of the price per share
of the Offering and the prices per share of all subsequent issuances of Common
Shares by the Company multiplied by (b) the Ten-Year U.S. Treasury Rate for
such quarter plus 3.5%, multiplied by (B) the weighted average number of Common
Shares outstanding during such quarter. "Funds From Operations" as defined by
NAREIT means net income (computed in accordance with generally accepted
accounting principals ("GAAP") excluding gains (or losses) from debt
restructuring and sales of property, 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 GAAP and should not be considered as an
alternative to net income as an indication of the Company's performance or to
cash flows as a measure of liquidity or ability to make distributions. See
"The Manager--The Management Compensation" for a more detailed explanation of
the management compensation arrangements.
The Manager is expected to use the proceeds from its Base Management Fee
and Incentive Compensation in part to pay compensation to its officers and
employees who, notwithstanding that certain of them also are officers of the
Company, will initially receive no cash compensation directly from the Company.
The Manager will be reimbursed by the Company for (or charge the Company
directly for) the Manager's costs and expenses for performing due diligence and
certain other tasks with respect to assets purchased, originated or approved
for purchase or origination by the Company. Expense reimbursement will be made
quarterly. See "The Manager--Expenses."
The Base Management Fee and Incentive Compensation are payable in
arrears. The Manager's Base Management Fee and Incentive Compensation and
reimbursable costs and expenses will be calculated by the Manager within 45
days after the end of each quarter, and such calculation will be promptly
delivered to the Company. The Company is obligated to pay such fees, costs and
expenses within 60 days after the end of each fiscal quarter.
The Management Agreement will have an initial term (the "Initial Term")
of two years during which period it will not be terminable by the Manager or the
Company except as a result of a breach by the Manager of its obligations
thereunder or other events constituting "cause" as defined therein. Upon
termination of the Management Agreement by the Company after the Initial Term
(except in the case of a termination by the Company for cause) or failure of the
Company to renew the Management Agreement after the Initial Term, the Company
will be obligated to pay the Manager a substantial termination fee. The
termination fee will be equal to the sum of the Base Management Fee (which would
be $7 million in the hypothetical circumstances described above), plus any
Incentive Compensation earned by the Manager during the four calendar quarters
immediately preceding the termination. In addition, if the Management Agreement
is terminated and no member of the AMRESCO Group is serving as manager of the
Company, the Right of First Refusal and the
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Correspondent Agreement may be terminated by the AMRESCO Group. See "Risk
Factors--Termination of the Management Agreement Could Adversely Affect the
Company's Investments and Operating Results" and "The Manager--The Management
Agreement." The Manager has the right, at any time after the Initial Term, to
terminate the Management Agreement upon 180 days prior written notice to the
Company. The Company has the right, at any time after the Initial Term, to
terminate the Management Agreement upon 90 days prior written notice to the
Manager.
INDUSTRY TRENDS
Management of the Company believes that fundamental structural changes
are occurring in the real estate capital markets, which have resulted in the
shift of investment capital and mortgage assets out of traditional lending and
savings institutions and into developing and growing new forms of mortgage
banking and mortgage investment firms, including those that qualify as REITs
under the Code. These opportunities are the result of the following
developments, among other factors:
o SCALE AND ROLLOVER. The Mortgage Loan market in the United
States has increased from $965 billion in 1980 to approximately
$3.9 trillion in 1996. Commercial real estate debt outstanding
in the United States has increased from $955 billion in 1995 to
approximately $1.1 trillion in 1996. The Company believes that a
significant amount of these commercial Mortgage Loans are
scheduled to mature in the near future. The Company believes
that significant rollover or maturity of commercial Mortgage
Loans over the next several years will create demand for Bridge
Loans and Mezzanine Loans which will be utilized to transition
underlying assets for sale or long-term financing through either
securitization or the private debt market.
o RAPID GROWTH OF SECURITIZATION. The total amount of MBS
currently outstanding has grown to approximately $1.9 trillion in
1996 from $1.0 billion in 1980. The total amount of CMBS
currently outstanding has grown to over $100 billion in 1996 from
approximately $6 billion in 1990. The Company believes that as
securitized lending continues to grow, demand for Mezzanine Loans
will increase. Lenders originating commercial Mortgage Loans for
securitization, as well as traditional lenders such as banks and
insurance companies which are subject to regulatory constraints
on their lending activities, have relatively inflexible
underwriting standards, particularly with regard to Loan to Value
Ratios. Mezzanine Loans are used to finance the portion of a
real estate project's value (typically, the tranche equal to
between 75% to 95% of total capitalized cost) which are typically
not financed by lenders originating commercial Mortgage Loans for
securitization or other traditional lenders. The Company
believes that it is well-positioned to review a significant
number of investment opportunities of this type through the
AMRESCO Group, including primarily Holliday Fenoglio Fowler,
which, if carefully underwritten and structured, could represent
attractive investment opportunities with potentially less risk
than direct ownership of real estate. See "Risk Factors--Risks
of Loss on Mortgage Loans."
o GROWTH IN ECONOMY. The Company believes, given the current
favorable ratio of supply to demand for commercial real estate in
many real estate markets in the United States, that continued
economic growth and job creation will result in the construction
of additional commercial real estate projects. Therefore, the
Company intends to offer Construction Loans to accommodate new
development. The Company may also offer Construction Loans
together with Mezzanine Loans in order to deliver a convenient,
single financing source to commercial real estate owners and
developers. However, there can be no assurance that economic
growth and job creation will continue and, accordingly, that
sufficient demand will exist for Construction Loans or other
Mortgage Loans. See "Risk Factors--Inability to Acquire or
Delays in Acquiring Targeted Investments Will Reduce Income to
the Company."
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<PAGE> 22
The Company believes that it is well-positioned to capitalize on the
opportunities resulting from these changes in the real estate market because of
its relationship to the Manager and the other members of the AMRESCO Group and
the resulting access to necessary expertise and resources, and the experience
and unique business relationships of the key executives of the Manager.
Further, the Company believes that, as the foregoing trends continue and demand
for mortgage capital continues to increase, the REIT investment structure will
be the most efficient vehicle to finance such growth and afford the Company the
greatest access to capital, due to the tax advantages provided by the REIT
Provisions of the Code. See "Federal Income Tax Consequences." Finally, the
Company believes that traditional providers of debt and equity financing to the
real estate industry have not (i) fully recognized the changing environment,
(ii) prepared for the changing environment, (iii) recognized the need for more
specialized Mortgage Loan products, or (iv) developed the corporate
infrastructure and management expertise to effectively implement a business
strategy designed to meet the demands and capitalize on the opportunities
developing in real estate lending and investment.
DIVIDEND POLICY AND DISTRIBUTIONS
To maintain its qualification as a REIT, the Company intends to make
quarterly distributions to its shareholders equal, on an annual basis, to at
least 95% of the Company's Taxable Income (computed without regard to the
dividends paid deduction and any net capital gains) ("REIT Taxable Income"). The
foregoing dividend policy is subject to revision at the discretion of the Board
of Trust Managers. All distributions in excess of those required for the
Company to maintain REIT status will be made by the Company at the discretion of
the Board of Trust Managers and will depend on the earnings of the Company, its
financial condition and such other factors as the Board of Trust Managers deems
relevant. The Board of Trust Managers has not established a minimum
distribution level.
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<PAGE> 23
THE OFFERING
Common Shares Offered Hereby . . . . . . 20,000,000 shares(1)
Common Shares to be Outstanding After
the Offering . . . . . . . . . . . . . . 22,222,333 shares(1)(2)(3)
Use of Proceeds. . . . . . . . . . . . . The Company expects to use
approximately $74.5 million of the
estimated net proceeds of the
Offering to acquire the Initial
Assets, up to $10 million of the
estimated net proceeds of the
Offering for general corporate
purposes, and the remainder of the
net proceeds of the Offering to
acquire additional Targeted
Investments from time to time. The
Company intends to temporarily invest
the net proceeds of the Offering in
readily marketable interest bearing
assets until appropriate Targeted
Investments are identified and
acquired. Pending full investment in
the desired mix of Targeted
Investments, funds will be committed
to short-term investments that are
expected to provide a lower net
return than the Company hopes to
achieve from its Targeted
Investments. See "Risk
Factors--Inability to Acquire or
Delays in Acquiring Targeted
Investments Will Reduce Income to the
Company" and "Use of Proceeds."
Proposed Nasdaq National Market Symbol. . AMCT
- --------------
(1) Assumes that the Underwriters' over-allotment option will not be
exercised. See "Underwriting."
(2) Includes 2,222,233 Common Shares subscribed for by Holdings in the
Private Placement, and 100 Common Shares issued to AMRESCO in connection
with the initial organization of the Company. See "Private Placement."
(3) Excludes 3,333,350 Common Shares to be reserved for issuance under the
Share Option Plan. Upon the closing of the Offering, options to acquire
2,222,233 Common Shares will be issued under the Share Option Plan to
the Manager, which options will vest ratably over a four-year period
commencing on the first anniversary of the closing of the Offering. See
"Management of the Company--Share Options Outstanding."
CONFLICTS OF INTEREST
Because of the Company's relationship with the Manager and the AMRESCO
Group, the Company will be subject to various potential conflicts of interest.
Three of the seven members of the Board of Trust Managers and all of the
Company's officers are employed by members of the AMRESCO Group. See "Risk
Factors--Conflicts of Interest May Result in Decisions That do Not Fully
Reflect the Shareholders' Best Interest" and "The Manager--Certain
Relationships; Conflicts of Interest."
The Company expects to acquire the Initial Assets from and may acquire
other Targeted Investments from, or co-invest with, members of the AMRESCO Group
from time to time. Transactions between the Company and members of the AMRESCO
Group that are within the Guidelines need not be specifically approved in
advance by a majority of the Independent Trust Managers. See "Business and
Strategy--Operating Policies and Guidelines--Relationship With AMRESCO" for a
description of the provisions of the Guidelines regarding transactions between
the Company and the AMRESCO
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<PAGE> 24
Group. Although the Independent Trust Managers will review the Guidelines
periodically and monitor compliance with the Guidelines, they will rely
primarily upon the Manager, a member of the AMRESCO Group, to advise it as to
the fairness of the terms (including the purchase price) of any such
transaction.
Except as contemplated by the Right of First Refusal, members of the
AMRESCO Group are not restricted from investing in Targeted Investments and,
therefore, the investment opportunities of the Company may be limited if any
such Targeted Investments would be attractive to other members of the AMRESCO
Group. Pursuant to the Right of First Refusal, AMRESCO will agree not to
permit any member of the AMRESCO Group to invest in Targeted Mortgage Loans (up
to specified limits) or certain MBS, unless the Company's Investment Committee
shall have first determined in each instance that the Company should not invest
in such asset or assets, or should invest in only a portion of such asset or
assets. See "Business and Strategy--Operating Policies and
Guidelines--Relationship With AMRESCO" and "Risk Factors--Conflicts of Interest
May Result in Decisions That do Not Fully Reflect the Shareholders' Best
Interest."
Except as contemplated by the Right of First Refusal, neither the
Manager nor any of its officers or employees is limited or restricted from
engaging in any business which competes with the Company or rendering services
of any kind to any other Person who competes with the Company, except that the
AMRESCO Group has agreed that it will not sponsor, act as manager to or make
any significant equity investment in any other mortgage REIT with investment
objectives substantially similar to those of the Company, without the prior
approval of the Independent Trust Managers. See "Business and
Strategy--Operating Policies and Guidelines--Relationship With AMRESCO" and
"Risk Factors--Conflicts of Interest May Result in Decisions That do Not Fully
Reflect the Shareholders' Best Interest."
All of Holliday Fenoglio Fowler's fees for its Mortgage Loan and real
estate brokerage and financing services are payable by the applicable borrower
or seller (but may from time to time be paid by the Company out of fees,
deposits or additional interest paid in the form of "points" by the applicable
borrower or seller to the Company for such purpose). No compensation will be
payable by the Company to Holliday Fenoglio Fowler for any Targeted Investments
identified to the Company by Holliday Fenoglio Fowler, whether pursuant to the
[6~respondent Agreement or otherwise. Therefore, Holliday Fenoglio Fowler will
receive compensation for any Mortgage Loan or real estate placed with or sold
to the Company through Holliday Fenoglio Fowler regardless of the quality of
the Mortgage Loan or real estate. Pursuant to the terms of the Management
Agreement, the Manager may engage members of the AMRESCO Group to provide
services to the Company from time to time, if the Manager believes such
services would be of comparable or superior quality to those which could be
provided by third parties and can be provided at comparable cost. Pursuant to
the Guidelines, fees charged to the Company by members of the AMRESCO Group for
services provided must be reasonable and customary and no more than such member
of the AMRESCO Group would charge an unaffiliated third party for such
services. The President and Chief Executive Officer of the Company and the
Manager is also the President of Holliday Fenoglio Fowler. Of the other senior
executive officers of the Manager, only the Chief Investment Officer, the
Chief Operating Officer and the Controller are not also officers or employees of
other members of the AMRESCO Group. Such conflicts may result in decisions by
the Manager that are not in the best interest of the Company. See "Business and
Strategy--Operating Policies and Guidelines--Relationship With AMRESCO" and
"Risk Factors--Conflicts of Interest May Result in Decisions That do Not Fully
Reflect the Shareholders' Best Interest."
In order to increase the amount of its Incentive Compensation, the
Manager may place undue emphasis on the maximization of Funds From Operations
at the expense of other criteria, such as preservation of capital, which could
result in increased risk to the Invested Portfolio. See "Business and
Strategy--Operating Policies and Guidelines--Relationship With AMRESCO" and
"Risk Factors--Conflicts of Interest May Result in Decisions That do Not Fully
Reflect the Shareholders' Best Interest."
The Company believes that the foregoing conflicts of interest are
minimized as a result of (i) the requirement in the Bylaws that a majority of
the Board of Trust Managers consist of Independent Trust Managers, (ii) the
periodic review by the Independent Trust Managers of the activities of the
Manager, (iii) the significant equity investment
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<PAGE> 25
in the Company to be made by the AMRESCO Group pursuant to the Private
Placement, and (iv) the Right of First Refusal. However, there can be no
assurance that the aforementioned conflicts of interest will not have a
material adverse effect on the Company. See "Business and Strategy--Operating
Policies and Guidelines--Relationship With AMRESCO" and "Risk
Factors--Conflicts of Interest May Result in Decisions That do Not Fully
Reflect the Shareholders' Best Interest."
ORGANIZATION AND RELATIONSHIPS
The Manager will manage the day-to-day operations of the Company,
subject to the supervision of the Board of Trust Managers. The relationship
among the Company, its subsidiaries, the Manager and certain other members of
the AMRESCO Group is depicted below:
[ORGANIZATIONAL CHART INSERTED HERE]
(1) Upon the closing of the Offering and the Private Placement, (i) Holdings
will own 10% of the outstanding Common Shares, (ii) the Trust Managers,
officers and key employees of the Company, the Manager and other members
of the AMRESCO Group will own 5% of the Common Shares sold pursuant to
the Offering, and (iii) the remainder of the outstanding Common Shares
(other than 100 Common Shares issued to AMRESCO pursuant to the
formation of AMRESCO Capital Trust) will be owned by the public
investors. See "Private Placement."
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<PAGE> 26
(2) Upon the closing of the Offering, certain Trust Managers, officers and
key employees of the Company will be issued options to purchase a number
of Common Shares equal to approximately ___% of the number of Common
Shares that will be outstanding upon the closing of the Offering. See
"Management of the Company--Share Options Outstanding."
(3) Upon the closing of the Offering, the Company will enter into the
Management Agreement with the Manager and AMRESCO pursuant to which (i)
the Manager will formulate operating strategies and provide certain
managerial and administrative functions for the Company, subject to the
supervision of the Board of Trust Managers, and (ii) AMRESCO will grant
the Right of First Refusal to the Company. In addition, upon the
closing of the Offering, the Company will grant to the Manager options
to purchase 2,222,233 Common Shares. See "Management of the
Company--Share Options Outstanding."
(4) Upon the closing of the Offering, the Company will enter into the
Correspondent Agreement with Holliday Fenoglio Fowler.
(5) AMREIT I, Inc., a Delaware corporation, is a wholly-owned Qualified REIT
Subsidiary of AMRESCO Capital Trust, through which the Company will
conduct most of its mortgage lending and related activities in states
other than the State of Texas.
(6) AMREIT II, Inc., a Nevada corporation, is a taxable subsidiary of
AMRESCO Capital Trust. In order to comply with the REIT Provisions of
the Code, the Company will own 100% of the non-voting common stock and
5% of the voting common stock of AMREIT II, Inc. The other 95% voting
common stock of AMREIT II, Inc. will be owned by the Manager. See
"Federal Income Tax Consequences--Requirements For Qualification" and
"Federal Income Tax Consequences--Proposed Tax Legislation and Possible
Other Legislative Actions Affecting Tax Consequences."
(7) All of the partnership interests of the Manager are owned by members of
the AMRESCO Group. AMREIT Managers G.P., Inc. is a wholly-owned
subsidiary of Holdings.
The Company may, from time to time, form additional subsidiaries (which
may include wholly-owned Qualified REIT Subsidiaries, taxable subsidiaries and
other entities owned in part by the Company and in part by third parties,
including members of the AMRESCO Group) for purposes of carrying out its
investment or co-investment activities. See "Risk Factors--Changes in Tax Laws
Applicable to REITs May Adversely Affect the Company," "Federal Income Tax
Consequences--Requirements For Qualification" and "Federal Income Tax
Consequences--Proposed Tax Legislation and Possible Other Legislative Actions
Affecting Tax Consequences." The Company may also form one or more
partnerships, the limited partnership interests in which would be convertible
into Common Shares, for the purpose of enabling the Company to acquire real
estate or interests therein from real estate owners on a tax deferred basis in
exchange for such real estate or interests therein. See "Business and
Strategy--Description of Targeted Investments--Commercial Real Estate."
The Company's principal executive offices are located at 700 North Pearl
Street, Suite 2400, Dallas, Texas 75201. Its telephone number is (214)
953-7700.
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<PAGE> 27
RISK FACTORS
An investment in the Common Shares involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, in addition to the other information set forth in this Prospectus, in
connection with an investment in the Common Shares.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "believe," "project," "intend," and
similar expressions are intended to identify forward-looking statements
regarding events, conditions and financial trends that may affect the Company's
future plans of operations, business strategy, results of operations and
financial position. Prospective investors are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ
materially from those included within the forward-looking statements as a
result of various factors. Factors that could cause or contribute to such
differences include, but are not limited to, those described below, and on the
inside front cover page of this Prospectus.
CONFLICTS OF INTEREST MAY RESULT IN DECISIONS THAT DO NOT FULLY REFLECT
THE SHAREHOLDERS' BEST INTEREST
Terms of Transactions With Members of the AMRESCO Group May Not
be Fair. As a result of the relationship between the Manager, the AMRESCO
Group and the Company, there are conflicts of interest between the operations
of the AMRESCO Group and the Company in the acquisition and disposition of
assets. The Company expects to acquire the Initial Assets from, and may
acquire other Targeted Investments from, or co-invest with, members of the
AMRESCO Group from time to time. Transactions with members of the AMRESCO
Group that are within the provisions of the Guidelines need not be specifically
approved in advance by a majority of the Independent Trust Managers. See
"Business and Strategy--Operating Policies and Guidelines--Relationship With
AMRESCO" for a description of the provisions of the Guidelines regarding
transactions between the Company and the AMRESCO Group. The Company does not
intend to enter into hedging transactions with members of the AMRESCO Group.
Although the Independent Trust Managers will review the Guidelines periodically
and monitor compliance with those Guidelines, it is anticipated that they will
rely primarily on information provided by the Manager. Such conflicts may
result in decisions and/or allocations of assets by the Manager that are not in
the best interest of the Company.
Investment Opportunities May Be Limited if Such Opportunities Are
Also Attractive to the AMRESCO Group. Pursuant to the Right of First Refusal,
AMRESCO will agree not to permit any member of the AMRESCO Group to invest in
Targeted Mortgage Loans (up to a specified limit) and certain MBS, unless the
Company's Investment Committee shall have first determined, in each instance,
not to invest in such asset or assets, or to invest in only a portion of such
asset or assets. Pursuant to the Correspondent Agreement, Holliday Fenoglio
Fowler will agree, so long as the Manager or any other member of the AMRESCO
Group is acting as manager of the Company, to present to the Company (on a
nonexclusive basis) investment opportunities arising within Holliday Fenoglio
Fowler which meet the investment parameters and objectives of the Company. See
"Business and Strategy--Operating Policies and Guidelines--Relationship With
AMRESCO." Except as contemplated by the Right of First Refusal and the
Correspondent Agreement, however, neither the Manager nor any other member of
the AMRESCO Group will have any obligation to make investment opportunities
available to the Company, even when such opportunities are consistent with the
Company's investment objectives and criteria. As a consequence, the investment
opportunities for the Company may be limited if such investment opportunities
would be attractive to the Manager or other members of the AMRESCO Group.
Competition by the AMRESCO Group May Adversely Affect the
Company. Except as contemplated by the Right of First Refusal, neither the
Manager nor any of its officers, directors, employees or Affiliates is limited
or restricted from engaging in any business or rendering services of any kind
to any other Person, except that AMRESCO has agreed not to permit the Manager
or any other member of the AMRESCO Group to sponsor, manage or make any
significant equity investment in any other mortgage REIT with the same
investment objectives as the Company. See "The Manager--Certain Relationships;
Conflicts of Interest." Since neither the Manager nor any of
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<PAGE> 28
its Affiliates is limited or restricted from engaging in any business or
rendering services except as described above, the Manager and other members of
the AMRESCO Group may compete with the Company or provide services to others
who compete with the Company (except as described above) which could result in
decisions by the Manager not in the best interests of the Company.
Conflicts of the Officers and Employees of the Manager May Cause
Them Not to Act in the Company's Best Interest. All of Holliday Fenoglio
Fowler's fees for its Mortgage Loan and real estate brokerage and financing
services are payable by the applicable borrower or seller (but may from time to
time be paid by the Company out of fees, deposits or additional interest paid
in the form of "points" by the applicable borrower or seller to the Company for
such purpose). Therefore, Holliday Fenoglio Fowler, a member of the AMRESCO
Group and an Affiliate of the Manager, will receive compensation for any
Mortgage Loan or real estate placed with or sold to the Company through
Holliday Fenoglio Fowler regardless of the quality of such Mortgage Loan or
real estate. Pursuant to the terms of the Management Agreement, the Manager
may engage members of the AMRESCO Group to provide services to the Company from
time to time, if the Manager believes such services would be of comparable or
superior quality to those which could be provided by third parties and can be
provided at comparable cost. Pursuant to the Guidelines, fees charged to the
Company by members of the AMRESCO Group for services provided must be
reasonable and customary and no more than such member of the AMRESCO Group
would charge an unaffiliated third party for such services. The President and
Chief Executive Officer of the Company and the Manager is also the President of
Holliday Fenoglio Fowler. Of the other senior executive officers of the
Manager, only the Chief Investment Officer, the Chief Operating Officer and the
Controller are not also officers or employees of other members of the AMRESCO
Group. Such conflicts may result in decisions by the Manager that are not in
the best interest of the Company. The Management Agreement does not specify a
minimum amount of time that the Manager or its officers and employees must
devote to the business of the Company. The ability of the Manager and its
employees to engage in other business activities on behalf of other members of
the AMRESCO Group could reduce the time and effort spent on the management of
the Company which would adversely impact the Company's performance. See
"Management of the Company" and "The Manager."
Structure of Management Compensation Could Jeopardize the
Invested Portfolio. In addition to its Base Management Fee, the Manager will
have the opportunity to earn Incentive Compensation under the Management
Agreement for each fiscal quarter based upon the Company's FFO for such
quarter. In evaluating Targeted Investments and other management strategies,
the opportunity to earn Incentive Compensation based on FFO may lead the
Manager to place undue emphasis on the maximization of FFO at the expense of
other criteria, such as preservation of capital, in order to achieve a higher
Incentive Compensation and could result in increased risk to the value of the
Invested Portfolio. In addition, the Incentive Compensation is calculated and
earned based upon the results of each quarter. Therefore, the Manager could
earn Incentive Compensation based upon one quarter's results even during a year
when the Company experiences a net loss for the year. The structure of the
Base Management Fee, which does not decrease with the size of the Company's
Invested Portfolio, provides an incentive for the Manager to highly leverage
the Invested Portfolio, even when such action may not be in the best interest
of the Company. See "The Manager--Management Compensation."
Agreements and Transactions May Not be Favorable to the Company.
The Management Agreement was not negotiated at arm's length and may be on terms
that are not as favorable to the Company as if it had been negotiated with a
third party. Likewise, the sale of the Initial Assets from AMRESCO Funding to
the Company was not negotiated at arm's length and, therefore, the purchase
price to be paid by the Company for such assets may not be the fair market
value of such assets.
DEPENDENCE ON THE MANAGER AND THE AMRESCO GROUP FOR OPERATIONS AND THE
LACK OF EXPERIENCE OF THE MANAGER MAY ADVERSELY AFFECT OPERATING RESULTS. The
Company will be wholly dependent for the selection, structuring and monitoring
of its Invested Portfolio and associated borrowings on the diligence and skill
of the officers and employees of the Manager. The Manager, in turn, is
dependent on its ability to attract, retain and motivate qualified personnel.
The Company does not anticipate requiring the Manager to enter into employment
agreements with its officers or employees. The loss of key employees of the
Manager could have a material adverse
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<PAGE> 29
effect on the Company's business, financial condition, cash flows and results
of operations. Moreover, the Manager will rely on the employees and other
resources of the AMRESCO Group for a significant portion of its operations.
Thus, the Company's success will depend to a large degree on the skill of the
officers and employees of the Manager and the other members of the AMRESCO
Group. Neither the Manager, which was formed in March 1998 and has no
operating history and no significant assets, nor any other member of the
AMRESCO Group, nor the Company, which was formed in January 1998 and has no
operating history, has any prior experience in managing and operating a REIT,
which could adversely affect the Company's business, financial condition and
results of operations. Further, there can be no assurance that the past
experience of the members of the AMRESCO Group upon which the Manager will rely
for a significant portion of its operations will be sufficient to successfully
manage the business of the Company. The past performance of the AMRESCO Group
is not indicative of future results of the Company.
INABILITY TO ACQUIRE OR DELAYS IN ACQUIRING TARGETED INVESTMENTS WILL
REDUCE INCOME TO THE COMPANY. The Company has issued non-binding commitments
to purchase approximately $74.5 million of Initial Assets in which it intends
to invest with a portion of the net proceeds of the Offering. There can be no
assurance that the Company will purchase any of such Initial Assets. The
Company's income and its ability to make distributions to its shareholders will
depend upon its ability to acquire Targeted Investments on acceptable terms and
at favorable spreads over the Company's borrowing costs. The Company expects
that a significant portion of its Invested Portfolio will be identified,
originated or otherwise made available to it through the AMRESCO Group. There
can be no assurance, however, that a sufficient quantity or quality of Targeted
Investments will be provided by the AMRESCO Group, or that any Targeted
Investments (which will typically be revealed to the Company on a nonexclusive
basis) will be acquired by the Company. The REIT Provisions of the Code place
certain restrictions on the Company's ability to invest in Participating Loans,
Mezzanine Loans and certain real estate, which may diminish the Company's
ability to compete with other investors for such Targeted Investments. See
"--Failure to Maintain REIT Status Would Have Adverse Tax Consequences." The
Company presently intends to have the net proceeds of the Offering fully
invested in Targeted Investments within six to nine months after the closing of
the Offering and to achieve a leverage ratio of 2:1 within 15 to 18 months after
the closing of the Offering. The Company's results of operations may be
adversely affected during the period in which the Company is initially
implementing its investment, leveraging and hedging strategies since during this
time the Company will be primarily investing in short-term investments which are
expected to provide a lower net return than the Company expects to achieve from
its Targeted Investments. See "Use of Proceeds." To the extent the Company is
unable to acquire and maintain a sufficient volume of Targeted Investments, the
Company's income and the Company's ability to make distributions to its
shareholders will be adversely affected.
COMPETITION FOR TARGETED INVESTMENTS COULD REDUCE INCOME TO THE COMPANY.
The Company will compete in the acquisition of Targeted Investments with a
significant number of other REITs, investment banking firms, savings and loan
associations, banks, mortgage bankers, insurance companies, mutual funds, and
other entities, some of which have greater financial resources than the
Company. In addition, there are several REITs similar to the Company, and
others may be organized in the future. The effect of the existence of such
additional investors may be to increase competition for the available supply of
Targeted Investments. Increased competition for the acquisition of Targeted
Investments or a diminution in the supply could result in lowered underwriting
standards, which could result in higher risk of loss to the Company, or higher
prices and, thus, lower yields on such Targeted Investments that could further
narrow the yield spread over borrowing costs. 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, which 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 the Company is unable to acquire and maintain a sufficient volume of
Targeted Investments, the Company's income and the Company's ability to make
distributions to its shareholders will be adversely affected.
CO-INVESTMENTS MAY BE RISKIER THAN INVESTMENTS MADE SOLELY BY THE
COMPANY. The Company intends to co-invest or participate with other entities
(including sometimes one or more members of the AMRESCO Group) in Targeted
Investments from time to time. Co-investments, partnership or joint venture
investments may, under certain circumstances, involve risks not otherwise
present, including the possibility that the Company's co-investors,
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<PAGE> 30
partners or co-venturers might become bankrupt, that such co-investors,
partners or co-venturers might at any time have economic or other business
interests or goals that are inconsistent with the business interests or goals
of the Company, and that such co-investors, partners or co-venturers may be in
a position to take action contrary to the instructions or the requests of the
Company or contrary to the Company's policies or objectives, including the
Company's policy with respect to maintaining its qualification as a REIT. See
"--Failure to Maintain REIT Status Would Have Adverse Tax Consequences." In
addition, the Company may in the future acquire investments without management
responsibility and, therefore, will not be in a position to exercise sole
decision-making authority regarding the investment.
RISKS OF LOSS ON MORTGAGE LOANS
Foreclosure May Not be Sufficient to Prevent Losses. With
respect to any Mortgage Loans in which it invests, the Company will be subject
to risks of borrower defaults, bankruptcies, fraud and special hazard losses
that are not covered by standard hazard insurance. In the event of any default
under Mortgage Loans held by the Company, the Company will bear a risk of loss
of principal to the extent of any deficiency between the value of the
collateral and the principal amount of the Mortgage Loan, and may not receive
interest payments on such Mortgage Loans which could have a material adverse
effect on the Company's cash flow from operations. In the event of the
bankruptcy of a Mortgage Loan borrower, the Mortgage Loan to such borrower will
be deemed to be secured only to the extent of the value of the underlying
collateral at the time of bankruptcy (as determined by the bankruptcy court),
and the lien securing the Mortgage Loan will be subject to the avoidance powers
of the bankruptcy trustee or debtor-in-possession to the extent the lien may be
unenforceable under state law. Foreclosure of a Mortgage Loan can be an
expensive and lengthy process which could have a substantial negative effect on
the Company's anticipated return on the foreclosed Mortgage Loan. If the
Company forecloses on a Mortgage Loan secured by real property which is
contaminated by hazardous substances, not only will the real property be
subject to a reduced value, but, if the Company assumes ownership of the real
estate, the Company could be subject to environmental liabilities (which could
exceed the value of the real estate) regardless of whether the Company was
responsible for the contamination. Finally, there can be no assurance that any
reserves which the Company may set aside from time to time on its balance sheet
for losses on Mortgage Loans will be adequate to cover the Company's actual
losses on its investments in Mortgage Loans.
Commercial Mortgage Loans May Involve a Greater Risk of Loss Than
Single-Family Mortgage Loans. Commercial Mortgage Loans are considered to
involve a higher degree of risk than single-family Mortgage Loans because of a
variety of factors, including generally larger loan balances, dependency for
repayment on successful operation of the mortgaged property and tenant
businesses operating therein, the fact that such loans are usually non-recourse
to the borrower and loan terms that include either no amortization of principal
or amortization schedules longer than the stated maturity and provide for
balloon payments at stated maturity rather than periodic principal payments.
In addition, the value of commercial real estate can be affected significantly
by the supply and demand in the market for that type of property.
Mezzanine, Construction and Bridge Loans Involve Greater Risks of
Loss. Mezzanine Loans, Construction Loans and Bridge Loans are considered to
involve a higher degree of risk than Permanent Mortgage Loans. In the case of
Mezzanine Loans, foreclosure by the mezzanine lender is often prohibited while
the senior debt is outstanding, and a foreclosure by the holder of the senior
Mortgage Loan could result in a Mezzanine Loan becoming unsecured. The
repayment of Construction Loans is often dependent on successful completion and
operation of the project. Construction Loans are also subject to additional
risk due to difficulties in estimating construction or rehabilitation costs and
loan terms that often require little or no amortization, providing instead for
additional advances to be made and for a balloon payment at a stated maturity
date. Bridge Loans are considered to involve a high degree of risk because,
among other things, repayment is often dependent upon the borrower obtaining a
Permanent Mortgage Loan. In addition, Mezzanine Loans, Construction Loans and
Bridge Loans typically have higher Loan to Value Ratios than conventional
Mortgage Loans.
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Participating Loans, Mezzanine Loans, Construction Loans and
Bridge Loans Involve Higher Administrative Costs. Participating Loans,
Mezzanine Loans, Construction Loans and Bridge Loans typically require more
extensive underwriting efforts than Permanent Mortgage Loans which increases
the lender's cost of originating such Mortgage Loans, or considering such
Mortgage Loans for origination. The Management Agreement requires the Company
to reimburse the Manager for expenses incurred in seeking to originate Mortgage
Loans approved by the Company for consideration, including all due diligence
expenses. If the Company incurs a significant amount of due diligence expenses
in connection with Mortgage Loans it does not acquire, the Company's cash flow
from operations may be materially adversely effected. Moreover, if the
Company's total costs to originate such Mortgage Loans become excessive, the
Company's returns on such Mortgage Loans may be materially adversely affected.
See "The Manager--Expenses."
Distressed Mortgage Loans May Have Greater Default Risks Than
Performing Loans. The Company may hold Nonperforming Mortgage Loans and
Subperforming Mortgage Loans, as well as Mortgage Loans that have had a history
of delinquencies. These Mortgage Loans presently may be in default or may have
a greater than normal risk of future defaults and delinquencies, as compared to
newly originated, higher quality Mortgage Loans. Returns on an investment of
this type depend on accurate pricing of the investment (if the Mortgage Loan is
acquired), the borrower's ability to make required payments, the timeliness of
payments, or, in the event of default, the ability of the Mortgage Loan's
servicer to foreclose and liquidate the mortgaged property underlying the
Mortgage Loan. There can be no assurance that the servicer can liquidate a
defaulted Mortgage Loan successfully, cost-effectively or in a timely fashion.
Limited Recourse Loans May Limit the Company's Recovery to the
Value of the Mortgaged Property. The Company anticipates that a substantial
portion of the Mortgage Loans that it will acquire or originate and of the
Mortgage Loans underlying MBS that it will acquire may contain limitations on
the lender's recourse against the borrower. In other cases, the lender's
recourse against the borrower may be limited by applicable provisions of the
laws of the jurisdictions in which the mortgaged properties are located or by
the lender's selection of remedies and the impact of those laws on that
selection. In those cases, in the event of a borrower default, recourse may be
limited to only the specific mortgaged property and other assets, if any,
pledged to secure the relevant Mortgage Loan. Even as to those Mortgage Loans
that provide for recourse against the borrower and its assets generally, there
can be no assurance that such recourse will provide a recovery in respect of a
defaulted Mortgage Loan greater than the liquidation value of the property
securing that Mortgage Loan.
Volatility of Values of Mortgaged Properties May Affect Adversely
the Company's Mortgage Loans. Commercial real estate values and net operating
income derived therefrom are subject to volatility and may be affected
adversely by a number of factors, including, but not limited to, national,
regional and local economic conditions (which may be adversely affected by
plant closings, industry slowdowns and corporate consolidations, among other
factors); local real estate conditions (such as an oversupply of housing,
retail, industrial, office or other commercial space); changes or continued
weakness in specific industry segments; perceptions by prospective tenants,
retailers and shoppers of the safety, convenience, services and attractiveness
of the property; the willingness and ability of the property's owner to provide
capable management and adequate maintenance, to make capital expenditures and
improvements and to provide leasing concessions; construction quality, age and
design; demographic factors; retroactive changes to building or similar codes;
and increases in operating expenses (such as energy costs). The Company
expects a substantial portion of its Invested Portfolio to consist of
Participating Loans and Mezzanine Loans which typically entitle the Company to
a portion of the appreciation or cash flow from the mortgaged property. In the
event of any economic downturn or recession in the market in which the real
estate underlying any such Participating Loan or Mezzanine Loan is located, or
in the event of any other decrease in value of such property, the returns to
the Company will be significantly reduced.
One Action Rules May Limit the Company's Rights Following
Defaults. Several states have laws that prohibit more than one "judicial
action" to enforce a Mortgage Loan, and some courts have construed the term
"judicial action" broadly. The servicer of the Mortgage Loan may be required
to foreclose first on properties located in states where such "one action"
rules apply (and when non-judicial foreclosure is permitted) before foreclosing
on
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properties located in states where judicial foreclosure is the only permitted
method of foreclosure. Such rules may increase the Company's costs to
foreclose on a Mortgage Loan and materially reduce the Company's return.
RISKS OF LOSS ON THE INITIAL ASSETS. In addition to all of the risks of
loss on Mortgage Loans described under "--Risks of Loss on Mortgage Loans," the
Initial Assets will be subject to the following risks:
Repayment May Depend on Successful Completion of the Project.
The Initial Assets consist of Mortgage Loans for the financing of the initial
construction of real property or the renovation or rehabilitation of existing
real property. The repayment of such Mortgage Loans may be dependent upon the
successful and timely rehabilitation or construction of the subject property.
If the applicable borrower is unable to successfully complete the proposed
rehabilitation or construction in accordance with the proposed budget and
timeline, or if the actual value of the completed project is less than estimated
because of any change in market conditions or otherwise, the borrower may not
have adequate funds to repay the loan on a timely basis.
Decrease in Property Values May Adversely Affect the Borrower's
Ability to Repay the Loan or Result in Reduced Profits to the Company. In the
event of any economic downturn or recession in the markets in which the
properties underlying the Initial Assets are located, or in the event of any
other decrease in the values of such properties, the borrowers may not be able
to secure long-term take-out financing for the mortgaged properties, which may
impair the abilities of such borrowers to repay the loans, and, if the Company
forecloses on a defaulted Initial Asset, the liquidation value of the mortgaged
property may not be sufficient to repay the loan. Further, a portion of the
Company's expected returns on Loan Two and Loan Four will be derived from the
payment by the borrower to the Company of a portion of the net sale proceeds of
the mortgaged property. In the event of any economic downturn or recession in
the markets in which the properties securing Loan Two and Loan Four are
located, or in the event of any other decrease in the values of such
properties, the returns to the Company would be significantly reduced.
Returns on Loan One and Loan Four May be Reduced due to Second
Lien Status. Loan One and Loan Four are secured by second-liens on the
mortgaged real estate. In the case of Loan One, the Company would be
prohibited from foreclosing on the mortgaged real estate without the consent of
the senior lender, and a foreclosure by the senior lender could result in Loan
One becoming unsecured. In addition, if the borrower of Loan One were to
default on its payments to the senior lender, the Company would not be able to
accept payments on Loan One until such default were cured. In the case of Loan
Four, in the event of a default under the senior debt, the Company would not be
able to accept payments without the consent of the senior lender, until such
default is cured. In the cases of both Loan One and Loan Four, the Company
would have the right to buy the senior note and/or the right to cure any
default on the senior debt. The Company's inability to exercise its remedies
under Loan One and Loan Four as quickly and efficiently as it would if it were
the senior lender could adversely effect its ability to recover its investments
in such loans.
Potential Environmental Problems Associated With Loan Three May
Adversely Affect the Company. The property proposed to secure Loan Three is
part of an 83 acre facility formerly owned by Continental Assurance Company and
operated by Raytheon Electronic Systems, a division of Raytheon Company
("Raytheon") from 1955 to 1995. An environmental site assessment which
included extensive subsurface soil and groundwater testing, was conducted by
Raytheon in 1996. The environmental site assessment disclosed the presence of
asbestos-containing materials ("ACM") in certain of the buildings located on
the subject property, hydrocarbon concentrations above reportable limits
impacting what appeared to be a limited area of soil, a release of No. 6 fuel
oil from a 20,000-gallon underground storage tank that had been removed in
1992, and the presence of oil and hazardous material ("OHM") containing metals
and volatile organic compounds, including polychlorinated biphenyls and
polynuclear aromatic hydrocarbons in drywells on the property. Significantly
lower levels of OHM were also detected in catch basins and within wetland
sediments adjacent to the property. Impact at the drywells has been abated by
Raytheon through soil removal actions conducted as Limited Response Actions
performed under the requirements imposed by Massachusetts Contingency Plan
regulations.
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The environmental site assessment concluded that the release of No. 6
fuel oil did not pose an eminent hazard and that the groundwater contamination
associated with the release had a low potential to impact current public water
supplies. The assessment also indicated that Raytheon was to conduct a Limited
Response Action to remove the hydrocarbons detected in the property. As part of
the rehabilitation costs associated with the property, the proposed borrower on
Loan Three has budgeted approximately $550,000 to remediate the contamination
associated with the release of the No. 6 fuel oil and approximately $300,000 to
abate the ACM. Further due diligence regarding the environmental condition of
the property and compliance with the requirements of the Massachusetts
Contingency Plan requirements will be conducted during the underwriting of Loan
Three. However, should the due diligence not detect any other significant
environmental problems and Loan Three closes as currently anticipated, no
assurance can be given that such due diligence will have identified all areas of
potential impact to soil, groundwater or other media or that the actual costs to
remediate any contamination that is or has been detected will not exceed the
costs estimated at the time the loan is closed. The discovery of unknown
environmental conditions or increased costs could limit the ability of the
Company to recover all of its interest and/or principal on Loan Three and may
expose the Company to additional liability. As a condition to the origination of
Loan Three, the Company would require that the borrower indemnify the Company
for any environmental liability (or other losses) incurred by the Company as a
result of any environmental problems associated with the real property securing
Loan Three. See "Risks Related to Investments in Real Estate--Real Estate With
Hidden Environmental Problems Will Increase Costs and May Create Liability for
the Company," "Risk Factors--Real Estate With Known Environmental Problems May
Create Liability for the Company" and "Business and Strategy--The Initial
Assets--Loan Three."
RISKS RELATED TO INVESTMENTS IN MBS
Subordinated Interests are Subject to Greater Credit Risks Than
More Senior Classes. The Company expects the Invested Portfolio to include a
significant amount of various classes of MBS, including "first loss" classes of
subordinated MBS (hereinafter referred to as "Subordinated Interests"). A
"first loss" class is the most subordinated class of a multi-class issuance of
pass-through or debt securities and is the first to bear the loss upon a
default on the underlying Mortgage Collateral. Subordinated Interests are
subject to special risks, including a substantially greater risk of loss of
principal and non-payment of interest than more senior classes. While the
market values of most Subordinated Interest classes tend to react less to
fluctuations in interest rate levels than more senior classes, the market
values of Subordinated Interest classes tend to be more sensitive to changes in
economic conditions than more senior classes. As a result of these and other
factors, Subordinated Interests generally are not actively traded, are more
difficult to pledge as collateral for borrowings and may not provide holders
thereof with liquidity of investment.
The yield to maturity on Subordinated Interests of the type the
Company intends to acquire will be extremely sensitive to the default and loss
experience of the underlying mortgage pass-through securities or pools of whole
loans securing or backing a series of MBS and the timing of any such defaults
or losses. Because the Subordinated Interests of the type the Company intends
to acquire generally have no credit support, to the extent there are realized
losses on the Mortgage Collateral for such classes, the Company may recover
less than the full amount, if any, of its initial investment in such
Subordinated Interests.
When the Company acquires a Subordinated Interest, it may be
unable to obtain the right to service the underlying performing Mortgage
Collateral. To minimize its losses, if the underlying Mortgage Collateral is
in default, the Company will seek to obtain the rights to service such
underlying Mortgage Collateral, although in some cases it will not be able to
obtain Special Servicing Rights on acceptable terms. To the extent the Company
does not obtain Special Servicing Rights with respect to the Mortgage
Collateral underlying its MBS, the servicer of the Mortgage Collateral
generally would be responsible to holders of the senior classes of MBS, whose
interests may not be the same as those of the holders of the subordinated
classes. Accordingly, the Mortgage Collateral may not be serviced in a manner
that is most advantageous to the Company as the holder of a subordinated class.
The subordination of Subordinated Interests to more senior
classes may affect adversely the yield on the Subordinated Interests even if
realized losses are not ultimately allocated to such classes. On any payment
date, interest and principal are paid on the more senior classes before
interest and principal are paid with respect to the unrated or non-investment
grade credit support classes. Typically, interest deferred on these credit
support classes
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is payable on subsequent payment dates to the extent funds are available, but
such deferral may not itself bear interest. Such deferral of interest will
affect adversely the yield on the Subordinated Interests.
Yields on Subordinated Interests May Be Affected Adversely By
Prepayments and Interest Rate Changes. The yield on the Subordinated Interests
also will be affected by the rate and timing of payments of principal
(including prepayments, repurchase, defaults and liquidations) on the Mortgage
Loans underlying a series of MBS. The rate of principal payments may vary
significantly over time depending on a variety of factors such as the level of
prevailing Mortgage Loan interest rates and economic, demographic, tax, legal
and other factors. Prepayments on the Mortgage Loans underlying a series of
MBS are generally allocated to the more senior classes of MBS until those
classes are paid in full or until the end of a lock-out period, typically of
five years or more. Generally, prepayments of principal from the Mortgage
Loans are not received by the Subordinated Interest holders for a period of at
least four years. As a result, the weighted average lives of the Subordinated
Interests may be longer than would be the case if, for example, prepayments
were allocated pro rata to all classes of MBS. To the extent that the holder
of a Subordinated Interest is not paid compensating interest on interest
shortfalls due to prepayments, liquidations or otherwise, the yield on the
Subordinated Interests may be affected adversely.
Certain Investments May Generate Taxable Income Exceeding Cash
Flow. The Company also may invest in certain classes of MBS that are
designated as the residual interest in the related REMIC (a "REMIC Residual
Interest") or that represents the residual interest in a non-REMIC
securitization ("Non-REMIC Residual Interest"), which receive principal and
interest payments in excess of amounts needed to make payments on other classes
of securities or to fund a reserve account. Like interest otherwise allocable
to Sub IOs, principal and interest amounts otherwise allocable to such residual
interests are used to protect the senior classes of securities from credit
losses on the underlying Mortgage Loans. Moreover, in any given year, the
taxable income produced by a residual interest may exceed its cash flow. The
Company may also invest in Distressed Mortgage Loans and such loans may produce
taxable interest income for the Company prior to the Company's receipt of loan
payments.
RISKS RELATED TO INVESTMENTS IN REAL ESTATE
Tenant Defaults and Bankruptcy May Cause Losses. A portion of
the Company's income is expected to be derived from rental income on real
estate owned and, consequently, the Company's distributable cash flow and
ability to make expected distributions to shareholders would be adversely
affected if a significant number of tenants of the Company's owned real estate
failed to meet their lease obligations. At any time, a tenant of the Company
could seek the protection of the bankruptcy laws, which could result in delays
in rental payments or in the rejection and termination of such tenant's lease.
No assurance can be given that tenants will not file for bankruptcy protection
in the future or, if any tenants file, that they will affirm their leases and
continue to make rental payments in a timely manner. In addition, a commercial
tenant from time to time may experience a downturn in its business which may
weaken its financial condition and result in the failure to make rental
payments when due.
Reliance on Third Party Operators May Adversely Affect Results.
Neither the Company nor the Manager has experience in the operation of real
estate. Therefore, neither the Company nor the Manager intends to operate any
of the Company's real estate investments. The Company will engage experienced
real estate operators to operate its properties and will be dependent upon the
abilities of such third parties to operate such real estate. The failure of
any such operator to operate the Company's real estate competently or
efficiently, or to operate any such real estate in accordance with the
Company's policies and objectives, including the Company's policy with respect
to maintaining its status as a REIT, could have a material adverse effect on
the results of operations of the Company.
Conditions Beyond the Company's Control May Affect Adversely the
Value of Real Estate. The underlying value of the Company's real estate
investments and the Company's income and ability to make distributions to its
shareholders are dependent upon the ability of the third party operators
engaged by the Company to operate such real estate in a manner sufficient to
maintain or increase revenues in excess of operating expenses and debt service
or, in the case of real estate leased to a single lessee, the ability of the
lessee to make rent payments. Revenues may be adversely affected by adverse
changes in national or local economic conditions, competition from other
properties
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offering the same or similar services, changes in interest rates and in the
availability, cost and terms of mortgage funds, the impact of present or future
environmental legislation and compliance with environmental laws, the ongoing
need for capital improvements (particularly in older structures), changes in
real estate tax rates and other operating expenses, adverse changes in
governmental rules and fiscal policies, civil unrest, acts of God, including
earthquakes, hurricanes and other natural disasters (which may result in
uninsured losses), acts of war, adverse changes in zoning laws, and other
factors which are beyond the control of the Company.
Real Estate is Illiquid and its Value May Decrease. Real estate
investments are relatively illiquid. To the extent the Company holds a
significant amount of real estate, the ability of the Company to vary its
Invested Portfolio in response to changes in economic and other conditions will
be limited. No assurances can be given that the fair market value of any of
the Company's real estate assets will not decrease in the future.
The Company's Insurance Will Not Cover All Losses. The Company
intends to maintain comprehensive insurance on all of its real estate,
including liability and fire and extended coverage, in amounts sufficient to
permit the replacement of the improvements thereon in the event of a total
loss, subject to applicable deductibles. The Company will endeavor to obtain
coverage of the type and in the amount customarily obtained by owners of real
estate similar in nature in the areas where such real estate is located. There
are certain types of losses, however, generally of a catastrophic nature, such
as earthquakes, floods and hurricanes, that may be uninsurable or not
economically insurable. Inflation, changes in building codes and ordinances,
environmental considerations, and other factors also might make it infeasible
to use insurance proceeds to replace a property if it is damaged or destroyed.
Under such circumstances, the insurance proceeds received by the Company, if
any, might not be adequate to restore the Company's investment with respect to
the affected property.
Property Taxes Decrease Returns on Real Estate. All real estate
owned by the Company will be subject to real property taxes and, in some
instances, personal property taxes. Such real and personal property taxes may
increase or decrease as property tax rates change and as the properties are
assessed or reassessed by taxing authorities. An increase in property taxes on
the Company's real estate could affect adversely the Company's income and
ability to make distributions to its shareholders and could decrease the value
of that real estate.
Compliance With Americans with Disabilities Act and Other Changes
in Governmental Rules and Regulations May Be Costly. Under the Americans with
Disabilities Act of 1990 (the "ADA"), all public properties are required to
meet certain federal requirements related to access and use by disabled
Persons. Certain real estate acquired by the Company may not be in compliance
with the ADA. If a property is not in compliance, the owner of the property
will be required to make modifications to such property to bring it in
compliance, or face the possibility of an imposition of fines or an award of
damages to private litigants. In addition, changes in governmental rules and
regulations or enforcement policies affecting the use and operation of the real
estate, including changes to building codes and fire and life-safety codes, may
occur. If the Company is required to make substantial modifications to any of
its properties to comply with the ADA or other changes in governmental rules
and regulations, the Company's ability to make expected distributions to its
shareholders could be adversely affected.
Real Estate with Hidden Environmental Problems Will Increase
Costs and May Create Liability for the Company. Operating costs and the value
of the real estate acquired by the Company may be affected by the obligation to
pay for the cost of complying with existing environmental laws, ordinances and
regulations, as well as the cost of future legislation. Under various federal,
state and local environmental laws, ordinances and regulations, a current or
previous owner or operator of real estate may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under or in such
real estate. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. Therefore, an environmental liability could have a material
adverse effect on the value of the real estate acquired by the Company, the
Company's income and cash available for distribution to its shareholders. The
Company intends to obtain Phase I environmental assessments on all real estate
acquired by the Company prior to the acquisition by the Company of such real
estate. The purpose of Phase I environmental assessments is to identify
potential environmental contamination that is made apparent from historical
reviews of the real estate, reviews of certain public
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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. Even if a Phase I
environmental assessment is obtained, however, there is no assurance it will
reveal all existing and potential environmental risks and liabilities, and
there is no assurance that there will be no unknown or material environmental
obligations or liabilities.
Real Estate With Known Environmental Problems May Create
Liability for the Company. The Company may invest in real estate with known
environmental problems that materially impair the value of the real estate. In
such cases, the Company will generally take certain steps to seek to limit its
environmental liability, including the creation of a special purpose entity
which will own such real estate. Despite these precautionary measures, there
are risks associated with such an investment.
Foreign Real Estate is Subject to Currency Conversion Risks and
Uncertainty of Foreign Laws. The Company may invest in real estate located
outside the United States. Investing in real estate located in foreign
countries creates risks associated with the uncertainty of foreign laws and
markets including, without limitation, laws respecting foreign ownership, the
enforceability of loan documents and foreclosure laws. Moreover, investments
in foreign real estate are subject to currency conversion risks. In addition,
income from investment in foreign real estate may be subject to tax by foreign
jurisdictions, which would reduce the economic benefit of such investments.
Neither the Company nor the Manager has experience in investing in foreign real
estate. The Company intends to limit its investments in foreign real estate to
those jurisdictions in which the AMRESCO Group has historically conducted
business (currently, Canada, the United Kingdom and Mexico).
INTEREST RATE FLUCTUATIONS MAY ADVERSELY AFFECT THE COMPANY'S
INVESTMENTS AND OPERATING RESULTS
Interest Rate Mismatch Could Occur Between Invested Portfolio
Yield and Borrowing Rates Resulting in Decreased Yield. The Company's
operating results will depend in large part on differences between the income
earned on its Invested Portfolio (net of credit losses) and its borrowing
costs. The Company may fund a substantial portion of its Invested Portfolio
with borrowings having interest rates that reset relatively rapidly, such as
monthly or quarterly. The Company anticipates that, in some cases, the income
from its Invested Portfolio may respond more slowly to interest rate
fluctuations than the cost of its borrowings, creating a potential mismatch
between the yield on its Invested Portfolio and borrowing rates. Consequently,
changes in interest rates, particularly short-term interest rates, may
significantly influence the Company's net income. If there is a mismatch,
increases in these rates will tend to decrease the Company's net income and
market value of the Company's net Invested Portfolio. Interest rate
fluctuations resulting in the Company's interest expense exceeding interest
income would result in the Company incurring operating losses.
Inverted Yield Curve Adversely Affects Income. The relationship
between short-term and long-term interest rates is often referred to as the
"yield curve." Ordinarily, short-term interest rates are lower than long-term
interest rates. If short-term interest rates rise disproportionately relative
to long-term interest rates (a flattening of the yield curve), the borrowing
costs of the Company may increase more rapidly than the interest income earned
on its Invested Portfolio. Because the Company's borrowings will primarily
bear interest at short-term rates and its Invested Portfolio will primarily
earn interest at medium-term to long-term rates, a flattening of the yield
curve will tend to decrease the Company's net income and market value of its
net Invested Portfolio. Additionally, to the extent cash flows from long-term
assets that return scheduled and unscheduled principal and other payments are
reinvested, the spread between the yields of the new assets and available
borrowing rates may decline and also may tend to decrease the net income and
market value of the Company's net Invested Portfolio. It is also possible that
short-term interest rates may adjust relative to long-term interest rates such
that the level of short-term rates exceeds the level of long-term rates (a
yield curve inversion). In such event, the Company's borrowing costs may
exceed its interest income and operating losses would be incurred.
Increased Interest Rates Could Decrease Demand for Mortgage
Loans. A significant increase in interest rates would likely reduce the demand
for Mortgage Loans, which could impair the Company's ability to acquire
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Targeted Investments, which could in turn reduce the Company's income and
ability to make distributions to its shareholders.
Increased Prepayment Rates Could Adversely Affect Yields. The
value of certain of the Company's assets may be adversely affected by
prepayment rates on Mortgage Loans. Prepayment rates on Mortgage Loans are
influenced by changes in current interest rates and a variety of economic,
geographic and other factors beyond the control of the Company, and
consequently, such prepayment rates cannot be predicted with certainty. In
periods of declining Mortgage Loan interest rates, prepayments on Mortgage
Loans generally increase. If general interest rates decline as well, the
proceeds of such prepayments received during such periods are likely to be
reinvested by the Company in assets yielding less than the yields on the
Mortgage Loans that were prepaid. In addition, the market value of the
Mortgage Loans may, because of the risk of prepayment, benefit less than other
fixed-income securities from declining interest rates. Conversely, in periods
of rising interest rates, prepayments on Mortgage Loans generally decrease, in
which case the Company would not have the prepayment proceeds available to
invest in assets with higher yields. Although the Company anticipates that the
majority of the Mortgage Loans in which it invests and which underlie the MBS
in which it invests will prohibit or substantially limit prepayments, to the
extent prepayments are not prohibited, the Company's income may be reduced or
the Company may incur losses.
LEVERAGE INCREASES EXPOSURE TO LOSS. The Company's operations are
expected to be highly leveraged. The Company intends to finance its
acquisitions of Targeted Investments through the net proceeds of the Offering
and the Private Placement and by borrowing against or "leveraging" its Invested
Portfolio. The Company will leverage primarily with reverse repurchase
agreements, securitizations of its Mortgage Loans and secured and unsecured
loans. The Company has obtained commitments from certain institutions pursuant
to which the Company expects to have the ability to obtain up to $500 million
of financing upon the closing of the Offering for the acquisition of Targeted
Investments. See "Management's Discussion and Analysis of Liquidity and
Capital Resources" and "Business and Strategy--Operating Policies and
Guidelines--Capital and Leverage Policies." The Company intends to operate at
a debt to equity ratio of less than 3:1, although the actual ratio may be
higher or lower from time to time depending upon market conditions and other
factors deemed relevant by the Manager, subject to the review of the Board of
Trust Managers. However, the Declaration of Trust and Bylaws do not limit the
amount of indebtedness the Company can incur, and the Board of Trust Managers
has the discretion to deviate from or change its indebtedness policy at any
time, without consent from or notice to the Company's shareholders. See "--The
Company's Ability to Revise its Policies and Strategies Without Shareholder
Consent May Create Uncertainty."
Leverage creates an opportunity for increased net income, but at
the same time increases volatility in the Company's income and the value of its
net Invested Portfolio. The Company will leverage its Invested Portfolio only
when there is an expectation that it will enhance returns, although there can
be no assurance that the Company's use of leverage will prove to be beneficial
or advantageous to the Company, relative to the Company's risks. Moreover,
there can be no assurance that the Company will be able to meet its debt
service obligations. The Company's ability to meet its debt service
obligations will be dependent upon the Company's receipt of sufficient income
from its Invested Portfolio. In the event of a mismatch in interest rates
between the Company's borrowings and the yield on its Invested Portfolio or
other reductions in cash flow, including without limitation reductions
resulting from payment defaults on the Company's Mortgage Loans, MBS or other
assets, the Company may not have sufficient cash flow to meet its debt service
obligations. See "--Interest Rate Fluctuations May Adversely Affect the
Company's Investments and Operating Results."
A substantial portion of the Company's borrowings are expected to
be in the form of securitizations and reverse repurchase agreements. If the
value of the assets pledged to secure such borrowings were to decline, the
Company would be required to post additional collateral, to reduce the amount
borrowed or suffer forced sales of the collateral. If sales were made at
prices lower than the carrying value of the collateral, the Company would
experience additional losses. If the Company is forced to liquidate Qualified
REIT Real Estate Assets to repay borrowings, there can be no assurance that it
will be able to maintain compliance with the REIT Provisions of the Code
regarding asset and source of income requirements. See "--Failure to Maintain
REIT Status Would Have Adverse Tax Consequences."
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<PAGE> 38
INABILITY TO IMPLEMENT LEVERAGING STRATEGY MAY REDUCE PROFITS. The
ability of the Company to achieve its desired level of leverage, and therefore
its investment objective, depends to a significant extent on its ability to
borrow money in sufficient amounts and on sufficiently favorable terms to earn
incremental returns. The Company may not be able to achieve the degree of
leverage it believes to be optimal due to decreases in the proportion of the
value of its Invested Portfolio that it can borrow, decreases in the market
value of the Invested Portfolio, increases in interest rates, changes in the
availability of financing in the market, conditions then applicable in the
lending market and other factors. If the Company is unable to enter into
borrowing arrangements on terms and conditions satisfactory to the Company, or
if such arrangements are subsequently terminated, the Company may be unable to
effectively implement its leveraging strategy. Such an occurrence may cause
the Company to experience losses or lower profits than would otherwise be the
case.
HEDGING TRANSACTIONS CAN LIMIT GAINS AND MAY INCREASE EXPOSURE TO
LOSSES. The Company may, from time to time, enter into hedging transactions,
including interest rate swaps, interest rate collars, caps or floors forward
contracts and U.S. Treasury and Eurodollar futures and options, in an effort
to protect itself from the effect of interest rate fluctuations on any floating
rate debt it may incur and also to protect its Invested Portfolio from interest
rate and prepayment rate fluctuations. There can be no assurance that the
Company will enter into hedging activities or that if entered into, such
activities will have the desired beneficial impact on the Company's results of
operations or financial condition. Moreover, no hedging activity can
completely insulate the Company from the risks associated with changes in
interest rates and prepayment rates.
Hedging involves risk and typically involves costs, including
transaction costs. Such costs increase dramatically as the period covered by
the hedging increases and during periods of rising and volatile interest rates.
The Company may increase its hedging activity and, thus, increase its hedging
costs, during such periods when interest rates are volatile or rising and
hedging costs have increased. The Company intends generally to hedge as much
of the interest rate risk as the Manager determines is in the best interest of
the shareholders of the Company given the cost of such hedging transactions and
the need to maintain the Company's status as a REIT. The Guidelines do not
contain specific requirements as to the percentages or amount of interest rate
risk which the Manager is required to hedge. The Board of Trust Managers will
from time to time review the extent and effectiveness of hedging transactions
conducted by the Company.
Hedging instruments often are not traded on regulated exchanges,
guaranteed by an exchange or its clearing house, or regulated by any U.S. or
foreign governmental authorities. Consequently, there are no requirements with
respect to record-keeping, financial responsibility or segregation of customer
funds and positions. The business failure of a counterparty with which the
Company has entered into a hedging transaction will most likely result in a
default. Default by a party with which the Company has entered into a hedging
transaction may result in the loss of unrealized profits and force the Company
to cover its resale commitments, if any, at the then current market price.
Although generally the Company will seek to reserve for itself the right to
terminate its hedging positions, it may not always be possible to dispose of or
close out a hedging position without the consent of the counterparty, and the
Company may not be able to enter into an offsetting contract in order to cover
its risk. There can be no assurance that a liquid secondary market will exist
for hedging instruments purchased or sold, and the Company may be required to
maintain a position until exercise or expiration which could result in losses.
To the extent the Company utilizes a derivatives transaction to
hedge another position, such transaction will also subject the Company to basis
or correlation risk. Basis or correlation risk refers to the exposure of a
transaction or portfolio to differences in the price performance of the
derivatives it contains and their hedges. If the Company enters into a
transaction in which an instrument and its hedge are not perfectly correlated,
changes in applicable indices or other price movements will result in a change
(which could include a loss) in the market value of the combined hedge
position. Hedging transactions may also subject the Company to risks of loss
resulting from the unenforceability of a contract with a counterparty. Such
risks could result from insufficient documentation, insufficient capacity or
authority of a counterparty and unenforceability in the event of bankruptcy or
insolvency. If a hedging transaction entered into by the Company was
determined to be unenforceable, the Company could incur unrecoverable losses
from such transaction.
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<PAGE> 39
TERMINATION OF THE MANAGEMENT AGREEMENT COULD ADVERSELY AFFECT THE
COMPANY'S INVESTMENTS AND OPERATING RESULTS. The Company expects that a
significant portion of its Invested Portfolio will be identified, originated or
otherwise made available to it through the AMRESCO Group. If the Management
Agreement is terminated (and no member of the AMRESCO Group is serving as
manager of the Company), the Right of First Refusal and the Correspondent
Agreement may be terminated by the AMRESCO Group. If the AMRESCO Group chooses
not to continue to offer Targeted Investments to the Company, the Company's
operations could be materially adversely affected. Further, the Manager may be
entitled to a significant termination fee if the Company does not renew, or
elects to terminate, the Management Agreement, which, if paid, would materially
adversely affect the cash available for distribution to the Company's
shareholders and may result in material net operating losses for the period.
THE COMPANY'S ABILITY TO REVISE ITS POLICIES AND STRATEGIES
WITHOUT SHAREHOLDER CONSENT MAY CREATE UNCERTAINTY. The Board of Trust
Managers has established the policies and strategies set forth in this
Prospectus as the policies and strategies of the Company. However, these
policies and strategies may be modified or waived by the Board of Trust
Managers without shareholder consent, subject, in certain cases, to approval by
a majority of the Independent Trust Managers. The ultimate effect of these
changes may have a positive or negative effect on the results of operations of
the Company. See "Business and Strategy--Operating Policies and
Guidelines--Future Revisions in Policies and Strategies."
FAILURE TO MAINTAIN REIT STATUS WOULD HAVE ADVERSE TAX
CONSEQUENCES. In order to maintain its qualification as a REIT for federal
income tax purposes, the Company must continually satisfy certain tests with
respect to the sources of its income, the nature of its assets, the amount of
its distributions to shareholders and the ownership of its shares. If the
Company fails to qualify as a REIT in any tax year, it would be taxed as a
regular domestic corporation. In such a case, the Company would be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates, and distributions to the Company's
shareholders would not be deductible by the Company in computing its Taxable
Income. Any such corporate tax liability could be substantial and would reduce
the amount of cash available for distribution to the Company's shareholders,
which in turn could have an adverse impact on the value of, and trading prices
for, the Common Shares. In addition, the unremedied failure of the Company to
be treated as a REIT for any one year would disqualify the Company from being
treated as a REIT for four subsequent years. See "Federal Income Tax
Consequences--Requirements For Qualification" and "Federal Income Tax
Consequences--Failure to Qualify."
Investment by the Company in certain real estate and in
Participating Loans and Mezzanine Loans may involve special considerations in
applying the various REIT qualification tests. For instance, since certain of
the Company's Participating Loans and Mezzanine Loans will entitle the Company
to an interest in either a percentage of the revenues of a mortgaged property
or the borrower, such Mortgage Loans must be structured to avoid violation by
the Company of the REIT Provisions of the Code. Generally, to the extent
interest is based upon or attributable to net cash flow from the real estate,
the real estate underlying such Mortgage Loans must be operated in accordance
with the REIT Provisions of the Code in order for the interest income on such
Mortgage Loans to qualify under the REIT Provisions of the Code, regardless of
whether the owner of any such real estate has elected to be taxed as a REIT.
If any such real estate is not operated in accordance with the REIT Provisions
of the Code, the interest income from such Mortgage Loans will not qualify
under the REIT Provisions of the Code. Further, the Company may be required to
transfer the related Participating Loan or Mezzanine Loan to a taxable
corporation owned in whole or in part by the Company, in which case there would
be a corporate level income tax on any income derived from such Mortgage Loan.
Moreover, the requirement that the real estate underlying a Mezzanine Loan or
Participating Loan must be operated in accordance with the REIT Provisions of
the Code may diminish the Company's ability to compete with other lenders for
such Mortgage Loans. See "Business and Strategy--Description of Targeted
Investments" and "Federal Income Tax Consequences--Requirements For
Qualification--Income Tests."
The Company must also ensure that at the end of each calendar
quarter at least 75% of the value of its assets consists of cash, cash items,
government securities and Qualifying REIT Real Estate Assets, and of the
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<PAGE> 40
investments in securities not included in the foregoing, the Company does not
hold more than 10% of the outstanding voting securities of any one issuer and
no more than 5% by value of the Company's assets consists of the securities of
any one issuer. Failure to comply with any of the foregoing tests would
require the Company to dispose of a portion of its assets within 30 days after
the end of the calendar quarter or face loss of REIT status and adverse tax
consequences. See "Federal Income Tax Consequences--Requirements For
Qualification--Asset Tests" and "Federal Income Tax Consequences--Failure to
Qualify."
The Company must generally distribute at least 95% of its REIT
Taxable Income each year after taking various timing considerations into
account. The Company's operations may from time to time generate Taxable
Income in excess of cash flows. To the extent that the Company does not
otherwise have funds available, the Company may need to borrow money, receive
additional capital or sell assets to obtain the cash needed for distribution to
the Company's shareholders. The Company generally intends to distribute
sufficient amounts to avoid excise tax liability unless retention of income
will create additional shareholder value. See "Federal Income Tax
Consequences--Requirements For Qualification--Annual Distribution
Requirements."
SALES BY SHAREHOLDERS COULD ADVERSELY AFFECT THE MARKET PRICE OF
THE COMMON SHARES. Upon the closing of the Offering and the Private Placement,
the Company will have a total of 22,222,333 Common Shares outstanding
(25,555,667 if the Underwriters' over-allotment option in the Offering is
exercised in full and the number of Common Shares sold in the Private Placement
is increased as a result). Of these shares, the 20,000,000 Common Shares
offered hereby (23,000,000 if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction or registration
under the Securities Act by Persons other than Affiliates of the Company. The
remaining 2,222,333 Common Shares (2,555,667 if the Private Placement is
increased to its maximum as a result of the separate exercise in full of the
Underwriters' over-allotment option) will be "restricted securities" as that
term is defined by Rule 144 as promulgated under the Securities Act. Upon the
closing of the Offering, the Company will issue options to purchase
[____________] Common Shares at the initial public offering price. Options to
purchase an additional [_____________] Common Shares will remain available for
issuance under the Share Option Plan. See "Management of the Company--Share
Options Outstanding" and "Shares Eligible for Future Sale."
The "restricted securities" and Common Shares issued upon the exercise
of Share Options will become eligible for sale upon expiration of the lock-up
restrictions described below. Holdings has agreed not to offer, sell, offer to
sell, or contract to sell, pledge, grant any option to purchase or otherwise
dispose of or sell (or announce any offer, sale, offer of sale, contract of
sale, pledge, grant any option to purchase or other sale or disposition of) the
Common Shares acquired by it pursuant to the Private Placement for a period of
two years after the closing of the Offering without the prior written consent
of Prudential Securities Incorporated on behalf of the Underwriters so long as
the Manager or another member of the AMRESCO Group continues to serve as
manager of the Company during such period. In addition, the Company and the
Trust Managers and executive officers of the Company have agreed not to offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise dispose of or sell (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant any option to purchase or other sale or
disposition of) any Common Shares, or any securities convertible into, or
exchangeable or exercisable therefor, for a period of 180 days after the
closing of the Offering, without the prior written consent of Prudential
Securities Incorporated on behalf of the Underwriters, except that during such
period, Common Shares may be issued upon the exercise of outstanding Share
Options and the Company may issue Share Options which are exercisable after the
180th day after the closing of the Offering. Prudential Securities
Incorporated may, in its sole discretion, at any time and without notice,
release all or any portion of the Common Shares subject to such lock-up
agreements.
The Company has agreed that, upon Holdings' demand, it will file and
seek to have declared effective a resale registration statement covering the
sale in the public market of the shares sold to Holdings in the Private
Placement. See "Description of Shares of Beneficial Interest--Registration
Rights" and "Private Placement." Following expiration of the lock-up period
described above, assuming such resale registration statement is filed and
declared effective, those shares will be available for sale in the public
market. If such resale registration statement is not filed and declared
effective, those shares will be available for sale, following expiration of the
lock-up restrictions
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<PAGE> 41
discussed above, pursuant to Rule 144 including the manner of sale and volume
limitations thereof. See "Private Placement."
In addition, the Company anticipates that during 1998 it will file a
registration statement with respect to the 3,333,350 Common Shares issuable
under the Share Option Plan and any Common Shares which may be issued in
connection with other incentive compensation arrangements thereby allowing such
Common Shares to be transferred or resold without restriction under the
Securities Act subject to the lock-up restrictions discussed above. See
"Management of the Company--Share Option Plan" and "Management of the
Company--Share Options Outstanding."
Prior to the Offering, there has been no public market for the Common
Shares and no prediction can be made of the effect, if any, that the sale or
availability for sale of additional Common Shares will have on the market price
of the Common Shares. Nevertheless, sales of substantial amounts of such
shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Shares and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Shares Eligible for Future Sale."
FUTURE OFFERINGS BY THE COMPANY OF DEBT AND EQUITY COULD DILUTE
THE INTERESTS OF HOLDERS OF COMMON SHARES. The Company may in the future
increase its capital resources by making additional offerings of equity and
debt securities, including classes of Preferred Shares, Common Shares,
commercial paper, medium-term notes, MBS and senior or subordinated notes. All
debt securities and other borrowings, as well as all classes of Preferred
Shares, will be senior to the Common Shares in a liquidation of the Company.
The effect of additional equity offerings may be the dilution of the equity of
shareholders of the Company or the reduction of the price of Common Shares, or
both. The Company is unable to estimate the amount, timing or nature of
additional offerings as they will depend upon market conditions and other
factors.
RESTRICTIONS ON OWNERSHIP OF THE COMMON SHARES COULD DISCOURAGE A
CHANGE OF CONTROL. The Declaration of Trust prohibits any Person from
acquiring or holding, directly or indirectly, shares of beneficial interest in
excess of 9.8% (in value or in number of shares, whichever is more restrictive)
of the aggregate of the outstanding shares of beneficial interest of the
Company ("Excess Shares") without approval of the Board of Trust Managers, even
in instances where such restriction is not necessary for the Company to meet
the requirements for qualification as a REIT. The Declaration of Trust further
prohibits (i) any Person from beneficially or constructively owning shares of
beneficial interest that would result in the Company being "closely held" under
Section 856(h) of the Code or otherwise cause the Company to fail to qualify as
a REIT and (ii) any Person from transferring shares of beneficial interest if
such transfer would result in shares of beneficial interest being owned by
fewer than 100 Persons. Subject to certain limitations, the Board of Trust
Managers may increase or decrease the ownership limitations or waive the
limitations for individual investors. The Board of Trust Managers has waived
the foregoing limitations for the Manager and other members of the AMRESCO
Group who will own approximately 20% of the outstanding Common Shares, in the
aggregate (assuming no exercise of the Underwriters' over-allotment option, and
exercise of all options granted to the Manager). See "Description of Shares of
Beneficial Interest--Restrictions on Transfer" and "Management of the
Company--Share Options Outstanding."
RESTRICTIONS ON OR IMPEDIMENTS TO CHANGE OF CONTROL COULD
ADVERSELY AFFECT THE VALUE OF THE COMMON SHARES. The authorized capital shares
of the Company include Preferred Shares issuable in one or more series. The
issuance of Preferred Shares could have the effect of making an attempt to gain
control of the Company more difficult by means of a merger, tender offer, proxy
contest or otherwise. The Preferred Shares, if issued, would have a preference
on dividend payments that could affect the ability of the Company to make
dividend distributions to the holders of Common Shares.
Material provisions of the Declaration of Trust relating to
"business combinations" may also have the effect of delaying, deterring or
preventing a takeover attempt or other change in control of the Company that
would be beneficial to shareholders and might otherwise result in a premium
over then prevailing market prices. In addition,
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<PAGE> 42
the staggered Board provisions of the Declaration of Trust and the advance
notice provisions of the Bylaws could delay, defer or prevent a change of
control of the Company or other transaction that might involve a premium price
for holders of Common Shares or otherwise be in their best interest.
CHANGES IN TAX LAWS APPLICABLE TO REITS MAY ADVERSELY AFFECT THE
COMPANY. The rules regarding federal income taxation are constantly under
review by the IRS, the Treasury Department and Congress. New federal tax
legislation or other provisions may be enacted into law or new interpretations,
rulings or Treasury Regulations could be adopted, all of which could adversely
affect the taxation of the Company or its stockholders, possibly with
retroactive effect. No prediction can be made as to the likelihood of passage
of any new tax legislation or other provisions either directly or indirectly
affecting the Company or its shareholders. See "Federal Income Tax
Consequences--Proposed Tax Legislation and Possible Other Legislative Actions
Affecting Tax Consequences."
FAILURE TO DEVELOP A STABLE MARKET MAY RESULT IN DEPRESSED MARKET
PRICE. Prior to the Offering, there has been no public market for the Common
Shares, and there can be no assurance that an active trading market for the
Common Shares offered hereby will develop or, if developed, be sustained. The
initial public offering price will be determined through negotiations between
the Company and the Representatives of the Underwriters and may bear no
relationship to the price at which the Common Shares will trade after the
closing of the Offering. See "Underwriting." The market price of the Common
Shares may be volatile and may be significantly affected by factors such as
actual or anticipated fluctuations in the Company's operating results,
developments with respect to conditions and trends in the Company's lines of
business or in the financial services industry or real estate market as a
whole, governmental regulation, changes in estimates by securities analysts of
the Company's or its competitors' future financial performance, general market
conditions and other factors, many of which are beyond the Company's control.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have adversely affected the market prices of
securities of companies irrespective of such companies' operating performances.
SOFTWARE DEFICIENCIES COULD ADVERSELY AFFECT THE COMPANY. The
Company will rely upon a significant number of computer software programs and
operating systems of the Manager and other members of the AMRESCO Group as well
as parties unaffiliated with the AMRESCO Group in conducting its operations.
To the extent that these software applications contain source code that is
unable to appropriately interpret the upcoming calendar year "2000," some level
of modification or even possibly replacement of such source code or
applications will be necessary. Pursuant to the Management Agreement, the
Manager will bear the costs associated with determining whether its systems are
Year 2000 compliant and the costs of any necessary modifying or replacing its
source code or application, unless such systems are used solely for the
Company's operations. Given the information known at this time about the
systems of the AMRESCO Group and those of other parties upon which the Company
intends to rely, it is currently not anticipated that these "Year 2000" costs
will have any material adverse impact on the Company's business, financial
condition or results of operations. However, the Company will be dependent
upon the AMRESCO Group to determine that its systems and applications and those
of other parties utilized by it are "Year 2000" compliant.
FAILURE TO MAINTAIN EXCLUSION FROM THE INVESTMENT COMPANY ACT
WOULD RESTRICT THE COMPANY'S OPERATING FLEXIBILITY. The Company at all times
intends to conduct its business so as not to become regulated as an investment
company under the Investment Company Act. Accordingly, the Company does not
expect to be subject to the restrictive provisions of the Investment Company
Act. The Investment Company Act excludes from regulation entities that are
primarily engaged in the business of purchasing or otherwise acquiring
"mortgages and other liens on and interests in real estate." Under the current
interpretations of the staff of the Commission, in order to qualify for this
exception, the Company must, among other things, maintain at least 55% of its
assets directly in Mortgage Loans and certain other qualifying liens on or
interests in real estate. In addition, unless certain MBS represent all the
certificates issued with respect to an underlying pool of Mortgage Loans, such
securities may be treated as securities separate from the underlying Mortgage
Loans and, thus, may not qualify as qualifying interests in real estate for
purposes of the 55% requirement. The Company's ownership of certain types of
mortgage assets, therefore, will be limited by the provisions of the Investment
Company Act. If the Company fails to qualify for
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<PAGE> 43
exemption from registration as an investment company, its ability to use
leverage would be substantially reduced, and it would be unable to conduct its
business as described herein. Any such failure to qualify for such exemption
would have a material adverse effect on the Company.
ADVERSE TAX TREATMENT OF EXCESS INCLUSION INCOME COULD ADVERSELY
AFFECT SHAREHOLDERS. In general, dividend income that a Tax-Exempt Entity
receives from the Company should not constitute unrelated trade or business
income as defined in Section 512 of the Code ("UBTI"). If, however, Excess
Inclusion income were realized by the Company and allocated to shareholders,
such income cannot be offset by net operating losses and, if the shareholder is
a Tax-Exempt Entity, is fully taxable as UBTI under Section 512 of the Code
and, as to foreign shareholders, would be subject to federal income tax
withholding without reduction pursuant to any otherwise applicable income tax
treaty. Excess Inclusion income would be generated if the Company were to
issue debt obligations with two or more maturities and the terms of the
payments on such obligations bore a relationship to the payments that the
Company received on its assets securing those debt obligations. The Company
intends to arrange its borrowings in a manner to avoid generating significant
amounts of Excess Inclusion income. Furthermore, certain types of Tax-Exempt
Entities, such as voluntary employee benefit associations and entities that
have borrowed to acquire their Common Shares, may be required to treat all or a
portion of the dividends they may receive from the Company as UBTI. See
"Federal Income Tax Consequences--Taxation of Shareholders--Taxation of
Tax-Exempt Shareholders."
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<PAGE> 44
USE OF PROCEEDS
The net proceeds from the Offering are estimated to be approximately
$_____ million ($_____ million if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $15 per Common
Share (the mid-point of the filing range set forth on the cover page of this
Prospectus). The Company will receive an additional $33.3 million in net
proceeds from the Private Placement ($38.3 million if the Private Placement is
fully increased as a result of the exercise in full of the Underwriters'
over-allotment option). See "Private Placement."
A portion of the estimated net proceeds from the Offering (approximately
$74.5 million) is expected to be used by the Company to acquire the Initial
Assets. Up to an additional $10 million of the estimated net proceeds from the
Offering may be used for general corporate purposes, and the remaining balance
of the estimated net proceeds from the Offering (approximately $_____ million),
and the net proceeds from the Private Placement, will be used by the Company to
acquire additional Targeted Investments.
The Company intends temporarily to invest the net proceeds of the
Offering in interest-bearing investment-grade securities, guaranteed
obligations of the United States government or money-market funds until
appropriate Targeted Investments are identified and acquired. The Company
presently intends to have the net proceeds of the Offering fully invested in
Targeted Investments within six to nine months after the closing of the
Offering and to achieve a leverage ratio of 2:1 within 15 to 18 months after
the closing of the Offering. Pending full investment in the desired mix of
assets, funds will be committed to short-term investments that are expected to
provide a lower net return than the Company expects to achieve from its
Targeted Investments. See "Risk Factors--Interest Rate Fluctuations May
Adversely Affect the Company's Investments and Operating Results," "Risk
Factors--Inability to Acquire or Delays in Acquiring Targeted Investments Will
Reduce Income to the Company."
DIVIDEND POLICY AND DISTRIBUTIONS
The Company intends to make quarterly distributions to its shareholders
equal, on an annual basis, to at least 95% of the Company's REIT Taxable Income
(which does not ordinarily equal net income as calculated in accordance with
GAAP). The Company's dividend policy is subject to revision at the discretion
of the Board of Trust Managers. All distributions in excess of those required
for the Company to maintain REIT status will be made by the Company at the
discretion of the Board of Trust Managers and will depend on the earnings and
financial condition of the Company and such other factors as the Board of Trust
Managers deems relevant. See "Risk Factors--The Company's Ability to Revise
its Policies and Strategies Without Shareholder Consent May Create
Uncertainty."
In order to qualify as a REIT under the Code, the Company must make
distributions to its shareholders each year in an amount at least equal to (i)
95% of its REIT Taxable Income, plus (ii) 95% of the excess of the net income
from Foreclosure Property over the tax imposed on such income by the Code,
minus (iii) any excess noncash income. The "Taxable Income" of the Company for
any year means the taxable income of the Company for such year (excluding any
net income derived either from property held primarily for sale to customers or
from Foreclosure Property) subject to certain adjustments provided in the REIT
Provisions of the Code. "REIT Taxable Income" means Taxable Income, computed
without regard to the dividends paid deduction or any net capital gain. See
"Federal Income Tax Consequences--Requirements For Qualification--Annual
Distribution Requirements."
It is anticipated that distributions generally will be taxable as
ordinary income to shareholders of the Company, although a portion of such
distributions may be designated by the Company as capital gain or may
constitute a return of capital. The Company will furnish annually to each of
its shareholders a statement setting forth distributions paid during the
preceding year and their characterization as ordinary income, return of capital
or capital gains. For a discussion of the federal income tax treatment of
distributions by the Company, see "Federal Income Tax Consequences--Taxation of
Shareholders."
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<PAGE> 45
CAPITALIZATION
The capitalization of the Company, as of March 31, 1998 and as adjusted
to reflect the sale of the Common Shares offered hereby at an assumed initial
public offering price of $15 per Common Share (the mid-point of the filing
range set forth on the cover page of this Prospectus), is as follows:
<TABLE>
<CAPTION>
Actual As Adjusted(1)(2)
------------- -----------------
<S> <C> <C>
Shareholders' Equity:
Preferred Shares, par value $.01
Authorized--50,000,000 shares
Outstanding--none
Common Shares, par value $.01
Authorized--200,000,000 shares
Outstanding--100 shares (as adjusted,
22,222,333 shares)(1) $ 1 $ 222,223
Additional Paid-in Capital 999 333,112,272
------------- -------------
Total $ 1,000 $ 333,334,495
============= =============
</TABLE>
- -------------------------
(1) Before deducting Offering expenses payable by the Company, estimated to
be approximately $1,300,000, and underwriting discounts and commissions,
and assuming no exercise of the Underwriters' over-allotment option and
no corresponding increase in the number of Common Shares sold pursuant to
the Private Placement. See "Private Placement."
(2) Includes 2,222,233 Common Shares subscribed for in the Private
Placement. See "Private Placement." Does not include 3,333,350 Common
Shares to be reserved for issuance upon exercise of options to be
granted under the Share Option Plan. See "Management of the
Company--Share Options Outstanding."
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<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES
The Company has no operating history. The Company's opening audited
balance sheet as of February 2, 1998, and related footnotes are presented
elsewhere in this Prospectus. The Management's Discussion and Analysis of
Liquidity and Capital Resources should be read in conjunction with such opening
balance sheet and related notes. The Company has been organized and will elect
to qualify as a REIT under the Code and, as such, anticipates distributing
annually at least 95% of its REIT Taxable Income. Cash for such distributions
is expected to be generated from the Company's operations, although the Company
also may borrow funds to make distributions. The Company's revenues will be
derived from ownership of real estate related assets. See "Business and
Strategy."
The principal sources of the Company's funds in the near term will be
the net proceeds of the Offering and the Private Placement and funds available
under the Warehouse Line and the Repurchase Agreement. A portion of the net
proceeds of the Offering (approximately $74.5 million) is expected to be
utilized to fund the origination or acquisition of the Initial Assets. Up to
an additional $10 million of the estimated net proceeds from the Offering may
be used for general corporate purposes. The remaining net proceeds of the
Offering ($___________), together with the net proceeds of the Private
Placement and the funds expected to be available under the Warehouse Line and
the Repurchase Agreement ($_____ million in the aggregate) will be used to
acquire additional Targeted Investments.
The Company has obtained a commitment, subject to legal documentation,
from Prudential Securities Credit Corporation (an affiliate of Prudential
Securities Incorporated, one of the Underwriters) ("PSCC") pursuant to which
PSCC will provide to the Company a $400 million warehouse financing facility
(the "Warehouse Line") and a $100 million repurchase agreement (the "Repurchase
Agreement"). The Warehouse Line and the Repurchase Agreement are expected to
close upon closing of the Offering.
The Warehouse Line and the Repurchase Agreement are expected to have
initial terms of two years and to be renewable annually thereafter, subject to
certain conditions. The Company expects that it will renew the Warehouse Line
and the Repurchase Agreement or enter into similar or additional secured and
unsecured lending arrangements with institutional lenders in the future,
although there can be no assurances that the Company will be able to obtain
renewed or additional financing on acceptable terms. See "Risk
Factors--Leverage Increases Exposure to Losses."
WAREHOUSE LINE. The Company expects to utilize the Warehouse Line to
provide financing for the origination or acquisition of Mortgage Loans. The
Warehouse Line is expected to bear interest at a floating rate of 1.0% to 1.5%
over LIBOR (depending upon the Loan-to-Value Ratios and the advance rate chosen
by the Company) and be secured by a first lien security interest in the
Mortgage Loans funded with the proceeds of the Warehouse Line.
The Company intends to utilize the Warehouse Line and other similar
warehouse lending arrangements to finance Mortgage Loans until a sufficient
quantity is accumulated at which time they may be refinanced through
securitization or other financing. Mortgage Loans financed with proceeds from
the Warehouse Line will generally be required to be refinanced through a
securitization or otherwise within approximately nine months from the date that
the Mortgage Loan is placed in the facility. In order to comply with the REIT
Provisions of the Code, securitizations may be conducted through taxable
subsidiaries of the Company. See "Business and Strategy--Operating Policies
and Guidelines--Capital and Leverage Policies--Securitizations," "Federal
Income Tax Consequences--Requirements for Qualification--Income Tests" and
"Federal Income Tax Consequences--Proposed Tax Legislation and Possible Other
Legislative Actions Affecting Tax Consequences."
In connection with the Warehouse Line, the Company will agree to engage
PSI as underwriter and/or placement agent for the sale or securitization of
Mortgage Loans financed with proceeds from the Warehouse Line, upon such terms
and conditions as are customary in comparable commercial Mortgage Loan
securitization transactions.
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REPURCHASE AGREEMENT. The Company expects to utilize the $100 million
Repurchase Agreement to finance the purchase of MBS. The Repurchase Agreement
is expected to provide that the lenders will loan to the Company a varying
percentage of the market value of the purchased MBS, depending upon the credit
quality of the MBS. The Repurchase Agreement is expected to require payment of
interest at varying percentages of 0.20% to 1.50% over LIBOR, depending upon
the advance rate and the credit quality of the MBS.
In the event the Company were to utilize all financing expected to be
available to it under the Warehouse Line and the Repurchase Agreement prior to
the issuance of any additional Common Shares or any Preferred Shares or other
equity investment in the Company, the Company would have total outstanding
indebtedness of $600 million and the Company's debt to equity ratio would be
approximately 1.8 to 1. See "Business and Strategy--Operating Policies and
Guidelines--Capital and Leverage Policies."
The Company plans to raise additional funds for operations by leveraging
its Invested Portfolio, primarily through additional secured financings,
including reverse repurchase agreements, secured term loans, warehouse lines of
credit, securitizations, credit and liquidity facilities and other borrowing
arrangements, which management believes will be sufficient to enable the
Company to meet its anticipated liquidity and capital requirements in the long
term. See "Business and Strategy" and "Use of Proceeds."
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BUSINESS AND STRATEGY
GENERAL
The Company was recently organized to take advantage of certain
mid- to high-yield lending and investment opportunities in real estate related
assets, including various types of Mortgage Loans, MBS, commercial real estate
and certain other real estate related assets. The Company will elect to be
taxed as a REIT under the Code. The Company generally will not be subject to
federal income taxation to the extent that it distributes at least 95% of its
REIT Taxable Income to its shareholders and maintains its qualification as a
REIT. See "Federal Income Tax Consequences." The day-to-day operations of the
Company will be managed by the Manager subject to the direction and oversight
of the Board of Trust Managers, a majority of whom will be unaffiliated with
the AMRESCO Group. See "The Manager--The Management Agreement."
The Company was formed to pursue and capitalize upon certain
investment opportunities arising within the AMRESCO Group which are currently
referred to entities unaffiliated with AMRESCO. Such investment opportunities
(which may include co-investment opportunities with members of the AMRESCO
Group) arise from the existing business and operations of the AMRESCO Group,
including primarily its commercial mortgage brokerage operations conducted
through Holliday Fenoglio Fowler and its commercial mortgage lending operations
conducted through AMRESCO Funding.
OBJECTIVE AND STRATEGY
The Company's principal business objective is to maximize
shareholder value by producing cash flow for distribution to its shareholders
through investment in mid- to high-yield real estate related assets which earn
an attractive spread over the Company's cost of funds. To achieve its
principal business objective, the Company's strategy is to:
o invest in certain types of assets, such as Participating
Loans, Mezzanine Loans, Construction Loans, Bridge Loans,
Subordinated Interests in MBS, Net Leased Real Estate and
Distressed Real Estate, which the Company expects to
generate the highest risk-adjusted returns on capital
invested, after considering all material relevant factors;
o take advantage of expertise existing within, and
investment and co-investment opportunities arising from
the business and operations of, the AMRESCO Group by
engaging the Manager, a member of the AMRESCO Group, to
manage the day-to-day operations of the Company, and
pursuant to the Right of First Refusal and the
Correspondent Agreement;
o utilize the expertise and resources of Holliday Fenoglio
Fowler to monitor trends and demands in the Mortgage Loan
and real estate markets and to adjust its Mortgage Loan
products in response thereto in order to increase its
ability to successfully compete for Targeted Investments;
o through the Manager, capitalize upon the market research
capabilities of the AMRESCO Group to analyze the Company's
investment opportunities and the economic conditions in
the Company's proposed geographic markets to assist the
Company in selecting investments which satisfy the
Company's investment criteria and targeted returns;
o through the Manager, utilize the expertise of the AMRESCO
Group in the underwriting, origination and closing of
Mortgage Loans and in the acquisition, management and
servicing of Mortgage Loans, Mortgage Loan portfolios and
MBS;
o borrow against or leverage its Invested Portfolio
(initially through the Warehouse Line and the Repurchase
Agreement), to the extent consistent with the Company's
leverage policies, in order to
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increase the size of the Invested Portfolio and increase
potential returns to the Company's shareholders;
o attempt to offset the potential interest rate mismatch
resulting from the differences between fixed rates or
other limitations on coupon rate adjustments associated
with its Invested Portfolio and the shorter-term variable
nature of the Company's borrowings by structuring the key
terms of its borrowings to generally correspond (in the
aggregate for the entire Invested Portfolio, and not on an
asset-by-asset basis) to the interest rate and maturity
parameters of its Invested Portfolio;
o implement various hedging strategies, including interest
rate swaps, interest rate collars, caps or floors, forward
contracts and U.S. Treasury and Eurodollar futures and
options (to the extent permitted by the REIT Provisions of
the Code), to minimize the effects of interest rate
fluctuations on its Invested Portfolio or its borrowings
if, given the cost of such hedges and the Company's desire
not to jeopardize its status as a REIT, the Manager
determines such strategies are in the best interest of the
Company's shareholders; and
o manage the credit risk of its Invested Portfolio by (i)
extensively underwriting its investments utilizing the
processes developed and utilized by the AMRESCO Group,
(ii) selectively choosing its investments for origination
or acquisition in compliance with the Company's investment
policies, (iii) actively monitoring (through the servicing
and asset management capabilities of the AMRESCO Group)
the credit quality of the Invested Portfolio, and (iv)
maintaining appropriate capital levels and allowances for
credit losses.
OPERATING POLICIES AND GUIDELINES
The Board of Trust Managers has established certain operating
policies for the Company. The Board of Trust Managers may, in its discretion,
revise such policies from time to time without shareholder approval. See "Risk
Factors--The Company's Ability to Revise its Policies and Strategies Without
Shareholder Consent May Create Uncertainty." Such policies include the
Company's policies with respect to (i) investments, (ii) leveraging of the
Invested Portfolio, (iii) the management of the credit risk of the Invested
Portfolio, (iv) management of the interest rate risks of the Invested
Portfolio, including its policies with respect to hedging of the Invested
Portfolio, (v) its relationship with the AMRESCO Group and (vi) compliance with
certain legal requirements, including the REIT Provisions of the Code.
INVESTMENT POLICIES. The Manager is authorized in accordance
with the terms of the Management Agreement to make the day-to-day investment
decisions of the Company based on the Guidelines in effect from time to time.
The investment decisions of the Manager will include decisions to issue
commitments on behalf of the Company to originate or purchase Mortgage Loans,
MBS, commercial real estate and other Targeted Investments. The Trust Managers
will review all transactions of the Company on a quarterly basis to determine
compliance with the Guidelines.
Pursuant to the Guidelines, the Company may invest in a
diversified portfolio of Mortgage Loans (including, among others, Participating
Loans, Mezzanine Loans, Construction Loans, Permanent Mortgage Loans and Bridge
Loans), MBS, commercial real estate (including Net Leased Real Estate, real
estate acquired at foreclosure or by deed-in-lieu of foreclosure or other
underperforming or Distressed Real Estate) and certain other real estate
related assets. The Company has no specific policy as to the percentages of
its Invested Assets which will be allocated to various categories of Permitted
Investments. The Guidelines provide that the Company's Invested Portfolio
include primarily those asset types with respect to which the Manager and other
members of the AMRESCO Group have significant knowledge and/or experience.
Similarly, with respect to Invested Assets which consist of Mortgage Loans or
commercial real estate, such Invested Assets (or the underlying collateral)
will generally be located in those geographic markets with respect to which the
Manager and the other members of the AMRESCO Group have significant knowledge
and/or experience. The Manager's loan underwriters will be afforded
flexibility and latitude
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with respect to the size of any single asset in the Invested Portfolio or
series of assets in the Invested Portfolio. However, with respect to Mortgage
Loans, the Guidelines provide that the Manager will typically target Mortgage
Loans ranging in size from $10 million to $40 million. Assets in the Invested
Portfolio may be originated by the Company or acquired from third parties,
including members of the AMRESCO Group. To the extent the Company acquires
assets from, or co-invests with, members of the AMRESCO Group, such acquisition
or co-investment will be made in accordance with the Company's policies
regarding transactions with the AMRESCO Group. See "--Relationship With
AMRESCO."
Upon the closing of the Offering, the Company will enter into the
Correspondent Agreement with Holliday Fenoglio Fowler pursuant to which
Holliday Fenoglio Fowler will agree, so long as the Manager or any other member
of the AMRESCO Group is acting as manager of the Company, to present to the
Company (on a nonexclusive basis) Mortgage Loan origination and other real
estate investment opportunities identified by Holliday Fenoglio Fowler which
meet the investment criteria and objectives of the Company. The Company
expects that a substantial portion of its Invested Portfolio will be identified
through the mortgage brokerage operations of Holliday Fenoglio Fowler and
pursuant to the Correspondent Agreement. In creating and managing its Invested
Portfolio, the Company will utilize the Manager's expertise and significant
business relationships with members of the AMRESCO Group, as well as
unaffiliated participants in the real estate and financial services industries.
The Company believes that Holliday Fenoglio Fowler's relationships and its
reputation and credibility with potential borrowers and other institutional
investors will continue to result in significant commercial brokerage business
to Holliday Fenoglio Fowler which will, in turn, provide investment
opportunities and competitive advantages to the Company. See "The
Manager--Description of the AMRESCO Group."
Upon the closing of the Offering, AMRESCO will grant the Right of
First Refusal to the Company pursuant to which AMRESCO will agree not to permit
any member of the AMRESCO Group to invest in (i) the first $100 million of
Targeted Mortgage Loans identified by or to any member of the AMRESCO Group
during any calendar quarter or (ii) any MBS, other than MBS issued in
securitizations sponsored in whole or in part by any member of the AMRESCO
Group, unless the Company's Investment Committee shall have first determined in
each instance that the Company should not invest in such asset or assets, or
should invest in only a portion of such asset or assets. The Company believes
that the Right of First Refusal will minimize conflicts of interest and
potential competition for Targeted Investments between the Company and the
AMRESCO Group.
The Company intends, through the services of the Manager, to
selectively and extensively underwrite its Targeted Investments. The Company
believes, due to the nature of its Targeted Investments (typically higher risk,
with higher Loan-to-Value Ratios and more contingent returns than Permanent
Mortgage Loans), that the underwriting analysis and procedures will be more
extensive and will require a greater level of expertise than those required in
connection with other types of real estate related assets. The Company intends
to utilize and benefit from the expertise, processes and procedures developed
by the AMRESCO Group with respect to the underwriting of assets such as the
Targeted Investments. See "Risk Factors--Dependence on the Manager and the
AMRESCO Group for Operations and the Lack of Experience of the Manager May
Adversely Affect Operating Results" and "--Description of Targeted
Investments" for a description of the underwriting analysis and procedure
expected to be applicable to the underwriting of each type of Targeted
Investment.
The Company has, in consultation with the Manager, established
certain underwriting criteria for the Company's investments. Such underwriting
criteria, which vary for each type of Targeted Investment, include, among
others, required credit quality of the prospective borrower, tenant or Mortgage
Collateral, as applicable, Loan-to-Value Ratios, loan structuring requirements
and satisfaction of certain due diligence requirements. See "--Description of
Targeted Investments" for a general description of such underwriting criteria
with respect to each type of Targeted Investment. Compliance with the
Company's underwriting criteria will be monitored by the Company's Chief
Investment Officer and will be reviewed annually by the Board of Trust
Managers. The Company's underwriting criteria may be changed from time to time
upon the recommendation of the Manager, with the approval of the Chief
Investment Officer, based upon changes in market conditions or Targeted
Investments, the performance
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of the Invested Portfolio or such other factors that the Manager and the Chief
Investment Officer or the Company determines are appropriate.
Although the Company intends to invest primarily in Mortgage
Loans, MBS and commercial real estate, the Company will take an opportunistic
approach to its investments and its business decisions will depend on changing
market factors. Thus, the Company cannot anticipate with any certainty the
percentage of its Invested Portfolio that will be invested in each category of
Targeted Investments. The Company has substantial discretion as to the manner
in which it may invest, leverage and hedge its assets. The Company may change
any of its policies without further shareholder approval. See "Risk
Factors--The Company's Ability to Revise its Policies and Strategies Without
Shareholder Consent May Create Uncertainty."
The Company presently intends to have the net proceeds of the
Offering fully invested in Targeted Investments within six to nine months after
the closing of the Offering and to achieve a leverage ratio of 2:1 within 15 to
18 months after the closing of the Offering. Pending investment of the net
proceeds of the Offering in the Targeted Investments as provided in the
Guidelines, the Company intends to invest the net proceeds of the Offering in
short-term interest bearing investment grade securities or guaranteed
obligations of the United States government until appropriate Targeted
Investments are identified and acquired. Such short-term investments are
expected to provide a lower net return than the Company expects to achieve from
its Targeted Investments. See "Risk Factors--Inability to Acquire or Delays in
Acquiring Targeted Investments Will Reduce Income to the Company" and "Use of
Proceeds."
CAPITAL AND LEVERAGE POLICIES. The Company intends to increase
its Invested Portfolio through the use of leverage. Initially, the Company
intends to finance its acquisition of Targeted Investments with the net
proceeds of the Offering, the net proceeds of the Private Placement, and with
funds available under the Warehouse Line and the Repurchase Agreement. In the
future, the Company intends to continue to borrow against or "leverage" its
Invested Portfolio and use the proceeds to acquire additional Targeted
Investments. Such financings are expected to include, among other things,
reverse repurchase agreements, securitizations of its Mortgage Loans and
secured and unsecured loans. The Company may also borrow on a long-term basis
and issue additional shares as a source of longer-term capital, including
Preferred Shares or additional Common Shares. See "Risk Factors--Leverage
Increases Exposure to Loss." The Company has adopted a policy that prohibits
its debt to equity ratio from exceeding 3:1, although such policy may be
changed from time to time depending upon market conditions and other factors
deemed relevant by the Manager, subject to the review of the Board of Trust
Managers. However, neither the Declaration of Trust nor the Bylaws limit the
amount of indebtedness the Company can incur, and the Board of Trust Managers
has discretion to deviate from or change the Company's indebtedness policy at
any time, without the consent of the Company's shareholders. The Company
intends to maintain an adequate capital base to protect against various
business environments in which the Company's financing and hedging costs might
exceed interest income (net of credit losses) from its Invested Portfolio.
These conditions could occur, for example, due to credit losses or when, due to
interest rate fluctuations, interest income on the Invested Portfolio lags
behind interest rate increases in the Company's borrowings, which are expected
to be predominantly variable rate. See "Risk Factors--Interest Rate
Fluctuations May Adversely Affect the Company's Investments and Operating
Results." The Company may enter into hedging transactions in an effort to
protect its Invested Portfolio and related debt from interest rate
fluctuations. See "--Financial Risk Management."
The Company expects to utilize a variety of debt vehicles (both
secured and unsecured) to execute its business strategy. Initially, the
Company will utilize proceeds from the Warehouse Line and the Repurchase
Agreement and other collateralized borrowings to finance the acquisition of
Targeted Investments.
Warehouse Line. The Company intends to enter into the Warehouse
Line upon the closing of the Offering pursuant to which it expects to obtain up
to $400 million of financing for the origination or acquisition of Mortgage
Loans. See "Management's Discussion and Analysis of Liquidity and Capital
Resources." The Warehouse Line is expected to bear interest at a floating rate
of 1.0% to 1.5% over LIBOR and to be secured by a first lien security interest
in the Mortgage Loans funded with the proceeds of the Warehouse Line.
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The Warehouse Line and other warehouse lending arrangements will
typically be used to finance Mortgage Loans which will be accumulated until a
sufficient quantity is accumulated at which time they will be refinanced via
securitization or other financing.
The Warehouse Line is expected to be renewable annually after the
expiration of its initial two year term (subject to certain conditions). The
Company intends to renew the Warehouse Line or enter into similar or additional
secured warehouse lending arrangements with institutional lenders in the
future, although there can be no assurances that the Company will be able to
obtain renewed or additional warehouse financing on acceptable terms. See
"Risk Factors--Leverage Increases Exposure to Loss" and "Management's
Discussion and Analysis of Liquidity and Capital Resources."
Repurchase Agreement. Upon the closing of the Offering, the
Company intends to enter into the Repurchase Agreement pursuant to which the
Company may obtain up to $100 million of financing for the purchase of MBS.
See "Management's Discussion and Analysis of Liquidity and Capital Resources."
Reverse repurchase agreements (including the Repurchase Agreement) are
structured as sale and repurchase obligations and have the economic effect of
allowing a borrower to pledge purchased CMBS as collateral securing short-term
loans to finance the purchase of such CMBS. Typically, the lender in a reverse
repurchase arrangement makes a loan in an amount equal to a percentage of the
market value of the pledged collateral. At maturity, the borrower is required
to repay the loan and the pledged collateral is released. The pledged assets
continue to pay principal and interest to the borrower.
The Repurchase Agreement is expected to provide that the
lender(s) will loan to the Company varying percentages (typically ranging from
70% to 95%) of the market value of the purchased MBS, depending upon the credit
quality of the MBS and the applicable advance rate. The Repurchase Agreement
is expected to require payment of interest at varying percentages (ranging from
0.20% to 1.50%) over LIBOR, depending upon the credit quality of the MBS. The
Repurchase Agreement is expected to mature after two years at which time the
Company intends to extend or renew such Repurchase Agreement or enter into
similar or additional reverse repurchase agreements, although there can be no
assurance that the Company will be successful in obtaining any such extension
or replacement. See "Risk Factors--Leverage Increases Exposure to Loss" and
"Management's Discussion and Analysis of Liquidity and Capital Resources."
Warehouse lines and reverse repurchase agreements (including the
Warehouse Line and the Repurchase Agreement) typically require the Company to
deposit additional collateral or reduce its borrowings thereunder, if the
market value of the pledged collateral declines. This may require the Company
to sell a portion of its Invested Portfolio to provide such additional
collateral or to reduce its borrowings. The Company intends to maintain an
equity cushion sufficient to provide liquidity in the event of interest rate
movements and other market conditions affecting the market value of the pledged
MBS. However, there can be no assurance that the Company will be able to
safeguard against being required to sell a portion of its Invested Portfolio in
the event of a change in market conditions.
Securitizations. The Company may obtain additional secured
financing through the securitization of all or any portion of its Mortgage
Loans. Securitization is the process of pooling Mortgage Loans and other fixed
income assets in a trust or other special purpose vehicle and issuing
securities, such as MBS or other debt securities, from the special purpose
vehicle. The Company expects that its securitizations will be accomplished
primarily through the issuance of structured debt with the Company retaining an
equity interest in the collateral. Under this approach, for accounting
purposes, the securitized Mortgage Loans will remain on the Company's balance
sheet as assets and the debt obligations (such as CMOs) will appear as
liabilities. The proceeds of securitizations by the Company will be used to
reduce pre-existing borrowings relating to such Mortgage Loans and to originate
or acquire additional Mortgage Loans. Issuing structured debt in this manner
locks in potentially less expensive, long-term, non-recourse financing that
generally better matches the terms of the Mortgage Loans and fixed income
instruments serving as collateral for such debt.
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The Company also may employ, from time to time, to the extent
permitted by the REIT Provisions of the Code, other forms of securitization
under which a "sale" of an interest in the Mortgage Loans occurs, and a
resulting gain or loss is recorded for accounting purposes at the time of sale.
In a "sale" securitization, only the net retained interest in the securitized
Mortgage Loans would remain on the Company's balance sheet. The Company may
elect to conduct certain of its securitization activities, including such
sales, through one or more taxable subsidiaries, as defined under the REIT
Provisions of the Code, formed for such purpose. In most cases, the special
purpose vehicle would elect to be taxed as a REMIC or a Financial Asset
Securitization Investment Trust ("FASIT"). If a taxable subsidiary were
formed, the Company would comply with the current REIT ownership requirements
under Section 856(c)(4) of the Code whereby the Company's ownership would not
exceed 10% of the voting securities of such subsidiary and would not exceed 5%
of the value of the Company's gross assets. However, the ability to use a
taxable subsidiary in this manner may be limited or prohibited. See "Federal
Income Tax Consequences--Requirements For Qualification--Income Tests" and
"Federal Income Tax Consequences--Proposed Tax Legislation and Possible Other
Legislative Actions Affecting Tax Consequences."
The Company may retain interests in the underlying Mortgage Loans
which will be subordinated with respect to payments of principal and interest
on the underlying Mortgage Loans to the classes of securities issued to
investors in such securitizations. Accordingly, any losses incurred on the
underlying Mortgage Loans will be applied first to reduce the remaining amount
of the Company's retained interest, until reduced to zero. Thereafter, the
Company would have no further exposure to losses.
Typically, in connection with the creation of a new Mortgage Loan
securitization, the issuer generally will be required to enter into a master
servicing agreement with respect to such series of securities with an entity
acceptable to the Rating Agencies, that regularly engages in the business of
servicing Mortgage Loans (a "Master Servicer"). Currently the AMRESCO Group
engages in this business through AMRESCO Services. AMRESCO Services provided
Master Servicing for approximately $20.2 billion of loans as of December 31,
1997. See "The Manager--Description of the AMRESCO Group." In order to
maintain its exclusion from regulation under the Investment Company Act, the
Company expects that it will retain the right to initiate, direct or forbear
from instituting foreclosure proceedings in connection with defaults on any of
the underlying Mortgage Loans and may retain AMRESCO Services, other affiliates
of the AMRESCO Group or other Special Servicers to maintain borrower
performance and to exercise available remedies, including foreclosure, at the
direction of the Company. See "Risk Factors--Failure to Maintain Exclusion
From the Investment Company Act Would Restrict the Company's Operating
Flexibility." Pursuant to and in accordance with the Management Agreement, the
expenses of all Master Servicing will be borne by the Manager, and the expenses
of all Special Servicing will be borne by the Company. See "The
Manager--Expenses."
The Company intends to structure any securitizations of its
Mortgage Loans so as to minimize the attribution of any Excess Inclusion income
to the Company's shareholders. See "Federal Income Tax Consequences--Taxation
of Shareholders."
Unsecured Financings. The Company may, at any time and from time
to time in the future, obtain financing on an unsecured basis. Such unsecured
financings (which will likely be in addition to the Company's secured
financings) may include unsecured lines of credit, medium or long-term notes or
Preferred Shares.
CREDIT RISK MANAGEMENT. With respect to its Invested Portfolio,
the Company will be exposed to various levels of credit and special hazard
risk, depending on the nature of the investments. The Company's policy is to
originate or purchase Targeted Investments which satisfy the Company's
underwriting criteria, including standards as to credit quality, Loan-to-Value
Ratios, loan structuring requirements and other standards established by the
Company to manage its credit risk. It is the Company's policy generally not to
loan in excess of 90% of the stabilized value of a property (i.e., the value
upon completion of construction or renovation, or achievement of full occupancy
(less a small vacancy factor) and attainment of market rents) and generally for
the loan not to exceed 100% of the cost of the property (which may include
budgeted interest costs in the case of Construction Loans). In underwriting a
Mortgage Loan, the Manager will typically not require minimum debt service
coverage. Instead,
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the Manager will analyze and project economic returns to the Company and the
borrower. Pursuant to the Management Agreement, the Manager will review and
monitor credit risk and other risks of loss associated with each investment.
In addition, pursuant to the Guidelines, the Manager will seek to diversify the
Company's Invested Portfolio to avoid undue geographic, borrower, issuer,
product type, industry and certain other types of concentrations. Pursuant to
the Guidelines, the Manager will maintain an investment committee (the
"Investment Committee") which will meet regularly to consider whether the
Company should invest in specific Targeted Investments. At least two-thirds of
the members of such committee, which includes the President and Chief
Investment Officer of the Company, must vote in favor of a particular Targeted
Investment before the Targeted Investment may be purchased, acquired or
originated by the Company. The Board of Trust Managers will monitor the
Invested Portfolio and the credit risk associated therewith.
The Manager will closely monitor the credit quality and
performance of the Invested Portfolio. Pursuant to the Guidelines, the Manager
will implement a portfolio review program to provide for periodic review of the
Invested Assets so that potential credit problems can be recognized and
addressed at the earliest opportunity. Pursuant to the portfolio review
program, the Manager will assign credit quality ratings to each Invested Asset
(other than MBS), will monitor the progress and effectiveness of corrective
action that has been implemented to improve the quality of any deteriorating
credits and will monitor the adequacy of loan loss reserves in effect from time
to time. The Manager will report to the Board of Trust Managers on a quarterly
basis, as to the performance of the Invested Portfolio as compared to budgets
or projected operating results and the credit quality status of the Invested
Portfolio. To the extent any investments become nonperforming, the Manager
will analyze the performance of such investments and develop a proposed course
of action for resolution or disposition of such investments. Such action may
include engaging a member of the AMRESCO Group to act as Special Servicer for
such investments.
FINANCIAL RISK MANAGEMENT. To the extent consistent with its
election to qualify as a REIT, the Company will follow an interest rate risk
management policy intended to mitigate the negative effects of major interest
rate changes. Pursuant to such policy, the Company intends, where appropriate,
to minimize its interest rate risk from borrowings by attempting to structure
the key terms of its borrowings to generally correspond (in the aggregate for
its entire Invested Portfolio, and not on an investment-by-investment basis) to
the interest rate and maturity parameters of its Invested Portfolio. The
Company intends to protect its Invested Portfolio against the effects of
significant interest rate fluctuations and to preserve the net income flows and
capital value of the Company. Specifically, the Company's acquisition and
borrowing strategies are intended to offset the potential adverse effects
resulting from the differences between fixed rates or other limitations on
coupon rate adjustment, such as interest rate caps, associated with its
Invested Portfolio and the shorter term predominantly variable nature of the
Company's related borrowings.
In addition, the Company may, from time to time, enter into
hedging transactions to protect its Invested Portfolio from interest rate
fluctuations and other changes in market conditions. These transactions may
include the purchase or sale of interest rate swaps, interest rate collars,
caps or floors, forward contracts and U.S. Treasury and Eurodollar futures and
options. It is the Company's policy that these instruments be used to hedge as
much of the interest rate risk as the Manager determines is in the best
interest of the Company, given the cost of and risks involved with such hedges
and the need to maintain the Company's status as a REIT. See "Federal Income
Tax Consequences--Requirements For Qualification--Income Tests." The Company
has not established specific policies as to the extent of the hedging
transactions in which it will engage. However, the Board of Trust Managers
will from time to time review the extent and effectiveness of hedging
transactions conducted by the Company. The Manager may elect to have the
Company bear a level of interest rate risk that could otherwise be hedged when
the Manager believes, based on all relevant facts, that bearing such risk is
advisable.
The Company's policy is to enter into hedging transactions only
with counterparties that have a current senior debt rating by either Standard &
Poor's or Moody's of "A" or better or an equivalent rating by one of the other
Rating Agencies. The Company will not enter into a hedging transaction with a
counterparty if the transaction will result in credit exposure exceeding
certain specified limits. If a counterparty's credit rating is downgraded
below "BBB" by Standard & Poor's or Moody's (or the equivalent) by one or more
of the Rating Agencies, the Company's
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policy is to require that the Manager take appropriate actions to minimize
risk, including obtaining collateral or some other form of credit enhancement
or terminating the transaction, if possible. The business failure of a
counterparty with which the Company has entered into a hedging transaction will
most likely result in a default, which may result in the loss of unrealized
profits and force the Company to cover its resale commitments, if any, at the
then current market price. Although generally the Company will seek to reserve
for itself the right to terminate its hedging positions, it may not always be
possible to dispose of or close out a hedging position without the consent of
the counterparty, and the Company may not be able to enter into an offsetting
contract in order to cover its risk. There can be no assurance that a liquid
secondary market will exist for hedging instruments purchased or sold, and the
Company may be required to maintain a position until exercise or expiration,
which could result in losses. See "Risk Factors--Hedging Transactions Can
Limit Gains and May Increase Exposure to Losses."
The Company's hedging activities are intended to address both
income and capital preservation. Income preservation refers to maintaining a
stable spread between the yield on the Invested Portfolio and the Company's
borrowing costs across a reasonable range of adverse interest rate
environments. Capital preservation refers to maintaining a relatively steady
level in the market value of the Company's capital across a reasonable range of
adverse interest rate scenarios. Pursuant to the Guidelines, to monitor and
manage capital preservation risk, the Manager will model and measure the
sensitivity of the market value of the Company's capital (i.e., the combination
of its Invested Portfolio, liabilities and hedging positions) to various
changes in interest rates in various economic scenarios. It is the Company's
policy not to enter into hedging transactions for speculative purposes or for
purposes other than managing identified business risks.
The Company believes its hedging activities, when utilized, will
provide a level of income and capital protection against reasonable interest
rate risks. However, no strategy can insulate the Company completely from
changes in interest rates. See "Risk Factors--Interest Rate Fluctuations May
Adversely Affect the Company's Investments and Operating Results."
RELATIONSHIP WITH AMRESCO
Right of First Refusal. Upon the closing of the Offering,
AMRESCO will grant the Right of First Refusal to the Company pursuant to which
AMRESCO will agree not to permit any member of the AMRESCO Group to invest in
(i) the first $100 million of Targeted Mortgage Loans identified by or to any
member of the AMRESCO Group during any calendar quarter or (ii) any MBS, other
than MBS issued in securitizations sponsored in whole or in part by any member
of the AMRESCO Group. If the Company's Investment Committee determines that the
Company should not invest in any such asset, or should invest in only a portion
of such asset, any member of the AMRESCO Group would be permitted to invest in
such asset, or portion thereof. The Company believes that the Right of First
Refusal will minimize conflicts of interest and potential competition for
Targeted Investments between the Company and the AMRESCO Group.
Correspondent Agreement. Upon the closing of the Offering, the
Company will enter into the Correspondent Agreement with Holliday Fenoglio
Fowler pursuant to which Holliday Fenoglio Fowler will agree, so long as the
Manager or any other member of the AMRESCO Group is acting as manager of the
Company, to present to the Company (on a nonexclusive basis) Mortgage Loan
origination and other real estate related investment opportunities identified
by Holliday Fenoglio Fowler which meet the investment criteria and objectives
of the Company. The Company expects that a substantial portion of its Invested
Portfolio will be identified through the mortgage brokerage operations of
Holliday Fenoglio Fowler and pursuant to the Correspondent Agreement.
Acquisition or Co-Investment Opportunities. The Company expects
to acquire the Initial Assets from, and may acquire other Targeted Investments
from, or co-invest with members of the AMRESCO Group from time to time. Such
transactions will be upon such terms and conditions as may be agreed from time
to time by the Company and the AMRESCO Group. Pursuant to the Guidelines, the
Company may acquire Targeted Investments (other than
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MBS originated by members of the AMRESCO Group) from members of the AMRESCO
Group without prior approval from the Independent Trust Managers, provided that
the requirements as to terms and price described below are satisfied, and
provided further, that the purchase price of any individual Targeted Investment
or pool of Targeted Investments proposed to be purchased at any one time (other
than the Initial Assets) does not exceed the greater of $75 million or 10% of
the Company's total consolidated assets, determined before the proposed
acquisition. Any Targeted Investment proposed for acquisition from a member of
the AMRESCO Group which does not meet the criteria set forth above may be
purchased only with the prior approval of a majority of the Independent Trust
Managers. It is the Company's policy that any MBS (including any Subordinated
Interests) originated by members of the AMRESCO Group may be purchased by the
Company from a member of the AMRESCO Group only pursuant to a competitive
bidding process (which may include a public or private offering) and only with
the prior approval of a majority of the Independent Trust Managers. See
"Conflicts of Interest May Result in Decisions Not in The Best Interest of the
Company's Shareholders."
The Company expects to be able to purchase Targeted Investments
from time to time from members of the AMRESCO Group on the same or better terms
as would be available from third parties for similar investments in bona fide
arms' length transactions. If a Targeted Investment is being offered to the
Company by the AMRESCO Group at a price that is greater, or on terms that are
less favorable, than would be available from third parties for similar
investments in bona fide arms' length transactions, the Manager would be
expected to recommend that the Company decline to acquire that Targeted
Investment at the quoted price and terms, notwithstanding the relationship
among the Company and the AMRESCO Group.
In deciding whether to approve an acquisition of, or an
investment in, any Targeted Investment, including Targeted Investments
identified or offered by the AMRESCO Group, the Manager may consider such
information as it deems appropriate to determine whether the acquisition is
consistent with the Guidelines, such as whether the price is fair, reflective
of appropriate diversification and risk levels and whether the Targeted
Investment otherwise is suitable and in the best interest of the Company. In
addition, the Manager may consider, among other factors, whether the
acquisition of that Targeted Investment will enhance the Company's ability to
achieve or exceed the Company's risk adjusted target rate of return, if any,
whether the Targeted Investment otherwise is well-suited for the Company and
whether the Company financially is able to take advantage of the investment
opportunity presented thereby. There is no geographic limitation or
requirement of geographic diversification (either as to size, jurisdictional
boundary, zip code or other geographic measure) as to the real estate that
secures repayment of the Mortgage Loans, the real estate underlying the MBS, or
the commercial real estate in which the Company may invest. The only
limitations as to the Targeted Investments that the Company may acquire and the
characteristics thereof being limitations either (i) imposed by law, (ii) set
forth in the Guidelines or other policies of the Company or (iii) with which
the Company must comply as a condition of maintaining both its status as a REIT
and its exemption from regulation under the Investment Company Act.
The Manager will determine fair transfer prices for the Company's
acquisitions of Targeted Investments from members of the AMRESCO Group based on
Guidelines approved by the Independent Trust Managers. The Guidelines provide
that, when possible, the price that the Company will pay for any Targeted
Investments acquired from the AMRESCO Group will be determined with reference
to the prices most recently paid to the AMRESCO Group for similar investments,
adjusted for differences in the terms of such transactions and for changes in
market conditions between the dates of the relevant transactions. If no
previous sales of similar investments have occurred, the Company will attempt
to determine a market price for the Targeted Investments by an alternative
method, such as obtaining a broker's price opinion or an appraisal, if it can
do so at a reasonable cost. Investors should understand, however, that such
determinations are estimates and are not bona fide third party offers to buy or
sell.
It is the Company's policy that the agreements and transactions,
including the sale of or co-investment in any Targeted Investment between the
Company on the one hand and the AMRESCO Group on the other hand are fair to
both parties. However, there can be no assurance that any of such agreements
and transactions will be on terms at least as favorable to the Company as it
could have obtained from unaffiliated third parties.
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The Company anticipates that the price it pays for Targeted
Investments acquired from members of the AMRESCO Group, in certain cases, may
be lower than the price that a third party would pay for those investments if
economic benefits would inure to the AMRESCO Group by selling to the Company,
rather than a third party. For example, the AMRESCO Group generally would not
incur any broker's fees in connection with a sale of Mortgage Loans and MBS to
the Company. In addition, if AMRESCO and its affiliates engage in repetitive
sales of Targeted Investments to the Company, the form of purchase and sale
agreement used in the successive transactions is likely to contain standard
terms and conditions that previously will have been negotiated by the parties,
which may result in reduced legal and other transaction costs.
COMPLIANCE POLICIES. As a requirement for maintaining REIT
status, the Company generally intends to distribute to the shareholders of the
Company aggregate dividends equaling at least 95% of its REIT Taxable Income
each year. See "Federal Income Tax Consequences--Requirements For
Qualification--Annual Distribution Requirements."
The Company has adopted certain compliance policies, including
restrictions on acquiring, holding and selling Targeted Investments, to ensure
that the Company continues to qualify as a REIT. Pursuant to such policies,
before acquiring any Targeted Investment, the Manager will determine whether
such Targeted Investment would constitute a Qualified REIT Real Estate Asset
under the REIT Provisions of the Code. Substantially all of the Targeted
Investments that the Company intends to acquire are expected to be Qualified
REIT Real Estate Assets. The Guidelines require the Manager to regularly
monitor the Company's Invested Portfolio and the income generated from its
Invested Portfolio, including income from its hedging activities, in an effort
to ensure that at all times the Company maintains its qualification as a REIT.
Pursuant to the Guidelines, the Company has engaged a nationally recognized
independent public accounting firm to assist it in developing internal
accounting and testing procedures and to assist in monitoring and conducting
quarterly compliance reviews to determine compliance with the REIT Provisions
of the Code. See "Risk Factors--Failure to Maintain REIT Status Would Have
Adverse Tax Consequences."
The Company's policy is to operate in a manner that will not
subject it to regulation under the Investment Company Act. Accordingly, the
Company may (i) invest in the securities of other issuers for the purpose of
exercising control over such issuers, (ii) underwrite securities of other
issuers, particularly in the course of disposing of portions of the Invested
Portfolio, (iii) originate Mortgage Loans and (iv) issue securities in exchange
for real estate or other assets. See "Risk Factors--Failure to Maintain
Exclusion From Investment Company Act Would Restrict the Company's Operating
Flexibility."
FUTURE REVISIONS IN POLICIES AND STRATEGIES. The Board of Trust
Managers has approved the operating policies and the strategies set forth in
this Prospectus. The Board of Trust Managers has the power to modify or waive
such policies and strategies without the consent of the shareholders of the
Company to the extent that the Board of Trust Managers determines that such
modification or waiver is in the best interest of the Company or the
shareholders of the Company. Among other factors, developments in the market
that affect the policies and strategies mentioned herein or which change the
Company's assessment of the market may cause the Board of Trust Managers to
revise its policies and strategies. See "Risk Factors--The Company's Ability
to Revise its Policies and Strategies Without Shareholder Consent May Create
Uncertainty."
DESCRIPTION OF TARGETED INVESTMENTS
The Company intends to invest principally in the following
Targeted Investments, subject to the operating restrictions described in
"Operating Policies and Guidelines" above and the additional policies described
below. See "Risk Factors" for a discussion of certain of the risks involved in
connection with the Company's investments in the Targeted Investments.
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MORTGAGE LOANS
PARTICIPATING LOANS. The Company intends to originate or acquire
Mortgage Loans secured by mortgages or deeds of trust on
commercial real estate which will typically entitle the Company
to receive a stated interest rate (which may be fixed or
variable) plus a portion of the pledged real estate's revenues or
cash flow, or a specified percentage or fixed amount of the net
proceeds from any sale or refinancing of the pledged real estate.
Such Participating Loans may be Construction Loans, Bridge Loans,
Mezzanine Loans or other types of Mortgage Loans.
CONSTRUCTION LOANS. The Company believes, given the current
favorable ratio of supply and demand for commercial real estate
in many real estate markets in the United States, that continued
economic growth and job creation will result in construction of
additional commercial real estate projects. Accordingly, the
Company believes there are significant opportunities to invest in
or provide Construction Loans. The Company intends to make
Construction Loans of up to 100% of total project costs if the
Construction Loan is secured by a first lien mortgage, deed of
trust or deed to secure debt, as collateral security for the
borrower's obligations with respect to the Construction Loan.
The Company may receive a stated fixed or variable interest rate
on the Construction Loan, and a percentage of the increase in the
fair market value of the property securing repayment of that
Construction Loan, payable upon maturity or refinancing of the
applicable Construction Loan or upon the sale of the property.
The Company may also offer Construction Loans together with
Mezzanine Loans to deliver a convenient, single financing source
to commercial real estate owners and developers.
MEZZANINE LOANS. The Company intends to take advantage of
opportunities to provide Mezzanine Loans on commercial real
estate that is subject to first lien mortgage debt. The Company
believes that there is a growing need for mezzanine capital
(i.e., capital representing the level typically between 75% and
100% of property value or cost, dependent upon the type and
structure of the proposed transaction) as a result of current
commercial mortgage lending practices setting Loan to Value Ratio
targets as low as 65%. For example, in the case of a commercial
real estate project subject to a first lien Mortgage Loan with a
principal balance equal to 70% of the cost of the property, the
Company could lend the owner of the property (typically a
partnership) an additional 15% to 30% of the cost of the
property. The Company's Mezzanine Loans may take the form of
subordinated Mortgage Loans, commonly known as second mortgages,
or, in the case of Mezzanine Loans originated for securitization,
partnership loans (also known as pledge loans), joint venture
interests or equity investments. The Company believes that as a
result of (i) the significant changes in the lending practices of
traditional commercial real estate lenders, primarily relating to
more conservative Loan to Value Ratios, and (ii) the significant
increase in securitized lending with strict Loan to Value Ratios
imposed by the Rating Agencies, there will be increasing demand
for mezzanine capital by property owners.
Typically, as security for a Mezzanine Loan, the borrower would
pledge to the Company either the real estate subject to the first
lien (giving the Company a second lien position) or the limited
partnership and/or general partnership interest in the borrower.
If the borrower's general partnership interest is pledged, then
the Company would be in a position to assume the operation of the
real estate pursuant to a foreclosure proceeding in the event of
a default by the borrower. By borrowing against the additional
value in the real estate, the borrower obtains an additional
level of liquidity to apply to real estate improvements or
alternative uses. Mezzanine Loans generally will provide the
Company with the right to receive a stated interest rate on the
Mezzanine Loan balance plus various commitment and/or exit fees.
In certain instances, the Company will negotiate to receive a
percentage of gross revenues or cash flows from the real estate,
payable to the Company on an ongoing basis, and a percentage of
any increase in value of the real estate, payable upon maturity
or refinancing of the Mezzanine Loan, or the Company will
otherwise seek terms to allow the Company to charge an interest
rate that would provide an attractive risk adjusted return.
Alternatively, the Mezzanine Loans can take the form of a
non-voting preferred equity investment in a single-purpose entity
borrower.
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The Company may originate or acquire Mezzanine Loans in
connection with Permanent Mortgage Loans on the same real estate.
BRIDGE LOANS. The Company intends to actively pursue
opportunities to originate and fund Mortgage Loans to owners and
developers of commercial and multifamily real estate who need
interim or "bridge" financing until permanent financing can be
obtained. Such Mortgage Loans generally are not intended to be
"permanent" in nature, but rather are intended to be of a
relatively short-term duration, with extension options as deemed
appropriate, and generally require a balloon payment of principal
and interest at maturity. Bridge Loans are intended to be
higher-yield loans with higher interest rates and commitment fees
than Permanent Mortgage Loans. Property owners or developers in
the market for Bridge Loans include, but are not limited to,
traditional property owners and operators who desire to acquire a
property before it has received a commitment for a Permanent
Mortgage Loan from a traditional commercial mortgage lender, or a
property owner or investor who has an opportunity to purchase its
existing mortgage debt or third party mortgage debt at a
discount. In addition, the Company believes that, as a result of
the recent increase in commercial real estate securitization,
there are attractive opportunities to originate Bridge Loans to
owners of mortgaged properties that are temporarily prevented, as
a result of timing and structural reasons, from securing
Permanent Mortgage Loans through securitization. Bridge Loans
are generally exposed to a higher default risk as well as the
risk of extension of principal repayment terms due to the need
for refinancing and minimal principal amortization. As they are
associated with transfers of equity ownership, property
repositioning and tenant lease-up, Bridge Loans bear the risk
that operating strategies may not be successful, economic
conditions may deteriorate and competitors may undertake
competing strategies.
DISTRESSED MORTGAGE LOANS. The Company may acquire Nonperforming
Mortgage Loans or Subperforming Mortgage Loans secured by
multifamily and commercial real estate. The Company may foreclose
on such Mortgage Loans in an attempt to acquire title to the
underlying Distressed Real Estate. If the Company acquires pools
of Distressed Mortgage Loans (or pools of Mortgage Loans that are
primarily Distressed Mortgage Loans), the Company's policy is
that the due diligence to be performed before acquiring such
Distressed Mortgage Loans or pools is to be substantially similar
to the due diligence process described below in connection with
the acquisition of performing pools of Mortgage Loans and in
connection with the acquisition of Distressed Real Estate.
REAL ESTATE POOLS. The Company may also acquire Mortgage Loans
originated by or purchased from various suppliers of Mortgage
Loans throughout the United States and abroad, such as savings
and loan associations, banks, mortgage bankers, home builders,
insurance companies and other mortgage lenders. The Company may
acquire Mortgage Loans directly from originators and from
entities holding Mortgage Loans originated by others.
In considering whether to acquire a pool of Mortgage Loans, the
Company's policy is to require that the Manager perform certain
due diligence tasks on behalf of the Company that reasonably may
be expected to provide relevant and material information as to
the value of the Mortgage Loans within that pool and whether the
Company should acquire that pool.
The Company's policy is to acquire or originate Mortgage Loans
only at prices that are fair to the Company and that meet the Company's
investment criteria. In determining the price of a Mortgage Loan, the Company
will require that the Manager review and analyze a number of factors. These
factors may include market conditions, market interest rates, the availability
of mortgage credit and economic, demographic, geographic, tax, legal and other
factors. They also may include yield to maturity of the Mortgage Loan, the
liquidity of the Mortgage Loan, the limitations on the obligations of the
seller with respect to the Mortgage Loan, the rate and timing of payments to be
made with respect to the Mortgage Loan, the mortgaged property underlying the
Mortgage Loan, the risk of adverse fluctuations in the market values of that
mortgaged property as a result of economic events or governmental regulations,
the historical performance and other attributes of the property manager
responsible for managing the mortgaged property, relevant laws limiting actions
that may be taken with respect to Mortgage Loans and limitations
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on recourse against the borrowers following realization on the collateral
through various means, risks of timing with respect to Mortgage Loan
prepayments, risks associated with geographic concentration of mortgaged
property, environmental risks, pending and threatened litigation, junior liens
and other issues relating to title, a prior history of real estate mortgage and
other contractual defaults by affiliated parties on similar and dissimilar
obligations, and other factors.
It is generally expected that when the Company acquires Mortgage
Loans, the seller will represent and warrant to the Company that there has been
no fraud or misrepresentation during the origination of the Mortgage Loans and
it will agree to repurchase any Mortgage Loan with respect to which there is
fraud or misrepresentation. The Company will provide similar representations
and warranties when the Company sells or pledges Mortgage Loans as collateral
for MBS. Although the Company will generally have recourse to the seller for
any loss resulting from the breach of the seller's representations and
warranties to the Company, the Company will generally be at risk for loss due
to credit quality and to the extent the seller does not perform its repurchase
obligations.
The Company may retain a Subordinate Interest in the pools of
Mortgage Loans it securitizes and may acquire Subordinate Interests in pools of
Mortgage Loans securitized by others. The credit quality of Mortgage Loans and
the MBS utilizing Mortgage Loans as the underlying collateral depends on a
number of factors, including their Loan to Value Ratio, their terms and the
geographic diversification of the location of the real estate securing the
Mortgage Loans and, in the case of multifamily and commercial real estate, the
creditworthiness of tenants and debt service coverage ratios.
MORTGAGE-BACKED SECURITIES. The Company intends to acquire MBS,
primarily non-investment grade classes of CMBS, from various sources. MBS
typically are divided into two or more interests, sometimes called "tranches"
or "classes." The senior classes are often securities which, if rated, would
have ratings ranging from low investment grade "BBB" to higher investment
grades "A," "AA" or "AAA." The junior, subordinated classes typically would
include one or more non-investment grade classes which, if rated, would have
ratings below investment grade "BBB." Such 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).
CMBS. CMBS generally are issued either as CMOs or Pass-Through
Certificates. CMOs are debt obligations of special purpose corporations, owner
trusts or other special purpose entities secured by commercial Mortgage Loans
or CMBS. Pass-Through Certificates evidence interests in trusts, the primary
assets of which are Mortgage Loans. CMO bonds and Pass-Through Certificates
may be issued or sponsored by private originators of, or investors in, Mortgage
Loans, including savings and loan associations, mortgage bankers, commercial
banks, investment banks and other entities. CMBS are not guaranteed by an
entity having the credit status of a governmental agency or instrumentality and
are generally structured with one or more of the types of credit enhancement
described below. In addition, CMBS may be illiquid. See "Risk Factors--Risks
Related to Investments in MBS."
In most commercial Mortgage Loan securitizations, a series of
CMBS is issued in multiple classes in order to obtain investment-grade credit
ratings for the senior classes and thus increase their marketability. Each
class of CMBS may be issued with a specific fixed or variable coupon rate and
has a stated maturity or final scheduled distribution date. Principal
prepayments on the Mortgage Loans comprising the collateral (i.e., mortgage
pass-through securities or pools of whole Mortgage Loans securing or backing a
series of CMBS) ("Mortgage Collateral") may cause the CMBS to be retired
substantially earlier than their stated maturities or final scheduled
distribution dates. Although, with respect to commercial Mortgage Loans, there
generally are penalties for or limitations on the ability of the borrower to
prepay the Mortgage Loan. Interest is paid or accrued on CMBS on a periodic
basis, typically monthly.
The credit quality of CMBS depends on the credit quality of the
underlying Mortgage Collateral. CMBS are collateralized generally by a more
limited number of commercial or multifamily Mortgage Loans with larger
principal balances than those of single-family Mortgage Loans. As a result, a
loss on a single Mortgage Loan
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underlying a CMBS will have a greater negative effect on the yield of such
CMBS, especially the Subordinated Investments in such CMBS.
Among the factors determining the credit quality of the Mortgage
Collateral will be the ratio of the Mortgage Loan balances to the value of the
properties securing the Mortgage Loans, the purpose of the Mortgage Loans
(e.g., refinancing or new purchase), the amount of the Mortgage Loans, their
terms, the geographic diversification of the location of the real estate
securing the Mortgage Loans, and the creditworthiness of tenants.
The principal of and interest on the underlying Mortgage Loans
may be allocated among the several classes of CMBS in many ways, and the credit
quality of a particular class results primarily from the order and timing of
the receipt of cash flow generated from the underlying Mortgage Loans.
Subordinated Interests in CMBS carry significant credit risks. See "Risk
Factors--Risks Related to Investments in MBS." Typically, in a
"senior-subordinated" structure, the Subordinated Interests provide credit
protection to the senior classes by absorbing losses from Mortgage Loan
defaults or foreclosures before such losses are allocated to more senior
classes. Moreover, typically as long as the more senior classes of securities
are outstanding, all prepayments on the Mortgage Loans generally are paid to
those senior classes, at least until the end of a lock-out period, which
typically is four years or more. In some instances, particularly with respect
to Subordinated Interests in commercial Mortgage Loan securitizations, the
holders of Subordinated Interests are not entitled to receive scheduled
payments of principal until the more senior classes are paid in full or until
the end of a lock-out period. Because of this structuring of the cash flows
from the underlying Mortgage Loans, Subordinated Interests in a typical
securitization are subject to a substantially greater risk of non-payment than
are those more senior classes. Accordingly, the Subordinated Interests are
assigned lower credit ratings, or no ratings at all. Neither the Subordinated
Interests nor the underlying Mortgage Loans are guaranteed by agencies or
instrumentalities of the United States government or by other governmental
entities and accordingly are subject, among other things, to credit risks. See
"Risk Factors--Risks Related to Investments in MBS."
As a result of the typical "senior-subordinated" structure, the
Subordinated Interests will be extremely sensitive to losses on the underlying
Mortgage Loans. Accordingly, the holder of the Subordinated Interest is
particularly interested in minimizing the loss frequency (the percentage of the
Mortgage Loan balances that default over the life of the Mortgage Collateral)
and the loss severity (the amount of loss on defaulted Mortgage Loans, i.e.,
the principal amount of the Mortgage Loan unrecovered after applying any
recovery to the expenses of foreclosure and accrued interest) on the underlying
Mortgage Loans.
Losses on the Mortgage Collateral underlying the Company's MBS
will depend upon a number of factors, many of which will be beyond the control
of the Company or the applicable servicer. Among other things, the default
frequency on the Mortgage Collateral will reflect broad conditions in the
economy generally and real property particularly, economic conditions in the
local area in which the underlying mortgaged real estate is located, the Loan
to Value Ratio of the Mortgage Loan, the purpose of the Mortgage Loan, and the
debt service coverage ratio (with respect to commercial and multifamily
Mortgage Loans). The loss severity on the Mortgage Collateral will depend upon
many of the same factors described above, and will also be influenced by
certain legal aspects of Mortgage Loans that underlie the MBS acquired by the
Company, including the servicer's ability to foreclose on the defaulted
Mortgage Loan and sell the underlying Mortgaged Collateral. Various legal
issues affect the ability to foreclose on a Mortgage Loan or sell the Mortgaged
Collateral. These legal issues may extend the time of foreclosure proceedings
or may require the expenditure of additional sums to sell the underlying
Mortgage Collateral, in either case increasing the amount of loss with respect
to the Mortgage Loans.
In considering whether to acquire MBS, the Company's policy is to
determine, in consultation with the Manager, the scope of review to be
performed before the Company acquires that MBS, which will be designed to
provide to the Company such information regarding the MBS as the Company and
Manager determine to be relevant and material to the Company's decision
regarding the acquisition of the MBS. The Company's policy generally is to
require that the Manager perform due diligence substantially similar to that
described above in connection with the acquisition of performing Mortgage
Loans. The due diligence may include an analysis of (i) the underlying
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collateral pool, (ii) the prepayment and default history of the Mortgage Loans
previously originated by the originator, (iii) cash flow analyses under various
prepayment and interest rate scenarios (including sensitivity analyses) and
(iv) an analysis of various default scenarios. The Company also may request
that the Manager determine and advise the Company as to the price at which the
Manager would recommend acquisition of the MBS by the Company, and the
Manager's reasons for such advice. However, which of these characteristics (if
any) are important and how important each characteristic may be to the
evaluation of a particular MBS depends on the individual circumstances.
Because there are so many characteristics to consider, each MBS must be
analyzed individually, taking into consideration both objective data as well as
subjective analysis.
With respect to CMBS, the Manager will use sampling and other
appropriate 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, a site inspection,
tenant-by-tenant rent roll analysis, review of historical income and expenses
for each property securing the Mortgage Loan, 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 such price opinions are available). For
those Mortgage Loans that are selected for the more streamlined review process,
the Manager's evaluation may include 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 such information does
not reveal any unusual or unexpected characteristics or factors, no further due
diligence will be performed.
Many of the MBS to be acquired by the Company will not have been
registered under the Securities Act, but instead initially will have been sold
in private placements. These MBS will be subject to restrictions on resale
and, accordingly, will have substantially more limited marketability and
liquidity.
Many special purpose trusts or corporations that issue
multi-class MBS elect to be treated, for federal income tax purposes, as
REMICs. The Company may acquire not only MBS that are treated as regular
interests in REMICs, but also those that are designated as REMIC Residual
Interests or as Non-REMIC Residual Interests. The cash flow generated by the
Mortgage Loans underlying a series of CMOs is first applied to the required
payments of principal and interest on the CMOs and second to pay the related
administrative expenses of the issuer. The Residual Interests generally
receive excess cash flows, if any, after making the foregoing payments. Unlike
regular interests, CMO Residuals typically generate Excess Inclusion income or
other forms of Taxable Income (including the accretion of market discount) that
bear no relationship to the actual economic income that is generated by a
REMIC. CMO Residuals that are required to report taxable income or loss, but
receive no cash flow from the Mortgage Loans are called "Non-Economic". To the
extent permitted by the REIT Provisions of the Code, the Company may conduct
any purchases and sales of CMO Residuals in a fully taxable corporate
subsidiary to prevent the liability for Excess Inclusion income from being
passed to the Company's shareholders. See "Federal Income Tax Consequences--
Taxation of Shareholders--Taxation of Taxable U.S. Shareholders" and "Federal
Income Tax Consequences--Proposed Tax Legislation and Possible Other
Legislative Actions Affecting Tax Consequences."
Any securitizations effected by the Company will generally create
a Residual Interest. If the residual is a Non-Economic Residual Interest, the
Company may incur a negative purchase price to dispose of it, or the Company
may retain it in a fully taxable corporate subsidiary. See "--Operating
Policies and Guidelines--Capital and Leverage Policies--Securitizations."
Subordinated Interests generally are issued at a significant
discount to their outstanding principal balance, which gives rise to OID for
federal income tax purposes. The Company will be required to accrue the OID as
taxable income over the life of the related MBS on a level-yield method whether
or not the Company receives the
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related cash flow. See "Federal Income Tax Consequences--Requirements For
Qualification--Annual Distribution Requirements."
The Company believes that it will not be, and intends to conduct
its operations so as not to become, regulated as an investment company under
the Investment Company Act. The Investment Company Act generally exempts
entities that are "primarily engaged in purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" ("Qualifying
Interests"). The Company intends to rely on current interpretations by the
staff of the Commission in an effort to qualify for this exemption. To comply
with the foregoing guidance, the Company, among other things, must maintain at
least 55% of its assets in Qualifying Interests and also may be required to
maintain an additional 25% in Qualifying Interests or other real estate-related
assets. Generally, the Mortgage Loans in which the Company may invest
constitute Qualifying Interests. While certain MBS may not constitute
Qualifying Interests, the Company may seek to structure such investments in a
manner in which the Company believes such interests may constitute Qualifying
Interests. The Company may seek, where appropriate, to obtain foreclosure
rights or other similar arrangements (including rights to control the oversight
and management of the resolution of such Mortgage Loans by workout or
modification of loan provisions, foreclosure, deed in lieu of foreclosure or
otherwise, and to control decisions with respect to the preservation of the
collateral generally, including property management and maintenance decisions
with respect to the underlying Mortgage Loans, however, there can be no
assurance that it will be able to do so on acceptable terms. As a result of
obtaining such rights, the Company believes that the related MBS will
constitute Qualifying Interests for purposes of the Investment Company Act.
The Company does not intend, however, to seek an exemptive order, no-action
letter or other form of interpretive guidance from the Commission or its staff
on this position. Any decision by the Commission or its staff advancing a
position with respect to whether such MBS constitute Qualifying Interests that
differs from the position taken by the Company could have a material adverse
effect on the Company. See "Risk Factors--Failure to Maintain Exclusion From
the Investment Company Act Would Restrict the Company's Operating Flexibility."
RMBS. The Company may also acquire interests, including
Subordinated Interests, in RMBS. Such RMBS will consist primarily of
securities backed by "non-conforming" Mortgage Loans, that is, single-family
Mortgage Loans secured by liens on residential property that do not qualify for
sale to GNMA, FNMA or FHLMC. Typically, non-conforming Mortgage Loans do not
meet agency guarantee criteria because their principal balances exceed agency
limits. Sometimes the Mortgage Loans or the borrower do not meet other agency
credit underwriting standards. In addition, such RMBS may include Agency
Certificates primarily issued by GNMA, FNMA or FHLMC, which represent interests
in fixed rate or adjustable rate Mortgage Loans secured primarily by liens on
single-family (one-to-four units) residential property.
The process of a single-family Mortgage Loan securitization is
similar to the process of a commercial Mortgage Loan securitization. As in
CMBS, a typical RMBS series allocates the cash flow on the underlying Mortgage
Loans so that the Subordinated Interests shield the more senior classes from
losses due to defaults on the underlying residential Mortgage Loans, resulting
in substantially greater credit risk to the Subordinated Interests.
In addition to creating credit support for the more senior
classes, another general goal in allocating cash flows from the Mortgage Loans
to the various classes of a securitization, particularly an RMBS issuance, is
to create certain tranches on which the expected cash flows have a higher
degree of predictability than the cash flows on the underlying Mortgage Loans.
As a general matter, the more predictable the cash flow is on a particular RMBS
tranche, the lower the anticipated yield will be on that tranche at the time of
issuance relative to prevailing market yields on certain other RMBS. As part
of the process of seeking to create more predictable cash flows on certain
tranches of a non-conforming Mortgage Loan securitization, one or more tranches
generally must be created that absorb most of the changes in the cash flows
from the Mortgage Collateral. The yields on these tranches generally are
higher than prevailing market yields on MBS with similar expected average
lives. Because of the uncertainty of the cash flows on these tranches, the
market prices of, and yields on, these tranches are more volatile.
Although Subordinated Interests in RMBS bear substantial credit
risk, because of the structuring of cash flows typically provided in RMBS
transactions, such Subordinated Interests generally tend to be less subject to
a
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substantial prepayment risk. Typically, all prepayments of principal are
allocated to the more senior, generally investment-grade, RMBS classes (for at
least five years for fixed-rate Mortgage Loans and ten years for
adjustable-rate Mortgage Loans) in order to increase the outstanding percentage
of subordination. After this initial period during which prepayments are
shifted to the more senior RMBS classes, prepayments then are made pro rata or
more likely phased in over a five-year period until all classes are receiving
their pro rata share. The net effect on the subordinated classes is a degree
of call protection because the principal amounts of the subordinated classes
are not reduced by prepayments of the Mortgage Loans, generally for at least
five years. The structuring of cash flows generally creates a Subordinated
Interest in RMBS with a longer but more predictable average life.
The Company may also acquire interests, including Subordinated
Interests, in RMBS secured by lower credit quality Mortgage Loans known as "B,"
"C" and "D" Mortgage Loans. B, C and D Mortgage Loans are made to borrowers
who have credit histories of a lower overall quality than "A" borrowers. These
credit histories generally result from previous repayment difficulties, brief
job histories, previous bankruptcies or other causes. The loan-to-value ratio
for a B, C and D Mortgage Loan is typically significantly lower than the
loan-to-value ratio of an "A" Mortgage Loan, and the pass-through coupon of a
B, C and D Mortgage Loan is typically higher than the coupon on an A Mortgage
Loan. Although the Company does not currently anticipate investing in such
RMBS, the Company may, in the future, consider investing in these types of RMBS
in the event and to the extent the Company determines that market conditions or
yields on such investments justify accepting the higher credit risk.
COMMERCIAL REAL ESTATE. The Company intends to invest in
commercial real estate, including properties which are newly developed, to be
built, Net Leased Real Estate, REO Properties or other Distressed Real Estate.
Such investment may be made directly by the Company or through partnerships or
other entities formed with other parties, including members of the AMRESCO
Group. The Company may also form one or more partnerships, the limited
partnership interests in which would be convertible into Common Shares, for the
purpose of enabling the Company to acquire real estate or interests therein
from real estate owners on a tax deferred basis in exchange for such real
estate or interests therein.
Net Leased Real Estate. The Company intends to invest in Net
Leased Real Estate on a leveraged basis. Net Leased Real Estate is generally
defined as real estate that is net leased on a long-term basis (i.e., ten years
or more) to tenants who are customarily responsible for paying all costs of
owning, operating, and maintaining the leased property during the term of the
lease, in addition to the payment of a monthly rent to the landlord for the use
and occupancy of the premises. The Company expects to acquire Net Leased Real
Estate on a leveraged basis that will provide sufficient cash flow to provide
an attractive return on its investment therein after debt service. Although
the time during which the Company will hold Net Leased Real Estate will vary,
the Company anticipates holding most Net Leased Real Estate for more than ten
years, although there are no assurances that it will do so. The Company will
focus on Net Leased Real Estate that is either leased to creditworthy tenants
or is real estate that can be leased to other tenants in the event of a default
of the initial tenant. See "Risk Factors--Risks Related to Investments in Real
Estate--Tenant Defaults and Bankruptcy May Cause Losses."
The Company expects to have the tax depreciation associated with
such investments to offset the non-cash accrual of interest on certain MBS and
Mortgage Loans, including the OID generally associated with either MBS that are
issued at a discount from par or Participating Loans and the "phantom" taxable
income associated with other MBS derivatives.
REO Properties and Other Distressed Real Estate. The Company
believes that under appropriate circumstances the acquisition of multifamily
and commercial real estate, including REO Properties and other Distressed Real
Estate, may offer significant opportunities to the Company. The Company's
policy will be to cause the Manager to conduct an investigation and evaluation
of the real estate proposed to be purchased before purchasing such real estate.
Prior to purchasing real estate, the Manager generally will obtain and analyze
rent and sale comparables for the real estate contemplated to be acquired. The
Manager will either obtain a Phase I environmental assessment or review a
previously obtained Phase I environmental assessment (if available) for each
property prior
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to its acquisition by the Company. This information will be used to supplement
other due diligence that will be performed by the Manager's employees.
The Company's policy generally is to request that the Manager
include within its due diligence review and analysis of the real estate
contemplated to be acquired by the Company a review of market studies for each
geographic market designated by the Company in which the real estate proposed
to be purchased is concentrated. The Company may request that such studies
include area economic data, employment trends, absorption rates and market
rental rates. The Company's policy is that such due diligence analyses
generally also include (i) site inspections of significant properties (and, if
the Company determines that such a review will be cost-effective, a random
sampling of less significant properties) and (ii) a review of all property
files and documentation that are made available to the Company or the Manager.
The Company generally will require that the Manager's review include, to the
extent possible, examinations of available legal documents, litigation files,
correspondence, title reports, operating statements, appraisals, engineering
reports and environmental reports, among other due diligence items.
The Company's policy is that the process of determining the fair
market value of real estate is to utilize those procedures that the Company and
the Manager deem relevant for the specific real estate being evaluated, which
procedures need not be the same for each property being evaluated. Sources of
information that may be examined in determining the fair market value of a
property may include one or more of the following: (a) current and historical
operating statements; (b) existing or new appraisals; (c) sales comparables;
(d) industry statistics and reports regarding operating expenses; (e) existing
leases and market rates for comparable leases; (f) deferred maintenance
observed during site inspections or described in structural and engineering
reports; and (g) correspondence and other documents and memoranda found in the
files of the seller of that real estate or other relevant parties.
The Manager is expected to develop projections of net operating
income and cash flows taking into account lease rollovers, tenant improvement
costs and leasing commissions. The Manager will compare its estimates of
revenue and expenses to historical operating statements and estimates provided
in appraisals and general industry and regional statistics. Market
capitalization rates and discount rates are then applied to the cash flow
projections to estimate values. These values are then compared to available
appraisals and market sale comparables to determine recommended bid prices for
each property. The amount offered by the Company generally will take into
account projected holding periods, capital costs and projected profit
expectations, and will be the price that the Manager estimates is sufficient to
generate an acceptable risk-adjusted return on the Company's investment.
After the Company acquires Distressed Real Estate, the Company's
goal will be to improve management of that property so as to increase its cash
flow. See "Risk Factors--Risks Related to Investments in Real Estate--Reliance
on Third Party Operators May Adversely Affect Results." If cash flows can be
increased and the net operating income stabilized, the Company may seek an
opportunity to sell the real estate. The length of time the Company will hold
Distressed Real Estate may vary considerably from property to property, and
will be based in part on the Manager's analysis and conclusions as to the best
time to sell some or all of them and will be subject to certain limitations
imposed by the REIT Provisions of the Code.
OTHER INVESTMENTS. The Company may also pursue a variety of
complementary commercial real estate and finance-related businesses and
investments in furtherance of its investment policies and strategies. Such
activities may include, but are not limited to, foreign real estate-related
asset investments and investing in (or lending to) other REITs and similar
companies. Any lending with regard to the foregoing may be on a secured or an
unsecured basis and will be subject to risks similar to those attendant to
investing in Mortgage Loans, MBS and commercial real estate. The Company seeks
to maximize yield by managing credit risk through credit underwriting, although
there can be no assurance that the Company will be successful in this regard.
Investment in Other Entities. The Company may acquire equity
interests or make other investments in other REITs, registered investment
companies, partnerships and other investment funds and real estate operating
companies to the extent permitted by the REIT Provisions of the Code when the
Manager believes that such purchase will yield attractive returns on capital
employed. When the stock market valuations of such companies are low in
relation to
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the market value of their assets, such stock purchases can be a way for the
Company to acquire an interest in a pool of Targeted Investments at an
attractive price. The Company may also decide in the future to pursue business
acquisition opportunities that it believes will complement the Company's
operations.
Foreign Investments. The Company may acquire or originate
Mortgage Loans to foreign borrowers secured by real estate located outside the
United States or may acquire such real estate. The Company intends that any
such investments in real estate or Mortgage Loans secured by real estate
located in foreign countries will be primarily in countries in which the
AMRESCO Group conducts business or has invested or made Mortgage Loans in the
past (currently Canada, the United Kingdom and Mexico). Investing in real
estate related assets located in foreign countries creates risks associated
with the uncertainty of foreign laws and markets and risks related to currency
conversion. The Company may attempt to mitigate such currency risks, to the
extent practicable, depending on the nature of the investment. For example,
the Company may originate Mortgage Loans or acquire Net Leased Real Estate
which require payments or are otherwise denominated in U.S. dollars. The
Company may be subject to foreign income tax with respect to its investments in
foreign real estate related assets. However, any foreign tax credit that
otherwise would be available to the Company for U.S. federal income tax
purposes will not flow through to the Company's shareholders.
THE INITIAL ASSETS
To date, the Company has identified four Mortgage Loans to
purchase or originate with the proceeds of the Offering, subject to, among
other things, the review and approval of the Board of Trust Managers, including
a majority of the Independent Trust Managers. There can be no assurance that
any of such Mortgage Loans will be purchased or originated by the Company. See
"Risk Factors--Risks of Loss on the Initial Assets."
LOAN ONE. The first Mortgage Loan identified for purchase by the
Company with the net proceeds of the Offering ("Loan One") is a $6 million
acquisition and rehabilitation Mezzanine Loan secured by a second lien on a
956,114 (approximate) square foot mixed-use development located in
north-central Columbus, Ohio. The improvements securing Loan One were built in
1973, are located on 59 acres and include 117,181 square feet of office space,
160,376 square feet of retail space, a 125,000 square foot athletic club, a
28,723 square foot food court/French market and 596 multi-family apartment
units.
Loan One was originated by AMRESCO Funding on February 20, 1998
and is currently owned by AMRESCO Funding. Of the $7 million committed amount,
$6 million was funded at the closing of the loan. Funded proceeds of Loan One
were used by the borrower to fund a portion of the purchase price for the
mortgaged property. The remaining $17 million of the purchase price for the
mortgaged property was furnished to the borrower by Credit Suisse First Boston
Mortgage Capital LLC, which has a first lien on the mortgaged property.
Loan One bears interest at 15% per annum. Payments of interest
only are due monthly commencing April 1, 1998, until the loan is paid in full.
All principal, and all remaining accrued and unpaid interest on the loan, are
due on March 31, 2001. Certain of the borrower's excess cash flow is required
to be applied toward payments of principal and interest on the loan. In
addition to a second lien on the mortgaged real property, Loan One is also
secured by a pledge of the partnership interests of each partner in the
borrower and limited guaranties of the three owners of the general partner of
the borrower.
The borrower is in the process of formulating a business plan to
redevelop the mortgaged real property. The borrower's tentative 3-year
redevelopment budget is approximately $10.5 million. The borrower has granted
to AMRESCO Funding (or its assignee) a right of first refusal with respect to
the redevelopment loan for the mortgaged property. In the event that AMRESCO
Funding (or its assignee) does not commit to provide the redevelopment
financing by May 1, 1998, it must advance an additional $1 million to the
borrower on May 1, 1998 to fund deferred maintenance costs. If AMRESCO Funding
(or its assignee) provides the redevelopment financing for the mortgaged real
property, prepayments on Loan One are generally prohibited until February 20,
1999 (except for certain payments required to be made out of excess cash flow).
The loan documents governing Loan One contain standard
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representations and warranties by the borrower, including customary
representations regarding environmental matters, compliance with laws, the
payment of taxes and maintenance of insurance.
Pursuant to the intercreditor agreement between Credit Suisse
First Boston Mortgage Capital LLC and AMRESCO Funding regarding Loan One,
AMRESCO Funding (or its assignee) is prohibited from foreclosing on the
mortgaged real property without the consent of Credit Suisse First Boston
Mortgage Capital LLC, or from accepting payments on Loan One while the first
lien loan is in default, but has rights to cure defaults or purchase the first
lien loan in the event of a default thereunder.
The Company has issued a non-binding commitment to purchase Loan
One from AMRESCO Funding for an amount equal to the aggregate outstanding
principal balance thereof as of the date of purchase, plus accrued and unpaid
interest to the date of purchase, subject to the review and approval of the
Board of Trust Managers, including a majority of the Independent Trust
Managers. If the Company purchases Loan One from AMRESCO Funding, AMRESCO
Funding will pay to the Company the unamortized portion of the loan origination
fee paid to AMRESCO Funding by the borrower (equal to 2% of the amount of the
loan commitment), less AMRESCO Funding's actual cost in underwriting and
closing such loan.
LOAN TWO. The second Mortgage Loan which the Company has
identified for purchase or origination with the net proceeds of the Offering
("Loan Two") is a proposed $12.8 million Participating Construction Loan for
the acquisition of approximately 10.2 acres of land located in a master planned
residential community near Houston, Texas and the construction thereon of a 236
unit multi-family apartment property. AMRESCO Funding has issued a proposal
dated March 10, 1998 (the "Loan Two Proposal") to originate Loan Two. The
proposed borrower has accepted the Loan Two Proposal and paid a good faith
deposit for the loan in the amount of $20,000, and AMRESCO Funding and the
proposed borrower are currently negotiating loan documents. However, there can
be no assurance that Loan Two will be funded.
The Loan Two Proposal provides that the proposed Loan Two would
bear interest at an accrual rate of 11.5% per annum and be due and payable
monthly at a pay rate of 10% per annum. Certain excess cash flow would be
required to be applied to the payment of accrued and unpaid interest. All
principal, and all accrued and unpaid interest, would be due 24 months after
the closing of the loan. Prepayments would not be permitted during the first
year, other than out of proceeds from an approved sale, or from certain excess
cash flow. In addition, the Loan Two Proposal provides that the lender would
be entitled to 60% of the net profits, if any, from the sale or refinancing of
the mortgaged property (calculated after the loan has been paid in full). The
Loan Two Proposal also provides that the lender would have a first right of
refusal on long-term take-out financing for the mortgaged property.
The Loan Two Proposal contemplates that AMRESCO Funding (or its
assignee) would provide up to $1.5 million of the total loan amount to finance
the acquisition of the land, commence construction and finance closing costs.
The balance of the loan proceeds would be disbursed according to the
construction budget, subject to customary retainage, upon AMRESCO Funding's (or
its assignee's) satisfaction with the completion of the subject construction
and the performance by the borrower of certain customary conditions. The Loan
Two Proposal requires the borrower to maintain a minimum of $150,000 cash
equity in the property, to cover all cost overruns and to defer management fees
of $389,000 until the loan is paid. In addition to a first lien on the
apartment property, Loan Two would also be secured by all ownership interests
in the borrower and the limited guaranties of the principals. The borrower
would be required to make customary representations and warranties, including
customary representations concerning environmental matters, compliance with
laws, the payment of taxes and the maintenance of insurance.
The Company has issued a non-binding commitment, subject to the
review and approval of the Board of Trust Managers, including a majority of the
Independent Trust Managers, to purchase Loan Two from AMRESCO Funding and
AMRESCO Funding has agreed to transfer Loan Two to the Company for an amount
equal to the aggregate outstanding principal balance thereof as of the date of
purchase, plus accrued and unpaid interest to the date of purchase, if the
proposed loan is closed prior to the closing of the Offering. If the Company
purchases Loan Two from AMRESCO Funding, AMRESCO Funding will pay to the
Company the unamortized portion of the loan
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origination fee paid to AMRESCO Funding by the borrower (estimated to be 1% of
the amount of the loan commitment), less AMRESCO Funding's actual cost in
underwriting and closing such loan. If the proposed Loan Two is not closed
prior to the closing of the Offering, AMRESCO Funding has agreed to transfer
its rights under the Loan Two Proposal to the Company after the closing of the
Offering, without charge, if the Board of Trust Managers, including a majority
of the Independent Trust Managers, determines that the Company should originate
the proposed loan.
LOAN THREE. The third Mortgage Loan which the Company has
identified for purchase or origination with the net proceeds of the Offering
("Loan Three") is a proposed $40 million Construction Loan for the acquisition
and renovation of a 403,000 (approximate) square foot office/research and
development building located in Massachusetts. AMRESCO Funding has issued a
quote for Loan Three dated March 10, 1998 (the "Loan Three Quote"). The
borrower has paid a good faith deposit in the amount of $50,000 for Loan Three.
AMRESCO Funding and the borrower are currently negotiating loan terms and
AMRESCO Funding is performing its underwriting. The Loan Three Quote provides
that the proposed Loan Three would bear interest at a rate of 10.5% per annum
and have an initial term of 24 months. The Loan Three Quote contemplates that
AMRESCO Funding (or its assignees) would make an initial advance under the loan
in the amount of approximately $8.8 million, and subsequent advances for
project costs as they are incurred. The Loan Three Quote requires the borrower
to maintain approximately 19% equity.
The property proposed to secure Loan Three is part of an 83 acre
facility formerly owned by Continental Assurance Company and operated by
Raytheon Electronic Systems, a division of Raytheon Company ("Raytheon") from
1955 to 1995. An environmental site assessment which included extensive
subsurface soil and groundwater testing, was conducted by Raytheon in 1996. The
environmental site assessment disclosed the presence of asbestos-containing
materials ("ACM") in certain of the buildings located on the subject property,
hydrocarbon concentrations above reportable limits impacting what appeared to be
a limited area of soil, a release of No. 6 fuel oil from a 20,000-gallon
underground storage tank that had been removed in 1992, and the presence of oil
and hazardous material ("OHM") containing metals and volatile organic compounds,
including polychlorinated biphenyls and polynuclear aromatic hydrocarbons in
drywells on the property. Significantly lower levels of OHM were also detected
in catch basins and within wetland sediments adjacent to the property. Impact
at the drywells has been abated by Raytheon through soil removal actions
conducted as Limited Response Actions performed under the requirements imposed
by Massachusetts Contingency Plan regulations.
The environmental site assessment concluded that the release of
No. 6 fuel oil did not pose an eminent hazard and that the groundwater
contamination associated with the release had a low potential to impact current
public water supplies. The assessment also indicated that Raytheon was to
conduct a Limited Response Action to remove the hydrocarbons detected in the
property. As part of the rehabilitation costs associated with the property, the
proposed borrower on Loan Three has budgeted approximately $550,000 to remediate
the contamination associated with the release of the No. 6 fuel oil and
approximately $300,000 to abate the ACM. Further due diligence regarding the
environmental condition of the property and compliance with the requirements of
the Massachusetts Contingency Plan requirements will be conducted during the
underwriting of Loan Three. However, should the due diligence not detect any
other significant environmental problems and Loan Three closes as currently
anticipated, no assurance can be given that such due diligence will have
identified all areas of potential impact to soil, groundwater or other media or
that the actual costs to remediate any contamination that is or has been
detected will not exceed the costs estimated at the time the loan is closed. The
discovery of unknown environmental conditions or increased costs could limit the
ability of the Company to recover all of its interest and/or principal on Loan
Three and may expose the Company to additional liability. As a condition to the
origination of Loan Three, the Company would require that the borrower indemnify
the Company for any environmental liability or other losses incurred by the
Company as a result of any environmental problems associated with the real
property securing Loan Three. See "Risks Related to Investments in Real
Estate--Real Estate With Hidden Environmental Problems will Increase Costs and
May Create Liability for the Company," "Risk Factors--Real Estate With Known
Environmental Problems May Create Liability for the Company" and "Risk
Factors--Risks of Loss on Initial Assets."
The Company has issued a non-binding commitment, subject to
review and approval of the Board of Trust Managers, including a majority of the
Independent Trust Managers, to purchase Loan Three from AMRESCO
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Funding and AMRESCO Funding has agreed to transfer Loan Three to the Company
for a purchase price equal to the amount of the aggregate outstanding principal
balance thereof as of the date of purchase, plus accrued and unpaid interest to
the date of purchase, if it is closed prior to the closing of the Offering. If
the Company purchases Loan Three from AMRESCO Funding, AMRESCO Funding will pay
to the Company the unamortized portion of the loan origination fee paid to
AMRESCO Funding by the borrower (estimated to be 1% of the amount of the loan
commitment), less AMRESCO Funding's actual cost in underwriting and closing
such loan. If Loan Three is not closed prior to the closing of the Offering,
AMRESCO Funding has agreed to transfer any of its rights to the proposed Loan
Three (under the Loan Three Quote or otherwise) to the Company after the
closing of the Offering without charge, if the Board of Trust Managers,
including a majority of the Independent Trust Managers, determines that the
Company should originate the proposed loan.
LOAN FOUR. The fourth Mortgage Loan which the Company has
identified for purchase or origination with the net proceeds of the Offering
("Loan Four") is a $14.7 million Participating Mezzanine Construction Loan for
the construction an 11 story multi-tenant office building containing
approximately 300,887 net rentable square feet and an adjoining five level
parking structure located in a suburb of Dallas, Texas. Loan Four includes a
$2.45 million interest reserve.
Loan Four was originated by AMRESCO Funding on March 30, 1998 and
is currently owned by AMRESCO Funding. Loan Four bears interest at an accrual
rate of 12% per annum. Payments of interest only are due and payable monthly
at a pay rate of 10% per annum. All excess cash flow will be applied to
payment of accrued and unpaid interest until the lender has received a 15%
return on its investment. After the borrower has also received a 15% return on
its equity,then the lender is entitled to a 30% shared appreciation in the
profits of the project until the lender achieves a 20% per annum return on its
investment and, finally, the lender will then be entitled to a 20% shared
appreciation in the profits of the project, with a maximum 25% per annum return
to the lender. All principal and accrued and unpaid interest, including any
shared appreciation contingent interest, will be due and payable on March 30,
2001. The borrower has two extension options of one year each, subject to
satisfaction of certain conditions, including reaching certain leasing
parameters and the payment of a 1% extension fee.
Construction of the improvements will be financed with a $26
million first lien senior Construction Loan to be made by Guaranty Federal,
FSB, the Company's Mezzanine Loan of $14.7 million and a borrower equity
contribution of approximately $5.2 million. The developer has provided a
completion guaranty and a limited guaranty of certain recourse carve-outs.
Pursuant to the intercreditor agreement between Guaranty Federal, FSB and
AMRESCO Funding, AMRESCO Funding is prohibited from accepting payments on Loan
Four while the first lien loan is in default, but has rights to cure default or
purchase the first lien loan in the event of a default thereunder.
The Company has issued a non-binding commitment, subject to
review and approval of the Board of Trust Managers, including a majority of the
Independent Trust Managers, to purchase Loan Four from AMRESCO Funding and
AMRESCO Funding has agreed to transfer Loan Four to the Company for an amount
equal to the aggregate outstanding principal balance thereof as of the date of
purchase, plus accrued and unpaid interest to the date of purchase. If the
Company purchases Loan Four from AMRESCO Funding, AMRESCO Funding will pay to
the Company the unamortized portion of the loan origination fee paid to AMRESCO
Funding by the borrower (equal to 1% of the amount of the loan commitment),
less AMRESCO Funding's actual cost in underwriting and closing such loan.
Set forth below is a chart summarizing certain of the material
terms of the Initial Assets.
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<PAGE> 70
Initial Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
====================================================================================================================================
Maximum Loan Loan Amount Location of Real General Description of
Loan Type Amount Funded to Date Estate Collateral Real Estate Collateral
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loan One Acquisition and $7.0 million $6.0 million Ohio 956,114 square foot mixed use facility 15%
rehabilitation built in 1973 (including office space,
Mezzanine Loan retail space, an athletic club, a food
court and 598 apartments)
- ------------------------------------------------------------------------------------------------------------------------------------
Loan Two (1) Participating $12.8 million (1) Texas (To be built) 236-unit apartment
Construction Loan complex located on 10.2 acres
- ------------------------------------------------------------------------------------------------------------------------------------
Loan Three (2) Construction Loan $40.0 million (2) Massachusetts 403,000 square foot office/research
(refinance and development building built in 1955
acquisition and
rehabilitation)
- ------------------------------------------------------------------------------------------------------------------------------------
Loan Four Participating $14.7 million $1,000 Texas (To be built) 11 story, 300,887 square
Mezzanine foot multi-tenant office building
Construction
====================================================================================================================================
<CAPTION>
====================================================================================================================================
Accrual Maturity Payment Schedule
Loan Type Interest Rate Date Interest Principal Prepayments
(per annum)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loan One Acquisition and 15% 03/31/2001 Monthly All due at Prohibited until
rehabilitation commencing maturity (3) February 20, 1999 (4)
Mezzanine Loan 4/1/98 (unless lender does
not provide permanent
financing)
- ------------------------------------------------------------------------------------------------------------------------------------
Loan Two (1) Participating 11.5% (plus 60% 24 months from Monthly at a All due at Prohibited for the
Construction Loan of net profits close (1) pay rate of 10% maturity (3) first 12 months (4)
from sale) per annum (3);
deferred
interest due at
maturity
(1) (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Loan Three (2) Construction Loan 10.5% 24 months from Monthly (3) All due at Prohibited for the
(refinance close (2) maturity (3) first 12 months (4)
acquisition and
rehabilitation)
- ------------------------------------------------------------------------------------------------------------------------------------
Loan Four Participating 12% (plus March 30, 2001 Monthly at a All due at Prohibited for the
Mezzanine shared pay rate of 10% maturity (3) first 18 months (4)
Construction appreciation) per annum (3);
(5) deferred
interest due at
maturity
====================================================================================================================================
<CAPTION>
============================================================
Loan Type Additional Collateral
- ------------------------------------------------------------
<S> <C> <C>
Loan One Acquisition and Ownership interests in
rehabilitation borrower; limited
Mezzanine Loan guarantees of recourse
carve-outs
- ------------------------------------------------------------
Loan Two (1) Participating Ownership interests in
Construction Loan borrower; limited
guarantees of recourse
carve-outs and of
completion and cost
overruns
- ------------------------------------------------------------
Loan Three (2) Construction Loan Ownership interests in
(refinance borrower; limited
acquisition and guarantees of recourse
rehabilitation) carve-outs and of
completion and cost
overruns
- ------------------------------------------------------------
Loan Four Participating Ownership interests in
Mezzanine borrower; limited
Construction guarantees of recourse
carve-outs and of
completion and cost
overruns
============================================================
</TABLE>
(1) Loan Two is currently being negotiated. It is expected to close in
approximately May 1998; however, there can be no assurance that Loan Two
will close.
(2) Loan Three is currently being negotiated. It is expected to close in
approximately April 1998; however, there can be no assurance that Loan
Three will close.
(3) Or earlier upon a prior approved sale of the property. Earlier payments
are also required out of excess cash flow.
(4) Except for payments required out of excess cash flow.
(5) Any excess cash flow will be applied to payment of accrued and unpaid
interest until the lender has received a 15% return on its investment.
After the borrower has also received a 15% return on its equity, then
the lender is entitled to a 30% shared appreciation in the profits of
the project until the lender achieves a 20% per annum return on its
investment and, finally, the lender will then be entitled to a 20%
shared appreciation in the profits of the project, until a maximum 25%
return to the lender.
-60-
<PAGE> 71
EMPLOYEES
The Company initially expects not to have any employees other
than officers, each of whom will also be employees of the Manager. See
"Management of the Company" and "The Manager."
FACILITIES
The executive offices of the Company, the Manager and AMRESCO are
located at 700 North Pearl Street, Suite 2400, Dallas, Texas 75201.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a
party or to which any property of the Company is subject.
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<PAGE> 72
\ MANAGEMENT OF THE COMPANY
EXECUTIVE OFFICERS AND TRUST MANAGERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Mark D. Gibson 38 President and Chief Executive Officer
Thomas J. Andrus 40 Executive Vice President and Chief Financial
Officer
Rebecca Kuban 42 Executive Vice President and Chief Investment
Officer
Jonathan S. Pettee 38 Executive Vice President and Chief Operating
Officer
Michael L. McCoy 42 Senior Vice President, General Counsel and
Secretary
John M. Jumonville 38 Vice President and Treasurer
Thomas R. Lewis 35 Vice President and Controller
</TABLE>
Mark D. Gibson is President and Chief Executive Officer of the Company
and a member of the Board of Trust Managers. Mr. Gibson also serves as
President and Chief Executive Officer of the Manager and as President of
Holliday Fenoglio Fowler. Mr. Gibson joined Holliday Fenoglio Fowler in 1984
and served at Holliday Fenoglio Fowler in various capacities until becoming
President in April 1996. 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. Gibson holds a B.B.A.
degree in Finance from The University of Texas.
Thomas J. Andrus is Executive Vice President and Chief Financial Officer
of both the Company and the Manager. Since May 1995, Mr. Andrus has also
served as Vice President and Treasurer of AMRESCO, where his primary
responsibilities include financing, capital raising, investor relations, asset
liability management, cash management, insurance and strategic planning. Mr.
Andrus has been employed by the AMRESCO Group in various capacities since 1987,
including Managing Director of Asset Marketing (with responsibility for
directing the marketing activities for loan and real estate assets) and
Director and Senior Vice President of Asset Management (with responsibility for
directing the management and liquidation of distressed commercial and real
estate loans). Prior to 1987, Mr. Andrus was employed by KPMG Peat Marwick, as
Manager in the Management Consulting Department, and NationsBank of Texas in
various capacities including Senior Vice President of Special Assets and Vice
President of Commercial Lending. Mr. Andrus holds a B.S. degree in Finance
from Trinity University and an M.B.A. degree from Texas A&M University.
Rebecca Kuban is Executive Vice President and Chief Investment Officer
of both the Company and the Manager. Until March 1998, Ms. Kuban served as the
Senior Credit Officer of the commercial finance group of the AMRESCO Group (see
"The Manager--Description of the AMRESCO Group"), with responsibilities for
various business lines, including the high-yield real estate lending group of
AMRESCO Funding. As one of the core group of senior officers of AMRESCO
Funding from its inception in 1995, her primary responsibilities were business
development, production, underwriting, training, management and leadership of
the staff responsible for high-yield real estate lending and structured
finance. Ms. Kuban, who has 15 years of real estate lending related
experience, has been with AMRESCO in various capacities since 1989, including
being a manager in AMRESCO's "Commercial Real Estate Owned Properties Group"
and being responsible for a large portfolio of distressed loans, with several
years of experience handling debt restructures, loan workouts and related
litigation and bankruptcies. Ms. Kuban
-62-
<PAGE> 73
was employed by First City National Bank - Austin N.A. from 1983 to 1989 as a
Vice President and commercial real estate lender. Ms. Kuban holds a B.B.A.
Degree in Finance from The University of Texas.
Jonathan S. Pettee is Executive Vice President and Chief Operating
Officer of both the Company and the Manager. From 1996 to March 1998, Mr.
Pettee was responsible for mortgage product development, capital raising and
CMBS portfolio management for the AMRESCO Group. Mr. Pettee has over ten 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. Mr. Pettee has held
previous positions as Managing Director at Copley Real Estate Advisors (1992 to
1994), where he was responsible for managing the external financing activities
for Copley's institutional funds, and as Senior Associate at Morgan Stanley
Realty (1986 to 1992), where he executed sale, financing and investment banking
transactions for the firm's clients. Mr. Pettee has a B.S. degree in
Mechanical Engineering from Cornell University and an M.B.A. degree from the
Harvard Business School.
Michael L. McCoy is Senior Vice President, General Counsel and Secretary
of the Company. Since February 1996, Mr. McCoy has also served as Assistant
General Counsel of AMRESCO responsible for overseeing the legal support to the
commercial mortgage banking, commercial finance and commercial loan servicing
areas of the AMRESCO Group. Mr. McCoy has been employed by the AMRESCO Group
since 1989. Prior to joining the AMRESCO Group, Mr. McCoy was a Director with
the law firm of Baker, Mills & Glast, P.C., where he practiced in the areas of
commercial real estate and banking and finance, and an associate with the law
firm of Carrington, Coleman, Sloman & Blumenthal. Mr. McCoy holds a J.D.
degree and a B.B.A. degree from the University of Texas at Austin.
John M. Jumonville is Vice President and Treasurer of both the Company
and the Manager. Since August 1996, Mr. Jumonville has served as Assistant
Treasurer of AMRESCO, where his primary responsibilities include corporate
asset and liability management and cash management. He has also performed
acquisition analysis and other special projects for the AMRESCO Group. Mr.
Jumonville has been employed by the AMRESCO Group in various capacities since
1989, including Director of Asset Marketing (with responsibility for marketing
and valuation analysis of loans and Asset Portfolios) and Vice President of
Asset Management (with responsibility for management and disposition of
underperforming and distressed Mortgage Loan portfolios). Mr. Jumonville
holds a B.S. degree in Accounting from Louisiana State University.
Thomas R. Lewis is Vice President and Controller of both the Company and
the Manager. From November 1995 to March 1998, Mr. Lewis was an employee of
the AMRESCO Group, with responsibility for accounting, cash management and
reporting for its 40 institutional advisory clients. Mr. Lewis has over twelve
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. ("Acacia"), a predecessor organization. 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 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. Mr. Lewis holds a B.B.A. degree in Accounting
from Texas A&M University and is a Certified Public Accountant.
-63-
<PAGE> 74
The current members of the Board of Trust Managers of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert L. Adair III 54 Chairman of the Board of Trust Managers
Robert H. Lutz, Jr. 48 Trust Manager
Mark D. Gibson(1) 38 Trust Manager
</TABLE>
(1) See above for certain biographical information regarding Mr. Gibson.
Robert L. Adair III is Chairman of the Board of Trust Managers. Since
1994, Mr. Adair has also served as a director, President and Chief Operating
Officer of AMRESCO. Mr. Adair has served AMRESCO and its predecessors in
various capacities since 1987. Mr. Adair holds a B.B.A. degree in Accounting
from The University of Texas and an M.B.A. degree from the Wharton School at
the University of Pennsylvania.
Robert H. Lutz, Jr. serves as a member of the Board of Trust Managers.
Since May 1994, Mr. Lutz has also served as Chairman of the Board and Chief
Executive Officer of AMRESCO. From November 1991 to May 1994, Mr. Lutz served
as President of Allegiance Realty, a real estate management company. Mr. Lutz,
who is also a director of Bristol Hotel Company, holds a B.A. degree from
Furman University, and an M.B.A. degree from Georgia State University.
Immediately prior to the closing of the Offering, the following
individuals will be elected to the Board of Trust Managers as Independent Trust
Managers:
<TABLE>
<CAPTION>
Name Age
- ---- ---
<S> <C>
James C. Leslie 42
Christopher Leinberger 47
</TABLE>
James C. Leslie has served as Chief Operating Officer of The Staubach
Company since 1996, and as a director of The Staubach Company since 1988. Mr.
Leslie was Chief Financial Officer of The Staubach Company from 1982 to January
1992 at which time he became President of Staubach Financial Services, a
position he held until February 1996. The Staubach Company operates tenant
representation businesses, including consulting services for commercial, retail
and industrial users of real estate. Mr. Leslie is also President and a board
member of Wolverine Holding Company, and serves on the boards of FM Properties,
Inc., Forum Retirement Partners, L.P., Wyndham Hotel Corporation and the North
Texas Chapter of the Arthritis Foundation. Mr. Leslie holds a B.S. degree from
The University of Nebraska and an M.B.A. degree from The University of Michigan
Graduate School of Business, and is a Certified Public Accountant.
Christopher Leinberger has been Managing Director and co-owner of Robert
Charles Lesser & Co. since 1982, where he specializes in metropolitan
development trends and strategic planning for cities and real estate companies.
Robert Charles Lesser & Co. is one of the largest independent real estate
advisory firms in the country, working on over 400 projects a year throughout
North America. Mr. Leinberger is also a partner in Arcadia Land Company, an
environmentally oriented development firm. Mr. Leinberger has written many
articles on strategic planning for real estate which have appeared in trade
magazines such as Builder, Urban Land and National Real Estate Investor. He is
also the author of Strategy for Real Estate Companies: Marketing, Finance,
Organization, jointly published by the ULI and NAIOP. Mr. Leinberger is
President of the Santa Fe Railyard Community Corporation, a nonprofit
development corporation and Chair of the Board of Trustees of the College of
Santa Fe. Mr. Leinberger also serves on the Board of Directors of Avalon
Properties, Inc. (an NYSE listed real estate
-64-
<PAGE> 75
investment trust) and a number of private firms. Mr. Leinberger is Vice
Chairman of the Metropolitan Economic Development Council of the Urban Land
Institute and on the National Advisory Board of NAIDP. He is a graduate of
Swarthmore College and the Harvard Business School.
The Company intends to elect two additional Independent Trust Managers
prior to the closing of the Offering.
Trust Managers of the Company are required to devote only so much of
their time to the Company's affairs as is necessary or required for the
effective conduct and operation of the Company's business. Because the
Management Agreement provides that the Manager will assume principal
responsibility for managing the affairs of the Company, the officers of the
Company, in their capacities as such, are not expected to devote substantial
time to the affairs of the Company. However, in their capacities as officers
or employees of the Manager, or its Affiliates, they will devote significant
amounts of their time to the affairs of the Manager as is required for the
performance of the duties of the Manager under the Management Agreement. See
"Risk Factors--Conflicts of Interest May Result in Decisions That do Not Fully
Reflect the Shareholders' Best Interest" and "The Manager." All officers serve
at the discretion of the Board of Trust Managers. Although the Company may
have salaried employees, it currently has no such employees.
The Bylaws of the Company provide that the Board of Trust Managers will
have not less than two nor more than nine members, as determined from time to
time by the existing Board of Trust Managers. Upon the closing of the
Offering, the Board of Trust Managers will have seven members consisting of
three Trust Managers affiliated with the Manager and four Independent Trust
Managers. The Bylaws further provide that except in the case of a vacancy, the
majority of the members of the Board of Trust Managers and of any committee of
the Board of Trust Managers must at all times after the issuance of the Common
Shares in the Offering be Independent Trust Managers. Vacancies occurring on
the Board of Trust Managers among the Independent Trust Managers may be filled
by the vote of a majority of the Trust Managers, including the Independent
Trust Managers, or a majority of the outstanding Common Shares at an annual or
special meeting of shareholders.
The Declaration of Trust provides that immediately after the closing of
the Offering, the Board of Trust Managers will be divided into three classes,
each class to consist as nearly as possible of one-third of the Trust Managers.
Each class of Trust Managers will contain one affiliated Trust Manager and at
least one Independent Trust Manager. The term of office of one class of Trust
Managers will expire each year. The initial term of office of the Class I,
Class II and Class III Trust Managers will expire at the 1999, 2000 and 2001
annual meeting of shareholders, respectively. Commencing with the 1999 annual
meeting of shareholders, the Trust Managers of the class elected at each annual
meeting of shareholders will hold office for a term of three years.
The Company will pay an annual Trust Manager's fee to each Independent
Trust Manager of $20,000, a fee of $1,000 for each meeting of the Board of
Trust Managers attended by each Independent Trust Manager and reimbursement of
costs and expenses of all Trust Managers for attending such meetings. In lieu
of cash payment of such fees, the Company may issue to the Independent Trust
Managers restricted Common Shares pursuant to the Share Option Plan. Trust
Managers who are also employed by the Company or the Manager will not be
separately compensated by the Company other than through the Share Option Plan.
Upon the closing of the Offering, the Company will establish an Audit
Committee of the Board of Trust Managers. The Audit Committee will be composed
of the Independent Trust Managers, and will be responsible for reviewing the
functions of the Company's management, the Manager and the Company's
independent auditors pertaining to the Company's financial statements, and
performing such other duties and functions as are deemed appropriate by the
Audit Committee or the Board of Trust Managers.
The Declaration of Trust provides for the indemnification of the Trust
Managers, officers, employees, and controlling Persons of the Company to the
fullest extent permitted by Texas law. The Texas REIT Act generally permits
the indemnification of a trust manager, officer, employee, or agent of a real
estate investment trust, who was,
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<PAGE> 76
is or is threatened to be made a named defendant or respondent in a proceeding
because of the Person's affiliation with the real estate investment trust only
if that Person: (i) conducted himself in good faith; (ii) reasonably believed:
(a) in the case of conduct in his official capacity, that his conduct was in
the real estate investment trust's best interest; and (b) in all other cases,
that his conduct was at least not opposed to the real estate investment trust's
best interest; and (iii) in the case of any criminal proceeding, had no
reasonable cause to believe that his conduct was unlawful. Furthermore, except
to the extent permitted by the Texas REIT Act, such Person may not be
indemnified in respect of a proceeding (i) in which the Person is found liable
on the basis that personal benefit was improperly received by him, whether or
not the benefit resulted from an action taken in the Person's official
capacity; or (ii) in which the Person is found liable to the real estate
investment trust.
If, in connection with a proceeding against the real estate investment
trust, such Person is found liable to the real estate investment trust or is
found liable on the basis that personal benefit was improperly received by the
Person, the indemnification (i) is limited to reasonable expenses actually
incurred by the Person in connection with the proceeding and (ii) shall not be
made to a Person that has been found liable for willful or intentional
misconduct in the performance of his duty to the real estate investment trust.
The Texas REIT Act also provides that the real estate investment trust
may indemnify Persons who are not or were not officers, employees, or agents of
the real estate investment trust but who are or were serving at the request of
the real estate investment trust as a trust manager, director, officer,
partner, venturer, proprietor, trustee, employee, agent or similar functionary
of another real estate investment trust or of a foreign or domestic
corporation, partnership, or other enterprise to the same extent that it may
indemnify its own trust managers, officers, employees, or agents.
Pursuant to the Texas REIT Act and the Declaration of Trust, no Trust
Manager will be liable for any act, omission, loss, damage or expense arising
from his or her duty to the Company, except for such Trust Manager's own
willful misfeasance, willful malfeasance or gross negligence. Under the Texas
REIT Act, a trust manager is not subject to any liabilities imposed by law upon
trust managers of a real estate investment trust nor liable for any claims or
damages that may result from his acts in the discharge of any duty imposed or
power conferred upon him by the real estate investment trust, if, in the
exercise of ordinary care, he acted in good faith and in reliance upon
information, opinions, reports or statements, including financial statements
and other financial data, concerning the real estate investment trust or
another Person, that were prepared or presented by: (i) one or more officers
or employees of the real estate investment trust, other than the real estate
investment trust manager; (ii) legal counsel, public accountants, investment
bankers, or other Persons as to matters the trust manager reasonably believes
are within the Person's professional or expert competence; or (iii) a committee
of the trust managers of which the trust manager is not a member.
EXECUTIVE COMPENSATION
The Company has not paid and does not intend to pay annual
compensation to the Company's executive officers for their services as
executive officers. This policy may be changed, however, by a vote of the
Trust Managers without notice to or approval by the shareholders. The Company
intends, upon closing of the Offering, to grant options to purchase Common
Shares to the Manager. The Company also intends upon closing of the Offering,
to grant options to purchase Common Shares to executive officers and key
employees of the Manager and the Company. See "--Share Options Outstanding."
The Company may from time to time, in the discretion of the Independent Trust
Managers, grant additional options to purchase Common Shares to the Manager,
its officers or employees or to the executive officers and Trust Managers of
the Company pursuant to the Share Option Plan.
SHARE OPTION PLAN
The Company will adopt a share option plan (the "Share Option
Plan") that will provide for the grant of qualified incentive share options
("ISOs") that meet the requirements of Section 422 of the Code, non-qualified
share options and restricted share awards having such vesting or forfeiture
provisions and other material terms as the Board
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<PAGE> 77
of Trust Managers shall determine. ISOs may be granted to the employees of the
Company. Nonqualified share options may be granted to the Trust Managers,
officers, directors and any key employees of the Company and to the Manager and
its officers and key employees. The exercise price for any ISO granted under
the Share Option Plan may not be less than 100% of the fair market value of the
Common Shares at the time the option is granted. The purpose of the Share
Option Plan is to provide a means of performance-based compensation to the
Manager and its officers and key employees and to the officers, directors,
Trust Managers and key employees of the Company in order to attract and retain
qualified personnel and to provide an incentive to others whose job performance
affects the Company.
Subject to anti-dilution provisions for share splits, share
dividends and similar events, the Share Option Plan authorizes the grant of
options to purchase Common Shares and restricted Common Shares up to an
aggregate of 15% of the outstanding Common Shares. If an option granted under
the Share Option Plan expires or terminates, the Common Shares subject to any
unexercised portion of that option will again become available for the issuance
of further options under the Share Option Plan. Unless previously terminated
by the Board of Trust Managers, the Share Option Plan will terminate ten years
from its effective date, and no options may be granted under the Share Option
Plan thereafter.
The Share Option Plan will be administered by a committee of the
Board of Trust Managers comprised of the Independent Trust Managers (the
"Compensation Committee"). Except for the grant of options issuable upon the
closing of the Offering described below, options granted under the Share Option
Plan will become exercisable in accordance with the terms of the grant made by
the Compensation Committee. The Compensation Committee has discretionary
authority to determine at the time an option is granted whether it is intended
to be an ISO or a non-qualified option, and when and in what increments Common
Shares covered by the option may be purchased.
Under current law, ISOs may not be granted to any Person who is
not a full-time employee of the Company or to directors, officers and other
employees of entities unrelated to the Company. In addition, no options may be
granted under the Share Option Plan to any Person (other than AMRESCO and its
Affiliates) who, assuming exercise of all options held by such Person, would
own or be deemed to own more than 9.8% of the outstanding Common Shares.
Each option must terminate no more than ten years from the date
it is granted. Options may be granted on terms providing that they will be
exercisable in whole or in part at any time or times during their respective
terms, or only in specified percentages at stated time periods or intervals
during the term of the option.
The exercise price of any option granted under the Share Option
Plan is payable in full (i) by cash, (ii) by surrender of Common Shares having
a market value equal to the aggregate exercise price of all shares to be
purchased, (iii) by cancellation of indebtedness owed by the Company to the
optionholder, (iv) by a promissory note executed by the optionholder, or (v) by
any combination of the foregoing.
The Board of Trust Managers may, without affecting any
outstanding options or restricted share awards, from time to time revise or
amend the Share Option Plan, and may suspend or discontinue it at any time.
However, no such revision or amendment may increase the number of Common Shares
subject to the Share Option Plan (with the exception of adjustments resulting
from changes in capitalization), reduce the minimum option price specified
therein, increase the maximum permissible term of any option specified therein
or remove responsibility for administering the Share Option Plan from the Board
of Trust Managers or the Compensation Committee without shareholder approval.
SHARE OPTIONS OUTSTANDING
Upon the closing of the Offering, the Company will grant to the
Manager options to purchase 2,222,233 Common Shares. 1,555,563 of the Common
Shares issuable upon the exercise of such options may be purchased at the
initial public offering price and the remaining 666,670 Common Shares may be
purchased for 125% of the
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<PAGE> 78
initial public offering price. All of such options vest ratably over a
four-year period commencing on the first anniversary of the closing of the
Offering, and will expire 10 years after the date of grant.
Upon the closing of the Offering, the Company intends to grant
options to purchase up to an additional ________ Common Shares to officers and
key employees of the Company and the Manager. Such options will be exercisable
at the initial public offering price and will vest ratably over a four-year
period beginning one year after the date of grant.
Upon the closing of the Offering, each Independent Trust Manager
will receive an initial grant of options to purchase up to _______ Common
Shares at the initial public offering price. These options will vest ratably
over a four-year period beginning one year from the date of grant and expire 10
years from the date of grant. Any Independent Trust Manager newly elected to
the Board of Trust Managers thereafter may receive an identical grant at the
fair market value on the date of grant.
The following table sets forth the share options expected to be
outstanding upon the closing of the Offering:
SHARE OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
====================================================================================================================================
Individual Grants
- -------------------------------------------------------------------------------------------------- Potential Realizable Value At
Assumed Annual Rates Of Stock
Percent Of Price Appreciation For Option
Number of Total Term
Securities Options/
Underlying SARs Granted To
Option/SARs Employees Exercise Or Base Expiration
Name Granted (#) In Fiscal Year Price ($/Sh) Date 5% ($) 10% ($)
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<S> <C> <C> <C> <C> <C> <C>
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</TABLE>
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THE MANAGER
The day-to-day operations of the Company will be managed by
AMREIT Managers, L.P., a newly formed member of the AMRESCO Group, pursuant to
the Management Agreement, which will become effective upon the closing of the
Offering. Mr. Mark D. Gibson, President, Chief Executive Officer and a Trust
Manager of the Company will serve as President and Chief Executive Officer of
the Manager. Each of the other executive officers of the Company described
under "Management of the Company" will also hold the same positions with the
Manager. Of the senior executive officers of the Manager, the Chief Investment
Officer, the Chief Operating Officer and the Controller will be full-time
employees of the Manager. Otherwise, the Manager intends to rely heavily upon
the employees and other resources of the AMRESCO Group to fulfill its
obligations under the Management Agreement. For a description of the Manager's
obligations under the Management Agreement, see "--The Management Agreement."
DESCRIPTION OF THE AMRESCO GROUP
The AMRESCO Group is a diversified financial services company
specializing in real estate lending, specialized commercial finance, and the
acquisition, resolution and servicing of nonperforming and underperforming
commercial real estate loans. During 1997, the AMRESCO Group derived its
earnings from four principal lines of business: residential mortgage banking
(33%), asset management (32%), commercial mortgage banking (21%) and commercial
finance (14%). At December 31, 1997, the AMRESCO Group employed approximately
1,600 persons. In order to fulfill its obligations under the Management
Agreement, the Manager expects to rely significantly on the AMRESCO Group for
administrative support and for expertise in the areas described below. See
"Business and Strategy--Strategy" and "Risk Factors--Dependence on the Manager
and the AMRESCO Group for Operations and the Lack of Experience of the Manager
May Adversely Affect Operating Results."
COMMERCIAL MORTGAGE BANKING
General. The AMRESCO Group performs a wide range of commercial
mortgage banking services, including originating, underwriting, placing,
selling, securitizing and servicing commercial real estate loans through
Holliday Fenoglio Fowler, AMRESCO Capital and AMRESCO Services.
Real Estate Capital Markets. Holliday Fenoglio Fowler, which was
the fifth largest commercial mortgage banking company in the United States in
1996 based on origination volume (according to the National Real Estate
Investor's Top Lender Survey), is engaged in three primary lines of business:
real estate related debt placement (which involves assisting real estate
developers and owners in obtaining non-Participating Mortgage Loans, including
Permanent Mortgage Loans, Bridge Loans and Construction Loans), real estate
investment banking (which involves assisting real estate developers and owners
in obtaining Participating Loans, Mezzanine Loans and other types of
non-traditional real estate financing) and real estate dispositions (which
involves brokering sales of institutional grade assets to pension funds, REITs
and private investors). In January 1998, Holliday Fenoglio Fowler significantly
expanded its operations by acquiring the mortgage banking business of Fowler,
Goedecke, Ellis & O'Connor Incorporated ("Fowler Goedecke"). Pursuant to such
acquisition, Holliday Fenoglio Fowler acquired five of its current 17 offices
and 17 of its current 96 mortgage bankers. Subsequent to such acquisition,
Holliday Fenoglio Fowler changed its name to reflect the Fowler Goedecke
acquisition. Mortgage Loans and other real estate financings originated by
Holliday Fenoglio Fowler have historically been funded by institutional lenders,
principally insurance companies, pension funds and other investment funds, and
by AMRESCO Capital and other conduit purchasers. Real estate related investments
originated by Holliday Fenoglio Fowler during 1997 (without giving effect to the
Fowler Goedecke acquisition) were placed with approximately 128 different
lenders. During 1997, Holliday Fenoglio Fowler closed over $6.0 billion in 706
real estate transactions (including only those transactions actually closed by
Holliday Fenoglio Fowler during 1997 and not those closed by Fowler Goedecke
during 1997). The transactions closed by Holliday Fenoglio Fowler during 1997,
1996 and 1995 included the following types of transactions (without giving
effect to the Fowler Goedecke acquisition):
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<TABLE>
<CAPTION>
Holliday Fenoglio Fowler
------------------------------------------
(in millions) Real Estate Transactions
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Permanent Mortgage Loans $3,650 $2,022 $1,408
Mezzanine Loans 933 304 225
Bridge Loans 312 221 134
Construction Loans 267 197 240
Real Estate Dispositions 892 386 185
------ ------ ------
Total $6,054 $3,130 $2,193
====== ====== ======
</TABLE>
Pursuant to the Correspondent Agreement, Holliday Fenoglio Fowler
will be obligated to present Targeted Investments to the Company (on a
non-exclusive basis). The Company believes that a substantial portion of the
Invested Portfolio will be identified through Holliday Fenoglio Fowler pursuant
to the Correspondent Agreement.
Commercial Real Estate Lending. AMRESCO Capital originates,
underwrites and securitizes commercial Mortgage Loans. AMRESCO Capital serves
its market directly through branch offices, as well as through a network of
independent mortgage brokers, including Holliday Fenoglio Fowler. AMRESCO
Capital is approved by Fannie Mae to participate in its Delegated Underwriting
and Servicing ("DUS") program, which AMRESCO Capital believes makes it a more
competitive Mortgage Loan originator and underwriter of multifamily Mortgage
Loans. AMRESCO Capital is also an approved lender in the FHLMC multifamily
seller/servicer program in the states of Florida, New York, North Carolina and
South Carolina.
AMRESCO Capital warehouses the commercial Mortgage Loans it
acquires or originates for securitization and sale as MBS. The AMRESCO Group
accumulates commercial Mortgage Loans until the pool of Mortgage Loans is of a
sufficient size (generally in excess of $400 million) to allow for an efficient
securitization in the public markets. The AMRESCO Group completed a single
securitization in 1997 relating to approximately $480.1 million of commercial
Mortgage Loans.
Commercial Loan Servicing. Through AMRESCO Services, the AMRESCO
Group serves as a primary servicer for whole commercial Mortgage Loans and
securitized pools of commercial Mortgage Loans, and as a Master Servicer for
securitized pools of commercial Mortgage Loans. As a primary servicer for
whole commercial Mortgage Loans and securitized pools of commercial Mortgage
Loans, AMRESCO Services is currently rated by Standard & Poor's as "strong,"
its highest rating category. As a commercial Master Servicer, AMRESCO Services
is rated by Standard & Poor's as "above average," which is the highest rating
ever awarded by Standard & Poor's in the commercial Master Servicer category.
All other Rating Agencies which have rated AMRESCO Services as either a primary
servicer or a Master Servicer have given AMRESCO Services their highest rating.
At December 31, 1997, AMRESCO Services acted as servicer with respect to
approximately $20.2 billion of Mortgage Loans.
The Manager expects to rely heavily on the expertise of the
Commercial Mortgage Banking division of the AMRESCO Group in the performance of
its duties under the Management Agreement.
COMMERCIAL FINANCE
General. Through its commercial finance group, the AMRESCO Group
focuses on (i) loans to franchisees of nationally recognized restaurant,
hospitality and service organizations, (ii) special situation lending, with an
emphasis on the real estate and communications industries, and (iii)
single-family residential construction lending. Loans originated by the
franchise lending operation are sold to third parties, principally through
securitization, while the real estate, communications and single-family
residential loans are generally retained for the AMRESCO Group's own portfolio.
Other ancillary products, services and investments provided by the commercial
finance group include equipment leasing, small business lending and loan
servicing.
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<PAGE> 81
The Manager expects to benefit from the expertise of the
commercial finance division of the AMRESCO Group, and to have co-investment
opportunities with such group.
Franchise Lending. AMRESCO Commercial Lending Corporation
("ACLC") specializes primarily in the origination of loans to operators of
nationally known franchise concepts and has loan producers in Idaho, Colorado,
Michigan, Oklahoma, Kansas and Georgia. ACLC funds these loans through a
warehouse borrowing facility until they are securitized and sold to investors,
with ACLC retaining the right to service the loans. ACLC also underwrites and
originates commercial real estate loans outside this core concept that are
funded by third party conduit purchasers. ACLC completed two loan
securitizations in 1997 which totalled approximately $298 million.
Specialty Lending. Through AMRESCO Funding, the AMRESCO Group
provides mid-to-high yield Mortgage Loans (including Participating Loans,
Mezzanine Loans, Construction Loans and Bridge Loans) the structures of which
typically do not meet the underwriting criteria of traditional institutional
lenders. Currently, the AMRESCO Group lends primarily to the real estate and
communications industries from production offices in Texas, California, Oregon,
Rhode Island, Virginia and Canada. The specialty lending division of the
AMRESCO Group began operations in August 1995. Between August 1995 and December
31, 1997, AMRESCO Funding originated 63 loans totalling $358.4 million, and at
December 31, 1997, AMRESCO Funding had approximately $145.3 million in
outstanding loans, on commitments of approximately $186 million. AMRESCO will
grant to the Company, upon the closing of the Offering, the Right of First
Refusal pursuant to which, among other things, AMRESCO will agree not to permit
AMRESCO Funding or any other member of the AMRESCO Group to invest in the first
$100 million of Targeted Mortgage Loans identified by or to any member of the
AMRESCO Group during any calendar quarter, unless the Company's Investment
Committee shall have first determined that the Company should not invest in such
asset or assets, or should invest in only a portion of such asset or assets.
Single-Family Residential Construction Lending. AMRESCO Builders
Group provides construction financing to builders of homes for first time and
first move-up buyers. The AMRESCO Group targets experienced homebuilders
starting between approximately 100 and 1,500 units per year that have proven
construction and sales expertise. AMRESCO Builders Group is headquartered in
Houston, Texas, and has loan production offices in California, Arizona, Nevada,
Colorado, Georgia and Florida. AMRESCO Builders Group also provides a limited
amount of acquisition and development lending for residential lots to
facilitate its construction loan program. As of December 31, 1997, AMRESCO
Builders Group had advanced approximately $65.5 million of residential
construction loans on commitments of approximately $114.6 million.
ASSET MANAGEMENT
General. The AMRESCO Group manages and resolves Asset Portfolios
and provides Special Servicing for nonperforming and underperforming Mortgage
Loans in commercial mortgage-backed bond trusts and similar securitized
commercial asset-backed Mortgage Loan portfolios. The AMRESCO Group also
provides real estate investment advice to various institutional investors
(primarily pension funds) seeking to invest in real estate and related
investments. The Manager expects to utilize the expertise of the asset
management division of the AMRESCO Group for the benefit of the Company,
including primarily its servicing expertise. See "--The Management Agreement."
Asset Portfolio Management and Investment. The AMRESCO Group
manages and resolves Asset Portfolios acquired at a discount to face value by
the AMRESCO Group alone and by the AMRESCO Group with co-investors. The
AMRESCO Group also manages and resolves Asset Portfolios owned by third
parties. Asset Portfolios generally include secured loans of varying qualities
and collateral types including fee-owned real estate. The majority of the
loans in the Asset Portfolios in which the AMRESCO Group invests are in payment
default at the time of acquisition. While the majority of the Asset Portfolios
are located in the United States, the AMRESCO Group has opened offices in
Toronto and London through which it pursues Asset Portfolio acquisition
opportunities and manages its
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<PAGE> 82
investments in Canada and Western Europe. At December 31, 1997, the face value
of the Company's total investment in wholly-owned Asset Portfolios aggregated
approximately $606.9 million, which was composed of approximately $431.1
million (71%) of collateralized business loans, approximately $91.0 million
(15%) of asset-backed securities, approximately $84.8 million (14%) of real
estate.
Special Servicing. The AMRESCO Group provides Special Servicing
to commercial mortgage-backed bond trusts and similar securitized commercial
asset-backed loan portfolios in respect of nonperforming or underperforming
assets included in such trusts or portfolios. As a Special Servicer, the
AMRESCO Group receives an annual fee (typically, approximately 50 basis points
of the face value of the delinquent or nonperforming loan being serviced), plus
a 75 to 100 basis points fee based on the total cash flow from resolution of
each loan as it is received. The AMRESCO Group has received a superior rating
from Standard & Poor's, the highest rating currently given by that rating
agency for Special Servicers such as the AMRESCO Group. As of December 31,
1997, the AMRESCO Group was the designated Special Servicer for securitized
pools holding approximately $13.5 billion face value of loans, of which $459.2
million (face value) had been assigned to the AMRESCO Group for resolution.
THE MANAGEMENT AGREEMENT
The Company will enter into the Management Agreement with the
Manager at the closing of the Offering. The Management Agreement will have an
initial term (the "Initial Term") of two years from the closing of the
Offering. The Management Agreement may be renewed at the end of the Initial
Term (and each successive term thereafter) for a period of one year, upon
review and approval by a majority of the Independent Trust Managers. If the
Independent Trust Managers do not vote to terminate or renew at least 90 days
prior to the end of the then current period, the Management Agreement will
automatically renew for a one-year period. The Manager will be primarily
involved in three activities: (i) underwriting, originating and acquiring real
estate related assets; (ii) asset/liability management, financing, hedging,
management and disposition of assets, including credit and prepayment risk
management; and (iii) capital management, oversight of the Company's
structuring, analysis, capital raising and investor relations activities. In
conducting these activities, the Manager will formulate operating strategies
for the Company, arrange for the acquisition of Targeted Investments by the
Company, arrange for various types of financing for the Company, monitor the
performance of the Company's Invested Portfolio and provide administrative and
managerial services in connection with the operation of the Company. The
Management Agreement requires the Manager to manage the business affairs of the
Company in conformity with the policies and Guidelines that are approved and
monitored by the Board of Trust Managers. The Manager will be required to
prepare regular reports for the Board of Trust Managers that will review the
Company's acquisitions of Targeted Investments, portfolio composition and
characteristics, credit quality, performance and compliance with the policies
approved by the Board of Trust Managers. If the Manager breaches its
obligations under the Management Agreement (including a breach of its
obligation to manage the business affairs of the Company in conformity with the
Guidelines), or certain other events occur, which breach or events constitute
"cause" as defined in the Management Agreement, the Company may terminate the
Management Agreement upon 60 days' prior written notice, without payment of any
termination fee.
At all times, the Manager will be subject to the direction and
oversight of the Board of Trust Managers and will have only such functions and
authority as the Company may delegate to it. The Manager will be responsible
for the day-to-day operations of the Company and will perform services and
activities relating to the assets and operations of the Company, including,
without limitation, the following:
(i) providing a complete program of investing and reinvesting the
capital and assets of the Company in pursuit of its investment
objectives and in accordance with the Guidelines and policies
adopted by the Board of Trust Managers from time to time;
(ii) serving as the Company's consultant with respect to formulation
of investment criteria and policies and preparation of the
Guidelines by the Board of Trust Managers;
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<PAGE> 83
(iii) assisting the Company in developing criteria for asset purchase
commitments that are specifically tailored to the Company's
investment objectives and making available to the Company its
knowledge and experience with respect to Mortgage Loans, MBS,
real estate and other real estate related assets;
(iv) representing and making recommendations to the Company in
connection with the origination of Mortgage Loans, the purchase
and commitment to purchase and financing of Mortgage Loans, MBS,
real estate and other real estate related assets, the sale and
commitment to sell such assets (including the underwriting of
Mortgage Loans, the accumulation of Mortgage Loans for
securitization and arrangement for the issuance of MBS from pools
of Mortgage Loans owned by the Company);
(v) furnishing reports and statistical and economic research to the
Company regarding market conditions in the areas in which the
Company proposes to invest as well as the Company's activities
and the services performed for the Company by the Manager;
(vi) monitoring and providing to the Board of Trust Managers on an
ongoing basis market 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;
(vii) providing the executive and administrative personnel and office
space and office and administrative services required in
rendering services to the Company;
(viii) monitoring the operating performance of the Company's investments
and providing periodic reports with respect thereto to the Board
of Trust Managers, including comparative information with respect
to such operating performance and budgeted or projected operating
results;
(ix) administering the day-to-day operations of the Company and
performing and supervising the performance of such other
administrative functions necessary for the management of the
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 Company's debts and obligations and
maintenance of appropriate computer services to perform such
administrative functions;
(x) communicating on behalf of the Company with the holders of the
equity and debt securities of the Company as required to satisfy
the reporting and other requirements of any governmental bodies
or agencies and to maintain effective relations with such
holders;
(xi) counseling the Company in connection with policy decisions made
or to be made by the Board of Trust Managers;
(xii) advising the Company regarding its status as a REIT, consulting
with legal counsel as appropriate regarding the application of
the REIT Provisions of the Code to the proposed investments and
operations of the Company and monitoring compliance with the REIT
Provisions of the Code;
(xiii) advising the Company regarding the status of its exemption from
the Investment Company Act, consulting with legal counsel as
appropriate regarding the nature of its proposed investments and
the impact thereof on the Company's exemption from registration
under such Act and monitoring the Company's continuing exemption
from registration thereunder;
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<PAGE> 84
(xiv) 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 Company,
consistent with the Company's status as a REIT and the
Guidelines;
(xv) upon request by and in accordance with the Board of Trust
Managers, investing or reinvesting any money of the Company, and
advising the Company as to its capital structure and capital
raising;
(xvi) causing the 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 Code and to conduct quarterly
compliance reviews with respect thereto;
(xvii) causing the Company to qualify to do business in all applicable
jurisdictions;
(xviii) assisting the Company in complying with all regulatory
requirements applicable to the Company in respect of its business
activities, including 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 Exchange Act;
(xix) taking all necessary actions to enable the Company to make
required tax filings and reports, including soliciting
shareholders for required information to the extent provided in
the REIT Provisions of the Code;
(xx) handling and resolving all claims, disputes or controversies
(including all litigation, arbitration, settlement or other
proceedings or negotiations) in which the Company may be involved
or to which the Company may be subject arising out of the
Company's day-to-day operations, subject to such limitations or
parameters as may be imposed from time to time by the Board of
Trust Managers;
(xxi) using commercially reasonable efforts to cause expenses incurred
by or on behalf of the Company to be reasonable or customary and
within any budgeted parameters or Guidelines set by the Board of
Trust Managers from time to time;
(xxii) performing such other services as may be required from time to
time for management and other activities relating to the assets
of the Company as the Board of Trust Managers shall reasonably
request or the Manager shall deem appropriate under the
particular circumstances; and
(xxiii) using commercially reasonable efforts to cause the Company to
comply with all applicable laws.
The Manager will perform portfolio management services on behalf
of the Company pursuant to the Management Agreement with respect to the
Company's investments. Such services will include, but not be limited to,
consulting with the Company on purchase, sale and other opportunities,
collection of information and submission of reports pertaining to the Company's
assets, interest rates, and general economic conditions, periodic review and
evaluation of the performance of the Company's portfolio of assets, acting as
liaison between the Company and banking, mortgage banking, investment banking
and other parties with respect to the purchase, financing and disposition of
assets, and other customary functions related to portfolio management. The
Manager may enter into subcontracts with other parties, including the AMRESCO
Group, to provide any such services to the Company.
The Manager will perform monitoring services on behalf of the
Company pursuant to the Management Agreement with respect to loan servicing
activities provided by third parties and with respect to the Company's
portfolio of Special Servicing Rights. Such monitoring services will include,
but not be limited to, the following activities: negotiating Special Servicing
agreements; acting as a liaison between the servicers of the Mortgage Loans
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<PAGE> 85
and the Company; review of servicers' delinquency, foreclosure and other
reports on Mortgage Loans; supervising claims filed under any mortgage
insurance policies; and enforcing the obligation of any servicer to repurchase
Mortgage Loans. The Manager may enter into subcontracts with other parties,
including its affiliates, to provide any such services for the Manager.
The Manager expects to rely heavily on the resources and
expertise of the AMRESCO Group to fulfill its obligations under the Management
Agreement. See "Risk Factors--Dependence on the Manager and the AMRESCO Group
for Operations and the Lack of Experience of the Manager May Adversely Affect
Operating Results."
Pursuant to the Management Agreement, the Manager has agreed, at
all times during which it is serving as manager of the Company, to maintain a
tangible net worth of at least $250,000. In addition, the Manager has agreed
to maintain "errors and omissions" insurance coverage (which may be provided by
a policy or policies maintained through, and providing coverage for, other
members of the AMRESCO Group) in an amount which is comparable to that
customarily maintained by other managers or servicers of other assets similar
to those held by the Company.
TERMINATION
During the Initial Term, the Management Agreement may not be
terminated except by the Company (upon a majority vote of the Independent Trust
Managers) as a result of "cause" as defined therein. After the Initial Term,
the Management Agreement may be terminated at any time by the Company upon at
least 90 days prior written notice to the Manager or by the Manager upon at
least 180 days prior written notice to the Company.
Upon termination of the Management Agreement by the Company after
the Initial Term (except in the case of a termination by the Company for cause)
or failure of the Company to renew the Management Agreement after the Initial
Term (except in the case of a termination by the Company for cause), the
Company will be obligated to pay the Manager a substantial termination fee.
The termination fee will be equal to the sum of the Base Management
Compensation (which would be $7 million in the hypothetical circumstances
described below) plus any Incentive Compensation earned by the Manager during
the four calendar quarters immediately preceding the termination. The payment
of such a fee would adversely affect the results of the Company's operations.
In addition, upon termination of the Management Agreement (if no member of the
AMRESCO Group is serving as manager of the Company), the Right of First Refusal
and the Correspondent Agreement may be terminated by the AMRESCO Group. See
"Risk Factors--Termination of the Management Agreement Could Adversely Affect
the Company's Investments and Operating Results."
The Management Agreement may be assigned by the Manager to an
Affiliate without the consent of the Company. The Management Agreement may be
assigned to a non-Affiliate only with the approval of a majority of the
Independent Trust Managers.
MANAGEMENT COMPENSATION
The Manager will receive the Base Management Fee calculated and
payable quarterly in an amount equal to (i) 1% per annum of the "Average
Invested Non-Investment Grade Assets" of the Company for such quarter and (ii)
0.50% per annum of the "Average Invested Investment Grade Assets" of the
Company for such quarter. "Average Invested Non-Investment Grade Assets"
means, for any quarter, the average of the aggregate book value of (i) all
assets of the Company on a consolidated basis (as reflected on the Company's
balance sheet), excluding the Company's investment in its nonconsolidated
taxable subsidiaries and (ii) all assets of the Company's taxable subsidiaries
(excluding from (i) and (ii) all Average Invested Investment Grade Assets)
before reserves for
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<PAGE> 86
depreciation or bad debts or other similar noncash reserves, computed by
dividing (a) the sum of such values for each of the three months during such
quarter (based on the book value of such assets as of the last day of each
month) by (b) three. "Average Invested Investment Grade Assets" means, for any
quarter, the average of the aggregate book value of (i) all assets of the
Company on a consolidated basis (as reflected on the Company's balance sheet),
excluding the Company's investment in its nonconsolidated taxable subsidiaries
and (ii) all assets of the Company's nonconsolidated taxable subsidiaries, in
each case which either (a) have received an Investment Grade Rating from all
Rating Agencies which have rated such assets or (b) are unrated but are
guaranteed by the U.S. government or any agency or instrumentality thereof
before reserves for depreciation or bad debts or other similar noncash
reserves, computed by dividing (A) the sum of such values for each of the three
months during such quarter (based on the book value of such assets as of the
last day of each month) by (B) three. The Base Management Fee is payable in
arrears. For example, if the Company had $650 million of Average Invested
Non-Investment Grade Assets and $100 million of Average Invested Investment
Grade Assets consistently during each calendar quarter of any one year period,
the Manager would be entitled to a Base Management Fee for such year of $7
million.
In addition to its Base Management Fee, the Manager will be
entitled to receive Incentive Compensation for each fiscal quarter in an amount
equal to the product of (A) 25% of the dollar amount by which (1)(a) Funds From
Operations (before the Incentive Compensation) of the Company per weighted
average number of Common Shares outstanding for such quarter plus (b) gains (or
minus losses) from debt restructuring and sales of property per weighted
average number of Common Shares, exceed (2) an amount equal to (a) the weighted
average of the price per share at the initial offering and the prices per share
of any subsequent issuances of Common Shares by the Company multiplied by (b)
the Ten-Year U.S. Treasury Rate for such quarter, plus 3.5% multiplied by (B)
the weighted average number of Common Shares outstanding during such period.
"Funds From Operations" as defined by the National Association of Real Estate
Investment Trusts ("NAREIT") means net income (computed in accordance with
GAAP) excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. As used in
calculating the Manager's compensation, the term "Ten Year U.S. Treasury Rate"
means the arithmetic average of the weekly average yield to maturity for
actively traded current coupon U.S. Treasury fixed interest rate securities
(adjusted to constant maturities of ten years) published by the Federal Reserve
Board during a quarter, or, if such rate is not published by the Federal
Reserve Board, any Federal Reserve Bank or agency or department of the federal
government selected by the Company. If the Company determines in good faith
that the Ten Year U.S. Treasury Rate cannot be calculated as provided above,
then the rate shall be the arithmetic average of the per annum average yields
to maturities, based upon closing asked prices on each business day during a
quarter, for each actively traded marketable U.S. Treasury fixed interest rate
security with a final maturity date not less than eight nor more than 12 years
from the date of the closing asked prices as chosen and quoted for each
business day in each such quarter in New York City by at least three recognized
dealers in U.S. government securities selected by the Company.
The ability of the Manager to earn the Incentive Compensation
described in the preceding paragraph, is dependent upon the level of credit
losses, the level and volatility of interest rates, the Company's ability to
react to changes in interest rates and to utilize successfully the operating
strategies described herein, and other factors, many of which are not within
the Company's control.
Base Management Fees and Incentive Compensation are payable in
arrears. Such amounts will be calculated by the Manager within 45 days after
the end of each quarter, and paid by the Company within 60 days after the end
of each quarter. In connection with its audit of the Company's financial
statements, an annual review of Base Management Fees and Incentive Compensation
will be conducted by the Company's independent auditors, with adjustment to be
made to fourth quarter fees if it is determined that fees for any preceding
quarter of the year were not correctly determined. The Manager will not
receive any Base Management Fee for the period prior to the sale of the Common
Shares offered hereby.
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<PAGE> 87
The Manager is expected to use the proceeds from its Base
Management Fee and Incentive Compensation in part to pay compensation to its
officers and employees who, notwithstanding that certain of them also are
officers of the Company, will initially receive no cash compensation directly
from the Company.
The Company expects to rely primarily on the facilities,
personnel and resources of the Manager and other members of the AMRESCO Group
to conduct its operations. The Manager will be reimbursed for (or charge the
Company directly for) the Manager's costs and expenses in employing
third-parties, including Affiliates of the Manager, to perform due diligence,
underwriting and other tasks with respect to assets purchased or originated, or
considered for purchase or origination by the Company. Further, the Manager
will be reimbursed for any expenses incurred in contracting with third parties,
including Affiliates of the Manager, for the Special Servicing of assets of the
Company. Such arrangements may also be made using an income sharing
arrangement such as a joint venture. Expense reimbursement will be made
quarterly.
The Company will adopt the Share Option Plan pursuant to which
the Manager will be granted and certain directors, officers and any employees
of the Manager and the Company may be granted options to purchase Common
Shares. See "Management of the Company--Share Options Outstanding."
EXPENSES
The Company will be required to pay all offering expenses
(including accounting, legal, printing, clerical, filing and other expenses)
incurred by the Company, the Manager or its Affiliates on behalf of the Company
in connection with the Offering, estimated at $1,300,000 (exclusive of
underwriting discounts and commissions).
Subject to the limitations set forth below, the Company will also
pay all operating expenses except those specifically required to be borne by
the Manager under the Management Agreement (including salary, wages, payroll
taxes and the cost of employee benefit plans for such personnel). The
operating expenses required to be borne by the Manager (or other members of the
AMRESCO Group) include the compensation of the Manager's officers and
employees, the cost of office space, telephone, utilities and equipment and
other expenses required for the Company's day-to-day operations, including
accounting, clerical, Mortgage Loan primary or Master Servicing (including all
expenses customarily paid by Master Servicers in performing Master Servicing
for third parties) and back office services provided by the Manager or its
Affiliates. The expenses that will be paid by the Company will include (but
not necessarily be limited to) issuance and transaction costs incident to the
acquisition, disposition and financing of investments, legal and auditing fees
and expenses, the compensation and expenses of the Independent Trust Managers,
the costs associated with the establishment and maintenance of any credit
facilities and other indebtedness of the Company (including commitment fees,
legal fees, closing costs, etc.), or any other securities offerings of the
Company, the costs of printing and mailing proxies and reports to shareholders,
costs incurred by employees of the Manager for travel on behalf of the Company,
costs associated with any computer software or hardware that is used solely for
the Company, costs to obtain liability insurance to indemnify the Company's
Trust Managers and officers and the compensation and expenses of the Company's
custodian and transfer agent, if any. The Company will also be required to pay
all expenses incurred in connection with due diligence of certain assets or
transactions (provided that such assets or transactions which were
preliminarily approved for investment by the Chief Investment Officer or the
Board of Trust Managers prior to the time such costs were incurred), the
underwriting and accumulation of Mortgage Loans, the Special Servicing of
Mortgage Loans, the issuance and administration of MBS from pools of Mortgage
Loans or otherwise, the raising of capital, incurrence of debt, the acquisition
of assets, interest expenses, taxes and license fees, non-cash costs,
litigation or other dispute resolution, the Base Management Fee and Incentive
Compensation and extraordinary or non-recurring expenses. Such services may be
provided to the Company by Affiliates of the Manager if the Manager believes
such services are of comparable or superior quality to those provided by third
parties and can be provided at comparable cost. Pursuant to the Guidelines,
fees charged to the Company by members of the AMRESCO Group for services
provided will be reasonable and customary and no more than such member of the
AMRESCO Group would charge an unaffiliated third party for such services. The
Company will reimburse the Manager for expenses within 60 days after the end of
each quarter, following receipt of written certification from the Manager as to
the amount of expenses incurred. The Board of Trust Managers will
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periodically review the Company's expense levels, the division of expenses
between the Company and the Manager and reimbursements of expenses advanced by
the Manager. Before incurring extraordinary expenses on behalf of the Company
(typically in excess of $500,000 for one asset or one transaction) the Manager
will seek advance approval from the Board of Trust Managers.
Because employees of the Manager and its Affiliates will perform
certain due diligence investigations that purchasers of real estate related
assets (including managers of REITs) typically hire outside consultants or
professionals to perform, the Manager will be reimbursed for (or charge the
Company directly for) the Manager's out-of-pocket costs in performing such due
diligence (subject to the preapproval requirements set forth above with respect
to extraordinary costs). In addition, certain legal and other services
typically performed by third party professionals may be performed by employees
of Affiliates of the Manager to the extent the Manager determines in good faith
that the requisite expertise is available through the Manager or other members
of the AMRESCO Group and that such services are superior in quality to those
available from third parties or that cost savings or other efficiencies arise
from the use of such employees rather than third party service providers. The
Manager and its affiliates will track the time their respective employees spend
on due diligence investigations and on legal and other services typically
provided by outside consultants or third party professionals and will be
entitled to reimbursement for the allocable portion of salary and benefits of
such employees.
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST
The Company, on the one hand, and the Manager and other members
of the AMRESCO Group, on the other, may enter into a number of relationships
other than those governed by the Management Agreement, some of which may give
rise to conflicts of interest between the Manager and other members of the
AMRESCO Group and the Company. Moreover, three of the seven members of the
Board of Trust Managers and all of the officers of the Company are also
employed by members of the AMRESCO Group. See "Risk Factors--Conflicts of
Interest May Result in Decisions That do Not Fully Reflect the Shareholders'
Best Interest."
The relationships between the Company, on the one hand, and the
Manager and other members of the AMRESCO Group, on the other, will be governed
by the Management Agreement, the Right of First Refusal, the Correspondent
Agreement, and the Guidelines. See "Business and Strategy--Relationship With
AMRESCO" for further description of the Guidelines. The Guidelines are to
assist and instruct the Manager and to establish restrictions applicable to
transactions with Affiliates of the Manager. Transactions with Affiliates of
the Manager (including the purchase of Targeted Investments from, or the
co-investment in Targeted Investments with, members of the AMRESCO Group) that
fall within the provisions of the Guidelines need not be specifically approved
by a majority of the Independent Trust Managers. The Independent Trust Managers
will review the Company's transactions on a quarterly basis to ensure compliance
with the Guidelines. Although the Independent Trust Managers will review the
Guidelines periodically and will monitor compliance with those Guidelines,
investors should be aware that, in conducting this review, the Independent Trust
Managers will rely primarily on information provided to them by the Manager.
Pursuant to the Correspondent Agreement, Holliday Fenoglio Fowler
will agree, so long as the Manager or any other member of the AMRESCO Group is
acting as manager of the Company, to present to the Company (on a nonexclusive
basis) Targeted Investments arising within Holliday Fenoglio Fowler which meet
the investment parameters and objectives of the Company. Pursuant to the Right
of First Refusal, AMRESCO will agree not to permit any member of the AMRESCO
Group to invest in (i) the first $100 million of Targeted Mortgage Loans
identified by or to any member of the AMRESCO Group during any calendar
quarter, or (ii) any MBS, other than MBS issued in securitizations sponsored in
whole or in part by any member of the AMRESCO Group, unless the Company's
Investment Committee shall have first determined that the Company should not
invest in such asset, or should invest in only a portion of such asset. The
Company believes that the Right of First Refusal will minimize conflicts of
interest and potential competition for Targeted Investments between the Company
and the AMRESCO
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Group. See "Business and Strategy--Operating Policies and
Guidelines--Relationship With AMRESCO." Except as provided in the Right of
First Refusal or the Correspondent Agreement, however, neither the Manager nor
any other member of the AMRESCO Group will have any obligation to make
investment opportunities available to the Company, nor will the Company have a
right of first refusal with respect thereto. As a consequence, the investment
opportunities for the Company may be limited if such investment opportunities
would be attractive to the Manager or other members of the AMRESCO Group.
AMRESCO has agreed that during the term of the Management
Agreement no member of the AMRESCO Group will (i) sponsor, (ii) act as manager
to or (iii) make any significant equity investment in, any other mortgage REIT
with investment objectives substantially similar to that of the Company,
without the prior approval of the Independent Trust Managers; otherwise, and
except pursuant to the Right of First Refusal (described above) there will be
no limits or restrictions on the right of the Manager, the AMRESCO Group or any
of their respective officers, directors, employees or Affiliates to engage in
any business or render services of any kind to any other Person, including the
purchase or origination of, or rendering advice to others purchasing, real
estate related assets that meet the Company's policies and criteria.
In addition to its Base Management Fee payable under the
Management Agreement, the Manager will have an opportunity to earn Incentive
Compensation, payable quarterly, based upon Funds From Operations of the
Company. As a result, in evaluating assets for investment and in implementing
the Company's other operating strategies, the Manager may place undue emphasis
on the maximization of income at the expense of other criteria, such as
preservation of capital, in order to achieve a higher Incentive Compensation
which could result in increased risk to the value of the Company's portfolio.
However, the Board of Trust Managers will evaluate the performance of the
Manager before entering into or renewing any management arrangement and the
Independent Trust Managers will review the Manager's compensation in relation
to the nature and quality of services performed. Any material changes in the
Company's investment and operating policies are required to be approved by the
Board of Trust Managers. See "Risk Factors--Conflicts of Interest May Result
in Decisions That do Not Fully Reflect the Shareholders' Best Interest" and
"--Future Revisions in Policies and Strategies."
Of the executive officers of the Company and the Manager, the
Chief Investment Officer, the Chief Operating Officer and the Controller are
full-time employees of the Manager. All other officers of the Company and the
Manager are also officers and/or employees of other members of the AMRESCO
Group. The Management Agreement does not specify a minimum amount of time that
the Manager or its officers or employees must devote to the Company's business.
See "Risk Factors--Conflicts of Interest May Result in Decisions That do Not
Fully Reflect the Shareholders' Best Interest."
Pursuant to the Private Placement, Holdings, a member of the
AMRESCO Group, will purchase 2,222,233 (2,555,567 if the Underwriters'
over-allotment option is separately exercised in full) Common Shares at a price
equal to the initial public offering price. See "Private Placement." As a
result of this purchase, the AMRESCO Group will own approximately 10% of the
total Common Shares outstanding after the Offering. Holdings has agreed not to
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose of any such Common Shares for a period of
two years from the closing of the Offering without the prior written consent of
Prudential Securities Incorporated on behalf of the Underwriters so long as the
Manager or another member of the AMRESCO Group continues to serve as manager of
the Company during such period. In addition, the Manager will receive options
to purchase Common Shares pursuant to the Company's Share Option Plan. See
"Management of the Company--Share Options Outstanding."
Directors, officers and employees of the Company, the Manager and
other members of the AMRESCO Group are expected to purchase up to 1,000,000
Common Shares pursuant to the Offering (or up to approximately 5% of the total
Common Shares offered hereby, exclusive of the Underwriters' over-allotment
option) at a price equal to the initial public offering price. The foregoing
parties have agreed not to sell any Common Shares or any rights to acquire
Common Shares to any unaffiliated third party for a period of 180 days from the
closing of the Offering without the consent of Prudential Securities
Incorporated. See "Underwriting." The Manager and its employees and
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the Independent Trust Managers may also receive options to purchase Common
Shares pursuant to the Company's Share Option Plan. See "Management of the
Company--Share Options Outstanding."
The market in which the Company expects to purchase Targeted
Investments is characterized by rapid evolution of products and services and,
thus, there may in the future be relationships between the Company, the
Manager, and other members of the AMRESCO Group in addition to those described
herein.
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager will not assume
any responsibility other than to undertake the services called for thereunder
and will not be responsible for any action of the Board of Trust Managers in
following or declining to follow its advice or recommendations. Neither the
Manager nor any member of the AMRESCO Group, nor any of their respective
directors or its officers will be liable to the Company, any issuer of MBS, any
subsidiary of the Company, the Independent Trust Managers, the Company's
shareholders or any other party for acts performed in accordance with and
pursuant to the Management Agreement, except by reason of acts constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement. The Manager does not have significant
assets and may not have significant assets in the future. Consequently, there
can be no assurance that the Company would be able to recover any damages for
claims it may have against the Manager.
The Company and AMRESCO have agreed to indemnify the Manager and
its directors, officers, employees and controlling Persons with respect to all
expenses, losses, damages, liabilities, demands, charges and claims arising
from any acts or omissions of the Manager or its employees made in good faith
in the performance of the Manager's duties under the Management Agreement and
not constituting bad faith, willful misconduct, gross negligence or reckless
disregard of its duties.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of ____________,
1998, relating to the beneficial ownership of the Common Shares by (i) all
Persons known by the Company to beneficially own more than 5% of the
outstanding Common Shares, (ii) each Trust Manager and (iii) all officers and
Trust Managers as a group.
<TABLE>
<CAPTION>
Name and Address of
Beneficial Amount and Nature of Percentage of Shares
Owner(1)(2) Beneficial Ownership Beneficially Owned
------------------- ----------------------------------- ----------------------------------
Before Offering After Offering Before Offering After Offering
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Holdings(4) . . . . . . . . . 0 shares 2,222,233 shares (5) 0% 10%(5)
AMRESCO(4) . . . . . . . . . 100 shares 100 shares 100% *
____________(3)(4) . . . . .
____________(3)(4) . . . . .
Officers and Trust Managers
as a Group (Persons)(3) . . 0 shares 1,000,000 shares 0% 5%
</TABLE>
- -----------------
*Less than 1%.
(1) Unless otherwise noted, the Company believes that each Person named in
the table has sole voting and investment power with respect to all
Common Shares owned by it.
(2) A Person is deemed to be the beneficial owner of securities that can be
acquired by such Person within 60 days from the date of this Prospectus
upon the exercise of warrants or options. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants
that are held by such Person (but not those held by any other Person)
and which are exercisable within 60 days from the date of this
Prospectus have been exercised. None of the outstanding options to
acquire Common Shares of the Company are exercisable within 60 days of
this Prospectus.
(3) Includes Common Shares to be purchased in the Offering pursuant to the
request by the Company to reserve an aggregate of 1,000,000 Common
Shares for sale to Trust Managers, officers and employees of the Company
and members of the AMRESCO Group. See "The Manager--Certain
Relationships; Conflicts of Interests."
(4) Address is 700 North Pearl Street, Suite 2400, Dallas, Texas 75201.
(5) Includes Common Shares to be purchased in the Private Placement and
assumes the Underwriters' over-allotment is not exercised, and therefore
Holdings does not purchase the additional 333,334 Common Shares it is
obligated to purchase in the Private Placement if the Underwriters
exercise their over-allotment option. See "Private Placement."
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material federal income tax consequences
that may be relevant to a prospective holder of Common Shares who purchases
such shares in the Offering. Winstead Sechrest & Minick P.C. has acted as
special tax counsel ("Tax Counsel") to the Company in connection with the
Offering and the preparation of this Prospectus. This summary should not be
construed as tax advice. The discussion contained herein does not address all
aspects of federal income taxation that may be relevant to particular holders
in light of their personal investment or tax circumstances, or to certain types
of holders (including, without limitation, insurance companies, financial
institutions, broker-dealers, Persons whose functional currency is other than
the United States dollar, Persons who hold Common Shares as part of a straddle,
hedging, or conversion transaction or, except as specifically described herein,
tax-exempt entities and foreign Persons) who are subject to special treatment
under the federal income tax
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laws. In addition, this summary is generally limited to Persons who will hold
Common Shares as "capital assets" (generally, property held for investment)
within the meaning of section 1221 of the Code.
The statements in this summary are based on current provisions of the
Code (including provisions enacted by the Taxpayer Relief Act of 1997 (the
"1997 Tax Act") which are effective for taxable years of the Company beginning
after August 5, 1997), Treasury Regulations promulgated thereunder, and
administrative and judicial interpretations thereof, as of the date hereof, all
of which are subject to change, possibly with retroactive effect. The
provisions of the Code, the Treasury Regulations promulgated thereunder and the
administrative and judicial interpretations thereof that concern REITs are
highly technical and complex and this summary is qualified in its entirety by
such Code provisions, Treasury Regulations, and administrative and judicial
interpretations. No assurance can be given that future legislative, judicial,
or administrative actions or decisions will not affect the accuracy of any
statements in this summary. In addition, no ruling will be sought from the
Internal Revenue Service (the "IRS") with respect to any matter discussed
herein, and there can be no assurance that the IRS or a court will agree with
the statements made herein.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP, AND SALE OF COMMON SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED
AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
GENERAL
The Company intends to make an election to be taxed as a REIT
under sections 856 through 860 of the Code and the applicable Treasury
Regulations promulgated thereunder, which together set forth the requirements
for qualifying as a REIT (the "REIT Provisions of the Code"), beginning with
its taxable year ending on December 31, 1998. The provisions of the 1997 Tax
Act will be fully applicable to the Company. The Company believes that it will
be organized and will operate in such a manner to qualify for taxation as a
REIT under the Code. No assurance can be given, however, that the Company
actually will operate in such a manner to so qualify as a REIT or will continue
to operate in such a manner so as to remain qualified as a REIT.
Subject to the qualifications stated herein and in its opinion,
Tax Counsel has given the Company an opinion that the Company will qualify to
be taxed as a REIT under the Code beginning with its taxable year ending
December 31, 1998 and that the Company's organization and proposed method of
operation will enable it to continue to meet the requirements for qualification
and taxation as a REIT under the Code. An opinion of counsel is not binding on
the IRS or a court and there can be no assurance that the IRS or a court will
not take a position different from that expressed by Tax Counsel. It also must
be emphasized that Tax Counsel's opinion is based on various assumptions and is
conditioned upon numerous representations made by the Company as to factual
matters, including those related to its business and its assets as set forth in
this Prospectus. Tax Counsel has not independently verified the Company's
representations. Moreover, the Company's qualification and taxation as a REIT
depend upon the Company's ability to meet on a continuing basis the actual
operating results, distribution levels, diversity of share ownership and the
various other qualification tests imposed by the Code as discussed below. Tax
Counsel will not review the Company's compliance with these tests on a
continuing basis. Accordingly, no assurance can be given that the actual
results of the Company's operations for any given taxable year will satisfy the
requirements for qualification and taxation as a REIT. See "--Failure to
Qualify."
TAXATION OF THE COMPANY
For any taxable year in which the Company qualifies for taxation
as a REIT, it generally will not be subject to federal corporate income tax on
that portion of its ordinary income or capital gain that is currently
distributed to its shareholders. The REIT Provisions of the Code generally
allow a REIT to deduct dividends paid to its
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shareholders. This deduction for dividends paid to shareholders substantially
eliminates the federal "double taxation" on earnings (once at the corporate
level and once again at the shareholder level) that generally results from an
investment in a corporation.
Even if the Company continues to qualify for taxation as a REIT,
it may be subject to federal income tax in certain circumstances. First, the
Company will be taxed at regular corporate rates on any undistributed REIT
Taxable Income and undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the corporate "alternative minimum
tax" on its undistributed items of tax preference, if any. Third, if the
Company has (i) net income from the sale or other disposition of "foreclosure
property" which is held primarily for sale to customers in the ordinary course
of business or (ii) other nonqualifying income from foreclosure property, the
Company will be subject to tax on such income at the highest regular corporate
rate (currently, 35%). Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of
business, other than foreclosure property or property that is involuntarily
converted), such income will be subject to a 100% tax. Fifth, if the Company
should fail to satisfy the 75% gross income test or the 95% gross income test
(as discussed below), but nonetheless maintains its qualification as a REIT
because certain other requirements are met, the Company will be subject to a
100% tax on the gross income attributable to the greater of the amount by which
the Company fails the 75% or the 95% test, multiplied by a fraction intended to
reflect the Company's profitability. Sixth, if the Company should fail to
distribute for each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year, and (iii) any undistributed taxable income from prior periods, the
Company will be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. However, to the extent the
Company elects to retain and pay income tax on net long-term capital gains it
received during the year such amounts will be treated as having been
distributed for purposes of the 4% excise tax. Finally, if the Company
acquires any asset from a C corporation (i.e., generally a corporation subject
to full corporate level tax) in a transaction in which the basis of the asset
in the Company's hands is determined by reference to the basis of the asset (or
any other property) in the hands of the C corporation, and the Company
subsequently recognizes gain on the disposition of such asset during the
ten-year period (the "Recognition Period") beginning on the date on which the
asset was acquired by the Company, then, pursuant to guidelines issued by the
IRS, the excess of (i) the fair market value of the asset as of the beginning
of the applicable Recognition Period, over (ii) the Company's adjusted basis in
such asset as of the beginning of such Recognition Period (i.e., "built-in
gain") will be subject to tax at the highest regular corporate rate. The
results described above with respect to the tax on "built- in-gain" assume that
the Company will elect pursuant to IRS Notice 88-19 to be subject to the rules
described in the preceding sentence if it were to make any such acquisition.
Upon the acquisition of a corporation which is a "Qualified REIT Subsidiary"
the Company also would be taxed on any built-in gain attributable to the
Qualified REIT Subsidiary's assets. See "--Requirements For
Qualification--Organizational Requirements--Qualified REIT Subsidiary."
The Company will be subject to tax at the highest marginal
corporate rate on the portion of any excess inclusion income (see "--Taxation
of Shareholders--Taxation of Taxable U.S. Shareholders" for a more complete
discussion of excess inclusion income) derived by the Company from REMIC
Residual Interests ("Excess Inclusion") equal to the percentage of the shares
of the Company held by 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 Code) that
is exempt from taxation under the unrelated business taxable income provisions
of the Code, or any rural electrical or telephone cooperative (each, a
"Disqualified Organization"). Any such tax on the portion of any Excess
Inclusion allocable to shares of the Company held by a Disqualified
Organization will reduce the cash available for distribution from the Company
to all shareholders.
If the Company invests in properties in foreign countries, the
Company's profits from such investments will generally be subject to tax in the
countries where such properties are located. The precise nature and amount of
any such taxation will depend on the laws of the countries where the properties
are located. If the Company satisfies the annual distribution requirements for
qualification as a REIT and is therefore not subject to federal corporate
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income tax on that portion of its ordinary income and capital gain that is
currently distributed to its shareholders, the Company will generally not be
able to recover the cost of any foreign tax imposed on profits from its foreign
investments by claiming foreign tax credits against its U.S. tax liability on
such profits. Moreover, a REIT is not able to pass foreign tax credits through
to its shareholders.
The Company will use the calendar year for both federal income
tax purposes and financial reporting purposes.
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Company must meet and continue to meet
the requirements, discussed below, relating to the Company's organization, the
sources of its gross income, the nature of its assets, and the level of
distributions to its shareholders.
ORGANIZATIONAL REQUIREMENTS. The Code requires that a REIT be a
corporation, trust, or association:
(i) which is managed by one or more trustees or
directors;
(ii) the beneficial ownership of which is evidenced by
transferable shares or by transferable certificates of beneficial
interest;
(iii) which would be taxable as a domestic corporation
but for compliance with the REIT requirements;
(iv) which is neither a financial institution nor an
insurance company subject to certain special provisions of the
Code;
(v) the beneficial ownership of which is held by 100 or
more Persons;
(vi) at all times during the last half of each taxable
year not more than 50% in value of the outstanding shares of
which is owned, directly or indirectly through the application of
certain attribution rules, by or for five or fewer individuals
(as defined in the Code to include certain tax-exempt entities
other than, in general, qualified domestic pension funds)(the
"5/50 Rule");
(vii) that makes an election to be a REIT (or has made
such election for a previous taxable year) and satisfies all
relevant filing and other administrative requirements established
by the IRS that must be met in order to elect and maintain REIT
status;
(viii) that uses a calendar year for federal income tax
purposes; and
(ix) which meets certain other tests, described below,
regarding the nature of its income and assets.
The Code provides that conditions (i) through (iv), inclusive,
must be met during the entire taxable year and that condition (v) must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (v)
and (vi) do not apply until after the first taxable year for which a REIT
election is made. For purposes of determining share ownership under the 5/50
Rule, a supplemental unemployment compensation benefits plan, a private
foundation, or a portion of a trust permanently set aside or used exclusively
for charitable purposes generally is considered an individual. A trust that is
a qualified trust under Code section 401(a), however, generally is not
considered an individual and beneficiaries of such trust are treated as holding
shares of a REIT in proportion to their actuarial interests in such trust for
purposes of the 5/50 Rule.
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The Company anticipates issuing sufficient Common Shares with
sufficient diversity of ownership pursuant to the Offering to allow it to
satisfy requirements (v) and (vi). In addition, the Declaration of Trust
provides for restrictions regarding the transfer of the Common Shares that are
intended to assist the Company in continuing to satisfy the share ownership
requirements described in clauses (v) and (vi) above. Such transfer
restrictions are described in "Description of Shares of Beneficial
Interest--Restrictions on Transfer." For purposes of determining ongoing
compliance with the beneficial share ownership requirements, Treasury
Regulations require the Company to issue letters to certain shareholders
demanding information regarding the amount of shares each such shareholder
actually or constructively owns ("shareholder demand letters"). If the Company
fails to comply with these regulatory rules it will be subject to a $25,000
penalty ($50,000 for intentional violations).
As set forth in (vi) above, to qualify as a REIT, the Company
must also satisfy the requirement set forth in Section 856(a)(6) of the Code
that it not be closely held. The Company will not be closely held so long as
at all times during the last half of any taxable year of the Company (other
than the first taxable year for which the REIT election is made) not more than
50% in value of its outstanding shares is owned, directly or constructively
under the applicable attribution rules of the Code, by five or fewer
individuals (as defined in the Code to include certain tax-exempt entities,
other than, in general, qualified domestic pension funds). Although the
Declaration of Trust of the Company contains certain restrictions on the
ownership and transfer of the Common Shares, the restrictions do not ensure
that the Company will be able to satisfy the 5/50 Rule requirement. If the
Company fails to satisfy the 5/50 Rule, the Company's status as a REIT will
terminate, and the Company will not be able to prevent such termination.
However, if the Company complies with the procedures prescribed in the Treasury
Regulations for issuing shareholder demand letters and does not know, or with
the exercise of reasonable diligence would not have known, that the 5/50 Rule
was violated, the requirement will be deemed to be satisfied for the year. See
"--Failure to Qualify."
Qualified REIT Subsidiary. If a REIT owns a corporate subsidiary
that is a "Qualified REIT Subsidiary," within the meaning of section 856(i) of
the Code, that subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities, and items of income, deduction, and credit of the
subsidiary are treated as assets, liabilities and such items of the REIT
itself. A "Qualified REIT Subsidiary" is a corporation all of the capital
shares of which are owned by the REIT. If an existing corporation is acquired
by a REIT and is a "Qualified REIT Subsidiary", all of its pre-REIT earnings
and profits must be distributed before the end of the REIT's taxable year. See
"--Taxation of the Company."
Ownership of a Partnership Interest. In the case of a REIT that
is a partner in a partnership, Treasury Regulations provide that the REIT is
deemed to own its proportionate share of the assets of the partnership
corresponding to the REIT's capital interest in such partnership and is deemed
to be entitled to the income of the partnership attributable to such
proportionate share. In addition, the character of the assets and gross income
of the partnership retain the same character in the hands of the REIT for
purposes of the REIT requirements, including satisfying the gross income tests
and the asset tests. Pursuant to Treasury Regulations effective January 1,
1997 relating to entity classification (the "Check-the-Box Regulations"), an
unincorporated entity that has a single owner is disregarded as an entity
separate from its owner for federal income tax purposes.
INCOME TESTS. To maintain its qualification as a REIT, the
Company must satisfy two gross income requirements annually. First, at least
75% of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or from
certain types of temporary investments. Second, at least 95% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property investments and from
dividends, interest, and gain from the sale or disposition of shares or
securities or from any combination of the foregoing.
The term "interest," as defined for purposes of the 75% and 95%
gross income tests, generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole
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or in part on the income or profits of any Person. However, an amount received
or accrued generally will not be excluded from the term "interest" solely by
reason of being based on a fixed percentage or percentages of receipts or
sales. In addition, an amount received or accrued generally will not be
excluded from the term "interest" solely by reason of being based on the income
or profits of a debtor if the debtor derives substantially all of its gross
income from the related property through the leasing of substantially all of
its interests in the property, to the extent the amounts received by the debtor
would be characterized as rents from real property if received by a REIT.
Furthermore, to the extent that interest from a loan that is based on the cash
proceeds from the sale of the property securing the loan constitutes a "shared
appreciation provision" (as defined in the Code), income attributable to such
participation feature will be treated as gain from the sale of the secured
property, which generally may be qualifying income for purposes of the 75% and
95% gross income tests.
Interest on obligations secured by mortgages on real property or
on interests in real property generally is qualifying income for purposes of
the 75% gross income test. Any amount includible in gross income with respect
to a regular or residual interest in a REMIC generally is treated as interest
on an obligation secured by a mortgage on real property. If, however, less
than 95% of the assets of a REMIC consists of real estate assets (determined as
if the Company held such assets), the Company will be treated as receiving
directly its proportionate share of the income of the REMIC. In addition, if
the Company receives interest income with respect to a Mortgage Loan that is
secured by both real property and other property and the highest principal
amount of the loan outstanding during a taxable year exceeds the fair market
value of the real property on the date the Company acquired the Mortgage Loan,
the interest income will be apportioned between the real property and the other
property, which apportionment may cause the Company to recognize income that is
not qualifying income for purposes of the 75% gross income test.
Tax Counsel is of the opinion that the interest, OID, and any
market discount income that the Company derives from its investments in MBS and
Mortgage Loans generally will be qualifying interest income for purposes of
both the 75% and the 95% gross income tests, except to the extent that less
than 95% of the assets of a REMIC in which the Company holds an interest
consists of real estate assets (determined as if the Company held such assets),
and the Company's proportionate share of the income of the REMIC includes
income that is not qualifying income for purposes of the 75% and 95% gross
income tests. Most of the income that the Company recognizes with respect to
its investments in Mortgage Loans will be qualifying income for purposes of
both gross income tests. In some cases, however, the loan amount of a Mortgage
Loan, particularly with respect to a Distressed Mortgage Loan, a Performing
Mortgage Loan, or any Subordinated Interest in any MBS, may exceed the value of
the real property securing the loan, which will result in a portion of the
income from the loan being classified as qualifying income for purposes of the
95% gross income test, but not for purposes of the 75% gross income test. It
is also 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, which in
some instances may disqualify the income from the loan for purposes of both the
75% and the 95% gross income tests.
The Company may originate or acquire Mortgage Loans that have
shared appreciation provisions. To the extent interest from a loan that is
based on the cash proceeds from the sale of property constitutes a "shared
appreciation provision" (as defined in the Code), income attributable to such
participation feature will be treated as gain from the sale of the secured
property, which generally may be qualifying income for purposes of the 75% and
95% gross income tests. Also, the Company may be required to recognize income
from a shared appreciation provision over the term of the related loan using
the constant yield method pursuant to certain Treasury Regulations.
The Company may originate or acquire Mortgage Loans and
securitize such loans through the issuance of non-REMIC CMOs. As a result of
such transactions, the Company will retain an equity ownership interest in the
Mortgage Loans that has economic characteristics similar to those of a
subordinated interest in a MBS. In addition, the Company may securitize MBS
(or non-REMIC CMOs) through the issuance of REMIC or non-REMIC CMOs, retaining
an equity interest in the MBS used as collateral in the resecuritization
transaction. Such transactions will not cause the Company to fail to satisfy
the gross income tests or the asset tests described below.
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The Company may receive income not described above that is not
qualifying income for purposes of the 75% and 95% gross income tests. For
example, certain fees for services rendered by the Company will not be
qualifying income for purposes of the gross income tests. It is not
anticipated that the Company will receive a significant amount of such fees.
The Company will monitor the amount of nonqualifying income produced by its
assets and intends to manage its portfolio in order to comply at all times with
both the 75% and the 95% gross income tests.
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described
above only if several conditions are met. First, the amount of rent received
or accrued with respect to any property must not be based in whole or in part
on the income or profits derived by any Person from such property, although an
amount received or accrued generally will not be excluded from the term "rents
from real property" solely by reason of being based on a fixed percentage or
percentages of gross receipts or gross sales. Rents received from a tenant
that are based on the tenant's income from the property will not be treated as
rents based on income or profits and thus excluded from the term "rents from
real property" if the tenant derives substantially all of its income with
respect to such property from the leasing or subleasing of substantially all of
such property, provided that the tenant receives from subtenants only amounts
that would be treated as rents from real property if received directly by a
REIT. Second, rents received from a tenant will not qualify as "rents from
real property" in satisfying the gross income tests if the REIT, or an owner of
10% or more of the REIT, directly or constructively owns 10% or more of such
tenant (a "Related Party Tenant"). Third, if rent attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." Finally, a REIT generally must not operate or manage the property or
furnish or render services to the tenants of such property, other than through
an "independent contractor" from whom the REIT derives no income. The
independent contractor requirement, however, does not apply to the extent the
services rendered by the REIT are customarily furnished or rendered in
connection with the rental of the real property such that they are services
that a tax-exempt organization could provide to its tenants without causing its
rental income to be unrelated business taxable income under the Code. A
tax-exempt organization may provide services which are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant," without incurring unrelated
business taxable income. A de minimis exception allows a REIT to provide
non-customary services to its tenants and not disqualify income as rents from
real property so long as the amount received or accrued by the REIT from the
impermissible services does not exceed 1.0% of the Company's gross income from
the property. The amount the Company receives that is attributable to
impermissible services cannot be valued at less than 150% of the direct cost to
the REIT of providing these services.
The Company intends to operate so that it will not charge rent
for any portion of any of its real property that is based, in whole or in part,
on the income or profits of any Person (except by reason of being based on a
fixed percentage or percentages of receipts of sales, as described above) to
the extent that the receipt of such rent would jeopardize the Company's status
as a REIT. In addition, the Company intends to operate so that, to the extent
that it receives rent from a Related Party Tenant, such rent will not cause the
Company to fail to satisfy either the 75% or 95% gross income test. The
Company also intends to operate so that it will not allow the rent attributable
to personal property leased in connection with any lease of real property to
exceed 15% of the total rent received under the lease, if the receipt of such
rent would cause the Company to fail to satisfy either the 75% or 95% gross
income test. Finally, the Company intends to operate so that it will not
operate or manage its real property or furnish or render noncustomary services
to the tenants of its real property other than through an "independent
contractor," to the extent that such operation or the provision of such
services would jeopardize the Company's status as a REIT.
Should the potential amount of nonqualifying income in the future
create a risk as to the qualification of the Company as a REIT, the Company
intends to take action to avoid not qualifying as a REIT. The Company may for
instance transfer certain nonqualifying activities to a taxable corporation,
from which it would receive dividends. If this should occur, the Company would
be entitled to receive dividends as a shareholder of such corporation. The
amount of dividends available for distribution to the Company would be reduced
below the comparable amount of
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income that would otherwise be received by the Company because such a
corporation would be subject to a corporate level tax on its taxable income,
thereby reducing the amount of cash available for distribution.
REITs generally are subject to 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 defined as any real property (including interests in real property) and any
personal property incident to such real property (i) that is acquired by a REIT
as the result of such REIT having bid on such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law, after there was a default (or default was imminent) on a
lease of such property or on an indebtedness owed to the REIT that such
property secured, (ii) for which the related loan was acquired by the REIT at a
time when default was not imminent or anticipated, and (iii) for which such
REIT makes a proper election to treat such property as foreclosure property.
The Company does not anticipate that it will receive any income from
foreclosure property that is not qualifying income for purposes of the 75% and
95% gross income tests, but, if the Company does receive any such income, the
Company intends to make an election to treat the related property as
foreclosure property.
If property is not eligible for the election to be treated as
foreclosure property ("Ineligible Property") because the related loan was
acquired by the REIT at a time when default was imminent or anticipated, income
received with respect to such Ineligible Property may not be qualifying income
for purposes of the 75% or 95% gross income test. The Company anticipates that
any income it receives with respect to Ineligible Property will be qualifying
income for purposes of the 75% and 95% gross income tests.
It is possible that, from time to time, the Company will enter
into hedging transactions with respect to one or more of its assets or
liabilities. Any such hedging transactions could take a variety of forms,
including interest rate swap contracts, interest rate cap or floor contracts,
futures or forward contracts, and options. To the extent that the Company
enters into an interest rate swap or cap agreement, option, futures contract,
forward rate agreement, or any similar financial instrument to reduce its
interest rate risk with respect to debt that was or will be incurred to acquire
or carry real estate assets, any periodic income or gain from the disposition
of such contract should be qualifying income for purposes of the 95% gross
income test, but not the 75% gross income test. To the extent that the Company
hedges with other types of financial instruments that are not similar to the
above or in other situations, it may not be entirely clear how the income from
those transactions will be treated for purposes of the various income tests
that apply to REITs under the Code. The Company intends to structure any
hedging transactions in a manner that does not jeopardize its status as a REIT.
If necessary, the Company may conduct some or all of its hedging activities
through a corporate subsidiary that is fully subject to federal corporate
income tax.
If the Company fails to satisfy one or both of the 75% or the 95%
gross income tests for any taxable year, it may nevertheless qualify as a REIT
for such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if (i) the Company's
failure to meet such test(s) was due to reasonable cause and not due to willful
neglect, (ii) the Company reported the nature and amount of each item of its
income included in the test(s) for such taxable year on a schedule attached to
its return, and (iii) any incorrect information on the schedule was not due to
fraud with intent to evade tax. It is not possible, however, to state whether,
in all circumstances, the Company would be entitled to the benefit of these
relief provisions. For example, if the Company fails to satisfy the gross
income tests because nonqualifying income that the Company intentionally earns
exceeds the limits on such income, the IRS could conclude that the Company's
failure to satisfy the tests was not due to reasonable cause. As discussed
above in "--Taxation of the Company" even if these relief provisions apply, the
Company will still be subject to a 100% tax on the gross income attributable to
the greater of the amount of by which the Company failed the 75% or the 95%
test, multiplied by a fraction intended to reflect the Company's profitability.
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ASSET TESTS. The Company, at the close of each quarter of each
taxable year, also must satisfy two tests relating to the nature of its assets.
First, at least 75% of the value of the Company's total assets must be
represented by cash or cash items (including certain receivables), government
securities, "real estate assets," or, in cases where the Company raises new
capital through shares or long-term (at least five-year) debt offerings,
temporary investments in shares or debt instruments during the one-year period
following the Company's receipt of such capital. The term "real estate assets"
includes interests in real property, interests in mortgages on real property to
the extent the principal balance of a mortgage does not exceed the fair market
value of the associated real property, regular or residual interests in a REMIC
(except that, if less than 95% of the assets of a REMIC consists of "real
estate assets" (determined as if the Company held such assets), the Company
will be treated as holding directly its proportionate share of the assets of
such REMIC), and shares of other REITs. For purposes of the 75% asset test,
the term "interest in real property" includes an interest in Mortgage Loans or
land and improvements thereon, such as buildings or other inherently permanent
structures (including items that are structural components of such buildings or
structures), a leasehold of real property, and an option to acquire real
property (or a leasehold of real property). An "interest" in real property
also generally includes an interest in Mortgage Loans secured by controlling
equity interests in entities treated as partnerships for federal income tax
purposes that own real property, to the extent that the principal balance of
the mortgage does not exceed the fair market value of the real property that is
allocable to the equity interest. Second, of the investments not included in
the 75% asset class, the value of any one issuer's securities owned by the
Company may not exceed 5% of the value of the Company's total assets, and the
Company may not own more than 10% of any one issuer's outstanding voting
securities (except for its interests in any Qualified REIT Subsidiary).
The Company expects that any Mortgage Loans, MBS or commercial
real property and temporary investments that it acquires generally will be
qualifying assets for purposes of the 75% asset test, except to the extent that
less than 95% of the assets of a REMIC in which the Company owns an interest
consists of "real estate assets" and the Company's proportionate share of those
assets includes assets that are non-qualifying assets for purposes of the 75%
asset test. In addition, the Company expects that any preferred equity
investments in partnerships that own real estate would also be treated as
qualifying real estate assets for such purposes as long as the assets were
qualifying assets in the hands of such partnership. Similarly, a preferred
equity investment in a corporation, which if acquired by the Company would
constitute a Qualified REIT Subsidiary, would be treated as a qualifying asset
to the extent that the principal balance of a Mortgage Loan does not exceed the
value of the associated real property. The Company will monitor the status of
the assets that it acquires for purposes of the various asset tests and intends
to manage its portfolio in order to comply at all times with such tests.
If the Company should fail to satisfy the asset tests at the end
of a calendar quarter, such a failure would not cause it to lose its REIT
status if (i) it satisfied the asset tests at the close of the preceding
calendar quarter and (ii) the discrepancy between the value of the Company's
assets and the asset test requirements arose from changes in the market values
of its assets and was not wholly or partly caused by the acquisition of one or
more non-qualifying assets. If the condition described in clause (ii) of the
preceding sentence were not satisfied, the Company still could avoid
disqualification by eliminating any discrepancy within 30 days after the close
of the calendar quarter in which it arose.
ANNUAL DISTRIBUTION REQUIREMENTS. To continue to qualify as a
REIT, the Company is required to distribute dividends (other than capital gain
dividends and retained capital gains) to its shareholders each year in an
amount at least equal to (i) the sum of (A) 95% of the Company's REIT Taxable
Income plus (B) 95% of the net income (after tax), if any, from foreclosure
property, minus (ii) the sum of certain items of non-cash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend
payment after such declaration. A distribution which is not pro rata within a
class of shares entitled to a dividend or which is not consistent with the
rights to distributions between classes of shares (a "preferential dividend")
is not taken into consideration for the purpose of meeting the distribution
requirement. Accordingly, the payment of a preferential dividend could affect
the Company's ability to meet this distribution requirement.
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To the extent that the Company does not distribute all of its net
capital gain or distributes at least 95%, but less than 100%, of its REIT
Taxable Income, as adjusted, it will be subject to tax on the undistributed
amount at regular capital gains or ordinary corporate tax rates, as the case
may be. Furthermore, if the Company should fail to distribute for each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, plus (iii)
any undistributed taxable income from prior periods, the Company will be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. However, to the extent the Company elects to
retain and pay income tax on net long-term capital gains it received during the
year such amounts will be treated as having been distributed for purposes of
the 4% excise tax. The Company intends to make timely distributions sufficient
to satisfy the annual distribution requirements.
It is possible that, from time to time, the Company 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, the Company will recognize taxable income in excess of its cash
receipts when, as generally happens, OID accrues with respect to its MBS.
Furthermore, some Distressed and Participating Loans may be deemed to have OID,
in which case the Company will be required to recognize taxable income in
advance of the related cash flow. OID generally will be accrued using a
methodology that does not allow credit losses to be reflected until they are
actually incurred. In addition, the Company may recognize taxable market
discount income upon the receipt of proceeds from the disposition of, or
principal payments on, MBS and Mortgage Loans that are "market discount bonds"
(i.e., obligations with a stated redemption price at maturity that is greater
than the Company's tax basis in such obligations), although such proceeds often
will be used to make non-deductible principal payments on related borrowings.
The Company also may recognize Excess Inclusion or other "phantom" taxable
income from REMIC Residual Interests. It also is possible that, from time to
time, the Company may recognize net capital gain attributable to the sale of
depreciated property that exceeds its cash receipts from the sale. In
addition, pursuant to certain Treasury Regulations, the Company may be required
to recognize the amount of any payment to be made pursuant to a shared
appreciation provision over the term of the related loan using the constant
yield method. Also, because the Company is an accrual-basis taxpayer, it may
have to recognize income on Distressed Mortgage Loans even though the borrower
is unable to pay the full amount due. Finally, the Company may recognize
taxable income without receiving a corresponding cash distribution if it
forecloses on or makes a "significant modification" (as defined in Regulations
section 1.1001-3(e)) 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 the Company's basis in the original loan. Although the
Code allows certain items of excess noncash income (including OID) to be
disregarded for purposes of the distribution requirements, the Company may have
less cash than is necessary to meet its annual 95% distribution requirement or
to avoid corporate income tax or the excise tax imposed on certain
undistributed income. In such a situation, the Company may find it necessary
to arrange for short-term (or possibly long-term) borrowings or to raise funds
through the issuance of Preferred Shares or additional Common Shares.
If the Company fails to meet the 95% distribution requirement as
a result of an adjustment to the Company's tax return by the IRS upon audit,
the Company may retroactively cure the failure by paying "deficiency dividends"
to its shareholders in a later year, which may then be included in the
Company's deduction for dividends paid for the earlier year. The Company may
thus be able to avoid being taxed on amounts distributed as deficiency
dividends; however, the Company will be required to pay interest to the IRS
based upon the amount of any deduction taken for deficiency dividends.
Any gross income derived from a prohibited transaction is not
taken into account in applying the 95% and 75% gross income tests necessary to
qualify as a REIT (but the net income from such a transaction is subject to a
100% tax). The term "prohibited transaction" generally includes a sale or
other disposition of property (other than foreclosure property or property that
was involuntarily converted) that is held primarily for sale to customers in
the ordinary course of a trade or business. The Company believes that no asset
owned by it will be held for sale to customers and that a sale of any such
asset will not be in the ordinary course of the Company's business. Whether
property is held "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 property. When
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relevant, the Company will attempt to comply with the terms of safe-harbor
provisions in the Code prescribing when asset sales will not be characterized
as prohibited transactions. Complete assurance cannot be given, however, that
the Company can comply with the safe-harbor provisions of the Code or avoid
owning property that may be characterized as property held "primarily for sale
to customers in the ordinary course of a trade or business."
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any
taxable year and the relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to shareholders in
any year in which the Company fails to qualify as a REIT will not be required
and, if made, will not be deductible by the Company. As a result, the
Company's failure to qualify as a REIT will reduce the cash available for
distribution by the Company to its shareholders. In addition, if the Company
fails to qualify as a REIT, all distributions to the Company's shareholders
will be taxable as ordinary dividend income to the extent of the Company's then
current and accumulated earnings and profits, and, subject to certain
limitations in the Code, corporate distributees may be eligible for the
dividends-received deduction. Unless entitled to relief under specific
statutory provisions, the Company also will be ineligible for qualification as
a REIT for the four taxable years following the year during which qualification
was lost. It is not possible to determine whether the Company would be
entitled to such statutory relief in all circumstances.
TAXATION OF SHAREHOLDERS
TAXATION OF TAXABLE U.S. SHAREHOLDERS. As used herein, the term
"U.S. Shareholder" means a holder of Common Shares who (for United States
federal income tax purposes) (i) is a citizen or resident of the United States,
(ii) is a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of any state unless, in the case of a
partnership, Treasury Regulations provide otherwise, (iii) is an estate whose
income is subject to taxation in the United States regardless of its connection
with the conduct of a U.S. trade or business or (iv) is a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States Persons have the
authority to control all substantial decisions of the trust.
As long as the Company continues to qualify as a REIT,
distributions made by the Company out of its current or accumulated earnings
and profits (and not designated as capital gain dividends) will constitute
dividends taxable to its U.S. Shareholders as ordinary income. Such
distributions will not be eligible for the dividends-received deduction in the
case of U.S. Shareholders that are corporations.
Dividends paid to U.S. Shareholders will be treated as portfolio
income. Such income, therefore, will not be subject to reduction by losses
from passive activities (i.e., any interest in a rental activity or in a trade
or business in which the holder does not materially participate, such as
certain interests held as a limited partner) of any holder who is subject to
the passive activity loss rules. Such distributions will, however, be
considered investment income which may be offset by certain investment expense
deductions.
Distributions made by the Company that are properly designated by
the Company as capital gain dividends will be taxable to U.S. Shareholders as
long-term capital gains (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which a U.S. Shareholder has held his/her Common Shares. The highest marginal
individual income tax rate currently is 39.6%. The maximum tax rate on
long-term capital gains applicable to noncorporate taxpayers is 28% for sales
and exchange of assets held for more than one year but not more than 18 months
and 20% for sales and exchange of assets held for more than 18 months. Thus,
the tax rate differential between capital gain and ordinary income for
noncorporate taxpayers may be significant. In addition, the characterization
of income as capital gain or ordinary income may affect the deductibility of
capital losses. Capital losses not offset by capital gains may be deducted
against noncorporate taxpayers' ordinary income only up to a maximum annual
amount of $3,000. Unused capital losses may be carried forward indefinitely by
individuals. All net capital gain of a corporate taxpayer is subject to tax at
ordinary corporate rates. A corporate taxpayer can deduct capital losses only
to the extent of capital gains, with unused losses being carried back three
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years and forward five years. U.S. Shareholders that are corporations may,
however, be required to treat up to 20% of certain capital gain dividends as
ordinary income.
The Company may elect to retain amounts representing long-term
capital gain income on which the Company will be taxed at regular corporate
rates. In that case, each shareholder will be taxed on a proportionate share
of the total long-term capital gains retained by the Company and will also
receive a credit for a proportionate share of the tax paid by the Company.
Finally, each shareholder shall increase the adjusted basis in his/her shares
by the difference between the allocable amount of long-term capital gain and
the tax deemed paid by the shareholder. If the Company should elect to retain
long-term capital gains, it will notify each shareholder of the relevant tax
information after the close of the taxable year.
To the extent that the Company makes distributions (not
designated as capital gain dividends) in excess of its current and accumulated
earnings and profits, such distributions will be treated first as a tax-free
return of capital to each U.S. Shareholder, reducing the adjusted basis which
such U.S. Shareholder has in his/her shares of Common Shares for tax purposes
by the amount of such distribution (but not below zero), with distributions in
excess of a U.S. Shareholder's adjusted basis in his/her shares taxable as
capital gains (provided that the shares have been held as a capital asset).
Dividends declared by the Company in October, November, or December of any year
and payable to a shareholder of record on a specified date in any such month
shall be treated as both paid by the Company and received by the shareholder on
December 31 of such year, provided that the dividend is actually paid by the
Company on or before January 31 of the following calendar year. Shareholders
may not include in their own income tax returns any net operating losses or
capital losses of the Company.
The Company's investment in Subordinated Interests and certain
types of MBS may cause it under certain circumstances to recognize taxable
income in excess of its economic income ("phantom income") and to experience an
offsetting excess of economic income over its taxable income in later years.
As a result, shareholders may from time to time be required to pay federal
income tax on distributions that economically represent a return of capital,
rather than a dividend. Such distributions would be offset in later years by
distributions representing economic income that would be treated as returns of
capital for federal income tax purposes. Accordingly, if the Company receives
phantom income, its shareholders may be required to pay federal income tax with
respect to such income on an accelerated basis, i.e., before such income is
realized by the shareholders in an economic sense. Taking into account the
time value of money, such an acceleration of federal income tax liabilities
would cause shareholders to receive an after-tax rate of return on an
investment in the Company that would be less than the after-tax rate of return
on an investment with an identical before-tax rate of return that did not
generate phantom income. For example, if an investor subject to an effective
income tax rate of 30% purchased a bond (other than a tax-exempt bond) with an
annual interest rate of 10% for its face value, his before-tax return on his
investment would be 10%, and his after-tax return would be 7%. However, if the
same investor purchased shares of the Company at a time when the before-tax
rate of return was 10%, his after-tax rate of return on his shares might be
somewhat less than 7% as a result of the Company's phantom income. In general,
as the ratio of the Company's phantom income to its total income increases, the
after-tax rate of return received by a taxable shareholder of the Company will
decrease.
Because the Company expects to own REMIC Residual Interests, it
is likely that shareholders (other than certain thrift institutions) will not
be permitted to offset certain portions of the dividend income they derive from
the Company with their current deductions or net operating loss carryovers or
carrybacks. The portion of a shareholder's dividends that will be subject to
this limitation will equal his allocable share of any Excess Inclusion income
derived by the Company with respect to the REMIC Residual Interests. The
Company's Excess Inclusion income for any calendar quarter will equal the
excess of its income from REMIC Residual Interests over its "daily accruals"
with respect to such REMIC Residual 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.
The adjusted issue price of a REMIC Residual Interest at the beginning of a
calendar quarter equals the original issue price of the REMIC Residual
Interest, increased by the amount of daily accruals for prior quarters and
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decreased by all prior distributions to the Company with respect to the REMIC
Residual Interest. To the extent provided in future Treasury Regulations, the
Excess Inclusion income with respect to any REMIC Residual Interests owned by
the Company that do not have significant value will equal the entire amount of
the income derived from such REMIC Residual Interests. Furthermore, to the
extent that the Company (or a Qualified REIT Subsidiary) acquires or originates
Mortgage Loans and uses those loans to collateralize one or more multiple-class
offerings of CMOs for which no REMIC election is made ("Non-REMIC
Transactions"), it is possible that, to the extent provided in future Treasury
Regulations, shareholders (other than certain thrift institutions) will not be
permitted to offset certain portions of the dividend income that they derive
from the Company that are attributable to Non-REMIC transactions with current
deductions or net operating loss carryovers or carrybacks. Although no
applicable Treasury regulations have yet been issued, no assurance can be
provided that such regulations will not be issued in the future or that, if
issued, such regulations will not prevent the Company's shareholders from
offsetting some portion of their dividend income with deductions or losses from
other sources.
Upon any sale or other disposition of Common Shares, the holder
will generally recognize gain or loss for federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition, and
(ii) the holder's adjusted basis in the shares. Such gain or loss will
generally be capital gain or loss and will be long-term capital gain or loss if
such shares have been held for more than twelve months. In general, any loss
recognized by a U.S. Shareholder upon the sale or other disposition of Common
Shares that have been held for six months or less (after applying certain
holding period rules) will be treated as a long-term capital loss, to the
extent of distributions received by such U.S. Shareholder from the Company
which were required to be treated as long-term capital gains.
TAXATION OF TAX-EXEMPT SHAREHOLDERS. Tax-exempt entities,
including qualified employee pension and profit sharing trusts and individual
retirement accounts ("Exempt Organizations"), generally are exempt from federal
income taxation. However, they are subject to taxation on their unrelated
business taxable income ("UBTI"). While many investments in real estate
generate UBTI, the IRS has issued a published ruling that dividend
distributions from a REIT to an exempt employee pension trust do not constitute
UBTI, provided that the shares of the REIT are not otherwise used in an
unrelated trade or business of the exempt employee pension trust. Based on
that ruling, amounts distributed by the Company to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of the Common Shares with debt, a portion of its
income from the Company will constitute UBTI pursuant to the "debt-financed
property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17), and (20), respectively, of Code section 501(c) are subject to different
UBTI rules, which generally will require them to characterize distributions
from the Company and any gain realized on the sale of Common Shares as UBTI.
Special rules apply to certain tax-exempt pension funds
(including 401(k) plans but excluding IRAs or government pension plans) that
own more than 10% (measured by value) of a "pension held REIT" at any time
during a taxable year. Such a pension fund must treat a certain percentage of
all dividends received from the REIT during the year as unrelated business
taxable income. The percentage is equal to the ratio of the REIT's gross
income (less direct expenses related thereto) derived from the conduct of
unrelated trades or businesses determined as if the REIT were a tax-exempt
pension fund, to the REIT's gross income (less direct expenses related thereto)
from all sources. The special rules will not apply to require a pension fund
to recharacterize a portion of its dividends as unrelated business taxable
income unless the percentage computed is at least 5%.
A REIT will be treated as a "pension held REIT" if the REIT is
predominantly held by tax-exempt pension funds and if the REIT would fail to
satisfy the 5/50 Rule discussed above, see "--Requirements For
Qualification--Organizational Requirements," if the shares of the REIT held by
such tax-exempt pension funds were not treated as held directly by their
respective beneficiaries. A REIT is predominantly held by tax-exempt pension
funds if at least one tax-exempt pension fund holds more than 25% (measured by
value) of the REIT's shares, or if one or more tax-exempt pension funds (each
of which owns more than 10% (measured by value) of the REIT's shares) own in
the aggregate more than 50% (measured by value) of the REIT's shares. The
Company believes that
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it will not be treated as a pension-held REIT. However, because the shares of
the Company will be publicly traded, no assurance can be given that the Company
is not or will not become a pension-held REIT.
Any dividends received by an Exempt Organization that are
allocable to Excess Inclusion will be treated as UBTI. In addition, the
Company will be subject to tax at the highest marginal corporate rate on the
portion of any Excess Inclusion income derived by the Company from REMIC
Residual Interests that is allocable to shares of the Company held by
Disqualified Organizations. Any such tax would be deductible by the Company
against its income that is not Excess Inclusion income.
If the Company derives Excess Inclusion income from REMIC
Residual Interests, a tax similar to the tax on the Company described in the
preceding paragraph may be imposed on shareholders who are (i) pass-through
entities (i.e., partnerships, estates, trusts, regulated investment companies,
REITs, common trust funds, and certain types of cooperatives (including
farmers' cooperatives described in section 521 of the Code)) in which a
Disqualified Organization is a record holder of shares or interests and (ii)
nominees who hold Common Shares on behalf of Disqualified Organizations.
Consequently, a brokerage firm that holds Common Shares in a "street name"
account for a Disqualified Organization may be subject to federal income tax on
the Excess Inclusion income derived from those shares.
The Treasury Department has been authorized to issue regulations
regarding issuances by a REIT of CMOs in Non-REMIC transactions. If such
Treasury regulations are issued in the future preventing taxable shareholders
from offsetting some percentage of the dividends paid by the Company with
deductions or losses from other sources, that same percentage of the Company's
dividends would be treated as UBTI for shareholders that are Exempt
Organizations. See "--Taxation of Taxable U.S. Shareholders."
TAXATION OF NON-U.S. SHAREHOLDERS. The rules governing United
States federal income taxation of nonresident alien individuals, foreign
corporations, foreign partnerships, foreign trusts and estates and other
foreign shareholders (collectively, "Non-U.S. Shareholders") are highly
complex, and the following discussion is intended only as a summary of such
rules. PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS TO DETERMINE THE IMPACT OF UNITED STATES FEDERAL, STATE, AND LOCAL
INCOME TAX LAWS ON AN INVESTMENT IN COMMON SHARES, INCLUDING ANY REPORTING
REQUIREMENTS.
In general, Non-U.S. Shareholders are subject to regular United
States income tax with respect to their investment in Common Shares in the same
manner as a U.S. Shareholder if such investment is "effectively connected" with
the Non-U.S. Shareholder's conduct of a trade or business in the United States.
A corporate Non-U.S. Shareholder that receives income with respect to its
investment in Common Shares that is (or is treated as) effectively connected
with the conduct of a trade or business in the United States also may be
subject to the 30% branch profits tax imposed by the Code, which is payable in
addition to regular United States corporate income tax. The following
discussion addresses only the United States taxation of Non-U.S. Shareholders
whose investment in Common Shares is not effectively connected with the conduct
of a trade or business in the United States.
Distributions made by the Company that are not attributable to
gain from the sale or exchange by the Company of United States real property
interests and that are not designated by the Company as capital gain dividends
will be treated as ordinary income dividends to the extent made out of current
or accumulated earnings and profits of the Company. Generally, such ordinary
income dividends will be subject to United States withholding tax at the rate
of 30% on the gross amount of the dividends paid unless reduced or eliminated
by an applicable United States income tax treaty. The Company expects to
withhold United States income tax at the rate of 30% on the gross amount of any
such dividends paid to a Non-U.S. Shareholder unless a lower treaty rate
applies and the Non-U.S. Shareholder has filed an IRS Form 1001 with the
Company certifying the Non-U.S. Shareholder's entitlement to treaty benefits.
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Distributions made by the Company in excess of its current and
accumulated earnings and profits will be treated first as a tax-free return of
capital to each Non-U.S. Shareholder, reducing the adjusted basis which such
Non-U.S. Shareholder has in his Common Shares for U.S. tax purposes by the
amount of such distribution (but not below zero), with distributions in excess
of a Non-U.S. Shareholder's adjusted basis in his shares being treated as gain
from the sale or exchange of such shares, the tax treatment of which is
described below. If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of the Company's current and
accumulated earnings and profits, the distribution will be subject to
withholding at the rate applicable to a dividend distribution. However, the
Non-U.S. Shareholder may seek a refund from the IRS of any amount withheld if
it is subsequently determined that such distribution was, in fact, in excess of
the Company's then current and accumulated earnings and profits.
If the Company derives Excess Inclusion income from REMIC
Residual Interests, the portion of the dividends paid to Non-U.S. Shareholders
that is allocable to the Excess Inclusion income may not be eligible for
exemption from the 30% withholding tax or a reduced treaty rate. In addition,
the U.S. Treasury Department has been authorized to issue regulations regarding
issuances by a REIT of multi-class MBS in Non-REMIC Transactions. If Treasury
Regulations are issued in the future preventing taxable shareholders from
offsetting some percentage of the dividends paid by the Company with deductions
or losses from other sources, that same percentage of the Company's dividends
would not be eligible for exemption from the 30% withholding tax or a reduced
treaty rate. See "--Taxation of Taxable U.S. Shareholders."
As long as the Company continues to qualify as a REIT,
distributions made by the Company that are attributable to gain from the sale
or exchange by the Company of United States real property interests will be
taxed to a Non-U.S. Shareholder under the Foreign Investment in Real Property
Tax Act of 1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a
Non-U.S. Shareholder as if such distributions were gains "effectively
connected" with the conduct of a trade or business in the United States.
Accordingly, a Non-U.S. Shareholder will be taxed on such distributions at the
same capital gain rates applicable to U.S. Shareholders (subject to any
applicable alternative minimum tax and a special alternative minimum tax in the
case of non-resident alien individuals). Distributions subject to FIRPTA also
may be subject to the 30% branch profits tax in the case of a corporate
Non-U.S. Shareholder that is not entitled to treaty relief or exemption. The
Company will be required to withhold tax from any distribution to a Non-U.S.
Shareholder that could be designated by the Company as a capital gain dividend
in an amount equal to 35% of the gross distribution. The amount of tax
withheld is fully creditable against the Non-U.S. Shareholder's FIRPTA tax
liability, and if such amount exceeds the Non-U.S. Shareholder's federal income
tax liability for the applicable taxable year, the Non-U.S. Shareholder may
seek a refund of the excess from the IRS. In addition, if the Company
designates prior distributions as capital gain dividends, subsequent
distributions, up to the amount of such prior distributions, will be treated as
capital gain dividends for purposes of withholding.
Gain recognized by a Non-U.S. Shareholder upon the sale or
exchange of Common Shares generally will not be subject to United States
taxation unless the Common Shares constitute a "United States real property
interest" within the meaning of FIRPTA. The Common Shares will not constitute
a "United States real property interest" so long as the Company is a
"domestically controlled REIT." A "domestically controlled REIT" is a REIT in
which at all times during a specified testing period less than 50% in value of
its shares is held directly or indirectly by Non-U.S. Shareholders. However,
because the shares of Common Shares will be publicly traded, no assurance can
be given that the Company is or will continue to be a "domestically-controlled
REIT." Notwithstanding the foregoing, gain from the sale or exchange of Common
Shares not otherwise subject to FIRPTA will be taxable to a Non-U.S.
Shareholder if the Non-U.S. Shareholder is a nonresident alien individual who
is present in the United States for 183 days or more during the taxable year
and has a "tax home" in the United States. In such case, the nonresident alien
individual will be subject to a 30% United States withholding tax on the amount
of such individual's gain.
If the Company did not constitute a "domestically-controlled
REIT," gain arising from the sale or exchange by a Non-U.S. Shareholder of
Common Shares would be subject to United States taxation under FIRPTA as a sale
of a "United States real property interest" only if the selling Non-U.S.
Shareholder's interest in the Company exceeded 5% at any time during the five
years preceding the sale or exchange. If gain on the sale or exchange of
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Common Shares was subject to taxation under FIRPTA, the Non-U.S. Shareholder
would be subject to regular United States income tax with respect to such gain
in the same manner as a U.S. Shareholder (subject to any applicable alternative
minimum tax, 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 the Common Shares
(including the Company in a redemption transaction) would be required to
withhold and remit to the IRS 10% of the purchase price. Additionally, in such
case, distributions on the Common Shares to the extent they represent a return
of capital or capital gain from the sale of the shares, rather than dividends,
would be subject to a 10% withholding tax.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its U.S. Shareholders and to the IRS
the amount of dividends paid during each calendar year and the amount of tax
withheld, if any, with respect thereto. Under the backup withholding rules, a
U.S. Shareholder may be subject to backup withholding at the rate of 31% on
dividends paid unless such U.S. Shareholder (i) is a corporation or falls
within certain other exempt categories and, when required, can demonstrate this
fact, or (ii) provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A U.S. Shareholder
who does not provide the Company with his correct taxpayer identification
number also may be subject to penalties imposed by the IRS. Any amount paid as
backup withholding will be creditable against the U.S. Shareholder's federal
income tax liability. In addition, the Company may be required to withhold a
portion of any capital gain distributions made to U.S. Shareholders who fail to
certify their non-foreign status to the Company. See "--Taxation of Non-U.S.
Shareholders."
Additional issues may arise pertaining to information reporting
and backup withholding with respect to Non-U.S. Shareholders, and Non-U.S.
Shareholders should consult their tax advisors with respect to any such
information reporting and backup withholding requirements.
PROPOSED TAX LEGISLATION AND POSSIBLE OTHER LEGISLATIVE ACTIONS
AFFECTING TAX CONSEQUENCES
On February 2, 1998 President Clinton released his budget
proposal for fiscal year 1999 (the "Budget Proposal"). Two provisions
contained in the Budget Proposal could affect the Company if enacted in final
form. First, the Budget Proposal would prohibit a REIT from owning, directly
or indirectly, more than 10% of the voting power or value of all classes of a C
corporation's stock (other than the stock of a Qualified REIT Subsidiary).
Currently, a REIT may own no more than 10% of the voting stock of a C
corporation (other than a Qualified REIT Subsidiary), but its ownership of the
nonvoting stock of a C corporation is not limited (other than by the rule that
the value of a REIT's combined equity and debt interest in a C corporation may
not exceed 5% of the value of a REIT's total assets). That provision is
proposed to be effective with respect to stock in a C corporation acquired by a
REIT on or after the date of "first committee action" (i.e., first action by
the House Ways and Means Committee with respect to the provision) ("First
Committee Action"). A REIT that owns stock in a C corporation in excess of the
new ownership limit prior to First Committee Action would be "grandfathered,"
but only to the extent that the corporation does not engage in a new trade or
business or acquire substantial new assets on or after the date of First
Committee Action. If enacted as presently written, that provision would limit
the Company's use of AMREIT II, Inc. and other taxable subsidiaries to conduct
businesses the income from which would be nonqualifying income if received
directly by the Company.
Second, the Budget Proposal would require recognition of any
built-in gain associated with the assets of a "large" C corporation (i.e., a C
corporation whose stock has a fair market value of more than $5 million) upon
its conversion to REIT status or merger into a REIT. That provision is
proposed to be effective for conversions to REIT status effective for taxable
years beginning after January 1, 1999 and mergers of C corporations into REITs
that occur after December 31, 1998. This provision would require immediate
recognition of gain if, at any time after December 31, 1998, a "large" C
corporation merges into the Company.
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On March 26, 1998, bills were introduced in both the House of
Representatives and the Senate (H.R. 3558 and S.1871) which would limit the
operations of certain "stapled" REITs. Since the Company is not a "stapled"
REIT, such proposed legislation, if enacted, is not expected to affect the
Company. Neither bill, as introduced, included the other provisions from the
Budget Proposal which, if enacted, would apply to all REITs.
Prospective holders should recognize that the present federal
income tax treatment of the Company may be modified by other future
legislative, judicial or administrative actions or decisions at any time, which
may be retroactive in effect, and, as a result, any such action or decision
may affect investments and commitments previously made. The rules dealing with
federal income taxation are constantly under review by Persons involved in the
legislative process and by the IRS and the Treasury Department, resulting in
statutory changes as well as promulgation of new, or revisions to existing,
regulations and revised interpretations of established concepts. No prediction
can be made as to the likelihood of passage of any new tax legislation or other
provisions either directly or indirectly affecting the Company or its
shareholders. Revisions in federal income tax laws and interpretations thereof
could adversely affect the tax consequences of an investment in the Common
Shares.
The Company or the Company's shareholders may be subject to state
and local tax in various states and localities, including those states and
localities in which it or they transact business, own property, or reside. The
state and local tax treatment of the Company and its shareholders in such
jurisdictions may differ from the federal income tax treatment described above.
Consequently, prospective shareholders should consult their own tax advisors
regarding the effect of state and local tax laws upon an investment in the
Common Shares.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising
under the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the prohibited transaction provisions of section 4975 of the
Code that may be relevant to a prospective purchaser. The discussion does not
purport to deal with all aspects of ERISA or Section 4975 of the Code that may
be relevant to particular shareholders (including employee benefit plans
subject to Title I of ERISA, other retirement plans and individual retirement
accounts ("IRAs") subject to the prohibited transaction provisions of Section
4975 of the Code, as well as governmental plans or church plans that are exempt
from ERISA and Section 4975 of the Code but that may be subject to state law
requirements) in light of their particular circumstances.
The discussion is based on current provisions of ERISA and the
Code, existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial, or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON SHARES ON
BEHALF OF A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A
TAX-QUALIFIED RETIREMENT PLAN, OR AN IRA SHOULD CONSULT ITS OWN LEGAL ADVISOR
REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE
CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE
COMMON SHARES BY SUCH PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS, AND IRAS
Each fiduciary of a pension, profit-sharing, or other employee
benefit plan (a "Plan") subject to Title I of ERISA should consider carefully
whether an investment in the Common Shares is consistent with his fiduciary
responsibilities under ERISA. In particular, the fiduciary requirements of
Part 4 of Title I of ERISA require a Plan's investment to be (i) prudent and in
the best interests of the Plan, its participants, and its beneficiaries, (ii)
diversified in order to minimize the risk of large losses, unless it is clearly
prudent not to do so, and (iii) authorized under the
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terms of the Plan's governing documents (provided the documents are consistent
with ERISA). In determining whether an investment in the Common Shares is
prudent for purposes of ERISA, the appropriate fiduciary of a Plan should
consider all of the facts and circumstances, including whether the investment
is reasonably designed, as a part of the Plan's portfolio for which the
fiduciary has investment responsibility, to meet the objectives of the Plan,
taking into consideration the risk of loss and opportunity for gain (or other
return) from the investment, the diversification, cash flow, and funding
requirements of the Plan's portfolio. A fiduciary also should take into
account the nature of the Company's business, the management of the Company,
the length of the Company's operating history, the fact that certain investment
assets may not have been identified yet, and the possibility of the recognition
of UBTI.
The fiduciary of an IRA or of a qualified retirement plan not
subject to Title I of ERISA because it is a governmental or church plan or
because it does not cover common law employees (a "Non-ERISA Plan") should
consider that such an IRA or Non-ERISA Plan may only make investments that are
authorized by the appropriate governing documents and under applicable state
law.
Fiduciaries of Plans and Persons making the investment decision
for an IRA or other Non-ERISA Plan should consider the application of the
prohibited transaction provisions of ERISA and the Code in making their
investment decision. A "party in interest" or "disqualified Person" with
respect to a Plan or with respect to a Plan or IRA subject to Code section 4975
other than a fiduciary acting as such is subject to (i) an initial 15% excise
tax on the amount involved in any prohibited transaction involving the assets
of the plan or IRA and (ii) an excise tax equal to 100% of the amount involved
if any prohibited transaction is not timely corrected. If the disqualified
Person who engages in the transaction is the individual on behalf of whom an
IRA is maintained (or his beneficiary), the IRA will lose its tax-exempt status
and its assets will be deemed to have been distributed to such individual in a
taxable distribution (and no excise tax will be imposed) on account of the
prohibited transaction. In addition, a fiduciary who permits a Plan to engage
in a transaction that the fiduciary knows or should know is a prohibited
transaction may be liable to the Plan for any loss the Plan incurs as a result
of the transaction or for any profits earned by the fiduciary in the
transaction.
STATUS OF THE COMPANY UNDER ERISA
The following section discusses certain principles that apply in
determining whether the fiduciary requirements of ERISA and the prohibited
transaction provisions of ERISA and the Code apply to an entity because one or
more investors in the equity interests in the entity is a Plan or is a
Non-ERISA Plan or IRA subject to Section 4975 of the Code. A Plan fiduciary
also should consider the relevance of those principles to ERISA's prohibition
on improper delegation of control over or responsibility for "plan assets" and
ERISA's imposition of co-fiduciary liability on a fiduciary who participates
in, permits (by action or inaction) the occurrence of, or fails to remedy a
known breach by another fiduciary.
Regulations of the DOL defining "plan assets" (the "Plan Asset
Regulations") generally provide that when a Plan or Non-ERISA Plan or IRA
acquires a security that is an equity interest in an entity and the security is
neither a "publicly-offered security" nor a security issued by an investment
company registered under the Investment Company Act, the Plan's or Non-ERISA
Plan's or IRA's assets include both the equity interest and an undivided
interest in each of the underlying assets of the issuer of such equity
interest, unless one or more exceptions specified in the Plan Asset Regulations
are satisfied.
If the assets of the Company are deemed to be "plan assets" under
ERISA, (i) the prudence standards and other provisions of Part 4 of Title I of
ERISA would be applicable to any transactions involving the Company's assets,
(ii) Persons who exercise any authority over the Company's assets, or who
provide investment advice to the Company, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each Plan that acquires
Common Shares, and transactions involving the Company's assets undertaken at
their direction or pursuant to their advice might violate their fiduciary
responsibilities under ERISA, especially with regard to conflicts of interest,
(iii) a fiduciary exercising his investment discretion over the assets of a
Plan to cause it to acquire or hold the Common Shares could be liable under
Part 4 of Title I of ERISA for transactions entered into by the Company
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that do not conform to ERISA standards of prudence and fiduciary
responsibility, and (iv) certain transactions that the Company might enter into
in the ordinary course of its business and operations might constitute
"prohibited transactions" under ERISA and the Code.
The Plan Asset Regulations define a publicly-offered security as
a security that is "widely-held," "freely transferable," and either part of a
class of securities registered under the Exchange Act, or sold pursuant to an
effective registration statement under the Securities Act (provided the
securities are registered under the Exchange Act within 120 days after the end
of the fiscal year of the issuer during which the offering occurred). The
Common Shares are being sold in an offering registered under the Securities Act
and will be registered under the Exchange Act. The Plan Asset Regulations
provide that a security is "widely held" only if it is part of a class of
securities that is owned by 100 or more investors independent of the issuer and
of one another. A security will not fail to be widely held because the number
of independent investors falls below 100 subsequent to the initial public
offering as a result of events beyond the issuer's control. The Company
anticipates that upon completion of this offering, the Common Shares will be
"widely held."
The Plan Asset Regulations provide that whether a security is
"freely transferable" is a factual question to be determined on the basis of
all relevant facts and circumstances. The Plan Asset Regulations further
provide that where a security is part of an offering in which the minimum
investment is $10,000 or less (as is the case with the Offering), certain
restrictions ordinarily will not, alone or in combination, affect a finding
that such securities are freely transferable. The restrictions on transfer
enumerated in the Plan Asset Regulations as not affecting that finding include:
(i) any restriction on or prohibition against any transfer or assignment that
would result in the termination or reclassification of an entity for federal or
state tax purposes, or that otherwise would violate any federal or state law or
court order, (ii) any requirement that advance notice of a transfer or
assignment be given to the issuer, (iii) any administrative procedure that
establishes an effective date, or an event (such as completion of an offering),
prior to which a transfer or assignment will not be effective, and (iv) any
limitation or restriction on transfer or assignment that is not imposed by the
issuer or a Person acting on behalf of the issuer. The Company believes that
the restrictions imposed under the Declaration of Trust on the transfer of the
Company's shares will not result in the failure of the Common Shares to be
"freely transferable." The Company also is not aware of any other facts or
circumstances limiting the transferability of the Common Shares other than
those enumerated in the Plan Asset Regulations as those not affecting free
transferability. However no assurance can be given that the DOL or the United
States Department of Treasury will not reach a contrary conclusion.
Assuming that the Common Shares will be "widely held" and that no
other facts and circumstances other than those referred to in the preceding
paragraph exist that restrict transferability of the Common Shares, the Common
Shares should be publicly offered securities and the assets of the Company
should not be deemed to be "plan assets" of any Plan, IRA or Non-ERISA Plan
that invests in the Common Shares.
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
The Declaration of Trust provides that the Company may issue up
to 250,000,000 shares of beneficial interest of the Company consisting of
200,000,000 Common Shares and 50,000,000 Preferred Shares. Upon completion of
the Offering and the Private Placement, 22,222,333 Common Shares will be issued
and outstanding (assuming no exercise of the Underwriters' over-allotment
option) and no Preferred Shares will be issued or outstanding.
Both the Texas REIT Act and the Declaration of Trust provide that
no shareholder of the Company will be personally liable for any debt, act,
omission or obligation incurred by the Company 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, the Company may hold assets or conduct business in states other than
Texas through wholly owned subsidiaries of the Company, if, among other
reasons, it determines that there would exist in that state a significant risk
of shareholder liability if the assets were owned or the business conducted
directly by the Company. Although the Company is not aware of any state which
has attempted to impose liability on shareholders of a Texas REIT, the Company
will use such subsidiaries to the fullest extent it can in those states where
the law is unclear regarding limited shareholder liability in an effort to
minimize the possibility of shareholder liability.
In addition, the Bylaws provide that the Company will indemnify
each shareholder against any claim or liability to which the shareholder may
become subject by reason of being or having been a shareholder, and that the
Company will reimburse each shareholder for all legal and other expenses
reasonably incurred by such shareholder in connection with any such claim or
liability. Further, the Company may, if it deems necessary, include a
provision in its contracts which provides that shareholders assume no personal
liability for obligations entered into on behalf of the Company. However, with
respect to tort claims, contractual claims where liability is not so negated,
claims for taxes and certain statutory liability, the shareholders may, in some
jurisdictions, be personally liable to the extent such claims are not paid by
the Company. Because the Company will carry public liability insurance which
it believes is adequate for tort claims, any risk of personal liability to
shareholders is limited to situations in which the Company's unencumbered
assets plus its insurance coverage would be insufficient to satisfy the claims
against the Company and its shareholders.
COMMON SHARES
VOTING RIGHTS. Subject to the provisions of the Declaration of
Trust regarding Beneficial Ownership or Constructive Ownership in excess of the
Aggregate Share Ownership Limit and to such preferential rights as may be
granted by the Board of Trust Managers in connection with the future issuance
of Preferred Shares, 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. Subject to the provisions of the Declaration of Trust
regarding Beneficial Ownership or Constructive Ownership in excess of the
Aggregate Share Ownership Limit and to such preferential rights as may be
granted by the Board of Trust Managers in connection with the future issuance
of Preferred Shares, holders of Common Shares are entitled to receive ratably
such dividends, in cash, property or Shares, as may be declared from time to
time by the Board of Trust Managers. The Company is prohibited from declaring
or paying any dividend when the Company is unable to pay its debts as they
become due in the usual course or when the payment of such dividend would
result in the Company becoming unable to pay its debts as they become due. See
"Dividend Policy and Distribution."
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LIQUIDATION RIGHTS. Subject to the provisions of the Declaration
of Trust regarding the Aggregate Share Ownership Limit, in the event of any
liquidation, dissolution or winding-up of the affairs of the Company, holders
of Common Shares will be entitled to share ratably in the assets of the Company
remaining after provision for liabilities to creditors and payment of
liquidation preferences to holders of Preferred Shares.
OTHER TERMS. Holders of Common Shares have no redemption,
preference, conversion, exchange or preemptive rights to subscribe to any
securities of the Company. All outstanding Common Shares will be fully paid
and nonassessable.
MEETINGS OF SHAREHOLDERS. The Bylaws provide that annual
meetings of shareholders, commencing with the 1999 annual meeting, will be held
no later than the last day of May of each year. Special meetings of the
shareholders may be called by the Trust Managers, any officer of the Company or
the holders of at least 10% of all of the Shares entitled to vote at the
meetings.
PREFERRED SHARES
The Board of Trust Managers is empowered to issue Preferred
Shares from time to time in one or more series, without shareholder approval,
and with respect to each series to determine, subject to limitations prescribed
by law, (i) the number of shares constituting such series, (ii) the dividend
rate on the shares of each series, whether such dividends shall be cumulative
and the relation of such dividends to the dividends payable on any other class
of shares, (iii) whether the shares of each series shall be redeemable and the
terms thereof, (iv) whether the shares will be convertible into Common Shares
and the terms thereof, (v) the amount per share payable on each series or other
rights of holders of such shares on liquidation or dissolution of the Company,
(vi) the voting rights, if any, of shares of each series, and (vii) generally
any other rights and privileges not in conflict with the Declaration of Trust
or the Texas REIT Act for each series and any qualifications, limitations or
restrictions thereof.
Because the Trust Managers have the power to establish the
preferences and rights of each class or series of Preferred Shares, it may
afford the holders in any series or class of Preferred Shares dividend rights,
preferences, powers and rights, voting or otherwise, senior to the rights of
holders of Common Shares. Issuance of a series of Preferred Shares also could,
depending on the terms of such series, either impede or facilitate the
completion of a merger, tender offer or other takeover attempt. Although the
Board of Trust Managers is required to make a determination as to the best
interest of the shareholders of the Company when issuing Preferred Shares, the
Board of Trust Managers 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 the Company 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 the Company's shareholders, unless such
action is required by applicable law or the rules of any stock exchange on
which the Common Shares may then be listed.
REGISTRATION RIGHTS
The Company has agreed that, upon the demand of Holdings, it will
file and use its best efforts to have declared effective a resale registration
statement covering the resale of the Common Shares sold in the Private
Placement. The Company has agreed with Holdings that it will keep such resale
registration statement effective until such time as sales may be made in
reliance on Rule 144(k) under the Securities Act. See "Private Placement."
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, among other
things, not more than 50% in value of its outstanding Shares may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of a taxable year, and such
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. See "Federal Income Tax Consequences--Requirements For
Qualification."
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Because the Board of Trust Managers believes it is essential for
the Company to continue to qualify as a REIT, the Declaration of Trust, subject
to certain exceptions, provides that no holder may own, or be deemed to own by
virtue of the attribution provisions of the Code, more than 9.8% (the
"Aggregate Share Ownership Limit") of the total outstanding Shares. The Trust
Managers may waive the Aggregate Share Ownership Limit and have waived such
Aggregate Share Ownership Limit with respect to the Manager and other members
of the AMRESCO Group. Any Transfer of Shares that would (i) create a direct or
indirect ownership of Shares in excess of the Aggregate Share Ownership Limit,
(ii) result in the Shares being owned by fewer than 100 Persons, (iii) result
in the Company being "closely held" within the meaning of Section 856(h) of the
Code, or (iv) result in the disqualification of the Company as a REIT, shall be
null and void.
If any Transfer of Shares (whether or not such Transfer is the
result of a transaction entered into through the facilities of any national
securities exchange or automated inter-dealer quotation system) occurs which,
if effective, would result in any Person becoming the Beneficial Owner or
Constructive Owner of Shares in violation of the Aggregate Share Ownership
Limit: (i) then that number of Shares the Beneficial Ownership or Constructive
Ownership of which otherwise would cause such Person to violate the Aggregate
Share Ownership Limit, (rounded to the nearest whole Share) will be
automatically, without any further action on the part of any Person, deemed to
be transferred to a Charitable Trust for the benefit of a Charitable
Beneficiary, effective as of the close of business on the business day prior to
the date of such Transfer, and such Person shall acquire no rights in such
Shares; or (ii) if the Transfer to the Charitable Trust described above would
not be effective for any reason to prevent the violation of the Aggregate Share
Ownership Limit, then the Transfer of that number of Shares that otherwise
would cause any Person to violate the Aggregate Share Ownership Limit, shall be
void ab initio, and the intended transferee shall acquire no rights in such
Shares.
Upon any purported Transfer or other event that would result in a
Transfer of Shares to a Charitable Trust, such Shares will be deemed to have
been transferred to the trustee of a Charitable Trust for the exclusive benefit
of one or more Charitable Beneficiaries. Such Transfer to the trustee shall be
deemed to be effective as of the close of business on the business day prior to
the purported Transfer or other event that results in the Transfer to the
Charitable Trust. The trustee will be appointed by the Company and will be a
Person unaffiliated with the prohibited owner. Each Charitable Beneficiary
will be designated by the Company as provided below.
Shares held by a trustee of a Charitable Trust will be issued and
outstanding Shares of the Company. The prohibited owner will have no rights in
the Shares held by the trustee. The prohibited owner will not benefit
economically from ownership of any Shares held in the Charitable Trust by the
trustee, shall have no rights to dividends or other distributions and will not
possess any rights to vote or other rights attributable to the Shares held in
the Charitable Trust.
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, which rights will be exercised for the exclusive benefit
of the Charitable Beneficiary. Any dividend or other distribution paid prior
to the discovery by the Company that Shares have been transferred to the
trustee will be paid with respect to such Shares to the trustee upon demand and
any dividend or other distribution authorized but unpaid shall be paid when due
to the trustee. Any dividends or distributions so paid over to the trustee
will be held in trust for the benefit of the Charitable Beneficiary for
distribution at such times as may be determined by the trustee. The prohibited
owner will have no voting rights with respect to Shares held in the Charitable
Trust and, subject to Texas law, effective as of the date that Shares have been
transferred to the trustee, the trustee will have the authority (at the
trustee's sole discretion) (i) to rescind as void any vote cast by a prohibited
owner prior to the discovery by the Company that Shares have been transferred
to the trustee and (ii) to recast such vote in accordance with the desires of
the trustee acting for the benefit of the Charitable Beneficiary.
Within 20 days of receiving notice from the Company 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 Aggregate
Share Ownership Limit. Upon such sale,
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the interest of the Charitable Beneficiary in the Shares sold will terminate
and the trustee will distribute the net proceeds of the sale to the prohibited
owner and to the Charitable Beneficiary. The prohibited owner will receive the
lesser of (i) the price paid by the prohibited owner for the Shares or, if the
prohibited owner did not give value for the Shares in connection with the event
causing the Shares to be held in the Charitable Trust (e.g., in the case of a
gift, devise or other such transaction), the Market Price of the Shares on the
day of the event causing the Shares to be held in the Charitable Trust and (ii)
the price per Share (net of costs of sales) received by the trustee from the
sale or other disposition of the Shares held in the Charitable Trust. Any net
sales proceeds in excess of the amount payable to the prohibited owner shall be
immediately paid to the Charitable Beneficiary. If, prior to the discovery by
the Company that Shares have been Transferred to the trustee, such Shares are
sold by a prohibited owner, then (i) such Shares will be deemed to have been
sold on behalf of the Charitable Trust and (ii) to the extent that the
prohibited owner received an amount for such Shares that exceeds the amount
that such prohibited owner was entitled to receive, such excess shall be paid
to the Trustee upon demand.
Shares Transferred to the trustee will be deemed to have been
offered for sale to the Company, or its designee, at a price per Share equal to
the lesser of (i) the price per Share in the transaction that resulted in such
Transfer to the Charitable Trust (or, in the case of a devise or gift, the
Market Price at the time of such devise or gift) and (ii) the Market Price on
the date the Company, or its designee, accepts such offer. The Company will
have the right to accept such offer until the Trustee has sold the Shares held
in the Charitable Trust. Upon such a sale to the Company, the interest of the
Charitable Beneficiary in the Shares sold will terminate and the Trustee will
distribute all net sales proceeds of the sale to the prohibited owner.
By written notice to the Trustee, the Company will designate one
or more nonprofit organizations to be the Charitable Beneficiary of the
interest in the Charitable Trust such that (i) Shares held in the Charitable
Trust would not violate the Aggregate Share Ownership Limit in the hands of
such Charitable Beneficiary and (ii) each such organization must fit within the
definition of a Charitable Beneficiary set forth in the Declaration of Trust.
All certificates representing Common Shares will bear a legend
referring to the restrictions described above.
Any Person who acquires or attempts or intends to acquire
Beneficial Ownership or Constructive Ownership of Shares that will or may
violate or any Person who would have owned Shares that resulted in a transfer
to the Charitable Trust, must immediately give written notice to the Company of
such event, or in the case of such a proposed or attempted transaction, give at
least 15 days prior written notice, and must provide to the Company such other
information as the Company may request in order to determine the effect, if
any, of such Transfer on the Company's status as a REIT.
The Aggregate Share Ownership Limit may have the effect of
precluding acquisition of control of the Company unless the Board of Trust
Managers determines that maintenance of REIT status is no longer in the best
interest of the Company. See "Certain Provisions of Texas Law and of the
Declaration of Trust and Bylaws."
Holdings has agreed not to offer, sell, offer to sell, contract
to sell, pledge, grant any option to purchase or otherwise sell or dispose of
the Common Shares acquired by it pursuant to the Private Placement for a period
of two years from the closing of the Offering without the prior written consent
of Prudential Securities Incorporated on behalf of the Underwriters, so long as
the Manager or another member of the AMRESCO Group continues to serve as
manager of the Company during such period. In addition, the Trust Managers and
executive officers of the Company have each agreed for a period of 180 days
from the closing of the Offering, not to offer, sell, offer to sell, contract
to sell, pledge, grant any option to purchase or otherwise sell or dispose of
(or announce any offer, sale, offer of sale, contract of sale, pledge, grant of
any option to purchase or other sale or disposition) Common Shares or any
securities convertible into or exchangeable or exercisable therefor to any
unaffiliated third party without the prior written consent of Prudential
Securities Incorporated on behalf of the Underwriters. See "Shares Eligible
for Future Sale."
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DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN
The Company intends to implement a dividend reinvestment and
share purchase plan whereby shareholders may automatically reinvest their
dividends and make additional cash purchases of the Common Shares. The details
of such plan will be sent to the Company's shareholders following the adoption
thereof by the Board of Trust Managers.
CERTAIN PROVISIONS OF TEXAS LAW AND
OF THE DECLARATION OF TRUST AND BYLAWS
The following paragraphs summarize certain provisions of Texas
law and the Declaration of Trust and Bylaws. The summary does not purport to be
complete and reference is made to Texas law and the Declaration of Trust and
Bylaws for complete information. Copies of the Declaration of Trust and Bylaws
have been filed with the Commission as exhibits to the Registration Statement
of which this Prospectus is a part.
Certain provisions of the Declaration of Trust and Bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of the Board of Trust
Managers and in the policies formulated by the Board of Trust Managers and to
discourage certain types of transactions that may involve an actual or
threatened change in control of the Company. These provisions are designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal
and to discourage certain tactics that may be used in proxy fights. However,
such provisions might discourage third parties from making tender offers for
the Shares. As a result, the Market Price of the Shares might not benefit from
any premium which might occur in anticipation of a threatened or actual change
in control. Such provisions also might have the effect of preventing changes in
the management of the Company.
BOARD OF TRUST MANAGERS
The Bylaws provide that the number of Trust Managers cannot be
fewer than two nor more than nine. At all times after the closing of the
Offering and except for a period of 90 days following a vacancy, at least a
majority of the Trust Managers must be Independent Trust Managers. Upon the
closing of the Offering, the Board of Trust Managers will consist of seven
members. Trust Managers will hold office until their successors are duly
elected and qualified or until their death, resignation or removal. Under the
Texas REIT Act, the Trust Managers must be natural Persons but do not need to
be residents of Texas or shareholders of the real estate investment trust
unless the declaration of trust or bylaws of such real estate investment trust
so require. The Declaration of Trust and Bylaws do not require that Trust
Managers be residents of Texas or shareholders of the Company.
REMOVAL OF TRUST MANAGERS
The Declaration of Trust and the Bylaws provide that a Trust
Manager may be removed at any time with or without cause by the vote of holders
of Shares representing two-thirds of the total votes authorized to be cast by
Shares then outstanding and entitled to vote thereon. Upon the resignation or
removal of any Trust Manager, or his otherwise ceasing to be a Trust Manager,
he must execute and deliver such documents as the remaining Trust Managers may
require for the conveyance of any Company property held in his name, must
account to the remaining Trust Managers as they require for all property which
he holds as Trust Manager and will thereupon be discharged as Trust Manager.
Upon the incapacity or death of any Trust Manager, his legal representative
must perform the acts set forth in the preceding sentence and the discharge
mentioned therein will run to such legal representative and to the
incapacitated Trust Manager or the estate of the deceased Trust Manager, as the
case may be.
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STAGGERED BOARD
The Declaration of Trust provides that immediately after the
closing of the Offering, the Board of Trust Managers will be divided into three
classes, each class to consist as nearly as possible of one-third of the Trust
Managers. The term of office of one class of Trust Managers will expire each
year. The initial term of office of the Class I, Class II and Class III Trust
Managers will expire at the 1999, 2000 and 2001 annual meeting of shareholders,
respectively. Commencing with the 1999 annual meeting of shareholders, the
Trust Managers of the class elected at each annual meeting of shareholders will
hold office for a term of three years.
The staggered board provision could have the effect of making the
removal of incumbent Trust Managers more time-consuming and difficult, which
could discourage a third party from making a tender offer or otherwise
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and its shareholders. At least two annual
meetings of shareholders, instead of one, will generally be required to effect
a change in a majority of the Board of Trust Managers. Thus, the staggered
board provision could increase the likelihood that incumbent Trust Managers
will retain their positions.
Further, holders of Common Shares have no right to cumulative
voting for the election of Trust Managers. Consequently, at each annual
meeting of shareholders, the holders of a majority of the outstanding Shares
will be able to elect all of the successors of the class of Trust Managers
whose term expires at the meeting.
BUSINESS COMBINATIONS
The Declaration of Trust requires that, except in certain
circumstances, a Business Combination (as defined below) between the Company
and a Related Person (as defined below) must be approved by the affirmative
vote of the holders of 80% of the outstanding Shares, including the vote of the
holders of not less than 50% of the Shares not owned by the Related Person.
The Declaration of Trust provides that a "Business Combination"
is: (i) any merger or consolidation, if and to the extent permitted by law, of
the Company or a subsidiary with or into a Related Person; (ii) any sale,
lease, exchange, mortgage, pledge, transfer or other disposition, of all or any
Substantial Part (as defined in the Declaration of Trust) of the total assets
of the Company as of the end of the last fiscal year, to or with a Related
Person; (iii) the issuance or transfer by the Company or a subsidiary (other
than by way of a pro rata dividend to all shareholders) of any securities of
the Company or a subsidiary to a Related Person; (iv) any reclassification of
securities (including a reverse share split) or recapitalization by the Company
that would increase the voting power of the Related Person; or (v) the adoption
of any plan or proposal for the liquidation or dissolution of the Company
proposed by or on behalf of a Related Person which involves any transfer of
assets or any other transaction in which the Related Person has any direct or
indirect interest (except proportionately as a shareholder); (vi) any series or
combination of transactions having, directly or indirectly, substantially the
same effect as the foregoing; and (vii) any agreement, contract or other
arrangement providing, directly or indirectly, for any of the foregoing.
A "Related Person" generally is defined in the Declaration of
Trust to include any individual, corporation, partnership or other Person and
the affiliates and associates of any such individual, corporation, partnership
or other Person which individually or together is the Beneficial Owner in the
aggregate of more than 50% of the Shares of the Company.
The 50% voting requirement referred to above will not be
applicable if the Business Combination is approved by the affirmative vote of
holders of not less than 90% of the outstanding Shares. Neither the 80% nor the
50% voting requirements outlined above will apply if: (i) the Board of Trust
Managers by a vote of not less than 80% of the Trust Managers then holding
office (a) have expressly approved in advance the acquisition of Shares that
caused the Related Person to become a Related Person or (b) have expressly
approved the Business Combination prior to the date on which the Related Person
involved in the Business Combination became a Related Person; or (ii) the
Business Combination is solely between the Company and a corporation, 100% of
the voting shares of which
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is owned directly or indirectly by the Company; or (iii) the Business
Combination is proposed to be consummated within one year of the closing of a
Fair Tender Offer (as defined in the Declaration of Trust) by the Related
Person in which Business Combination the cash or the Fair Market Value (as
defined in the Declaration of Trust) of the property, securities or other
consideration to be received per Share by all remaining holders of Shares in
the Business Combination is not less than the price offered in the Fair Tender
Offer; or (iv) the Rights (as defined below) have become exercisable; or (v)
all of the following conditions have been met: (a) the Business Combination is
a merger or consolidation, closing of which is proposed to take place within
one year of the date of the transaction pursuant to which such Person became a
Related Person and the cash or Fair Market Value of the property, securities or
other consideration to be received per Share by all remaining holders of Shares
in the Business Combination is not less than the highest per Share price paid
by the Related Person in acquiring any of its holdings of Shares, determined as
of the date of closing of such Business Combination (a "Fair Price"); (b) the
consideration to be received by such holders is either cash or, if the Related
Person has acquired the majority of its holdings of Shares for a form of
consideration other than cash, in the same form of consideration with which the
Related Person acquired such majority; (c) after such Person has become a
Related Person and prior to closing of such Business Combination; (1) except as
approved by a majority of the Independent Trust Managers continuing in office,
there has been no reduction in the annual rate of dividends, if any, paid per
Share on the Shares except any reduction proportionate with any decline in the
Company's net income, and (2) such Related Person has not received the benefit,
directly or indirectly, of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax advantages provided by the
Company prior to the closing of such Business Combination (other than in
connection with financing a Fair Tender Offer); and (d) a proxy statement that
conforms in all respects with the provisions of the Exchange Act is mailed to
shareholders of the Company at least 30 days prior to the closing of the
Business Combination for the purpose of soliciting shareholder approval of the
Business Combination.
If a Person has become a Related Person and within one year after
the date (the "Acquisition Date") of the transaction pursuant to which the
Related Person became a Related Person (i) a Business Combination meeting all
of the requirements of clause (v) above regarding the applicability of the 80%
voting requirement has not been consummated and (ii) a Fair Tender Offer has
not been consummated and (iii) the Company has not been dissolved and
liquidated, then, in such event, the Beneficial Owner of each Share (not
including Shares beneficially owned by the Related Person) will have the right
(individually a "Right" and collectively the "Rights"), which may be exercised,
subject to certain conditions, commencing at the opening of business on the
one-year anniversary date of the Acquisition Date and continuing for a period
of 90 days thereafter (the "Exercise Period"), to sell to the Company one Share
upon exercise of such Right. At 5:00 p.m., Dallas, Texas time, on the last day
of the Exercise Period, each Right not exercised will become void, and, except
as otherwise provided in the Declaration of Trust, the certificates
representing Shares beneficially owned by a Beneficial Owner will no longer
represent Rights. The purchase price for a Share upon exercise of an
accompanying Right generally will be equal to the then-applicable Fair Price
paid by the Related Person pursuant to the exercise of the Right relating
thereto.
The fair price provision is designed to prevent a purchaser from
utilizing two-tier pricing and similar tactics in an attempted takeover of the
Company, and it may have the overall effect of making it more difficult to
acquire and exercise control of the Company. The fair price provision may
provide the Trust Managers with enhanced ability to block any proposed
acquisition of the Company and to retain their positions in the event of a
takeover bid, even if their continued service for the Company would not be in
the best interest of the Company. In certain situations, the fair price
provision may require a Related Person to pay a higher price for the Shares or
structure the transaction differently than would be the case in the absence of
the fair price provision.
AMENDMENT TO THE DECLARATION OF TRUST
The Texas REIT Act and the Declaration of Trust require the
affirmative vote of the holders of at least two-thirds of the outstanding
Shares entitled to vote on the proposed amendment in order to amend the
Declaration of Trust, unless any class or series of Shares is entitled to vote
on the amendment as a class, in which case the amendment must be adopted on
receiving the affirmative vote of the holders of at least two-thirds of the
Shares within each series of outstanding Shares entitled to vote as a class and
of at least two-thirds of the total outstanding
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Shares entitled to vote on the amendment, except that (i) the provision
relating to the approval of Business Combinations; (ii) the provision relating
to the Aggregate Share Ownership Limit; and (iii) the provision relating to the
amendment of the Declaration of Trust may not be amended or repealed, except by
the affirmative vote of the holders of at least 80% of the outstanding Shares.
AMENDMENT OF BYLAWS
Except as otherwise provided by applicable law or the Declaration
of Trust, the power to alter, amend or repeal the Bylaws or to adopt new Bylaws
will be vested in the Trust Managers and (to the extent not inconsistent with
the Texas REIT Act and the Declaration of Trust and specified in the notice of
the meeting) the shareholders. Such action to amend the Bylaws may be taken
(i) with respect to all Bylaw provisions, by the affirmative vote of a majority
of the Trust Managers, or (ii)(a) with respect to the provisions relating to
the meetings of the shareholders, the provisions relating to the Trust
Managers, or the provision relating to the amendment of the Bylaws, by the
affirmative vote of the holders of two-thirds of the Shares entitled to vote on
the matter, or (b) with respect to all other Bylaws, by the affirmative vote of
the holders of a majority of the outstanding Shares entitled to vote on the
matter.
TERMINATION OF THE COMPANY
The Texas REIT Act and the Declaration of Trust provide that,
subject to the provisions of any class or series of Shares at the time
outstanding, the Company may be terminated at any meeting of the shareholders,
by the affirmative vote of two-thirds of all votes entitled to be cast on the
matter.
SPECIAL MEETINGS OF THE SHAREHOLDERS
Under the Bylaws, special meetings of the shareholders may be
called by shareholders only if such shareholders hold outstanding Shares
representing at least 10% of all votes entitled to be cast on any issue
proposed to be considered at any such special meeting.
ADVANCE NOTICE OF TRUST MANAGER NOMINATIONS AND NEW BUSINESS
The Bylaws provide that (a) with respect to an annual meeting of
shareholders, nominations of Persons for election to the Board of Trust
Managers and the proposal of business to be considered by shareholders may be
made only (1) pursuant to the Company's notice of the meeting, (2) by the Board
of Trust Managers or, (3) by a shareholder who is entitled to vote at the
meeting and has complied with the advance notice procedures set forth in the
Bylaws, and (b) with respect to special meetings of shareholders, only the
business specified in the Company's notice of meeting may be brought before the
meeting of shareholders and nominations of Persons for election to the Board of
Trust Managers or (c) provided that the Board of Trust Managers has determined
that Trust Managers shall be elected at such meeting, by a shareholder who is
entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF TEXAS LAW AND OF
THE DECLARATION OF TRUST AND BYLAWS
The business combination provisions and the staggered board
provisions of the Declaration of Trust and the advance notice provisions of the
Bylaws could delay, defer or prevent a change in control of the Company or
other transaction that might involve a premium price for holders of Common
Shares or otherwise be in their best interest.
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TRANSFER AGENT AND REGISTRAR
The Company intends to appoint The Bank of New York as its
transfer agent and registrar for the Common Shares.
REPORTS TO SHAREHOLDERS
As stated in the Bylaws, the Company will furnish its
shareholders with annual reports containing audited financial statements and
such other periodic reports as it may determine to furnish or as may be
required by law.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering and the Private Placement, the Company
will have 22,222,333 Common Shares issued and outstanding (25,555,667 if the
Underwriters' over-allotment option is exercised in full). After the effective
date of this Registration Statement, the Company intends that all of the Common
Shares issued in the Offering will be freely tradeable without registration or
other restrictions under the Securities Act, except for any Common Shares
purchased by an Affiliate of the Company.
The 2,222,233 (2,555,567 if the Underwriters' over-allotment option is
exercised in full) Common Shares sold in the Private Placement will be
"restricted securities" for purposes of Rule 144 under the Securities Act. See
"Private Placement." However, upon the demand of Holdings, the Company will
file and seek to have declared effective a resale registration statement
covering the sale of such shares in the public market. See "Description of
Shares of Beneficial Interest--Registration Rights" and "Private Placement."
Following expiration of the lock-up restrictions described in "Underwriting,"
assuming such resale registration statement is filed and declared effective,
these shares will be available for sale in the public market. If such resale
registration statement is not filed and declared effective, these shares will
be available for sale, following expiration of the lock-up restrictions
discussed in "Underwriting," pursuant to Rule 144 including the manner of sale
and volume limitations thereof. See "Private Placement."
In addition, the Company anticipates that it will file a registration
statement during 1998 with respect to the 3,333,350 Common Shares issuable
under the Share Option Plan and any Common Shares which may be issued in
connection with other incentive compensation arrangements thereby allowing such
shares to be transferred or resold without restriction under the Securities Act
(subject to the restrictions on transfer agreed to by the Company, Trust
Managers and executive officers of the Company, as described above). See
"Management of the Company--Share Option Plan" and "Management of the
Company--Share Options Outstanding."
In general, under Rule 144 under the Securities Act, as currently in
effect, as soon as one year has elapsed from the date of the closing of the
Offering, any Affiliate of the Company purchasing shares in the Offering or in
the Private Placement will be entitled to sell a limited number of such shares
within any three-month period, subject to certain manner of sale provisions,
notice requirements and the availability of current public information about
the Company. If two years have elapsed since the date of acquisition of any
Common Shares which are Restricted Securities (as defined in Rule 144 under the
Securities Act) from the Company or from any Affiliate of the Company, and the
acquiror or subsequent holder thereof is deemed not to have been an Affiliate
of the Company at any time during the 90 days preceding a sale, such Person
would be entitled to sell such Common Shares in the public market under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements or notice requirements.
In addition, Rule 144A under the Securities Act, as currently in effect,
generally permits unlimited resales of certain Restricted Securities of any
issuer provided that the purchaser is an institution that owns or invests on a
discretionary basis at least $100 million in securities or is a registered
broker-dealer that owns and invests on a discretionary basis at least $10
million in securities. Rule 144A allows the existing shareholders of the
Company to sell their Common Shares which are Restricted Securities to such
institutions and registered broker-dealers without regard to any volume or
other restrictions. Unlike Rule 144, Restricted Securities sold under Rule 144A
to non-affiliates do not lose their status as Restricted Securities.
Notwithstanding the foregoing, Holdings has agreed not to offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose of (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant any option to purchase or other sale or
disposition) of any Common Shares acquired by it pursuant to the Private
Placement for a period of two years from the closing of the Offering without
the prior written consent of Prudential Securities Incorporated, so long as the
Manager or another member of the AMRESCO Group continues to serve as manager of
the Company during such period. The Trust Managers and executive officers of
the Company have also agreed for a period of 180 days from the closing of the
Offering, not to offer, sell, offer to sell, contract
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to sell, pledge, grant any option to purchase or otherwise sell or dispose of
(or announce any offer, sale, offer of sale, contract of sale, pledge, grant
any option to purchase or other sale or disposition) of any Common Shares or
any securities convertible into or exchangeable or exercisable therefor to any
unaffiliated third party without the prior written consent of Prudential
Securities Incorporated on behalf of the Underwriters. Prudential Securities
Incorporated may, in its sole discretion, at any time and without notice
release all or any portion of the shares subject to such lock-up agreements.
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UNDERWRITING
The underwriters named below (the "Underwriters") for whom Prudential
Securities Incorporated, Credit Suisse First Boston, J.C. Bradford & Co.,
NationsBanc Montgomery Securities LLC and Piper Jaffray Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions contained in the underwriting agreement (the "Underwriting
Agreement"), to purchase from the Company the number of Common Shares set forth
below opposite their respective names:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
- ----------- ---------
<S> <C>
Prudential Securities Incorporated
Credit Suisse First Boston
J.C. Bradford & Co.
NationsBanc Montgomery Securities LLC
Piper Jaffray Inc..
----------
Total 20,000,000
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Company is obligated to sell, and the Underwriters are obligated to purchase,
all of the Common Shares offered hereby, if any are purchased.
The Underwriters, through the Representatives, have advised the Company
that they propose to offer the Common Shares initially at the public offering
price set forth on the cover page of this Prospectus; that the Underwriters may
allow to selected dealers a concession of $________ per Common Share; and that
such dealers may reallow a concession of $________ per Common Share to certain
other dealers. After the initial public offering, the public offering price
and the concessions may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to 3,000,000
additional Common Shares at the initial public offering price, less
underwriting discounts and commissions, as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose
of covering over-allotments incurred in the sale of the Common Shares offered
hereby. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table.
The Company and the Trust Managers and executive officers of the Company
have agreed not to offer, sell, offer to sell, contract to sell, pledge, grant
any option to purchase or otherwise sell or dispose of (or announce any offer,
sale, offer of sale, contract of sale, pledge, grant of any option to purchase
or other sale or disposition of) any Common Shares, or any securities
convertible into, or exchangeable or exercisable therefor, for a period of 180
days after the closing of the Offering, without the prior written consent of
Prudential Securities Incorporated on behalf of the Underwriters, except that
during such period, Common Shares may be issued upon the exercise of
outstanding Share Options and the Company may issue Share Options which are
exercisable after the 180th day after the closing of the Offering. Prudential
Securities Incorporated may, in its sole discretion, at any time and without
notice, release all or any portion of the Common Shares subject to such lock-up
agreements.
At the request of the Company, the Underwriters have reserved up to 5%
of the Common Shares offered hereby for sale at the initial public offering
price to Trust Managers, directors, officers and employees of the Company and
members of the AMRESCO Group. The number of Common Shares available for sale
to the general public will be reduced to the extent such Persons purchase such
reserved shares. Any reserved shares which are not so purchased will be
offered by the Underwriters to the general public on the same basis as the
other shares offered
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hereby. To the extent any such shares are purchased by Trust Managers or
officers of the Company, they will be subject to the lock-up restrictions
described above.
Pursuant to the Private Placement, Holdings will purchase 2,222,233
(2,555,567 if the Underwriters' over-allotment option in the Offering is
separately exercised in full) Common Shares at a price equal to the initial
public offering price. See "Private Placement." As a result of this purchase,
the AMRESCO Group will own approximately 10% of the total Common Shares
outstanding after the closing of the Offering. Holdings has agreed not to
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose of (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale
or disposition of) such Common Shares for a period of two years from the
closing of the Offering without the prior written consent of Prudential
Securities Incorporated on behalf of the Underwriters, so long as the Manager
or another member of the AMRESCO Group continues to serve as manager of the
Company during such period. Prudential Securities Incorporated may, in its
sole discretion, at any time and without notice release all or any portion of
the shares subject to such lock-up. In addition, the Manager will receive
options to purchase Common Shares pursuant to the Company's Share Option Plan.
See "Management of the Company--Share Options Outstanding."
The Company and AMRESCO have agreed to indemnify the several
Underwriters against and contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
The Representatives have informed the Company that the Underwriters do
not intend to confirm sales to any accounts over which they exercise
discretionary authority.
Prior to the Offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price will be determined
through negotiations between the Company and the Representatives. Among the
factors to be considered in making such determination will be prevailing market
conditions, the Company's prospects and prospects for the industry in general,
the management of the Company and the market prices of securities for companies
in businesses similar to that of the Company.
PSCC, an affiliate of PSI, one of the Underwriters, has issued a
commitment to provide up to $500 million of financing to the Company. Such
financing is expected to close upon closing of the Offering. See "Management's
Discussion and Analysis of Liquidity and Capital Resources." In connection
with such financing, the Company is expected to agree to engage PSI as
underwriter and/or placement agent for the sale or securitization of Mortgage
Loans financed with proceeds from the Warehouse Line, upon such terms and
conditions as are customary in comparable commercial Mortgage Loan
securitization transactions. In addition, an Affiliate of Credit Suisse First
Boston is the senior lender on Loan One. If the Company acquires Loan One, it
will be subject to the terms of an intercreditor agreement with such Affiliate.
See "Business and Strategy--Initial Assets--Loan One."
Certain of the Underwriters have also previously acted as underwriters in
connection with public offerings of securities by AMRESCO for which they have
received customary compensation. Most recently, Credit Suisse First Boston,
Piper Jaffray Inc., Prudential Securities Incorporated and certain other
investment banking firms acted as underwriters in connection with the public
offering by AMRESCO of $155,250,000 of its common stock and Credit Suisse First
Boston, Piper Jaffray Inc., NationsBanc Montgomery Securities LLC, together with
another investment banking firm, acted as underwriters in connection with
AMRESCO's public offering of $330,200,000 of Senior Subordinated Notes.
In connection with the Offering, certain Underwriters (if any) and
selling group members, and their respective affiliates may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Shares. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M, pursuant to which such
Persons may bid for or purchase Common Shares for the purpose of stabilizing
the market price. The Underwriters also may create a short position for the
account of the Underwriters by selling more Common Shares in connection with
the Offering than they are committed to purchase from the Company, and in such
case may purchase Common Shares in the open market following completion of the
Offering to cover all or a portion of such short position, up to 3,000,000
shares, by exercising the Underwriters' over-allotment option
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referred to above. In addition, Prudential Securities Incorporated, on behalf
of the Underwriters, may impose "penalty bids" under contractual arrangements
with the Underwriters whereby it may reclaim from an Underwriter (or dealer
participating in the Offering) for the account of the other Underwriters, the
selling concession with respect to the Common Shares that are distributed in
the Offering but subsequently purchased for the account of the Underwriters in
the open market. Any of the transactions described in this paragraph may
result in the maintenance of the price of the Common Shares at a level above
that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if any is
undertaken, it may be discontinued at any time.
PRIVATE PLACEMENT
The Company received a commitment from AMRESCO prior to the filing of
the Registration Statement of which this Prospectus is a part for the purchase,
in a private placement (the "Private Placement"), of up to 2,555,567 Common
Shares at the initial public offering price. Holdings (a member of the AMRESCO
Group) will purchase 2,222,233 of such Common Shares simultaneously with the
closing of the Offering. No underwriting discounts or commissions will be paid
on Common Shares purchased in the Private Placement. Consummation of the
Private Placement is contingent only upon the closing of the Offering. Upon
closing of the sale of any Common Shares sold by the Company to the
Underwriters pursuant to the Underwriters' over-allotment option, Holdings will
purchase an additional number of Common Shares, up to a maximum of 333,334
Common Shares, equal to (i) the number of Common Shares purchased by the
Underwriters pursuant to the over-allotment option, divided by 3,000,000,
multiplied by (ii) 333,334. Consummation of such purchase is contingent only
upon the closing of the sale of the shares purchased by the Underwriters
pursuant to the over-allotment option. The Common Shares sold in the Private
Placement will be sold without registration under the Securities Act, in
reliance on the exemption provided by Section 4(2) thereof.
The Company has agreed that, upon the demand of Holdings, it will file
and use its best efforts to have declared effective a resale registration
statement covering the sale of the Common Shares purchased in the Private
Placement. These shares will be subject to certain lock-up restrictions as
described in "Underwriting" but will be available for public sale following
expiration of such restrictions.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for
the Company by Winstead Sechrest & Minick P.C., and certain legal matters will
be passed upon for the Underwriters by O'Melveny & Myers LLP, San Francisco,
California. In addition, the description of federal income tax consequences
contained in this Prospectus entitled "Federal Income Tax Consequences" is
based upon the opinion of Winstead Sechrest & Minick P.C.
EXPERTS
The balance sheet of AMRESCO Capital Trust included in this Prospectus
has been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein, and is included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a
part and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission (the "Commission") in Washington, D.C., and may be obtained
from the Commission at rates prescribed by the Commission upon request to the
Commission or inspected, without charge, at the offices of the Commission. In
addition, the Commission maintains a Web site (at http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, and the
Registration Statement of which this Prospectus is
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a part, and the exhibits thereto, are available on that site. The Company will
be subject to the informational requirements of the Exchange Act, and in
accordance therewith, will periodically file reports and other information with
the Commission. Such reports and other information can be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048, and
at 500 West Madison Street, Chicago, Illinois 60661. Copies of such material
can also be obtained from the Commission at prescribed rates through its Public
Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
The Company intends to furnish the holders of Common Shares with annual
reports containing financial statements audited by its independent certified
public accountants and with quarterly reports containing unaudited financial
statements for each of the first three quarters of each year.
GLOSSARY
There follows an abbreviated definition of all defined terms used in
this Prospectus. Whenever used in this Prospectus, the following terms shall
have the meanings set forth below, unless the context indicates otherwise. The
singular shall include the plural and the masculine gender shall include the
feminine, and vice versa, as the context requires. In addition, the term
"Person" and its pronouns "he," "she," "him," and "her" as used in this
Prospectus shall include natural Persons of the masculine and feminine gender
and entities, including, without limitation, corporations, partnerships,
limited liability companies and trusts, unless the context indicates otherwise.
"5/50 Rule" means at all times during the last half of each taxable year
not more than 50% in value of the Company's outstanding shares may be owned,
directly or indirectly through the application of certain attribution rules, by
or for five or fewer individuals (as defined in the Code to include certain
tax-exempt entities other than, in general, qualified domestic pension funds).
"75% of Assets Test" means the asset-based test requiring that on the
last day of each calendar quarter at least 75% of the Company's assets must
consist of Qualified REIT Real Estate Assets, government securities, cash and
cash items, as described in "Federal Income Tax Consequences--Requirements For
Qualification--Asset Tests."
"75% Gross Income Test" means the income-based test that the Company
must meet to qualify as a REIT described in "Federal Income Tax
Consequences--Requirements For Qualification--Income Tests."
"95% Gross Income Test" means the income-based test that the Company
must meet to qualify as a REIT described in "Federal Income Tax
Consequences--Requirements For Qualification--Income Tests."
"1996 Lender Liability Act" means Asset Conservation, Lender Liability
and Deposit Insurance Act of 1996, as amended.
"1997 Tax Act" means The Taxpayer Relief Act of 1997.
"ACLC" means AMRESCO Commercial Lending Corporation.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"Affiliates" means, when used with reference to a specified Person, (i)
any Person that directly or indirectly controls or is controlled by or is under
common control with the specified Person, (ii) any Person that is an officer
of, partner in or trustee of, or serves in a similar capacity with respect to,
the specified Person or of which the specified Person is an officer, partner or
trustee, or with respect to which the specified Person serves in a similar
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capacity, and (iii) any Person that, directly or indirectly, is the beneficial
owner of 5% or more of any class of equity securities of the specified Person
or of which the specified Person is directly or indirectly the owner of 5% or
more of any class of equity securities; provided, however, that the Company
will not be treated as an Affiliate of the Manager and its Affiliates.
"Agency Certificates" means GNMA Certificates, Fannie Mae Certificates
and FHLMC Certificates.
"Aggregate Share Ownership Limit" means not more than 9.8% in value of
the aggregate of the outstanding Shares. The value of the outstanding Shares
shall be determined by the Board of Trust Managers in good faith, which
determination shall be conclusive for all purposes.
"AMREIT I, Inc." means the wholly-owned Qualified REIT Subsidiary of the
Company.
"AMREIT II, Inc." means the non-Qualified REIT Subsidiary of the
Company.
"AMREIT Managers G.P., Inc." means the wholly-owned subsidiary of
AMRESCO which owns the general partnership interest in the Manager.
"AMREIT Managers, L.P." means the Manager of the Company which is also a
newly formed member of the AMRESCO Group.
"AMRESCO" means AMRESCO, INC., a Delaware corporation.
"AMRESCO Capital" means AMRESCO Capital, L.P., a subsidiary of AMRESCO.
"AMRESCO Funding" means AMRESCO Funding Corporation, a member of the
AMRESCO Group.
"AMRESCO Group" means AMRESCO, together with its affiliated entities.
"AMRESCO Services" means AMRESCO Services, L.P., a subsidiary of
AMRESCO.
"Asset Portfolio" means a pool or portfolio of performing, nonperforming
or underperforming commercial, industrial, agricultural and/or real estate
loans.
"Audit Committee" means the committee comprised of certain Independent
Trust Managers charged with the responsibility of reviewing the functions of
the Company's management, the Manager and the Company's independent auditors
pertaining to the Company's financial statements and performing such other
duties and functions as are deemed appropriate by the Audit Committee or the
Board of Trust Managers.
"Average Invested Investment Grade Assets" means, for any quarter, the
average of the aggregate book value of (i) all assets of the Company on a
consolidated basis (as reflected on the Company's balance sheet), excluding the
Company's investment in its nonconsolidated taxable subsidiaries and (ii) all
assets of the Company's nonconsolidated taxable subsidiaries, which either (a)
have received an Investment Grade Rating from all Rating Agencies which have
rated such asset, or (b) are unrated but are guaranteed by the U.S. government
or any agency or instrumentality thereof, before reserves for depreciation or
bad debts or other similar noncash reserves, computed by dividing (A) the sum
of such values for each of the three months during such quarter (based on the
book value of such assets as of the last day of each month) by (B) three.
"Average Invested Non-Investment Grade Assets" means, for any quarter,
the average of the aggregate book value of (i) all assets of the Company on a
consolidated basis (as reflected on the Company's balance sheet), excluding the
Company's investment in its nonconsolidated taxable subsidiaries and (ii) all
assets of the Company's nonconsolidated taxable subsidiaries, excluding from
(i) and (ii) all Average Invested Investment Grade Assets, before
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reserves for depreciation or bad debts or other similar noncash reserves,
computed by dividing (a) the sum of such values for each of the three months
during such quarter (based on the book value of such assets as of the last day
of each month) by (b) three.
"Bankruptcy Code" means Title 11, United States Code, as amended.
"Base Management Fee" means the compensation of the Manager payable and
calculated quarterly in an amount equal to (i) 1% per annum of the Average
Invested Non-Investment Grade Assets for such calendar quarter, and (ii) 0.50%
per annum of the Average Invested Investment Grade Assets for such calendar
quarter.
"Beneficial Ownership" means ownership of Shares by a Person, whether
the interest in Shares is held directly or indirectly, and shall include
interests that would be treated as owned through the application of Section 544
of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms
"Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have the
correlative meanings.
"Board of Trust Managers" means the Board of Trust Managers of AMRESCO
Capital Trust, a Texas real estate investment trust.
"Bridge Loan" means a Mortgage Loan used for temporary financing.
"Business Combination" means (i) any merger or consolidation, if and to
the extent permitted by law, of the Company or a subsidiary with or into a
Related Person; (ii) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition, of all or any Substantial Part (as defined in the
Declaration of Trust) of the total assets of the Company as of the end of the
last fiscal year, to or with a Related Person; (iii) the issuance or transfer
by the Company or a subsidiary (other than by way of a pro rata dividend to all
shareholders) of any securities of the Company or a subsidiary to a Related
Person; (iv) any reclassification of securities (including a reverse share
split) or recapitalization by the Company that would increase the voting power
of the Related Person; or (v) the adoption of any plan or proposal for the
liquidation or dissolution of the Company proposed by or on behalf of a Related
Person which involves any transfer of assets or any other transaction in which
the Related Person has any direct or indirect interest (except proportionately
as a shareholder); (vi) any series or combination of transactions having,
directly or indirectly, substantially the same effect as the foregoing; and
(vii) any agreement, contract or other arrangement providing, directly or
indirectly, for any of the foregoing.
"Bylaws" means the Bylaws of the Company.
"CERCLA" means Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"Charitable Beneficiary" means one or more beneficiaries of the
Charitable Trust, provided that each such organization must be described in
Section 501(c)(3) of the Code and contributions to each such organization must
be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of
the Code.
"Charitable Trust" means a trust that is the transferee of that number
of Common Shares the Beneficial Ownership or Constructive Ownership of which
otherwise would cause a Person to acquire or hold, directly or indirectly,
Common Shares in an amount that violates the Declaration of Trust, which trust
shall be for the exclusive benefit of one or more Charitable Beneficiaries.
"Check-the-Box Regulations" means the entity classification for tax
purposes pursuant to the Treasury Regulations.
"CMBS" means commercial or multifamily MBS.
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"CMO Residuals" means Mortgage Derivative Securities issued by agencies
of the U.S. government or by private originators of, or investors in, Mortgage
Loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
"CMOs" means debt obligations (bonds) that are collateralized by
Mortgage Loans or mortgage certificates other than Mortgage Derivative
Securities and Subordinated Interests. CMOs are structured so that principal
and interest payments received on the collateral are sufficient to make
principal and interest payments on the bonds. Such bonds may be issued by
United States government agencies or private issuers in one or more classes
with fixed or variable interest rates, maturities and degrees of subordination
that are characteristics designed for the investment objectives of different
bond purchasers.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Share Ownership Limit" means not more than 9.8% (in value or in
number of Shares, whichever is more restrictive) of the aggregate of the
outstanding Common Shares. The number and value of outstanding Common Shares
shall be determined by the Board of Trust Managers in good faith, which
determination shall be conclusive for all purposes.
"Common Shares" means the common shares of beneficial interest, $.01 par
value per share of AMRESCO Capital Trust, a Texas real estate investment trust.
"Company" means either (i) AMRESCO Capital Trust, a Texas real estate
investment trust, or (ii) AMRESCO Capital Trust, a Texas real estate investment
trust, collectively with its affiliated entities (which does not include the
Manager or any other member of the AMRESCO Group), as the context may require.
"Construction Loan" means a Mortgage Loan the proceeds of which are to
be used to finance the costs of construction or rehabilitation of real
property.
"Constructive Ownership" means ownership of Shares by a Person, whether
the interest in Shares is held directly or indirectly, and shall include
interests that would be treated as owned through the application of Section
318(a) of the Code, as modified by Section 856(d)(5) of the Code. Constructive
Ownership shall include ownership of convertible securities, which are any
securities of AMRESCO Capital Trust, a Texas real estate investment trust, that
are convertible into Shares. The terms "Constructive Owner," "Constructively
Owns" and "Constructively Owned" shall have the correlative meanings.
"Correspondent Agreement" means the nonexclusive correspondent agreement
between Holliday Fenoglio Fowler and the Company.
"Crime Control Act" means Comprehensive Crime Control Act of 1984, as
amended.
"Declaration of Trust" means the Amended and Restated Declaration of
Trust of AMRESCO Capital Trust, a Texas real estate investment trust.
"Disqualified Organization" means a tax-exempt organization or any rural
electrical or telephone cooperative that is exempt from taxation under the
unrelated business taxable income provisions of the Code.
"Distressed Mortgage Loans" means Subperforming Mortgage Loans and
Nonperforming Mortgage Loans.
"Distressed Real Estate" means REO Properties and other underperforming
or otherwise distressed real estate.
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"DOL" means the Department of Labor.
"Domestically Controlled REIT" means a REIT in which, at all times
during a specified testing period, less than 50% in value of its shares is held
directly or indirectly by Non-U.S. Shareholders.
"Duff and Phelps" means Duff & Phelps Credit Rating Co.
"DUS" means Fannie Mae's Delegated Underwriting and Servicing Program.
"ERISA" means Employee Retirement Income Security Act of 1974, as
amended.
"Excepted Holder" means a shareholder of the Company for whom an
Excepted Holder Limit is created by the Board of Trust Managers.
"Excepted Holder Limit" means, provided that the affected Excepted
Holder agrees to comply with the requirements established by the Board of Trust
Managers, the percentage limit established by the Board of Trust Managers.
"Excess Inclusion" has the meaning specified in Section 860E(c) of the
Code.
"Excess Shares" means the number of shares of beneficial interest in the
Company held by any Person or group of Persons in excess of 9.8% of the
outstanding shares.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exempt Organizations" means tax-exempt entities, such as qualified
employee benefit plans, profit sharing trusts and individual retirement
accounts.
"Fair Market Value" means (i) in the case of securities, the highest
closing sale price during the 30-day period immediately preceding the date in
question of such security on the Composite Tape for NYSE-Listed Stocks, or, if
such security is not quoted on the Composite Tape, on the New York Stock
Exchange, or, if such security is not listed on such Exchange, on the principal
United States securities exchange registered under the Exchange Act on which
such security is listed, or, if such security is not listed on any such
exchange, the highest closing bid quotation with respect to such security
during the 30-day period preceding the date in question on the Nasdaq or any
system then in use, or if no such quotations are available, the Fair Market
Value on the date in question of such security as reasonably determined by an
independent appraiser selected by a majority of the Continuing Trust
Managers(as defined in the Declaration of Trust) (or, if there are no
Continuing Trust Managers, as reasonably determined by Prudential Securities
Incorporated) in good faith; and (ii) in the case of property other than cash
or stock, the Fair Market Value of such property on the date in question as
reasonably determined by an independent appraiser selected by a majority of the
Continuing Trust Managers (or, if there are no Continuing Trust Managers, by
Prudential Securities Incorporated) in good faith. In each case hereunder in
which an independent appraiser is to be selected to determine Fair Market
Value, (i) in the event (x) there are no Continuing Trust Managers and (y)
Prudential Securities Incorporated is unable or elects not to serve as such
appraiser or (ii) in the event there are Continuing Trust Managers that do not
select an independent appraiser within ten (10) Business Days of a request for
such appointment made by a Related Person, such independent appraiser may be
selected by such Related Person.
"Fair Price" means the highest per-Share price (which, to the extent not
paid in cash, shall equal the Fair Market Value of any other consideration
paid), with appropriate adjustments for recapitalizations and for Share splits,
reverse Share splits and Share dividends, paid by a Person in acquiring any of
its holdings of the Shares.
"Fair Tender Offer" means a bona fide tender offer for all of the Shares
outstanding (and owned by Persons other than a Related Person if the tender
offer is made by the Related Person), whether or not such offer is
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conditional upon any minimum number of Shares being tendered, in which the
aggregate amount of cash or the Fair Market Value of any securities or other
property to be received by all holders who tender their Shares for each Share
so tendered shall be at least equal to the then applicable Fair Price paid by a
Related Person or paid by the Person making the tender offer if such Person is
not a Related Person. In the event that at the time such tender offer is
commenced the terms and conduct thereof are not directly regulated by Section
14(d) or 13(e) of the Exchange Act and the general rules and regulations
promulgated thereunder, then the terms of such tender offer regarding the time
such offer is held open and regarding withdrawal rights shall conform in all
respects with such terms applicable to tender offers regulated by either of
such Sections of the Exchange Act. A Fair Tender Offer shall not be deemed to
be "consummated" until Shares are purchased and payment in full has been made
for all duly tendered Shares.
"Fannie Mae" means the federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act (12 U.S.C., (S)1716 et seq.), formerly known as the
Federal National Mortgage Association.
"FASIT" means a Financial Asset Securitization Investment Trust.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FIRPTA" means Foreign Investment in Real Property Tax Act of 1980, as
amended.
"First Loss Class" means the most subordinated class of a multi-class
issuance of pass-through or debt securities and is the first to bear the loss
upon a default on the underlying Mortgage Collateral.
"Fitch" means Fitch IBCA, Inc.
"Foreclosure Property" means real estate acquired at or in lieu of
foreclosure of the mortgage secured by such real estate or as a result of a
default under a lease of such real estate.
"Fowler Goedecke" means Fowler, Goedecke, Ellis & O'Connor Incorporated.
"Funds From Operations" or "FFO" means net income (computed in
accordance with GAAP) excluding gains or losses from debt restructuring and
sales of property, plus depreciation and amortization on real estate assets and
after adjustments for unconsolidated partnerships and joint ventures.
"GAAP" means generally accepted accounting principles.
"GNMA" means the Government National Mortgage Association.
"Grantee" means the lending party to a deed securing debt.
"Grantor" means the borrowing party to a deed securing debt.
"Guidelines" means general guidelines adopted by the Board of Trust
Managers for the Company's investments, borrowings and operations as the same
may be modified from time to time.
"Holdings" means AMREIT Holdings, Inc., a Nevada corporation.
"Holliday Fenoglio Fowler" means Holliday Fenoglio Fowler, L.P., a
subsidiary of AMRESCO.
"Incentive Compensation" means the compensation of the Manager, for each
fiscal quarter, in an amount equal to the product of (A) 25% of the dollar
amount by which (1)(a) Funds From Operations of the Company (before the
Incentive Compensation) per Common Share (based on the weighted average number
of shares
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outstanding) for such quarter plus (b) gains (or minus losses) from debt
restructuring and sales of property per Common Share (based on the weighted
average number of shares outstanding), exceeds (2) an amount equal to (a) the
weighted average of the price per share of the Offering and the prices per
share of all subsequent issuances of Common Shares by the Company multiplied by
(b) the Ten-Year U.S. Treasury Rate for such quarter plus 3.5% multiplied by
(B) the weighted average number of Common Shares outstanding during such
quarter.
"Independent Trust Managers" means those members of the Board of Trust
Managers that are not affiliated, directly, or indirectly, with the Manager or
AMRESCO, whether by ownership of, ownership interest in, employment by, any
material business or professional relationship with, or serving as an officer
or Trust Manager of the Manager or AMRESCO or an Affiliated business entity of
the Manager or AMRESCO.
"Ineligible Property" means property that is not eligible for the
election to be treated as foreclosure property.
"Initial Assets" means those Mortgage Loans identified by the Company
which the Company may originate or acquire with a portion of the net proceeds
of the Offering.
"Initial Term" means the Management Agreement's initial term of two
years from the closing of the Offering.
"Interest in Real Property" means, among other things, an interest in
Mortgage Loans or land and improvements thereon, such as buildings or other
inherently permanent structures (including items that are structural components
of such buildings or structures), a leasehold of real property, and an option
to acquire real property (or a leasehold of real property). An "interest" in
real property also generally includes an interest in Mortgage Loans secured by
controlling equity interests in entities treated as partnerships for federal
income tax purposes that own real property, to the extent that the principal
balance of the mortgage does not exceed the Fair Market Value of the real
property that is allocable to the equity interest.
"Invested Portfolio" means, as of any given date, the portfolio of real
estate related assets in which the Company has invested as of such date.
"Investment Committee" means a committee maintained by the Manager
(which committee will include the President and the Chief Investment Officer of
the Company) which must approve the purchase, acquisition or origination by the
Company of any Targeted Investment.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"Investment Grade Rating" means a rating at least equal to "BBB-" by
Standard & Poor's, "Baa3" by Moody's, "2" by NAIC, "BBB-" by Duff and Phelps or
"BBB-" by Fitch.
"IO" means MBS representing the right to receive interest only from the
underlying loans or a disproportionately large amount of interest in relation
to principal payments from the underlying loans.
"IRA" means individual retirement account.
"IRS" means the Internal Revenue Service.
"ISO" means the qualified incentive share options.
"LIBOR" means the London InterBank Offering Rate in effect from time to
time.
"Loan-to-Value Ratios" means the percentage obtained by dividing the
principal amount of a Mortgage Loan by the appraised value of the mortgaged
property when the Mortgage Loan is originated.
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"Management Agreement" means the agreement by and between the Company
and the Manager whereby the Manager agrees to perform certain services to the
Company in exchange for certain compensation.
"Manager" means AMREIT Managers, L.P., a Delaware limited partnership, a
subsidiary of AMRESCO.
"Market Price" on any day means, with respect to a class or series of
outstanding Shares, the closing price for such shares on such date.
"Master Servicer" means an entity acceptable to the Rating Agencies that
regularly engages in the business of Master Servicing.
"Master Servicing" means providing administrative and reporting services
to securitized pools of MBS.
"MBS" means mortgage-backed securities (including CMBS and RMBS).
"Mezzanine Loan" means a commercial real estate loan the repayment of
which is subordinated to a senior Mortgage Loan and which is secured either by
a second lien mortgage or a pledge of the ownership interests of the borrower.
Such loans can also take the form of a joint venture interest in or equity
investment in the borrower.
"Moody's" means Moody's Investors Service, Inc.
"Mortgage Collateral" means mortgage pass-through securities or pools of
whole loans securing or backing a series of CMBS.
"Mortgage Derivative Securities" means mortgage securities that provide
for the holder to receive interest only, principal only, or interest and
principal in amounts that are disproportionate to those payable on the
underlying Mortgage Loans and may include other derivative instruments.
"Mortgage Loans" means, collectively, loans secured by real property and
Mezzanine Loans.
"Mortgagee" means the lending party to a mortgage.
"Mortgages" means mortgages, deeds of trust and deeds to secure debt.
"Mortgagor" means the borrowing party to a mortgage.
"NAIC" means the National Association of Insurance Commissioners.
"NAREIT" means the National Association of Real Estate Investment
Trusts, Inc.
"Nasdaq National Market" means the Nasdaq Stock Market's National
Market.
"Net Income" means the taxable income of the Company.
"Net Leased Real Estate" means real estate that is net leased on a
long-term basis (ten years or more) to tenants who are typically responsible
for paying a majority of the costs of owning, operating, and maintaining the
leased property during the term of the lease, in addition to the payment of a
monthly rent to the landlord for the use and occupancy of the premises.
"Non-Conforming Mortgage Loans" means single-family Mortgage Loans
secured by liens on residential property that do not qualify for sale to GNMA,
FNMA OR FHLMC.
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"Non-Economic Residual Interest" means CMO Residuals that are required
to report taxable income or loss but receive no cash flow from the underlying
Mortgage Loans.
"Non-ERISA Plan" means a qualified retirement plan not subject to Title
I of ERISA because it is a governmental or church plan or because it does not
cover common law employees.
"Nonperforming Mortgage Loans" means Mortgage Loans for which the
payment of principal and/or interest is more than 90 days delinquent.
"Non-REMIC Residual Interest" means a class of MBS that is not
designated as the residual interest in one or more REMICS.
"Non-REMIC Transactions" means transactions in which an entity acquires
or originates Mortgage Loans and uses those loans to collateralize one or more
multiple class offerings of CMOS for which no REMIC election is made.
"Offering" means the offering of Common Shares hereby.
"OID" means original issue discount.
"Participating Loan" means a Mortgage Loan that entitles the lender to
the receipt of interest at a stated rate, plus a percentage of the pledged real
estate's revenues or cash flow, or a specified percentage or fixed amount of
the net proceeds from any sale of the property, which Participating Loan may be
a Mezzanine Loan, Construction Loan, Bridge Loan or other Mortgage Loan.
"Pass-Through Certificates" means securities (or interests therein)
other than Mortgage Derivative Securities and Subordinate Interests evidencing
undivided ownership interests in a pool of Mortgage Loans, the holders of which
receive a "pass-through" of the principal and interest paid in connection with
the underlying Mortgage Loans in accordance with the holders' respective
undivided interests in the pool. Pass-Through Certificates include Agency
Certificates, as well as other certificates evidencing interests in loans
secured by single-family properties.
"Pension Held REIT" means a REIT that is predominantly held by
tax-exempt pension funds and fails to satisfy the 5/50 Rule.
"Permanent Mortgage Loans" means long-term senior Mortgage Loans.
"Person" means an individual, corporation, partnership, estate, trust
(including a trust qualified under Sections 401(a) or 501(c)(17) of the Code),
a portion of a trust permanently set aside for or to be used exclusively for
the purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock
company or other entity and also includes a group as that term is used for
purposes of Section 13(d)(3) of the Exchange Act.
"Phantom Income" means taxable income in excess of economic income.
"Plan" means pension, profit sharing or other employee benefit plans.
"Plan Asset Regulations" means regulations of the DOL defining "plan
assets."
"PO" means classes of MBS representing the right to receive principal
only from the underlying loans or a disproportionate amount of principal from
the underlying loans.
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"Preferential Dividend" means a distribution which is not pro rata
within a class of shares entitled to a dividend or which is not consistent with
the rights to distributions between classes of shares.
"Preferred Shares" means the preferred shares of beneficial interest,
$.01 par value per share, of AMRESCO Capital Trust, a Texas real estate
investment trust.
"Private Placement" means the consummation of the transactions described
herein under the caption "Private Placement."
"Prospectus" means this Prospectus of the Company dated ___________,
1998, as the same may be amended or supplemented from time to time.
"PSCC" means Prudential Securities Credit Corporation, an Affiliate of
Prudential Securities Incorporated, one of the Underwriters.
"PSI" means Prudential Securities Incorporated.
"Qualified Hedges" means bona fide interest rate swap or cap agreements
entered into by the Company to hedge variable-rate indebtedness only that the
Company incurred to acquire or carry Qualified REIT Real Estate Assets and any
futures and options, or other investments (other than Qualified REIT Real
Estate Assets) made by the Company to hedge its mortgage assets or borrowings
that have been determined by a favorable opinion of counsel to generate
qualified income for purposes of the 95% source of income test applicable to
REITS.
"Qualified REIT Real Estate Assets" means Mortgage Loans, real property
and other assets of the type described in Section 856(c)(6)(B) of the Code.
"Qualified REIT Subsidiary" means a corporation whose stock is entirely
owned by AMRESCO Capital Trust at all times during such corporation's
existence.
"Qualifying Interests" means interests obtained by primarily engaging in
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate.
"Rating Agencies" means, with respect to securities of U.S. issuers, any
nationally recognized statistical rating organization, such as Standard &
Poor's and Moody's, and, with respect to non-U.S. issuers, any of the foregoing
or any equivalent organization operating in the jurisdiction where the issuer's
principal operations are located.
"Real Estate Assets" means, among other things, interests in real
property, interests in mortgages on real property to the extent the principal
balance of a mortgage does not exceed the Fair Market Value of the associated
real property, regular or residual interests in a REMIC (except that, if less
than 95% of the assets of a REMIC consists of "real estate assets" (determined
as if the Company held such assets), the Company will be treated as holding
directly its proportionate share of the assets of such REMIC), and shares of
other REITs.
"Recognition Period" means the period, defined pursuant to guidelines
issued by the IRS, during which an entity recognizes gain on the disposition of
an asset.
"Registration Statement" means this Form S-11, together with any
exhibits and amendments, filed on behalf of or by the Company.
"REIT" means a real estate investment trust, as defined under Section
856 of the Code.
"REIT Provisions of the Code" means Sections 856 through 860 of the
Code.
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"REIT Taxable Income" means Taxable Income, computed without regard to
the dividends paid deduction or any net capital gain.
"Related Person" means any individual, corporation, partnership or other
Person and the affiliates and associates of any such individual, corporation,
partnership or other Person which individually or together is the Beneficial
Owner in the aggregate of more than 50% of the Shares of the Company.
"Relief Act" means Soldier's and Sailor's Civil Relief Act of 1940, as
amended.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Residual Interest" means a class of MBS that is designated as the
residual interest in one or more REMICS.
"REO Property" means real estate acquired at foreclosure (or by deed in
lieu of foreclosure).
"Representatives" means, collectively, Prudential Securities
Incorporated, Credit Suisse First Boston, J.C. Bradford & Co., NationsBanc
Montgomery Securities LLC and Piper Jaffray Inc.
"Repurchase Agreement" means the reverse repurchase agreement to be
entered into by the Company and PSCC to provide the Company up to $100 to
finance the purchase of MBS.
"Residual Interests" means REMIC Residual Interests and non-REMIC
Residual Interests collectively.
"Restricted Securities" has the meaning set forth in Rule 144 under the
Securities Act.
"RICO" means Racketeer Influenced and Corrupt Organizations statute, as
amended.
"Right of First Refusal" means the right to be granted by AMRESCO to the
Company with respect to Targeted Mortgage Loans and MBS, pursuant to which
AMRESCO will agree not to permit any member of the AMRESCO Group to invest in
(i) the first $100 million of Targeted Mortgage Loans identified by or to any
member of the AMRESCO Group during any calendar quarter or (ii) any MBS, other
than MBS issued in securitizations sponsored in whole or in part by any member
of the AMRESCO Group, unless the Investment Committee shall have first
determined, in each case, that the Company should not invest in such asset or
assets, or should invest in only a portion of such asset or assets.
"RMBS" means a series of one-to four-family residential MBS.
"Rule 144" means Rule 144 contained in the Securities Act.
"Rule 144A" means Rule 144A as contained in the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Share Option Plan" means the AMRESCO Capital Trust 1998 Share Option
and Award Plan.
"Share Options" means the options issued by the Company under the Share
Option Plan.
"Share Ownership Limits" means the Aggregate or Common Share Ownership
Limit or the Excepted Holder Limit.
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"Shares" means the Common Shares and, solely to the extent specifically
required by law or as specifically provided in any resolution or resolutions of
the Trust Managers providing for the issuance of any particular series of
Preferred Shares, the Preferred Shares.
"Special Servicer" means an entity which services delinquent and/or
defaulted Mortgage Loans, including the oversight and management of the
resolution of such Mortgage Loans by modification, foreclosure, deed in lieu of
foreclosure or otherwise.
"Special Servicing" means the oversight and management of the resolution
of Mortgage Loans by workout or modification of loan provisions, foreclosure,
deed in lieu of foreclosure or otherwise, and to control decisions with respect
to the preservation of the collateral generally, including property management
and maintenance decisions.
"Special Servicing Rights" means rights to control the oversight and
management of the resolution of Mortgage Loans by workout or modification of
loan provisions, foreclosure, deed in lieu of foreclosure or otherwise, and to
control decisions with respect to the preservation of the collateral generally,
including property management and maintenance decisions.
"Standard & Poor's" means Standard & Poor's Rating Services, a division
of the McGraw-Hill Companies.
"Sub IOs" means an IO with characteristics of a Subordinated Interest.
"Subordinated Interests" means classes of MBS that are subordinated in
right of payments of principal and interest to more senior classes.
"Subperforming Mortgage Loans" means Mortgage Loans for which default is
likely or imminent or for which the borrower is making payments in accordance
with a forbearance plan.
"Targeted Investments" means the various types of real estate related
assets targeted to be invested in by the Company.
"Targeted Mortgage Loan" means any Mortgage Loan which (i) meets the
investment criteria and objectives of the Company and (ii) has been
preliminarily reviewed and approved for further consideration by any member
of the AMRESCO Group.
"Tax Counsel" means Winstead Sechrest & Minick P.C.
"Tax-Exempt Entity" means a qualified pension, profit sharing or other
employee retirement benefit plan, Keogh plan, bank commingled trust funds for
such plans, or IRA, and other similar entities intended to be exempt from
federal income taxation.
"Taxable Income" means for any year the taxable income of the Company
for such year (excluding any net income derived either from property held
primarily for sale to customers or from Foreclosure Property) subject to
certain adjustments provided in the REIT Provisions of the Code.
"TBCA" means the Texas Business Corporation Act.
"Ten-Year U.S. Treasury Rate" means the arithmetic average of the weekly
average yield to maturity for actively traded current coupon U.S. Treasury
fixed interest rate securities (adjusted to a constant maturity of ten years)
published by the Federal Reserve Board during a quarter, or, if such rate is
not published by the Federal Reserve Board, any Federal Reserve Bank or agency
or department of the federal government selected by the Company. If the
Company determines in good faith that the Ten Year U.S. Treasury Rate cannot be
calculated as provided above, then the rate shall be the arithmetic average of
the per annum average yields to maturities, based upon closing asked prices on
each business day during a quarter, for each actively traded marketable U.S.
Treasury
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fixed interest rate security with a final maturity date not less than eight nor
more than twelve years from the date of the closing asked prices as chosen and
quoted for each business day in each such quarter in New York City by at least
three recognized dealers in U.S. government securities selected by the Company.
"Texas REIT Act" means the Texas Real Estate Investment Trust Act, found
at Article 6138A of the Texas Revised Civil Statutes, as amended.
"Title V" means Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, as amended.
"Transfer" means any issuance, sale, transfer, gift, assignment, devise
or other disposition, as well as any other event that causes any Person to
acquire Beneficial Ownership or Constructive Ownership, or any agreement to
take any such actions or cause any such events, of Shares or the right to vote
or receive dividends on Shares, including (i) the granting or exercise of any
option (or any disposition of any option), (ii) any disposition of any
securities or rights convertible into or exchangeable for Shares or any
interest in Shares or any exercise of any such conversion or exchange right and
(iii) transfers of interests in other entities that result in changes in
Beneficial Ownership or Constructive Ownership of Shares; in each case, whether
voluntary or involuntary, whether owned of record, Constructively Owned or
Beneficially Owned and whether by operation of law or otherwise. The terms
"Transferring" and "Transferred" shall have the correlative meanings.
"Treasury Regulations" means the Federal Income Tax Regulations,
including Temporary Regulations, promulgated under the Code, as such
regulations may be amended from time to time (including corresponding
provisions of succeeding regulations).
"Trust Manager" means a member of the Board of Trust Managers.
"UBTI" means "unrelated trade or business income" as defined in Section
512 of the Code.
"UCC" means Uniform Commercial Code, as amended.
"Underwriters" means the firms identified in this Prospectus as
underwriters of the Offering.
"Underwriting Agreement" means the agreement by and among the
Underwriters pursuant to which the Underwriters will purchase Common Shares.
"U.S. Shareholder" means a holder of Common Shares who (for United
States federal income tax purposes) (i) is a citizen or resident of the United
States, (ii) is a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of any state unless, in
the case of a partnership, Treasury Regulations provide otherwise, (iii) is an
estate whose income is subject to taxation in the United States regardless of
its connection with the conduct of a U.S. trade or business or (iv) is a trust
if a court within the United States is able to exercise primary supervision
over the administration of the trust and one or more United States Persons have
the authority to control all substantial decisions of the trust.
"Warehouse Line" means the $400 million warehouse financing arrangement
to be entered into by the Company, PSCC and certain other institutional lenders
to provide financing to the Company for the origination or acquisition of
Mortgage Loans.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pages
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<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . F-2
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Notes to Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
</TABLE>
F-1
<PAGE> 138
AMRESCO CAPITAL TRUST
BALANCE SHEET
FEBRUARY 2, 1998
INDEPENDENT AUDITORS' REPORT
To the Shareholder of AMRESCO Capital Trust:
We have audited the accompanying balance sheet of AMRESCO Capital Trust (the
"Trust") as of February 2, 1998. This financial statement is the responsibility
of the Trust's management. Our responsibility is to express an opinion on this
balance sheet 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 balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of AMRESCO Capital Trust as of February 2, 1998, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
February 2, 1998
F-2
<PAGE> 139
AMRESCO CAPITAL TRUST
BALANCE SHEET
FEBRUARY 2, 1998
<TABLE>
<S> <C>
ASSETS
Cash $1,000
======
SHAREHOLDER'S EQUITY
SHAREHOLDER'S EQUITY:
Preferred Shares, par value $.01 per share; 50,000,000 shares
authorized, none outstanding;
Common Shares, par value $.01 per share;
200,000,000 shares authorized; 100 shares
issued and outstanding $ 1
Additional paid-in-capital 999
------
Total Shareholder's Equity $1,000
======
</TABLE>
See accompanying notes to balance sheet.
F-3
<PAGE> 140
AMRESCO Capital Trust
Notes to Balance Sheet
February 2, 1998
NOTE 1--ORGANIZATION
AMRESCO Capital Trust (the "Trust") is a Texas real estate investment trust and
was initially capitalized through the sale of 100 Common Shares for $1,000 on
February 2, 1998. The Trust will seek to acquire primarily mortgage loans,
mortgage-backed securities, real estate and certain other real estate related
assets.
The Trust has had no operations to date other than matters relating to the
organization and start-up of the Trust. Accordingly, no statement of
operations is presented.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash - Cash includes cash on hand and deposits in banks. The Trust has no cash
equivalents.
Federal and State Income Taxes - The Trust will elect to be taxed as a real
estate investment trust under the Internal Revenue Code of 1986, as amended,
and generally will not be subject to federal and state taxes on its income to
the extent it distributes annually 95% of its predistribution taxable income to
shareholders and maintains its qualification as a real estate investment trust.
Income recognition - Income and expenses are to be recorded on the accrual
basis of accounting.
NOTE 3--TRANSACTIONS WITH AFFILIATES
The Trust intends to enter into a Management Agreement (the "Management
Agreement") with AMREIT Managers, L.P. (the "Manager"), a subsidiary of
AMRESCO, Inc. ("AMRESCO"), under which the Manager will manage its day-to-day
operations, subject to the direction and oversight of the Trust's Board of
Trust Managers. The Trust will pay the Manager quarterly base management
compensation and incentive compensation based on Funds From Operations of the
Trust in excess of a minimum return on equity.
NOTE 4--PUBLIC OFFERING OF COMMON SHARES
The Trust is in the process of filing a Registration Statement for the sale of
its common shares. Contingent upon the consummation of the public offering, the
Trust will be liable for organization and offering expenses in connection with
the sale of the shares offered. AMRESCO has committed to cause a subsidiary of
AMRESCO to purchase 10% of the Trust's common shares at the initial public
offering price in a private placement simultaneous with the closing of the
public offering.
NOTE 5--SHARE OPTION PLAN
The Trust intends to adopt a share option and award plan (the "Share Option
Plan") that will provide for the grant of both qualified incentive share
options and non-qualified share options and restricted shares. Trust Managers,
directors, officers and key employees of the Trust and the Manager are eligible
to participate in the Share Option Plan. The Share Option Plan will authorize
the grant of options to purchase an aggregate of up to 15% of the Trust's
outstanding common shares.
F-4
<PAGE> 141
No options or rights have yet been granted under the Share Option Plan. The
Trust intends to grant options to the Manager to purchase 2,222,233 common
shares, effective on the closing of the public offering of common shares and
the execution of the Management Agreement. The fair value of the options
cannot be determined until the closing of the public offering.
F-5
<PAGE> 142
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
ANY SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON
SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Dividend Policy and Distributions . . . . . . . . . . . . . . . . . . . . . 34
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Management's Discussion and Analysis of Liquidity and Capital Resources . . 37
Business and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Management of the Company . . . . . . . . . . . . . . . . . . . . . . . . . 64
The Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Security Ownership of Certain Beneficial Owners and Management . . . . . . 84
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . 84
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Description of Shares of Beneficial Interest . . . . . . . . . . . . . . . 113
Certain Provisions of Texas Law and of the Declaration of Trust and
Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Shares Eligible for Future Sale . . . . . . . . . . . . . . . . . . . . . . 112
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
Private Placement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
<PAGE> 143
UNTIL ____________, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
20,000,000 SHARES
AMRESCO CAPITAL TRUST
COMMON SHARES OF BENEFICIAL INTEREST
PROSPECTUS
PRUDENTIAL SECURITIES INCORPORATED
CREDIT SUISSE FIRST BOSTON
J.C. BRADFORD & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
PIPER JAFFRAY INC.
_________________, 1998
<PAGE> 144
ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Shares being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE PAID
<S> <C>
SEC Registration Fee $ 108,560
NASDAQ Stock Market Filing Fee $ 95,000
NASD Filing Fee $ 30,500
Printing and Engraving Expenses $ 200,000
Legal Fees and Expenses $ 650,000
Accounting Fees and Expenses $ 75,000
Transfer Agent Fees and Custodian Fees $ 10,000
Miscellaneous $ 130,940
------------------- ----------
Total $1,300,000
==========
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES
The securities described in Item 33(a) were issued to AMRESCO,
Inc., in exchange for cash.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to the exemption provided by Section 4(2) of the Securities
Act, on February 2, 1998 the Company issued 100 Common Shares for an aggregate
purchase price of $1,000 to AMRESCO, Inc.
ITEM 34. INDEMNIFICATION OF TRUST MANAGERS AND OFFICERS.
The Declaration of Trust provides for the indemnification of the
directors and officers of the Company and the Manager and its employees,
officers, directors and controlling Persons to the fullest extent permitted by
the Texas REIT Act. The Texas REIT Act generally permits the indemnification
of a trust manager, officer, employee, or agent of the real estate investment
trust, who was, is or is threatened to be made a named defendant or respondent
in a proceeding because of the Person's affiliation with the real estate
investment trust only if that Person: (i) conducted himself in good faith;
(ii) reasonably believed: (a) in the case of conduct in his official capacity,
that his conduct was in the real estate investment trust's best interest; and
(b) in all other cases, that his conduct was at least not opposed to the real
estate investment trust's best interest; and (iii) in the case of any criminal
proceeding, had no reasonable cause to believe that his conduct was unlawful.
Furthermore, except to the extent permitted by the Texas REIT Act, such Person
may not be indemnified in respect of a proceeding (i) in which the Person is
found liable on the basis that personal benefit was improperly received by him,
whether or not the benefit resulted from an action taken in the Person's
official capacity; or (ii) in which the Person is found liable to the real
estate investment trust.
If, in connection with a proceeding against the real estate investment
trust, such Person is found liable to the real estate investment trust or is
found liable on the basis that personal benefit was improperly received by the
Person, the indemnification (i) is limited to reasonable expenses actually
incurred by the Person in connection with the proceeding, and (ii) shall not be
made to a Person that has been found liable for willful or intentional
misconduct in the performance of his duty to the real estate investment trust.
II-1
<PAGE> 145
The Texas REIT Act also provides that the real estate investment trust
may indemnify Persons who are not or were not officers, employees, or agents of
the real estate investment trust but who are or were serving at the request of
the real estate investment trust as a trust manager, director, officer,
partner, venturer, proprietor, trustee, employee, agent or similar functionary
of another real estate investment trust or of a foreign or domestic
corporation, partnership, or other enterprise to the same extent that it may
identify its own trust managers, officers, employees, or agents.
Pursuant to the Texas REIT Act and the Declaration of Trust, no Trust
Manager will be liable for any act, omission, loss, damage or expense arising
from his or her duty to a real estate investment trust, except for such trust
manager's own willful misfeasance, willful malfeasance or gross negligence.
Under the Texas REIT Act, a trust manager is not subject to any liabilities
imposed by law upon trust managers of a real estate investment trust nor liable
for any claims or damages that may result from his acts in the discharge of any
duty imposed or power conferred upon him by the real estate investment trust,
if, in the exercise of ordinary care, he acted in good faith and in reliance
upon information, opinions, reports or statements, including financial
statements and other financial data, concerning the real estate investment
trust or another Person, that were prepared or presented by: (i) one or more
officers or employees of the real estate investment trust, other than the real
estate investment trust manager; (ii) legal counsel, public accountants,
investment bankers, or other Persons as to matters the trust manager reasonably
believes are within the Person's professional or expert competence; or (iii) a
committee of the trust managers of which the trust manager is not a member.
The Company has obtained directors' and officers' liability insurance
coverage in the aggregate amount of approximately $10 million. Directors' and
officers' insurance insures (i) the officers and Trust Managers of the Company
from any claim arising out of an alleged wrongful act by the Trust Managers and
officers of the Company in their respective capacities as Trust Managers and
officers of the Company, and (ii) the Company, to the extent that the Company
has indemnified the Trust Managers and officers for such loss.
The Underwriting Agreement (Exhibit 1.1) also provides for the
indemnification by the Underwriters of the Company, its Trust Managers and
officers and Persons who control the Company within the meaning of Section 15
of the Securities Act with respect to certain liabilities, including
liabilities arising under the Securities Act.
ITEM 35. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements included in the Prospectus are:
Balance sheet at February 2, 1998
Notes to Balance Sheet
All schedules have been omitted because they are not applicable.
(b) Exhibits
1.1 Form of Underwriting Agreement (2)
3.1 Amended and Restated Declaration of Trust of the
Registrant (1)
3.2 Form of Bylaws of the Registrant (3)
4.1 Common Share Certificate (2)
5.1 Form of Opinion of Winstead Sechrest & Minick P.C.
regarding legality (3)
8.1 Opinion of Winstead Sechrest & Minick P.C. regarding tax
matters (2)
II-2
<PAGE> 146
10.1 Management Agreement between the Registrant and AMRESCO
Capital Trust Managers, L.P. (2)
10.2 AMRESCO Capital Trust 1998 Share Option and Award Plan (2)
10.3 Form of Registration Rights Agreement among the
Registrant, AMREIT Holdings, Inc. and AMREIT Managers,
L.P. (3)
10.4 Form of Correspondent Agreement between the Registrant and
Holliday Fenoglio Fowler, L.P. (3)
10.6 Warehouse Loan Agreement (2)
10.7 Repurchase Agreement (2)
10.8 Form of Right of First Refusal and Non-Competition
Agreement (2)
21.1 Subsidiaries of the Registrant (3)
23.1 Consent of Deloitte & Touche LLP (3)
23.2 Consent of Winstead Sechrest & Minick P.C. (included in
Exhibits 5.1 and 8.1) (3)
24.1 Power of Attorney (included on page II-4) (3)
99.1 Consents to be named as a trust manager pursuant to Rule
438 (2)
- --------------------
(1) Previously filed on February 3, 1998.
(2) To be filed by amendment.
(3) Filed herewith.
ITEM 37. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing of the Offering certificates in such denominations
and registered in such names as required by the Underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification by Registrant for liabilities arising under
the Securities Act may be permitted to trust managers, officers and controlling
Person of the Registrant pursuant to the provisions referenced in Item 34 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trust manager,
officer, or controlling Person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such trust manager, officer or
controlling Person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act, the information omitted from the Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE> 147
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-11 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in Dallas, Texas, on the 1st day of April, 1998.
AMRESCO CAPITAL TRUST
By:
/s/ Mark D. Gibson
-------------------------------------------------
Mark D. Gibson,
President and Chief Executive Officer
POWER OF ATTORNEY
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY CONSTITUTES AND
APPOINTS MARK D. GIBSON AND ROBERT L. ADAIR III, AND EACH OF THEM, ACTING
ALONE, AS HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT, WITH FULL POWERS OF
SUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL
CAPACITIES, TO SIGN AND TO FILE ANY AND ALL AMENDMENTS, INCLUDING
POST-EFFECTIVE AMENDMENTS AND ANY REGISTRATION STATEMENTS FILED PURSUANT TO
RULE 462(B), TO THIS REGISTRATION STATEMENT WITH THE SECURITIES AND EXCHANGE
COMMISSION, GRANTING TO SAID ATTORNEY-IN-FACT POWER AND AUTHORITY TO PERFORM
ANY OTHER ACT ON BEHALF OF THE UNDERSIGNED REQUIRED TO BE DONE IN CONNECTION
THEREWITH.
PURSUANT TO REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
/s/ Robert L. Adair Chairman of the Board April 1, 1998
- ----------------------------
Robert L. Adair III
/s/ Mark D. Gibson Trust Manager, President and April 1, 1998
- ---------------------------- Chief Executive Officer
Mark D. Gibson (Principal Executive Officer)
/s/ Thomas J. Andrus Executive Vice President April 1, 1998
- ---------------------------- Chief Financial Officer
Thomas J. Andrus (Principal Financial and
Accounting Officer)
/s/ Robert H. Lutz, Jr. Trust Manager April 1, 1998
- ----------------------------
Robert H. Lutz, Jr.
II-4
<PAGE> 148
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
1.1 Form of Underwriting Agreement (2)
3.1 Amended and Restated Declaration of Trust of the
Registrant (1)
3.2 Form of Bylaws of the Registrant (3)
4.1 Common Share Certificate (2)
5.1 Form of Opinion of Winstead Sechrest & Minick P.C.
regarding legality (3)
8.1 Opinion of Winstead Sechrest & Minick P.C. regarding tax
matters (2)
10.1 Management Agreement between the Registrant and AMRESCO
Capital Trust Managers, L.P. (2)
10.2 AMRESCO Capital Trust 1998 Share Option and Award Plan (2)
10.3 Form of Registration Rights Agreement among the
Registrant, AMREIT Holdings, Inc. and AMREIT Managers,
L.P. (3)
10.4 Form of Correspondent Agreement between the Registrant and
Holliday Fenoglio Fowler, L.P. (3)
10.6 Warehouse Loan Agreement (2)
10.7 Repurchase Agreement (2)
10.8 Form of Right of First Refusal and Non-Competition
Agreement (2)
21.1 Subsidiaries of the Registrant (3)
23.1 Consent of Deloitte & Touche LLP (3)
23.2 Consent of Winstead Sechrest & Minick P.C. (included in
Exhibits 5.1 and 8.1) (3)
24.1 Power of Attorney (included on page II-4) (3)
99.1 Consents to be named as a trust manager pursuant to Rule
438 (2)
</TABLE>
- --------------------
(1) Previously filed on February 3, 1998.
(2) To be filed by amendment.
(3) Filed herewith.
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
AMRESCO CAPITAL TRUST
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 Principal Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Additional Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - MEETINGS OF SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.1 Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.2 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.3 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.4 Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.5 Scope of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.6 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.7 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.8 Voting of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.9 Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.10 Voting of Shares by Certain Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.11 Inspectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.12 Reports to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.13 Proposals and Nominations by Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.14 Informal Action by Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE III - TRUST MANAGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 3.1 Powers and Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 3.2 Number and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 3.3 Independent Majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 3.4 Election and Term of Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.5 Nomination of Trust Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.6 Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.7 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.8 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.9 Bond Not Required; Time Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.10 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.11 Execution of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE IV - MEETINGS OF THE TRUST MANAGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.1 Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.2 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.3 Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.4 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.5 Quorum and Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.6 Presumption of Assent to Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
-i-
<PAGE> 3
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 4.7 Telephone Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.8 Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.9 Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.10 Interest of Trust Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.11 Right of Trust Managers and Officers to Own Shares or
Other Property and to Engage in Other Business . . . . . . . . . . . . . . . . . . . . 14
Section 4.12 Transactions Between Trust Managers and the Trust . . . . . . . . . . . . . . . . . . . . . . 15
Section 4.13 Persons Dealing with Trust Managers or Officers . . . . . . . . . . . . . . . . . . . . . . . 15
Section 4.14 Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 4.15 Liability of Trust Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE V - COMMITTEES OF THE TRUST MANAGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 5.1 Number, Tenure and Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 5.2 Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 5.3 Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 5.4 Minutes and Rules of Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 5.5 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 5.6 Telephone Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 5.7 Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE VI - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 6.1 General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 6.2 Election, Term of Office and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 6.3 Subordinate Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 6.4 Removal and Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 6.5 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 6.6 Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 6.7 Chief Operating Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 6.8 Chief Investment Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 6.9 Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 6.10 Chairman and Vice Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 6.11 President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 6.12 Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 6.13 General Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 6.14 Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 6.15 Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 6.16 Assistant Secretaries and Assistant Treasurers . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 6.17 Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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ARTICLE VII - CONTRACTS, LOANS, CHECKS AND DEPOSITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 7.1 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 7.2 Checks and Drafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 7.3 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE VIII - TRUST SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 8.1 Share Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 8.2 Lost Certificates, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 8.3 Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 8.4 Ownership of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 8.5 Closing of Transfer Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 8.6 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 8.7 Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE IX - ACCOUNTING YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE X - DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 10.1 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 10.2 Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE XI - PROHIBITED INVESTMENTS AND ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE XII - INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 12.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 12.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 12.3 Successful Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 12.4 Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 12.5 Advancement of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 12.6 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 12.7 Other Indemnification and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 12.8 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 12.9 Continuing Offer, Reliance, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 12.10 Indemnification of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 12.11 Effect of Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE XIII - GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 13.1 General Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 13.2 Limited Liability of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 13.3 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
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Section 13.4 Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 13.5 Examination of Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 13.6 Voting by the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 13.7 Number, Gender, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 13.8 Amendments to Declaration of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE XIV - AMENDMENT OF BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE XV - SUBJECT TO ALL LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
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<PAGE> 6
AMRESCO CAPITAL TRUST
(THE "TRUST")
BYLAWS
ARTICLE I
OFFICES
Section 1.1 Principal Office. The principal office of the Trust
shall be located at 700 North Pearl Street, Suite 2400, Dallas, Texas 75201 or
at such place or places as the Trust Managers may designate.
Section 1.2 Additional Offices. The Trust may have additional
offices at such places as the Trust Managers may from time to time determine or
the business of the Trust may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.1 Place of Meetings. All meetings, annual or special, of
the shareholders shall be held at the principal office of the Trust or at such
other place within or without the State of Texas as shall be stated in the
notice of the meeting.
A waiver of notice signed by all shareholders entitled to vote at a
meeting may designate any place, either within or without the State of Texas,
as the place for the holding of such meeting. If no designation is made, or if
a special meeting be otherwise called, the place of meeting shall be the
principal office of the Trust.
Section 2.2 Annual Meeting. An annual meeting of the shareholders
for the election of Trust Managers and the transaction of any business within
the powers of the Trust shall be held no later than the last day of May of each
year, after the delivery of the annual report, referred to in Section 2.12, at
a convenient location and on proper notice, on a date and at the time set by
the Trust Managers, beginning with the year 1999. Notwithstanding the
foregoing, the Trust Managers may, from time to time, by resolution, provide
that the annual meeting of shareholders be held on a date after the last day in
May of each year. Failure to hold an annual meeting does not invalidate the
Trust's existence or affect any otherwise valid acts of the Trust.
Section 2.3 Special Meetings. Special meetings of the shareholders
for any purpose or purposes, unless otherwise prescribed by law or by the
Declaration of Trust, may be called by the Trust Managers, any officer of the
Trust or the holders of at least ten percent (10%) percent of all of the shares
entitled to vote at the proposed special meetings. Business transacted at all
special meetings shall be confined to the purpose or purposes stated in the
notice.
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Section 2.4 Notice of Meetings. Written or printed notice of all
meetings of shareholders stating the place, day and hour thereof, and in the
case of a special meeting the purpose or purposes for which the meeting is
called, shall be personally delivered or mailed, not less than ten (10) days
nor more than sixty (60) days prior to the date of the meeting, to the
shareholders of record entitled to vote at such meeting. If personally
delivered, such notice shall be deemed to be delivered when left at the
residence or usual place of business of the shareholder. Personal delivery of
any such notice to any officer of a corporation or association, or to any
member of a partnership, shall constitute delivery of such notice to such
corporation, association or partnership.
Section 2.5 Scope of Notice. Any business of the Trust may be
transacted at an annual meeting of shareholders without being specifically
designated in the notice, except such business as is required by any statute to
be stated in such notice. No business shall be transacted at a special meeting
of shareholders except as specifically designated in the notice.
Section 2.6 Organization. At every meeting of the shareholders, the
Chairman of the Board (the "Chairman") shall preside at the meeting or, in the
case of vacancy in office or absence of the Chairman, one of the following
officers, if so elected and present, shall conduct the meeting in the order
stated: the Vice Chairman of the Board, the President, the Chief Executive
Officer, the Chief Operating Officer, the Chief Investment Officer, the Chief
Financial Officer, the Vice Presidents in their order of rank and seniority, or
a Chairman chosen by the shareholders entitled to cast a majority of the votes
which all shareholders present in person or by proxy are entitled to cast,
shall act as Chairman, and the Secretary, or, in his absence, an Assistant
Secretary, or in the absence of both the Secretary and Assistant Secretaries, a
person appointed by the Chairman shall act as Secretary. The presiding officer
shall set the agenda for the meeting, shall conduct all aspects of the meeting
and shall establish and interpret the rules of order for the conduct of the
meeting.
Section 2.7 Quorum. At any meeting of shareholders, the presence in
person or by proxy of shareholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this Section
2.7 shall not affect any requirement under any statute or the Declaration of
Trust for the vote necessary for the adoption of any measure. If, however,
such quorum shall not be present at any meeting of the shareholders, the
shareholders entitled to vote at such meeting, present in person or by proxy,
shall have the power to adjourn the meeting from time to time to a date not
more than one hundred twenty (120) days after the original record date without
notice other than announcement at the meeting. At such adjourned meeting at
which a quorum shall be present, any business may be transacted which might
have been transacted at the meeting as originally notified. The shareholders
present at a duly organized meeting at which a quorum was present may continue
to transact business until adjournment notwithstanding the withdrawal of enough
shareholders to leave less than a quorum present, provided that there remain at
such meeting the holder or holders of at least one-third (1/3) of the shares
issued and outstanding and entitled to vote thereof, present in person or
represented in the manner specified above. A holder of a share shall be
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treated as being present at a meeting if the holder of such share is (i)
present in person at the meeting or (ii) represented at the meeting by a valid
proxy, whether the instrument granting such proxy is marked as casting a vote
or abstaining, is left blank or does not empower such proxy to vote with
respect to some or all matters to be voted upon at the meeting.
Section 2.8 Voting of Shares. Except as otherwise provided by law,
the Declaration of Trust or these Bylaws, each shareholder shall be entitled at
each meeting of shareholders to one (1) vote on each matter submitted to a vote
at such meeting for each share having voting rights registered in his name on
the books of the Trust at the time of the closing of the share transfer books
(or at the record date) for such meeting. When a quorum is present at any
meeting (and notwithstanding the subsequent withdrawal of enough shareholders
to leave less than a quorum present) in accordance with Section 2.7, the votes
of holders of a majority of the shares entitled to vote, present in person or
represented by proxy, shall decide any matter submitted to such meeting, unless
the matter is one upon which by law or by express provision of the Declaration
of Trust or of these Bylaws the vote of a greater number is required, in which
case the vote of such greater number shall govern and control the decision of
such matter. In determining the number of shares entitled to vote, shares
abstaining from voting or not voted on a matter (including elections) will not
be treated as entitled to vote. The provisions of this Section 2.8 will govern
with respect to all votes of shareholders except as otherwise provided for in
these Bylaws or in the Declaration of Trust or by some specific statutory
provision superseding the provisions contained in these Bylaws or the
Declaration of Trust.
Section 2.9 Proxies.
(a) At any meeting of the shareholders every shareholder
entitled to vote at such meeting shall be entitled to vote in person
or by proxy executed in writing by such shareholder or by his duly
authorized attorney-in-fact. Proxies shall be filed with the
Secretary or Trust Managers immediately after the meeting has been
called to order.
(b) No proxy shall be valid after eleven (11) months from
the date of its execution unless otherwise provided in such proxy.
(c) A proxy shall be revocable unless the proxy form
conspicuously states that the proxy is irrevocable and the proxy is
coupled with an interest but in no event shall it remain irrevocable
for a period of more than eleven (11) months unless otherwise provided
in the proxy. A proxy which is revocable as aforesaid may be revoked
at any time by filing with the Secretary an instrument revoking it or
a duly executed proxy bearing a later date. Any revocable proxy which
is not so revoked shall, subject to paragraph (b) above, continue in
full force and effect.
(d) In the event that any instrument in writing shall
designate two (2) or more persons to act as proxies, a majority of
such persons present at the meeting
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or, if only one (1) shall be present, then that one (1), shall have
and may exercise all of the powers conferred by such written
instrument upon all the persons so designated unless the instrument
shall otherwise provide.
Section 2.10 Voting of Shares by Certain Holders.
(a) Shares standing in the name of another business
organization may be voted by such officer, agent or proxy as the
organizational documents of such organization may authorize or, in the
absence of such authorization, as may be determined by the governing
body of such organization.
(b) Shares held by an administrator, executor, guardian
or conservator may be voted by him, either in person or by proxy,
without a transfer of such shares into his name so long as such shares
forming a part of an estate are in the possession and form a part of
the estate being served by him. Shares standing in the name of a
trustee may be voted by him, either in person or by proxy, but no
trustee shall be entitled to vote shares held by him without a
transfer of such shares into his name as trustee.
(c) Shares standing in the name of a receiver may be
voted by such receiver, and shares held by or under the control of a
receiver may be voted by such receiver without the transfer thereof
into his name if authority to do so is contained in an appropriate
order of the court by which such receiver was appointed.
(d) A shareholder whose shares are pledged shall be
entitled to vote such shares until the shares have been transferred
into the name of the pledgee, and thereafter the pledgee shall be
entitled to vote the shares so transferred.
(e) Shares of the Trust directly or indirectly owned by it
shall not be voted at any meeting and shall not be counted in
determining the total number of outstanding shares entitled to be voted
at any given time, unless they are held by it in a fiduciary capacity,
in which case they may be voted and shall be counted in determining the
total number of outstanding shares at any given time.
(f) The Trust Managers may adopt by resolution a procedure
by which a shareholder may certify in writing to the Trust that
any shares registered in the name of the shareholder are held for the
account of a specified person other than the shareholder. The
resolution shall set forth the class of shareholders who may make the
certification, the purpose for which the certification may be made, the
form of certification and the information to be contained in it; if the
certification is with respect to a record date or closing of the share
transfer books, the time after the record date or closing of the share
transfer books within which the certification must be received by the
Trust; and any other provisions with respect to the procedure which the
Trust Managers consider necessary or desirable. On receipt of such
certification, the person specified in the certification shall be
regarded as,
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<PAGE> 10
for the purposes set forth in the certification, the shareholder of
record of the specified shares in place of the shareholder who makes
the certification.
Section 2.11 Inspectors.
(a) The Trust shall, in advance of any meeting of
shareholders, appoint one (1) or more inspectors to act at the meeting
and make a written report thereof. The Trust may designate one (1) or
more persons as alternate inspectors to replace any inspector who
fails to act. If no inspector or alternate is able to act at a
meeting of shareholders, the person presiding at the meeting shall
appoint one (1) or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of his duties, shall
take and sign an oath faithfully to execute the duties of inspector
with strict impartiality and according to the best of his ability.
(b) The inspectors shall (i) ascertain the number of
shares outstanding and the voting power of each, (ii) determine the
shares represented at a meeting and the validity of proxies and
ballots, (iii) count all votes and ballots, (iv) determine and retain
for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors and (v) certify their
determination of the number of shares represented at the meeting, and
their count of all votes and ballots. The inspectors may appoint or
retain other persons or entities to assist the inspectors in the
performance of the duties of the inspectors.
(c) The date and time of the opening and closing of the
polls for each matter upon which the shareholders will vote at a
meeting shall be announced at the meeting. No ballots, proxies or
votes, nor any revocations thereof or changes thereto, shall be
accepted by the inspectors after the closing of the polls unless a
court of appropriate jurisdiction, upon application by a shareholder,
shall determine otherwise.
(d) In determining the validity and counting of proxies
and ballots, the inspectors may examine and consider such records or
factors as allowed by the Texas Real Estate Investment Trust Act (the
"Texas REIT Act").
(e) Each report of an inspector shall be in writing and
signed by him or by a majority of them if there is more than one (1)
inspector acting at such meeting. If there is more than one (1)
inspector, the report of a majority shall be the report of the
inspectors. The report of the inspector or inspectors on the number
of shares represented at the meeting and the results of the voting
shall be prima facie evidence thereof.
Section 2.12 Reports to Shareholders. The Trust Managers shall
submit to the shareholders at or before the annual meeting of shareholders a
report of the business and operations of the Trust during such fiscal year,
containing a balance sheet and a statement of income and surplus of the Trust,
accompanied by the certification of an independent certified public accountant,
and such further information as the Trust
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<PAGE> 11
Managers may determine is required pursuant to any law or regulation to which
the Trust is subject. Within the earlier of twenty (20) days after the annual
meeting of shareholders or one hundred twenty (120) days after the end of the
fiscal year of the Trust, the Trust Managers shall place the annual report on
file at the principal office of the Trust and with any governmental agencies as
may be required by law and as the Trust Managers may deem appropriate.
Section 2.13 Proposals and Nominations by Shareholders.
(a) Annual Meetings of Shareholders. No business may be
transacted at an annual meeting of shareholders, other than business
that is either (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Trust Managers
(or any duly authorized committee thereof), (ii) otherwise properly
brought before the annual meeting by or at the direction of the Trust
Managers (or any duly authorized committee thereof) or (iii) otherwise
properly brought before the annual meeting by any shareholder of the
Trust (A) who is a shareholder of record on the date of the giving of
the notice provided for in this Section 2.13 and on the record date
for the determination of shareholders entitled to vote at such annual
meeting and (B) who complies with the notice procedures set forth in
this Section 2.13.
In addition to any other applicable requirements, for business
to be properly brought before an annual meeting by a shareholder, such
shareholder must have given timely notice thereof in proper written
form to the Secretary. To be timely, a shareholder's notice to the
Secretary must be delivered to or mailed and received at the principal
office of the Trust not less than sixty (60) days nor more than ninety
(90) days prior to the date of the applicable annual meeting of
shareholders, provided, however, that in the event that less than
seventy (70) days' notice or prior public disclosure of the date of
the meeting be given or made, notice by the shareholder to be timely
must be so received not later than the close of business on the tenth
(10th) day following the day on which such notice of the date of the
applicable annual meeting was mailed or such public disclosure of the
date of such annual meeting was made, whichever first occurs.
To be in proper written form, a shareholder's notice to the
Secretary must set forth as to each matter such shareholder proposes
to bring before the annual meeting (i) a brief description of the
business desired to be brought before the annual meeting and the
reasons for conducting such business at the annual meeting, (ii) the
name and record address of such shareholder, (iii) the number of
shares of the Trust that are owned beneficially or of record by such
shareholder, (iv) a description of all arrangements or understandings
between such shareholder and any other person or persons (including
their names) in connection with the proposal of such business by such
shareholder and any material interest of such shareholder in such
business and (v) a representation that such shareholder intends to
appear in person or by proxy at the annual meeting to bring such
business before the meeting.
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No business shall be conducted at the annual meeting of the
shareholders except business brought before the annual meeting in
accordance with the procedures set forth in this Section 2.13;
provided, however, that, once business has been properly brought
before the annual meeting in accordance with such procedures, nothing
in this Section 2.13 shall be deemed to preclude discussion by any
shareholder of any such business. If the presiding officer of an
annual meeting determines that business was not properly brought
before the annual meeting in accordance with the foregoing procedures,
the presiding officer shall declare to the meeting that the business
was not properly brought before the meeting and such business shall
not be transacted.
Nominations of persons for election to the Board of Trust
Managers may be made at an annual meeting of shareholders at which
Trust Managers are to be elected. In addition to any other applicable
requirements, for a nomination to be made at an annual meeting by a
shareholder, such shareholder must have given timely notice thereof in
proper written form to the Secretary. To be timely, a shareholder's
notice to the Secretary must be delivered to or mailed and received at
the principal offices of the Trust not less than sixty (60) days not
more than ninety (90) days prior to the date of the applicable annual
meeting of shareholders; provided, however, that in the event that
less than seventy (70) days' notice or prior public disclosure of the
date of the meeting is given or made, notice by the shareholder to be
timely must be so received not later than the close of business on the
tenth (10th) day following the day on which such notice of the date of
the applicable annual meeting was mailed or such public disclosure of
the date of such annual meeting was made, whichever first occurs.
To be in proper written form, a shareholder's notice to the
Secretary must set forth (a) as to each person whom the shareholder
proposes to nominate for election as a Trust Manager (i) the name,
age, business address and residence address of the person, (ii) the
principal occupation or employment of the person, (iii) the number of
shares of the Trust that are owned beneficially or of record by the
person and (iv) any other information relating to the person that
would be required to be disclosed in a proxy statement or other
filings required to be made in connection with solicitation of proxies
for election of Trust Managers pursuant to Section 14 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and
the rules and regulations thereunder, and (b) as to the shareholder
giving the notice (i) the name and record address of such shareholder,
(ii) the number of shares of the Trust that are owned beneficially or
of record by such shareholder, (iii) a description of all arrangements
or understandings between such shareholder and each proposed nominee
and any other person or persons (including their names) pursuant to
which the nomination(s) are to be made by such shareholders, (iv) a
representation that such shareholder intends to appear in person or by
proxy at the meeting to nominate the persons named in the notice and
(v) any other information relating to such shareholder that would be
required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for
election of Trust Managers pursuant to Section 14 of the
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Exchange Act and the rules and regulations thereunder. Such notice
must be accompanied by a written consent of each proposed nominee to
being named as a nominee and to serve as a Trust Manager if elected.
No person shall be eligible for election as a Trust Manager
unless nominated in accordance with the procedures set forth in this
Section 2.13. If the presiding officer of the meeting determines that
a nomination was not made in accordance with the foregoing procedures,
the presiding officer shall declare to the meeting that the nomination
was defective and such defective nomination shall be disregarded.
(b) Special Meetings of Shareholders. Only such business
shall be conducted at a special meeting of shareholders as shall have
been brought before the meeting pursuant to the Trust's notice of
meeting. Nominations of persons for election to the Board of Trust
Managers may be made at a special meeting of the shareholders at which
Trust Managers are to be elected (i) pursuant to the Trust's notice of
meeting, (ii) by or at the direction of the Board of Trust Managers or
(iii) provided that the Board of Trust Managers has determined that
the Trust Managers shall be elected at such special meeting, by any
shareholder of the Trust who was a shareholder of record both at the
time of giving of notice provided for in this Section 2.13(b) and at
the time of the special meeting, who is entitled to vote at the
meeting and who complied with the notice procedures set forth in this
Section 2.13(b). In the event the Trust calls a special meeting of
shareholders for the purpose of electing one (1) or more Trust
Managers to the Board of Trust Managers, any such shareholder may
nominate a person or persons (as the case may be) for election to such
position as specified in the Trust's notice of meeting, if the
shareholder's notice containing the information required by paragraph
(a) of this Section 2.13 shall be delivered to the Secretary at the
principal executive offices of the Trust not earlier than the close of
business on the ninetieth (90th) day prior to such special meeting and
not later than the close of business on the later of the sixtieth
(60th) day prior to such special meeting or the tenth (10th) day
following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Trust
Managers to be elected at such meeting. In no event shall the public
announcement of a postponement or adjournment of a special meeting to
a later date or time commence a new time period for the giving of a
shareholder's notice as described above.
(c) Cumulative Voting. At each election for Trust
Managers, each shareholder entitled to vote at such election shall,
unless otherwise provided by the Declaration of Trust or by applicable
law, have the right to vote the number of shares owned by him for as
many persons as there are to be elected and for whose election he has
a right to vote. Unless otherwise provided by the Declaration of
Trust, no shareholder shall have the right or be permitted to cumulate
his votes on any basis.
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(d) General. Only such persons who are nominated in
accordance with the procedures set forth in this Section 2.13 shall be
eligible to serve as Trust Managers and only such business shall be
conducted at a meeting of shareholders as shall have been brought
before the meeting in accordance with the procedures set forth in this
Section 2.13. The presiding officer of the meeting shall have the
power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed, as the
case may be, in accordance with the procedures set forth in this
Section 2.13 and, if any proposed nomination or business is not in
compliance with this Section 2.13, to declare that such nomination or
proposal shall be disregarded.
For purposes of this Section 2.13, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable news service or in a
document publicly filed by the Trust with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
Notwithstanding the foregoing provisions of this
Section 2.13, a shareholder shall also comply with all applicable
requirements of state law and of the Exchange Act and the rules and
regulations thereunder with respect to the matters set forth in this
Section 2.13. Nothing in this Section 2.13 shall be deemed to affect
any rights of shareholders to request inclusion of proposals in, nor
the right of the Trust to omit a proposal from, the Trust's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
Section 2.14 Informal Action by Shareholders. Unless otherwise
provided by the Declaration of Trust, any action required or permitted to be
taken at a meeting of shareholders may be taken without a meeting if a consent
in writing, setting forth such action, is signed by shareholders entitled to
cast a sufficient number of votes to approve the matter, as required by
statute, the Declaration of Trust or these Bylaws, and such consent is filed
with the minutes of proceedings of the shareholders. Such action shall then
have the same force and effect as action taken at a meeting, and may be stated
as such in any Declaration of Trust or document filed with the county clerk of
the county of the principal place of business of the Trust.
Shareholders may participate in and hold a meeting of the shareholders
by means of conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this Section 2.14 shall constitute
presence in person at such meeting, except where a person participates in the
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
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ARTICLE III
TRUST MANAGERS
Section 3.1 Powers and Responsibilities. The business and affairs of
the Trust shall be managed under the direction of its Trust Managers who may
exercise all such powers of the Trust and do all such lawful acts and things as
are not by statute, the Declaration of Trust or these Bylaws directed or
required to be exercised or done by the shareholders. The enumeration of any
specific power or authority herein shall not be construed as limiting the
aforesaid powers or the general powers or authority or any other specified
power or authority conferred herein upon the Trust Managers. Among other
things, the Trust Managers shall be responsible for (a) supervising the Trust's
relations with the managers of the Trust's assets, (b) evaluating the
capability and performance of the managers of the Trust's assets, (c) adopting
the Trust's investment policies and reviewing such policies from time to time,
(d) determining that the fees and expenses of the Trust are reasonable, (e)
reviewing the aggregate borrowings of the Trust, (f) authorizing the issuance
of the capital stock of the Trust, (g) authorizing the acquisition and
disposition of assets and setting guidelines in connection with the same, (h)
ratifying the appointments of independent accountants for the Trust and (i)
establishing and reviewing guidelines for the Trust's investments, borrowings
and operations.
Section 3.2 Number and Qualification. There shall at all times be no
less than two (2) nor more than nine (9) Trust Managers who shall be elected
annually by the shareholders or at a special meeting if the circumstances so
require. Subject to any limitations specified by law or in the Declaration of
Trust, the number of Trust Managers may be fixed from time to time by
resolution adopted by a majority of the Trust Managers. No decrease in the
number of Trust Managers shall have the effect of shortening the term of any
incumbent Trust Manager. The Trust Managers do not need to be residents of the
State of Texas nor shareholders of the Trust. Trust Managers must be natural
persons at least twenty-one (21) years of age and must not be subject to any
legal disability.
Section 3.3 Independent Majority. At all times (except (i) during a
period not to exceed ninety (90) days following the death, resignation,
incapacity or removal from office of a Trust Manager prior to the expiration of
the Trust Manager's term of office or (ii) prior to the closing date of the
Trust's initial public offering of its common shares) a majority of the Trust
Managers shall be Independent Trust Managers.
An Independent Trust Manager shall be a natural person who: (i) is
not an officer or employee of the Trust or any Affiliate of the Trust; (ii) is
not an Affiliate of any advisor or manager to the Trust under an advisory or
management agreement of the Trust and (iii) has not performed more than a "de
minimus" amount of services for the advisor or manager of the Trust or had any
material business relationship with the advisor or manager of the Trust other
than as a Trust Manager or as a director of any entity controlled by the Trust.
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For purposes of this Section 3.3, (A) an "Affiliate" of a Person shall
mean (i) any Person that, directly or indirectly, controls or is controlled by
or is under common control with such Person, (ii) any other Person that owns,
beneficially, directly or indirectly, five percent (5%) or more of the
outstanding capital shares, shares or equity interests of such Person or (iii)
any officer, director, employee, partner or trustee of such Person or any
Person controlling, controlled by or under common control with such Person
(excluding trustees and Persons serving in similar capacities who are not
otherwise an Affiliate of such Person), (B) the term "Person" means and
includes individuals, corporations, general and limited partnerships, stock
companies or associations, joint ventures, associations companies, trusts,
banks, trust companies, business trusts, or other entities and governments and
agencies and political subdivisions thereof and (c) "control" (including the
correlative meanings of the terms "controlled by" and "under common control
with," as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, through the ownership of voting securities,
partnership interests or other equity interests.
For purposes of this Section 3.3, an interest, service or business
relationship automatically is not "de minimus" or is material, as the case may
be, if the interest or gross revenue involved exceeds five percent (5%) of the
Trust Manager or other Person's (i) annual gross revenue from all sources in
either of the last two (2) years or (ii) net worth, on a fair market value
basis.
Notwithstanding the foregoing requirement that a majority of the Trust
Managers be Independent Trust Managers, no action otherwise validly taken by
the Board of Trust Managers during a period in which a majority of its members
are not Independent Trust Managers shall be invalidated or otherwise affected
by such circumstance, nor shall such circumstance subject the Trust Managers
taking any such action to a higher standard of care or to liability other than
that which would have applied to such action had a majority of the members of
the Board of Trust Managers been Independent Trust Managers at the time such
action was taken.
Section 3.4 Election and Term of Office. The Trust Manager nominees
who have not been previously elected as Trust Managers by the shareholders of
the Trust shall be elected at the annual or a special meeting of the
shareholders by the affirmative vote of the holders of a majority of the
outstanding shares of the Trust. Trust Managers who have been previously
elected as Trust Managers by the shareholders of the Trust shall be re-elected
at the annual or a special meeting of the shareholders by the affirmative vote
of the holders of a majority of the shares of the Trust present in person or
represented by proxy at such meeting; provided, however, that any Trust Manager
that has been previously elected as a Trust Manager by the shareholders who is
not re-elected by such majority vote at a subsequent annual or special meeting
shall nevertheless remain in office until his successor is elected and
qualified. Each Trust Manager shall hold office until his successor is elected
and qualified, or until his death, resignation or removal in the manner
provided in these Bylaws.
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Section 3.5 Nomination of Trust Managers. Only persons who are
nominated in accordance with the procedures set forth in Section 2.13 shall be
eligible for election as Trust Managers. Nominations of persons for election
as Trust Managers may be made at any annual or special meeting of shareholders
(a) by or at the direction of the Trust Managers (or any duly authorized
committee thereof) or (b) by any shareholder of the Trust (i) who is a
shareholder of record on the date of the giving of the notice set forth in
Section 2.13 and on the record date for the determination of shareholders
entitled to vote at such annual meeting and (ii) who complies with the notice
procedures set forth in Section 2.13.
Section 3.6 Resignation. Any Trust Manager may resign at any time by
giving written notice to the remaining Trust Managers. Such resignation shall
take effect at the time specified therein, and unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective. A Trust Manager judged incompetent or for whom a guardian or
conservator has been appointed, shall be deemed to have resigned as of the date
of such adjudication or appointment.
Section 3.7 Removal. A Trust Manager may be removed at any time with
or without cause by the vote of holders of shares representing two-thirds (2/3)
of the total votes authorized to be cast by shares then outstanding and
entitled to vote thereon. Upon the resignation or removal of any Trust
Manager, or his otherwise ceasing to be a Trust Manager, he shall execute and
deliver such documents as the remaining Trust Managers shall require for the
conveyance of any Trust property or assets held in his name, shall account to
the remaining Trust Managers as they require for all property or assets which
he holds as Trust Manager and shall thereupon be discharged as Trust Manager.
Upon the incapacity or death of any Trust Manager, his legal representative
shall perform the acts set forth in the preceding sentence and the discharge
mentioned therein shall run to such legal representative and to the
incapacitated Trust Manager or the estate of the deceased Trust Manager, as the
case may be.
Section 3.8 Vacancies. If any or all of the Trust Managers cease to
be Trust Managers hereunder, whether by reason or resignation, removal,
incapacity, death or otherwise, such event shall not terminate the Trust or
affect its continuity. Until vacancies are filled, the remaining Trust Manager
or Trust Managers (even though fewer than two (2)) may exercise the powers of
the Trust Managers hereunder. Vacancies may be filled by successor Trust
Managers either appointed by a majority of the remaining Trust Managers or
elected by the vote of the holders of a majority of the outstanding shares at
an annual or special meeting of the shareholders. Any Trust Manager elected to
fill a vacancy created by the resignation, removal, incapacity or death of a
former Trust Manager shall hold office for the unexpired term of such former
Trust Manager. The election of a successor Trust Manager shall be considered
an amendment to the Declaration of Trust.
Section 3.9 Bond Not Required; Time Commitment. Unless otherwise
required by law, no Trust Manager shall be required to give bond, surety or
security in any jurisdiction for the performance of his duties or obligations
to the Trust. No Trust
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Manager shall be required to devote his entire time to the business and affairs
of the Trust.
Section 3.10 Compensation. Trust Managers shall receive compensation
for their services to the Trust as may be determined from time to time by the
Trust Managers. The Trust Managers may delegate to any committee the power to
fix from time to time the compensation of Trust Managers. Officers of the
Trust who also serve as Trust Managers shall not receive compensation for their
service as Trust Managers.
Section 3.11 Execution of Documents. Each Trust Manager and any one
of them is authorized to execute on behalf of the Trust any document or
instrument of any nature whatsoever, provided that the execution by the Trust
of any such document or instrument shall have been previously authorized by
such action of the Trust Managers as may be required by statute, the
Declaration of Trust or these Bylaws.
ARTICLE IV
MEETINGS OF THE TRUST MANAGERS
Section 4.1 Place of Meetings. The Trust Managers may hold their
meetings, whether annual, regular or special, either within or without the
State of Texas.
Section 4.2 Annual Meeting. The annual meeting of the Trust Managers
shall be held immediately following the adjournment of the annual meeting of
the shareholders and no notice of such meeting shall be necessary to the Trust
Managers in order to legally constitute the meeting, provided a quorum shall be
present, or they may meet at such time and place as shall be fixed by the
consent in writing of all of the Trust Managers.
Section 4.3 Regular Meetings. Regular meetings of the Trust
Managers, in addition to the annual meetings referred to in Section 4.2, may be
held without notice at such time and place as shall from time to time be
determined by the Trust Managers.
Section 4.4 Special Meetings. Special meetings of the Trust Managers
may be called by the Chairman, the President or the Chief Executive Officer, in
the case of a Chairman not being elected or being unavailable, on one (1) day's
notice (oral or written) to each Trust Manager. Special meetings shall be
called by the Chairman, the President, the Chief Executive Officer or the
Secretary on like notice on the written request of any Trust Manager. Neither
the purpose of, nor the business to be transacted at, any special meeting of
the Trust Managers need be specified in the notice or waiver of notice of such
meeting. Attendance of a Trust Manager at a meeting shall constitute a waiver
of notice of such meeting except where a Trust Manager attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the grounds that the meeting is not lawfully
called or convened.
Section 4.5 Quorum and Action. At all meetings of the Trust
Managers, the presence of a majority of the Trust Managers shall be necessary
and sufficient to
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constitute a quorum for the transaction of business and the act of a majority
of the Trust Managers at any meeting at which a quorum is present shall be the
act of the Trust Managers unless the act of a greater number is required by
law, the Declaration of Trust or these Bylaws. If a quorum shall not be
present at any meeting of Trust Managers, the Trust Managers present may
adjourn the meeting from time to time without notice other than announcement at
the meeting until a quorum shall be present.
Section 4.6 Presumption of Assent to Action. A Trust Manager who is
present at a meeting of the Trust Managers at which action on any Trust matter
is taken shall be presumed to have assented to the action taken unless his
dissent shall be entered in the minutes of the meeting or unless he shall file
his written dissent to such action with the Secretary of the meeting before the
adjournment thereof or shall forward such dissent by registered mail to the
Secretary immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a Trust Manager who voted in favor of such action.
Section 4.7 Telephone Meetings. Trust Managers may participate in
and hold a meeting of the Trust Managers by means of conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other. Participation in a meeting pursuant to
this Section 4.7 shall constitute presence in person at such meeting, except
where a person participates in the meeting for the express purpose of objecting
to the transaction of any business on the ground that the meeting is not
lawfully called or convened.
Section 4.8 Action Without Meeting. Any action required or permitted
to be taken at a meeting of the Trust Managers may be taken without a meeting
if a consent in writing, setting forth the action so taken, is signed by all
the Trust Managers, and such consent shall have the same force and effect as a
unanimous vote at a meeting.
Section 4.9 Minutes. The Trust Managers shall keep regular minutes
of their proceedings. The minutes shall be placed in the minute book of the
Trust.
Section 4.10 Interest of Trust Managers. With respect to the
actions of the Trust Managers, Trust Managers who have any direct or indirect
interest in connection with any matter being acted upon may be counted for all
quorum purposes under this Article IV.
Section 4.11 Right of Trust Managers and Officers to Own Shares or
Other Property and to Engage in Other Business. Any Trust Manager or officer
of the Trust ("Officer") may acquire, own, hold and dispose of shares of the
Trust for his individual account, and may exercise all rights of a shareholder
to the same extent and in the same manner as if he or she were not a Trust
Manager or an Officer. Except as provided specifically to the contrary in a
written agreement with the Trust, any Trust Manager or Officer may, in a
capacity other than that of Trust Manager or officer of the Trust, have
business interests and engage in business activities similar to or in addition
to those relating to the Trust, which interests and activities may be similar
to and competitive with those of the Trust and may include, without limitation,
the acquisition, holding, management, development, operation or disposition,
for his or her own account or for the
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account of others, of interests in mortgage loans, mortgage backed securities,
interests in real estate or other real estate related assets, or interests in
entities engaged in the business of investing in, owning or operating real
estate related investments. Except as provided specifically to the contrary in
a written agreement with the Trust, each Trust Manager and Officer shall be
free of any obligation to present to the Trust any investment opportunity which
comes to him in any capacity other than solely as Trust Manager or agent of the
Trust, even if such opportunity is of a character which, if presented to the
Trust, could be exploited by the Trust. Subject to the provisions of Article
III, any Trust Manager or Officer may be a trustee, officer, director,
shareholder, partner, member, advisor or employee of, or otherwise have a
direct or indirect interest in any person who may be engaged to render advice
or services to the Trust, and may receive compensation from such person as well
as compensation as Trust Manager or Officer or otherwise hereunder.
Section 4.12 Transactions Between Trust Managers and the Trust.
(a) Except as otherwise provided by the Declaration of
Trust or these Bylaws, and in the absence of fraud, a contract, act or
other transaction, between the Trust and any other person, or in which
the Trust is interested, shall be valid and no Trust Manager or
Officer shall have any liability as a result of entering into any such
contract, act or transaction, even though (a) one (1) or more of the
Trust Managers or Officers, directly or indirectly is interested in or
connected with, or is a trust manager, trustee, partner, director,
shareholder, member, employee, officer or agent of such other person
or (b) one (1) or more of the Trust Managers or Officers, individually
or jointly with others, is a party to, or directly or indirectly is
interested in, or connected with, such contract, act or transaction,
provided that (i) such interest or connection is disclosed in
reasonable detail or known to the Trust Managers and thereafter the
Trust Managers authorize or ratify such contract, act or other
transaction by the affirmative vote of a majority of the Trust
Managers who are not interested in the transaction or (ii) such
interest or connection is disclosed in reasonable detail or known to
the shareholders, and thereafter such contract, act or transaction is
approved by shareholders holding a majority of the shares then
outstanding and entitled to vote thereon.
(b) Common or interested Trust Managers may be counted in
determining the presence of a quorum at a meeting of the Trust
Managers or a committee of Trust Managers that authorizes the contract
or transaction.
Section 4.13 Persons Dealing with Trust Managers or Officers. Any
act of the Trust Managers or Officers purporting to be done in their capacity
as such shall, as to any person dealing with such Trust Managers or Officers,
conclusively be deemed to be within the purposes of the Trust and within the
powers of the Trust Managers or Officers. No person dealing with the Trust
Managers or with the Officers or any of them, shall be bound to see to the
application of any funds or property passing into their hands or control. The
receipt of the Trust Managers or any of the Officers of moneys or other
consideration shall be binding upon the Trust.
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Section 4.14 Reliance. Trust Managers and Officers shall not be
liable for any claims or damages that may result from their acts in the
discharge of any duty imposed or power conferred upon them by the Trust, if, in
the exercise of ordinary care, they acted in good faith and in reliance upon
information, opinions, reports or statements, including financial statements
and other financial data, concerning the Trust or another person, that were
prepared or presented by (a) one (1) or more Officers or employees of the
Trust, other than the Trust Manager; (b) legal counsel, public accountants,
investment bankers or other persons as to matters the Trust Manager reasonably
believes are within the persons professional or expert competence; or (c) a
committee of the Trust Managers of which the Trust Manager is not a member.
The Trust Managers and Officers may rely upon any instrument or other document
believed by them to be genuine.
Section 4.15 Liability of Trust Managers. No Trust Manager shall be
liable to the Trust for any act, omission, loss, damage or expense arising from
the performance of his duty under the Trust, except to the extent specifically
required by statute, the Declaration of Trust or these Bylaws.
ARTICLE V
COMMITTEES OF THE TRUST MANAGERS
Section 5.1 Number, Tenure and Qualifications. The Trust Managers
may appoint from among its members a Compensation Committee and an Audit
Committee, composed of two (2) or more Independent Trust Managers. The Trust
Managers may appoint such other committees as it shall determine appropriate or
advisable from time to time composed of two (2) or more Trust Managers. All
committee members shall serve at the pleasure of the Trust Managers.
Section 5.2 Powers. The Trust Managers may delegate to committees
appointed under Section 5.1 any of the powers of the Trust Managers, except as
prohibited by law.
Section 5.3 Meetings. In the absence of any member of any such
committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint another Trust Manager to act in the place of
such absent member. Notice of committee meetings shall be given in the same
manner as notice for special meetings of the Board of Trust Managers.
One-third (1/3), but not less than two (2), of the members of any
committee shall be present in person at any meeting of such committee in order
to constitute a quorum for the transaction of business at such meeting, and the
act of a majority present shall be the act of such committee. The Board of
Trust Managers may designate a chairman of any committee, and such chairman or
any two (2) members of any committee may fix the time and place of its meetings
unless the Board shall otherwise provide. In the absence or disqualification
of any member of any such committee, the members thereof present at any meeting
and not disqualified from voting, whether or not they constitute a quorum,
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may unanimously appoint another Trust Manager to act at the meeting in the
place of such absent or disqualified members.
Section 5.4 Minutes and Rules of Procedure. Each committee
designated by the Trust Managers shall keep regular minutes of its proceedings
and report the same to the Trust Managers when required. Subject to the
provisions of these Bylaws, the members of any committee may fix such
committee's own rules of procedure.
Section 5.5 Vacancies. The Trust Managers shall have the power at
any time to fill vacancies in, to change the membership of, or to dissolve, any
committee.
Section 5.6 Telephone Meetings. Members of any committee designated
by the Trust Managers may participate in or hold a meeting by use of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Participation in a meeting
pursuant to this Section 5.6 shall constitute presence in person at such
meeting, except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the grounds that the
meeting is not lawfully called or convened.
Section 5.7 Action Without Meeting. Any action required or permitted
to be taken at a meeting of any committee designated by the Trust Managers may
be taken without a meeting if a consent in writing, setting forth the action
so taken, is signed by all the members of the committee, and such consent shall
have the same force and effect as a unanimous vote at a meeting.
ARTICLE VI
OFFICERS
Section 6.1 General Provisions. The Officers shall initially include
a Chairman of the Board, President, Chief Executive Officer, Chief Financial
Officer and Secretary and may include a Vice Chairman of the Board, Chief
Operating Officer, Chief Investment Officer, General Counsel, Treasurer, one
(1) or more Vice Presidents, one (1) or more Assistant Secretaries and one (1)
or more Assistant Treasurers. In addition, the Trust Managers may from time to
time appoint such other Officers with such powers and duties as they shall deem
necessary or desirable. The Officers shall be elected annually by the Trust
Managers at the first meeting of the Trust Managers held after each annual
meeting of shareholders. If the election of Officers shall not be held at such
meeting, such election shall be held as soon thereafter as may be convenient.
Each Officer shall hold office until his successor is elected and qualifies or
until his death, resignation or removal in the manner hereinafter provided.
Any two (2) or more Officers, except President and Vice President, may be held
by the same person. In their discretion, the Trust Managers may leave unfilled
any office except that of President and Secretary. Election of an Officer or
agent shall not of itself create contract rights between the Trust and such
Officer or agent.
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Section 6.2 Election, Term of Office and Qualification. The Trust
Managers shall elect officers, none of whom need be a Trust Manager, except for
the Chairman of the Board, at any time from time to time as they deem
necessary. Each Officer so elected shall hold office until his successor shall
have been duly elected and qualified or until his death, resignation or removal
in the manner hereinafter provided. Election or appointment of an Officer or
agent shall not of itself create contract rights.
Section 6.3 Subordinate Officers. The Trust Managers may appoint
such other Officers and agents as it shall deem necessary who shall hold their
offices for such terms, have such authority and perform such duties as the
Trust Managers may from time to time determine. The Trust Managers may
delegate to any committee or Officer the power to appoint any such subordinate
Officer or agent. No subordinate officer appointed by any committee or
superior Officer as aforesaid shall be considered an officer of the Trust, the
officers of the Trust being limited to the officers elected or appointed as
such by the Trust Managers.
Section 6.4 Removal and Resignation. Any Officer or agent of the
Trust may be removed by the Trust Managers if in their judgment the best
interests of the Trust would be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed.
Any Officer may resign at any time by giving written notice of his resignation
to the Trust Managers, the Chairman of the Board, the President or the
Secretary. Any resignation shall take effect at any time subsequent to the
time specified therein or, if the time when it shall become effective is not
specified therein, immediately upon its receipt. The acceptance of a
resignation shall not be necessary to make it effective unless otherwise stated
in the resignation. Such resignation shall be without prejudice to the
contract rights, if any, of the Trust.
Section 6.5 Vacancies. A vacancy in any office may be filled by the
Trust Managers for the balance of the term, but in the case of a vacancy
occurring in an office filled by a committee or superior officer in accordance
with the provisions of Section 6.3, such vacancy may be filled by such
committee or superior officer.
Section 6.6 Chief Executive Officer. The Chief Executive Officer
shall have responsibility for implementation of the policies of the Trust, as
determined by the Trust Managers, and for the administration of the business
affairs of the Trust. In the absence of both the Chairman and Vice Chairman of
the Board, the Chief Executive Officer shall preside over the meetings of the
Trust Managers and of the shareholders at which he shall be present. The Chief
Executive Officer shall have the general supervision and direction of all other
Officers with full power to see that their duties are properly performed and
shall see that all orders and resolutions of the Trust Managers are carried
into effect. He may sign, with any other proper Officer, certificates for
shares of the Trust and any deeds, bonds, mortgages, contracts and other
documents which the Trust Managers have authorized to be executed, except where
required by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Trust
Managers or these Bylaws, to some other Officer or agent of the
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Trust. In addition, the Chief Executive Officer shall perform whatever duties
and shall exercise all powers that are given to him by the Trust Managers.
Section 6.7 Chief Operating Officer. The Trust Managers may
designate and elect a Chief Operating Officer. Said officer will have the
responsibilities and duties as set forth by the Trust Managers or the Chief
Executive Officer.
Section 6.8 Chief Investment Officer. The Trust Managers may
designate and elect a Chief Investment Officer who shall have such
responsibilities and duties with respect to the investments of the Trust as may
be designated by the Trust Managers.
Section 6.9 Chief Financial Officer. The Chief Financial Officer
shall have the custody of the funds and securities of the Trust and shall keep
full and accurate accounts of receipts and disbursements in books belonging to
the Trust and shall deposit all moneys and other valuable effects in the name
and to the credit of the Trust in such depositories as may be designated by the
Trust Managers.
The Chief Financial Officer shall disburse the funds of the Trust as
may be ordered by the Trust Managers, taking proper vouchers for such
disbursements, and shall render to the Chairman, the President and the Trust
Managers, at the regular meetings of the Trust Managers or whenever they may
require it, an account of all his transactions as Chief Financial Officer and
of the financial condition of the Trust. The Chief Financial Officer may sign,
with any other proper Officer, certificates for shares of the Trust.
If required by the Trust Managers, he shall give the Trust a bond in
such sum and with such surety or sureties as shall be satisfactory to the Trust
Managers for the faithful performance of the duties of his office and for the
restoration to the Trust, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, moneys and other property
of whatever kind in his possession or under his control belonging to the Trust.
Section 6.10 Chairman and Vice Chairman of the Board. The Chairman
of the Board shall preside over the meetings of the Trust Managers and of the
shareholders at which he shall be present and shall in general oversee all of
the business and affairs of the Trust. In the absence of the Chairman of the
Board, the Vice Chairman of the Board, if there be one, shall preside at such
meetings at which he shall be present. The Chairman and the Vice Chairman of
the Board may execute any deed, mortgage, bond, contract or other instrument,
except in cases where the execution thereof shall be expressly delegated by the
Trust Managers or by these Bylaws to some other Officer or agent of the Trust
or shall be required by law to be otherwise executed. The Chairman of the
Board and the Vice Chairman of the Board shall perform such other duties as may
be assigned to him or them by the Trust Managers.
Section 6.11 President. In the absence of the Chairman, the Vice
Chairman of the Board, if there be one, and the Chief Executive Officer, the
President shall preside over the meetings of the Trust Managers and of the
shareholders at which he shall be
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present. In the absence of a designation of a Chief Executive Officer by the
Trust Managers, the President shall be the Chief Executive Officer and shall be
ex officio a member of all committees that may, from time to time, be
constituted by the Trust Managers. The President may execute any deed,
mortgage, bond, contract or other instrument, except in cases where the
execution thereof shall be expressly delegated by the Trust Managers or by
these Bylaws to some other officer or agent of the Trust or shall be required
by law to be otherwise executed; and in general shall perform all duties
incident to the office of President and such other duties as may be prescribed
by the Trust Managers or Chairman from time to time.
Section 6.12 Vice Presidents. The Trust Managers may designate one
(1) or more Vice Presidents as Executive Vice President, Senior Vice President
or as Vice President for particular areas of responsibility. At the request of
the President, in his absence, or in the event of a vacancy in such office, the
Vice President (or in the event there be more than one (1) Vice President, the
Vice Presidents in the order designated at the time of their election or, in
the absence of any designation, then in the order of their election) shall
perform the duties of the President and when so acting shall have all the
powers of and be subject to all the restrictions upon the President; and shall
perform such other duties as from time to time may be assigned to him by the
President or by the Chairman or by the Trust Managers.
Section 6.13 General Counsel. The Trust Managers may designate and
elect a General Counsel who shall have responsibility for overseeing the legal
affairs of the Trust.
Section 6.14 Secretary. The Secretary shall (a) attend the
proceedings, keep the minutes of such proceedings of the shareholders, the
Trust Managers and committees of the Trust Managers in one or more books
provided for that purpose; (b) see that all notices are duly given in
accordance with the provisions of these Bylaws or as required by law; (c) be
custodian of the trust records and of the seal of the Trust; (d) keep a
register of the post office address of each shareholder which shall be
furnished to the Secretary by such shareholder; (e) have general charge of the
share transfer books of the Trust; and (f) in general perform such other duties
as from time to time may be assigned to him by the Chief Executive Officer, the
Chairman, the President or by the Trust Managers.
Section 6.15 Treasurer. The Trust Managers may designate a Treasurer
from among the elected officers. Said officer will have the responsibilities
and duties as set forth by the Trust Managers or the Chief Executive Officer.
Section 6.16 Assistant Secretaries and Assistant Treasurers. The
Assistant Secretaries and Assistant Treasurers, in general, shall perform such
duties as shall be assigned to them by the Secretary or Treasurer, if there be
one, respectively, or by the Chairman, the President or the Trust Managers. At
the request of the Secretary, or in his absence or disability, the Assistant
Secretary designated by the Secretary (or in the absence of such designation
the senior Assistant Secretary), shall perform the duties and exercise the
powers of the Secretary. The Assistant Treasurers shall, if required by the
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Trust Managers, give bonds for the faithful performance of their duties in such
sums and with such surety or sureties as shall be satisfactory to the Trust
Managers. At the request of the Treasurer, or in his absence or disability,
the Assistant Treasurer designated by the Treasurer (or in the absence of such
designation, the senior Assistant Treasurer), shall perform the duties and
exercise the powers of the Treasurer.
Section 6.17 Salaries. The salaries and other compensation of the
Officers shall be fixed from time to time by the Trust Managers and no Officer
shall be prevented from receiving such salary or other compensation by reason
of the fact that he is also a Trust Manager. The Trust Managers may delegate
to any committee or Officer the power to fix from time to time the salary or
other compensation of subordinate Officers and agents appointed in accordance
with the provisions of Section 6.3.
ARTICLE VII
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 7.1 Contracts. The Trust Managers may authorize any Officer
or agent to enter into any contract or to execute and deliver any instrument in
the name of and on behalf of the Trust and such authority may be general or
confined to specific instances. Any agreement, deed, mortgage, lease or other
document executed by one (1) or more of the Trust Managers or by an authorized
person shall be valid and binding upon the Trust Managers and upon the Trust
when authorized or ratified by action of the Trust Managers.
Section 7.2 Checks and Drafts. All checks, drafts or other orders
for the payment of money, notes or other evidences of indebtedness issued in
the name of the Trust shall be signed by such Officer or agent of the Trust in
such manner as shall from time to time be determined by the Trust Managers.
Section 7.3 Deposits. All funds of the Trust not otherwise employed
shall be deposited from time to time to the credit of the Trust in such banks,
trust companies or other depositories as the Trust Managers may designate.
ARTICLE VIII
TRUST SHARES
Section 8.1 Share Certificates.
(a) The certificates representing shares of beneficial
interests of the Trust shall be in such form, not inconsistent with
statutory provisions and the Declaration of Trust, as shall be
approved by the Trust Managers. The certificates shall be signed by
the Chairman, the President or a Vice President and a Secretary or
Assistant Secretary, or such other or additional Officers as may be
prescribed from time to time by the Trust Managers. The signatures of
such Officer or Officers
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upon a certificate may be facsimiles if the certificate is
countersigned by a transfer agent or registered by a registrar, either
of which is other than the Trust itself or an employee of the Trust.
In case any officer who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such Officer
before such certificate is issued, it may be issued with the same
effect as if he were such officer at the date of its issuance.
(b) In the event the Trust has, by its Declaration of
Trust, limited or denied the preemptive right of shareholders, there
shall be set forth on the face or back of the certificates, which the
Trust shall issue to represent beneficial interests, such legends or
statements, if any, as shall be required by applicable law or the
Declaration of Trust or as may be approved by the Trust Managers.
(c) All certificates shall be consecutively numbered and
the name of the person owning the shares represented thereby, with the
number of such shares and the date of issue, shall be entered on the
Trust's books.
(d) All certificates surrendered to the Trust shall be
cancelled, and, except as provided in Section 8.2 with respect to
lost, destroyed or mutilated certificates, no new certificate shall be
issued until the former certificate for the same number of shares has
been surrendered and cancelled.
Section 8.2 Lost Certificates, Etc. The Trust Managers may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Trust alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost or destroyed. In authorizing such issue of
a new certificate or certificates, the Trust Managers may, in their discretion
and as a condition precedent to the issue thereof, require the owner of such
lost or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as the Trust Managers shall require and/or
indemnify the Trust as the Trust Managers may prescribe.
Section 8.3 Transfer of Shares. Subject to any restrictions upon
transfer, upon surrender to the Trust or the transfer agent of the Trust of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer and satisfaction of the Trust
that the requested transfer complies with the provisions of applicable state
and federal laws and regulations, the Declaration of Trust and any agreements
to which the Trust is a party, the Trust shall issue a new certificate to the
person entitled thereto, cancel the old certificate and record the transaction
upon its books.
Section 8.4 Ownership of Shares. The Trust shall be entitled to
treat and recognize the holder of record of any share or shares as the holder
in fact thereof and, accordingly, shall not be bound to recognize any equitable
or other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of the State of Texas.
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Section 8.5 Closing of Transfer Books. For the purpose of
determining shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled to receive a distribution
by the Trust (other than a distribution involving a purchase or redemption by
the Trust of its own shares) or a share dividend, or in order to make a
determination of shareholders for any other proper purpose, the Trust Managers
may provide that the share transfer books shall be closed for a stated period
but not to exceed, in any case, sixty (60) days. If the share transfer books
shall be closed for the purpose of determining shareholders entitled to notice
of or to vote at a meeting of shareholders, such books shall be closed for at
least ten (10) days immediately preceding such meeting. In lieu of closing the
share transfer books, the Trust Managers may fix in advance a date as the
record date for any such determination of shareholders, such date in any case
to be not more than sixty (60) days and, in case of a meeting of shareholders,
not less than ten (10) days prior to the date on which the particular action
requiring such determination of shareholders is to be taken, and the
determination of shareholders on such record date shall apply with respect to
the particular action requiring the same notwithstanding any transfer of shares
on the books of the Trust after such record date.
Section 8.6 Dividends. The Trust Managers may, from time to time,
declare, and the Trust may pay, dividends on its outstanding shares in the
manner and upon the terms and conditions provided by the Declaration of Trust
and by law, such dividends to be paid in cash or in property or in shares of
beneficial interests of the Trust, except no dividends shall be paid when the
Trust is insolvent or when the payment thereof would render the Trust
insolvent.
Section 8.7 Reserves. By resolution, the Trust Managers may create
such reserve or reserves as the Trust Managers from time to time, in their
absolute discretion, determine to be proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Trust, or for such other purpose as the Trust Managers shall
determine to be beneficial to the interest of the Trust. The Trust Managers
may modify or abolish any such reserve in the manner in which it was created.
ARTICLE IX
ACCOUNTING YEAR
The Trust Managers shall have the power, from time to time, to fix the
fiscal year of the Trust by a duly adopted resolution.
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ARTICLE X
DISTRIBUTIONS
Section 10.1 Authorization. The Trust Managers may authorize and the
Trust may make distributions subject to any restrictions in the Declaration of
Trust and to the limitations set forth below.
Section 10.2 Limitations. The Trust may not make a distribution if:
(i) after giving effect to the distribution, the Trust would be insolvent or
(ii) the distribution exceeds the surplus, as defined in Section 14.40 of the
Texas REIT Act.
ARTICLE XI
PROHIBITED INVESTMENTS AND ACTIVITIES
Notwithstanding anything to the contrary in the Declaration of Trust,
the Trust shall not enter into any transaction referred to in (i), (ii) or
(iii) below which it does not believe is in the best interests of the Trust,
and will not, without the approval of a majority of the Independent Trust
Managers, (i) acquire from or sell to any Trust Manager, Officer or employee of
the Trust, any corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise in which a Trust Manager, Officer or employee of the
Trust owns more than a one percent (1%) interest or any affiliate of any of the
foregoing, any of the assets or other property of the Trust, except for the
acquisition directly or indirectly of certain properties or related interests
therein, directly or indirectly, through entities in which it owns an interest
in connection with the initial public offering of shares by the Trust or
pursuant to agreements entered into in connection with such offering, which
properties or related interests therein shall be described in the prospectus
relating to such initial public offering, (ii) make any loan to or borrow from
any of the foregoing persons or (iii) engage in any other transaction with any
of the foregoing persons. Each such transaction will be in all respects on
such terms as are, at the time of the transaction and under the circumstances
then prevailing, fair and reasonable to the Trust. Subject to the provisions
of the Declaration of Trust, the Trust Managers may from time to time adopt,
amend, revise or terminate any policy or policies with respect to investments
by the Trust as it shall deem appropriate in its sole discretion.
ARTICLE XII
INDEMNIFICATION
Section 12.1 Definitions. In this Article:
(a) "Indemnitee" means (i) any present or former Trust
Manager or Officer, (ii) any person who while serving in any of the
capacities referred to in clause (i) hereof served at the Trust's
request as a trust manager, director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary of
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another real estate investment trust or foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust,
employee benefit plan or other enterprise and (iii) any person
nominated or designated by (or pursuant to authority granted by) the
Trust Managers or any committee thereof to serve in any of the
capacities referred to in clauses (i) or (ii) hereof.
(b) "Official Capacity" means (i) when used with respect
to a Trust Manager, the office of Trust Manager of the Trust and (ii)
when used with respect to a person other than a Trust Manager, the
elective or appointive office of the Trust held by such person or the
employment or agency relationship undertaken by such person on behalf
of the Trust, but in each case does not include service for any other
real estate investment trust or foreign or domestic corporation or any
partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other enterprise.
(c) "Proceeding" means any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, any appeal in such an
action, suit or proceeding, and inquiry or investigation that could
lead to such an action, suit or proceeding.
Section 12.2 Indemnification. The Trust shall indemnify every
Indemnitee against all judgments, penalties (including excise and similar
taxes), fines, amounts paid in settlement and reasonable expenses actually
incurred by the Indemnitee in connection with any Proceeding in which he was,
is or is threatened to be named defendant or respondent, or in which he was or
is a witness without being named a defendant or respondent, by reason, in whole
or in part, of his serving or having served, or having been nominated or
designated to serve, in any of the capacities referred to in Section 12.1(a),
if it is determined in accordance with Section 12.4 that the Indemnitee (a)
conducted himself in good faith, (b) reasonably believed, in the case of
conduct in his Official Capacity, that his conduct was in the Trust's best
interests and, in all other cases, that his conduct was at least not opposed to
the Trust's best interests and (c) in the case of any criminal proceeding, had
no reasonable cause to believe that his conduct was unlawful; provided,
however, that in the event that an Indemnitee is found liable to the Trust or
is found liable on the basis that personal benefit was improperly received by
the Indemnitee the indemnification (i) is limited to reasonable expenses
actually incurred by the Indemnitee in connection with the Proceeding and (ii)
shall not be made in respect of any Proceeding in which the Indemnitee shall
have been found liable for willful or intentional misconduct in the performance
of his duty to the Trust. Except as provided in the immediately preceding
proviso to the first sentence of this Section 12.2, no indemnification shall be
made under this Section 12.2 in respect of any Proceeding in which such
Indemnitee shall have been (x) found liable on the basis that personal benefit
was improperly received by him, whether or not the benefit resulted from an
action taken in the Indemnitee's Official Capacity, or (y) found liable to the
Trust. The termination of any Proceeding by final or interlocutory judgment,
order, settlement or conviction, or a plea of nolo contendere or its
equivalent, is not of itself determinative that the Indemnitee did not meet the
requirements set forth in clauses (a), (b) or (c) in the first sentence of
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this Section 12.2. An Indemnitee shall be deemed to have been found liable in
respect of any claim, issue or matter only after the Indemnitee shall have been
so adjudged by a court of competent jurisdiction after exhaustion of all
appeals therefrom. Reasonable expenses shall include, without limitation, all
court costs and all fees and disbursements of attorneys for the Indemnitee.
Section 12.3 Successful Defense. Without limitation of Section 12.2
and in addition to the indemnification provided for in Section 12.2, the Trust
shall indemnify every Indemnitee against reasonable expenses incurred by such
person in connection with any Proceeding in which he is a witness or a named
defendant or respondent because he served in any of the capacities referred to
in Section 12.1(a), if such person has been wholly successful, on the merits or
otherwise, in defense of the Proceeding.
Section 12.4 Determinations. Subject to Section 12.5, any
indemnification under Section 12.2 (unless ordered by a court of competent
jurisdiction) shall be made by the Trust only upon a determination that
indemnification of the Indemnitee is proper in the circumstances because he has
met the applicable standard of conduct. Such determination shall be made (a)
by the Trust Managers by a majority vote of a quorum consisting of Trust
Managers who, at the time of such vote, are not named defendants or respondents
in the Proceeding; (b) if such a quorum cannot be obtained, then by a majority
vote of a committee of the Trust Managers, duly designated to act in the matter
by a majority vote of all Trust Managers (in which designation Trust Managers
who are named defendants or respondents in the Proceeding may participate),
such committee to consist solely of two (2) or more Trust Managers who, at the
time of the committee vote, are not named defendants or respondents in the
Proceeding; (c) by special legal counsel selected by the Trust Managers or a
committee thereof by vote as set forth in clauses (a) or (b) of this Section
12.4 or, if the requisite quorum of all of the Trust Managers cannot be
obtained and such committee cannot be established, by a majority vote of all of
the Trust Managers (in which Trust Managers who are named defendants or
respondents in the Proceeding may participate); or (d) by the shareholders in a
vote that excludes the shares held by Trust Managers that are named defendants
or respondents in the Proceeding. Determination as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination that
indemnification is permissible is made by special legal counsel, determination
as to reasonableness of expenses must be made in the manner specified in clause
(c) of the preceding sentence for the selection of special legal counsel. In
the event a determination is made under this Section 12.4 that the Indemnitee
has met the applicable standard of conduct as to some matters but not as to
others, amounts to be indemnified may be reasonably prorated.
Section 12.5 Advancement of Expenses. Reasonable expenses (including
court costs and attorneys' fees) incurred by an Indemnitee who was, is, or is
threatened to be made a named defendant or respondent in a Proceeding shall be
paid or reimbursed by the Trust at reasonable intervals in advance of the final
disposition of such Proceeding, and without making any of the determinations
specified in Section 12.4, after receipt by the Trust of (a) a written
affirmation by such Indemnitee of his good faith belief that he
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has met the standard of conduct necessary for indemnification by the Trust
under this Article XII and (b) a written undertaking by or on behalf of such
Indemnitee to repay the amount paid or reimbursed by the Trust if it shall
ultimately be determined that he is not entitled to be indemnified by the Trust
as authorized in this Article XII. Such written undertaking shall be an
unlimited obligation of the Indemnitee but need not be secured and it may be
accepted without reference to financial ability to make repayment.
Notwithstanding any other provision in this Article XII, the Trust shall pay or
reimburse expenses incurred by any Indemnitee in connection with his appearance
as a witness or other participation in a Proceeding at a time when he is not
named a defendant or respondent in the Proceeding.
Section 12.6 Employee Benefit Plans. For purposes of this Article
XII, the Trust shall be deemed to have requested an Indemnitee to serve an
employee benefit plan whenever the performance by him of his duties to the
Trust also imposed or imposes duties on or otherwise involved or involves
services by him to the plan or participants or beneficiaries of the plan.
Excise taxes assessed on an Indemnitee with respect to an employee benefit plan
pursuant to applicable law shall be deemed fines. Action taken or omitted by
an Indemnitee with respect to an employee benefit plan in the performance of
his duties for a purpose reasonably believed by him to be in the interest of
the participants and beneficiaries of the plan shall be deemed to be for a
purpose which is not opposed to the best interests of the Trust.
Section 12.7 Other Indemnification and Insurance. The
indemnification provided by this Article XII shall (a) not be deemed exclusive
of, or to preclude, any other rights to which those seeking indemnification may
at any time be entitled under the Trust's Declaration of Trust, any law,
agreement or vote of shareholders or disinterested Trust Managers, or
otherwise, or under any policy or policies of insurance purchased and
maintained by the Trust on behalf of any Indemnitee, both as to action in his
Official Capacity and as to action in any other capacity, (b) continue as to a
person who has ceased to be in the capacity by reason of which he was an
Indemnitee with respect to matters arising during the such capacity and (c)
inure to the benefit of the heirs, executors and administrators of such person.
Section 12.8 Notice. Indemnification of or advance of expenses to an
Indemnitee in accordance with this Article XII shall be reported in writing to
the shareholders of the Trust with or before the notice or waiver of notice of
the next shareholders' meeting or with or before the next submission to
shareholders of a consent to action without a meeting and, in any case, within
the twelve (12) month period immediately following the date of the
indemnification or advance.
Section 12.9 Continuing Offer, Reliance, Etc. The provisions of this
Article XII are (a) for the benefit of, and may be enforced by, each Indemnitee
of the Trust, the same as if set forth in their entirety in a written
instrument duly executed by the Trust and such Indemnitee and (b) constitute a
continuing offer to all present and future Indemnitees. The Trust, by its
adoption of Bylaws, (x) acknowledges and agrees that each Indemnitee of the
Trust has relied upon and will continue to rely upon the provisions of this
Article XII
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in becoming, and serving in any of the capacities referred to in Section 12.1,
(y) waives reliance upon, and all notices of acceptance of, such provisions by
such Indemnitees and (z) acknowledges and agrees that no present or future
Indemnitee shall be prejudiced in his right to enforce the provisions of this
Article XII in accordance their terms by any act or failure to act on the part
of the Trust.
Section 12.10 Indemnification of Shareholders. The Trust shall
indemnify each shareholder against any claim or liability to which the
shareholder may become subject by reason of being or having been a shareholder.
The Trust shall reimburse each shareholder for all legal and other expenses
reasonably incurred by such shareholder in connection with any such claim or
liability.
Section 12.11 Effect of Amendment. No amendment, modification or
repeal of this Article XII or any provision of this Article XII shall in any
manner terminate, reduce or impair the right of any past, present or future
Indemnitees to be indemnified by the Trust, nor the obligation of the Trust to
indemnify any such Indemnitees, under and in accordance with the provisions of
this Article XII as in effect immediately prior to such amendment,
modification or repeal with respect to claims arising from or relating to
matters occurring, in whole or in part, prior to such amendment, modification
or repeal, regardless of when such claims may be asserted.
ARTICLE XIII
GENERAL PROVISIONS
Section 13.1 General Policies. The Trust intends to make investments
that are consistent with the applicable requirements of the Internal Revenue
Code of 1986, as amended, and the Texas REIT Act, as amended, and related
regulations with respect to the composition of the Trust's investments and the
derivation of its income.
Section 13.2 Limited Liability of Shareholders. A shareholder shall
not be personally or individually liable in any manner whatsoever for any debt,
act, omission or obligation incurred by the Trust or the Trust Managers. A
shareholder shall be under no obligation to the Trust or to its creditors with
respect to any shares of beneficial interest held or subscribed for by such
shareholder other than the obligation to pay to the Trust the full amount of
the consideration for which such shares were issued or to be issued. Upon the
payment of such consideration, such shares shall be fully paid and
non-assessable by the Trust.
Section 13.3 Waiver of Notice.
(a) Whenever, under the provisions of applicable law or
the Declaration of Trust or these Bylaws, any notice is required to be
given to any shareholder or Trust Manager, a waiver thereof in writing
signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be equivalent to the
giving of such notice.
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(b) Attendance of a Trust Manager at a meeting shall
constitute a waiver of notice of such meeting except where a Trust
Manager attends a meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not
lawfully called or convened.
Section 13.4 Seal. If one be adopted, the Trust's seal shall have
inscribed thereon the name of the Trust and shall be in such form as may be
approved by the Trust Managers. Said seal shall be kept in the custody of the
Secretary and may be used by causing it or a facsimile of it to be impressed or
affixed or in any manner reproduced.
Section 13.5 Examination of Books and Records. The Trust Managers
shall determine from time to time whether, and if allowed, when and under what
conditions and regulations the accounts and books of the Trust (except such as
may by statute be specifically opened to inspection) or any of them shall be
open to inspection by the shareholders, and the shareholders' rights in this
respect are and shall be restricted and limited accordingly.
Section 13.6 Voting by the Trust. Unless otherwise ordered by the
Trust Managers, the President, acting on behalf of the Trust, shall have full
power and authority to attend and to act and to vote at any meeting of
shareholders of any corporation or other entity in which the Trust may hold
shares and at any such meeting, shall possess and may exercise any and all of
the rights and powers incident to the ownership of such shares which, as the
owner thereof, the Trust might have possessed and exercised, if present. The
Trust Managers by resolution from time to time may confer like powers upon any
other person or persons.
Section 13.7 Number, Gender, Etc. Whenever the singular number is
used in these Bylaws required by the context, the same shall include the
plural, and the masculine gender shall include the feminine and neuter genders.
The term "person," as used herein and as the context requires shall mean and
include individuals, corporations, limited partnerships, general partnerships,
joint stock companies or associations, joint ventures, associations, companies,
trusts, banks, trust companies, land trusts, business trusts, or other entities
and governments and agencies and political subdivisions thereof.
Section 13.8 Amendments to Declaration of Trust. All references to
the Declaration of Trust shall include any amendments thereto.
ARTICLE XIV
AMENDMENT OF BYLAWS
Except as otherwise provided by applicable law or the Declaration of
Trust, the power to alter, amend or repeal these Bylaws or to adopt new Bylaws
shall be vested in the Trust Managers and (to the extent not inconsistent with
the Texas REIT Act and the Declaration of Trust and specified in the notice of
the meeting) the shareholders. Such action to amend the Bylaws may be taken
(i) with respect to all Bylaw provisions, by the
-29-
<PAGE> 35
affirmative vote of a majority of the Trust Managers, or (ii)(a) with respect
to Sections 2.13, 3.3, or 3.6 or this Article XIV of these Bylaws, by the
affirmative vote of the holders of two-thirds (2/3) of the Trust's outstanding
shares entitled to vote thereon, or (b) with respect to all other Bylaw
provisions, by the affirmative vote of the holders of a majority of the Trust's
outstanding shares entitled to vote thereon.
ARTICLE XV
SUBJECT TO ALL LAWS
The provisions of these Bylaws shall be subject to all valid and
applicable laws, including, without limitation, the Texas REIT Act as now or
hereafter amended, and in the event that any of the provisions of these Bylaws
are found to be inconsistent with or contrary to any such valid laws, the
latter shall be deemed to control and these Bylaws shall be deemed modified
accordingly, and, as so modified, shall continue in full force and effect.
-30-
<PAGE> 36
CROSS REFERENCE SHEET
<TABLE>
<S> <C>
II MEETINGS OF SHAREHOLDERS
2.2 ANNUAL MEETING
2.12 REPORTS TO SHAREHOLDERS
2.7 QUORUM
2.8 VOTING
2.13 PROPOSALS AND NOMINATIONS
2.14 INFORMAL ACTION BY SHAREHOLDERS
III TRUST MANAGERS
3.3 INDEPENDENT MAJORITY
3.6 RESIGNATION
3.7 REMOVAL
IV MEETINGS OF TRUST MANAGERS
4.2 ANNUAL MEETING OF TRUST MANAGERS
4.7 TELEPHONE MEETINGS
5.1 NUMBER, TENURE
6.3 SUBORDINATE OFFICERS
8.2 LOST CERTIFICATES
XII INDEMNIFICATION
12.1 DEFINITIONS
12.2 INDEMNIFICATIONS
12.4 DETERMINATIONS
</TABLE>
-1-
<PAGE> 1
EXHIBIT 5.1
Direct Dial: (214) 745-5431
____________, 1998
AMRESCO Capital Trust
Attn: Mr. Mark D. Gibson
700 North Pearl Street
Suite 2400, LB 342
Dallas,Texas 75201-7424
Re: AMRESCO Capital Trust
Gentlemen:
We have acted as counsel for AMRESCO Capital Trust, a Texas real estate
investment trust (the "Company"), in connection with the offer and sale by the
Company of up to 23,000,000 common shares (the "Shares") of beneficial interest,
par value $0.01 per share (the "Common Shares"), of the Company pursuant to the
Company's Registration Statement on Form S-11 (Registration No. 333-45543)
originally filed with the Securities and Exchange Commission on February 3, 1998
(as amended, the "Registration Statement"). Capitalized terms used but not
otherwise defined herein shall have the respective meanings set forth in the
Registration Statement.
We have examined originals, or copies identified to our satisfaction
as being true copies, of (a) the Company's Amended and Restated Declaration of
Trust, (b) the Company's Bylaws, as currently in effect, (c) unanimous consents
in lieu of meetings of the Company's Board of Trust Managers and (d) such other
records and documents of the Company, certificates of the Company, certificates
of public officials and statutes as we have deemed necessary for the purpose of
this opinion.
Based upon such examination and in reliance thereon, we are of the
opinion that the Shares have been duly and validly authorized by the Company
and will, upon issuance in accordance with the terms contemplated in the
Registration Statement, be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the statement made in reference to this firm
under the caption "Legal Matters" in the Registration Statement. In giving our
consent, we do not thereby admit
<PAGE> 2
AMRESCO Capital Trust
______________, 1998
that we are in the category of persons whose consent is required under Section
7 of the Securities Act or the rules or regulations of the Commission
thereunder. The opinion expressed herein is limited to the matters set forth
in this letter and no other opinion should be inferred beyond the matters
expressly stated.
Very truly yours,
WINSTEAD SECHREST & MINICK P.C.
By:
-------------------------------------
Michelle P. Goolsby
<PAGE> 1
EXHIBIT 10.3
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is entered into
as of ___________, 1998, by and between AMRESCO CAPITAL TRUST, a Texas real
estate investment trust (the "Company"), AMREIT HOLDINGS, INC., a Nevada
corporation ("Holdings"), and AMREIT MANAGERS, L.P., a Delaware limited
partnership (the "Manager," and collectively with Holdings, the "Shareholders").
WITNESSETH:
WHEREAS, the Company and AMRESCO, INC. have entered into an agreement
(the "Purchase Agreement") pursuant to which the Company has agreed to sell to
Holdings, and Holdings has agreed to purchase from the Company, up to 2,556,000
common shares of beneficial interest, par value $.01 per share ("Common
Shares"), of the Company;
WHEREAS, the Company and the Manager have entered into an agreement
(the "Management Agreement") pursuant to which the Manager will perform
managerial services for the Company and its subsidiaries;
WHEREAS, the Company has established its 1998 Share Option and
Incentive Award Plan (the "Plan") pursuant to which options to acquire Common
Shares may be granted, and, pursuant to an agreement between the Company and the
Manager (the "Share Option Agreement"), the Company has granted to the Manager
options (the "Options") to purchase 2,222,322 Common Shares over a four-year
vesting period;
WHEREAS, neither the Common Shares to be acquired by Holdings pursuant
to the Purchase Agreement nor the Common Shares subject to the Options have been
registered under the Securities Act of 1933, as amended;
WHEREAS, from time to time, Holdings or the Manager may acquire
additional Common Shares; and
WHEREAS, the parties desire to set forth certain rights of Holdings and
the Manager as holders of Common Shares.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
<PAGE> 2
1. DEFINITIONS.
"Commission" means, as of any time, the United States
Securities and Exchange Commission or any other federal agency at the time
administering the Securities Act.
"Demand Registration" means the registration of a Registrable
Security pursuant to the terms and provisions of Section 2.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time. Reference
to a particular section of the Exchange Act shall include a reference to the
comparable section, if any, of any such similar federal statute.
"Holder" means any Shareholder, and, subject to Section 10(f),
any assignee or transferee of a Registrable Security initially held by any
Shareholder, which assignee or transferee expressly is granted rights as a
Holder hereunder by any Shareholder at the time of such transfer.
"Indemnified Party" means a party who is to be indemnified
pursuant to Section 7.
"Indemnifying Party" means a party who shall indemnify an
Indemnified Party pursuant to Section 7.
"Inspectors" has the meaning set forth in Section 5(h).
"Person" means a natural person, a corporation, a partnership,
a trust, a joint venture, any regulatory authority or any other entity or
organization.
"Piggy-back Registration" means the registration of a
Registrable Security pursuant to the terms and provisions of Section 3.
"Pro Rata Basis" means a pro rata allocation based on the
number of Registrable Securities requested to be included in a registered
offering pursuant hereto.
"Records" has the meaning set forth in Section 5(h).
"Registrable Securities" means the Common Shares currently
held by the Shareholders, all Common Shares hereafter acquired by any
Shareholder, including all Common Shares issuable pursuant to the Options, and
any and all securities of the Company issued or issuable with respect to such
Common Shares by way of a dividend, reclassification, stock split, or other
distribution or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization or otherwise. Any Registrable
Security will cease to be a Registrable Security when (i) a registration
statement covering such Registrable Security has been declared effective by the
REGISTRATION RIGHTS AGREEMENT - PAGE 2
<PAGE> 3
Commission and the Registrable Security has been disposed of pursuant to such
effective registration statement, (ii) the Registrable Security is sold under
circumstances in which all of the applicable conditions of Rule 144 (or any
similar provisions then in force) under the Securities Act are met, (iii) the
Registrable Security has been otherwise transferred, the Company has delivered a
new certificate or other evidence of ownership for it not bearing a legend
restricting further transfer, and it may be resold without subsequent
registration under the Securities Act or (iv) the Registrable Security is
eligible for sale pursuant to Rule 144(k) (or any successor provision) under the
Securities Act.
"Registration Expenses" means those expenses associated with
any registration statement filed hereunder, as described in Section 6.
"Securities Act" means the Securities Act of 1933, as amended,
or any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. References to a
particular section of the Securities Act shall include a reference to the
comparable section, if any, of any such similar or successor federal statute.
"Shelf Registration" means the registration of a Registrable
Security pursuant to the terms and provisions of Section 2(b).
"Term" means that period of time set forth in Section 10(b).
"Underwriter" means a securities dealer which purchases any
Registrable Securities as principal and not as part of such dealer's
market-making activities.
2. DEMAND REGISTRATION.
(a) Request for Registration. At any time after the earlier to
occur of (i) the expiration of the Lock-Up Period (as defined in Section 4(a))
and (ii) the date when the Manager (or any other member of the AMRESCO Group, as
defined in the Management Agreement) ceases for any reason to act as manager for
the Company pursuant to the Management Agreement (or any similar agreement), any
Holder may make a written request ("Demand Notice") for registration under Rule
415 of the Securities Act (a "Demand Registration") of all or part of its
Registrable Securities, subject to the terms and conditions hereof. Each Demand
Notice will specify the number of shares of Registrable Securities proposed to
be sold and will also specify the intended method of disposition thereof. The
Company shall not be required to file and effect more than two Demand
Registrations pursuant to this Section 2(a).
Notwithstanding any provision hereof to the contrary, the Company shall
not be obligated to honor any Demand Notice requesting a Demand Registration, or
otherwise cause a Demand Registration to become effective if the Demand Notice
is delivered to the Company during the period commencing 90 days before the
effective date of a registration statement pursuant to which the Company is
offering shares of any class of equity securities of the Company in an
underwritten offering and ending 120 days after the closing date of any such
offering.
REGISTRATION RIGHTS AGREEMENT - PAGE 3
<PAGE> 4
(b) Effective Registration and Expenses. Upon receipt of a
written request for a Demand Registration, the Company will (i) take appropriate
action, on a reasonable, timely basis, to prepare and file a registration
statement covering the Registrable Securities requested to be included in such
Demand Registration (subject to Section 2(d)) and (ii) use its commercially
reasonable efforts to cause each Demand Registration to become effective under
the Securities Act and thereafter to keep it effective under the Securities Act
until the earliest of (A) the date on which the Holders no longer hold any
Registrable Securities registered under the Demand Registration, (B) the date on
which the Registrable Securities registered under the Demand Registration may be
sold by the Holders thereof pursuant to Rule 144(k) promulgated under the
Securities Act or (C) the date which is two years from the effective date of
such Demand Registration statement.
(c) No Third-Party Piggy-back on Demand Registrations. Neither
the Company nor any of its respective securityholders (other than the Holders of
Registrable Securities in such capacity pursuant to Section 3) may include
securities of the Company in any Demand Registration without the prior written
consent of the Demanding Holder (as hereinafter defined) or, if more than one
Demanding Holder, the Majority Demanding Holder (as hereinafter defined), and
the Company shall not enter into any agreement providing any such right to any
of its securityholders.
(d) Priority on Demand Registrations. In the event the
offering of shares pursuant to a Demand Registration shall be in the form of an
underwritten offering pursuant to Section 2(e), if the managing Underwriter or
Underwriters of such offering advise the Company and the selling Holders in
writing that, in their good faith judgment, the number of Registrable Securities
and any other securities requested to be included in such offering is
sufficiently large to materially and adversely affect the success of such
offering (a "Material Adverse Effect"), the Company shall include in such
registration the aggregate number of Common Shares which in the good faith
judgment of such managing Underwriter or Underwriters can be sold without any
such Material Adverse Effect, and such amount shall be allocated (i) first on a
Pro Rata Basis among the selling Holders, unless any of the selling Holders
desires to sell a number of Registrable Securities that is less than the total
pro rata amount that it is entitled to sell, in which event the number of
Registrable Securities not so elected to be sold shall be allocated among the
other selling Holders on a Pro Rata Basis, and (ii) second, among the Company
and, subject to Section 2(c), all other holders of securities of the Company
permitted to include their securities in such Demand Registration (allocated
among such shareholders as they may so determine).
(e) Manner of Offering; Selection of Underwriters. If the
Holder(s) requesting a Demand Registration ("Demanding Holder(s)") so requests
(or if more than one Demand Holder, if the Demanding Holder owning a majority of
the Registrable Securities requested to be included in the Demand Registration
by the Demanding Holders so requests (the "Majority Demanding Holder")), the
offering of Registrable Securities pursuant to a Demand Registration shall be in
the form of an underwritten offering. If a Demand Registration is in the form of
an underwritten offering, the Majority Demanding Holder shall select the
managing Underwriter or Underwriters to be used in
REGISTRATION RIGHTS AGREEMENT - PAGE 4
<PAGE> 5
connection with the offering; provided, however, that such Underwriter or
Underwriters must be reasonably satisfactory to the Company.
3. PIGGY-BACK REGISTRATION.
(a) Request for Registration. At any time after the date
hereof (subject to the provisions of Section 4(a)), if the Company proposes to
file a registration statement under the Securities Act (other than a
registration statement on Form S-4 or S-8 (or any successor form that may be
adopted by the Commission) or a registration statement filed in connection with
an exchange offer or offering of securities or debt solely to the Company's
existing security or debt holders) with respect to an offering of any class of
equity securities by the Company for its own account or for the account of any
of its security holders, then the Company shall give written notice of such
proposed filing to each Holder as soon as practicable (but in no event less than
20 nor more than 60 days before the anticipated filing date). Such notice shall
offer each Holder the opportunity to have all or any of the Registrable
Securities held by such Holder included in the registration statement proposed
to be filed or, at the Company's option, in a separate registration statement to
be filed concurrently with such registration statement (the "Piggyback
Registration"). Within ten days after receiving such notice, each Holder may
make a written request to the Company that any or all of the Holder's
Registrable Securities be included in the Piggy-back Registration, which notice
shall specify the number of shares to be so included. Subject to Section 3(b),
the Company shall include in the Piggy-back Registration (or in a separate
registration statement filed concurrently therewith) all Registrable Securities
with respect to which the Company has received written requests for inclusion
therein within ten days after the receipt by each Holder of the Company's
notice. The Company may in its discretion withdraw any registration statement
filed pursuant to this Section 3(a) subsequent to its filing without liability
to the Holders except with respect to expenses. Any Holder shall be permitted to
withdraw all or part of such Holder's Registrable Securities requested to be
included in a Piggy-back Registration at any time prior to the effective date of
such Piggy-back Registration without any liability for any Registration
Expenses.
(b) Priority on Piggy-back Registration. If any Piggy-back
Registration is to be an underwritten offering, the Company shall use its
commercially reasonable efforts to cause the managing Underwriter or
Underwriters to permit the shares of Registrable Securities requested by the
Holders of Registrable Securities ("Selling Piggyback Holders") to be included
in the Piggy-back Registration (on the same terms and conditions as similar
securities of the Company included therein to the extent appropriate).
Notwithstanding the foregoing, if the managing Underwriter or Underwriters of
such offering advise the Company in writing that, in their good faith judgment,
the number of Registrable Securities and any other securities requested to be
included in such offering is sufficiently large to have a Material Adverse
Effect, then (i) if such Piggy-back Registration is incident to a primary
registration on behalf of the Company, the amount of securities to be included
in the Piggy-back Registration for any Persons other than the Company and the
Selling Piggy-back Holders shall first be reduced, and thereafter the
Registrable Securities to be offered for the account of the Selling Piggy-back
Holders shall be reduced or limited on a Pro Rata Basis so that the total number
of securities to be
REGISTRATION RIGHTS AGREEMENT - PAGE 5
<PAGE> 6
included in the offering shall be the total number of securities recommended by
such managing Underwriter or Underwriters, unless any of the Selling Piggy-back
Holders desires to sell a number of Registrable Securities that is less than the
total pro rata amount that it is entitled to sell, in which event the number of
Registrable Securities not so elected to be sold shall be allocated among the
other Selling Piggy-back Holders on a Pro Rata Basis, and (ii) if such
Piggy-back Registration is incident to a secondary registration on behalf of
holders of securities of the Company (excluding pursuant to Section 2, in which
priority will be governed by Section 2(d)), the Company shall include in such
registration statement (A) first, the number of securities of such Person(s) on
whose behalf the registration is being made (allocated among such Persons as
they may so determine), (B) second, the number of Registrable Securities
requested to be included in such registration pursuant to this Section 3 in
excess of the securities such Persons on whose behalf the registration is being
made propose to sell that, in the good faith judgment of such managing
Underwriters, can be sold without causing a Material Adverse Effect on such
offering, allocated among the Selling Piggy-back Holders on a Pro Rata Basis as
described in clause (i) above and (C) third, the number of securities requested
to be included in such registration by the Company or by other Persons pursuant
to similar piggy-back registration rights (allocated among the Company and such
Persons as they may so determine).
4. HOLDBACK AGREEMENTS.
(a) Restrictions on Sale by Holders of Registrable Securities.
Upon inclusion by the Company of any Holder's Registrable Securities in a
registration statement filed pursuant to Sections 2 or 3, such Holder agrees not
to effect any public sale or distribution of the issue being registered or a
similar security of the Company or any securities convertible into or
exchangeable or exercisable for such securities, including a sale pursuant to
Rule 144 or Rule 144A under the Securities Act, during the 14 days prior to, and
during the 90-day period beginning on, the effective date of such registration
statement (except as part of such registration), if and to the extent requested
by the Company in the case of a non-underwritten public offering or if and to
the extent requested by the managing Underwriter or Underwriters in the case of
an underwritten public offering. Each of Holdings and the Manager acknowledges
that it is subject to certain restrictions on its ability to sell its Common
Shares pursuant to agreements between Holdings and the Manager, respectively,
and the underwriters of the Company's initial public offering, and agrees that
it shall not request any registration of its Registrable Securities pursuant to
the terms hereof until such restrictions have been terminated or waived (the
period during which such restrictions are in effect being herein referred to as
the "Lock-Up Period").
(b) Restrictions on Public Sale by the Company. The Company
agrees (i) that it shall not effect any public or private sale or distribution
of securities of the nature of the Registrable Securities, or any securities
convertible into or exchangeable or exercisable for securities of the nature of
the Registrable Securities (except pursuant to a registration statement on Form
S-4 or S-8 or any successor form that may be adopted by the Commission), during
the 14 days prior to, and during the 90-day period beginning on, the effective
date of any Demand Registration other than a Shelf Registration and
REGISTRATION RIGHTS AGREEMENT - PAGE 6
<PAGE> 7
(ii) that any agreement entered into after the date hereof pursuant to which the
Company agrees to issue any securities, the issuance of which is not registered
under the Securities Act, shall contain a provision under which holders of such
securities agree not to effect any public sale or distribution of any such
securities during the periods described in clause (i) above, including a sale
pursuant to Rule 144 or Rule 144A under the Securities Act; provided, however,
that the provisions of this Section 4(b) shall not prevent the grant of options
or similar rights to employees of the Company pursuant to the Plan and shall not
prevent the exercise, conversion or exchange of any securities pursuant to their
terms into or for other securities.
5. REGISTRATION PROCEDURES.
Subject to the other provisions and limitations contained herein
whenever any Holder has requested that any Registrable Securities be registered
pursuant to Sections 2 or 3, the Company will use its commercially reasonable
efforts to effect the registration and the sale of such Registrable Securities
in accordance with the intended method of disposition thereof as quickly as
practicable, and in connection with any such request, the Company will as
expeditiously as possible:
(a) prepare and file with the Commission a registration
statement on any form for which the Company then qualifies or which
counsel for the Company shall deem appropriate and which form shall be
available for the sale of the Registrable Securities to be registered
thereunder in accordance with the intended method of distribution
thereof, and use its commercially reasonable efforts to cause such
filed registration statement to become effective under the Securities
Act; provided, however, that, (i) at least five days before filing a
registration statement or prospectus or as promptly as practicable
prior to filing any amendments or supplements thereto, the Company will
furnish to one counsel selected by the Holder or Holders of the
Registrable Securities covered by such registration statement copies of
all such documents proposed to be filed, which documents will be
subject to the review of such counsel and (ii) after the filing of the
registration statement, the Company will promptly notify each such
Holder and such counsel of comments received from, or any stop order
issued or threatened by, the Commission and take all reasonable actions
required to respond to such comments or, as the case may be, prevent
the entry of such stop order or to remove it if it has been entered;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for the applicable period required by the terms
hereof, and comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such
registration statement during such period in accordance with the
intended methods of disposition as set forth in such registration
statement;
(c) furnish to each Holder of Registrable Securities covered
by such registration statement, prior to filing the registration
statement, if requested, copies
REGISTRATION RIGHTS AGREEMENT - PAGE 7
<PAGE> 8
of such registration statement as proposed to be filed, and thereafter
furnish to each such Holder such number of copies of such registration
statement, each amendment and supplement thereto (in each case
including all exhibits thereto and documents incorporated or deemed to
be incorporated therein by reference), the prospectus included in such
registration statement (including each preliminary prospectus), and
such other documents as each such Holder may reasonably request in
order to facilitate the disposition of the Registrable Securities owned
by each such Holder;
(d) register or qualify, or file requisite notifications with
respect to the sale of, such Registrable Securities under such other
securities or blue sky laws of such jurisdictions as each Holder of
Registrable Securities covered by such registration statement
reasonably (in light of each such Holder's intended plan of
distribution) requests and do any and all other acts and things which
may be reasonably necessary to enable each such Holder to consummate
the disposition in such jurisdictions of the Registrable Securities
owned by each such Holder and keep each such registration or
qualification (or exemption therefrom) effective during the period such
registration statement is effective; provided, however, that the
Company will not be required to (i) qualify generally to do business in
any jurisdiction where it would not otherwise be required to qualify
but for this Section 5(d), (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction;
(e) use its commercially reasonable efforts to cause such
Registrable Securities to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of
the business and operations of the Company to enable each Holder of
Registrable Securities covered by the registration statement to
consummate the disposition of such Registrable Securities; provided,
however, that the Company will not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 5(e), (ii) subject itself to
taxation in any such jurisdiction or (iii) consent to general service
of process in any such jurisdiction;
(f) at any time when a prospectus relating to Registrable
Securities is required to be delivered under the Securities Act, (i)
notify each Holder of Registrable Securities covered by the
registration statement of the occurrence of an event requiring the
preparation of a supplement or amendment to such prospectus, (ii)
prepare and file such supplement, amendment or any other required
document so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus will not contain an 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 and (iii) promptly make available to each such
Holder any such supplement, amendment or other document;
REGISTRATION RIGHTS AGREEMENT - PAGE 8
<PAGE> 9
(g) enter into and perform customary agreements (including an
underwriting agreement in customary form with the managing Underwriter
or Underwriters, if any), use its commercially reasonable efforts to
obtain any necessary consents in connection with any proposed
registration and sale of Registrable Securities, and take such other
actions as are reasonably required in order to expedite or facilitate
the disposition of such Registrable Securities;
(h) make available for inspection during business hours on
reasonable advance notice by each Holder of Registrable Securities
covered by the registration statement, any Underwriter participating in
any disposition pursuant to such registration statement, and any
attorney, accountant or other professional retained by any such Holder
or such Underwriter (collectively, the "Inspectors"), all financial and
other records, pertinent corporate documents, and properties of the
Company (collectively, the "Records") as shall be reasonably necessary
to enable them to exercise their due diligence responsibility, and
cause the Company's officers, directors, and employees to supply all
information reasonably requested by any such Inspectors in connection
with such registration statement. Records which the Company determines,
in good faith, to be confidential and which it notifies the Inspectors
are confidential shall not be disclosed by the Inspectors unless (i) in
the reasonable judgment of counsel to the Company the disclosure of
such Records is necessary to avoid or correct a misstatement or
omission in such registration statement or (ii) the release of such
Records is ordered pursuant to a subpoena or other order from a court
of competent jurisdiction. Each Holder agrees that information obtained
by him as a result of such inspections shall be deemed confidential and
shall not be used by him as the basis for any market transactions in
the securities of the Company unless and until such is made generally
available to the public. Each Holder further agrees that he will, upon
learning that disclosure of such Records is sought in a court of
competent jurisdiction, give notice to the Company and allow the
Company, at the Company's expense, to undertake appropriate action to
prevent disclosure of the Records deemed confidential;
(i) if such sale is pursuant to an underwritten offering, use
its commercially reasonable efforts to obtain a comfort letter or
comfort letters from the Company's independent public accountants in
customary form and covering such matters of the type customarily
covered by comfort letters as any Holder of Registrable Securities
covered by the registration statement or the managing Underwriter or
Underwriters may reasonably request;
(j) otherwise use its commercially reasonable efforts to
comply with all applicable rules and regulations of the Commission, and
make available to its security holders as soon as reasonably
practicable, an earnings statement covering a period of 12 months,
beginning within three months after the effective date of the
registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act;
REGISTRATION RIGHTS AGREEMENT - PAGE 9
<PAGE> 10
(k) if requested by the managing Underwriter or Underwriters,
if any, or any Holder of Registrable Securities covered by the
registration statement in connection with an underwritten offering
pursuant to Sections 2 or 3, (i) promptly incorporate in a prospectus
supplement or post-effective amendment such information as the managing
Underwriter or Underwriters, if any, and/or any such Holder reasonably
requests to be included therein, as may be required by applicable laws
and (ii) make all required filings of such prospectus supplement or
such post-effective amendment as soon as practicable after the Company
has received notification of the matters to be incorporated in such
prospectus supplement or post-effective amendment; provided, however,
that the Company shall not be required to take any actions pursuant to
this Section 5(k) that are not, in the reasonable opinion of counsel
for the Company, in compliance with applicable law;
(l) use its commercially reasonable efforts to obtain the
withdrawal of any order suspending the effectiveness of a registration
statement filed in connection herewith, or the lifting of any
suspension of the qualification (or exemption from qualification) of
any of the Registrable Securities for sale in any jurisdiction, at the
earliest possible moment;
(m) cooperate with each Holder of Registrable Securities
covered by the registration statement and the managing Underwriters, if
any, to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be sold, which certificates or
notes shall not bear any restrictive legends and shall be in a form
eligible for deposit with the transfer agent for the Common Stock; and
enable such Registrable Securities to be in such denominations and
registered in such names as the managing Underwriters, if any, or
holders may request at least two business days prior to any sale of
Registrable Securities; and
(n) take such other actions as are reasonably required in
order to expedite or facilitate the disposition of such Registrable
Securities.
Notwithstanding the provisions of this Section 5, the Company shall be
entitled to postpone, for a reasonable period of time not to exceed 45 days, the
filing or effectiveness of any registration statement under Sections 2 or 3 if
(A) the Company determines, in the good faith exercise of its reasonable
business judgment, that such registration and offering could materially
interfere with or adversely affect bona fide financing, acquisition or other
material business plans of the Company (including a proposed primary offering by
the Company of its own securities) at the time the right to delay is exercised
or would require disclosure of non-public information, the premature disclosure
of which could materially adversely affect the business, properties, operations
or financial results of the Company; provided, however, that the Company shall
not be required to disclose to the Holders requesting registration any such
transaction, plan or non-public information or (B) at any time prior to the
effectiveness of any Demand Registration or Piggy-back Registration the Company
determines that it is unable to comply with the provisions of Article 3 or
Article 11 of Regulation S-X under the Securities Act, to the extent then
applicable to the Company. If the Company postpones the filing or effectiveness
of a
REGISTRATION RIGHTS AGREEMENT - PAGE 10
<PAGE> 11
registration statement pursuant hereto, it shall promptly notify in writing the
Holders of Registrable Securities requesting such registration when the events
or circumstances permitting such postponement have ended and at such time shall
proceed with the filing of the registration statement as requested.
The Company may require each Holder to promptly furnish in writing to
the Company such information regarding the distribution of the Registrable
Securities as the Company may from time to time reasonably request and such
other information as may be legally required in connection with such
registration.
Each Holder requesting registration of Registrable Securities pursuant
to Sections 2 or 3 shall cooperate with the Company and, if applicable, the
Underwriter or Underwriters in providing such information and executing and
delivering such documents as the Company or the Underwriter or Underwriters
reasonably shall request in connection with any such registration, and the
Company shall not be obligated to include in any such registration any
Registrable Securities of any Holder who does not comply with this paragraph.
Each Holder of Registrable Securities covered by a registration
statement agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 5(f), such Holder will
forthwith discontinue disposition of Registrable Securities pursuant to the
registration statement covering such Registrable Securities until such Holder's
receipt of the copies of the supplemented or amended prospectus contemplated by
Section 5(f), and, if so directed by the Company, such Holder will deliver to
the Company all copies, other than permanent file copies then in such Holder's
possession, of the most recent prospectus covering such Registrable Securities
at the time of receipt of such notice. If the Company shall give such notice,
the Company shall extend the period during which such registration statement
shall be maintained effective (including the period referred to in Section 5(b))
by the number of days during the period from and including the date of the
giving of notice pursuant to Section 5(f) to the date when the Company shall
make available to such Holder a prospectus supplemented or amended to conform
with the requirements of Section 5(f).
6. REGISTRATION EXPENSES.
In connection with any registration statement required to be filed
hereunder, the Company shall pay the following registration expenses (the
"Registration Expenses"): (a) all registration and filing fees; (b) fees and
expenses of compliance with securities or blue sky laws (including reasonable
fees and disbursements of counsel in connection with any blue sky qualifications
of the Registrable Securities); (c) printing expenses (including expenses of
printing certificates for Registrable Securities); (d) internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties); (e) any fees and expenses
incurred in connection with the listing of the Registrable Securities on the
national securities exchange or automated quotation system on which the Common
Shares are listed; (f) reasonable fees and disbursements of counsel for the
Company and customary fees and expenses for independent certified public
accountants retained by the Company (including the costs
REGISTRATION RIGHTS AGREEMENT - PAGE 11
<PAGE> 12
associated with the delivery by independent certified public accountants of a
comfort letter or comfort letters requested pursuant to Section 5(i)); (g) the
reasonable fees and expenses of any special experts or other Persons retained by
the Company in connection with such registration; and (h) messenger, delivery
and telephone expenses related to any registration contemplated hereunder. The
Company shall not have any obligation to pay any underwriting fees, discounts,
or commissions attributable to the sale of Registrable Securities, or any
out-of-pocket expenses of any Holder (or the agents who manage his accounts),
which amounts shall be the responsibility of the selling Holder or Holders.
7. INDEMNIFICATION; CONTRIBUTION.
(a) Indemnification by the Company. The Company agrees to
indemnify and hold harmless each Holder of Registrable Securities and, if
applicable, its directors and officers and each Person who controls such Holder
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act, covered by a registration statement filed pursuant hereto from
and against any and all losses, claims, damages, liabilities and expenses
(including reasonable legal and other costs of investigation and defense)
(collectively, "Losses") arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any such registration
statement or prospectus relating to the Registrable Securities or in any
amendment or supplement thereto or in any preliminary prospectus, or arising out
of or based upon any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, except insofar as such Losses arise out of, or are based upon,
any such untrue statement or omission or allegation thereof based upon
information furnished in writing to the Company by such Holder or on such
Holder's behalf expressly for use therein; provided, however, that with respect
to any untrue statement or omission or alleged untrue statement or omission made
in any preliminary or final prospectus, the indemnity agreement contained in
this Section 7(a) shall not apply to the extent that any such Losses result from
the fact that a current copy of the prospectus was not sent or given to the
Person asserting any such Losses at or prior to the written confirmation of the
sale of the Registrable Securities concerned to such Person if it is determined
that it was the responsibility of such Holder to provide such Person with a
current copy of the prospectus and such current copy of the prospectus would
have cured the defect giving rise to such Losses. The Company also agrees to
indemnify any Underwriters of the Registrable Securities, their officers and
directors, and each Person who controls such Underwriters within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act on
substantially the same basis as the indemnification of Holders provided in this
Section 7(a).
(b) Indemnification by Holders. Each Holder agrees to
indemnify and hold harmless the Company, its directors and officers, and each
Person, if any, who controls the Company within the meaning of either Section 15
of the Securities Act or Section 20 of the Exchange Act (other than the Holder),
covered by a registration statement filed pursuant hereto from and against any
and all Losses arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any such registration statement
or prospectus relating to the Registrable Securities or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out
REGISTRATION RIGHTS AGREEMENT - PAGE 12
<PAGE> 13
of or based upon any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, but only insofar as such Losses arise out of, or are based upon,
any such untrue statement or omission or allegation thereof based upon
information furnished in writing to the Company by such Holder or on such
Holder's behalf, solely in such Holder's capacity as a Holder and not in his
capacity as a trust manager or officer of the Company, as manager of the Company
pursuant to the Management Agreement, or as a director of officer of the
Manager, if applicable, expressly for use therein; provided, however, that with
respect to any untrue statement or omission or alleged untrue statement or
omission made in any preliminary or final prospectus, the indemnity agreement
contained in this Section 7(b) shall not apply to the extent that any such
Losses result from the fact that a current copy of the prospectus was not sent
or given to the Person asserting any such Losses at or prior to the written
confirmation of the sale of the Common Shares concerned to such Person if it is
determined that it was the responsibility of the Company or any other Person or
entity (other than the Holder) to provide such Person with a current copy of the
prospectus and such current copy of the prospectus would have cured the defect
giving rise to such Losses. Each Holder also agrees to indemnify and hold
harmless underwriters of the Registrable Securities, their officers and
directors, and each Person who controls such underwriters within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act on
substantially the same basis as the indemnification of the Company provided in
this Section 7(b).
(c) Conduct of Indemnification Proceedings. If any action or
proceeding (including any governmental investigation) shall be brought or
asserted against any Person entitled to indemnification under Sections 7(a) or
7(b) (an "Indemnified Party") in respect of which indemnity may be sought from
any party who has agreed to provide such indemnification (an "Indemnifying
Party"), the Indemnified Party shall promptly notify the Indemnifying Party in
writing, and the Indemnifying Party shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to such Indemnified Party, and
shall assume the payment of all expenses. The Indemnified Party shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Party unless (i) the Indemnifying Party has agreed
to pay such fees and expenses, (ii) the Indemnifying Party shall have failed to
promptly assume the defense of such action or proceeding and to employ counsel
reasonably satisfactory to the Indemnified Party, (iii) the named parties to any
such action or proceeding (including any impleaded parties) include both such
Indemnified Party and the Indemnifying Party, and such Indemnified Party shall
have been advised by counsel that there is a conflict of interest on the part of
counsel employed by the Indemnifying Party to represent such Indemnified Party,
or (iv) the Indemnified Party's counsel shall have advised the Indemnified Party
that there may be defenses available to the Indemnified Party that are different
from or in addition to those available to the Indemnifying Party and that the
Indemnifying Party is not able to assert on behalf of or in the name of the
Indemnified Party (in which case of either (iii) or (iv), if such Indemnified
Party notifies the Indemnifying Party in writing that it elects to employ
separate counsel at the expense of the Indemnifying Party, the Indemnifying
Party shall not have the right to assume the defense of such action or
proceeding on behalf of such Indemnified Party); it being
REGISTRATION RIGHTS AGREEMENT - PAGE 13
<PAGE> 14
understood, however, that the Indemnifying Party shall not, in connection with
any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such Indemnified Parties, which firm shall be
designated in writing by such Indemnified Parties. The Indemnifying Party shall
not be liable for any settlement of any such action or proceeding effected
without its written consent, which consent shall not be unreasonably withheld,
but if settled with its written consent, or if there be a final judgment for the
plaintiff in any such action or proceeding, the Indemnifying Party shall
indemnify and hold harmless such Indemnified Parties from and against any loss
or liability (to the extent stated above) by reason of such settlement or
judgment.
(d) Contribution. If the indemnification provided for in this
Section 7 is unavailable to the Indemnified Parties in respect of any Losses
(other than by reason of exceptions provided in Section 7(a) or 7(b)), then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses (i) in such proportion as is appropriate to reflect the relative
fault of the Company, on the one hand, and Holders (together with any other
selling shareholders that may be obligated thereon pursuant to similar
indemnification or contribution provisions as contained herein), on the other
hand, with respect to the statements or omissions which resulted in such Losses,
or action in respect thereof, as well as any other relevant equitable
considerations or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as shall be appropriate to
reflect the relative benefits received by the Company, on the one hand, and
Holders (together with any other selling shareholders that may be obligated
thereon pursuant to similar indemnification or contribution provisions as
contained herein), on the other hand, from the offering of the securities
covered by such registration statement. The relative fault of the Company on the
one hand and of Holders (together with any other selling shareholders that may
be obligated thereon pursuant to similar indemnification or contribution
provisions as contained herein) on the other shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by such party, and such party's relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission. The relative benefits received by the Company on the one
hand and Holders (together with any other selling shareholders that may be
obligated thereon pursuant to similar indemnification or contribution provisions
as contained herein) on the other shall be deemed to be in the same proportion
as the total proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company bears to the
total proceeds (net of underwriting discounts and commissions but before
deducting expenses) received by the Holders (together with any other selling
shareholders that may be obligated thereon pursuant to similar indemnification
or contribution provisions as contained herein).
The Company and each Holder agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if
REGISTRATION RIGHTS AGREEMENT - PAGE 14
<PAGE> 15
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to in the immediately preceding subsection.
Notwithstanding the provisions of this Section 7(d), no Holder shall be required
to contribute any amount in excess of the amount by which the total price at
which the securities of such Holder were offered to the public exceeds the
amount of any damages which such Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
(e) Survival. The indemnity and contribution agreements
contained in this Section 7 shall remain operative and in full force and effect
regardless of (i) any termination of this Agreement or any underwriting
agreement, (ii) any investigation made by or on behalf of any Indemnified Party
or by or on behalf of the Company and (iii) the consummation of the sale or
successive resale of the Registrable Securities.
8. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS.
No Holder may participate in any underwritten registration hereunder
unless such Holder (a) agrees to sell its securities on the basis provided in
any underwriting arrangements approved by the Persons or entities entitled
hereunder to approve such arrangements and (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements, and
other documents reasonably required under the terms of such underwriting
arrangements and this Agreement; provided, however, that no such Holder shall be
required to make any representations or warranties in connection with any such
registration other than representations and warranties as to (i) such Holder's
ownership of its Registrable Securities to be sold or transferred free and clear
of all liens, claims, and encumbrances, (ii) such Holder's power and authority
to effect such transfer and (iii) such matters pertaining to compliance with
securities laws as may be reasonably requested; provided further, however, that
the obligation of such Holder to indemnify pursuant to any such underwriting
arrangements shall be several, not joint and several, among such Holders selling
Registrable Securities, and the liability of each such Holder will be in
proportion to, and provided further that such liability will be limited to, the
net amount received by such Holder from the sale of its Registrable Securities
pursuant to such registration.
9. SPECIAL COVENANT.
The Company covenants that it will file any reports required to be
filed by it under the Securities Act and the Exchange Act, and it will take such
further action that any Holder may reasonably request to enable such Holder to
sell Registrable Securities, from time to time, without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 144
under the Securities Act, as such Rule may be amended from time to time, or (b)
any similar rule or regulation hereafter adopted by the Commission. Upon the
request of any Holder, the Company will deliver to such Holder a written
statement as to whether it has complied with such information and requirements.
REGISTRATION RIGHTS AGREEMENT - PAGE 15
<PAGE> 16
10. MISCELLANEOUS.
(a) Remedies. In addition to being entitled to exercise all
rights provided herein and granted by law, including recovery of damages, each
Holder will be entitled to specific performance of its rights hereunder. The
Company agrees that monetary damages would not be adequate compensation for any
loss incurred by reason of a breach by it of the provisions hereof and hereby
agrees to waive the defense in any action for specific performance that a remedy
at law would be adequate.
(b) Term. The term hereof shall terminate on the earlier to
occur of (i) the tenth anniversary of the date hereof or (ii) the first date on
which there are no longer any Registrable Securities (the "Term").
(c) No Inconsistent Agreements. The Company will not on or
after the date hereof enter into any agreement with respect to its securities
which is inconsistent with the rights granted to Holders herein or otherwise
conflicts with the provisions hereof.
(d) Amendments and Waivers. The provisions hereof may not be
amended, modified, or supplemented, and waivers or consents to departures from
the provisions hereof may not be given, unless the Company has obtained the
written consent of the Holders.
(e) Notices. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand delivery, registered
first-class mail, telex, telecopier, or air courier guaranteeing overnight
delivery:
(i) if to Holdings or the Manager, at the most
current address given to the Company in accordance with the provisions
of this Section 10(e)(i), which address initially is:
c/o AMRESCO, INC.
700 North Pearl Street
Suite 2400, LB 342
Dallas, Texas 75201
Attention: President and General Counsel
(ii) if to the Company, at its most current address
and thereafter at such other address as may be designated from time to
time by notice given in accordance with the provisions of this section,
which address initially is:
AMRESCO CAPITAL TRUST
700 North Pearl Street
Suite 2400, LB 342
Dallas, Texas 75201
Attention: President and General Counsel
REGISTRATION RIGHTS AGREEMENT - PAGE 16
<PAGE> 17
(f) Successors and Assigns. The Company shall not assign its
rights or obligations hereunder without the prior written consent of the
Holders. Holder may assign their respective rights and obligations hereunder to
Persons to whom they transfer or otherwise assign Registrable Securities. In the
event of any such assignment, such assignees shall be entitled to the rights of
the assignor only to the extent such rights expressly are assigned to such
assignor. Any assignment of rights hereunder in violation of the foregoing shall
be null and void. Subject to the foregoing, this Agreement shall inure to the
benefit of and be binding upon the successors and assigns of the Company
(including, without limitation, any successor by operation of law or any
purchaser or acquiror of all or substantially all of the assets of the Company)
and each Holder; provided, however, that any assignee or transferee of
Registrable Securities that is deemed a Holder hereunder shall be entitled to
the rights and benefits afforded such Person hereby only upon such Person's
execution and delivery of an addendum hereto, in form and substance acceptable
to the Company, agreeing to be bound by the duties and obligations of a Holder
hereunder.
(g) Counterparts. This Agreement may be executed in a number
of identical counterparts and it shall not be necessary for the Company and each
Holder to execute each of such counterparts, but when both have executed and
delivered one or more of such counterparts, the several parts, when taken
together, shall be deemed to constitute one and the same instrument, enforceable
against each in accordance with its terms. In making proof of this Agreement, it
shall not be necessary to produce or account for more than one such counterpart
executed by the party against whom enforcement hereof is sought.
(h) Headings. The headings herein are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OR CHOICE OF LAW.
(j) Severability. If any provision hereof is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable; this Agreement shall
be construed and enforced as if such illegal, invalid, or unenforceable
provision had never comprised a part hereof; and the remaining provisions hereof
shall remain in full force and effect and shall not be affected by the illegal,
invalid, or unenforceable provision or by its severance from this Agreement.
Furthermore, in lieu of each such illegal, invalid, or unenforceable provision,
there shall be added automatically as a part hereof a provision as similar in
terms to such illegal, invalid, or unenforceable provision as may be possible
and be legal, valid, and enforceable.
(k) Entire Agreement. This Agreement is intended by the
Company and the Holders as a final expression of their agreement and is intended
to be a complete and exclusive statement of their agreement and understanding in
respect of the subject matter
REGISTRATION RIGHTS AGREEMENT - PAGE 17
<PAGE> 18
contained herein. This agreement supersedes all prior agreements and
understandings between the Company and the Holders with respect to such subject
matter.
(l) Third Party Beneficiaries. Subject to the terms of Section
10(f), this Agreement is intended for the benefit of the Company and the Holders
and their respective successors and assigns and is not for the benefit of, nor
may any provision hereof be enforced by, any other Person.
(m) Attorneys' Fees. In any proceeding brought to enforce any
provision hereof, the successful party shall be entitled to recover reasonable
attorneys' fees in addition to its costs and expenses and any other available
remedy.
[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
REGISTRATION RIGHTS AGREEMENT - PAGE 18
<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
COMPANY: AMRESCO CAPITAL TRUST
By:
--------------------------------
Title:
-----------------------------
HOLDINGS: AMREIT HOLDINGS, INC.
By:
--------------------------------
Title:
-----------------------------
MANAGER: AMREIT MANAGERS, L.P.
By: AMREIT MANAGERS G.P., INC.,
its General Partner
By:
--------------------------------
Title:
-----------------------------
REGISTRATION RIGHTS AGREEMENT - PAGE 19
<PAGE> 1
EXHIBIT 10.4
CORRESPONDENT AGREEMENT
This CORRESPONDENT AGREEMENT (this "Agreement") dated as of __________,
1998 is by and between HOLLIDAY FENOGLIO FOWLER L.P., a Delaware limited
partnership ("HFF") and AMRESCO CAPITAL TRUST, a Texas real estate investment
trust ("AMCT"), with reference to the following:
A. AMCT, together with its affiliated entities, is in the business of,
among other things, (i) originating and purchasing various types of commercial
mortgage loans, including participating loans, construction loans, bridge loans,
permanent loans and mezzanine loans, and (ii) investing in commercial real
estate.
B. HFF serves commercial real estate developers and owners by
originating and placing commercial mortgage loans and providing brokerage and
other real estate capital market services for commercial real estate
transactions.
C. AMCT desires to review from time to time the real estate investment
opportunities identified by HFF through its services which meet the investment
criteria and objectives of AMCT and HFF desires to submit such investment
opportunities to AMCT.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto agree as follows:
1. SUBMISSION OF INVESTMENT OPPORTUNITIES.
(a) During the term of this Agreement, HFF shall submit to AMCT
those commercial mortgage loan origination and commercial real estate
investment opportunities for which HFF has been engaged to provide
brokerage or other services and that HFF reasonably determines meet
the investment criteria and objectives of AMCT (individually, an
"Investment Opportunity," and collectively, the "Investment
Opportunities").
(b) AMCT shall from time to time provide to HFF a written copy of
its then current investment criteria and objectives, and the terms,
conditions and characteristics of investments generally acceptable to
it. A copy of AMCT's investment criteria and objectives in effect as
of the date of this Agreement have been delivered to HFF. HFF
understands and acknowledges that AMCT's investment criteria and
objectives are subject to change, in AMCT's sole discretion.
(c) HFF shall use commercially reasonable efforts to inform its
officers and employees responsible for commercial mortgage loan
origination and commercial real estate investment and disposition
activities of AMCT's investment criteria and objectives.
(d) In connection with the submission to AMCT of the Investment
Opportunities, HFF, at its sole cost and expense, shall provide to
AMCT such loan applications, credit reports, rent rolls, financial
statements and other documentation
<PAGE> 2
and information as HFF customarily provides to third parties in
connection with their investigation and consideration of such
Investment Opportunities. In addition, HFF shall, at its sole cost and
expense, perform those other duties and responsibilities which HFF
customarily provides to third parties to facilitate the underwriting
and closing of the applicable Investment Opportunity.
(e) HFF will take the same care in verifying facts regarding the
Investment Opportunities as it would if the investment were being made
by HFF for its own account with its own funds. HFF will apply
practices which are in all respects legal, proper and prudent and
which meet the usual and customary standards.
2. REPRESENTATIONS AND WARRANTIES OF HFF. HFF represents and warrants
to AMCT that (a) HFF is duly qualified to do business and has obtained all
necessary licenses to conduct its business as presently conducted and to perform
its obligations under this Agreement, (b) HFF has not made and will not make any
representations to any borrower or seller regarding any investment proposal
submitted to AMCT or AMCT's conduct with respect thereto and (c) HFF has
complied, in all material respects, with the terms of its licenses and all
applicable laws, including without limitation any disclosure obligations to the
borrower or seller. The representations and warranties of HFF contained herein
will survive the termination of this Agreement.
3. FEES. No fees or commissions, or reimbursement of expenses, shall be
payable by AMCT to HFF in connection with any Investment Opportunity presented
to AMCT, regardless of whether any such proposed investment is made by AMCT. Any
fees and commissions due and payable to HFF in connection with any Investment
Opportunity presented to AMCT which are required to be paid by the applicable
borrower or seller must be disclosed in writing to AMCT. Further, neither AMCT,
nor any of its officers, trust managers, shareholders or affiliates shall have
any liability or obligation to pay any fees or other compensation including,
without limitation, finder's fees, to any third party or co-broker which may
have an agreement or arrangement, express or implied, with HFF in connection
with AMCT's funding of any investment, and any obligation arising from such
agreement or arrangement shall be the sole responsibility of HFF.
4. NO OBLIGATION. HFF acknowledges and agrees that nothing in this
Agreement or the submission of any Investment Opportunity to AMCT shall be
construed as creating any obligation on behalf of AMCT to accept any Investment
Opportunity. HFF further acknowledges that neither AMCT nor any of its
affiliates shall have any obligation or liability to HFF or any other third
party for any refusal or failure by AMCT or any of its affiliates to make a
proposed investment or for any delay in processing any proposal submitted by HFF
to AMCT.
5. TERMINATION OF AGREEMENT. This Agreement may be terminated by AMCT
at any time upon the delivery of thirty (30) days prior written notice of
termination to HFF. This Agreement may be terminated by HFF, upon the delivery
of thirty (30) days prior written notice to AMCT, at any time after the
termination of the Management Agreement
CORRESPONDENT AGREEMENT - PAGE 2
<PAGE> 3
dated as of the date hereof, between AMCT and AMREIT Managers, L.P., a Delaware
limited partnership and an affiliate of HFF. Any notice shall become effective
upon either personal delivery or delivery by mail, first class postage prepaid,
to the address set forth below.
6. NON-EXCLUSIVE AGREEMENT. This Agreement is non-exclusive. Each of
AMCT and HFF and their respective affiliates may enter into similar agreements
with other parties without limitation.
7. INDEPENDENT CONTRACTOR/LIMITATION ON AUTHORITY. HFF agrees that it
is an independent contractor in performing its services for AMCT and its
affiliates. Accordingly, HFF and its employees, agents, and contractors are not
employees of AMCT or any of its affiliates and shall not receive any
compensation or any employee benefits provided by AMCT with respect to services
performed hereunder. As an independent contractor, HFF's duties are limited as
provided by this Agreement, and its employees, agents and contractors have no
authority to represent or to obligate AMCT in any way.
8. TAXES. HFF at HFF's expense, shall pay all taxes imposed by reason
of the services or work to be performed by HFF, including but not limited to all
sales and use taxes, licenses, fees, income, franchise and personal property
taxes, and all employment taxes (including but not limited to FICA and state
unemployment taxes) or contributions imposed by any law or trade union contracts
or regulations with respect to or measured by the wages, salaries or other
compensation paid to employees of HFF or contractors of HFF in connection with
this Agreement, including but not limited to, taxes or contributions for
unemployment compensation insurance, old age benefits, welfare fund, pensions
and annuities and disability insurance.
9. TRADEMARK. HFF IS NOT ENTITLED, AUTHORIZED OR PERMITTED TO USE
AMCT'S TRADEMARK OR TRADENAME, OR ANY OTHER IDENTIFYING SYMBOL OR NAME OWNED BY
AMCT OR PHOTOGRAPHS OF AMCT'S PROPERTIES, EQUIPMENT, PRODUCTS OR FACILITIES IN
ADVERTISEMENTS, BROCHURES, PUBLICITY, RELEASES OR SIMILAR MATERIALS WITHOUT THE
EXPRESS WRITTEN APPROVAL OF AMCT. AMCT may provide HFF promotional and other
material relating to its lending and investment programs and HFF may distribute
such materials in accordance with the directions of AMCT, subject to the
limitations as independent contractor contained in paragraph 7.
CORRESPONDENT AGREEMENT - PAGE 3
<PAGE> 4
10. NOTICES. Any notices necessary to be given under the provisions of
this Agreement shall be in writing and delivered either personally or by
facsimile or by mail, first class postage prepaid, to the address set forth
below:
Holliday Fenoglio Fowler L.P.
8750 North Central Expressway
Suite 950
Dallas, Texas 75231-6428
Attn: President
AMRESCO Capital Trust
700 North Pearl Street
Suite 2400, LB 342
Dallas, Texas 75201-7424
Attn: President and General Counsel
11. MISCELLANEOUS PROVISIONS.
(a) The arrangements and relationships contemplated in this
Agreement are the sole understandings of the parties hereto with
respect to the subject matter hereof, and any other agreements,
expressed or implied, entered into prior or contemporaneous to this
Agreement are null and void.
(b) This Agreement shall be considered the entire agreement and no
further arrangements between the parties will be considered valid and
enforceable under this Agreement or any amendment thereto unless they
are in writing and executed by the parties herein.
(c) This Agreement shall be governed by the laws of the State of
Texas. Any suit or controversy arising out of this Agreement, if
litigated shall be filed in state or federal court in the State of
Texas.
(d) If any part of this Agreement is found to be unenforceable, the
remainder of the Agreement shall still remain in full force and effect.
(e) If any action or claim is made by any party hereto against the
other, the prevailing party shall be entitled to their reasonable
attorney's fees and costs.
(f) This Agreement may be executed in counterparts, each of which
shall be deemed an original, but both of which taken together shall
constitute one and the same instrument.
CORRESPONDENT AGREEMENT - PAGE 4
<PAGE> 5
12. NO PARTNERSHIP. Nothing herein contained shall be deemed or
construed to create a partnership or joint venture between the parties hereto.
13. NON-DISCRIMINATION. HFF shall not discriminate, either directly or
indirectly, against any person because of race, color, creed, sex or national
origin in the origination of any loans under this Agreement, or hiring employees
or agents to perform services for HFF under this Agreement.
Executed and effective as of the date first written above.
AMRESCO CAPITAL TRUST
By:
-----------------------------------------
Name:
--------------------------------
Title:
--------------------------------
HOLLIDAY FENOGLIO FOWLER, L.P.
By: AMRESCO Mortgage Capital, Inc.,
its general partner
By:
-----------------------------------------
Name:
--------------------------------
Title:
--------------------------------
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Registrant
AMREIT I, INC., a Delaware Corporation
AMREIT II, Inc., a Nevada Corporation
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-45543 of AMRESCO Capital Trust on Form S-11 of our report dated February 2,
1998, appearing in the Prospectus, which is part of such Registration
Statement.
We also consent to the reference to us under the heading "Experts" in such
Registration Statement.
/s/ Deloitte & Touche LLP
Dallas, Texas
April 1, 1998
