<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1998
REGISTRATION NO. 333-45543
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 4
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)
---------------------
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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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED(1) PER SHARE PRICE(2) REGISTRATION FEE(3)
- --------------------------------------------------------------------------------------------------------------------
<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
====================================================================================================================
</TABLE>
(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) The required filing fee has been previously paid.
---------------------
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.
SUBJECT TO COMPLETION -- DATED , 1998
PROSPECTUS
- --------------------------------------------------------------------------------
20,000,000 Shares
[AMRESCO LOGO]
Common Shares of Beneficial Interest
- --------------------------------------------------------------------------------
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 16 TO 33 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON SHARES OFFERED HEREBY, INCLUDING:
- - Conflicts of interest between the Company and members of the AMRESCO Group
could result in decisions not in the best interest of the Company's
shareholders.
- - 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.
- - The Company will be wholly dependent upon the Manager and other members of the
AMRESCO Group for its operations.
- - 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.
- - The Company has issued non-binding commitments to purchase only $101.0 million
or approximately 36.4% (based on the committed amount) of the estimated net
proceeds of the Offering, assuming an initial public offering price of $15 per
share. 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
will adversely affect operations of the Company.
- - The Company intends to invest in various types of commercial mortgage loans
(including construction and rehabilitation loans, bridge loans, participating
loans and second-lien loans) which may be subject to significant credit risk,
resulting in possible losses.
- - Each of the proposed Initial Assets is a non-recourse commercial mortgage
loan. In the event of a default under any such Mortgage Loan, the Company's
recourse would be limited to the value of the collateral, which may be less
than the outstanding balance of such loan.
- - The Company intends to invest in mortgage-backed securities, including
non-investment grade mortgage-backed securities, which may be subject to a
greater risk of loss than investments in senior, investment grade securities.
- - The Company intends to invest in commercial real properties, including net
leased properties which may be subject to risk of non-payment by the
applicable tenant, particularly in the event of an economic downturn, and
subperforming and nonperforming properties, which may not generate sufficient
revenues to meet operating expenses and debt service obligations.
- - 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 a reduction in the Company's income from such
investments. (Cont. 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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Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
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<S> <C> <C> <C>
Per Common Share............................................ $ $ $
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Total(3).................................................... $ $ $
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(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
ABN AMRO INCORPORATED
J.C. BRADFORD & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
, 1998 PIPER JAFFRAY INC.
<PAGE> 3
(Continued from previous page)
- - The Company currently intends to operate at a ratio of total debt to equity of
less than 3:1 (although the actual ratio may be higher or lower and the
Company's Declaration of Trust does not limit the amount of indebtedness the
Company can incur). Such leverage is likely to increase the volatility of the
Company's income and net asset value and could result in operating or capital
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 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.
- - 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.
- - The Company will have broad discretion in the types of real estate related
assets which may be included in its portfolio, in the types and percentages of
any type of assets included in such portfolio, and may change its investment
and operating policies and strategies (including the Company's policies
regarding the incurrence of debt) at any time without the consent of the
shareholders of the Company, which creates uncertainty for shareholders and
could cause losses to the Company.
- - Certain of the Underwriters (or their affiliates) have in the past, and may in
the future, provide investment banking services and financings to members of
the AMRESCO Group and an affiliate of at least one Underwriter has committed
to provide a financing facility to the Company in connection with the
Offering. As a result, there may be conflicts of interest between purchasers
of Common Shares in the Offering and the Underwriters.
- - 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.
- - Shareholders may, under certain circumstances, be subject to significant
potential dilution from future equity offerings, including offerings of
preferred shares.
- - 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.
- - 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 (or 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.
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. The Common Shares have been approved for inclusion in The
Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the
symbol "AMCT."
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> 4
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.......................... 1
The Company............................... 1
Business and Strategy..................... 2
Summary Risk Factors...................... 2
Targeted Investments...................... 7
The Initial Assets........................ 8
The Manager............................... 9
The Management Agreement.................. 10
Dividend Policy and Distributions......... 11
The Offering.............................. 12
Conflicts of Interest..................... 12
Organization and Relationships............ 14
RISK FACTORS................................ 16
Conflicts of Interest May Result in
Decisions That Do Not Fully Reflect the
Shareholders' Best Interest............ 16
Terms of Transactions With Members of
the AMRESCO Group May Not be Fair.... 16
Investment Opportunities May Be Limited
if Such Opportunities Are Also
Attractive to the AMRESCO Group...... 16
Competition by the AMRESCO Group May
Adversely Affect the Company......... 16
Conflicts of the Officers and Employees
of the Manager May Cause Them Not to
Act in the Company's Best Interest... 17
Structure of Management Compensation
Could Jeopardize the Invested
Portfolio............................ 17
Agreements and Transactions May Not be
Favorable to the Company............. 17
Dependence on the Manager and the AMRESCO
Group for Operations and the Lack of
Experience of the Manager May Adversely
Affect Operating Results............... 17
Inability to Acquire or Delays in
Acquiring Targeted Investments Will
Reduce Income to the Company........... 18
Competition Could Reduce Income to the
Company................................ 18
Co-Investments May be Riskier Than
Investments Made Solely by the
Company................................ 19
Risks of Loss on Mortgage Loans........... 19
Foreclosure May Not be Sufficient to
Prevent Losses....................... 19
Commercial Mortgage Loans May Involve a
Greater Risk of Loss Than
Single-Family Mortgage Loans......... 20
Mezzanine Loans, Construction Loans,
Rehabilitation Loans and Bridge Loans
Involve Greater Risks of Loss........ 20
Participating Loans, Mezzanine Loans,
Construction Loans, Rehabilitation
Loans and Bridge Loans Involve Higher
Administrative Costs................. 20
Distressed Mortgage Loans May Have
Greater Default Risks Than Performing
Loans................................ 20
Limited Recourse Loans May Limit the
Company's Recovery to the Value of
the Mortgaged Property............... 20
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....... 21
Repayment May Depend on Successful
Completion of the Project............ 21
</TABLE>
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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.... 21
Returns on Loan One and Loan Four May
be Reduced due to Second Lien
Status............................... 21
Potential Environmental Problems
Associated With Loan Three May
Adversely Affect the Company......... 22
Concentrations of Asset Types May
Increase Risk........................ 23
Non-recourse Nature of the Initial
Assets May Limit the Company's
Recovery on the Initial Assets....... 23
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.......................... 25
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............ 27
Increased Prepayment Rates Could
Adversely Affect Yields.............. 27
Leverage Increases Exposure to Loss....... 27
Inability to Implement Leveraging Strategy
May Reduce Profits..................... 28
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
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The Company's Broad Discretion Creates
Uncertainty............................ 29
Conflicts of Interest of Certain
Underwriters May Affect Offering....... 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............. 32
Changes in Tax Laws Applicable to REITs
May Adversely Affect the Company....... 32
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.... 33
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....................... 37
General................................... 37
Industry Trends........................... 37
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 Policy.......... 43
Financial Risk Management Policy....... 44
Relationship With AMRESCO.............. 45
Right of First Refusal............... 45
Correspondent Agreement.............. 45
Acquisition or Co-Investment
Opportunities..................... 46
Compliance Policies.................... 47
Future Revisions in Policies and
Strategies........................... 47
Description of Targeted Investments....... 48
Mortgage Loans......................... 48
Participating Loans.................. 48
Construction Loans and Rehabilitation
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
</TABLE>
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REO Properties and Other Distressed
Real Estate....................... 54
Other Investments...................... 55
Investment in Other Entities......... 56
Foreign Investments.................. 56
The Initial Assets........................ 56
Loan One............................... 56
Loan Two............................... 57
Loan Three............................. 58
Loan Four.............................. 59
Loan Five.............................. 60
Employees................................. 63
Facilities................................ 63
Legal Proceedings......................... 63
MANAGEMENT OF THE COMPANY................... 63
Executive Officers and Trust Managers of
the Company............................ 63
Executive Compensation.................... 68
Share Option Plan......................... 68
Share Options Outstanding................. 69
THE MANAGER................................. 70
Description of the AMRESCO Group.......... 70
Commercial Mortgage Banking............ 71
General.............................. 71
Real Estate Capital Markets.......... 71
Commercial Real Estate Lending....... 72
Commercial Loan Servicing............ 72
Commercial Finance..................... 72
General.............................. 72
Franchise Lending.................... 73
Specialty Lending.................... 73
Single-Family Residential
Construction Lending.............. 73
Asset Management....................... 73
General.............................. 73
Asset Portfolio Management and
Investment........................ 73
Special Servicing.................... 74
Servicing Risks; Borrower
Delinquencies and Claims.......... 74
The Management Agreement.................. 74
Termination............................... 77
Management Compensation................... 77
Expenses.................................. 79
Certain Relationships; Conflicts of
Interest............................... 80
Limits of Responsibility.................. 82
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..................... 82
FEDERAL INCOME TAX
CONSEQUENCES.............................. 83
General................................... 83
Taxation of the Company................... 84
Requirements For Qualification............ 85
Organizational Requirements............ 85
Qualified REIT Subsidiary............ 86
Ownership of a Partnership
Interest.......................... 86
Income Tests........................... 86
Asset Tests............................ 90
Annual Distribution Requirements....... 90
Failure to Qualify........................ 92
Taxation of Shareholders.................. 92
Taxation of Taxable U.S.
Shareholders......................... 92
Taxation of Tax-Exempt Shareholders.... 94
Taxation of Non-U.S. Shareholders...... 95
Information Reporting Requirements and
Backup Withholding Tax................. 97
Proposed Tax Legislation and Possible
Other Legislative Actions Affecting Tax
Consequences........................... 97
ERISA CONSIDERATIONS........................ 98
Employee Benefit Plans, Tax-Qualified
Retirement Plans, and IRAs............. 98
</TABLE>
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Status of the Company Under ERISA......... 99
DESCRIPTION OF SHARES OF BENEFICIAL
INTEREST.................................. 101
General................................... 101
Common Shares............................. 101
Voting Rights.......................... 101
Dividends.............................. 101
Liquidation Rights..................... 101
Other Terms............................ 102
Meetings of Shareholders............... 102
Preferred Shares.......................... 102
Registration Rights....................... 102
Restrictions on Transfer.................. 102
Dividend Reinvestment and Share Purchase
Plan................................... 105
CERTAIN PROVISIONS OF TEXAS LAW AND OF THE
DECLARATION OF TRUST AND BYLAWS........... 105
Board of Trust Managers................... 105
Removal of Trust Managers................. 105
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Staggered Board........................... 105
Business Combinations..................... 105
Amendment to the Declaration of Trust..... 107
Amendment of Bylaws....................... 108
Termination of the Company................ 108
Special Meetings of the Shareholders...... 108
Advance Notice of Trust Manager
Nominations and New Business........... 108
Possible Anti-Takeover Effect of Certain
Provisions of Texas Law and of the
Declaration of Trust and Bylaws........ 108
Transfer Agent and Registrar.............. 108
Reports to Shareholders................... 108
SHARES ELIGIBLE FOR FUTURE SALE............. 109
UNDERWRITING................................ 111
PRIVATE PLACEMENT........................... 113
LEGAL MATTERS............................... 113
EXPERTS..................................... 113
ADDITIONAL INFORMATION...................... 114
GLOSSARY.................................... 114
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iii
<PAGE> 7
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 115. 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, Rehabilitation 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 intends 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 is engaged in three primary lines
of business: real estate related debt placement, real estate investment banking
and real estate dispositions. Based on the most recently available National Real
Estate Investor's Top Lender Survey (which is based on 1996 originations), the
Company believes that Holliday Fenoglio Fowler is the largest commercial
mortgage brokerage company in the United States (including originations of
Fowler Goedecke, which was acquired by Holliday Fenoglio Fowler in January
1998). AMRESCO Funding provides mid- to high-yield commercial Mortgage Loans
(including Participating Loans, Mezzanine Loans, Construction Loans,
Rehabilitation 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 the 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 the Right of First Refusal will minimize conflicts
and potential competition for Targeted Investments between the Company and the
AMRESCO Group. Also 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 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. 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. 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."
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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. See "Management of the Company." 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:
- invest in certain types of Mortgage Loans, MBS and commercial real estate
which the Company expects to generate the highest risk-adjusted returns
on capital invested, after considering all material relevant factors;
- 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;
- utilize the expertise and resources (including the market research
capabilities) of the AMRESCO Group to monitor trends and demands in the
Mortgage Loan and real estate markets (and to adjust its Mortgage Loan
products in response thereto) and 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;
- 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;
- 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;
- 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;
- 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 and its borrowings if, given
the cost of such hedges, the Manager determines such strategies are in
the best interest of the Company; and
- 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 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.
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."
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- 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 an 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 contain 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.
- 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. The ability of the AMRESCO
Group to support, manage and control its continued growth and to provide
services and support to the Manager to enable the Manager to perform its
obligations under the Management Agreement is dependent upon, among other
things, the ability of the AMRESCO Group to hire, train, supervise and
manage its work force and to continue to develop the skills necessary to
compete successfully in its business lines. 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 (or any member thereof) is not indicative of future results of the
Company.
- Failure to Acquire Targeted Investments Will Reduce Income to the
Company. The Company currently has no Invested Portfolio. The Company has
issued non-binding commitments to purchase or originate Targeted
Investments with a maximum aggregate purchase price equal to
approximately $101.0 million (based on the committed amount), or 36.4% of
the estimated net proceeds of the Offering, and there is no assurance
that the Company will purchase any of such Targeted Investments. Further,
a majority of the Initial Assets are either Construction Loans or
Rehabilitation Loans and, generally, only a portion of the committed
amount of such loans will be funded at the time of purchase or
origination. 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.
- 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
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Targeted Investments and, therefore, lower yields on such investments and
lower income to the Company.
- 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.
- Investments in Higher-Risk Mortgage Loans Could Result in Losses to the
Company. The Targeted Investments include Participating Loans (including
Mezzanine Loans, Construction Loans, Rehabilitation 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.
- Repayment of Initial Assets May Depend Upon Successful Completion of
Financed Projects. The Initial Assets consist primarily of Construction
Loans and Rehabilitation Loans. The repayment of such Mortgage Loans may
be dependent upon the successful and timely completion of the financed
construction or rehabilitation. If the applicable borrower is unable to
successfully complete the proposed construction or rehabilitation 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.
- Non-Recourse Nature of Initial Assets May Limit the Company's Recovery on
the Initial Assets. Each Mortgage Loan included in the Initial Assets is
(or is expected to be) non-recourse against the applicable borrower. In
addition, each applicable borrower is expected to be a newly formed or
to-be-formed special purpose entity with no operating history and no
significant assets other than the property mortgaged or pledged to secure
the Mortgage Loan. In the event of a default in the payment of any
Mortgage Loan included in the Initial Assets, recourse will be limited to
the mortgaged real estate and the pledged ownership interests in the
applicable borrower. Accordingly, in the event of such default, the
Company's recovery would be limited to the liquidation value of the
property securing such Mortgage Loan, which value may be less than the
outstanding balance of such loan.
- 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.
- Ability to Foreclose on Certain Initial Assets May be Impaired. Since two
of the five 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.
- 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, Rehabilitation 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
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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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Leverage Increases Exposure to Loss. The Company expects to increase the
size of its Invested Portfolio by employing a significant amount of
leverage. The Company presently intends to achieve a Leverage Ratio of
2:1 within 24 months after the closing of the Offering, and thereafter to
operate at a Leverage Ratio of less than 3:1, although the actual
Leverage Ratio may be higher or lower, and the Company's Declaration of
Trust does not limit the amount of indebtedness the Company can incur.
Such leverage 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.
- 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 return
on its investments) and may not be effective in mitigating interest rate
and prepayment risks.
- 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
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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.
- The Company's Broad Discretion Creates Uncertainty. The Company will have
broad discretion (i) in the types of real estate related assets which may
constitute Targeted Investments from time to time, (ii) in the types and
percentages of any type of Targeted Investments included in the Invested
Portfolio from time to time, and (iii) to change its investment and
operating policies and strategies at any time without the consent of the
shareholders. Such discretion creates uncertainty for shareholders and
could cause losses to the Company.
- Conflicts of Interest of Certain Underwriters May Affect
Offering. Certain of the Underwriters (or their affiliates) have, in the
past, and may in the future, provide investment banking services and
financing to members of the AMRESCO Group. Prudential Securities Credit
Corporation ("PSCC"), an affiliate of Prudential Securities Incorporated
("PSI"), the lead Underwriter, has committed to provide a $400 million
Warehouse Line and a $100 million Repurchase Agreement to the Company
upon the closing of the Offering for which PSCC will receive certain
fees. In addition, in connection with the Warehouse Line, the Company
will agree (as is customary in many similar warehouse lending
arrangements with affiliates of investment banking firms), to engage PSI
to act as underwriter and/or placement agent for any sale or
securitization of Mortgage Loans financed with proceeds from the
Warehouse Line. Accordingly, the Underwriters may have certain conflicts
of interest in connection with the Offering.
- 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.
- 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.
- 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.
- 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.
- 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 its investment in the Company.
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TARGETED INVESTMENTS
The Company currently intends to originate or purchase primarily the
following types of assets:
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 additional 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 initial construction of real property ("Construction Loans"), the
acquisition and renovation or rehabilitation of existing real property
("Rehabilitation 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 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 originated Mortgage Loans, 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. See "Risk Factors -- Risks
Related to Investments in Real Estate -- Foreign Real Estate is Subject to
Currency Conversion Risks and Uncertainty of Foreign Laws."
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The Company has no policy requiring any specific percentage of the Invested
Portfolio to consist of any particular type of Targeted Investment, or limiting
any particular type of Targeted Investment to a specific percentage of the
Invested Portfolio. 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.
THE INITIAL ASSETS
To date, the Company has identified five Mortgage Loans to purchase or
originate with the net proceeds of the Offering (the "Initial Assets"), subject
to, among other things, the review and approval of the Company's Investment
Committee. See "Risk Factors -- Risks of Loss on the Initial Assets." There can
be no assurance that any of such Mortgage Loans will be purchased or originated
by the Company. Each of the Initial Assets is currently owned (if the Mortgage
Loan is currently existing) or being negotiated (if the Mortgage Loan has not
yet been originated) by AMRESCO Funding. With respect to each Initial Asset
which is originated by AMRESCO Funding prior to the closing of the Offering, the
Company has issued a non-binding commitment to purchase such Initial Asset from
AMRESCO Funding, and AMRESCO Funding has agreed to sell such Initial Asset 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. With respect to Initial Assets which are not originated prior to
the closing of the Offering, AMRESCO Funding has agreed to transfer its rights
to originate such Mortgage Loans to the Company after the closing of the
Offering, without charge, if the Company's Investment Committee determines that
the Company should originate the proposed loans.
The first Mortgage Loan identified for purchase by the Company with the net
proceeds of the Offering ("Loan One") is a $6 million Rehabilitation Mezzanine
Loan secured by a second lien on a 956,114 (approximate) square foot mixed-use
development located in Columbus, Ohio. Loan One was closed on February 20, 1998.
The 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 (an affiliate of one of the Underwriters),
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 Loan One, are due on March 31, 2001. AMRESCO Funding has
committed to fund an additional $1 million to the borrower on May 25, 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 May 1998 in the amount of approximately $20.3 million. See "Business
and Strategy -- The Initial Assets -- Loan One" for further information about
Loan One.
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 multifamily
apartment property. AMRESCO Funding has issued a terms letter (the "Loan Two
Terms Letter") 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 Loan Two. 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 Loan Two has been paid
in full) up to a maximum return to the Company of 18% per annum. The Loan Two
Terms Letter 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 -- Loan Two" for further information about Loan
Two.
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 Rehabilitation Loan to refinance the
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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 commitment for Loan Three (the "Loan Three Commitment"),
and AMRESCO Funding and the proposed borrower are currently negotiating terms
while AMRESCO Funding completes the underwriting process. The Loan Three
Commitment 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 -- Loan Three" for further information about Loan
Three.
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
located in a suburb of Dallas, Texas. Loan Four was closed on March 30, 1998.
Loan Four bears 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 25% per annum return to the Company. See "Business
and Strategy -- The Initial Assets -- Loan Four" for further information about
Loan Four.
The final Mortgage Loan which the Company has identified for origination or
purchase with the net proceeds of the Offering ("Loan Five") is a proposed $26.5
million senior Participating Mortgage Loan for the acquisition of a
four-building industrial office complex located on 173 acres in Rhode Island,
and containing 769,551 (approximate) net rentable square feet, and the
completion of certain tenant improvements, renovations and lease-up of the
project. AMRESCO Funding has issued a commitment (the "Loan Five Commitment") to
originate Loan Five and AMRESCO Funding and the borrower are currently
negotiating loan documents while AMRESCO Funding completes its underwriting
process. Loan Five is proposed to bear interest at an accrual rate of 13.5% 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 36 months from the
closing of Loan Five. In addition, the Company would be entitled to receive a
shared appreciation interest in the property, with a maximum return of 20% per
annum to the Company. See "Business and Strategy -- The Initial Assets -- Loan
Five" for further information about Loan Five.
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."
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<PAGE> 16
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 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. See "The Manager -- Management Compensation."
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
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<PAGE> 17
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 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 on page 10), 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 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.
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> 18
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 no more
than $101.0 million (or 36.4%) of
the estimated net proceeds of the
Offering to acquire (and fully
fund) 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 invest the net proceeds
of the Offering temporarily in
readily marketable interest
bearing assets until appropriate
Targeted Investments are 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 an aggregate of 6,000 restricted Common Shares expected to be
issued to the Independent Trust Managers during the first year after the
closing of the Offering, as compensation for their first year of service on
the Board of Trust Managers, and 3,333,350 Common Shares reserved for
issuance under the Share Option Plan. Immediately after the closing of the
Offering, options to acquire 3,092,233 Common Shares will be issued under
the Share Option Plan to the Manager and to officers, Trust Managers and key
employees of the Company, the Manager and certain other members of the
AMRESCO Group, 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" and "Management of
the Company -- Executive Officers and Trust Managers of the Company."
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 --
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<PAGE> 19
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. 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). 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 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
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<PAGE> 20
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:
[CHART]
- ---------------
(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 may own up to 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."
(2) Immediately after the closing of the Offering, certain Trust Managers,
officers and key employees of the Company, the Manager and other members of
the AMRESCO Group will be issued options to purchase a number of Common
Shares in an aggregate amount equal to approximately 3.9% of the number of
Common Shares that will be outstanding upon the closing of the Offering. See
"Management of the Company -- Share Options Outstanding." In addition, the
Company intends to grant 1,500 restricted Common Shares annually to each
Independent Trust Manager, in lieu of cash compensation.
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<PAGE> 21
(3) Upon the closing of the Offering, the Company will enter into the Management
Agreement with the Manager and AMRESCO pursuant to which 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 AMRESCO will grant the Right of First Refusal to
the Company. In addition, immediately after the closing of the Offering, the
Company will grant to the Manager options to purchase 2,222,233 Common
Shares (assuming the Underwriters' over-allotment is not exercised). 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> 22
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.
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 investment objectives substantially similar to
those of the Company. See "The Manager -- Certain Relationships; Conflicts of
Interest." Since neither the Manager nor any of its Affiliates is limited or
restricted from engaging in any business or rendering services except as
described above, the Manager and other members of
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<PAGE> 23
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. See "The Manager -- The Management Agreement" and "Business and
Strategy -- The Initial 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 effect on the Company's business, financial condition, cash
flows and results of operations.
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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. The AMRESCO Group has
recently diversified its business lines and increased its investments in asset
portfolios, and intends to acquire additional businesses which complement the
AMRESCO Group's core capabilities in financial services. The ability of the
AMRESCO Group to support, manage and control its continued growth and to provide
services and support to the Manager to enable the Manager to perform its
obligations under the Management Agreement is dependent upon, among other
things, the ability of the AMRESCO Group to hire, train, supervise and manage
its work force and to continue to develop the skills necessary to compete
successfully in its business lines. 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 $101.0 million (based on committed amount) of Initial
Assets in which it intends to invest with approximately 36.4% of the estimated
net proceeds of the Offering. There can be no assurance that the Company will
purchase any of such Initial Assets. Further, even if such assets are purchased
by the Company, because all of the Initial Assets are Construction Loans or
Rehabilitation Loans (except for Loan Five), only a portion of the committed
amount will be funded at the date of purchase or origination and, therefore, the
Company's Invested Portfolio (based on funding) will grow more slowly than it
would if such loans were fully funded at the date of purchase or origination.
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 12 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 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
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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.
In addition, the Company (to the extent the Company owns commercial or
multifamily property) and the owners of real properties securing the Company's
Mortgage Loans will compete with numerous other owners and operators of similar
commercial or multifamily properties, including commercial developers, real
estate companies and REITs, many of which may have greater financial and other
resources and more operating experience than the Company or the owners of real
properties securing the Company's Mortgage Loans, as applicable. The Company
expects that many of the real properties which may be owned by it and those
owned and operated by borrowers under its Mortgage Loans (including certain of
the Initial Assets) will be located in markets or submarkets in which
significant construction or rehabilitation of properties is underway, which
could result in overbuilding in such markets or submarkets. Any such
overbuilding could adversely impact the ability of the Company to lease its
properties and the ability of the borrowers under the Company's Mortgage Loans
to lease their respective properties and repay their Mortgage Loans, which
could, in turn, adversely impact the Company's income and its ability to make
distributions to its shareholders. See "Business and Strategy -- The Initial
Assets."
CO-INVESTMENTS MAY BE RISKIER THAN INVESTMENTS MADE SOLELY BY THE COMPANY.
The Company intends to co-invest or participate with other entities (including
from time to time 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, 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.
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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 LOANS, CONSTRUCTION LOANS, REHABILITATION LOANS AND BRIDGE LOANS
INVOLVE GREATER RISKS OF LOSS. Mezzanine Loans, Construction Loans,
Rehabilitation 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 and Rehabilitation Loans is often dependent on successful completion and
operation of the project. Construction Loans and Rehabilitation 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, Rehabilitation Loans and Bridge Loans
typically have higher Loan-to-Value Ratios than conventional Mortgage Loans.
PARTICIPATING LOANS, MEZZANINE LOANS, CONSTRUCTION LOANS, REHABILITATION
LOANS AND BRIDGE LOANS INVOLVE HIGHER ADMINISTRATIVE COSTS. Participating Loans,
Mezzanine Loans, Construction Loans, Rehabilitation 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 affected.
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
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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 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 primarily of Construction Loans and Rehabilitation Loans. The
repayment of such Mortgage Loans may be dependent upon the successful and timely
construction or rehabilitation of the subject property. If the applicable
borrower is unable to successfully complete the proposed construction or
rehabilitation 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 Loans Two, Four and Five will be derived from the payment by the
borrower to the Company of a portion of the net sale or refinancing proceeds of
the mortgaged property. In the event of any economic downturn or recession in
the markets in which the properties securing Loans Two, Four and Five 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
with respect to the real property collateral. In addition, if the borrower of
Loan One were to default on its payments to the senior lender, the
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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, if ever. 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, if at all.
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. See "-- Risks Related to Investments
in Real Estate -- Real Estate With Hidden Environmental Problems Will Increase
Costs and May Create Liability for the Company" and "-- Risks Related to
Investments in Real Estate -- Real Estate With Known Environmental Problems May
Create Liability for the Company."
The environmental site assessment concluded that the release of No. 6 fuel
oil did not pose an imminent 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 of the proceeds of Loan Three to
remediate the contamination associated with the release of the No. 6 fuel oil
and approximately $300,000 of the proceeds of Loan Three 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 problem associated with the real property securing Loan Three.
The proposed borrower, which was formed in December 1997, has no operating
history and is not expected to have any material assets other than the property
proposed to secure Loan Three. As of December 31, 1997, the proposed borrower's
balance sheet reflected (i) total assets of approximately $19.3 million
(consisting of real property valued at approximately $17.3 million, cash of
approximately $1.7 million and capitalized organizational costs of approximately
$300,000), (ii) total liabilities of approximately $7.5 million and (iii) owners
equity of approximately $11.8 million. Prior to the funding of Loan Three, the
Borrower is expected to use or to have used all or a significant portion of its
cash in connection with the proposed rehabilitation. Upon the funding of Loan
Three, the proposed borrower is not expected to have any significant assets and
will have no requirement to maintain any specified amount of assets in the
future, other than the real property proposed to secure Loan Three. Therefore,
there can be no assurance that the borrower will have the ability to satisfy its
indemnification
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obligation under 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," "-- Risks Related to Investments in Real
Estate -- Real Estate With Known Environmental Problems May Create Liability for
the Company" and "Business and Strategy -- The Initial Assets -- Loan Three."
CONCENTRATIONS OF ASSET TYPES MAY INCREASE RISK. All of the Initial Assets
identified by the Company to date (other than Loan Five) consist of Construction
Loans or Rehabilitation Loans. The lack of diversification in the Company's
proposed initial Invested Portfolio may increase the Company's risk of loss in
the event of an economic downturn. In addition, because all of the Initial
Assets (other than Loan Five) are Construction Loans or Rehabilitation Loans,
the committed amount will not be fully funded at the time of purchase or
origination of such loans and, therefore, the Invested Portfolio (based on
amounts funded) will grow more slowly than it would if such Mortgage Loans were
fully funded at the date of origination or purchase. See "-- The Company's Broad
Discretion Creates Uncertainty" and "-- Risks of Loss on Mortgage Loans --
Mezzanine, Construction, Rehabilitation and Bridge Loans Involve Greater Risks
of Loss."
NON-RECOURSE NATURE OF INITIAL ASSETS MAY LIMIT THE COMPANY'S RECOVERY ON
THE INITIAL ASSETS. Each Mortgage Loan included in the Initial Assets is (or is
expected to be) non-recourse against the applicable borrower. In addition, each
applicable borrower is expected to be a newly formed or to-be-formed special
purpose entity with no operating history and no significant assets other than
the property mortgaged or pledged to secure the Mortgage Loan. In the event of a
default in the payment of any Mortgage Loan included in the Initial Assets,
recourse will be limited to the mortgaged real estate and the pledged ownership
interests in the applicable borrower. Accordingly, in the event of such default,
the Company's recovery would be limited to the liquidation value of the property
securing such Mortgage Loan, which value may be less than the outstanding
balance of such Mortgage Loan.
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.
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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 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.
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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 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 into 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
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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 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-
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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 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 a commitment from PSCC 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,"
"Business and Strategy -- Operating Policies and Guidelines -- Capital and
Leverage Policies" and "Risk Factors -- Conflicts of Interest of Certain
Underwriters May Affect Offering." The Company presently intends to achieve a
Leverage Ratio of 2:1 within 24 months after the closing of the Offering and
thereafter to operate at a Leverage 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. 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 Broad Discretion Creates 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
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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."
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 Company's desire
to maintain its 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
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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.
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. In
addition, pursuant to a License Agreement between AMRESCO and the Company, upon
termination of the Management Agreement, the AMRESCO Group will have the right
to require the Company to cease all use of the "AMRESCO" name, which could have
a material adverse effect on the Company. See "The Manager -- Termination."
THE COMPANY'S BROAD DISCRETION CREATES UNCERTAINTY. Management of the
Company will have broad discretion (i) in the types of real estate related
assets which constitute Targeted Investments from time to time, (ii) in the
types and percentages of any type of Targeted Investments included in the
Invested Portfolio from time to time, and (iii) to modify or waive the Company's
investment and operating policies and strategies at any time 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 and could result in
losses to the Company. See "Business and Strategy -- Operating Policies and
Guidelines -- Future Revisions in Policies and Strategies."
CONFLICTS OF INTEREST OF CERTAIN UNDERWRITERS MAY AFFECT OFFERING. Certain
of the Underwriters or their affiliates have in the past, and may in the future,
provide investment banking services and financing to members of the AMRESCO
Group. Prudential Securities Credit Corporation ("PSCC"), an affiliate of
Prudential Securities Incorporated ("PSI"), the lead Underwriter, has committed
to provide a $400 million Warehouse Line and a $100 million Repurchase Agreement
to the Company upon the closing of the Offering for which PSCC will receive
certain fees. In addition, in connection with the Warehouse Line, the Company
will agree (as is customary in many similar warehouse lending arrangements with
affiliates of investment banking firms), to engage PSI to act as underwriter
and/or placement agent for any sale or securitization of Mortgage Loans financed
with proceeds from the Warehouse Line. Accordingly, PSI may have certain
conflicts of interest in connection with the Offering. For example, PSI's
decisions or recommendations with respect to the Offering (including, without
limitation, its recommendations to the Company with respect to determining the
initial public offering price of the Common Shares) may be influenced by the
fact that PSI or its affiliate, PSCC, will receive compensation in addition to
that payable to it as an Underwriter in connection with the Offering. See
"Underwriting."
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."
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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 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 fully 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. Immediately after the
closing of the Offering, the Company will issue options to purchase 3,092,233
Common Shares at or above the initial public offering price (assuming the
Underwriters' over-allotment option is not exercised). Options to purchase an
additional 241,117 Common Shares (assuming the Underwriters' over-allotment
option is not exercised) will remain available for issuance under the Share
Option Plan. See "Management of the Company -- Share Options Outstanding" and
"Shares Eligible for Future Sale." In addition, the Company intends to grant
1,500 restricted Common Shares annually to each Independent Trust Managers in
lieu of annual fees. See "Management of the Company -- Executive Officers and
Trust Managers of the Company."
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, and the expiration of any
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applicable vesting periods or other restrictions. See "Management of the
Company -- Executive Officers and Trust Managers of the Company." 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. See
"Underwriting."
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 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 and other restrictions discussed above.
See "Management of the Company."
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
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<PAGE> 38
"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, 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
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<PAGE> 39
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 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> 40
USE OF PROCEEDS
The net proceeds from the Offering are estimated to be approximately $277.7
million ($319.6 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 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 net proceeds from the Offering (up to $101.0 million
(based on the committed amount) or 36.4% of the estimated net proceeds of the
Offering) 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 $166.7 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
12 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" and "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 Broad Discretion
Creates 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> 41
CAPITALIZATION
The capitalization of the Company, as of February 2, 1998 and as adjusted
to reflect the sale of the Common Shares offered hereby and in the Private
Placement at an assumed initial public offering price of $15 per Common Share
(the mid-point of the range set forth on the cover page of this Prospectus), is
as follows:
<TABLE>
<CAPTION>
AS
ACTUAL ADJUSTED(1)(2)
------ --------------
<S> <C> <C>
Shareholders' Equity:
Preferred Shares 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 underwriting discounts and commissions and Offering
expenses payable by the Company (estimated to be approximately $1,300,000)
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 reserved
for issuance under the Share Option Plan. See "Management of the Company."
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<PAGE> 42
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. Up to $101.0 million (based on
the committed amount), or 36.4% of the estimated net proceeds of the Offering,
is expected to be utilized to originate or acquire (and fully fund) 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 ($166.7 million), together with the net proceeds of the Private
Placement and the funds expected to be available under the Warehouse Line and
the Repurchase Agreement ($700.0 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, the lead Underwriter) ("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. See "Risk Factors -- Conflicts of Interest of Certain
Underwriters May Affect Offering" and "Underwriting."
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."
Pursuant to the Warehouse Line, the Company will agree to engage PSI as
underwriter and/or placement agent for the sale or securitization, if any, 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. See "Underwriting" and "Risk Factors -- Conflicts
of Interest of Certain Underwriters May Affect Offering."
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<PAGE> 43
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 1.75% 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 $500 million and the Company's Leverage Ratio would be
approximately 1.5 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."
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 intends 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.
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:
- 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.
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<PAGE> 44
- 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. See "Risk
Factors -- Risks of Loss on Mortgage Loans."
- 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 and rehabilitation of commercial
real estate projects. Therefore, the Company intends to offer
Construction Loans and Rehabilitation Loans to accommodate new
development. The Company may also offer Construction Loans and
Rehabilitation 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, Rehabilitation Loans or other Mortgage
Loans. See "Risk Factors -- Inability to Acquire or Delays in Acquiring
Targeted Investments Will Reduce Income to the Company."
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, based upon the experience of management of the Manager and the
AMRESCO Group in the real estate finance industry, 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.
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:
- invest in certain types of assets, such as Participating Loans, Mezzanine
Loans, Construction Loans, Rehabilitation 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;
- 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
38
<PAGE> 45
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;
- 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;
- 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;
- 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;
- 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;
- 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;
- 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 and 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
- 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 Broad Discretion Creates Uncertainty." Such policies
include the Company's policies with respect to (i) investments, (ii) leveraging
of the Invested Portfolio, (iii) 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
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<PAGE> 46
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 Mortgage Loans
(including, among others, Participating Loans, Mezzanine Loans, Construction
Loans, Rehabilitation 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 Targeted Investments. The
Company expects that its Invested Portfolio will include primarily those asset
types with respect to which the Manager and other members of the AMRESCO Group
have significant knowledge and/or experience. However, the Company intends to be
opportunistic in its approach to its investments and, therefore, the types of
real estate related assets that constitute Targeted Investments and the types
and percentages of any type of Targeted Investments contained in the Invested
Portfolio from time to time will change depending on market conditions. See
"Risk Factors -- The Company's Broad Discretion Creates Uncertainty." Similarly,
the Company expects that, 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. However, the Manager will have
broad discretion with respect to the geographic markets in which the Company
invests and such locations are expected to change from time to time depending
upon market conditions.
The Manager's loan underwriters will be afforded flexibility and latitude
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 and that, without the prior
approval of the Board of Trust Managers, the Company's investment in any one
Mortgage Loan may not exceed the greater of (i) $75 million in principal amount
or (ii) 10% of the Company's total consolidated assets. With respect to MBS,
without the prior approval of the Board of Trust Managers, the percentage of the
Company's total consolidated assets which may be invested in MBS at any time may
not exceed 40%. The Company may, in the future, in consultation with the Manager
and the Investment Committee, establish specified limitations or parameters on
the percentage of the Company's total consolidated assets invested in MBS that
relate to any one issuer. 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."
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."
After the closing of the Offering, the Company will, in consultation with
the Manager, establish certain underwriting criteria for the Company's
investments. Such underwriting criteria, which will vary for each type of
Targeted Investment, will 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 expected to be established
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
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may be changed from time to time upon the recommendation of the Manager, with
the approval of the Investment Committee, based upon changes in market
conditions or Targeted Investments, the performance of the Invested Portfolio or
such other factors that the Manager and the Investment Committee 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 Broad Discretion Creates Uncertainty."
The Company presently intends to have the net proceeds of the Offering
fully invested in Targeted Investments within 12 months after the closing of the
Offering. Pending investment of the net proceeds of the Offering in the Targeted
Investments, 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
intends to achieve a ratio of (i) total indebtedness with respect to which the
Company is the obligor, to (ii) the Company's total shareholders' equity
("Leverage Ratio") of 2:1 within 24 months after the closing of the Offering,
and currently intends thereafter to operate at a Leverage Ratio of less than
3:1, although the actual Leverage 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, 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 Policy."
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.
See "Management's Discussion and Analysis of Liquidity and Capital Resources."
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
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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.
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 through
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 1.75%)
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 POLICY. 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, the Manager will analyze and project economic returns to
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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.
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. The Company
may, in the future (in consultation with the Investment Committee and the
Manager), establish specified limitations or parameters as to the foregoing
concentrations. In addition, with respect to the Company's MBS portfolio, the
Guidelines include the following risk control parameters: (i) investments (other
than the Company's initial MBS investments) should be made in a manner intended
to minimize overweighting of economic concentration as measured by the quotient
of the weighted average loan distribution (compared to the U.S. as a whole) of
the largest states divided by the size of the state's economy relative to the
entire U.S. economy; (ii) no single property type should represent more than 50%
of the Company's entire MBS portfolio without the prior approval of the Board of
Trust Managers (except for the Company's initial MBS investments); and (iii)
distribution of loan sizes should be expected to result in favorable loss
distributions (with large loans individually analyzed with respect to their
impact on the Company's position). Pursuant to the Guidelines, the Manager will
maintain one or more investment committee(s) (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
present and voting at such meeting 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 POLICY. 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 correspond generally (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,
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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 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 which are 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
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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 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 (or a majority of the Independent Trust Managers
on any committee of the Board of 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 "Risk Factors -- Conflicts of Interest May
Result in Decisions That Do Not Fully Reflect the Shareholders' Best Interest."
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
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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.
Pursuant to the Guidelines, the Company may co-invest with any member of
the AMRESCO Group, without prior approval from the Independent Trust Managers,
provided that the terms of the Company's investment are substantially similar to
the terms of the investment of the AMRESCO Group, except for such differences as
may be attributable solely to the size of the investment. Any potential
co-investments by the Company with any member of the AMRESCO Group which exceed
$15 million in the aggregate during any calendar year and which contemplate
investment terms which are different than those proposed for any member of the
AMRESCO Group will require the prior approval of a majority of the Independent
Trust Managers (or a majority of the Independent Trust Managers on any
authorized committee of the Board).
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.
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 the 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
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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 Broad Discretion Creates Uncertainty."
DESCRIPTION OF TARGETED INVESTMENTS
The following types of real estate related assets currently constitute
Targeted Investments; however, the Company has broad discretion to vary the
types of real estate related assets which constitute Targeted Investments from
time to time (and to determine and vary from time to time the portion of the
Invested Portfolio invested or to be invested in any particular type of Targeted
Investment). See "Risk Factors -- The Company's Broad Discretion Creates
Uncertainty." Also, see "Risk Factors" for a discussion of certain of the risks
involved in connection with the Company's investments in the Targeted
Investments.
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,
Rehabilitation Loans, Bridge Loans, Mezzanine Loans or other types of
Mortgage Loans.
CONSTRUCTION LOANS AND REHABILITATION 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 the construction and
rehabilitation of commercial real estate projects. Accordingly, the Company
believes there are significant opportunities to invest in or provide
Construction Loans and Rehabilitation Loans. The Company intends to make
Construction Loans and Rehabilitation Loans of up to 100% of total project
costs if the Construction Loan or Rehabilitation 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 or
Rehabilitation Loan. The Company may receive a stated fixed or variable
interest rate on the Construction Loan or Rehabilitation Loan, and a
percentage of the increase in the fair market value of the property
securing repayment of that Construction Loan or Rehabilitation Loan,
payable upon maturity or refinancing of the applicable Construction Loan or
Rehabilitation Loan or upon the sale of the property. The Company may also
offer Construction Loans and Rehabilitation 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
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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.
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.
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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 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 expects that it 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.,
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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 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
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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 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."
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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 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
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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
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
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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 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.
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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 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 five Mortgage Loans to purchase or
originate with the proceeds of the Offering, subject to, among other things, the
review and approval of the Company's Investment Committee. See "Risk
Factors -- Risks of Loss on the Initial Assets." There can be no assurance that
any of such Mortgage Loans will be purchased or originated by the Company. Each
of the Initial Assets is currently owned (if the Mortgage Loan is currently
existing) or being negotiated (if the Mortgage Loan has not yet been originated)
by AMRESCO Funding. With respect to each Initial Asset which is originated by
AMRESCO Funding prior to the closing of the Offering, the Company has issued a
non-binding commitment to purchase such Initial Asset from AMRESCO Funding, and
AMRESCO Funding has agreed to sell such Initial Asset 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. With
respect to Initial Assets which are not originated prior to the closing of the
Offering, AMRESCO Funding has agreed to transfer its rights to originate such
Mortgage Loans to the Company after the closing of the Offering, without charge,
if the Company's Investment Committee determines that the Company should
originate the proposed loans. If the Company purchases any Initial Asset from
AMRESCO Funding, AMRESCO Funding will pay to the Company the unamortized portion
of any loan origination fee paid to AMRESCO Funding by the applicable borrower
(typically equal to 1% to 2% of the committed amount of the loan), less AMRESCO
Funding's actual cost in underwriting and closing such loan. Each of the
Mortgage Loans included in the Initial Assets is or is expected to be
non-recourse to the applicable borrower, and each borrower is or is expected to
be a newly formed or to-be-formed special purpose entity with no operating
history and no significant assets other than the property pledged to secure the
applicable Mortgage Loan.
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 non-recourse
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 multifamily apartment units. Based
on information provided by the proposed borrower to AMRESCO Funding to date, the
Company believes that approximately 91.7% of the property is currently occupied.
Loan One was originated by AMRESCO Funding on February 20, 1998. 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
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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 (an
affiliate of one of the Underwriters), 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
certain recourse carve-outs by 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 $20.3 million. In the event that AMRESCO Funding (or its
assignee) does not commit to provide the redevelopment financing by May 25,
1998, it must advance an additional $1 million to the borrower on May 25, 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 representations and warranties by
the borrower, including customary representations regarding environmental
matters, compliance with laws, the payment of taxes and the maintenance of
insurance. The Company believes, based upon the due diligence conducted by
AMRESCO Funding, that the project is, and will continue to be when the proposed
renovation is complete, suitable for its intended use.
The senior indebtedness on the real property securing Loan One, in the
original principal amount of $17 million, bears interest initially at a per
annum rate equal to 300 basis points over the 30-day LIBOR rate and requires the
borrower to pay a $170,000 exit fee. Payments of interest only are due monthly.
All principal and all accrued and unpaid interest are due February 1, 2001. The
borrower has a one-year extension option which may be exercised upon thirty
days' notice and payment of a 1% extension fee, if the borrower's debt service
coverage ratio is then greater than 1.35 to 1. The per annum interest rate on
the senior indebtedness will decrease to 275 basis points over the 30-day LIBOR
rate after the proposed renovation is completed if the borrower's debt service
coverage ratio is then greater than 1.15 to 1. If the borrower's debt service
coverage ratio is less than 1.15 to 1 after the proposed renovation is
completed, the borrower's net cash flow (after debt service and operating
expenses are paid) must be applied to the reduction of principal on the senior
indebtedness. The senior indebtedness is non-recourse to the borrower, except
for certain standard recourse carve-outs, and prepayments are prohibited until
October 1, 1999. 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 property securing Loan One is not currently subject to any option or
contract to sell.
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 non-recourse 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 multifamily apartment property. The proposed borrower has not yet entered
into any leases with respect to the proposed project. AMRESCO Funding has issued
a terms letter dated March 30, 1998 (the "Loan Two Terms Letter") to originate
Loan Two. The proposed borrower has 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 closed and funded.
The Loan Two Terms Letter 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 and then to principal. All
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principal, and all accrued and unpaid interest, would be due 24 months after the
closing of the loan. The borrower would have two six-month extension options
with the payment of a 1% extension fee for each extension. 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 Terms Letter
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) until the lender has received a return of 18% per
annum. The proposed borrower has not entered into any option or contract to sell
the property proposed to secure Loan Two. The Loan Two Terms Letter 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 Terms Letter contemplates that AMRESCO Funding (or its
assignee) would provide up to $1.85 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
Terms Letter requires the borrower to maintain a minimum of $150,000 cash equity
in the property, to cover all cost overruns and to defer development 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 believes, based
upon the due diligence conducted to date by AMRESCO Funding, that the project,
when complete, will be suitable for its intended use.
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 non-recourse Rehabilitation Loan to refinance the
acquisition and finance the renovation of a 403,000 (approximate) square foot
office/research and development building located in Massachusetts to a class-A
office facility. AMRESCO Funding has issued a commitment for Loan Three dated
March 31, 1998 (the "Loan Three Commitment"). The borrower has paid a good faith
deposit in the amount of $150,000 for Loan Three. AMRESCO Funding and the
borrower are currently negotiating loan terms and AMRESCO Funding is performing
its underwriting. However, there can be no assurance that Loan Three will be
closed and funded. The Loan Three Commitment 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. Prepayments would not be permitted during the first year, other
than out of proceeds from an approved sale, or from certain excess cash flows.
The property proposed to secure Loan Three is not currently subject to any
option or contract to sell. The Loan Three Commitment contemplates that AMRESCO
Funding (or its assignees) would make an initial advance under the loan in the
amount of approximately $10 million, and subsequent advances for project costs
as they are incurred. The Loan Three Commitment requires the borrower to
maintain an approximately 19% equity interest in the property.
The Loan Three Commitment does not require any portion of the project to be
pre-leased and no leases have yet been entered into with respect to the project.
The Company believes, based on overall occupancy rates and conditions in the
submarket in which the property proposed to secure Loan Three is located, that
the borrower will be able to enter into leases at competitive rates. However,
the Company believes, based upon information provided by the prospective
borrower to AMRESCO Funding to date, that there are at least two projects
currently under construction in such submarket and at least two other projects
currently planned for construction, each of which, if completed, are expected to
compete for tenants with the property securing Loan Three. Accordingly, the
market conditions may become more competitive and the proposed borrower may not
be able to enter into leases in a timely manner or may be required to enter into
leases at reduced rates. See "Risk Factors -- Competition Could Reduce Income to
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.
Raytheon ceased operations on, and substantially vacated, the property in 1995.
The property has remained substantially vacant since 1995. An environmental site
assessment which included extensive subsurface soil and groundwater testing, was
conducted by Raytheon in 1996. The environmental
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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 of the proceeds of Loan Three to
remediate the contamination associated with the release of the No. 6 fuel oil
and approximately $300,000 of the proceeds of Loan Three 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 problem associated with the real property securing Loan Three.
The proposed borrower, which was formed in December 1997, has no operating
history and is not expected to have any material assets other than the property
proposed to secure Loan Three. As of December 31, 1997, the proposed borrower's
balance sheet reflected (i) total assets of approximately $19.3 million
(consisting of real property valued at approximately $17.3 million, cash of
approximately $1.7 million and capitalized organizational costs of approximately
$300,000), (ii) total liabilities of approximately $7.5 million and (iii)
owners' equity of approximately $11.8 million. Prior to the funding of Loan
Three, the proposed borrower is expected to use or to have used all or a
significant portion of its cash in connection with the proposed rehabilitation.
Upon the funding of Loan Three, the proposed borrower is not expected to have
any significant assets and will have no requirement to maintain any specified
amount of assets in the future, other than the real property proposed to secure
Loan Three. Therefore, there can be no assurance that the borrower will have the
ability to satisfy its indemnification obligation under 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 borrower would also be required to make customary representations
concerning compliance with laws and the payment of taxes and insurance. The
Company believes, based upon the due diligence conducted by AMRESCO Funding to
date, that the project, when complete, will be suitable for its intended use.
Real estate taxes on the mortgaged real property are expected to be
assessed at a rate of $17.95 per $1,000 in value, based on certain information
provided by the proposed borrower to AMRESCO Funding.
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 non-recourse Participating Mezzanine Construction Loan for the
construction of an 11 story multi-tenant office building containing 300,887
(approximate) net rentable square feet and an adjoining five level parking
structure located in a suburb of
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Dallas, Texas. The borrower has not yet entered into any leases with respect to
the to-be-constructed office building. Loan Four includes a $2.45 million
interest reserve.
Loan Four was originated by AMRESCO Funding on March 30, 1998. 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. A portion of excess
cash flow will be applied to payment of accrued and unpaid interest until the
lender has received a 12% return. Any remaining operating cash flow will be
applied to the principal balance of Loan Four and any excess may be retained by
the borrower. In addition, Loan Four provides that the lender will receive 100%
of any appreciation in the value of the mortgaged real property until the lender
has achieved a 15% per annum return. After the borrower has received a 15%
return on its equity,then the lender is entitled to a 30% interest in the
appreciation in value 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%
interest in any appreciation in the value of the project, with a maximum 25% per
annum return to the lender. The to-be-built project securing Loan Four is not
subject to any option or contract to sell. 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. The developer has
provided a completion guaranty and a limited guaranty of certain recourse
carve-outs.
Construction of the improvements will be financed with a $26.2 million
first lien senior Construction Loan to be made by Guaranty Federal Bank, FSB,
the Company's Mezzanine Loan of $14.7 million and a borrower equity contribution
of approximately $5.2 million. Loan proceeds will 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 documents
governing Loan Four contain certain customary representations and warranties,
including customary representations concerning environmental matters, compliance
with laws, the payment of taxes and the maintenance of insurance. The Company
believes, based on due diligence conducted by AMRESCO Funding, that the project,
when complete, will be suitable for its intended use.
The senior indebtedness bears interest at a per annum rate of 200 basis
points over the 30-day LIBOR rate. Payments of accrued and unpaid interest are
due and payable monthly. All outstanding principal, plus all accrued and unpaid
interest, will be due and payable on March 30, 2001. The borrower has two
12-month extension options, each of which may be exercised upon the payment of
an extension fee in an amount equal to 1/8% of the principal amount of the
debt, provided the borrower has a debt service coverage ratio of greater than or
equal to 1.25 to 1. If the senior indebtedness is extended, the borrower will be
required to make payments of $16,000 per month toward reduction of principal on
the senior indebtedness. The senior indebtedness, which is recourse to the
borrower, is also secured by a letter of credit in the amount of 10% of the
outstanding principal amount of the senior indebtedness, which letter of credit
will be released upon completion of the proposed construction and satisfaction
of certain other conditions. Pursuant to the intercreditor agreement between
Guaranty Federal Bank, 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 defaults or purchase the first lien loan in the event of
a default thereunder.
Loan Five. The fifth Mortgage Loan which the Company has identified for
origination or purchase with the net proceeds of the Offering ("Loan Five") is a
proposed $26.5 million non-recourse senior Participating Mortgage Loan for the
acquisition of a four-building industrial office complex located on 173 acres in
Portsmouth, Rhode Island, and containing 769,551 (approximate) net rentable
square feet, and the completion of certain tenant improvements, renovations and
lease-up of the project. AMRESCO Funding has issued a commitment dated April 13,
1998 (the "Loan Five Commitment") to originate Loan Five and AMRESCO Funding and
the borrower are currently negotiating loan documents while AMRESCO Funding
completes its underwriting process. There can be no assurance that Loan Five
will close or be funded.
Loan Five is proposed to bear interest at an accrual rate of 13.5% 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 36 months from the
closing of Loan Five. All of cash flow from operations from the property after
the payment of certain approved operating expenses would be required to be
applied to pay accrued and unpaid interest at
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the pay rate and to fund certain required reserves. The lender would be entitled
to receive 20% of net cash flow from operations to be applied to accrued and
unpaid interest at the accrual rate. In addition, the lender would be entitled
to a 20% interest in any proceeds from the sale or refinancing of the project
(which are in excess of all principal and pay rate interest payments on Loan
Five, payment to the borrower of a 10% return on borrower's equity and the
payment of any unreturned borrower's equity), until the lender has achieved a
20% per annum return. The property has not yet been acquired by the proposed
borrower and the proposed borrower has not entered into contract for the re-sale
of the property.
A portion of the loan proceeds equal to $24.7 million would be used by the
borrower to purchase the real property. The remainder of the loan proceeds would
be used to finance tenant improvements ("TI"), renovations and lease-up. The
portion of the loan amount allocated to TI, renovations and leasing would be
required to be disbursed according to budget, subject to customary retainage and
other customary procedures.
As conditions to the origination of Loan Five, the Loan Five Commitment
requires the borrower to maintain a minimum of $1.4 million of equity in the
property, and to pre-lease at least 440,000 square feet to an approved tenant
pursuant to an approved triple net lease. This property is currently vacant and
the proposed borrower has not yet entered into any leases with respect to the
project. See "Risk Factors -- Competition Could Reduce Income to the Company."
In addition to a first lien on the property, the Company would have a security
interest in all ownership interests of the borrower, and the limited guaranties
of certain principals of the borrower of certain recourse carve-outs.
Prepayments would be prohibited for the first 12 months after the closing of
Loan Five, and the borrower would be required to grant to AMRESCO Funding (or
its assignee) the first right to negotiate to provide a Permanent Mortgage Loan
to refinance Loan Five. Finally, the borrower would be required to make
customary representations concerning environmental matters, compliance with
laws, the payment of taxes and the maintenance of insurance. The Company
believes, based on due diligence conducted by AMRESCO Funding to date, that the
mortgaged property is suitable for its intended use.
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Set forth below is a summary of certain of the material terms of the
Initial Assets, as currently proposed.
<TABLE>
<CAPTION>
LOCATION OF GENERAL DESCRIPTION OF ACCRUAL
MAXIMUM LOAN AMOUNT REAL ESTATE REAL ESTATE INTEREST RATE
LOAN TYPE(1) LOAN AMOUNT FUNDED TO DATE COLLATERAL COLLATERAL(7) (PER ANNUM)
------------ ----------- -------------- ----------- ---------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Loan One Rehabilitation $7.0 million $6.0 million Ohio 956,114 sq ft (approx) 15%
Mezzanine mixed use facility
Loan built in 1973
(including office
space, retail space,
an athletic club,
a food court and 598
apartments)
Loan Two(2) Participating $12.8 (2) Texas (To be built) 236-unit 11.5% (plus
Construction million apartment complex shared
Loan located on 10.2 acres appreciation
capped at 18%
return)
Loan Three(3) Rehabilitation $40.0 (3) Massachusetts 403,000 (approx) sq ft 10.5%
Loan million office/R&D building
built in 1955
Loan Four Participating $14.7 $1,000 Texas (To be built) 11 12% (plus
Mezzanine million story, 300,887 shared
Construction (approx) sq ft apprecia-
Loan multi-tenant office tion capped
building at 25%
return)
Loan Five(4) Participating $26.5 (4) Rhode Island A four building 13.5% (plus
Loan million industrial/R&D/ office shared
complex on 173 acres appreciation
built circa 1958 and capped at 20%
containing 769,551 return)
(approx) net rentable
sq ft
<CAPTION>
PAYMENT SCHEDULE
--------------------------
MATURITY DATE INTEREST PRINCIPAL PREPAYMENTS ADDITIONAL COLLATERAL
------------- ------------ ------------ ----------- ---------------------
<S> <C> <C> <C> <C> <C>
Loan One 03/31/2001 Monthly(5) All due at Prohibited until Ownership interests
maturity(5) February 20, in borrower; limited
1999(6) (unless guarantees of
lender does not recourse carve-outs
provide permanent
financing)
Loan Two(2) 24 months Monthly at a All due at Prohibited for the Ownership interests
from close(2) pay rate of maturity(5) first 12 months(6) in borrower; limited
10% per guarantees of
annum; recourse carve-outs
deferred and of completion and
interest due cost overruns
at
maturity(5)
Loan Three(3) 24 months Monthly(5) All due at Prohibited for the Ownership interests
from close(3) maturity(5) first 12 months(6) in borrower; limited
guarantees of
recourse carve-outs
and of completion and
cost overruns
Loan Four 3/30/2001 Monthly at a All due at Prohibited for the Ownership interests
pay rate of maturity(5) first 18 months(6) in borrower; limited
10% per guarantees of
annum; recourse carve-outs
deferred and of completion and
interest due cost overruns
at
maturity(5)
Loan Five(4) 36 months Monthly at a All due at Prohibited for the Ownership interests
from close(4) pay rate of maturity(5) first 12 months(6) in borrower; limited
10% per guarantees of
annum; recourse carve-outs
deferred and of completion and
interest due cost overruns
at
maturity(5)
</TABLE>
- ---------------
(1) Each of the Initial Assets is (or will be) non-recourse to the applicable
borrower, and each borrower is (or is expected to be) a newly formed or
to-be-formed special purpose entity with no operating history and no
significant assets other than the property pledged to secure the applicable
Mortgage Loan.
(2) 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.
(3) Loan Three is currently being negotiated. It is expected to close in
approximately May 1998; however, there can be no assurance that Loan Three
will close.
(4) Loan Five is currently being negotiated. It is expected to close in
approximately May 1998; however, there can be no assurance that Loan Five
will close.
(5) Or earlier upon a prior approved sale of the property. Earlier payments are
also required out of excess cash flow.
(6) Except for payments required out of excess cash flow.
(7) Each of the proposed borrowers owns or is expected to own a fee simple
interest in the mortgaged real property.
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<PAGE> 69
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.
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.
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<PAGE> 70
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 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
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<PAGE> 71
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.
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>
John C. Deterding...................................... 66
Bruce W. Duncan........................................ 46
Christopher B. Leinberger.............................. 47
James C. Leslie........................................ 42
</TABLE>
John C. Deterding served as Senior Vice President and General Manager of
the Commercial Real Estate Division of General Electric Capital Corporation
("GECC") from 1975 to June 1993. In directing the real estate activities of
GECC, Mr. Deterding was responsible for both domestic and international lending
activities, portfolio purchases, joint ventures, asset management and real
estate securitization. From November 1989 to June 1993, Mr. Deterding served as
Chairman of the General Electric Real Estate Investment Company, a privately
held REIT. He served as Director of GECC Financial Corporation from 1986 to
1993. Since retiring from GECC, Mr. Deterding has worked as a private real
estate consultant. He has also served as a director of Patriot American
Hospitality Inc., a publicly-held REIT (or its predecessors), since September
1995 and is a former member and trustee of the Urban Land Institute. He holds a
B.S. degree from the University of Illinois.
Bruce W. Duncan has been the President and Chief Executive Officer of
Cadillac Fairview Corporation Limited ("Cadillac Fairview") since 1994. Cadillac
Fairview owns, manages and develops commercial real estate in North America and
has a total enterprise value (including equity and debt) of nearly $5.0 billion
(CDN). It has ownership interests in or manages 96 properties containing over 49
million square feet. Prior to joining Cadillac Fairview, Mr. Duncan worked for
JMB Realty Corporation from 1978 to 1992, where he served as Executive
Vice-President and a member of the Board of Directors. From 1992 to 1994, he was
President and Co-Chief Executive Officer of JMB Institutional Realty Corporation
providing advice and management for investments in excess of $9 billion (US) in
real estate by tax exempt investors, including public and corporate pension
funds, unions, endowments and foundations. Mr. Duncan serves as a member of the
Board of Trustees of Starwood Lodging Trust, one of the largest hotel REITs in
the United States, and as a member of the Board of Trustees of Kenyon College.
He is also a member of the Board of Directors of the Canadian Institute of
Public Real Estate Companies (CIPREC). Mr. Duncan is a member of the Urban Land
Institute (ULI) and a member and past trustee of the International Council of
Shopping Centers
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<PAGE> 72
(ICSC). Mr. Duncan holds an M.B.A. degree from the University of Chicago and an
undergraduate degree from Kenyon College. He is a Certified Public Accountant.
Christopher B. 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 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.
James C. Leslie has served as President and 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 International Inc.
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 member of the American
Institute of Certified Public Accountants.
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
66
<PAGE> 73
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.
In lieu of the cash payment of fees to Independent Trust Managers, the
Company intends to grant to each Independent Trust Manager 1,500 restricted
Common Shares annually (subject to adjustment in the event of stock splits,
recapitalization, etc.). The Company will also reimburse costs and expenses of
all Trust Managers for attending meetings of the Board of Trust Managers (or any
committee thereof). Immediately after the closing of the Offering, the Company
will grant to each Independent Trust Manager an option to purchase 20,000 Common
Shares at a purchase price equal to the initial public offering price of the
Common Shares. Such options will vest ratably over a four-year period commencing
on the first anniversary of the date of grant. 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.
Immediately after 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 two or more 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, 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
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<PAGE> 74
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
Immediately prior to the closing of the Offering, the Company will adopt
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 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. No more than 1,000,000 ISOs may
be granted under the Plan. The purpose of the Share Option Plan will be 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 will authorize 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 two or more 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.
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<PAGE> 75
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 will
be payable in full by (i) cash, (ii) surrender of Common Shares having a market
value equal to the aggregate exercise price of all shares to be purchased, (iii)
cancellation of indebtedness owed by the Company to the optionholder, (iv) a
promissory note executed by the optionholder, or (v) 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
Immediately after the closing of the Offering, the Company will grant to
the Manager options to purchase 2,222,233 Common Shares (assuming the
Underwriters' over-allotment option is not exercised). If the Underwriters'
over-allotment option is exercised, the Company will grant to the Manager
options to purchase up to 333,334 additional Common Shares (or such lesser
number of Common Shares as would result in the Manager owning options to
purchase a number of Common Shares equal to 10% of the number of Common Shares
outstanding after giving effect to the exercise of the Underwriters'
over-allotment option, and any corresponding increase in the number of Common
Shares sold pursuant to the Private Placement). Seventy percent of the Common
Shares issuable upon the exercise of such options will have an exercise price
equal to the initial public offering price and the remaining thirty percent of
such Common Shares will have an exercise price equal to 125% of the initial
public offering price. All of such options will 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.
Immediately after the closing of the Offering, the Company will grant
options to purchase an additional 790,000 Common Shares to officers and key
employees of the Company, the Manager and other members of the AMRESCO Group.
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.
Immediately after the closing of the Offering, each Independent Trust
Manager will receive an option to purchase up to 20,000 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.
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The following table sets forth the share options expected to be awarded to
executive officers and Trust Managers of the Company immediately after the
closing of the Offering:
SHARE OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM(4)
OPTION/SARS EMPLOYEES IN BASE EXPIRATION -------------------------
NAME GRANTED(#)(1) FISCAL YEAR PRICE($/SH)(2) DATE 5%($) 10%($)
- ---- ------------- ------------ -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mark D. Gibson............ 100,000 12.66% $15.00 (3) $ 943,342 $ 2,390,614
Robert L. Adair III....... 75,000 9.50 15.00 (3) 707,506 1,792,960
Robert H. Lutz, Jr........ 75,000 9.50 15.00 (3) 707,506 1,792,960
Rebecca Kuban............. 75,000 9.50 15.00 (3) 707,506 1,792,960
John S. Pettee............ 50,000 6.33 15.00 (3) 471,671 1,195,307
Thomas J. Andrus.......... 30,000 3.80 15.00 (3) 283,003 717,184
Michael L. McCoy.......... 25,000 3.16 15.00 (3) 235,835 597,653
John M. Jumonville........ 15,000 1.90 15.00 (3) 141,501 358,592
Thomas R. Lewis........... 10,000 1.26 15.00 (3) 94,334 239,061
Others(5)................. 335,000 42.21 15.00 (3) 3,160,195 8,008,556
------- ------ ---------- -----------
Total..................... 790,000 100.00% $7,452,399 $18,885,847
======= ====== ========== ===========
</TABLE>
- ---------------
(1) The options granted will be exercisable starting 12 months after the date of
grant.
(2) Based on an assumed initial public offering price of $15.00 per share. See
"Underwriting." The exercise price and tax withholding obligations incurred
upon exercise of the options may be paid by the option holder by delivering
already owned Common Shares, including those which are issuable upon
exercise of the options.
(3) Each option will have an expiration date which is ten years from the date of
grant.
(4) The dollar amounts under these columns are the result of calculations at 5%
and 10% compounded at annual rates set by the Commission, and therefore are
not intended to forecast future appreciation, if any, in the price of the
Common Shares.
(5) Expected to be awarded to officers and employees of the Manager and other
members of the AMRESCO Group.
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. A majority of the other executive officers of the Company described
under "Management of the Company" will also hold the same positions with the
Manager. See "Management of the Company." 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. AMRESCO is a publicly-held company and its common stock is traded
on the NASDAQ National Market under the symbol "AMMB." During 1997, the AMRESCO
Group
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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.
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 (or any member thereof) is
not indicative of future results of the Company. See "Business and
Strategy -- Objective and 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 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. The Company believes that, as a result of the acquisition
of Fowler Goedecke and based on the most recently available National Real Estate
Investor's Top Lender Survey, Holliday Fenoglio Fowler is the largest commercial
mortgage brokerage company in the United States (based on 1996 originations,
including those of Fowler Goedecke).
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):
<TABLE>
<CAPTION>
HOLLIDAY FENOGLIO FOWLER
--------------------------
REAL ESTATE TRANSACTIONS
--------------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Permanent Mortgage Loans................................. $3,650 $2,022 $1,408
Mezzanine Loans.......................................... 933 304 225
Bridge Loans............................................. 312 221 134
Construction/Rehabilitation Loans........................ 267 197 240
Real Estate Dispositions................................. 892 386 185
------ ------ ------
Total.......................................... $6,054 $3,130 $2,193
====== ====== ======
</TABLE>
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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. However, the commercial mortgage banking business is
highly competitive and highly fragmented, with certain large national
competitors and significant localized competition. There can be no assurance
that Holliday Fenoglio Fowler will continue to have opportunities to originate
Mortgage Loans and other real estate financings or that, if presented to the
Company, the Company will be successful in its efforts to originate or acquire
such Mortgage Loans or other real estate financings.
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 $400.0 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. See "-- Asset Management -- Servicing Risks;
Borrower Delinquencies and Claims."
COMMERCIAL FINANCE
General. Through its commercial finance division, 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.
The Company expects to benefit from the expertise of the commercial finance
division of the AMRESCO Group, including, in particular, AMRESCO Funding, and to
have co-investment opportunities with such division. There can be no assurance
that the loan origination volumes of the commercial finance division of the
AMRESCO Group will continue to increase or that such loan origination volumes
will not decrease. The commercial mortgage lending business is highly
competitive and highly fragmented, and many competitors of the commercial
finance division of the AMRESCO Group are substantially larger and better
capitalized than the AMRESCO Group. In addition, periods of economic slowdown or
recession, rising
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interest rates or declining demand for real estate may reduce the demand for
Mortgage Loans and the number of loan origination opportunities available to the
commercial finance division of the AMRESCO Group and to the Company.
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 $298.0 million.
Specialty Lending. Through AMRESCO Funding, the AMRESCO Group provides
mid-to-high yield Mortgage Loans (including Participating Loans, Mezzanine
Loans, Construction Loans, Rehabilitation 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 $186.0 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 during any calendar quarter,
identified by or to 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 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 investments in Canada and Western Europe. At December 31, 1997, the face
value of the Company's total investment in wholly-owned Asset Portfolios
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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.
Servicing Risks; Borrower Delinquencies and Claims. When borrowers are
delinquent in making monthly payments on commercial Mortgage Loans serviced by
the AMRESCO Group, the AMRESCO Group may be required to advance interest
payments and certain other property protection expenses such as real estate
taxes with respect to such delinquent loans to the extent that the servicer
deems such advances ultimately recoverable. These advances require funding from
the AMRESCO Group's capital resources but have priority of repayment from
collections or recoveries on the loans in the related pool in the succeeding
month. In addition, in the ordinary course of its business, the AMRESCO Group is
subject to claims made against it by borrowers and private investors arising
from, among other things, losses that are claimed to have been incurred as a
result of alleged breaches of fiduciary obligations, misrepresentations, errors
and omissions of employees and officers of the Company (including its
appraisers), incomplete documentation and failures by the AMRESCO Group to
comply with various laws and regulations applicable to its business. The Company
does not believe that liability with respect to any currently asserted claims or
legal actions is likely to be material to the AMRESCO Group's consolidated
financial position or results of operations; however, any claims asserted in the
future may result in legal expenses or liabilities which could have a material
adverse effect on the AMRESCO Group's financial position and results of
operations and could adversely impact the ability of the AMRESCO Group to
perform its obligations under the Management Agreement.
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
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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;
(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;
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<PAGE> 82
(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;
(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
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the Mortgage Loans 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.
The Management Agreement may be assigned by the Manager to an Affiliate
without the consent of the Company. Upon delivery of written notice to the
Company, the Management Agreement may be assigned to a non-Affiliate only with
the approval of a majority of the Independent Trust Managers.
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."
Further, pursuant to a License Agreement between AMRESCO and the Company,
upon termination of the Management Agreement, the AMRESCO Group will have the
right to require the Company to cease all use of the "AMRESCO" name, which could
have a material adverse effect on the Company.
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 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
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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.
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.
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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 key employees of the
Company, the Manager and other members of the AMRESCO Group will 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
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
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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 are 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 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 which are 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 Group. 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. 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
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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 "Business and
Strategy -- 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, and certain third parties identified by 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. Any Trust Manager or officer of the
Company who purchases Common Shares in the Offering will agree 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 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."
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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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 27, 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>
AMOUNT AND NATURE OF PERCENTAGE OF SHARES
BENEFICIAL OWNERSHIP BENEFICIALLY OWNED
NAME AND ADDRESS OF ---------------------------------- --------------------------------
BENEFICIAL OWNER(1)(2) BEFORE OFFERING AFTER OFFERING BEFORE OFFERING AFTER OFFERING
---------------------- --------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Holdings(3)......................... 0 shares 2,222,233 shares(5) 0% 10%(5)
AMRESCO(4).......................... 100 shares 100 shares 100% *
Officers and Trust Managers as a
Group (Persons)(6)................ 0 shares 0 shares 0% 0%
</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) Address is 330 E. Warm Springs Road, Las Vegas, Nevada 89119.
(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."
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(6) Does not include Common Shares which may 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, and to certain third parties
identified by the AMRESCO Group. See "The Manager -- Certain Relationships;
Conflicts of Interests."
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 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
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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 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
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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 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.
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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.
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
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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 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
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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.
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
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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 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
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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 by which the Company failed the 75% or the 95% test,
multiplied by a fraction intended to reflect the Company's profitability.
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
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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.
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
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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 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
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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 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
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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 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 UBTI. 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 UBTI unless the
percentage computed is at least 5%.
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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 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
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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.
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.
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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 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
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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.
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
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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 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 that do not
conform to ERISA standards of
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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
Distributions."
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,
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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
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Ownership Limit. Upon such sale, the interest of the Charitable Beneficiary in
the Shares sold will terminate and the trustee will distribute the net proceeds
of the sale to the 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 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
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(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-
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thirds of the total outstanding 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.
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 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
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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, ABN AMRO Incorporated, 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 OF
UNDERWRITER COMMON SHARES
- ----------- -------------
<S> <C>
Prudential Securities Incorporated..........................
Credit Suisse First Boston..................................
ABN AMRO Incorporated.......................................
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
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Company and members of the AMRESCO Group, and third parties identified by 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
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.
In connection with the Offering, certain Underwriters and selling group
members (if any), 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 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.
In connection with the Offering, the Company has agreed to pay to PSI, the
lead Underwriter, an advisory fee equal to 0.75% of the gross proceeds of the
Offering for structuring and advisory services rendered in connection with the
Offering. In addition, PSCC, an affiliate of PSI, 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 any 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. See
"Business and
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Strategy -- Initial Assets -- Loan One." If the Company acquires Loan One, it
will be subject to the terms of an intercreditor agreement with such Affiliate.
PSI acted as a manager in various transactions for the sale of securities in
securitization transactions sponsored by AMRESCO in 1996 and 1997 for which PSI
received customary underwriting commissions. PSCC provides a secured warehouse
facility to AMRESCO Residential Capital Markets, Inc. ("ARCM"), which is subject
to various conditions. PSCC also provides a secured warehouse facility to ACLC,
which is subject to various conditions.
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.
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.
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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 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, a member of the
AMRESCO Group.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
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"ARMC" means AMRESCO Residential Capital Markets, Inc., a member of the
AMRESCO Group.
"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
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 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.
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"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.
"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
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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 the initial construction 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.
"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.
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"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 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.
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"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 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
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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 the committee(s) maintained by the Manager
(which committee(s) 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.
"Leverage Ratio" means the ratio of (i) total indebtedness with respect to
which the Company is the primary obligor, to (ii) the Company's total
shareholders' equity.
"LIBOR" means the London InterBank Offering Rate in effect from time to
time.
"License Agreement" means a License Agreement entered into between the
Company and AMRESCO pursuant to which AMRESCO has granted a license to the
Company for the use of the "AMRESCO" name and logo.
"Loan One" means one of the Initial Assets, as described in "Business and
Strategy -- The Initial Assets."
"Loan Two" means one of the Initial Assets, as described in "Business and
Strategy -- The Initial Assets."
"Loan Three" means one of the Initial Assets, as described in "Business and
Strategy -- The Initial Assets."
"Loan Four" means one of the Initial Assets, as described in "Business and
Strategy -- The Initial Assets."
"Loan Five" means one of the Initial Assets, as described in "Business and
Strategy -- The Initial Assets."
"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.
"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.
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"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.
"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.
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"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.
"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 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
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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.
"Rehabilitation Loan" means a Mortgage Loan the proceeds of which are used
to finance the acquisition and renovation or rehabilitation of existing real
property.
"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.
"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, ABN AMRO Incorporated, 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 million 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, upon closing of the Offering, not to permit any member of
the AMRESCO Group to invest in (i) the first $100 million of Targeted Mortgage
Loans which are 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.
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"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.
"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, as of any time, the various types of real
estate related assets targeted to be invested in by the Company at such time.
"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
124
<PAGE> 131
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 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.
125
<PAGE> 132
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheet............................................... F-3
Notes to Balance Sheet...................................... F-4
</TABLE>
F-1
<PAGE> 133
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> 134
AMRESCO CAPITAL TRUST
BALANCE SHEET
FEBRUARY 2, 1998
ASSETS
<TABLE>
<CAPTION>
<S> <C>
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> 135
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.
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-4
<PAGE> 136
======================================================
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.
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.
---------------------
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 16
Use of Proceeds....................... 34
Dividend Policy and Distributions..... 34
Capitalization........................ 35
Management's Discussion and Analysis
of Liquidity and Capital
Resources........................... 36
Business and Strategy................. 37
Management of the Company............. 63
The Manager........................... 70
Security Ownership of Certain
Beneficial Owners and Management.... 82
Federal Income Tax Consequences....... 83
ERISA Considerations.................. 98
Description of Shares of Beneficial
Interest............................ 101
Certain Provisions of Texas Law and of
the Declaration of Trust and
Bylaws.............................. 105
Shares Eligible for Future Sale....... 109
Underwriting.......................... 111
Private Placement..................... 113
Legal Matters......................... 113
Experts............................... 113
Additional Information................ 114
Glossary.............................. 114
Financial Statements.................. F-1
</TABLE>
======================================================
======================================================
20,000,000 Shares
[AMRESCO LOGO]
Common Shares of
Beneficial Interest
---------------------
PROSPECTUS
---------------------
PRUDENTIAL SECURITIES INCORPORATED
CREDIT SUISSE FIRST BOSTON
ABN AMRO INCORPORATED
J.C. BRADFORD & CO.
NATIONSBANC MONTGOMERY
SECURITIES LLC
PIPER JAFFRAY INC.
, 1998
======================================================
<PAGE> 137
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.
AMOUNT TO BE PAID
<TABLE>
<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................................ $ 125,000
Transfer Agent Fees and Custodian Fees...................... $ 10,000
Miscellaneous............................................... $ 80,940
----------
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.
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
II-1
<PAGE> 138
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
<TABLE>
<C> <S>
1.1 -- Form of Underwriting Agreement(5)
3.1 -- Amended and Restated Declaration of Trust of the
Registrant(1)
3.2 -- Form of Bylaws of the Registrant(2)
4.1 -- Form of Common Share Certificate(4)
5.1 -- Opinion of Winstead Sechrest & Minick P.C. regarding
legality(5)
8.1 -- Opinion of Winstead Sechrest & Minick P.C. regarding
tax matters(5)
10.1 -- Management Agreement between the Registrant and
AMRESCO Capital Trust Managers, L.P.(5)
</TABLE>
II-2
<PAGE> 139
<TABLE>
<C> <S>
10.2 -- Form of AMRESCO Capital Trust 1998 Share Option and
Award Plan(5)
10.3 -- Form of Registration Rights Agreement among the
Registrant, AMREIT Holdings, Inc. and AMREIT
Managers, L.P.(2)
10.4 -- Form of Correspondent Agreement between the
Registrant and Holliday Fenoglio Fowler, L.P.(2)
10.5 -- Form of Right of First Refusal and Non-Competition
Agreement(3)
10.6 -- Form of License Agreement between AMRESCO, Inc. and
the Registrant(5)
21.1 -- Subsidiaries of the Registrant(2)
23.1 -- Consent of Deloitte & Touche LLP(5)
23.2 -- Consent of Winstead Sechrest & Minick P.C. (included
in Exhibits 5.1 and 8.1)
24.1 -- Power of Attorney(2)
99.1 -- Consent of Mr. Duncan to be named as a trust manager
pursuant to Rule 438(3)
99.2 -- Consent of Mr. Leinberger to be named as a trust
manager pursuant to Rule 438(3)
99.3 -- Consent of Mr. Leslie to be named as a trust manager
pursuant to Rule 438(3)
99.4 -- Consent of Mr. Deterding to be named as a trust
manager pursuant to Rule 438(4)
</TABLE>
- ---------------
(1) Previously filed with the Company's initial Registration Statement on Form
S-11 (on February 3, 1998).
(2) Previously filed with Amendment No. 1 to the Company's Registration
Statement on Form S-11 (on April 1, 1998).
(3) Previously filed with Amendment No. 2 to the Company's Registration
Statement on Form S-11 (on April 13, 1998).
(4) Previously filed with Amendment No. 3 to the Company's Registration
Statement on Form S-11 (on April 20, 1998).
(5) 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.
II-3
<PAGE> 140
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-4
<PAGE> 141
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 28th day of April, 1998.
AMRESCO CAPITAL TRUST
By: /s/ MARK D. GIBSON
----------------------------------
Mark D. Gibson,
President and Chief Executive
Officer
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT L. ADAIR III Chairman of the Board April 28, 1998
- ------------------------------------------------------------
Robert L. Adair III
/s/ MARK D. GIBSON Trust Manager, April 28, 1998
- ------------------------------------------------------------ President and Chief
Mark D. Gibson Executive Officer
(Principal Executive
Officer)
/s/ THOMAS J. ANDRUS Executive Vice April 28, 1998
- ------------------------------------------------------------ President and Chief
Thomas J. Andrus Financial Officer
(Principal Financial
and Accounting Officer)
/s/ ROBERT H. LUTZ, JR. Trust Manager April 28, 1998
- ------------------------------------------------------------
Robert H. Lutz, Jr.
</TABLE>
II-5
<PAGE> 142
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement(5)
3.1 -- Amended and Restated Declaration of Trust of the
Registrant(1)
3.2 -- Form of Bylaws of the Registrant(2)
4.1 -- Form Common Share Certificate(4)
5.1 -- Opinion of Winstead Sechrest & Minick P.C. regarding
legality(5)
8.1 -- Opinion of Winstead Sechrest & Minick P.C. regarding tax
matters(5)
10.1 -- Management Agreement between the Registrant and AMRESCO
Capital Trust Managers, L.P.(5)
10.2 -- Form of AMRESCO Capital Trust 1998 Share Option and Award
Plan(5)
10.3 -- Form of Registration Rights Agreement among the
Registrant, AMREIT Holdings, Inc. and AMREIT Managers,
L.P.(2)
10.4 -- Form of Correspondent Agreement between the Registrant
and Holliday Fenoglio Fowler, L.P.(2)
10.5 -- Form of Right of First Refusal and Non-Competition
Agreement(3)
10.6 -- Form of License Agreement between AMRESCO, Inc. and the
Registrant(5)
21.1 -- Subsidiaries of the Registrant(2)
23.1 -- Consent of Deloitte & Touche LLP(5)
23.2 -- Consent of Winstead Sechrest & Minick P.C. (included in
Exhibits 5.1 and 8.1)
24.1 -- Power of Attorney(2)
99.1 -- Consent of Mr. Duncan to be named as a trust manager
pursuant to Rule 438(3)
99.2 -- Consent of Mr. Leinberger to be named as a trust manager
pursuant to Rule 438(3)
99.3 -- Consent of Mr. Leslie to be named as a trust manager
pursuant to Rule 438(3)
99.4 -- Consent of Mr. Deterding to be named as a trust manager
pursuant to Rule 438(4)
</TABLE>
- ---------------
(1) Previously filed with the Company's initial Registration Statement on Form
S-11 (on February 3, 1998).
(2) Previously filed with Amendment No. 1 to the Company's Registration
Statement on Form S-11 (on April 1, 1998).
(3) Previously filed with Amendment No. 2 to the Company's Registration
Statement on Form S-11 (on April 13, 1998).
(4) Previously filed with Amendment No. 3 to the Company's Registration
Statement on Form S-11 (on April 20, 1998).
(5) Filed herewith.
<PAGE> 1
EXHIBIT 1.1
- --------------------------------------------------------------------------------
20,000,000 SHARES
AMRESCO CAPITAL TRUST
COMMON SHARES
UNDERWRITING AGREEMENT
DATED MAY __, 1998
PRUDENTIAL SECURITIES INCORPORATED
CREDIT SUISSE FIRST BOSTON
ABN AMRO INCORPORATED
J.C. BRADFORD & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
PIPER JAFFRAY INC.
- --------------------------------------------------------------------------------
<PAGE> 2
AMRESCO Capital Trust
20,000,000 Shares(1)
Common Shares
UNDERWRITING AGREEMENT
May __, 1998
PRUDENTIAL SECURITIES INCORPORATED
CREDIT SUISSE FIRST BOSTON
ABN AMRO INCORPORATED
J.C. BRADFORD & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
PIPER JAFFRAY INC.
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Ladies and Gentlemen:
AMRESCO Capital Trust, a Texas real estate investment trust
(the "Company"), hereby confirms its agreement with the several underwriters
named in Schedule 1 hereto (the "Underwriters"), for whom you have been duly
authorized to act as representatives (in such capacities, the
"Representatives"), as set forth below. If you are the only Underwriters, all
references herein to the Representatives shall be deemed to be to the
Underwriters.
On or before the Firm Closing Date (as hereinafter defined),
the Company (i) will sell to AMREIT Holdings, Inc., a Nevada corporation
("Holdings"), a subsidiary of AMRESCO, INC., a Delaware corporation ("Amresco")
pursuant to a valid private placement (the "Private Placement") (A) 2,222,233
Common Shares (as hereinafter defined), and (B) up to an additional 333,334
Common Shares if the Underwriters' over-allotment is exercised in full, and
(ii) will enter into a management agreement (the "Management Agreement") with
AMREIT Managers, L.P., a Delaware limited partnership (the "Manager") whereby
the Manager will manage the assets of the Company.
- ----------------------------------
1 Plus an option to purchase from AMRESCO Capital Trust up to 3,000,000
additional shares to cover over- allotments.
<PAGE> 3
For purposes of this Agreement, the term "Subsidiary," with
respect to the Company, refers to each of AMREIT I, Inc., a Delaware
corporation and AMREIT II, Inc., a Nevada corporation and all other
corporations, partnerships, associations, limited liability companies, joint
ventures or other business entities of which 50% or more of the total voting
power of shares of stock or other ownership interest entitled (without regard
to the occurrence of any contingency) to vote in the election of the person or
persons (whether directors, trust managers, partners, trustees or other persons
performing similar functions) having the power to direct or cause the direction
of the management and policies thereof is at the time owned or controlled,
directly or indirectly, by the Company or one or more of the other Subsidiaries
of the Company or a combination thereof.
The Company and the Manager (collectively, the "AMRESCO
Parties") hereby confirm their respective agreements with the Underwriters as
follows:
1. Securities. Subject to the terms and conditions
herein contained, the Company proposes to issue and sell to the several
Underwriters an aggregate of 20,000,000 (the "Firm Securities") of the
Company's Common Shares of Beneficial Interest, par value $0.01 per share
("Common Shares"). The Company also proposes to issue and sell to the several
Underwriters not more than 3,000,000 additional Common Shares if requested by
the Representatives as provided in Section 3 of this Agreement. Any and all
Common Shares to be purchased by the Underwriters pursuant to such option are
referred to herein as the "Option Securities," and the Firm Securities and any
Option Securities are collectively referred to herein as the "Securities."
2. Representations and Warranties of the Company and the
Manager.
A. The Company hereby represents and warrants to, and
agrees with, each of the several Underwriters that:
(a) A registration statement on Form S-11 (File No.
333-45543) with respect to the Securities, including a prospectus subject to
completion, has b,Meen filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"), and one or more amendments to such registration statement may have been
so filed. After the execution of this Agreement, the Company will file with
the Commission either (i) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the Act,
either (A) if the Company relies on Rule 434 under the Act, a Term Sheet (as
hereinafter defined) relating to the Securities, that shall identify the
Preliminary Prospectus (as hereinafter defined) that it supplements containing
such information as is required or permitted by Rules 434, 430A and 424(b)
under the Act or (B) if the Company does not rely on Rule 434 under the Act, a
prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been filed, in such
registration statement), with such changes or insertions as are required by
Rule 430A under the Act or permitted by Rule 424(b) under
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<PAGE> 4
the Act, and in the case of either clause (i)(A) or (i)(B) of this sentence as
have been provided to and approved by the Representatives prior to the
execution of this Agreement, or (ii) if such registration statement, as it may
have been amended, has not been declared by the Commission to be effective
under the Act, an amendment to such registration statement, including a form of
prospectus, a copy of which amendment has been furnished to and approved by the
Representatives prior to the execution of this Agreement. The Company may also
file a related registration statement with the Commission pursuant to Rule
462(b) under the Act for the purpose of registering certain additional
Securities, which registration shall be effective upon filing with the
Commission. As used in this Agreement, the term "Original Registration
Statement" means the registration statement initially filed relating to the
Securities, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration
Statement" means any registration statement filed with the Commission pursuant
to Rule 462(b) under the Act (including the Registration Statement and any
Preliminary Prospectus or Prospectus incorporated therein at the time such
Registration Statement becomes effective); the term "Registration Statement"
includes both the Original Registration Statement and any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each prospectus
subject to completion filed with the Registration Statement (including the
prospectus subject to completion, if any, included in the Registration
Statement at the time it was or is declared effective); the term "Prospectus"
means:
(A) if the Company relies on Rule 434 under the Act, the Term
Sheet relating to the Securities that is first filed pursuant to Rule
424(b)(7) under the Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act, the
prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and if
no prospectus is required to be filed pursuant to Rule 424(b) under
the Act, the prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order preventing or
suspending use of any Preliminary Prospectus. When any Preliminary Prospectus
was filed with the Commission it (i) contained all statements required to be
stated therein (except where information was intentionally left blank in any
filing and thereafter completed) in accordance with, and complied in all
material respects with the requirements of, the Act
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<PAGE> 5
and the rules and regulations of the Commission thereunder and (ii) did not
include any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. When the
Registration Statement or any amendment thereto was or is declared effective,
it (i) contained or will contain all statements required to be stated therein
in accordance with, and complied or will comply in all material respects with
the requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any Term Sheet that
is a part thereof or any amendment or supplement to the Prospectus is filed
with the Commission pursuant to Rule 424(b) (or, if the Prospectus or part
thereof or such amendment or supplement is not required to be so filed, when
the Registration Statement or the amendment thereto containing such amendment
or supplement to the Prospectus was or is declared effective) and on the Firm
Closing Date and any Option Closing Date (both as hereinafter defined), the
Prospectus, as amended or supplemented at any such time, (i) contained or will
contain all statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements of, the
Act and the rules and regulations of the Commission thereunder and (ii) did not
or will not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this paragraph (b) do not apply to statements or
omissions made in any Preliminary Prospectus, the Registration Statement or any
amendment thereto or the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives specifically for use
therein.
(c) If the Company has elected to rely on Rule 462(b) and
the Rule 462(b) Registration Statement has not been declared effective (i) the
Company has filed a Rule 462(b) Registration Statement in compliance with and
that is effective upon filing pursuant to Rule 462(b) and has received
confirmation of its receipt and (ii) the Company has given irrevocable
instructions for transmission of the applicable filing fee in connection with
the filing of the Rule 462(b) Registration Statement, in compliance with Rule
111 promulgated under the Act or the Commission has received payment of such
filing fee.
(d) The Company and each of its Subsidiaries have been
duly organized and are validly existing as real estate investment trusts or
corporations, as applicable, in good standing under the laws of their
respective jurisdictions of incorporation and are duly qualified to transact
business as foreign corporations and are in good standing under the laws of all
other jurisdictions where the ownership or leasing of their respective
properties or the conduct of their respective businesses requires such
qualification, except where the failure to be so qualified does not amount to a
material liability or disability to the Company and its Subsidiaries, taken as
a whole.
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<PAGE> 6
(e) The Company and each of its Subsidiaries have full
power (corporate and other) to own or lease their respective properties and
conduct their respective businesses as described in the Registration Statement
and the Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus; and the Company has full power (corporate and other) to
enter into this Agreement and to carry out all the terms and provisions hereof
to be carried out by it.
(f) The issued shares of capital stock of each of the
Company's Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable, have been issued in compliance with all federal and
state securities laws and, except for directors' qualifying shares and as
otherwise set forth in the Prospectus (including voting stock of AMREIT II,
Inc. held by the Manager) or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus, are owned beneficially by the Company free and
clear of any security interests, liens, encumbrances, equities or claims.
(g) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus. All of the issued capital
shares of the Company have been duly authorized and validly issued and are
fully paid and nonassessable. The Firm Securities, the Option Securities and
the securities to be acquired in the Private Placement have been duly
authorized and at the Firm Closing Date or the related Option Closing Date (as
the case may be), after payment therefor in accordance herewith, will be
validly issued, fully paid and nonassessable. No holders of outstanding
capital shares of the Company are entitled as such to any preemptive or other
rights to subscribe for any of the Securities, and no holder of securities of
the Company has any right (by reason of the filing of the Registration
Statement or otherwise) which has not been fully exercised or waived to require
the Company to register the offer or sale of any securities owned by such
holder under the Act in the public offering contemplated by this Agreement.
(h) The capital shares of the Company conform to the
description thereof contained in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus.
(i) Except as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), there
are no outstanding (A) securities or obligations of the Company or any of its
Subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such Subsidiary, (B) warrants, rights or options to subscribe
for or purchase from the Company or any such Subsidiary any such capital stock
or any such convertible or exchangeable securities or obligations, or (C)
obligations of the Company or any such Subsidiary to issue any capital shares,
any such convertible or exchangeable securities or obligations, or any such
warrants, rights or options.
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<PAGE> 7
(j) Any consolidated financial statements and schedules
of the Company and its consolidated Subsidiaries included in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) fairly present the financial position of
the Company and its consolidated Subsidiaries and the results of operations and
changes in financial condition as of the dates and periods therein specified.
Such financial statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved (except as otherwise noted therein). No other financial
statements or supporting schedules are required to be included in the
Registration Statement.
(k) Deloitte & Touche LLP, who have certified certain
financial statements of the Company and its consolidated Subsidiaries and
delivered their report with respect to the audited consolidated financial
statements and schedules included in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), are independent public accountants as required by the
Act and the applicable rules and regulations thereunder.
(l) The execution and delivery of this Agreement has been
duly authorized by the Company and this Agreement has been duly executed and
delivered by the Company, and is a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms.
(m) The execution and delivery of the Management
Agreement by the Company has been duly authorized by the Company and the
Management Agreement has been, or will be upon execution and delivery thereof,
duly executed and delivered by the Company. The Company has full legal right,
power and authority to enter into the Management Agreement and to consummate
the transactions contemplated therein. The Management Agreement constitutes a
valid and binding agreement of the Company and the Manager, enforceable in
accordance with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(n) The execution and delivery of the purchase agreement
between the Company and Holdings regarding the Private Placement (the "Purchase
Agreement") has been duly authorized by each party thereto and the Purchase
Agreement has been, or will be upon execution and delivery thereof, duly
executed and delivered by the Company and Holdings. The Company and Holdings
have full legal right, power and authority to enter into the Purchase Agreement
and to consummate the transactions contemplated therein. The Purchase
Agreement constitutes a valid and binding agreement of the Company and
Holdings, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting the rights and remedies of
creditors or by general equitable principles.
6
<PAGE> 8
(o) No legal or governmental proceedings are pending to
which the Company or any of its Subsidiaries, is a party or to which the
property of the Company, or any of its Subsidiaries is subject that are
required to be described in the Registration Statement or the Prospectus and
are not described therein (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), and no such proceedings have been threatened
against the Company or any of its Subsidiaries or with respect to any of their
respective properties; and no contract or other document is required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement that is not described therein (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) or
filed as required.
(p) No default exists, and no event has occurred which,
with notice or lapse of time or both, would constitute a default in the due
performance and observance of any term, covenant or condition of any indenture,
mortgage, deed of trust, lease or other agreement or instrument to which the
Company, or any Subsidiary is a party or by which any of them or any of their
respective properties is bound or may be affected in any material adverse
respect with regard to property, business or operations of the Company and its
subsidiaries.
(q) The execution, delivery and performance by the
Company, the Manager and each Subsidiary of this Agreement, and each Existing
Instrument, as applicable and consummation of the transactions contemplated
hereby and thereby and by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), including, without
limitation, the issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement and the compliance by
the Company with the other provisions of this Agreement, do not (i) require the
consent, approval, authorization, registration or qualification of or with any
governmental authority, except such as have been obtained, such as may be
required under state securities or blue sky laws, and, if the Registration
Statement filed with respect to the Securities (as amended) is not effective
under the Act as of the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement) under the Act, (ii) conflict
with or result in a breach or violation of any of the terms and provisions of,
or constitute a default under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or any
of the Subsidiaries pursuant to, any indenture, mortgage, deed of trust, lease
or other agreement or instrument to which the Company, or any Subsidiary is a
party or by which any of them or any of their respective properties is bound
(each an "Existing Instrument"), or the charter documents or by-laws of the
Company, or any Subsidiary, or any statute or any judgment, decree, order, rule
or regulation of any court or other governmental authority or any arbitrator
applicable to the Company, or any of the Subsidiaries, or (iii) require the
consent of any other party to any Existing Instrument except for such consents
which have been obtained in writing (the "Written Consents") and except for
such consents the failure of which to obtain will not, individually or in the
aggregate, amount to a material liability or disability to the Company and its
Subsidiaries, taken as a whole.
7
<PAGE> 9
(r) The issuance of Common Shares to Holdings, the
issuance of options to acquire Common Shares to the Manager, the exercise of
such options and the issuance of all of the capital shares of the Subsidiaries
to be issued on or before the Firm Closing Date are exempt from registration
under the Act. All of such shares are separate and distinct from the
Securities, and all of such issuances have been and will be conducted without
the involvement or participation of any of the Underwriters.
(s) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus, (i)
none of the Company or its Subsidiaries has sustained any material loss or
interference with their respective businesses or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by insurance, or
from any labor dispute or any legal or governmental proceeding, and (ii) there
has not been any material adverse change, or any development involving a
prospective material adverse change, in the condition (financial or otherwise),
management, business prospects, net worth, or results of the operations of the
Company or any of its Subsidiaries, except in each case as described in or
contemplated by the Prospectus or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus.
(t) None of the Company or any Subsidiary has, directly
or indirectly, (i) taken any action designed to cause or to result in, or that
has constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or (ii) since the filing of the
Registration Statement (A) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Securities or (B) paid or agreed
to pay to any person any compensation for soliciting another to purchase any
other securities of the Company.
(u) Neither the Company nor any Subsidiary has
distributed and, prior to the later of (i) the Firm Closing Date and (ii) the
completion of the distribution of the Securities, will not distribute any
offering material in connection with the offering and sale of the Securities
other than the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or other
materials, if any, permitted by the Act.
(v) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus),
(i) the Company and its Subsidiaries have not incurred any material liability
or obligation, direct or contingent, nor entered into any material transaction
not in the ordinary course of business, except as described in the Registration
Statement; (ii) the Company has not purchased any of its outstanding capital
shares, nor declared, paid or otherwise made any dividend or distribution of
any kind on its capital shares; and (iii) there has not been any material
change in the capital shares, short-term debt or long-term debt of the Company
and its consolidated Subsidiaries,
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<PAGE> 10
except in each case as described in or contemplated by the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).
(w) The Company and each of its Subsidiaries have good
and marketable title in fee simple to all items of real property and marketable
title to all personal property owned by each of them, in each case free and
clear of any security interests, liens, encumbrances, equities, claims and
other defects, except such as do not materially and adversely affect the value
of such property and do not interfere with the use made or proposed to be made
of such property by the Company or such Subsidiary, and any real property and
buildings held under lease by the Company or any such Subsidiary are held under
valid, subsisting and enforceable leases, with such exceptions as are not
material and do not interfere with the use made or proposed to be made of such
property and buildings by the Company or such Subsidiary, in each case except
as described in or contemplated by the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(x) No labor dispute with the employees of the Company,
or any of the Subsidiaries exists or is threatened or imminent that could
result in a material adverse change in the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company and its
Subsidiaries, except as described in or contemplated by the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).
(y) The Company, and the Subsidiaries own or possess, or
can acquire on reasonable terms, all material patents, patent applications,
trademarks, service marks, trade names, licenses, copyrights and proprietary or
other confidential information currently employed by them in connection with
their respective businesses, and neither of the Company, nor any such
Subsidiary has received any notice of infringement of or conflict with asserted
rights of any third party with respect to any of the foregoing which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company and its Subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(z) Each of the Company, and each of the Subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as are prudent and customary in the businesses in
which they are engaged; none of the Company, or any Subsidiary has been refused
any insurance coverage sought or applied for, and the Company has no reason to
believe that any such entity will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company, or
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<PAGE> 11
such Subsidiary, as applicable, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(aa) No Subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from making
any other distribution on such Subsidiary's capital stock, from repaying to the
Company any loans or advances to such Subsidiary from the Company or from
transferring any of such Subsidiary's property or assets to the Company or any
other Subsidiary of the Company, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(ab) The Company, and the Subsidiaries possess all
certificates, authorizations, licenses and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor any Subsidiary has received
any notice of proceedings relating to the revocation or modification of any
such certificate, authorization, license or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
result in a material adverse change in the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company and its
Subsidiaries, taken as a whole, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(ac) The Company, and each Subsidiary will use its
commercially reasonable efforts to conduct its operations in a manner that will
not subject it to registration as an investment company under the Investment
Company Act of 1940, as amended, and this transaction will not cause the
Company, or any Subsidiary to become an investment company subject to
registration under such Act.
(ad) Except for the shares of capital stock of each of the
Subsidiaries owned by the Company and such Subsidiaries, neither the Company
nor any such Subsidiary owns any shares of stock or any other equity securities
of any corporation or has any equity interest in any firm, partnership,
association or other entity, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than the
Subsidiaries listed in Exhibit 21 to the Registration Statement.
(ae) The Company, and each of the Subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurance that (1) transactions are executed in accordance with management's
general or specific authorizations; (2) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (3) access
to assets is permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for
10
<PAGE> 12
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(af) Neither the Company, nor any of the Subsidiaries
nor, to the knowledge of the Company, any employee or agent of the Company, or
any Subsidiary, has (i) made any contribution or other payment to any official
of, or candidate for, any federal, state or foreign office in violation of any
law or of the character required to be disclosed in the Prospectus or (ii) made
any payment to any federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any jurisdiction
thereof.
(ag) There are no business relationships or related-party
transactions of the type described in Item 404 of Regulation S-K of the
Commission involving the Company which have not been described in the
Prospectus, except for such transactions that would be considered immaterial
under such Item 404. The descriptions in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) under the caption
"The Manager -- Certain Relationships; Conflicts of Interest" are complete and
accurate in all material respects.
(ah) Each of the Company, and each Subsidiary has filed
all foreign, federal, state and local tax returns that are required to be filed
or has requested extensions thereof (except in any case in which the failure so
to file would not have a material adverse effect on the Company and its
Subsidiaries, taken as a whole) and has paid all taxes required to be paid by
it and any other assessment, fine or penalty levied against it, to the extent
that any of the foregoing is due and payable, except (i) for any such
assessment, fine or penalty that is currently being contested in good faith and
for which adequate reserves have been taken in conformity with generally
accepted accounting principles and the nonpayment of which does not in any way
jeopardize the Company's status as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended
(the "Tax Code"), and the rules and regulations thereunder (the "REIT
Provisions of the Tax Code"), as may be amended from time to time, or (ii) as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). The Company has made
adequate charges, accruals and reserves in the applicable financial statements
referred to above in respect of all federal, state and foreign income and
franchise taxes for all periods as to which the tax liability of the Company or
any of its Subsidiaries has not been finally determined.
(ai) The Company intends to operate and will operate in
such a manner as to qualify as a REIT under the REIT Provisions of the Tax
Code; and the Company intends to elect to and will elect to be taxed as a REIT
under the Tax Code beginning with its taxable year ending December 31, 1998.
The Company does not know of any currently existing event or condition which
would cause or is reasonably likely to cause the Company to fail to qualify as
a REIT.
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<PAGE> 13
(aj) The Company has adopted operating policies and
guidelines (the "Guidelines") respecting the Company's (i) investments, (ii)
leveraging of its invested portfolio, (iii) management of the credit risk of
its invested portfolio, (iv) management of the interest rate risk of its
invested portfolio, including hedging, (v) its relationship with Amresco, and
(vi) its compliance with the REIT provisions of the Tax Code. Such policies
are currently in full force and effect, have not been amended, and copies have
been delivered to the Underwriters. The Company is not currently modifying,
waiving or amending any portion of the Guidelines, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(ak) Neither the Company, nor any of the Subsidiaries is
in violation of any federal or state law or regulation relating to occupational
safety and health or to the storage, handling or transportation of hazardous or
toxic materials and each of them has received all permits, licenses or other
approvals required of it under applicable federal and state occupational safety
and health and environmental laws and regulations to conduct its respective
business, and the Company, and each Subsidiary is in compliance with all terms
and conditions of any such permit, license or approval, except for any such
violation of law or regulation, failure to receive required permits, licenses
or other approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals which would not, singly or in the aggregate,
result in a material adverse change in the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company and its
Subsidiaries, taken as a whole, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(al) The Company and its Subsidiaries and any "employee
benefit plan" (as defined under the Employee Retirement Income Security Act of
1974, as amended, and the regulations and published interpretations thereunder
(collectively, "ERISA")) established or maintained by the Company, its
Subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance
in all material respects with ERISA. "ERISA Affiliate" means, with respect to
the Company or a Subsidiary, any member of any group of organizations described
in Sections 414(b),(c),(m) or (o) of the Tax Code, and the regulations and
published interpretations thereunder of which the Company or such Subsidiary is
a member. No "reportable event" (as defined under ERISA) has occurred or is
reasonably expected to occur with respect to any "employee benefit plan"
established or maintained by the Company, its Subsidiaries or any of their
ERISA Affiliates. No "employee benefit plan" established or maintained by the
Company, its Subsidiaries or any of their ERISA Affiliates, if such "employee
benefit plan" were terminated, would have any "amount of unfunded benefit
liabilities" (as defined under ERISA). Neither the Company, its Subsidiaries
nor any of their ERISA Affiliates has incurred or reasonably expects to incur
any liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975
or 4980B of the Tax Code. Each "employee benefit plan" established or
maintained by the Company, its Subsidiaries or any of their ERISA
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<PAGE> 14
Affiliates that is intended to be qualified under Section 401(a) of the Tax
Code is so qualified and nothing has occurred, whether by action or failure to
act, which would cause the loss of such qualification.
(am) The Company, and each Subsidiary is conducting
business in compliance with all other applicable state, federal and foreign
laws, rules and regulations, except where failure to be in compliance, if the
subject of an unfavorable decision, ruling or finding, would not singly or in
the aggregate reasonably be expected to result in a material adverse change in
the condition (financial or otherwise), business prospects, net worth or
results of operations of the Company and its Subsidiaries, taken as a whole.
To the best of Company's knowledge the description of the laws and regulations
affecting the investment operations of Company, and the Subsidiaries in the
Prospectus is a true and accurate description thereof in all material respects
and does not omit any information relating to such laws and regulations
reasonably likely to be material to an investor in the Securities.
(an) Each certificate signed by any officer of the
Company, and delivered to the Representatives or counsel for the Underwriters
shall be deemed to be a representation and warranty by the Company, to each
Underwriter as to the matters covered thereby.
B. The Manager hereby represents and warrants to, and
agrees with, each of the several Underwriters that:
(a) The Manager has been duly formed and is validly
existing as a limited partnership in good standing under the laws of the State
of Delaware with full power and authority (partnership and other) to own and
lease its properties and conduct its business as described in the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) and to enter into and perform its obligations under this Agreement.
The Manager is duly qualified to do business and in good standing as a foreign
partnership in each jurisdiction in which the ownership or leasing of
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified does not amount to a material liability or
disability or to the Manager. As of the Firm Closing Date, all of the
outstanding partnership interests in the Manager will be validly issued and
will be owned, directly or indirectly, by Amresco, except as described in the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus. Except as described in the Prospectus, or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus, there
are no outstanding options, warrants or other rights calling for the issuance
of, or any commitment, plan or arrangement to issue, any partnership interests
in the Manager or any security convertible into or exchangeable or exercisable
for, any partnership interests in the Manager.
(b) The execution and delivery of the Management
Agreement by the Manager has been duly authorized by the Manager and the
Management Agreement has been, or will be upon execution and delivery thereof,
duly executed and delivered by the
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<PAGE> 15
Manager. The Manager has full legal right, power and authority to enter into
the Management Agreement and to consummate the transactions contemplated
therein. The Management Agreement constitutes a valid and binding agreement of
the Manager, enforceable in accordance with its terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(c) No legal or governmental proceedings are pending to
which the Manager is a party or to which the property of the Manager is subject
that are required to be described in the Registration Statement or the
Prospectus and are not described therein (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), and no such proceedings
have been threatened against the Manager with respect to any of its properties;
and no contract or other document to which the Manager is a party is required
to be described in the Registration Statement or the Prospectus or to be filed
as an exhibit to the Registration Statement that is not described therein (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus)
or filed as required.
(d) No default exists, and no event has occurred which,
with notice or lapse of time or both, would constitute a default in the due
performance and observance of any term, covenant or condition of any indenture,
mortgage, deed of trust, lease or other agreement or instrument to which the
Manager is a party or by which the Manager or its properties is bound or may be
affected in any material adverse respect with regard to property, business or
operations of the Manager.
(e) The execution, delivery and performance by the
Manager of this Agreement, and each Company Agreement to which it is a party,
as applicable and consummation of the transactions contemplated hereby and
thereby and by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), and the compliance by the Manager with the
other provisions of this Agreement, do not (i) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained, (ii) conflict with or result in a
breach or violation of any of the terms and provisions of, or constitute a
default under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Manager pursuant to, any
existing Instrument to which the Manager is a party or by which any of its
properties is bound or the charter documents or by-laws of the Manager or any
statute or any judgment, decree, order, rule or regulation of any court or
other governmental authority or any arbitrator applicable to the Manager or
(iii) require the consent of any other party to any Existing Instrument except
for such consents which have been obtained in writing and except for such
consents the failure of which to obtain will not, individually or in the
aggregate, amount to a material liability or disability to the Manager.
(f) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus or, if
the Prospectus is not in existence,
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<PAGE> 16
the most recent Preliminary Prospectus, (i) the Manager has not sustained any
material loss or interference with its businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental proceeding,
and (ii) there has not been any material adverse change, or any development
involving a prospective material adverse change, in the condition (financial or
otherwise), management, business prospects, net worth, or results of the
operations of the Manager, except in each case as described in or contemplated
by the Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus.
(g) No labor dispute with the employees of the Manager,
exists or is threatened or imminent that could result in a material adverse
change in the condition (financial or otherwise), business prospects, net worth
or results of operations of the Company and its Subsidiaries, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(h) The Manager owns or possesses, or can acquire on
reasonable terms, all material patents, patent applications, trademarks,
service marks, trade names, licenses, copyrights and proprietary or other
confidential information currently employed by them in connection with their
respective businesses, and the Manager has received any notice of infringement
of or conflict with asserted rights of any third party with respect to any of
the foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material adverse
change in the condition (financial or otherwise), business prospects, net worth
or results of operations of the Manager, except as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(i) The Manager is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
are prudent and customary in the businesses in which it is engaged including ,
without limitation errors and omissions insurance; the Manager has not been
refused any insurance coverage sought or applied for, and the Company has no
reason to believe that any such entity will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business at
a cost that would not materially and adversely affect the condition (financial
or otherwise), business prospects, net worth or results of operations of the
Manager, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(j) The Manager, possesses all certificates,
authorizations, licenses and permits issued by the appropriate federal, state
or foreign regulatory authorities necessary to conduct its business, and has
not received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization, license or permit which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling
or finding, would result in a material adverse change in the condition
(financial or otherwise),
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<PAGE> 17
business prospects, net worth or results of operations of the Manager, except
as described in or contemplated by the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(k) The Manager will use its commercially reasonable
efforts to conduct its operations in a manner that will not subject it to
registration as an investment company under the Investment Company Act of 1940,
as amended, and this transaction will not cause the Manager to become an
investment company subject to registration under such Act.
(l) The Manager maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (1) transactions are
executed in accordance with management's general or specific authorizations;
(2) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (3) access to assets is permitted only in
accordance with management's general or specific authorization; and (4) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, the Company agrees to issue and sell to each of
the Underwriters, and each of the Underwriters, severally and not jointly,
agrees to purchase from the Company, at a purchase price of $[_____] per share,
the number of Firm Securities set forth opposite the name of such Underwriter
in Schedule 1 hereto; except as provided in Section 3(b), below. One or more
certificates in definitive form for the Firm Securities that the several
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Representatives
request upon notice to the Company at least 48 hours prior to the Firm Closing
Date, shall be delivered by or on behalf of the Company to the Representatives
for the respective accounts of the Underwriters, against payment by or on
behalf of the Underwriters of the purchase price therefor by wire transfer in
same-day funds (the "Wired Funds") to the account of the Company. Such
delivery of and payment for the Firm Securities shall be made at the offices of
O'Melveny & Myers LLP; 275 Battery Street, Suite 2600; San Francisco, CA
94111-3305, at 9:30 A.M., New York time, on [_____], or at such other place,
time or date as the Representatives and the Company may agree upon or as the
Representatives may determine pursuant to Section 9 hereof, such time and date
of delivery against payment being herein referred to as the "Firm Closing
Date". The Company will make such certificate or certificates for the Firm
Securities available for checking and packaging by the Representatives at the
offices in New York, New York of the Company's transfer agent or registrar or
of Prudential Securities Incorporated at least 24 hours prior to the Firm
Closing Date.
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<PAGE> 18
(b) For the purpose of covering any over-allotments in
connection with the distribution and sale of the Firm Securities as
contemplated by the Prospectus, the Company hereby grants to the several
Underwriters an option to purchase, severally and not jointly, the Option
Securities. The purchase price to be paid for any Option Securities shall be
the same price per share as the price per share for the Firm Securities set
forth above in paragraph (a) of this Section 3. The option granted hereby may
be exercised as to all or any part of the Option Securities from time to time
within thirty (30) days after the date of the Prospectus (or, if such 30th day
shall be a Saturday or Sunday or a holiday, on the next business day thereafter
when the New York Stock Exchange is open for trading). The Underwriters shall
not be under any obligation to purchase any of the Option Securities prior to
the exercise of such option. The Representatives may from time to time
exercise the option granted hereby by giving notice in writing or by telephone
(confirmed in writing) to the Company setting forth the aggregate number of
Option Securities as to which the several Underwriters are then exercising the
option and the date and time for delivery of and payment for such Option
Securities. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two business days or later than
five business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representatives and
Company may agree upon or as the Representatives may determine pursuant to
Section 9 hereof, is herein called the "Option Closing Date" with respect to
such Option Securities. Upon exercise of the option as provided herein, the
Company shall become obligated to sell to each of the several Underwriters,
and, subject to the terms and conditions herein set forth, each of the
Underwriters (severally and not jointly) shall become obligated to purchase
from the Company, the same percentage of the total number of the Option
Securities as to which the several Underwriters are then exercising the option
as such Underwriter is obligated to purchase of the aggregate number of Firm
Securities, as adjusted by the Representatives in such manner as they deem
advisable to avoid fractional shares. If the option is exercised as to all or
any portion of the Option Securities, one or more certificates in definitive
form for such Option Securities, and payment therefor, shall be delivered on
the related Option Closing Date in the manner, and upon the terms and
conditions, set forth in paragraph (a) of this Section 3, except that reference
therein to the Firm Securities and the Firm Closing Date shall be deemed, for
purposes of this paragraph (b), to refer to such Option Securities and Option
Closing Date, respectively.
(c) The Company hereby acknowledges that the wire
transfer by or on behalf of the Underwriters of the purchase price for any
Securities does not constitute closing of a purchase and sale of the
Securities. Only execution and delivery of a receipt for Securities by the
Underwriters indicates completion of the closing of a purchase of the
Securities from the Company. Furthermore, in the event that the Underwriters
wire funds to the Company prior to the completion of the closing of a purchase
of Securities, the Company hereby acknowledges that until the Underwriters
execute and deliver a receipt for the Securities, by facsimile or otherwise,
the Company will not be entitled to the wired funds and shall return the wired
funds to the Underwriters as soon as
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<PAGE> 19
practicable (by wire transfer of same-day funds) upon demand. In the event
that the closing of a purchase of Securities is not completed and the wired
funds are not returned by the Company to the Underwriters on the same day the
wired funds were received by the Company, the Company agrees to pay to the
Underwriters in respect of each day the wire funds are not returned by it, in
same-day funds, interest on the amount of such wire funds in an amount
representing the Underwriters' cost of financing as reasonably determined by
Prudential Securities Incorporated.
(d) It is understood that any of you, individually and
not as the Representatives, may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for any of the Securities to be
purchased by such Underwriter or Underwriters. No such payment shall relieve
such Underwriter or Underwriters from any of its or their obligations
hereunder.
4. Offering by the Underwriters. Upon your
authorization of the release of the Firm Securities, the several Underwriters
propose to offer the Firm Securities for sale to the public upon the terms set
forth in the Prospectus.
5. Covenants of the Company. The Company further
covenants and agrees with each of the Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto to become effective as promptly as
possible. If required, the Company will file the Prospectus or any Term Sheet
that constitutes a part thereof and any amendment or supplement thereto with
the Commission in the manner and within the time period required by Rules 434
and 424(b) under the Act. During any time when a prospectus relating to the
Securities is required to be delivered under the Act, the Company (i) will
comply with all requirements imposed upon it by the Act and the rules and
regulations of the Commission thereunder to the extent necessary to permit the
continuance of sales of or dealings in the Securities in accordance with the
provisions hereof and of the Prospectus, as then amended or supplemented, and
(ii) will not file with the Commission the Prospectus, Term Sheet or the
amendment referred to in the second sentence of Section 2(a) hereof, any
amendment or supplement to such Prospectus, Term Sheet or any amendment to the
Registration Statement or any Rule 462(b) Registration Statement of which the
Representatives previously have been advised and furnished with a copy for a
reasonable period of time prior to the proposed filing and as to which filing
the Representatives shall not have given their consent. The Company will
prepare and file with the Commission, in accordance with the rules and
regulations of the Commission, promptly upon request by the Representatives or
counsel for the Underwriters, any amendments to the Registration Statement or
amendments or supplements to the Prospectus that may be necessary or advisable
in connection with the distribution of the Securities by the several
Underwriters, and will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective by the Commission as promptly
as possible. The Company will advise the Representatives,
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<PAGE> 20
promptly after receiving notice thereof, of the time when the Registration
Statement or any amendment thereto has been filed or declared effective or the
Prospectus or any amendment or supplement thereto has been filed and will
provide evidence satisfactory to the Representatives of each such filing or
effectiveness.
(b) The Company will advise the Representatives, promptly
after receiving notice or obtaining knowledge thereof, of (i) the issuance by
the Commission of any stop order suspending the effectiveness of the Original
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, (ii) the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, (iii) the institution, threatening or
contemplation of any proceeding for any such purpose or (iv) any request made
by the Commission for amending the Original Registration Statement or any Rule
462(b) Registration Statement, for amending or supplementing the Prospectus or
for additional information. The Company will use its best efforts to prevent
the issuance of any such stop order and, if any such stop order is issued, to
obtain the withdrawal thereof as promptly as possible.
(c) The Company will cooperate with the Representatives
in arranging for the qualification of the Securities for offering and sale
under the securities or blue sky laws of such jurisdictions (whether domestic
or foreign) as the Representatives may designate and will use its best efforts
to continue such qualifications in effect for as long as may be necessary to
complete the distribution of the Securities, provided, however, that in
connection therewith the Company shall not be required to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction.
(d) If, at any time prior to the later of (i) the final
date when a prospectus relating to the Securities is required to be delivered
under the Act or (ii) the Option Closing Date, any event occurs as a result of
which the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if for any other reason it is
necessary at any time to amend or supplement the Prospectus to comply with the
Act or the rules or regulations of the Commission thereunder, the Company will
promptly notify the Representatives thereof and, subject to Section 5(a)
hereof, will prepare and file with the Commission, at the Company's expense, an
amendment to the Registration Statement or an amendment or supplement to the
Prospectus that corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the
Representatives and to counsel for the Underwriters a signed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto), (ii) to each other
Underwriter, a conformed copy of such registration statement or any Rule 462(b)
Registration Statement and each amendment thereto (in each case without
exhibits thereto) and (iii) so long as a
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<PAGE> 21
prospectus relating to the Securities is required to be delivered under the
Act, as many copies of each Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto as the Representatives may reasonably request;
without limiting the application of clause (iii) of this sentence, the Company,
not later than (A) 6:00 P.M., New York City time, on the date of determination
of the public offering price, if such determination occurred at or prior to
10:00 A.M., New York City time, on such date or (B) 2:00 P.M., New York City
time, on the business day following the date of determination of the public
offering price, if such determination occurred after 10:00 A.M., New York City
time, on such date, will deliver to the Underwriters, without charge, as many
copies of the Prospectus and any amendment or supplement thereto as the
Representatives may reasonably request for purposes of confirming orders that
are expected to settle on the Firm Closing Date.
(f) The Company, as soon as practicable, will make
generally available to its securityholders and to the Representatives a
consolidated earnings statement of the Company and its Subsidiaries that
satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale
of the Securities as set forth under "Use of Proceeds" in the Prospectus,
including the acquisition of any initial assets described therein.
(h) The Company will not, and will cause each of the
Subsidiaries within its control not to, directly or indirectly, without the
prior written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (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 for, Common Shares for a period of 180
days after the date hereof, except (i) pursuant to this Agreement, (ii)
issuances pursuant to the exercise of employee share options outstanding on the
date hereof, (iii) grants made pursuant to the Company's employee share option
plan which are not exercisable for 180 days after the date hereof, (iv)
pursuant to the Company's dividend reinvestment plan or pursuant to the terms
of convertible securities of the Company outstanding on the date hereof, and
(v) pursuant to grants of operating partnership units convertible to Common
Shares in connection with the acquisition of assets by the Company (provided
the holders of such units shall be bound by the provisions of this Section 5(h)
for the balance of the lock-up period.
(i) The Company will not, directly or indirectly, (i)
take any action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities or (ii) (A) sell, bid for, purchase, or pay anyone
any compensation for soliciting purchases of, the Securities or
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<PAGE> 22
(B) pay or agree to pay to any person any compensation for soliciting another
to purchase any other securities of the Company.
(j) The Company will obtain the agreements described in
Section 7(h) hereof prior to the Firm Closing Date.
(k) The Company agrees that, if at any time during the
twenty-five (25) day period after the Registration Statement becomes effective,
any rumor, publication or event relating to or affecting any of the AMRESCO
Parties or the Subsidiaries shall occur as a result of which in the
Representatives' opinion the market price of the Securities has been or is
likely materially to be affected (regardless of whether such rumor, publication
or event necessitates a supplement to or amendment of the Prospectus), the
Company will, upon the request of the Representatives, promptly prepare,
consult with the Representatives concerning the substance of, and disseminate a
press release or other public statement, reasonably satisfactory to the
Representatives, responding to or commenting on such rumor, publication or
event.
(l) If the Company elects to rely on Rule 462(b), the
Company shall both file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) and pay the applicable fees in
accordance with Rule 111 promulgated under the Act by the earlier of (i) 10:00
P.M. Eastern time on the date of this Agreement and (ii) the time confirmations
are sent or given, as specified by Rule 462(b)(2).
(m) The Company will cause the Securities to be duly
included for quotation on The Nasdaq Stock Market's National Market (the
"Nasdaq National Market") prior to the Firm Closing Date. The Company will
thereafter comply with the requirements of the Nasdaq National Market to permit
the Common Shares to remain eligible for quotation unless and until the Company
elects to no longer be eligible for quotation on the Nasdaq National Market
(n) The Company shall initially operate so as to qualify
as a REIT in accordance with the requirements of Sections 856-860 of the Tax
Code, and shall elect to be taxed as a REIT beginning with its taxable year
ending December 31, 1998 and thereafter use commercially reasonable effort to
remain qualified as a REIT. The Company will use its best efforts to comply
with the representations made as support for the opinion letter rendered by the
Company's tax counsel under the REIT Provisions of the Tax Code, the form of
which opinion is filed as Exhibit 8.1 to the Registration Statement.
(o) The Company will engage and retain a "Big 6"
Accounting Firm as its qualified accountants and such tax experts at such
accounting firm with experience in advising REITs as are reasonably acceptable
to the Representatives to assist the Company in developing appropriate
accounting systems and testing procedures and to conduct quarterly compliance
reviews designed to determine compliance with the REIT
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<PAGE> 23
Provisions of the Tax Code and the maintenance of Company's exempt status under
the Investment Company Act.
(p) The Company will, and will cause each Subsidiary to,
in good faith expend reasonable efforts to enforce the terms of the Management
Agreement and Purchase Agreement.
(q) The Company will conduct its business, or require the
Manager to conduct its business, in accordance with the Guidelines, as the same
may be amended from time to time.
(r) The Company will deliver on or before the Firm
Closing Date an indemnification agreement (the "Indemnification Agreement")
from Amresco as to factual matters contained in the Registration Statement
concerning the AMRESCO Group (as such term is defined in the Registration
Statement), which term includes the Manager, in the form attached hereto as
Exhibit B.
(s) The Company will deliver, on or before the Firm
Closing Date, a form of loan purchase agreement (the "Loan Purchase Agreement")
in form and substance satisfactory to the Representatives and their counsel.
Each loan described in the Registration Statement which is to be acquired by
the Company from the AMRESCO Group shall be acquired by an agreement
substantially in the form of the Loan Purchase Agreement.
6. Expenses. The Company will pay all costs and
expenses incident to the performance of its obligations under this Agreement,
whether or not the transactions contemplated herein are consummated or this
Agreement is terminated pursuant to Section 11 hereof including all costs and
expenses incident to (i) the printing or other production of documents with
respect to the transactions, including any costs of printing the registration
statement originally filed with respect to the Securities and any amendment
thereto, any Rule 462(b) Registration Statement, any Preliminary Prospectus and
the Prospectus and any amendment or supplement thereto, this Agreement and any
blue sky memoranda, (ii) all arrangements relating to the delivery to the
Underwriters of copies of the foregoing documents, (iii) the fees and
disbursements of the counsel, the accountants and any other experts or advisors
retained by the Company, (iv) preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Securities, including transfer
agent's and registrar's fees, (v) the qualification of the Securities under
state securities and blue sky laws, including filing fees and fees and
disbursements of counsel for the Underwriters relating thereto, (vi) the filing
fees of the Commission and the National Association of Securities Dealers, Inc.
(the "NASD") relating to the Securities, (vii) any listing of the Securities on
the Nasdaq National Market, (viii) any meetings with prospective investors in
the Securities (other than as shall have been specifically approved by the
Representatives to be paid for by the Underwriters) and (ix) advertising
relating to the offering of the Securities (other than one tombstone
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<PAGE> 24
announcement to be run in the Wall Street Journal, which will be paid for by
the Underwriters). If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 7 hereof is not satisfied, because this Agreement is
terminated pursuant to Section II (a)(i) or II (a)(ii) hereof or because of any
failure, refusal or inability on the part of the Company to perform all
obligations and satisfy all conditions on its part to be performed or satisfied
hereunder other than by reason of a default by any of the Underwriters, the
Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including counsel fees and disbursements) that shall
have been incurred by them in connection with the proposed purchase and sale of
the Securities. The Company shall not in any event be liable to any of the
Underwriters for the loss of anticipated profits from the transactions covered
by this Agreement.
7. Conditions of the Underwriters' Obligations. The
obligations of the several Underwriters to purchase and pay for the Firm
Securities shall be subject, in the Representatives' sole discretion, to the
accuracy in of the representations and warranties of the Company contained
herein as of the date hereof and as of the Firm Closing Date, as if made on and
as of the Firm Closing Date, to the accuracy of the statements of the Company's
officers made pursuant to the provisions hereof, to the performance by the
Company of its covenants and agreements hereunder and to the following
additional conditions:
(a) If the Original Registration Statement or any
amendment thereto filed prior to the Firm Closing Date has not been declared
effective as of the time of execution hereof, the Original Registration
Statement or such amendment and, if the Company has elected to rely upon Rule
462(b), the Rule 462(b) Registration Statement shall have been declared
effective not later than the earlier of (A) 11:00 A.M., New York time, on the
date on which the amendment to the registration statement originally filed with
respect to the Securities or to the Registration Statement, as the case may be,
containing information regarding the initial public offering price of the
Securities has been filed with the Commission and (B) the time confirmations
are sent or given as specified by Rule 462(b)(2), or with respect to the
Original Registration Statement, or such later time and date as shall have been
consented to by the Representatives. If required, the Prospectus or any Term
Sheet that constitutes a part thereof and any amendment or supplement thereto
shall have been filed with the Commission in the manner and within the time
period required by Rules 434 and 424(b) under the Act. No stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto shall have been issued, and no proceedings for that purpose shall have
been instituted or threatened or, to the knowledge of the Company or the
Representatives, shall be contemplated by the Commission; and the Company shall
have complied with any outstanding request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise).
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(b) The Representatives shall have received an opinion,
dated the Firm Closing Date, of Winstead Sechrest & Minick P.C., counsel for
the Company, to the effect that:
(i) the Company, each of its subsidiaries listed in
Exhibit 21 to the Registration Statement (for purposes of this Section
7(b), the "Subsidiaries") and the Manager have been duly organized and
are validly existing as trusts, corporations, or limited partnerships
as the case may be, in good standing (except as to the Company, where
such good standing opinion is not applicable) under the laws of their
respective jurisdictions of formation or incorporation, as the case
may be, and are duly qualified to transact business as foreign trusts,
corporations or limited partnerships, as the case may be, and are in
good standing under the laws of all other jurisdictions where the
ownership or leasing of their respective properties or the conduct of
their respective businesses requires such qualification, except where
the failure to be so qualified will not have a material adverse effect
on the Company or the Subsidiaries, taken as a whole, or to the
Manager;
(ii) the Company, each of the Subsidiaries and the Manager
have trust, partnership or corporate power to own or lease their
respective properties and conduct their respective businesses as
described in the Registration Statement and the Prospectus, and the
Company and the Manager have power to enter into this Agreement, the
Management Agreement and the Purchase Agreement and to carry out all
the terms and provisions hereof and thereof to be carried out by it;
(iii) the issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable and, except as otherwise set forth in the
Prospectus, are owned beneficially by the Company free and clear of
any perfected security interests or, to the knowledge of such counsel,
any other security interests, liens, encumbrances, equities or claims;
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued
capital shares of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, have been issued in
compliance with all applicable federal and state securities laws and
were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities; the Firm
Securities have been duly authorized by all necessary corporate action
of the Company and, when issued and delivered to and paid for by the
Underwriters pursuant to this Agreement, will be validly issued, fully
paid and nonassessable; the forms of certificates used to evidence the
Securities are in due and proper form and comply with all applicable
requirements of the charter and bylaws of the Company and the Texas
Real Estate Investment Trust Act; the Securities have been duly
included for trading on the Nasdaq National Market; no holders of
outstanding capital shares of the Company are entitled as such to any
preemptive
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or other rights to subscribe for any of the Securities; and no holders
of securities of the Company are entitled to have such securities
registered under the Registration Statement;
(v) all of the outstanding shares of beneficial interest
in the Company to be acquired by Holdings, pursuant to the Private
Placement, and any options to acquire such shares will have been
issued in a valid private placement exempt from the registration
requirements of the Act and will not be integrated with the public
sale of the securities subject to the Registration Statement and will
otherwise have been issued in accordance with all state and federal
securities laws. Such securities have been duly authorized by all
necessary action of the Company and, when issued and delivered to and
paid for by Holdings will be validly issued, fully paid and
nonassessable;
(vi) all of the issued and outstanding capital stock,
membership interests or other equity interests of each Subsidiary (i)
has been duly authorized and validly issued and is fully paid and
non-assessable, (ii) except as otherwise disclosed in the Prospectus,
is beneficially owned by the Company or the Manager, directly or
through other Subsidiaries, in the respective amounts set forth in the
Prospectus, free and clear of any security interest, mortgage, pledge,
lien, encumbrance or, to the knowledge of such counsel, any pending or
threatened claim, and (iii) has been issued in compliance with all
state and federal securities laws;
(vii) the statements set forth under the heading
"Description of Shares of Beneficial Interest" in the Prospectus,
insofar as such statements purport to summarize certain provisions of
the capital shares of the Company, provide a fair summary of such
provisions; and the statements set forth (i) in the Prospectus under
the captions, "Shares Eligible for Future Sale," "Certain Provisions
of Texas Law and of the Declaration of Trust and Bylaws," and "Federal
Income Tax Consequences" and (ii) in Item 33 (Recent Sales of
Unregistered Securities) and Item 34 (Indemnification of Directors and
Officers) of the Registration Statement, insofar as such statements
constitute a summary of the legal matters, documents or proceedings
referred to therein, provide a fair summary of such legal matters,
documents and proceedings;
(viii) the descriptions of the law and the legal conclusions
contained in the Prospectus under the caption "ERISA Considerations"
are correct in all material respects, and the discussion thereunder
fairly summarizes the considerations that are likely to be material to
a fiduciary of a Plan (as defined in the Prospectus);
(ix) the execution and delivery of this Agreement, the
Management Agreement and each of the agreements filed as an exhibit to
the Registration Statement (collectively, the "Company Agreements")
have been duly authorized
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<PAGE> 27
by all necessary corporate action of the Company and each Company
Agreement has been duly executed and delivered by, and is a valid and
binding agreement of, the Company, enforceable in accordance with its
terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws related
to or affecting creditors' rights generally or by general equitable
principles and, with respect to this Agreement, except as rights to
indemnification hereunder may be limited by applicable law;
(x) the execution and delivery by the Manager of each of
this Agreement and the Management Agreement (collectively, the
"Manager Agreements") have been duly authorized by all necessary
action of the Manager, and each Manager Agreement has been executed
and delivered by, and is a valid and binding agreement of, the
Manager, enforceable in accordance with its terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws related to or
affecting creditors' rights generally or by general equitable
principles and, with respect to this Agreement, except as rights to
indemnification hereunder may be limited by applicable law;
(xi) the execution and delivery of the Indemnification
Agreement has been duly authorized by all necessary corporate action
of Amresco, and the Indemnification Agreement has been executed and
delivered by, and is a valid and binding agreement of, Amresco,
enforceable in accordance with its terms, except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws related to or affecting creditors'
rights generally or by general equitable principles and except as
rights to indemnification thereunder may be limited by applicable law;
(xii) (A) to the knowledge of such counsel, no legal or
governmental proceedings are pending to which the Company, the Manager
or any of the Subsidiaries is a party or to which the property of the
Company or any of the Subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not
described therein, and, to the knowledge of such counsel, no such
proceedings have been threatened against the Company, the Manager or
any of the Subsidiaries or with respect to any of their respective
properties and (B) to the knowledge of such counsel, no contract or
other document is required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that is not described therein or filed as
required;
(xiii) to the knowledge of such counsel, none of the
Company, the Manager or any Subsidiary is (i) in violation of its
charter, bylaws, partnership agreement, certificate of partnership or
other organizational documents, as applicable;
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<PAGE> 28
(xiv) to such counsel's knowledge, no default exists, and
no event has occurred which, with notice or lapse of time or both,
would constitute a default in the due performance and observance of
any term, covenant or condition of any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Company,
the Manager, or any Subsidiary is a party or by which any of them or
any of their respective properties is bound or may be affected in any
material adverse respect with regard to property, business or
operations of the Company and its subsidiaries or of the Manager or of
Holliday Fenoglio;
(xv) the issuance, offering and sale of the Securities to
the Underwriters by the Company pursuant to this Agreement, the
compliance by the Company with the other provisions of this Agreement,
the consummation of the other transactions herein contemplated and the
Private Placement do not (A) require the consent, approval,
authorization, registration or qualification of or with any
governmental authority, except such as have been obtained and such as
may be required under state securities or blue sky laws, (B) to the
knowledge of such counsel, conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, lease or other
agreement or instrument known to such counsel, to which the Company,
the Manager or any of the Subsidiaries is a party or by which the
Company, the Manager or any of the Subsidiaries or any of their
respective properties are bound, or the charter documents or by-laws
of the Company or any of the Subsidiaries, or any statute or any
judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator known to such counsel and
applicable to the Company or Subsidiaries; or (C) require the consent
of any other party to any Company Agreement except for such consents
which have been obtained in writing and except for such consents as
the failure of which to obtain will not, individually or in the
aggregate, amount to a material liability or disability to the Company
and its Subsidiaries, taken as a whole, or to the Manager;
(xvi) the Registration Statement is effective under the
Act; any required filing of the Prospectus, or any Term Sheet that
constitutes a part thereof, pursuant to Rules 434 and 424(b) has been
made in the manner and within the time period required by Rules 434
and 424(b); and no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and
no proceedings for that purpose have been instituted or threatened or,
to the knowledge of such counsel, are contemplated by the Commission;
and
(xvii) the Registration Statement originally filed with
respect to the Securities and each amendment thereto, any Rule 462(b)
Registration Statement and the Prospectus (in each case, other than
the financial statements and other financial information contained
therein, as to which such counsel need express no opinion) comply as
to form in all material respects with the applicable
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<PAGE> 29
requirements of the Act and the rules and regulations of the
Commission thereunder;
(xviii) the Company is organized in conformity with the
requirements for qualification as a real estate investment trust
("REIT") under Sections 856 through 860 of the Tax Code; and the
Company's proposed method of operation is sufficient to enable it to
meet the requirements for qualification and taxation as a REIT under
the Tax Code beginning with its taxable year ending December 31, 1998.
To such counsel's knowledge, there is no currently existing event or
condition which would cause or is likely to cause the Company to fail
to qualify as a REIT at any time after the Firm Closing Date; and
(xix) the issuance of the Securities and the Company's
proposed method of operation will not cause the Company, the Manager
or any Subsidiary to become an investment company subject to
registration under the Investment Company Act of 1940.
Such counsel shall also state that they have no reason to
believe that the Registration Statement, as of its effective date, contained
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus, as of its date or the date of such opinion,
included or includes any untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deem proper, on certificates of
responsible officers of the Company and public officials. The foregoing
opinion shall also expressly authorize reliance upon such opinion by O'Melveny
& Myers LLP, as counsel for the Underwriters, in connection with such firm's
opinion to be rendered pursuant to Section 7(c) of the Underwriting Agreement.
References to the Registration Statement and the Prospectus in
this paragraph (b) shall include any amendment or supplement thereto at the
date of such opinion.
(c) The Representatives shall have received an opinion,
dated the Firm Closing Date, of O'Melveny & Myers LLP, counsel for the
Underwriters, with respect to the issuance and sale of the Firm Securities, the
Registration Statement and the Prospectus, and such other related matters as
the Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they may reasonably request for the
purpose of enabling them to pass upon such matters. In rendering such opinion,
such counsel may rely as to all matters of Texas law upon the opinion of
Winstead Sechrest & Minick P.C.
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(d) The Representatives shall have received from Deloitte
& Touche LLP a letter or letters dated, respectively, the date hereof and the
Firm Closing Date, in form and substance satisfactory to the Representatives,
to the effect that:
(i) they are independent accountants with respect to the
Company and its consolidated Subsidiaries within the meaning of the
Act and the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements and schedules and pro forma financial statements examined
by them and included in the Registration Statement and the Prospectus
comply in form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations; and
(iii) on the basis of carrying out certain specified
procedures (which do not constitute an examination made in accordance
with generally accepted auditing standards) that would not necessarily
reveal matters of significance with respect to the comments set forth
in this paragraph (iii), a reading of the minute books of the
shareholders, the board of directors and any committees thereof of the
Company and each of its consolidated Subsidiaries, and inquiries of
certain officials of the Company and its consolidated Subsidiaries who
have responsibility for financial and accounting matters, nothing came
to their attention that caused them to believe that:
(A) at a specific date not more than five business days
prior to the date of such letter, there were any changes in
the capital stock or long-term debt of the Company and its
consolidated Subsidiaries or any decreases in net current
assets or stockholders' equity of the Company and its
consolidated Subsidiaries, in each case compared with amounts
shown on the February 2, 1998 balance sheet included in the
Registration Statement and the Prospectus, except in all
instances for changes, decreases or increases set forth in
such letter; and
(iv) they have carried out certain specified procedures,
not constituting an audit, with respect to certain amounts,
percentages and financial information that are derived from the
general accounting records of the Company and its consolidated
Subsidiaries and the AMRESCO Group and are included in the
Registration Statement and the Prospectus under the captions
"Capitalization", and "The Manager" and in Exhibit 11 to the
Registration Statement, and have compared such amounts, percentages
and financial information with such records of the Company and its
consolidated subsidiaries and with information derived from such
records and have found them to be in agreement, excluding any
questions of legal interpretation.
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<PAGE> 31
In the event that the letters referred to above set forth any
such changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives,
make it impractical or inadvisable to proceed with the purchase and delivery of
the Securities as contemplated by the Registration Statement, as amended as of
the date hereof.
References to the Registration Statement and the Prospectus in
this paragraph (d) with respect to either letter referred to above shall
include any amendment or supplement thereto at the date of such letter.
(e) The Representatives shall have received a
certificate, dated the Firm Closing Date, of the principal executive officer
and the principal financial or accounting officer of the Company certifying as
to such matters as the Representatives shall have reasonably requested,
including, without limitation, that:
(i) the representations and warranties of the Company in
this Agreement are true and correct as if made on and as of the Firm
Closing Date; the Registration Statement, as amended as of the Firm
Closing Date, does not include any untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein not misleading, and the Prospectus, as amended or supplemented
as of the Firm Closing Date, does not include any untrue statement of
a material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and the Company has
performed all covenants and agreements and satisfied all conditions on
its part to be performed or satisfied at or prior to the Firm Closing
Date under this Agreement and each agreement to which it is a party;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and
no proceedings for that purpose have been instituted or threatened or,
to the best of the Company's knowledge, are contemplated by the
Commission; and
(iii) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
neither the Company nor any of the Subsidiaries nor the Manager, has
sustained any material loss or interference with their respective
businesses or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding, and there has not
been any material adverse change, or any development involving a
prospective material adverse change, in the condition (financial or
otherwise), management, business prospects, net worth or results of
operations of the
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Company or any of its Subsidiaries, taken as a whole, or of the
Manager, except in each case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement thereto).
(f) The Representatives shall have received from Holdings
and each person who is a trust manager or named executive officer of the
Company an agreement, substantially in the form of Exhibit B to the effect that
such person will not, directly or indirectly, without the prior written consent
of Prudential Securities Incorporated, on behalf of the Underwriters, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (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 for, Common Shares for a period of 180 days after the date of this
Agreement. With respect to Holdings, for a period until the earlier to occur of
two years from the date hereof or the termination of the Management Agreement
or in connection with the pledge of any Common Shares acquired by Holdings in
the Private Placement to an institutional lender.
(g) On or before the Firm Closing Date, the
Representatives and counsel for the Underwriters shall have received such
further certificates, documents or other information as they may have
reasonably requested from the Company.
(h) On or before the Firm Closing Date, the
Representatives shall have received the Indemnification Agreement signed by
AMRESCO.
(i) On or before the Firm Closing Date Holdings shall
have acquired the Common Shares as contemplated by the Purchase Agreement.
(j) Prior to the commencement of the offering of the
Securities, the Securities shall have been listed for quotation on the Nasdaq
National Market.
All opinions, certificates, letters and documents delivered
pursuant to this Agreement will comply with the provisions hereof only if they
are reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to
purchase and pay for any Option Securities shall be subject, in their
discretion, to each of the foregoing conditions to purchase the Firm
Securities, except that all references to the Firm Securities and the Firm
Closing Date shall be deemed to refer to such Option Securities and the related
Option Closing Date, respectively.
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8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Securities Exchange
Act of 1934 (the "Exchange Act"), against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter or such controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon:
(i) any untrue statement or alleged untrue statement in
Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue statement of
any material fact contained in (A) the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or (B) any application or other
document, or any amendment or supplement thereto, executed by any
AMRESCO Party or based upon written information furnished by or on
behalf of any AMRESCO Party filed in any jurisdiction in order to
qualify the Securities under the securities or blue sky laws thereof
or filed with the Commission or any securities association or
securities exchange (each an "Application"),
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto,
or any Application a material fact required to be stated therein or
necessary to make the statements therein not misleading or
(iv) any untrue statement or alleged untrue statement of
any material fact contained in any audio or visual materials used in
connection with the marketing of the Securities, including without
limitation, slides, videos, films, tape recordings,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement
or any amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto or any Application in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through the Representatives specifically for use therein; and
provided, further, that the Company will
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<PAGE> 34
not be liable to any Underwriter or any person controlling such Underwriter
with respect to any such untrue statement or omission made in any Preliminary
Prospectus that is corrected in the Prospectus (or any amendment or supplement
thereto) if the person asserting any such loss, claim, damage or liability
purchased Securities from such Underwriter but was not sent or given a copy of
the Prospectus (as amended or supplemented) at or prior to the written
confirmation of the sale of such Securities to such person in any case where
such delivery of the Prospectus (as amended or supplemented) is required by the
Act, unless such failure to deliver the Prospectus (as amended or supplemented)
was a result of noncompliance by the Company with Section 5(d) and (e) of this
Agreement. This indemnity agreement will be in addition to any liability which
the Company may otherwise have. The Company shall not, without the prior
written consent of the Underwriter or Underwriters purchasing, in the
aggregate, more than fifty percent (50%) of the Securities, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not any such Underwriter or any person who
controls any such Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of all of the Underwriters and such controlling persons
from all liability arising out of such claim, action, suit or proceeding.
(b) Each Underwriter, severally and not jointly, will
indemnify and hold harmless the Amresco Parties, each of their respective trust
managers and directors, each of its officers who signed the Registration
Statement and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act against any losses,
claims, damages or liabilities to which the Company or any such director,
officer or controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement
or any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or any Application or (ii) the omission or the
alleged omission to state therein a material fact required to be stated in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through the Representatives specifically for use therein: and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or any
action in respect thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
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<PAGE> 35
(c) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought against
any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to those available
to the indemnifying party, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or
parties and such indemnified party or parties shall have the right to select
separate counsel to defend such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof and approval by such indemnified
party of counsel appointed to defend such action, the indemnifying party will
not be liable to such indemnified party under this Section 8 for any legal or
other expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified party in connection with the defense thereof,
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representatives in the case of
paragraph (a) of this Section 8, representing the indemnified parties under
such paragraph (a) who are parties to such action or actions) or (ii) the
indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the
consent of the indemnifying party.
(d) In circumstances in which the indemnity agreement
provided for in the preceding paragraphs of this Section 8 is unavailable or
insufficient, for any reason, to hold harmless an indemnified party in respect
of any losses, claims, damages or liabilities (or actions in respect thereof),
each indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
(i) the relative benefits received by the indemnifying party or parties on the
one hand and the indemnified party
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<PAGE> 36
on the other from the offering of the Securities or (ii) if the allocation
provided by the foregoing clause (i) is not permitted by applicable law, not
only such relative benefits but also the relative fault of the indemnifying
party or parties on the one hand and the indemnified party on the other in
connection with the statements or omissions or alleged statements or omissions
that resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total proceeds
from the offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the Underwriters.
The relative fault of the parties 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 the Company or the Underwriters, the parties' relative
intents, knowledge, access to information and opportunity to correct or prevent
such statement or omission, and any other equitable considerations appropriate
in the circumstances. The Company and the Underwriters agree that it would not
be equitable if the amount of such contribution were determined by pro rata or
per capita allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take into
account the equitable considerations referred to above in this paragraph (d).
Notwithstanding any other provision of this paragraph (d), no Underwriter shall
be obligated to make contributions hereunder that in the aggregate exceed the
total public offering price of the Securities purchased by such Underwriter
under this Agreement, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Prudential Securities Incorporated Master Agreement Among Underwriters.
For purposes of this paragraph (d), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as such Underwriter,
and each director of the Company, each officer of the Company who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall
have the same rights to contribution as the Company.
9. Default of Underwriters. If one or more Underwriters
default in their obligations to purchase Firm Securities or Option Securities
hereunder and the aggregate number of such Securities that such defaulting
Underwriter or Underwriters agreed but failed to purchase is ten percent or
less of the aggregate number of Firm Securities or Option Securities to be
purchased by all of the Underwriters at such time hereunder, the other
Underwriters may make arrangements satisfactory to the Representatives for the
purchase of such Securities by other persons (who may include
35
<PAGE> 37
one or more of the non-defaulting Underwriters, including the Representatives),
but if no such arrangements are made by the Firm Closing Date or the related
Option Closing Date, as the case may be, the other Underwriters shall be
obligated severally in proportion to their respective commitments hereunder to
purchase the Firm Securities or Option Securities that such defaulting
Underwriter or Underwriters agreed but failed to purchase. If one or more
Underwriters so default with respect to an aggregate number of Securities that
is more than ten percent of the aggregate number of Firm Securities or Option
Securities, as the case may be, to be purchased by all of the Underwriters at
such time hereunder, and if arrangements satisfactory to the Representatives
are not made within 36 hours after such default for the purchase by other
persons (who may include one or more of the non-defaulting Underwriters,
including the Representatives) of the Securities with respect to which such
default occurs, this Agreement will terminate without liability on the part of
any non-defaulting Underwriter or the Company other than as provided in Section
10 hereof. In the event of any default by one or more Underwriters as
described in this Section 9, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 3 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and delivery of the Firm Securities or Option
Securities, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
10. Survival. The respective representations,
warranties, agreements, covenants, indemnities and other statements of the
AMRESCO Parties, their officers and the several Underwriters set forth in this
Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the AMRESCO Parties, any of their
officers, trust managers or directors, any Underwriter or any controlling
person referred to in Section 8 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 6 and 8 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
11. Termination.
(a) This Agreement may be terminated with respect to the
Firm Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company given prior to the Firm Closing Date
or the related Option Closing Date, respectively, in the event that the Company
shall have failed, refused or been unable to perform all obligations and
satisfy all conditions on its part to be performed or satisfied hereunder at or
prior thereto or, if at or prior to the Firm Closing Date or such Option
Closing Date, respectively,
36
<PAGE> 38
(i) the Company, the Manager, Amresco, Holliday Fenoglio,
or any of the Subsidiaries shall have, in the sole judgment of the
Representatives, sustained any material loss or interference with
their respective businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or
from any labor dispute or any legal or governmental proceeding or
there shall have been any material adverse change, or any development
involving a prospective material adverse change (including without
limitation a change in management or control of the Company, Amresco,
Holliday Fenoglio, or the Manager), in the condition (financial or
otherwise), business prospects, net worth or results of operations of
the Company and its Subsidiaries, taken as a whole, or Amresco,
Holliday Fenoglio or the Manager, except in each case as described in
or contemplated by the Prospectus (exclusive of any amendment or
supplement thereto);
(ii) trading in the Common Shares shall have been
suspended by the Commission or the Nasdaq National Market;
(iii) trading in securities generally on the New York Stock
Exchange or Nasdaq National Market shall have been suspended or
minimum or maximum prices shall have been established on either such
exchange;
(iv) a banking moratorium shall have been declared by New
York or United States authorities; or
(v) there shall have been (A) an outbreak or escalation
of hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the U.S. financial markets that, in the
sole judgment of the Representatives, makes it impractical or
inadvisable to proceed with the public offering or the delivery of the
Securities as contemplated by the Registration Statement, as amended
as of the date hereof.
(b) Termination of this Agreement pursuant to this
Section 11 shall be without liability of any party to any other party except as
provided in Section 10 hereof.
12. Information Supplied by Underwriters. The statements
set forth in the last paragraph on the inside front cover page and under the
heading "Underwriting" in any Preliminary Prospectus or the Prospectus (to the
extent such statements relate to the Underwriters) constitute the only
information furnished by any Underwriter through the Representatives to the
Company for the purposes of Sections 2(A)(b) and 8 hereof. The Underwriters
confirm that such statements (to such extent) are correct.
37
<PAGE> 39
13. Notices. All communications hereunder shall be in
writing and, shall be delivered or sent by mail, telex or facsimile
transmission and confirmed in writing as follows:
(a) If to the Representatives:
c/o Prudential Securities Incorporated
One New York Plaza
New York, NY 10292
Facsimile: (212) 778-3621
Attention: Equity Transactions Group
with a copy to:
O'Melveny & Myers LLP
Embarcadero Center West
275 Battery Street, Suite 2600
San Francisco, California 94111-3305
Facsimile: (415) 984-8701
Attention: Peter T. Healy, Esq.
(b) If to the Company:
AMRESCO Capital Trust
700 North Pearl Street
Suite 2400
Dallas, Texas 75201
Facsimile: (214) 265-1686
Attention: Michael McCoy, Esq.
If to the Manager:
AMREIT Managers, L.P.
700 North Pearl Street
Suite 2400
Dallas, Texas 75201
Facsimile: (214) 265-1685
Attention: L. Keith Blackwell, Esq.
38
<PAGE> 40
In each case with a copy to:
Winstead Sechrest & Minick P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
Facsimile: (214) 745-5390
Attention: Michelle P. Goolsby, Esq.
14. Successors. This Agreement shall inure to the
benefit of and shall be binding upon the several Underwriters, the AMRESCO
Parties and their respective successors and legal representatives, and nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any other person any legal or equitable right, remedy or claim under or in
respect of this Agreement, or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of such persons and for the benefit of no other
person except that (i) the indemnities of the AMRESCO Parties contained in
Section 8 of this Agreement shall also be for the benefit of any person or
persons who control any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters
contained in Section 8 of this Agreement shall also be for the benefit of the
directors and trust managers of the Company, the officers of the Company who
have signed the Registration Statement and any person or persons who control
the Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act. No purchaser of Securities from any Underwriter shall be deemed
a successor because of such purchase.
15. Applicable Law. THE VALIDITY AND INTERPRETATION OF
THIS AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS.
16. Consent to Jurisdiction and Service of Process. All
judicial proceedings arising out of or relating to this Agreement may be
brought in any state or federal court of competent jurisdiction in the State of
New York, and by execution and delivery of this Agreement, each AMRESCO Party
accepts for itself and in connection with its properties, generally and
unconditionally, the nonexclusive jurisdiction of the aforesaid courts and
waives any defense of forum non conveniens and irrevocably agrees to be bound
by any judgment rendered thereby in connection with this Agreement. Service of
any process, summons, notice or document by mail to such party's address set
forth above shall be effective service of process for any suit, action or other
proceeding brought in any such court and shall be binding in every respect.
Nothing herein shall affect the right to serve process in any other manner
permitted by law or shall limit the right of any Underwriter to bring
proceedings against any AMRESCO Party in the courts of any other jurisdiction.
39
<PAGE> 41
17. Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
[signature page follows]
40
<PAGE> 42
If the foregoing correctly sets forth our understanding,
please indicate your acceptance thereof in the space provided below for that
purpose, whereupon this letter shall constitute an agreement binding the
Company, the Manager and each of the several Underwriters.
Very truly yours,
AMRESCO CAPITAL TRUST, the Company
By:
--------------------------------------
[name]
[title]
AMREIT MANAGERS, L.P., the Manager
By: AMREIT MANAGERS G.P., INC.
Its: General Partner
By:
--------------------------------------
[name]
[title]
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
PRUDENTIAL SECURITIES INCORPORATED
CREDIT SUISSE FIRST BOSTON
ABN AMRO INCORPORATED
J.C. BRADFORD & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
PIPER JAFFRAY INC.
By: PRUDENTIAL SECURITIES INCORPORATED
By:
-----------------------------------------------
Jean-Claude Canfin
Managing Director
For itself and on behalf of the Representatives.
S - 1
<PAGE> 43
SCHEDULE 1
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm
Underwriter Securities to
be Purchased
- ----------------------------------------------------------------------- ------------------
<S> <C>
Prudential Securities Incorporated . . . . . . . . . . . . . . . . 000,000
Credit Suisse First Boston . . . . . . . . . . . . . . . . . . . . 000,000
ABN AMRO Incorporated . . . . . . . . . . . . . . . . . . . . . . . 000,000
J.C. Bradford . . . . . . . . . . . . . . . . . . . . . . . . . . . 000,000
NationsBanc Montgomery Securities LLC . . . . . . . . . . . . . . . 000,000
Piper Jaffray Inc . . . . . . . . . . . . . . . . . . . . . . . . . 000,000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 000,000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 000,000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 000,000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 000,000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 000,000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 000,000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 000,000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 000,000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 000,000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 000,000
------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000,000
==================
</TABLE>
Schedule 1 - Page 1
<PAGE> 44
EXHIBIT A
FORM OF TRUST MANAGERS, OFFICERS' AND HOLDINGS LOCK-UP AGREEMENT
[Pricing Date]
PRUDENTIAL SECURITIES INCORPORATED
CREDIT SUISSE FIRST BOSTON
ABN AMRO INCORPORATED
J.C. BRADFORD & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
PIPER JAFFRAY INC.
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Re: AMRESCO Capital Trust (the "Company")
Gentlemen:
The undersigned understands that Amresco Capital Trust, a Texas real estate
investment trust (the "Company") has filed a Registration Statement on Form
S-11 (the "Registration Statement") with the Securities and Exchange Commission
(the "Commission") for the registration of approximately 23,000,000 Common
shares of beneficial interest (the "Common Shares") (including shares subject
to an over-allotment option) (the "Offering"). The undersigned further
understands that you are contemplating entering into an Underwriting Agreement
with the Company in connection with the Offering. All terms not otherwise
defined herein shall have the same meanings as in the Underwriting Agreement.
In order to induce the Company, you and the other Underwriters to enter into
the Underwriting Agreement and to proceed with the Offering, the undersigned
agrees, for the benefit of the Company, you and the other Underwriters, that
should the Offering be effected, the undersigned will not, without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of (i) any Common Shares (ii)
any other securities convertible into, or exchangeable or exercisable for,
Common Shares beneficially owned (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as amended) by the undersigned on the date
hereof or hereafter acquired for a period of 180 days subsequent to the date of
the final Prospectus filed with the Securities and Exchange Commission pursuant
to Rule 424(b) of the Securities Act of 1933, as amended (the "Act")
promulgated by the Commission or if no filing under Rule 424(b)
Exhibit A - Page 1
<PAGE> 45
Prudential Securities Incorporated
Page 2
[Date]
is made, the date of the final Prospectus included in the Registration
Statement when declared effective under the Act.
[With respect to Holdings, for a period until the earlier to occur of two years
from the date hereof or the termination of the Management Agreement or in
connection with the pledge of any Common Shares acquired by Holdings in the
Private Placement to an institutional lender.]
The undersigned, whether or not participating in the Offering, confirms that
he, she or it understands that the Underwriters and the Company will rely upon
the representations set forth in this agreement in proceeding with the
Offering. This agreement shall be binding on the undersigned and his, her or
its respective successors, heirs, personal representatives and assigns.
Very truly yours,
By: By:
-------------------------------- ----------------------------
[Print Stockholder's name] [Stockholder's signature]
Exhibit A - Page 2
<PAGE> 46
EXHIBIT B
INDEMNIFICATION AGREEMENT
[TO BE ATTACHED]
Exhibit B - Page 1
<PAGE> 1
EXHIBIT 5.1
Direct Dial: (214) 745-5431
April 28, 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
April 28, 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: /s/ MICHELLE P. GOOLSBY
-------------------------------------
Michelle P. Goolsby
<PAGE> 1
EXHIBIT 8.1
Direct Dial: 745-5342
[email protected]
April 28, 1998
AMRESCO Capital Trust
700 North Pearl Street
Suite 2400
Dallas, Texas 75201
Re: REIT Opinion
Ladies and Gentlemen:
We have acted as counsel to AMRESCO Capital Trust (the "Company") in
connection with the initial public offering by the Company and any transactions
related thereto and which are described in the Company's Registration Statement
on Form S-11 (No. 333-45543) (as amended, the "Registration Statement"). This
opinion relates to the Company's qualification for federal income tax purposes
as a real estate investment trust ("REIT") under the Internal Revenue Code of
1986, as amended (the "Code"), for taxable years beginning with the taxable year
ending December 31, 1998.
For the purpose of rendering our opinion, we have examined and are
relying upon the truth and accuracy, at all relevant times, of the statements
and representations contained in the following documents:
1. The Declaration of Trust of the Company.
2. The Bylaws of the Company.
3. The Registration Statement.
4. Representations with respect to factual matters made to us by
officers of the Company in certificates (the "Certificates") delivered to us in
connection with the Registration Statement or this opinion letter.
5. Such other books, records and instruments of the Company and
entities in which the Company owns an interest as we deemed necessary for
purposes of this opinion.
<PAGE> 2
AMRESCO Capital Trust
April 28, 1998
Page 2
In connection with rendering this opinion, we have assumed to be true
and are relying upon, without any independent investigation or review thereof,
the following:
1. The authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to
us as copies, and authenticity of the originals of such documents.
2. The genuineness of all signatures, the due authorization,
execution and delivery of all documents by all parties thereto and the due
authority of all persons executing such documents.
Based on our examination of the foregoing items, subject to the
assumptions, limitations and qualifications set forth herein, we are of the
opinion that the Company was organized in conformity with the requirements for
qualification as a REIT under the Code beginning with its taxable year ending
December 31, 1998 and its current organization and proposed method of operation
should enable it to continue to meet the requirements for qualification and
taxation as a REIT for the taxable year ended December 31, 1998. We are of the
opinion that the descriptions of the law contained in the Prospectus included in
the Registration Statement under the caption "Federal Income Tax Consequences"
are correct in all material respects, and the discussion thereunder fairly
summarizes the material federal income tax consequences to a holder of shares in
the Company. As noted in such Prospectus, the Company's qualification and
taxation as a REIT depends upon its ability to meet, through actual annual
operating results, certain requirements, including requirements relating to
distribution levels and diversity of stock ownership, and the various
qualification tests imposed under the Code, the results of which will not be
reviewed by us. Accordingly, no assurance can be given that the actual results
of the Company's operation for any one taxable year will enable the Company to
satisfy the requirements for qualification and taxation as a REIT under the
Code.
In addition to the matters set forth above, this opinion is subject to
the following exceptions, limitations and qualifications:
1. Our opinion expressed herein is based upon our interpretation
of the existing provisions of the Code and existing judicial decisions,
administrative regulations and rulings and revenue procedures. Our opinion is
not binding upon the Internal Revenue Service or courts and there is no
assurance that the Internal Revenue Service will not challenge the conclusions
set forth herein. No assurance can be given that future legislative, judicial
or administrative changes, on either a prospective or retroactive basis, would
not adversely affect the accuracy of the conclusions stated herein. We
undertake no obligation to advise you of changes in law which may occur after
the date hereof.
2. Our opinion is limited to the United States federal income tax
matters addressed herein, and no other opinions are rendered with respect to
any other matter not specifically set forth in the foregoing opinion.
<PAGE> 3
AMRESCO Capital Trust
April 28, 1998
Page 3
In the event any one of the statements, representations, or
assumptions we have relied upon to issue this opinion is incorrect in a
material respect, our opinion might be adversely affected and may not be relied
upon.
We hereby consent to the reference to us under the caption "FEDERAL
INCOME TAX CONSEQUENCES" in the Prospectus, and to the filing of this opinion
as an Exhibit to the Registration Statement of which the Prospectus is a part.
Very truly yours,
WINSTEAD SECHREST & MINICK P.C.
By: /s/ THOMAS R. HELFAND
-------------------------------------
Thomas R. Helfand
<PAGE> 1
EXHIBIT 10.1
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (this "Agreement"), dated as of May ___,
1998, is by and between AMRESCO CAPITAL TRUST, a Texas real estate investment
trust (the "Company"), and AMREIT MANAGERS, L.P., a Delaware limited
partnership (the "Manager").
WHEREAS, the Company intends to invest in various types of real estate
related assets and to qualify as a "real estate investment trust" under the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Company desires to retain the Manager to undertake, on
the Company's behalf, the duties and responsibilities set forth in this
Agreement, subject to the direction and oversight of the Board of Trust
Managers of the Company (the "Board of Trust Managers"), on the terms and
conditions set forth in this Agreement; and
WHEREAS, the Manager desires to undertake, on the Company's behalf,
the duties and responsibilities set forth in this Agreement, subject to the
direction and oversight of the Board of Trust Managers, on the terms and
conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the mutual agreements herein set
forth, the parties hereto agree as follows:
SECTION 1. Definitions. Capitalized terms used herein and not
otherwise defined herein shall have the respective meanings assigned to them
below:
(a) "AMRESCO Group" means AMRESCO, Inc. together with its
affiliated entities.
(b) "Average Invested Investment Grade Assets" means, for
any quarter, the average of the aggregate book value of the assets of
the Company on a consolidated basis (as reflected on the Company's
balance sheet) and of all of the Company's nonconsolidated taxable
subsidiaries (but excluding the Company's investment in such
subsidiaries), which either (i) have received an Investment Grade
Rating from all Rating Agencies which have rated such asset or (ii)
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.
(c) "Average Invested Non-Investment Grade Assets" means,
for any quarter, the average of the aggregate book value of the assets
of the Company on a consolidated basis (as reflected on the Company's
<PAGE> 2
balance sheet) and of all of the Company's nonconsolidated taxable
subsidiaries (but excluding the Company's investment in such
subsidiaries), other than 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 the last day of each month) by (b) three.
(d) "Chief Investment Officer" means the Chief Investment
Officer of the Company.
(e) "Closing Date" means the date of closing of the
Company's initial public offering of its Common Shares.
(f) "Common Shares" means the Company's common shares of
beneficial interest, $.01 par value per share.
(g) "Confidential Information" means all information of
the Company not generally known in the Company's industry or in the
financial markets which is obtained by the Manager from the Company or
directly as a result of the performance by the Manager of its services
to the Company pursuant to this Agreement.
(h) "Exchange Act" means the Securities Exchange Act of
1934, as amended.
(i) "Funds From Operations" or "FFO" means net income
(computed in accordance with generally accepted accounting principles)
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.
(j) "Governing Instruments" means (i) with respect to the
Company, its Declaration of Trust and Bylaws, (ii) with respect to any
Subsidiary which is a corporation, the articles or certificate of
incorporation and bylaws of such corporation, (iii) with respect to
any Subsidiary which is a partnership, the partnership agreement of
such partnership and (iv) with respect to any Subsidiary which is a
limited liability company the articles of organization and the
regulations of such limited liability company, in each case, as the
same may be amended from time to time.
(k) "Guidelines" means the operating policies and general
guidelines for the Company's investments, borrowings and operations,
as approved by the Board of Trust Managers of the Company and in
effect from time to time. The Guidelines, as initially approved by
the Board of Trust Managers of the Company, are attached hereto as
Exhibit "A.".
MANAGEMENT AGREEMENT - PAGE 2
<PAGE> 3
(l) "Investment Grade Rating" means a rating equal to or
higher than (i) "BBB-" by Standard & Poor's Rating Services, a
division of the McGraw-Hill Companies, (ii) "Baa3" by Moody's
Investors Services, Inc., (iii) "2" by National Association of
Insurance Commissioners, (iv) "BBB-" by Duff and Phelps Credit Rating
Co. or (v) "BBB-" by Fitch IBCA, Inc.
(m) "Master Servicing" means providing administrative and
reporting services to securitized pools of MBS.
(n) "MBS" means mortgage-backed securities (including
commercial or multifamily mortgage backed securities and residential
mortgage backed securities).
(o) "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 preferred equity investment in the borrower.
(p) "Mortgage Loans" means, collectively, loans secured
by real property and Mezzanine Loans.
(q) "Nasdaq" means the Nasdaq National Market.
(r) "Nonperforming Mortgage Loans" means Mortgage Loans
for which the payment of principal and/or interest is more than 90
days delinquent.
(s) "NYSE" means the New York Stock Exchange.
(t) "REIT" means a real estate investment trust, as
defined under Section 856 of the Code.
(u) "REIT Provisions of the Code" means Sections 856
through 860 of the Code.
(v) "Securities Act" means the Securities Act of 1933, as
amended.
(w) "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.
(x) "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 the control of decisions
MANAGEMENT AGREEMENT - PAGE 3
<PAGE> 4
with respect to the preservation of the collateral generally,
including property management and maintenance decisions.
(y) "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.
(z) "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.
(aa) "Subsidiary" means any corporation, partnership,
limited liability company or other entity formed and controlled by the
Company.
(bb) "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 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.
(cc) "Trust Manager" means a member of the Board of Trust
Managers.
SECTION 2. Duties of the Manager.
(a) Subject to the direction and oversight of the Board
of Trust Managers and in accordance with the Governing Instruments,
the Manager shall be responsible for the day-to-day operations of the
Company and perform (or cause to be performed as permitted herein)
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;
MANAGEMENT AGREEMENT - PAGE 4
<PAGE> 5
(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;
(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 of and commitment to purchase Mortgage
Loans, MBS, real estate and other real estate related assets,
the financing of Mortgage Loans, MBS, real estate and other
real estate related assets, and the sale and commitment to
sell Mortgage Loans, MBS, real estate and other real estate
related assets (including, without limitation, 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 price information and other
data, obtained from certain nationally recognized brokers or
dealers identified by the Board of Trust Managers from time to
time, and providing data and recommendations to the Board of
Trust Managers in connection with the identification of such
brokers or dealers;
(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,
MANAGEMENT AGREEMENT - PAGE 5
<PAGE> 6
including the collection of revenues and the payment of the
Company's debts and obligations;
(x) communicating on behalf of the Company with
the holders of any equity or 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, including, without limitation, policy decisions with
respect to investments, leveraging of the Company's assets,
management of the credit risk of the Company's assets,
management of the interest rate risks of the Company's assets,
including decisions with respect to hedging of the assets and
compliance with certain legal requirements;
(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 by the Company with the REIT Provisions
of the Code;
(xiii) advising the Company regarding the status of
its exemption from the Investment Company Act of 1940, as
amended, consulting with legal counsel as appropriate
regarding the nature of its proposed investments and the
impact of such proposed investments on the Company's exemption
from registration under such Act and monitoring the Company's
continuing exemption from registration;
(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 with the Guidelines;
(xv) upon request by and in accordance with the
directions of 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;
MANAGEMENT AGREEMENT - PAGE 6
<PAGE> 7
(xvii) causing the Company to qualify to do business
in all applicable jurisdictions;
(xviii) assisting the Company in complying with all
federal, state and local regulatory requirements applicable to
the Company in respect of its business activities, including,
without limitation, preparing or causing to be prepared all
financial statements required under applicable regulations and
contractual undertakings and all reports and documents, if
any, required under the Exchange Act;
(xix) taking all necessary actions to enable the
Company to make required federal, state and local tax filings
and reports, including, without limitation, soliciting
shareholders for required information to the extent provided
by the REIT Provisions of the Code;
(xx) handling and resolving all claims, disputes
or controversies (including all litigation, arbitration,
settlement or other proceedings or negotiation) 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 limitation 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 or other activities
relating to the assets of the Company in furtherance of the
Manager's obligations hereunder, 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.
(b) The Manager will perform portfolio management
services on behalf of the Company with respect to the Company's
investments. Such services will include, but not be limited to,
consulting 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
MANAGEMENT AGREEMENT - PAGE 7
<PAGE> 8
enter into subcontracts with other parties, including AMRESCO, Inc.
and its affiliates, to provide any such services to the Company.
(c) The Manager will monitor and administer the loan
servicing activities provided by servicers of the Company's Mortgage
Loans, other than loans pooled to collateralize MBS or pledged to
secure MBS. Such monitoring and administrative services will include,
but not be limited to, the following activities: serving as the
Company's consultant with respect to the servicing of loans;
collection of information and submission of reports pertaining to the
Mortgage Loan and the moneys remitted to the Manager or the Company by
servicers; periodic review and evaluation of the performance of each
servicer to determine its compliance with the terms and conditions of
the servicing agreement and, if deemed appropriate, recommending to
the Company the termination of such servicing agreement; acting as a
liaison between servicers and the Company and working with servicers
to the extent necessary to improve their servicing performance; review
of and recommendations as to fire losses, easement problems and
condemnation, delinquency and foreclosure procedures with regard to
the Mortgage Loans; review of servicers' delinquency, foreclosing and
other reports on Mortgage Loans; advising as to and supervising claims
filed under any mortgage insurance policies; and enforcing the
obligation of any servicer to repurchase Mortgage Loans from the
Company.
(d) The Manager will perform monitoring services on
behalf of the Company 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: negotiating Special Servicing agreements;
acting as liaison between the servicers of the Mortgage Loans and the
Company; review of servicer's delinquency, foreclosures 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.
(e) The Manager agrees to use its commercially reasonable
efforts at all times in performing services for the Company hereunder
and in accordance with the Guidelines and policies of the Company in
effect from time to time.
SECTION 3. Obligations of the Manager and the Company.
(a) The Manager shall use commercially reasonable efforts
to determine, in good faith, whether each Mortgage Loan, MBS, real
estate or other real estate asset proposed to be acquired by the
Company conforms to the investment criteria and Guidelines of the
Company approved from time to time by the Board of Trust Managers.
(b) The Manager shall require each seller or transferor
of assets to the Company to make such representations and warranties
regarding such assets as are customarily made in similar transactions
and as may, in the judgment of the
MANAGEMENT AGREEMENT - PAGE 8
<PAGE> 9
Manager, be necessary and/or appropriate. With respect to Mortgage
Loans acquired by the Company, and to the extent consistent with
prevailing industry practices, the Manager shall use commercially
reasonable efforts to require the seller or transferor of any Mortgage
Loan to the Company to agree to repurchase any such Mortgage Loan with
respect to which there is fraud or misrepresentation. In addition,
the Manager shall take all such other action as it deems reasonably
necessary or appropriate with regard to the protection of the
Company's investments.
(c) The Manager shall refrain from any action which, in
its sole judgment made in good faith, (i) would adversely affect the
status of the Company as a REIT under the Code, (ii) would violate any
law, rule or regulation of any governmental body or agency having
jurisdiction over the Company which violation could have a material
adverse effect on the Company, its business or assets or results of
operations or (iii) would otherwise not be permitted by the Governing
Instruments, the Guidelines, any operating policies adopted from time
to time by the Company or any agreements of the Company which have
previously been provided to the Manager. If the Manager is ordered to
take any such action by the Board of Trust Managers, the Manager shall
promptly notify the Board of Trust Managers of the Manager's judgment
that such action would adversely affect such status or violate any
such law, rule or regulation or the Governing Instruments, the
Guidelines, the operating policies adopted from time to time by the
Company or any agreements which have previously been provided to the
Manager.
(d) The Manager shall cause Deloitte & Touche LLP, or
another independent accounting firm having the requisite expertise and
reputation, to review the Company's assets and operations on a
quarterly basis to determine whether the Company has complied with the
REIT Provisions of the Code. The Manager shall cause such accounting
firm to deliver to the Board of Trust Managers no later than March 31
of each year an annual report regarding compliance by the Company with
the REIT Provisions of the Code for the preceding fiscal year.
(e) The Manager shall prepare regular reports for the
Board of Trust Managers that will review the Company's acquisitions of
assets, portfolio composition and characteristics, credit quality and
compliance with the Guidelines and the operating performance of such
assets (including comparative information with respect to such
operating performance and budgeted or projected operating results).
(f) In purchasing assets for the Company, the Manager
shall endeavor to obtain on behalf of the Company terms no less
favorable than commercially reasonable terms. In assessing
commercially reasonable terms for any transaction, the Manager shall
consider all factors which it, in good faith, deems relevant,
including the breadth of the market in the asset, the price of the
asset, the reasonableness of any broker commissions both for the
specific transaction
MANAGEMENT AGREEMENT - PAGE 9
<PAGE> 10
and on a continuing basis and the market terms determined in
comparable arm's length transactions.
(g) The Company agrees to take all actions reasonably
required to permit the Manager to carry out its duties and obligations
under this Agreement. The Company further agrees to make available to
the Manager all materials reasonably requested by the Manager to
enable the Manager to satisfy its obligations to deliver financial
statements and other information or reports with respect to the
Company.
(h) The Manager agrees, at all times during which it is
serving as Manager to the Company, to (i) maintain a tangible net
worth of at least $250,000 and (ii) 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 assets similar to those
held by the Company.
SECTION 4. Additional Activities of Manager.
(a) Except as expressly provided below, this Agreement shall
not prevent or restrict the Manager or any other member of the AMRESCO
Group, or any of their respective officers, directors, partners,
officers, stockholders, employees or Affiliates from engaging in other
businesses or from rendering services of any kind to any other Person,
including investment in, or advisory service to others investing in,
any type of real estate related assets, including assets which meet
the principal investment objectives of the Company; provided, however,
that during the term of this Agreement, neither the Manager, nor any
other member of the AMRESCO Group, nor any of their respective
directors, partners, officers, employees or affiliates (while acting
in such capacity only) will (i) sponsor, (ii) act as manager to or
(iii) make any significant equity investment in, any other REIT with
investment objectives substantially similar to those of the Company,
without the prior approval of a majority of the Independent Trust
Managers.
(b) Directors, partners, officers, stockholders,
employees and Affiliates of the Manager or any other member of the
AMRESCO Group may serve as directors, partners, officers,
stockholders, employees or signatories for the Company or any
Subsidiary of the Company, to the extent permitted by their Governing
Instruments, as from time to time amended, or by any resolutions duly
adopted by the Board of Trust Managers pursuant to the Company's
Governing Instruments. When executing documents or otherwise acting
in such capacities for the Company, such persons shall use their
respective titles in the Company.
(c) Nothing in this Agreement shall prevent the Manager
or any other member of the AMRESCO Group from selling assets to, or
engaging in any other transaction with, the Company; provided, that
any such transactions must be
MANAGEMENT AGREEMENT - PAGE 10
<PAGE> 11
effected in accordance with the Guidelines or shall otherwise be
approved in advance by a majority of the Independent Trust Managers.
SECTION 5. Bank Accounts. At the direction of the Board of
Trust Managers, the Manager may establish and maintain one or more bank
accounts in the name of the Company, and may collect and deposit into any such
account or accounts, and disburse funds from any such account or accounts,
under such terms and conditions as the Board of Trust Managers may approve.
The Manager shall from time to time (or at any time upon the request of a
majority of the Independent Trust Managers) render appropriate accounting of
such collections and payments to the Board of Trust Managers and, upon request,
to the auditors of the Company.
SECTION 6. Records; Confidentiality. The Manager shall maintain
appropriate books of accounts and records relating to the assets of the Company
and the services performed hereunder, and such books of account and records
shall be accessible for inspection by representatives of the Company at any
time during normal business hours. Except in the ordinary course of business
or as required by the Securities Act, the Exchange Act, NYSE, Nasdaq or any
statute, rule, regulation, order or decree of any governmental entity, the
Manager agrees not to disclose any Confidential Information to third parties
who are not Affiliates of the Manager, except with the prior approval of a
majority of Independent Trust Managers.
SECTION 7. Compensation.
(a) For services rendered under this Agreement, the
Company shall pay to the Manager a 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 and (ii)
0.50% per annum of the Average Invested Investment Grade Assets of the
Company.
(b) In addition to the base management fee, the Manager
shall 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
fee) of the Company for such quarter per Common Share (based on the
weighted average number of shares outstanding during such quarter) (b)
plus gains (or minus losses) from debt restructuring and sales of
property per Common Share (based on the weighted average number of
shares outstanding during such quarter), exceed (2) an amount equal to
(a) the weighted average of the price per Common Share at the initial
offering and the prices per Common Share for any subsequent issuances
of Common Shares by the Company, multiplied by (b) the Ten-Year U.S.
Treasury Rate for the respective quarter plus 3.5% multiplied by (B)
the weighted average number of Common Shares outstanding during such
period.
(c) The Manager shall compute the compensation payable
under Sections 7(a) and 7(b) within 45 days after the end of each
fiscal quarter. A copy
MANAGEMENT AGREEMENT - PAGE 11
<PAGE> 12
of the computations made by the Manager to calculate its compensation
shall thereafter promptly be delivered to the Board of Trust Managers
and payment of the compensation earned under Sections 7(a) and 7(b) of
this Agreement shown therein shall be due and payable within 60 days
after the end of such fiscal quarter.
SECTION 8. Expenses.
(a) Without regard to the compensation received under
this Agreement by the Manager and subject to Sections 8(b) and 8(c),
the Manager shall bear the following expenses:
(i) employment expenses of the personnel employed
by the Manager (including, but not limited to, officers of the
Company employed by the Manager) including, but not limited
to, salaries, wages, payroll taxes and the cost of the
employee benefit plans of such personnel;
(ii) rent, telephone, utilities, office furniture,
equipment, machinery, and other office expenses of the Manager
and/or its Affiliates required for the Company's day-to-day
operations, including costs associated with accounting,
clerical, primary or Master Servicing (including all expenses
customarily paid by primary loan servicers or Master Servicers
in performing primary loan servicing or Master Servicing for
third parties) and back-office services provided by the
Manager or its affiliates;
(iii) computer hardware and software costs
(including costs associated with determining whether its
systems are "Year 2000" compliant and with modifying or
replacing source codes to bring its systems into "Year 2000"
compliance), except for any such expenses that relate solely
to the computer hardware or software used solely for the
business and operations of the Company; and
(iv) all premiums and other expenses required in
connection with "errors and omissions" insurance policies
covering officers and employees of the Manager.
(b) The Company shall pay all of its expenses except
those that are the responsibility of the Manager pursuant to Section
8(a) and without limiting the generality of the foregoing, it is
specifically agreed that the following expenses actually incurred by
or on behalf of the Company shall be paid by the Company and shall not
be paid by the Manager or any other member of the AMRESCO Group:
(i) the cost of money borrowed by the Company,
including interest, commitment fees and other charges;
MANAGEMENT AGREEMENT - PAGE 12
<PAGE> 13
(ii) all taxes and license fees applicable to the
Company, including interest and penalties thereon;
(iii) legal, audit, accounting, underwriting,
brokerage, listing, filing, rating agency, registration and
other fees, printing, engraving and other expenses and taxes
incurred in connection with the issuance, distribution,
transfer, registration and stock exchange listing of any
securities of the Company (including, without limitation, debt
or equity securities, options or warrants to purchase debt or
equity securities, convertible securities, etc.);
(iv) fees and expenses paid to advisors and
independent contractors, consultants, managers and other
agents (including the Manager or any other member of the
AMRESCO Group) engaged directly by the Company upon its
written request or by the Manager at the Company's written
request for the account of the Company;
(v) due diligence costs and related costs
(including legal fees, accounting and auditing fees,
environmental and engineering reviews) associated with the
acquisition or proposed acquisition or the disposition or
proposed disposition of any of the Company's assets; provided
that with respect to any proposed acquisition of assets, such
asset(s) shall have been preliminarily approved in writing for
investment by the Chief Investment Officer or the Board of
Trust Managers, and further provided that any extraordinary
costs (in excess of $500,000 with respect to any single
transaction or asset) shall be required to be approved in
advance by the Board of Trust Managers;
(vi) other expenses connected with the
acquisition, disposition, financing and ownership of the
Company's assets, including, but not limited to, commitment
fees, brokerage fees, guaranty fees, ad valorem taxes, costs
of foreclosure, maintenance, repair and improvement of
property and premiums for insurance on property owned by the
Company;
(vii) costs related to hedging transactions
(including losses);
(viii) the expenses of organizing, modifying or
dissolving the Company;
(ix) costs related to advertising and marketing of
the Company's assets or services;
(x) expenses connected with payments of dividends
or interest or distributions in any other form made or caused
to be made by the Board of Trust Managers to holders of the
securities of the Company;
MANAGEMENT AGREEMENT - PAGE 13
<PAGE> 14
(xi) expenses connected with the structuring,
issuance and administration of MBS by the Company, including,
but not limited to, legal, audit, accounting, underwriting,
listing, filing, rating agency and trustee's fees, insurance
premiums and costs of required credit enhancements;
(xii) all expenses of third parties connected with
communications to holders of equity securities or debt
securities issued by the Company and the other bookkeeping and
clerical work necessary in maintaining relations with holders
of such securities and in complying with the continuous
reporting and other requirements of governmental bodies or
agencies, including any costs of computer services in
connection with this function, the cost of printing and
mailing certificates for such securities and proxy
solicitation materials and reports to holders of the Company's
securities and reports to third parties required under any
indenture to which the Company is a party;
(xiii) custodian's, transfer agent's and registrar's
fees and charges;
(xiv) compensation, fees and expenses paid to the
Independent Trust Managers, the cost of director and officer
liability insurance and premiums for any errors and omissions
insurance coverage maintained for the Company and its
employees (solely in their capacity as employees of the
Company and not in their capacity as employees of the Manager
or any other member of the AMRESCO Group);
(xv) legal, accounting, tax and auditing fees and
expenses paid to third parties relating to the Company's
operations;
(xvi) legal, expert and other fees and expenses
paid to third parties relating to any actions, proceedings,
lawsuits, demands, causes of action and claims, whether actual
or threatened, made by or against the Company, or which the
Company is authorized or obligated to pay under applicable law
or the Governing Instruments or by the Board of Trust
Managers;
(xvii) any judgment rendered against the Company, or
against any Trust Manager, director or officer of the Company
in his capacity as such for which the Company is required to
indemnify such Trust Manager, director, or officer by any
court or governmental agency, or settlement of pending or
threatened litigation; provided that such settlement is
approved or authorized by the Board of Trust Managers or is
entered into by the Manager pursuant to the discretionary
authority granted to the Manager by the Board of Trust
Managers;
(xviii) expenses relating to any office or office
facilities maintained solely for the use or benefit of the
Company exclusive of the office of the Manager;
MANAGEMENT AGREEMENT - PAGE 14
<PAGE> 15
(xix) expenses related to the accumulation and
Special Servicing of Mortgage Loans;
(xx) travel and related expenses of directors,
officers and employees of the Manager or other members of the
AMRESCO Group, and of Trust Managers, directors, officers and
employees of the Company who are also directors, officers or
employees of the Manager or other members of the AMRESCO
Group, incurred in connection with attending meetings of the
Board of Trust Managers or holders of securities of the
Company or performing other business activities that relate to
the Company, including, where applicable, a proportionate
share of such expenses as reasonably determined by the Manager
where such expenses were not incurred solely for the benefit
of the Company;
(xxi) costs associated with computer hardware and
software, third party information services and office expenses
that relate solely to the business activities of the Company
(including the costs of bringing any systems into "Year 2000"
compliance, if such systems relate solely to the business
activities of the Company);
(xxii) any extraordinary or non-recurring costs or
charges incurred by the Company; and
(xxiii) other expenses of the Company that are not
expenses of the Manager under Section 8(a).
(c) Any due diligence investigations, underwriting and
other services typically performed by third-party consultants or
service providers (including, without limitation, legal review and
documentation) may be provided to the Company by the Manager or any
other member of the AMRESCO Group if the Manager determines in good
faith that (i) the requisite expertise is available through the
Manager or the other members of the AMRESCO Group and that (ii) either
(a) such services provided by the Manager or other members of the
AMRESCO Group are superior in quality to those available from third
parties or (b) costs savings or other efficiencies will arise from the
use of such services. The Manager will, and will cause each other
member of the AMRESCO Group to, document the time spent by its
employees on such services on behalf of the Company and will be
entitled to reimbursement for the allocable portion of salary and
benefits for such employees.
(d) Notwithstanding the foregoing provisions of this
Section 8, if the Company (or the Manager on behalf of the Company)
incurs due diligence and related costs with respect to a proposed
acquisition of one or more assets and all or any portion of such
assets are not acquired by the Company but are instead acquired by a
member of the AMRESCO Group, then AMRESCO or the appropriate member of
the AMRESCO Group shall, within 30 days of its receipt
MANAGEMENT AGREEMENT - PAGE 15
<PAGE> 16
of an itemized statement from the Manager reflecting the costs
incurred by or on behalf of the Company, pay or reimburse the Company
for all such costs (or the appropriate portion thereof allocable to
the portion of the asset(s) acquired).
SECTION 9. Calculations of Expenses. The Manager shall
prepare a statement documenting the expenses of the Company and those incurred
by the Manager on behalf of the Company during each quarter and shall deliver
such statement to the Company within 45 days after the end of each quarter.
Expenses incurred by the Manager on behalf of the Company shall be reimbursed
quarterly to the Manager within 60 days after the end of each quarter. All
expenses incurred by the Manager and submitted to the Company for reimbursement
shall be reviewed by the Independent Trust Managers on a quarterly basis.
SECTION 10. Limits of Manager Responsibility. The Manager
assumes no responsibility under this Agreement other than to render the
services called for hereunder in good faith and shall not be responsible for
any action of the Board of Trust Managers in following or declining to follow
any advice or recommendations of the Manager, including as set forth in Section
3(b). Neither the Manager, nor any other member of the AMRESCO Group will be
liable to the Company, the Independent Trust Managers, the Company's
shareholders or partners, any issuer of MBS or any other party for any acts or
omissions by the Manager, any other member of the AMRESCO Group or any of their
respective partners, directors, officers, stockholders or employees under or in
connection with this Agreement, except by reason of acts constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties. The Company shall reimburse, indemnify and hold harmless the Manager
and the members of the AMRESCO Group and their respective stockholders,
directors, partners, officers and employees (collectively, the "Indemnified
Parties") for, from and against any and all expenses, losses, damages,
liabilities, demands, charges and claims of any nature whatsoever, (including
attorneys' fees) in respect of or arising from any acts or omissions of the
Manager, its stockholders, directors, partners, officers and employees made in
good faith in the performance of the Manager's duties under this Agreement and
not constituting bad faith, willful misconduct, gross negligence or reckless
disregard of its duties. WITHOUT LIMITING ANY OTHER PROVISION OF THIS
AGREEMENT, IT IS THE EXPRESS INTENTION OF THE COMPANY AND THE MANAGER THAT THE
COMPANY'S OBLIGATION TO INDEMNIFY THE INDEMNIFIED PARTIES PURSUANT TO THIS
SECTION 10 INCLUDES INDEMNIFICATION FOR EXPENSES, LOSSES, DAMAGES, LIABILITIES,
DEMANDS AND CHARGES AND CLAIMS OF ANY NATURE WHATSOEVER (INCLUDING ATTORNEYS'
FEES) ARISING DIRECTLY OR INDIRECTLY FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE
OF ANY OF SUCH INDEMNIFIED PARTIES.
SECTION 11. No Joint Venture. The Company and the Manager are
not partners or joint venturers with each other and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.
MANAGEMENT AGREEMENT - PAGE 16
<PAGE> 17
SECTION 12. Term; Termination.
(a) This Agreement shall commence on the date set forth
above and shall continue in force until the second anniversary of such
date, and thereafter, it shall be subject to successive one-year
renewal periods upon the review and approval of the Independent Trust
Managers. If the Independent Trust Managers do not resolve to renew
or terminate this Agreement within at least 90 days prior to the end
of the then-current period of this Agreement, this Agreement shall be
automatically extended for a one-year period. The Manager shall have
the right, following the initial term of this Agreement, to terminate
this Agreement at any time upon not less than 180 days prior written
notice. The Company shall have the right, following the initial term
of this Agreement and subject to Section 12(b), to terminate this
Agreement at any time upon not less than 90 days prior written notice.
(b) In addition to such further liability or obligation
of either party to the other provided in Sections 15 and 16, if this
Agreement is terminated by the Company without cause (as "cause" is
defined in Section 14) by delivery of a notice of non-renewal or
termination pursuant to Section 12(a), the Company, in addition to its
obligations under Section 15, shall pay the Manager a termination fee
in an amount equal to the sum of the Manager's base management fee and
incentive compensation earned pursuant to Sections 7(a) and 7(b)
during the four calendar quarters immediately preceding such
termination. Such termination fee shall be paid no later than 30 days
following receipt of the accounting contemplated by Section 15(b).
SECTION 13. Assignments.
(a) Except as set forth in Section 13(b), this Agreement
shall terminate automatically in the event of its assignment, in whole
or in part, by the Manager, unless such assignment is consented to in
writing by the Company with the consent of a majority of the
Independent Trust Managers. Any such assignment approved by the
Independent Trust Managers, in their sole discretion, shall bind the
assignee hereunder in the same manner as the Manager is bound. In
addition, the assignee shall execute and deliver to the Company an
amendment to this Agreement naming such assignee as Manager. This
Agreement shall not be assigned by the Company without the prior
written consent of the Manager, except in the case of assignment by
the Company to another REIT or other organization which (i) is a
successor to the Company (by merger, consolidation or otherwise by
operation of law) or (ii) is the purchaser of all or substantially all
of the assets of the Company, in which case such successor
organization shall be bound hereunder and by the terms of such
assignment in the same manner as the Company is bound hereunder.
(b) Notwithstanding any provision of this Agreement, the
Manager may subcontract any or assign all of its responsibilities
under this Agreement to any of
MANAGEMENT AGREEMENT - PAGE 17
<PAGE> 18
its qualified Affiliates, and the Company hereby consents to any such
assignment and subcontracting; provided that no such subcontract or
assignment shall relieve the Manager of its duties and obligations
hereunder. The Manager agrees to send copies of any subcontract or
assignment to the Company promptly following its agreement to the
same.
SECTION 14. Termination by the Company for Cause. This Agreement
may be terminated by the Company for "cause" upon 60 days' prior written notice
of termination from the Board of Trust Managers to the Manager, without payment
of any termination fee, if any of the following events shall occur:
(a) if a majority of the Independent Trust Managers shall
determine that the Manager has breached any provision of this
Agreement in any material respect and, within 30 days after receipt of
written notice of such violation, the Manager shall not have cured
such violation, provided that, if such breach is not capable of cure
within such 30-day period, the Manager shall have failed to commence
to cure such breach within such 30-day period and thereafter to
diligently and in good faith prosecute the cure of such breach and
further provided, that if such breach is not capable of cure within
any period of time, a majority of the Independent Trust Managers shall
have also determined that such breach may have a material adverse
effect on the business, operations or financial condition of the
Company; or
(b) there is entered an order for relief or similar
decree or order with respect to the Manager by a court having
competent jurisdiction in an involuntary case under the federal
bankruptcy laws as now or hereafter constituted or under any
applicable federal or state bankruptcy, insolvency or other similar
laws; or the Manager (i) ceases, or admits in writing its inability to
pay its debts as they become due and payable, or makes a general
assignment for the benefit of, or enters into any composition or
arrangement with, creditors; (ii) applies for, or consents (by
admission of material allegations of a petition or otherwise) to the
appointment of a receiver, trustee, assignee, custodian, liquidator or
sequestrator (or other similar official) of the Manager or of any
substantial part of its properties or assets, or authorizes such an
application or consent, or proceedings seeking such appointment are
commenced without such authorization, consent or application against
the Manager and continue undismissed for 30 days; (iii) authorizes or
files a voluntary petition in bankruptcy, or applies for or consents
(by admission of material allegations of a petition or otherwise) to
the application of any bankruptcy, reorganization, arrangement,
readjustment of debt, insolvency, dissolution, liquidation or other
similar law of any jurisdiction, or authorizes such application or
consent, or proceedings to such end are instituted against the Manager
without such authorization, application or consent and are approved as
properly instituted and remain undismissed for 30 days or result in
adjudication of bankruptcy or insolvency; or (iv) permits or suffers
all or any substantial part of its properties or assets to be
sequestered or attached by court order and the order remains
undismissed for 30 days. If any of the events specified in this
MANAGEMENT AGREEMENT - PAGE 18
<PAGE> 19
Section 14(b) shall occur, the Manager shall give prompt written
notice thereof to the Board of Trust Managers.
SECTION 15. Action Upon Termination. From and after the
effective date of termination of this Agreement, the Manager shall not be
entitled to compensation for further services hereunder, but shall be paid all
compensation accruing to the date of termination and, if terminated for any
reason other than for "cause" under Section 14, the applicable termination fee.
Upon such termination, the Manager shall forthwith:
(a) after deducting any accrued compensation, any
applicable termination fee and reimbursement for its expenses
permitted hereunder to which it is then entitled, promptly pay over to
the Company all money collected and held for the account of the
Company pursuant to this Agreement;
(b) deliver to the Board of Trust Managers a full
accounting, including a statement showing all payments collected by
it, all expenses incurred by it and a statement of all money held by
it, covering the period following the date of the last accounting
furnished to the Board of Trust Managers with respect to the Company;
and
(c) deliver to the Board of Trust Managers all property,
documents, records and reports of the Company or pertaining to the
Company's assets or operations then in the custody of the Manager.
SECTION 16. Release of Money or Other Property Upon Written
Request. The Manager agrees that any money or other property of the Company
held by the Manager under this Agreement shall be held by the Manager as
custodian for the Company, and the Manager's records shall be appropriately
marked clearly to reflect the ownership of such money or other property by the
Company. Upon the receipt by the Manager of a written request signed by a duly
authorized officer of the Company requesting the Manager to release to the
Company any money or other property then held by the Manager for the account of
the Company under this Agreement, the Manager shall release such money or other
property to the Company within a reasonable period of time, but in no event
later than 60 days following such request. Subject to Section 10, the Manager
shall not be liable to the Company, the Independent Trust Managers, or the
Company's shareholders or partners for any acts performed or omissions to act
by the Company in connection with the money or other property released to the
Company in accordance with this Section 16. The Company shall indemnify the
Manager, its directors, officers, stockholders, partners and employees against
any and all expenses, losses, damages, liabilities, demands, charges and claims
of any nature whatsoever, which arise in connection with the Manager's release
of such money or other property to the Company upon written request of the
Company in accordance with the terms of this Section 16. Indemnification
pursuant to this provision shall be in addition to any right of the Manager to
indemnification under Section 10.
MANAGEMENT AGREEMENT - PAGE 19
<PAGE> 20
SECTION 17. Representations and Warranties.
(a) The Company hereby represents and warrants to the
Manager as follows:
(i) The Company is duly organized and validly
existing under the laws of the jurisdiction of its
incorporation, has the power to own its assets and to transact
the business in which it is now engaged and is duly qualified
as a foreign corporation and in good standing under the laws
of each jurisdiction where its ownership or lease of property
or the conduct of its business requires such qualification,
except for failures to be so qualified, authorized or licensed
that could not in the aggregate have a material adverse effect
on the business operations, assets or financial condition of
the Company. The Company does not do business under any
fictitious business name.
(ii) The Company has the power and authority to
execute, deliver and perform this Agreement and all
obligations required hereunder and has taken all necessary
action to authorize this Agreement on the terms and conditions
hereof and the execution, delivery and performance of this
Agreement and all obligations required hereunder. No consent
of any other person, including, without limitation,
shareholders and creditors of the Company, and no license,
permit, approval or authorization of, exemption by, notice or
report to, or registration, filing or declaration with, any
governmental authority is required by the Company in
connection with this Agreement or the execution, delivery,
performance, validity or enforceability of this Agreement and
all obligations required hereunder. This Agreement has been,
and each instrument or document required hereunder will be,
executed and delivered by a duly authorized officer of the
Company, and this Agreement constitutes, and each instrument
or document required hereunder when executed and delivered
hereunder will constitute, the legally valid and binding
obligation of the Company enforceable against the Company in
accordance with its terms.
(iii) The execution, delivery and performance of
this Agreement and the documents or instruments required
hereunder will not violate any provision of any existing law
or regulation binding on the Company, or any order, judgment,
award or decree of any court, arbitrator or governmental
authority binding on the Company, or the Governing Instruments
of the Company or of any mortgage, indenture, lease, contract
or other agreement, instrument or undertaking to which the
Company is a party or by which the Company or any of its
assets may be bound, the violation of which would have a
material adverse effect on the business operations, assets or
financial condition of the Company, and will not result in, or
require, the creation or imposition of any lien on any of its
property, assets or revenues
MANAGEMENT AGREEMENT - PAGE 20
<PAGE> 21
pursuant to the provisions of any such mortgage, indenture, lease,
contract or other agreement, instrument or undertaking.
(b) The Manager hereby represents and warrants to the
Company as follows:
(i) The Manager is duly organized, validly
existing and in good standing under the laws of the
jurisdiction of its formation, has the power to own its assets
and to transact the business in which it is now engaged and is
duly qualified to do business and is in good standing under
the laws of each jurisdiction where its ownership or lease of
property or the conduct of its business requires such
qualification, except for failures to be so qualified,
authorized or licensed that could not in the aggregate have a
material adverse effect on the business operations, assets or
financial condition of the Manager and its subsidiaries, taken
as a whole. The Manager does not do business under any
fictitious business name.
(ii) The Manager has the power and authority to
execute, deliver and perform this Agreement and all
obligations required hereunder and has taken all necessary
action to authorize this Agreement on the terms and conditions
hereof and the execution, delivery and performance of this
Agreement and all obligations required hereunder. No consent
of any other person including, without limitation, partners
and creditors of the Manager, and no license, permit, approval
or authorization of, exemption by, notice or report to, or
registration, filing or declaration with, any governmental
authority is required by the Manager in connection with this
Agreement or the execution, delivery, performance, validity or
enforceability of this Agreement and all obligations required
hereunder. This Agreement has been, and each instrument or
document required hereunder will be, executed and delivered by
a duly authorized agent of the Manager, and this Agreement
constitutes, and each instrument or document required
hereunder when executed and delivered hereunder will
constitute, the legally valid and binding obligation of the
Manager enforceable against the Manager in accordance with its
terms.
(iii) The execution, delivery and performance of
this Agreement and the documents or instruments required
hereunder, will not violate any provision of any existing law
or regulation binding on the Manager, or any order, judgment,
award or decree of any court, arbitrator or governmental
authority binding on the Manager, or the partnership agreement
of the Manager or of any mortgage, indenture, lease, contract
or other agreement, instrument or undertaking to which the
Manager is a party or by which the Manager or any of its
assets may be bound, the violation of which would have a
material adverse effect on the business operations, assets or
financial condition of the Manager and its subsidiaries, taken
as a whole, and will not result in, or require, the creation
or imposition of any lien on any
MANAGEMENT AGREEMENT - PAGE 21
<PAGE> 22
of its property, assets or revenues pursuant to the provisions of any
such mortgage, indenture, lease, contract or other agreement,
instrument or undertaking.
SECTION 18. Notices. Unless expressly provided otherwise
herein, all notices, requests, demands and other communications required or
permitted under this Agreement shall be in writing and shall be deemed to have
been duly given, made and received when delivered against receipt or upon
actual receipt of registered or certified mail, postage prepaid, return receipt
requested, addressed as set forth below:
(a) If to the Company:
AMRESCO Capital Trust
700 North Pearl Street
Suite 2400
Dallas, Texas 75201
Attention: President and General Counsel
(b) If to the Manager:
AMREIT Managers, L.P.
700 North Pearl Street
Suite 2400
Dallas, Texas 75201
Attention: President and General Counsel
Either party may alter the address to which communications or copies
are to be sent by giving notice of such change of address in conformity with
the provisions of this Section 18 for the giving of notice.
SECTION 19. Binding Nature of Agreement; Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, personal representatives, successors and
assigns as provided herein.
SECTION 20. Entire Agreement. This Agreement contains the
entire agreement and understanding among the parties hereto with respect to the
subject matter hereof, and supersedes all prior and contemporaneous agreements,
understandings, inducements and conditions, express or implied, oral or
written, of any nature whatsoever with respect to the subject matter hereof.
The express terms hereof control and supersede any course of performance and/or
usage of the trade inconsistent with any of the terms hereof.
SECTION 21. Amendment. This Agreement may not be modified or
amended other than by an agreement in writing signed by the Manager and the
Company, provided that the amendment of any provision of this Agreement
requiring
MANAGEMENT AGREEMENT - PAGE 22
<PAGE> 23
consent or approval of any matter by a majority of the Independent Trust
Managers may not be amended without the approval of a majority of the
Independent Trust Managers.
SECTION 22. CONTROLLING LAW. THIS AGREEMENT AND ALL QUESTIONS
RELATING TO ITS VALIDITY, INTERPRETATION, PERFORMANCE AND ENFORCEMENT SHALL BE
GOVERNED BY AND CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF TEXAS.
SECTION 23. Indulgences, Not Waivers. Neither the failure nor
any delay on the part of a party to exercise any right, remedy, power or
privilege under this Agreement shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, remedy, power or privilege preclude
any other or further exercise of the same or of any other right, remedy, power
or privilege, nor shall any waiver of any right, remedy, power or privilege
with respect to any occurrence be construed as a waiver of such right, remedy,
power or privilege with respect to any other occurrence. No waiver shall be
effective unless it is in writing and is signed by the party asserted to have
granted such waiver.
SECTION 24. Titles Not to Affect Interpretation. The titles of
paragraphs and subparagraphs contained in this Agreement are for convenience
only, and they neither form a part of this Agreement nor are they to be used in
the construction or interpretation hereof.
SECTION 25. Execution in Counterparts. This Agreement may be
executed in any number of counterparts, each of which shall be deemed to be an
original as against any party whose signature appears thereon, and all of which
shall together constitute one and the same instrument. This Agreement shall
become binding when one or more counterparts hereof, individually or taken
together, shall bear the signatures of all of the parties reflected hereon as
the signatories.
SECTION 26. Provisions Separable. The provisions of this
Agreement are independent of and separable from each other, and no provision
shall be affected or rendered invalid or unenforceable by virtue of the fact
that for any reason any other or others of them may be invalid or unenforceable
in whole or in part.
SECTION 27. Attorneys' Fees. Should any action or other
proceeding be necessary to enforce any of the provisions of this Agreement or
the various transactions contemplated hereby, the prevailing party will be
entitled to recover its actual reasonable attorneys' fees and expenses from the
non-prevailing party.
SECTION 28. Gender. Words used herein regardless of the number
and gender specifically used, shall be deemed and construed to include any
other number, singular or plural, and any other gender, masculine, feminine or
neuter, as the context requires.
MANAGEMENT AGREEMENT - PAGE 23
<PAGE> 24
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
"COMPANY"
AMRESCO CAPITAL TRUST
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
"MANAGER"
AMREIT MANAGERS, L.P.
By: AMREIT MANAGERS G.P., INC.
its general partner
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
MANAGEMENT AGREEMENT - PAGE 24
<PAGE> 25
EXHIBIT "A"
TO MANAGEMENT AGREEMENT
AMRESCO CAPITAL TRUST
OPERATING POLICIES
PRELIMINARY STATEMENT
I. INVESTMENT POLICIES
II. CAPITAL AND LEVERAGE POLICIES
III. CREDIT RISK MANAGEMENT POLICIES
IV. FINANCIAL RISK MANAGEMENT POLICIES
V. POLICIES REGARDING TRANSACTIONS WITH THE AMRESCO GROUP
VI. REIT COMPLIANCE POLICIES
VII. POLICY REGARDING INVESTMENT COMPANY ACT
SCHEDULE I - DEFINITIONS
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 1
<PAGE> 26
PRELIMINARY STATEMENT
The following operating policies of AMRESCO Capital Trust (the
"Company") are intended to be guidelines for the business and operations of the
Company. Such policies are intended to be reviewed from time to time and may
be changed from time to time by the Board of Trust Managers, in their sole
discretion without shareholder approval. As used in these policies, the term
"Company" means either AMRESCO Capital Trust, a Texas real estate investment
trust ("AMCT") or AMCT collectively with its affiliates, as the context
requires, the term "AMRESCO Group" means AMRESCO, INC. and its affiliated
entities (other than the Manager) and the term "Manager" means AMREIT Managers,
L.P., an affiliate of AMRESCO. Other capitalized terms used in these policies
have the meanings set forth on Schedule I attached.
SECTION SECTION 1. INVESTMENT POLICIES
A. General
1. Principal Business Objective. 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. The investment policies set forth below are intended
to enable the Company to achieve its principal business objective.
2. Role of the Manager. The Manager is authorized in
accordance with the terms of the Management Agreement to make all day-to-day
investment decisions of the Company based on the policies and guidelines set
forth below. The Manager should use all commercially reasonable efforts to
determine, in good faith, whether each investment proposed to be made by the
Company conforms to the policies and guidelines set forth below. All proposed
investments shall be reviewed and approved by the Investment Committee prior to
investment.
3. Review by the Board. The Board will review the
investments of the Company on a quarterly basis to determine general compliance
with the policies and guidelines set forth below.
B. Investment Objectives
1. General. The Company will invest in those real
estate related assets which it believes are likely to generate attractive
risk-adjusted returns on capital invested, after considering all material
relevant factors. Initially the Company intends to invest in a diversified
portfolio of commercial and multifamily Mortgage Loans (including, among
others, Participating Loans, Mezzanine Loans, Construction Loans and Bridge
Loans), MBS, and commercial real estate (including, but not limited to, Net
Leased Real Estate, real estate acquired at foreclosure or by deed-in-lieu of
foreclosure or other
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 2
<PAGE> 27
underperforming or Distressed Real Estate). Investments in real estate may
also take the form of equity investments in partnerships and joint ventures,
but not in corporations in which more than 10% of the voting shares would be
owned by the Company or which would represent more than 5% of the value of the
Company's total consolidated assets (unless such corporation is a Qualified
REIT Subsidiary), and shall otherwise be structured in compliance with the REIT
Provisions of the Code.
2. Types of Investments. The Company shall invest
principally in the following types of investments:
(a) Mortgage Loans. The Company may invest in
various types of commercial and multifamily Mortgage Loans, including
without limitation Permanent Mortgage Loans, Participating Loans,
Construction Loans, Mezzanine Loans, Bridge Loans or any combination
thereof. The Company may not invest directly nor originate
residential Mortgage Loans secured by single family (one-to-four unit)
residential property.
(i) Limits on Investments. The
Manager's loan underwriters will be afforded flexibility and
latitude with respect to the size of any single Mortgage Loan,
but shall generally target loans ranging from $10 million to
$40 million. However, without the prior approval of the
Board, the Company's investment in any one Mortgage Loan may
not exceed the greater of (A) $75 million in principal amount
outstanding or (B) 10.0% of the Company's total consolidated
assets.
(ii) Coinvestment. The Company may
invest in any Mortgage Loan alone or may coinvest with others.
If the Company coinvests in any Mortgage Loan with any member
of the AMRESCO Group, such investment must be made in
accordance with the Company's policies regarding transactions
with members of the AMRESCO Group.
(iii) Concentration Limits. The Manager
shall seek to achieve diversification in the Company's assets
to avoid undue geographic, borrower, issuer, product type,
industry and certain other types of concentrations. The
Company may, in the future, in consultation with the Manager
and the Investment Committee, establish specified limitations
or parameters as to the foregoing concentrations. The Manager
shall seek to invest, on the Company's behalf, primarily in
Mortgage Loans secured by property located in the United
States and in foreign countries in which the AMRESCO Group has
previously conducted business.
(iv) Sources of Loans. Mortgage Loans in
which the Company invests may be either originated or
purchased by the Company. Purchased loans may be purchased
individually, through loan participations or syndications or
in pools and may include Distressed Mortgage Loans. Loans
purchased from any member of the AMRESCO Group must be
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 3
<PAGE> 28
purchased in accordance with the Company's policies regarding
transactions with members of the AMRESCO Group.
(v) Pricing. In determining the rate at
which an originated Mortgage Loan will bear interest, or the
price at which a purchased Mortgage Loan will be acquired, the
Manager should consider the following factors, in addition to
the Company's targeted rate of return on such investment:
market conditions, market interest rates, the availability of
mortgage credit and other economic factors, the term of the
Mortgage Loan, the liquidity of the Mortgage Loan, the
limitations on the obligations of the borrower and/or 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 existence
and quality of any credit enhancement related to such 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 on
recourse against the borrower 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
deemed relevant by the Manager.
(vi) Due Diligence. In considering
whether to originate or acquire any Mortgage Loan, the Manager
should 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 such Mortgage Loan
and whether the Company should originate or acquire that
Mortgage Loan, including all such information described above
as necessary to be considered in connection with the pricing
of a Mortgage Loan or as may be required by any warehouse
lender.
(vii) Credit Risk Management. Each
Mortgage Loan investment must be in accordance with the
Company's credit risk management policies and underwriting
criteria, including its policies or criteria, to the extent
applicable, regarding loan-to-value ratios or loan-to-cost
ratios, borrower and tenant credit quality, credit
enhancement, collateral requirements, etc.
(viii) Compliance With Other Policies.
Each Mortgage Loan investment shall comply with Company
policies, including, without limitation, its policies
regarding compliance with the REIT Provisions of the Code and
exclusions from regulation under the Investment Company Act.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 4
<PAGE> 29
(b) MBS. The Company may invest in all types of
MBS, including, without limitation, all types of investment grade and
non-investment grade CMBS and RMBS (except that the Company does not
currently intend to invest in RMBS secured by lower credit quality
Mortgage Loans known as "B," "C" and "D" Mortgage Loans).
(i) Limits on Investments. Without the
prior approval of the Board, the percentage of the Company's
total consolidated assets which may be invested in MBS at any
time may not exceed 40%. The Company may, in the future, in
consultation with the Manager and Investment Committee,
establish specified limitations or parameters on the
percentage of the Company's total consolidated assets invested
in MBS that may be related to any one issuer.
(ii) Coinvestment. The Company may
invest in any MBS alone or may coinvest with others. If the
Company coinvests in any MBS with any member of the AMRESCO
Group, such investment must be made in accordance with the
Company's policies regarding transactions with members of the
AMRESCO Group.
(iii) Sources of MBS. MBS may be
purchased by the Company from any source. MBS purchased from
any member of the AMRESCO Group must be purchased in
accordance with the Company's policies regarding transactions
with members of the AMRESCO Group.
(iv) Pricing. In determining the price
at which to acquire any MBS, the Manager should consider, in
addition to the Company's targeted rate of return on such
investment, the following factors: (A) the quality of the
underlying collateral pool, (B) the prepayment and default
history of the underlying Mortgage Loans, (C) cash flow
analyses under various prepayment and interest rate scenarios
(including sensitivity analyses), (D) an analysis of various
default scenarios and (E) prices paid for similar MBS by bona
fide third parties or broker price opinions. Because there
are so many characteristics to consider, each MBS should be
analyzed individually, taking into consideration both
objective data as well as subjective analysis.
(v) Due Diligence. The Company shall, in
consultation with the Manager, determine the scope of review
to be performed before the Company acquires MBS, which will be
designed to provide sufficient information regarding the MBS
to enable the Company to make a decision regarding the
acquisition and pricing of the MBS. The due diligence should
include an analysis of the information described above as
necessary to be considered in connection with the pricing of
MBS. With respect to CMBS, the Manager will use sampling and
other appropriate analytical techniques to determine which
Mortgage Loans will undergo a full-scope review or a more
streamlined review process. Considerations that should
influence the
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 5
<PAGE> 30
choice for scope of review should generally include size of the loan,
debt service coverage ratio, loan-to-value ratio, maturity of the
loan, 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 report and
a review of prices paid for similar CMBS by bonafide 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 need be
performed.
(vi) Compliance With Other Policies.
Each MBS investment must be in accordance with all Company policies,
including, without limitation, its policies regarding compliance with
the REIT Provisions of the Code and exclusion from regulation under
the Investment Company Act and the Investment Advisors Act.
(c) Real Estate. The Company intends to invest
in various types of commercial real estate, including, but not limited to,
Net Leased Real Estate, REO Properties and other Distressed Real Estate.
(i) Coinvestment; Manner of Investment.
The Company may invest in any real estate project alone or may
coinvest with others. Investments may be made directly by the
Company or through partnerships or other entities formed with
other parties, including members of the AMRESCO Group. If the
Company coinvests in any real estate project with any member
of the AMRESCO Group, such investment must be made in
accordance with the Company's policies regarding transactions
with members of the AMRESCO Group.
(ii) Concentration Limits. The Manager
shall seek to avoid undue geographic and product type
concentrations with respect to the Company's commercial real
estate, when considered together with the Company's other
invested assets. The Manager will seek to invest, on the
Company's behalf, primarily in commercial real estate located
in the United States and in other foreign countries in which
the AMRESCO Group has previously conducted business.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 6
<PAGE> 31
(iii) Sources. Real estate may be
purchased by the Company from any source. Real estate
purchased from any member of the AMRESCO Group must be
purchased in accordance with the Company's policies regarding
transactions with members of the AMRESCO Group.
(iv) Pricing. The Company's policy is to
determine the fair market value of real estate utilizing 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.
Information that may be examined in determining the fair
market value of a property includes the following: (A) the
Company's projected rate of return on such investment; (B)
current and historical operating statements; (C) existing or
new appraisals; (D) sales comparables; (E) industry statistics
and reports regarding operating expenses; (F) existing leases
and market rates for comparable leases; (G) deferred
maintenance observed during site inspections or described in
structural and engineering reports; and (H) 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 should
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 should then be applied
to the cash flow projections to estimate values. These values
should then be compared to available appraisals and market
sale comparables to determine recommended bid prices for each
property. The amount offered by the Company generally should
take into account projected holding periods, capital costs and
projected profit expectations.
(v) Due Diligence. The Manager should
conduct an investigation and evaluation of all real estate
proposed to be purchased. The Manager should include within
its due diligence review and analysis of the real estate
contemplated to be acquired a review of market studies for
each geographic market in which the real estate proposed to be
purchased is concentrated, including area economic data,
employment trends, absorption rates and market rental rates.
Such due diligence analyses generally also should include (A)
site inspections of properties, (B) a review of all property
files and documentation that are made available to the Company
or the Manager, (C) a Phase I environmental assessment for
each property, and (D) all other information necessary to
determine a fair price for such property. The Manager's
review should 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.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 7
<PAGE> 32
(vi) Credit Risk Management. Each real
estate investment must be in accordance with the Company's
credit risk management policies, including its policies
regarding tenant credit quality.
(vii) Compliance With Other Policies.
Each real estate investment must be in accordance with all
Company policies including without limitation its policies
regarding compliance with the REIT Provisions of the Code and
exclusion from regulation under the Investment Company Act.
(d) Other Investments. The Company may also
pursue a variety of complementary commercial real estate and
finance-related businesses and investments in furtherance of its
business objective. Such activities may include, but are not limited
to, foreign real estate-related asset investments, equity interests or
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.
Any such investments may be made by the Company in accordance with the
operating policies of the Company upon approval of the Investment
Committee.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 8
<PAGE> 33
SECTION SECTION 2. CAPITAL AND LEVERAGE POLICIES
A. General. The Company intends to increase its invested assets
through the use of leverage in order to create yields commensurate with its
investment objectives. The Company intends to utilize leverage in a manner
that is prudent and consistent with maintaining an acceptable level of risk.
B. Limitations on Indebtedness. The Company's Leverage Ratio
(i.e., ratio of (i) indebtedness with respect to which the Company is the
obligor to (ii) the Company's total outstanding equity) shall not exceed (at
the time any debt is incurred) 3:1, without the prior approval of the Board of
Trust Managers.
C. Sources of Financing. The Company may utilize a variety of
debt vehicles, including warehouse lending arrangements, reverse repurchase
agreements, securitizations of mortgage loans or other secured or unsecured
financing sources, as deemed appropriate by the Manager, considering the
availability of financing sources and existing rates and market conditions at
any given time.
D. Securitizations. The Company may obtain secured financing
through the securitization of all or any portion of its Mortgage Loans.
Securitizations may be accomplished through the issuance of structured debt,
with the Company retaining an equity interest in the collateral or through a
"sale" of the underlying Mortgage Loans, if the Manager reasonably determines
there are structural or other advantages to such form of securitization. Any
securitizations conducted by the Company under which a "sale" of an interest in
Mortgage Loans occurs shall be conducted, to the extent permitted by the REIT
Provisions of the Code, through one or more taxable subsidiaries of the
Company, unless otherwise approved by the Board of Trust Managers or the
Company's investment or tax compliance officer. In addition, any such
securitizations shall be structured, to the extent practicable, to minimize the
attribution of any Excess Inclusion income to the Company's shareholders.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 9
<PAGE> 34
SECTION SECTION 3. CREDIT RISK MANAGEMENT POLICIES
A. General. The Company is expected to be exposed to
various levels of credit and special hazard risks depending on the nature of
its investments. The Company's policy is to manage such risk by originating or
otherwise acquiring only those assets which satisfy the Company's underwriting
criteria and credit quality standards and, through the activities of the
Manager, by closely monitoring the quality and performance of its invested
assets.
B. Investment Committee. The Manager will establish one or more
Investment Committees (an "Investment Committee") which will meet regularly to
consider whether the Company should invest in specific Targeted Investments.
Subject to the following conditions, the voting members of an Investment
Committee may vary depending on the type of Targeted Investment under
consideration. At least two-thirds of the members of the Investment Committee
present and voting, must vote in favor of a particular Targeted Investment
before the Targeted Investment may be purchased, acquired or originated by the
Company. A quorum must be present for any meeting of the Investment Committee.
A quorum shall consist of a minimum of four of the members of the Investment
Committee and must include at least two of the following officers of the
Company: the President, the Chief Investment Officer and the Chief Operating
Officer. The Board of Trust Managers will monitor the Invested Portfolio and
the credit risk associated therewith.
C. Portfolio Review Program. The Manager shall implement a
Portfolio Review Program to provide for periodic review of the Invested
Portfolio so that potential credit problems can be recognized and addressed at
the earliest opportunity.
D. Underwriting Criteria and Credit Quality. The Company shall,
from time to time, in consultation with the Manager and the Investment
Committee, establish underwriting criteria and credit quality standards for the
various types of assets in which the Company intends to invest. Such
underwriting criteria shall include, without limitation, the following:
1. Loan to Value Ratios. The Company will typically not
loan in excess of 90% of the "stabilized" value of the property or in
excess of 100% of the cost of a property (which may include budgeted
construction period interest in the case of a Construction Loan).
2. Return Requirements. In underwriting a Mortgage
Loan, the Manager will model the economic return to the Company and
the borrower to determine whether the loan is economically feasible.
The Manager is not required to establish minimum debt service coverage
ratios, but shall underwrite to a "market" debt service coverage ratio
in evaluating the viability of refinancing of a loan. With respect to
MBS, the Manager shall utilize bond models (including those of
AMRESCO, Charter Research and dealers), as appropriate, to project
potentials for delinquency, prepayment and extension and to project
losses and returns prior to pricing of transactions.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 10
<PAGE> 35
3. Concentrations of Credit. The Manager shall seek to
diversify and balance the Company's portfolio to minimize risk and
potential losses. To the extent applicable, the Manager shall monitor
the Company's Mortgage Loan concentrations from the perspectives of
(i) the size of any single loan, (ii) the total size of the
transaction if the Company is in a subordinate loan position, (iii)
the aggregate amount of loans to one borrower, (iv) geographic
concentrations, (v) property type concentrations. The Company may, in
the future (in consultation with the Investment Committee and the
Manager), establish specified limitations or parameters as to the
foregoing concentrations. With respect to the Company's MBS
portfolio, the Manager shall employ the following risk control
guidelines: (i) investments should be made in a manner intended to
minimize overweighing of economic concentration as measured by the
quotient of the weighted average loan distribution (compared to the
U.S. as a whole) of the largest states divided by the size of the
state's economy relative to the entire U.S. economy, (ii) no single
property type shall represent more than 50% of the Company's entire
MBS portfolio, (iii) distribution of loan sizes intended to result in
favorable loss distributions (large loans must be individually
analyzed and determined to be secure enough to protect the Company's
position) and (iv) the establishment of a maximum percentage of the
Company's MBS portfolio that may be represented by a single issuer.
4. Insurance Requirements. The Manager shall require
that the borrower or owner, as applicable, maintain, at all times
during the term of the loan or the investment, liability, hazard, rent
loss, flood, earthquake and/or other insurance coverage as may be
applicable, in such amounts and in accordance with the requirements
established from time to time by the Manager.
5. Borrower or Tenant Credit Quality. The Manager shall
review and analyze the credit history, net worth, liquidity, etc. of
each borrower/guarantor or significant tenant, as applicable.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 11
<PAGE> 36
SECTION SECTION 4. FINANCIAL RISK MANAGEMENT POLICY
A. General. The objective of the Company's Financial Risk
Management Policy is to ensure that business exposures to risk are identified,
measured, and are managed in the most effective and efficient methods within
established guidelines. It is the Company's policy 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
Company's desire not to jeopardize its status as a REIT.
B. Financial Risk Management Committee. The Trust Managers will
establish the Financial Risk Management Committee to assist it in establishing
financial risk management, hedging and derivatives policies and to oversee and
monitor the Company's management of risk and use of derivatives. The Committee
will be composed initially of the Chairman of the Board of Company, Chief
Executive Officer ("CEO"), Chief Operating Officer ("COO"), Chief Investment
Officer ("CIO"), Chief Financial Officer ("CFO"), Treasurer and Chief
Accounting Officer. At least 50% of the members of the Financial Risk
Committee are required to constitute a quorum at any meeting of such Committee
and at least two-thirds of those present and voting at any meeting is required
for approval of any action. The Committee can also designate other persons to
act as nonvoting members who serve in an advisory capacity. To assist the
Committee in operating decisions and implementation of policy and procedures,
it may establish a Financial Risk Steering Committee to handle operational
issues.
C. General Objectives for the Use of Derivatives. Derivative
transactions or hedging activities are not to be undertaken for speculative
purposes, but only to lessen risks associated with earnings, credit, interest
rate, foreign currency, and other similar risks. Use of derivatives is not
automatic, nor is it necessarily the only response to managing business risk.
Derivative transactions should only be undertaken after the risks that have
been identified are determined to exceed defined levels established by this
Policy and are considered to be unavoidable because they are necessary or
support normal business activities.
The use of derivatives involves risks such as credit, liquidity,
basis, settlement, legal and systemic. Derivatives should be used only to the
extent that the Manager determines that the expected benefit of such use (after
considering the cost of the derivative transactions) is considered to outweigh
these risks. The Manager should avoid any incremental increase in the
Company's overall market exposure from the use of derivatives.
D. Specific Objectives for Use of Derivatives. Derivatives may
be used to protect foreign activities, including foreign revenue sources,
specific assets and liabilities denominated in foreign currencies, to hedge
firm commitments and forecasted transactions that expose the Company to risk,
and to protect against exchange rate movements between different currencies
that impact revenue and profit expressed in U.S. Dollars. Derivatives may also
be used to protect the value of the Company's investments in Mortgage Loans and
MBS and to hedge purchase commitments and forecasted
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 12
<PAGE> 37
transactions that expose the Company to risk and to protect against interest
rate movements that negatively impact the value and/or intended execution of a
transaction.
E. Prohibitions on Use of Derivatives.
1. General. Derivatives shall not be used for trading,
speculation, or any other purpose in which the objective is to
generate profits. Derivative transactions are considered speculative
if they are perceived (at the time such transaction is entered into)
to increase risk, if their use has no relation to objectives specified
by the Company's policy, or if their use is not intended and expected
to manage business risks that have been identified.
2. Leverage. Derivative transactions are considered to
be highly leveraged if they expose the Company to loss in excess of
gains expected to be generated by positions and transactions they
modify. Unless approved by the Board of Trust Managers, the Manager
shall not utilize highly leveraged derivatives as they generally do
not reduce risk.
3. Valuation. Unless otherwise approved by the Board of
Trust Managers, the Manager shall avoid using any derivative for which
a market quotation cannot be obtained or which cannot be valued
reliably internally by the financial staff using valuation
methodologies that have been approved for use by the Financial Risk
Management Committee.
4. GAAP Accounting. Use of derivatives that do not
qualify for hedge accounting or deferral accounting under generally
accepted accounting principles shall not be utilized unless approval
is obtained from the Financial Risk Management Committee.
5. Accounting Motivated Transactions. Derivative
transactions that are primarily motivated by accounting implications
and do not reduce economic or business risk exposure shall not be
utilized. Derivative transactions are considered to be accounting
motivated transactions if they result in the current recognition of
revenue or current reduction of cost as a result of incurring a
liability to be recognized in the future or taking a risk to be
determined and settled in the future.
Use of derivatives solely to manage earnings is prohibited.
Derivative transactions are unauthorized if the intention of the
transaction is to recognize a profit by closing out, modifying,
terminating or offsetting the derivative instrument, even if the
transaction would otherwise meet the requirements for use under this
policy.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 13
<PAGE> 38
F. Operating Limitations on Use of Derivatives.
1. Forecasted Transactions. Forecasted transactions
that are not expected to occur within one year generally are not
considered to be probable of occurring under this policy. The Manager
shall not use derivatives to hedge such forecasted transactions unless
specific written approval is obtained from the Financial Risk
Management Committee.
2. Derivative Products and Strategies. Use of the
following products and strategies requires specific approval for each
transaction by the Financial Risk Management Committee:
o Written options
o Combination options involving the use of written options
o Written options embedded in swaps and other derivatives
o Selective hedging and partial hedging of exposures outside of
preapproved parameters that have been identified
o Frequent buying and selling or terminating derivatives used in
risk management activities not
specifically related to changing positions of the matched items
3. Types of Contracts Authorized for Use. The Company
may use the following derivative instruments specifically approved by
the Financial Risk Management Committee:
Cash Market Derivatives
o Treasury or Eurodollar securities
o Futures contracts Treasury or Eurodollar securities
o Purchased options on Treasury and Eurodollar features
o MBS forward securities
Mortgage Backed Securities ("MBS") - FNMA, GNMA, FHLMC, and Other Debt
Securities
o Futures contracts on MBS and other debt securities
o Purchase options on MBS and other debt securities
o MBS forward cash securities
Interest Rate Derivatives
o Interest rate swaps
o Interest rate caps, floors and collars
o Options on swaps
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 14
<PAGE> 39
Foreign Currency Derivatives
<TABLE>
<S> <C>
o Currency forwards and futures
o Purchased currency options
o Combination foreign currency options - where the notional amount and maturity date exactly match the
underlying transaction being hedged and the cost of the purchased options is equal to or greater than
the proceeds received on the option sold
o Foreign currency derivatives - authorized for use by business units exposed to foreign currency risk to
the extent identified by the risk identification and measurement process
</TABLE>
Use of any derivative not specifically identified above requires the written
approval of the Financial Risk Management Committee.
G. Counterparty Risk. The Company will only enter into
derivative transactions with counterparties that have a current senior debt
rating by either Standard & Poor's Rating Services, a division of McGraw-Hill
Companies, or Moody's Investors Service, Inc. of A or better or the equivalent
rating by other recognized rating agencies approved by the Financial Risk
Management Committee.
The Company will generally continue in a derivative transaction if the
counterparty's credit rating is downgraded to BBB. Appropriate steps should be
taken by the Manager to minimize risks if the counterparty's credit rating is
downgraded below BBB. Such steps may include obtaining collateral or some
other acceptable form of credit enhancement, or terminating the transactions,
if practicable. The Manager shall notify the Financial Risk Management
Committee of all credit downgrades. The Committee must approve the actions
proposed to be taken with respect to a transaction where the counterparty's
credit rating is downgraded below BBB.
The Company will not enter into a new derivative transaction with a
counterparty if the new transaction will result in credit exposure exceeding
limits specified by the Financial Risk Management Committee. Such limits are
currently set as follows:
(Senior Debt Rating)
<TABLE>
<S> <C> <C>
o For counterparties rated AAA Unlimited
o For counterparties rated AA Unlimited
o For counterparties rated A 10% of the Company's Equity
</TABLE>
For purposes of this paragraph, "credit exposure" means the greater of the
current net market value of all derivative transactions with the counterparty,
or 5% of the total notional value of the derivatives with that counterparty.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 15
<PAGE> 40
H. Authorized Brokers. The Manager is authorized, on behalf of
the Company, to enter into derivative transactions with primary dealers and
other financial institutions as follows:
<TABLE>
<S> <C>
o Any "primary" government security dealer as approved from time to time by the Federal Reserve Bank of New York.
o Any commercial bank which is FDIC insured and maintains a commercial paper rating in the top two credit
categories from a rating service of national prominence.
o Any SEC-registered broker dealer that meets the voluntary capital requirements of the Federal Reserve Bank of
New York.
o Any federal agency or federally sponsored agency.
</TABLE>
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 16
<PAGE> 41
SECTION SECTION 5. POLICIES REGARDING TRANSACTIONS WITH THE AMRESCO GROUP
A. General. As a result of the Company's relationship with the
AMRESCO Group (including, particularly, as a result of the Right of First
Refusal and the Correspondent Agreement), the Company expects to benefit from
the market reputation, expertise and relationships developed by the AMRESCO
Group and the potential investment opportunities (including coinvestment
opportunities) expected to be identified through the AMRESCO Group. It is the
intention of the Company that the agreements and transactions, including the
sale of or coinvestment in any asset, between the Company and the AMRESCO Group
be fair to the Company and be on terms at least as favorable as those the
Company could have obtained from unaffiliated third parties. Accordingly, the
following procedures should be implemented to assist the Company in
ascertaining that any transactions and agreements with the AMRESCO Group meet
such standard.
B. Acquisitions from Members of the AMRESCO Group.
1. The Company may acquire assets which meet its
investment criteria and objectives (other than CMBS or RMBS issued in
securitizations sponsored by members of the AMRESCO Group) from
members of the AMRESCO Group, without prior approval from the
Independent Trust Managers provided that:
(a) the Chief Investment Officer reasonably
determines in good faith that the price of the asset is no
greater and the terms of the sale are no less favorable than
that which would be available from third parties for similar
investments;
(b) the purchase price of any individual asset or
pool of assets proposed to be purchased at any one time does
not exceed the greater of $75 million or 10.0% of the
Company's total consolidated assets, determined before the
proposed acquisition; and
(c) when possible, the price that the Company
will pay for any asset acquired from the AMRESCO Group shall
be determined by 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 comparable investments
have occurred, the Manager shall attempt to determine a market
price for the asset by obtaining a broker's price opinion or
an appraisal, if it can do so at a reasonable cost.
2. Assets which do not meet the criteria set forth above
may be purchased from any member of the AMRESCO Group only with the
prior approval
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 17
<PAGE> 42
of a majority of the Independent Trust Managers (or a majority of the
Independent Trust Managers of any authorized Committee of the Board).
3. The Company may purchase CMBS or RMBS issued in
securitizations sponsored by members of the AMRESCO Group only in a
competitive bidding situation and upon prior approval of a majority of
the Independent Trust Managers.
C. Coinvestments with Members of The AMRESCO Group.
1. The Company may coinvest in any asset with any member
of the AMRESCO Group, without prior approval from the Independent
Trust Managers, provided that the terms of the Company's investment is
substantially similar to the terms of the investment of the AMRESCO
Group, except for such differences as may be attributable solely to
the size of the investment.
2. Any potential coinvestments by the Company with any
member of the AMRESCO Group which exceed $15 million (in the
aggregate, during any calendar year) and which contemplate investment
terms for the Company which are different than those proposed for any
member of the AMRESCO Group will require the prior approval of a
majority of the Independent Trust Managers (or a majority of the
Independent Trust Managers of any authorized Committee of the Board).
D. Expense Reimbursement and Allocation Matters.
1. Due diligence and underwriting expenses incurred by
the Manager or any member of the AMRESCO Group may be charged to and
reimbursed by the Company only after an asset has been preliminarily
approved for investment by the Chief Investment Officer or other
authorized officer of the Company.
2. The Manager may incur due diligence, underwriting and
other costs and expenses on behalf of the Company, provided that, in
the event costs and expenses with respect to any one transaction are
expected to exceed $500,000, the incurrence of such costs and expenses
must be approved, in advance, by the Board of Trust Managers (or a
majority of the Independent Trust Managers of any authorized Committee
of the Board).
3. In the event that any member of the AMRESCO Group
purchases or otherwise invests in all or any portion of an asset with
respect to which due diligence, underwriting or other costs of which
have been charged to or reimbursed by the Company, the Company shall
recover from the AMRESCO Group all or the applicable portion of such
costs and expenses allocable to the investment by the AMRESCO Group.
4. To the extent any member of the AMRESCO Group (other
than the Manager) provides services to the Company pursuant to the
Management Agreement or otherwise for which it is entitled to receive
payment or
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 18
<PAGE> 43
compensation, such payment or compensation shall be reasonable and no
greater than amounts which are charged by third parties in arms-length
transactions.
E. Quarterly Review of Related Party Transactions. The
Independent Trust Managers shall review, on a quarterly basis, all (i)
acquisitions of assets by the Company from members of the AMRESCO Group made
during the preceding calendar quarter (including the prices of and the terms of
such acquisitions) which were not specifically approved for acquisition by the
Independent Trust Managers, (ii) all coinvestments made with any member of the
AMRESCO Group during the preceding calendar quarter, (iii) the reasonableness
of the expenses paid to any member of the AMRESCO Group and (iv) the terms of
all other transactions between the Company and any member of the AMRESCO Group.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 19
<PAGE> 44
SECTION SECTION 6. REIT COMPLIANCE POLICIES
A. General. It is the Company's intention to qualify as a REIT
under the Code beginning with its taxable year ending on December 31, 1998.
Accordingly, the Company shall conduct its business in accordance with the
following procedures so as to meet the (i) organizational requirements, (ii)
income tests, (iii) asset tests and (iv) annual distribution requirements
applicable to REITs.
B. Organizational Requirements. The Company shall enforce the
"Excess Share" provisions of its Declaration of Trust prohibiting ownership of
more than 9.8% of the Common Shares by any person, subject to the exceptions
provided therein. In addition, on or before January 30th of each year, the
Company shall send a letter demanding information regarding the amount of
shares each such shareholder constructively owns (the "shareholder demand
letters") (i) in the event the Company has 2,000 or more shareholders of record
on any dividend record date, from each record holder of 5% or more of its
shares, (ii) in the event the Company has less than 2,000 and more than 200
shareholders of record on any dividend record date, from each record holder of
1% or more of its shares and (iii) in the event the Company has 200 or less
shareholders of record on any dividend record date, from each shareholder of
record of one-half of 1% or more of its shares.
C. Income Tests. At least 75% of the Company's gross income
(excluding income from prohibited transactions) for each taxable year shall be
derived directly or indirectly from investments relating to real property or
mortgages on real property (including "rents from real property" and interest)
or from certain types of temporary investments. In addition, at least 95% of
the Company's gross income (excluding 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 securities.
1. Acquisition of Assets. Prior to purchasing,
originating or otherwise acquiring any asset (including, without
limitation, any acquisition by foreclosure or deed-in-lieu of
foreclosure), such asset will be reviewed and analyzed by the
Company's investment compliance officer (and, to the extent the
investment compliance officer or other executive officer of the
Company determines necessary, by qualified REIT tax counsel) to ensure
that the acquisition and ownership will not cause the Company to fail
to qualify as a REIT for federal income tax purposes. To the extent
that any proposed acquisition includes an equity investment in real
estate or a Mortgage Loan or a pool of Mortgage Loans secured by real
estate, the Company shall require the owner of the real estate or the
borrower, as applicable, to complete a "checklist," make
representations, and/or otherwise supply requisite information
regarding the nature of the income from and the operation of the
property to enable the Company's investment compliance officer (or
REIT tax counsel, as applicable) to determine whether such proposed
investment satisfies the income tests applicable to REITs.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 20
<PAGE> 45
2. Other Income. Prior to entering into any transaction
which may result in the receipt by the Company of income (whether
through the sale or lease of assets, the provision of services, the
entering into of a hedging transaction or otherwise), such transaction
will be reviewed and analyzed by the Company's investment compliance
officer (and, to the extent the investment or tax compliance officer
or other executive officer of the Company determines necessary, by
qualified REIT tax counsel) to ensure that the receipt of income from
such transaction will not cause the Company to fail to qualify as a
REIT for federal income tax purposes. If the investment compliance
officer or qualified REIT tax counsel determines it to be appropriate,
the Company may transfer certain nonqualifying activities to a taxable
corporation from which it may receive dividends, to the extent
permitted by the Code.
D. Asset Tests. At least 75% of the value of the Company's total
assets shall be represented by cash or cash items (including certain
receivables), government securities, "real estate assets" (including loans
secured by real estate interests) or, in certain cases, temporary investments
as defined in or permitted by the Code. In addition to the foregoing
requirement, the value of any one issuer's securities owned by the Company
shall not exceed 5% of the value of the Company's total consolidated assets,
and the Company shall not own more than 10% of any one issuer's outstanding
voting securities (except for its interests in any qualified REIT subsidiary).
Prior to any acquisition or disposition of the Company's assets, the investment
compliance officer (or qualified REIT counsel, as applicable) shall review such
proposed acquisition or disposition to determine that such acquisition or
disposition will not cause the Company to fail to qualify as a REIT for federal
income tax purposes as a result of the foregoing asset tests.
E. Annual Distribution Requirements. The Company shall make
quarterly distributions to its shareholders equal, on an annual basis, to at
least 95% of the Company's REIT taxable income (computed without regard to the
dividends paid deduction and any net capital gains).
F. Review by Independent Accounting Firm. The Company shall
cause its independent accounting firm to review, in connection with its
quarterly review of the financial statements of the Company, the Company's
compliance with the REIT Provisions of the Code. The Company shall cause its
independent accounting firm to review, in connection with its annual audit of
the financial statements of the Company, the Company's compliance with the REIT
Provisions of the Code and, in connection therewith, to prepare and deliver, on
an annual basis, a report of its findings with respect thereto to the Board.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 21
<PAGE> 46
SECTION SECTION 7. POLICY REGARDING INVESTMENT COMPANY ACT
A. General. The Company intends to be primarily engaged in the
business of purchasing or otherwise acquiring "mortgages and other liens on and
interests in real estate" and therefore to be excluded from regulation under
the Investment Company Act.
B. Percentage of Assets Constituting Interests in Real Estate.
The Company shall maintain at least 55% of its assets directly in Mortgage
Loans, MBS which represent all of the beneficial interest in the underlying
pool of Mortgage Loans, direct equity investments in real estate and other
qualifying liens on and interests in real estate.
C. Collateral Rights. With respect to any proposed investment in
any MBS which does not represent all of the beneficial interest in the
underlying pool of Mortgage Loans, the Manager shall seek (where appropriate
and feasible) to obtain the right to foreclose on the underlying property, to
control the oversight and management of the resolution of the underlying
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 (collectively, the "Collateral
Rights").
D. Maximum Percentage of Partial MBS Interests. Without the
prior approval of the Board of Trust Managers (or any authorized Committee of
the Board), the Company's aggregate investments in MBS shall not exceed, at the
time of such investment, 40% of the Company's total consolidated assets.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 22
<PAGE> 47
SCHEDULE I
DEFINITIONS
Capitalized terms used above have the meanings set forth below, unless
the context indicates otherwise.
"Board" means the Board of Trust Managers of AMCT.
"Bridge Loan" means a Mortgage Loan used for temporary financing.
"CMBS" means commercial or multifamily MBS.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Shares" means AMCT's common shares of beneficial interest, par
value $.01 per share.
"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.
"Correspondent Agreement" means the nonexclusive Correspondent
Agreement between Holliday Fenoglio Fowler and the Company.
"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.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"Investment Committee" means the committee(s) maintained by the
Manager (which committee(s) 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.
"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.
"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
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 23
<PAGE> 48
mortgage or a pledge of the ownership interests of the borrower. Such loans
can also take the form of a direct equity investment in a partnership or joint
venture.
"Mortgage Collateral" means mortgage pass-through securities or pools
of whole loans securing or backing a series of CMBS.
"Mortgage Loans" means, collectively, loans secured by real property
and Mezzanine Loans.
"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.
"Nonperforming Mortgage Loans" means Mortgage Loans for which the
payment of principal and/or interest is more than 90 days delinquent.
"Participating Loan" means a Mortgage Loan that entitles the lender to
the receipt of interest based on a percentage of the mortgaged property's
revenues or cash flow, and/or any gain on sale of the property which
Participating Loan may be a Mezzanine Loan, Construction Loan, Bridge Loan or
other Mortgage Loan.
"Permanent Mortgage Loans" means long-term senior Mortgage Loans.
"Qualified REIT Subsidiary" means a corporation whose stock is
entirely owned by the Company at all times during such corporation's existence.
"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.
"REO Property" means real estate acquired at foreclosure (or by deed
in lieu of foreclosure).
"Residual Interests" means REMIC Residual Interests and non-REMIC
Residual Interests collectively.
"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 which are 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
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 24
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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.
"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 Loans" 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.
EXHIBIT "A" TO MANAGEMENT AGREEMENT - PAGE 25
<PAGE> 1
EXHIBIT 10.2
AMRESCO CAPITAL TRUST
1998 SHARE OPTION AND AWARD PLAN
AMRESCO CAPITAL TRUST, a Texas real estate investment trust (the
"Company"), hereby adopts the following 1998 Share Option and Award Plan (the
"Plan").
RECITALS
WHEREAS, the Company and AMREIT Managers, L.P., a Delaware limited
partnership (the "Manager"), have entered into a Management Agreement of even
date herewith pursuant to which the Manager will manage the day-to-day
operations of the Company;
WHEREAS, the Company desires to encourage high levels of performance by
the Manager and those individuals who are key to the success of the Company, to
attract new individuals who are highly motivated and who will contribute to the
success of the Company and to encourage such individuals to remain as trust
managers, officers and/or employees of the Manager, the Company and its
subsidiaries by increasing their proprietary interest in the Company's growth
and success; and
WHEREAS, to further these goals, the Company has formulated this 1998
Share Option and Award Plan to authorize the granting of incentive awards
through grants of share options ("Options") and Restricted Share Awards (as
hereinafter defined) to the Manager and those individuals whose judgment,
initiative and efforts are responsible for the success of the Company.
NOW, THEREFORE, the Company hereby constitutes and adopts the following
Plan and agrees to the following provisions:
ARTICLE 1
PURPOSE OF THE PLAN
1.1 PURPOSE. The purpose of the Plan is to assist the Company in
motivating the Manager by aligning the interests of the Manager with those of
the Company's shareholders, and attracting and retaining selected individuals to
serve as trust managers, officers and employees of the Manager and the Company
who will contribute to the Company's success and to achieve long-term objectives
which will inure to the benefit of all shareholders of the Company through the
additional incentive inherent in the ownership of the Company's common shares of
beneficial interest, par value $.01 per share (the "Shares"). Options granted
under the Plan will be either "incentive stock options" intended to qualify as
such under the provisions of Section 422 of the Internal Revenue Code of 1986,
as from time to time amended (the "Code"), or
<PAGE> 2
"nonqualified stock options." For purposes of the Plan, the term "subsidiary"
shall mean "subsidiary corporation," as such term is defined in Section 424(f)
of the Code, and "affiliate" shall have the meaning set forth in Rule 12b-2 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For
purposes of the Plan, the term "Award" shall mean a grant of an Option or a
Restricted Share Award.
ARTICLE 2
SHARES SUBJECT TO AWARDS
2.1 NUMBER OF SHARES. Subject to the adjustment provisions of SECTION
6.9 hereof, the aggregate number of Shares which may be issued under Awards
under the Plan, whether pursuant to Options or Restricted Share Awards, shall
not exceed, at any time, an amount equal to 15% of the outstanding Shares at
such time. The aggregate number of "incentive stock options" which may be
granted under the Plan is 1,000,000. No Awards to purchase fractional Shares
shall be granted or issued under the Plan.
2.2 SHARES SUBJECT TO TERMINATED AWARDS. The Shares covered by any
unexercised portions of terminated Options granted under Article 4, Shares
forfeited as provided in SECTION 5.3(a) and Shares subject to any Awards which
are otherwise surrendered by the Participant (as hereinafter defined) without
receiving any payment or other benefit with respect thereto may again be subject
to new Awards under the Plan. In the event the purchase price of an Option is
paid in whole or in part through the delivery of Shares, the number of Shares
issuable in connection with the exercise of the Option shall not again be
available for the grant of Awards under the Plan.
2.3 CHARACTER OF SHARES. Shares delivered under the Plan may be
authorized and unissued Shares or Shares acquired by the Company, or both.
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<PAGE> 3
ARTICLE 3
ELIGIBILITY AND ADMINISTRATION
3.1 AWARDS TO EMPLOYEES AND TRUST MANAGERS.
(a) Persons (or entities) who are eligible to receive Options
under Article 4 hereof ("Optionees") or Restricted Share Awards under
Article 5 hereof, (in either case, a "Participant") include (i) the
Manager, and (ii) such officers, employees and Trust Managers
(hereinafter defined) of the Company or any of its subsidiaries or
affiliates, or of the Manager as the Board of Trust Managers of the
Company (the "Board") or the Committee (hereinafter defined) shall
select from time to time. The Board's or the Committee's designation of
an Optionee or Participant in any year shall not require the Board or
the Committee to designate such Optionee or Participant to receive
Awards or grants in any other year. The designation of an Optionee or
Participant to receive Awards or grants under one portion of the Plan
shall not require the Committee to include such Optionee or Participant
under other portions of the Plan.
(b) No Option which is intended to qualify as an "incentive
stock option" may be granted to any officer, employee or Trust Manager
who, at the time of such grant, owns, directly or indirectly (within
the meaning of sections 422(b)(6) and 424(d) of the Code), shares
possessing more than ten percent (10%) of the total combined voting
power of all classes of shares of the Company or any of its
subsidiaries or affiliates, unless at the time of such grant, (i) the
option price is fixed at not less than 110% of the Fair Market Value
(as defined below) of the Shares subject to such Option, determined on
the date of the grant, and (ii) the exercise of such Option is
prohibited by its terms after the expiration of five (5) years from the
date such Option is granted.
3.2 ADMINISTRATION.
(a) The Plan shall be administered by a committee (the
"Committee") consisting of the compensation committee of the Board, or
such other Trust Managers as may be appointed from time to time by the
Board, provided that the Committee will consist of not fewer than two
Trust Managers each of whom will be (i) a "Non-Employee Director"
within the meaning of and to the extent required by Rule 16b-3 (or any
successor rule) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), (ii) an "outside director" as required pursuant to
Section 162(m) of the Code and such regulations as may be promulgated
thereunder, and (iii) an Independent Trust Manager, as defined in the
Bylaws of the Company.
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<PAGE> 4
(b) The Committee is authorized, subject to the provisions of
the Plan, to establish such rules and regulations as it may deem
appropriate for the conduct of meetings and proper administration of
the Plan. All actions of the Committee shall be taken by majority vote
of its members.
(c) Subject to the provisions of the Plan, the Board or the
Committee shall have authority, in its sole discretion, to interpret
the provisions of the Plan and, subject to the requirements of
applicable law, including Rule 16b-3 of the Exchange Act, to prescribe,
amend, and rescind rules and regulations relating to it as it may deem
necessary or advisable. All decisions made by the Board or the
Committee pursuant to the provisions of the Plan shall be final,
conclusive and binding on all persons, including the Company, its
shareholders, Trust Managers, officers, employees, Optionees and
Participants.
ARTICLE 4
OPTIONS
4.1 GRANT OF OPTIONS. The Board or the Committee shall determine,
within the limitations of the Plan, the Participants to whom Options are to be
granted under the Plan, the number of Shares that may be purchased under each
such Option and the option price, and shall designate such Options at the time
of the grant as either "incentive stock options" or "nonqualified stock
options;" provided, however, that (i) the aggregate number of "incentive stock
options" that may be granted under the Plan is 1,000,000, and (ii) Options
granted to the Manager, employees of the Manager or to any other non-employee of
the Company may only be "nonqualified stock options."
All Options granted pursuant to this Article 4 shall be authorized by
the Board or the Committee and shall be evidenced in writing by share option
agreements ("Share Option Agreements") in such form and containing such terms
and conditions as the Board or the Committee shall determine which are not
inconsistent with the provisions of the Plan, and, with respect to any Share
Option Agreement granting Options which are intended to qualify as "incentive
stock options," are not inconsistent with Section 422 of the Code. Granting an
Option pursuant to the Plan shall impose no obligation on the recipient to
exercise such option. Any individual who is granted an Option pursuant to this
Article 4 may hold more than one Option granted pursuant to such Articles at the
same time and may hold both "incentive stock options" and "nonqualified stock
options" at the same time. To the extent that any Option does not qualify as an
"incentive stock option" (whether because of its provisions, the time or manner
of its exercise or otherwise) such Option or the portion thereof which does not
so qualify shall constitute a separate "nonqualified stock option."
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<PAGE> 5
4.2 OPTION PRICE. Subject to SECTION 3.1(B), the option price per each
Share purchasable under any "incentive stock option" granted pursuant to this
Article 4 shall not be less than 100% of the Fair Market Value (as hereinafter
defined) of such Share on the date of the grant of such Option. The option price
per share of each Share purchasable under any "nonqualified stock option"
granted pursuant to this Article 4 shall be such amount as the Board or the
Committee shall determine at the time of the grant of such Option.
4.3 OPTION EXERCISE LOANS. The Board or the Committee may determine
that an Optionee may pay all or a portion of the purchase price of Shares being
purchased by an Optionee pursuant to the exercise of an Option through a loan
made by the Company to the Optionee (an "Option Exercise Loan") as set forth in
this Article 4.
4.4 TERMS OF OPTION EXERCISE LOANS.
(a) Option Exercise Loan. Each Option Exercise Loan shall be
evidenced by a promissory note of the Optionee. The term of the Option
Exercise Loan shall be a period not to exceed ten years, as determined
by the Board or the Committee, and the proceeds of the Option Exercise
Loan shall be used exclusively by the Optionee for purchase of Shares
from the Company at a purchase price equal to the option price set
forth in the Optionee's Share Option Agreement.
(b) Interest on Option Exercise Loan. An Option Exercise Loan
shall bear interest at such rate as the Committee shall determine (but
not in excess of the maximum rate permissible under applicable law),
payable in a manner and at such times as the Committee shall determine.
Those terms and provisions as the Board or the Committee shall
determine shall be incorporated into the promissory note evidencing the
Option Exercise Loan.
4.5 SECURITY FOR OPTION EXERCISE LOAN.
(a) Stock Power and Pledge. Option Exercise Loans granted to
Optionees shall be secured by a pledge of the Shares acquired pursuant
to the exercise of the Option. Such pledge shall be evidenced by a
pledge agreement (an "Option Exercise Pledge Agreement") containing
such terms and conditions as the Board or the Committee shall
determine. Option Exercise Loans may be recourse, or partially recourse
or non-recourse with respect to an Optionee, as the Board or the
Committee shall determine. The share certificates for the Shares
purchased by an Optionee with an Option Exercise Loan shall be issued
in the Optionee's name, but shall be held by the Company as security
for repayment of the Optionee's Option Exercise Loan together with a
stock power executed in blank
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<PAGE> 6
by the Optionee (the execution and delivery of which by the Optionee
shall be a condition to the issuance of the Shares). The Optionee shall
be entitled to exercise all rights applicable to such Shares,
including, but not limited to, the right to vote such Shares and the
right to receive dividends and other distributions made with respect to
such Shares.
(b) Release and Delivery of Share Certificates During the Term
of the Option Exercise Loan. On each anniversary date of an Option
Exercise Loan, the Company may release and deliver to each Optionee
certificates for Shares purchased by an Optionee with an Option
Exercise Loan, in such amounts and on such terms and conditions as the
Board or the Committee shall determine, which shall be set forth in the
Option Exercise Pledge Agreement.
(c) Release and Delivery of Share Certificates Upon Repayment
of the Option Exercise Loan. The Company shall release and deliver to
each Optionee certificates for the Shares purchased by the Optionee
with an Option Exercise Loan and then held by the Company at such time
as the Optionee has paid or otherwise satisfied in full the balance of
the Option Exercise Loan and any accrued but unpaid interest thereon.
In the event the balance of the Option Exercise Loan is not repaid,
forgiven or satisfied on (i) the date repayment of the Option Exercise
Loan is due (whether in accordance with its term, by reason of
acceleration or otherwise), or (ii) such later date as the Board or the
Committee, in its discretion, shall provide for repayment or
satisfaction, the Company shall foreclose upon, retain or sell those
Shares then held by the Company in accordance with the Option Exercise
Pledge Agreement.
4.6 TERMINATION OF SERVICE.
(a) Forgiveness of Option Exercise Loans. In the event of an
Optionee's termination of service by reason of death, Disability (as
hereinafter defined) or by the Company without "cause", or in the event
of a "change of control", the Board or the Committee shall have the
right (but shall not be required) to forgive all or any portion of the
remaining unpaid principal amount of any Option Exercise Loan
outstanding to such Optionee in whole or in part as of the date of such
occurrence; provided that, in the event of death or Disability, the
Company is able to obtain key man life insurance or other insurance
coverage to satisfy or offset the amount of such forgiven indebtedness.
"Change of control" and "cause" shall have the respective meanings as
set forth in the promissory note evidencing the Option Exercise Loan.
(b) Acceleration of Option Exercise Loans. In the event of the
termination of an Optionee's service by the Optionee without "good
reason" (as
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<PAGE> 7
defined in the promissory note evidencing the Option Exercise Loan) or
by the Company with "cause", the Optionee shall repay to the Company
the entire balance of the Option Exercise Loan and any accrued but
unpaid interest thereon, which amounts shall become immediately due and
payable on the thirtieth (30th) day following the date of such
termination.
4.7 RESTRICTIONS ON TRANSFER. No Shares purchased by an Optionee with
an Option Exercise Loan may be pledged (other than to the Company pursuant to
SECTION 4.5 above), sold, assigned or transferred (other than by will or by the
laws of descent and distribution) until the repayment in full of all principal
and accrued interest due and payable with respect to the Option Exercise Loan.
4.8 OTHER PROVISIONS. Options granted pursuant to this Article 4 shall
be made in accordance with the terms and provisions of Article 6 hereof and any
other applicable terms and provisions of the Plan.
ARTICLE 5
RESTRICTED AWARDS
5.1 RESTRICTED SHARE AWARDS.
(a) Grants of Restricted Share Awards. A grant of Shares made
pursuant to this Article 5 is referred to as a "Restricted Share
Award." The Board or the Committee may grant to any Participant an
amount of Shares in such manner, and subject to such terms and
conditions relating to vesting, forfeitability and restrictions on
delivery and transfer (whether based on performance standards, periods
of service or otherwise) as the Committee shall establish (such Shares
referred to herein as "Restricted Shares"). The terms of any Restricted
Share Award granted under this Plan shall be set forth in a written
agreement (a "Restricted Share Agreement") which shall contain
provisions determined by the Board or the Committee and not
inconsistent with this Plan. The provisions of Restricted Share Awards
need not be the same for each Participant receiving such Awards.
(b) Issuance of Restricted Shares. As soon as practicable on
or after the date of grant of a Restricted Share Award by the Board or
the Committee, the Company shall cause to be transferred on the books
of the Company Shares, registered in the name of the Participant,
evidencing the Restricted Shares covered by the Award, but subject to
forfeiture to the Company retroactive to the date of grant, if a
Restricted Share Agreement delivered to the Participant by the Company
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<PAGE> 8
with respect to the Restricted Shares covered by the Award is not duly
executed by the Participant and timely returned to the Company. All
Restricted Shares covered by Awards under this Article 5 shall be
subject to the restrictions, terms and conditions contained in the Plan
and the Restricted Share Agreement entered into by and between the
Company and the Participant. Until the lapse or release of all
restrictions applicable to an Award of Restricted Shares, the share
certificates representing such Restricted Shares may, in the discretion
of the Committee, be held in custody by the Company or its designee and
shall bear a restrictive legend describing the applicable restrictions,
terms and conditions.
(c) Shareholder Rights. Beginning on the date of grant of any
Restricted Share Award and subject to execution of the Restricted Share
Agreement as provided in SECTIONS 5.1(A) and (B), the Participant shall
become a shareholder of the Company with respect to all Shares subject
to the Restricted Share Agreement and shall have all of the rights of a
shareholder, including, but not limited to, the right to vote such
Shares and the right to receive distributions made with respect to such
Shares; provided, however, that any Shares distributed as a dividend or
otherwise with respect to any Restricted Shares as to which the
restrictions have not yet lapsed shall be subject to the same
restrictions as such Restricted Shares.
(d) Restriction on Transferability. Except as may be agreed in
writing by the Company, no Restricted Shares may be assigned or
transferred (other than by will or the laws of descent and
distribution), pledged or sold prior to lapse or release of the
restrictions applicable thereto.
(e) Delivery of Shares Upon Release of Restrictions. With
respect to any Restricted Shares, upon expiration or earlier
termination of the forfeiture period without a forfeiture and the
satisfaction of or release from any other conditions prescribed by the
Board or the Committee, the restrictions applicable to such Restricted
Shares shall lapse. As promptly as administratively feasible
thereafter, subject to the requirements of SECTION 8.1, the Company
shall deliver to the Participant or, in case of the Participant's
death, to the Participant's beneficiary, one or more stock certificates
for the appropriate number of Shares, free of all such restrictions,
except for any restrictions that may be imposed by law.
5.2 ISSUANCE OF RESTRICTED SHARES IN LIEU OF TRUST MANAGER FEES. The
Board or the Committee may award to any Trust Manager who is not also an
employee of the Company or any direct or indirect subsidiary of the Company (an
"Independent Trust Manager") all or any portion of the fees payable to such
Independent Trust Manager in Restricted Shares having a Fair Market Value equal
to such value as may be set by the Board or the Committee. Such Restricted
Shares may be issued to any Independent
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<PAGE> 9
Trust Manager as of the date the Trust Manager fees would otherwise be payable
in cash or as soon thereafter as practicable. Such issuance of Restricted Shares
shall be made upon such terms, conditions and procedures as the Board or the
Committee may establish from time to time.
5.3 TERMS OF RESTRICTED SHARES.
(a) Forfeiture of Restricted Shares. Subject to SECTION
5.3(B), all Restricted Shares shall be forfeited and returned to the
Company and all rights of the Participant with respect to such
Restricted Shares shall terminate unless the Participant satisfies the
requirements of the Restricted Share Agreement which may include
requirements for continuation of service, performance, etc. The
Committee, in its sole discretion, shall determine the forfeiture
period (which may, but need not, lapse in installments) and any other
terms and conditions applicable with respect to any Restricted Share
Award.
(b) Waiver of Forfeiture Period. Notwithstanding anything
contained in this Article 5 to the contrary, the Board or the Committee
may, in its sole discretion, waive the forfeiture period and any other
conditions set forth in any Restricted Share Agreement under
appropriate circumstances (which may include the death, disability or
retirement of the Participant, or a material change in circumstances
arising after the date of an Award) and subject to such terms and
conditions (including forfeiture of a proportionate number of the
Restricted Shares) as the Board or the Committee shall deem
appropriate.
ARTICLE 6
GENERALLY APPLICABLE PROVISIONS
6.1 OPTION PERIOD. Subject to SECTION 3.1(B), the period for which an
Option is exercisable shall not exceed ten (10) years from the date such Option
is granted. After the Option is granted, the option period may not be reduced.
6.2 FAIR MARKET VALUE. If the Shares are listed or admitted to trading
on a securities exchange registered under the Exchange Act, the "Fair Market
Value" of a Share as of a specified date shall mean the average of the high and
low price of the shares for the day immediately preceding the date as of which
Fair Market Value is being determined (or if there was no reported sale on such
date, on the last preceding date on which any reported sale occurred) as
reported on the principal securities exchange on which the Shares are listed or
admitted to trading. If the Shares are not listed or admitted to trading on any
such exchange but are listed as a national market security on NASDAQ,
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traded in the over-the-counter market or listed or traded on any similar system
then in use, the Fair Market Value of a Share shall be the average of the high
and low sales price for the day immediately preceding the date as of which the
Fair Market Value is being determined (or if there was no reported sale on such
date, on the last preceding date on which any reported sale occurred) as
reported on such system. If the Shares are not listed or admitted to trading on
any such exchange, are not listed as a national market security on NASDAQ and
are not traded in the over-the-counter market or listed or traded on any similar
system then in use, but are quoted on NASDAQ or any similar system then in use,
the Fair Market Value of a Share shall be the average of the closing high bid
and low asked quotations on such system for the Shares on the date in question.
If the Shares are not publicly traded, Fair Market Value shall be determined by
the Board or the Committee in its sole discretion using appropriate criteria. An
Award shall be considered granted on the date the Board or the Committee acts to
grant the Award or such later date as the Board or the Committee shall specify.
6.3 EXERCISE OF OPTIONS. Options granted under the Plan shall be
exercised by the Optionee thereof (or by his or her executors, administrators,
guardian or legal representative, as provided in SECTIONS 6.6 and 6.7 hereof) as
to all or part of the Shares covered thereby, by the giving of written notice of
exercise to the Company, specifying the number of Shares to be purchased,
accompanied by payment of the full purchase price for the Shares being
purchased. Full payment of such purchase price shall be made within five (5)
business days following the date of exercise and shall be made (i) in cash or by
certified check or bank check, (ii) with the consent of the Board or the
Committee, by delivery of a promissory note in favor of the Company upon such
terms and conditions as determined by the Board or the Committee, (iii) with the
consent of Board or the Committee, by tendering previously acquired Shares
(valued at its Fair Market Value, as determined by the Board or the Committee as
of the date of tender), or (iv) with the consent of the Board or the Committee,
any combination of (i), (ii) and (iii); provided, however, that payment may not
be pursuant to (iii) above unless the Optionee shall have owned the Shares being
tendered in payment for a period of at least six months prior to the date of
exercise of the Option. Such notice of exercise, accompanied by such payment,
shall be delivered to the Company at its principal business office or such other
office as the Committee may from time to time direct, and shall be in such form,
containing such further provisions consistent with the provisions of the Plan,
as the Board or the Committee may from time to time prescribe. In no event may
any Option granted hereunder be exercised for a fraction of a Share. The Company
shall effect the transfer of Shares purchased pursuant to an Option as soon as
practicable, and, within a reasonable time thereafter, such transfer shall be
evidenced on the books of the Company. No person exercising an Option shall have
any of the rights of a holder of Shares subject to an Option until certificates
for such Shares shall have been issued following the exercise of such Option. No
adjustment shall be made for cash dividends or other rights for which the record
date is prior to the date of such issuance.
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<PAGE> 11
6.4 NON-TRANSFERABILITY OF OPTIONS. No Option shall be assignable or
transferable by the Optionee, other than by will or the laws of descent and
distribution, and may be exercised during the life of the Optionee only by the
Optionee or his duly appointed guardian or legal representative. Notwithstanding
the foregoing or any other provisions contained in this Plan, a nonqualified
Share Option Agreement may provide that the Optionee may transfer the option and
all rights and privileges evidenced by the Share Option Agreement to (i) members
of Optionee's immediate family (i.e., Optionee's spouse, or the children,
grandchildren or parents of Optionee or Optionee's spouse) (any such person
referred to herein as a "Family Member"), (ii) one or more trusts for the
benefit of any Family Member, and (iii) any partnership whose only partners are
Family Members (any person or entity referred to in clauses (i), (ii) or (iii)
above being a "Permitted Transferee"), provided that (a) no consideration may be
paid for the transfer of the option or other rights or privileges evidenced by
the Share Option Agreement and (b) any Permitted Transferee who is the
transferee of any Option will remain subject to all conditions (including the
transfer restrictions) which were applicable to the Option and the rights and
privileges evidenced by the Plan and the Share Option Agreement prior to the
transfer to such Permitted Transferee.
6.5 TERMINATION OF SERVICE. If the service of an Optionee is terminated
for any reason other than (1) Disability (as hereinafter defined) of the
Optionee, (2) death of the Optionee, or (3) for cause (as defined in the
applicable Share Option Award Agreement or, if not so defined, as determined by
the Committee in its sole and absolute discretion), an Option (whether or not
exercisable on the date of such termination) shall be exercisable by the
Optionee at any time prior to the expiration of the Option or, in the case of an
Option which is an "incentive stock option", within three (3) months after the
date of such termination of service, whichever is the shorter period.
Notwithstanding the foregoing provisions, with respect to Share Options intended
to qualify as "incentive stock options," in the event such Options are not
exercised by the Optionee within three (3) months after termination of service
in accordance with this SECTION 6.5, a Share Option Agreement may provide that
the Optionee may still exercise his Option at any time prior to the expiration
of the Option, but such Option shall be deemed to be a "nonqualified stock
option."
6.6 DEATH. If the Optionee dies while employed by the Company or any of
its subsidiaries or affiliates or during his term as a Trust Manager of the
Company or any of its subsidiaries or affiliates, as the case may be, any
Option(s) granted to him not previously expired or exercised shall, to the
extent exercisable on the date of death, be exercisable by the estate of such
Optionee or by any person who acquired such Option by bequest or inheritance, at
any time within one year after the death of the Optionee, unless earlier
terminated pursuant to its terms; provided, however, that if the term of such
Option would expire by its terms within six months after the Optionee's death,
the term of such Option shall be extended until six months after the Optionee's
death; provided
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<PAGE> 12
further, that in no instance may the term of the Option, as so extended, exceed
the maximum term set forth in SECTION 3.1(B) or 6.1 above.
6.7 DISABILITY. If an Optionee's service is terminated by reason of
the Optionee's Disability, an Option (whether or not exercisable on the date of
the Optionee's termination of service by reason of Disability) shall be
exercisable by the Optionee at any time prior to the expiration of the Option
or, in the case of an Option which is an "incentive stock option", within twelve
(12) months after the date of such termination of service, whichever is the
shorter period. Notwithstanding the foregoing provisions, with respect to
"incentive stock options", in the event such Options are not exercised by the
Optionee within twelve (12) months after the date of termination of service in
accordance with this SECTION 6.7, a Share Option Agreement may provide that the
Optionee may still exercise his Option at any time prior to the expiration of
the Option, but such Option shall be deemed to be a "nonqualified stock option."
As used herein, the term "Disability" shall have the meaning set forth in the
applicable Share Option Agreement or Restricted Share Agreement (each such type
of agreement being hereinafter sometimes referred to as an "Award Agreement"),
or, if not so defined therein, shall mean the determination by the Board or the
Committee, upon the advice of an independent qualified physician, that the
Participant has become physically or mentally incapable of performing his or her
duties and such disability has disabled the Participant for a consecutive period
of one-hundred and eighty (180) days. The determination of whether or not an
Optionee's service is terminated by reason of Disability shall be in the sole
and absolute discretion of the Board or the Committee.
6.8 AMENDMENT AND MODIFICATION OF THE PLAN. The Board or the Committee
may, from time to time, alter, amend, suspend or terminate the Plan as it shall
deem advisable, subject to any requirement for shareholder approval imposed by
applicable law or any rule of any stock exchange or quotation system on which
Shares are listed or quoted; provided that neither the Board nor the Committee
may amend the Plan in any manner that would result in noncompliance with Rule
16b-3 of the Exchange Act or any applicable law; and further provided that
neither the Board nor the Committee may, without the approval of the Company's
shareholders, amend the Plan to (a) increase the number of Shares that may be
the subject of Awards under the Plan (except for adjustments pursuant to SECTION
6.9 hereof), (b) reduce the minimum option price specified by SECTION 3.1(B)
hereof, (c) increase the maximum permissible term of any Option specified by
SECTIONS 3.1(B) and 6.1 hereof, or (d) remove responsibility for administering
the Plan from the Board or the Committee. In addition, no amendments to, or
termination of, the Plan shall in any way impair the rights of an Optionee or a
Participant under any Award previously granted without such Optionee's or
Participant's consent.
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<PAGE> 13
6.9 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event that a
dividend payable in Shares of the Company or a share split shall be hereinafter
declared upon the Shares of the Company, the number of Shares then subject to
any Award hereunder and the number of Shares reserved for issuance pursuant to
the Plan but not yet covered by an Award shall be adjusted by adding to each
such Share the number of shares which would be distributable thereon if such
Share had been outstanding on the date fixed for determining the shareholders
entitled to receive such share dividend or share split. In the event that the
outstanding Shares of the Company shall be changed into or exchanged for a
different number or kind of shares of beneficial interest or other securities of
the Company or of another corporation, whether through reorganization,
recapitalization, share split, combination of shares, merger, consolidation,
combination, spin-off, repurchase or exchange of Shares then there shall be
substituted for each Share subject to any such Award and for each Share reserved
for issuance pursuant to the Plan but not yet covered by an Award, the number
and kind of shares of beneficial interest or other securities into which each
outstanding Common Share shall be so changed or for which each such Share shall
be exchanged. In the event there shall be any change, other than as specified
above in this SECTION 6.9, in the number or kind of outstanding Shares of the
Company or of any shares of beneficial interest or other securities into which
Shares shall have been changed or for which they shall have been exchanged, then
if the Board or the Committee shall in its sole discretion determine that such
change equitably requires an adjustment in the number or kind of Shares
theretofore reserved for issuance pursuant to the Plan but not yet covered by an
Award and of the Shares then subject to an Award or Awards, such adjustment
shall be made by the Committee and shall be effective and binding for all
purposes of the Plan and of each Award Agreement. In the case of any such
substitution or adjustment as provided for in this Section, the option or
purchase price in each Award Agreement for each Share covered thereby prior to
such substitution or adjustment will be the option or purchase price for all
shares of beneficial interest or other securities which shall have been
substituted for such Share or to which such adjustment provided for in this
SECTION 6.9 shall be made, in accordance with Section 424(a) of the Code. No
adjustment or substitution provided for in this SECTION 6.9 shall require the
Company pursuant to any Award Agreement to sell a fractional Share, and the
total substitution or adjustment with respect to each Award Agreement shall be
limited accordingly.
6.10 ACCELERATION. A "Change in Control" for purposes of this Plan
shall mean the occurrence of any of the following events: (i) any "person" or
"group" of persons, as such terms are used in Sections 13 and 14 of the Exchange
Act, other than any employee benefit plan sponsored by the Company, becomes the
"beneficial owners," as such term is used in Section 13 of the Exchange Act, of
fifty percent (50%) or more of the Shares issued and outstanding immediately
prior to such acquisition; (ii) any Shares are purchased pursuant to a tender or
exchange offer other than an offer by the Company; or (iii) the dissolution or
liquidation of the Company or the consummation of any merger
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<PAGE> 14
or consolidation of the Company or any sale or other disposition of all or
substantially all of its assets, if the shareholders of the Company immediately
before such transaction own, immediately after consummation of such transaction,
equity securities (other than Options and other rights to acquire equity
securities) possessing less than fifty percent (50%) of the voting power of the
surviving or acquiring corporation.
(a) Change in Control With Provision Being Made
Therefor. If provision be made in writing in connection with a
Change in Control for the assumption and continuance of any Award
granted under the Plan, or the substitution for such Award of a
new option or other security covering the shares of the successor
employer corporation, with appropriate adjustment as to number and
kind of shares and prices, the Award granted under the Plan, or
the new Award substituted therefor, as the case may be, shall
continue in the manner and under the terms provided.
(b) Change in Control Without Provision Being Made
Therefor. In the event provision is not made in connection with a
Change in Control for the continuance and assumption of any Award
granted under the Plan or for the substitution of any Award
covering the shares of the successor employer corporation, then,
subject to the $100,000 annual limitation with respect to
"incentive stock options", the holder of any such Award shall be
entitled, prior to the effective date of any such Change in
Control, to purchase the full number of shares not previously
exercised under such Award, without regard to the periods of
exercisability of such Award established by the Committee and set
forth in the Award Agreement evidencing such Award if (and only
if) such Award has not at that time expired or been terminated and
any other requirements for purchase or exercise set forth in the
Award Agreement have been satisfied, failing which purchase, any
unexercised portion of the Option shall continue to be exercisable
during the remaining term thereof, except as otherwise provided in
the Award Agreement granting the Award.
(c) Binding Decision. All adjustments under this Section
shall be made by the Committee, whose determination as to what
adjustments shall be made and the extent thereof, shall be final,
binding and conclusive for all purposes of the Plan and of each
Award Agreement.
6.11 QUALIFICATION OF THE PLAN. This Plan is not intended to be, and
shall not be, qualified under Section 401(a) of the Code.
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<PAGE> 15
ARTICLE 7
MISCELLANEOUS
7.1 TAX WITHHOLDING. The Company shall notify an Optionee or
Participant of any income tax withholding requirements arising as a result of
the grant of any Award, exercise of an Option or any other event occurring
pursuant to this Plan. The Company shall have the right to withhold from such
Optionee or Participant such withholding taxes as may be required by law, or to
otherwise require the Optionee or Participant to pay such withholding taxes. If
the Optionee or Participant shall fail to make such tax payments as are
required, the Company or its subsidiaries or affiliates shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment of
any kind otherwise due to such Optionee or Participant or to take such other
action as may be necessary to satisfy such withholding obligations.
7.2 RIGHT OF DISCHARGE RESERVED. Nothing in the Plan nor the grant of
an Award hereunder shall confer upon the Manager or any officer, employee, Trust
Manager or other individual the right to continue in the employment or service
of the Company or any subsidiary or affiliate of the Company or affect any right
that the Company or any subsidiary or affiliate of the Company may have to
terminate the employment or service of (or to demote or to exclude from future
Awards under the Plan) any such officer, employee, Trust Manager or other
individual at any time for any reason. Except as specifically provided by the
Committee, the Company shall not be liable for the loss of existing or potential
profit from an Award granted in the event of termination of an employment or
other relationship even if the termination is in violation of an obligation of
the Company or any subsidiary or affiliate of the Company to the officer,
employee or Trust Manager.
7.3 NATURE OF PAYMENTS. All Awards made pursuant to the Plan are in
consideration of services performed for the Company or any subsidiary or
affiliate of the Company. Any income or gain realized pursuant to Awards under
the Plan constitutes a special incentive payment to the Optionee or Participant
and shall not be taken into account, to the extent permissible under applicable
law, as compensation for purposes of any of the employee benefit plans of the
Company or any subsidiary or affiliate of the Company except as may be
determined by the Committee or by the Trust Managers or directors of the
applicable subsidiary or affiliate of the Company.
7.4 INDEMNIFICATION OF COMMITTEE. The Company shall indemnify each
present and future member of the Committee against, and each member of the
Committee shall be entitled to indemnity from the Company in connection with
actions brought against any such member by reason of such member serving on the
Committee
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<PAGE> 16
in accordance with the provisions of the Company's Amended and Restated
Declaration of Trust (as currently in effect from time to time).
7.5 SEVERABILITY. If any provision of the Plan shall be held unlawful
or otherwise invalid or unenforceable in whole or in part, such unlawfulness,
invalidity or unenforceability shall not affect any other provision of the Plan
or part thereof, each of which remain in full force and effect. If the making of
any payment or the provision of any other benefit required under the Plan shall
be held unlawful or otherwise invalid or unenforceable, such unlawfulness,
invalidity or unenforceability shall not prevent any other payment or benefit
from being made or provided under the Plan, and if the making of any payment in
full or the provision of any other benefit required under the Plan in full would
be unlawful or otherwise invalid or unenforceable, then such unlawfulness,
invalidity or unenforceability shall not prevent such payment or benefit from
being made or provided in part, to the extent that it would not be unlawful,
invalid or unenforceable, and the maximum payment or benefit that would not be
unlawful, invalid or unenforceable shall be made or provided under the Plan.
7.6 GENDER AND NUMBER. In construing the Plan, any masculine
terminology herein shall also include the feminine, and the definition of any
term herein in the singular shall also include the plural, except when otherwise
indicated by the context.
7.7 GOVERNING LAW. The Plan and all determinations made and actions
taken thereunder, to the extent not otherwise governed by the Code or the laws
of the United States, shall be governed by the laws of the State of Texas and
construed accordingly and the Plan shall be deemed to be performable in Dallas
County, Texas.
7.8 TERMINATION OF PLAN. Awards may be granted under the Plan at any
time and from time to time on or prior to April 20, 2008, on which date the Plan
will expire except as to Awards then outstanding under the Plan. Such
outstanding Awards shall remain in effect until they have been exercised or
terminated, or have expired.
7.9 CAPTIONS. The captions in this Plan are for convenience of
reference only, and are not intended to narrow, limit or affect the substance or
interpretation of the provisions contained herein.
7.10 EFFECTIVE DATE. The effective date of the Plan shall be April
20, 1998.
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<PAGE> 1
EXHIBIT 10.6
LICENSE AGREEMENT
This License Agreement (this "Agreement"), effective as of February 1,
1998, is made and entered into by and between AMRESCO, INC., a Delaware
corporation ("Licensor"), and AMRESCO Capital Trust, a Texas real estate
investment trust ("Licensee").
ARTICLE 1
DEFINITIONS
1.1 "Intellectual Property" means "AMRESCO" the registered mark of
Licensor (Registration Number 1,757,736) and the unregistered trademark of
Licensor, a likeness of which is set forth on Exhibit "A" hereto.
1.2 "Management Agreement" means the Management Agreement to be
entered into on the date hereof between Licensee and AMREIT Managers, L.P., a
Delaware limited partnership and a subsidiary of Licensor.
ARTICLE 2
LICENSE GRANT
Licensor hereby grants to Licensee, subject to the terms and
conditions of this Agreement, a non-exclusive, royalty-free, non-transferrable
right and license to use the Intellectual Property in connection with the
conduct of the business of Licensee, as described in Licensee's Registration
Statement on Form S-11, including all amendments thereto, as filed with the
Securities and Exchange Commission.
ARTICLE 3
LIMITATIONS ON THE USE OF INTELLECTUAL PROPERTY
3.1 Licensee agrees not to use the Intellectual Property except as
specifically authorized by this Agreement.
3.2 All use of the Intellectual Property by Licensee under this
Agreement shall be deemed to be used by Licensor and shall accrue to the
benefit of Licensor.
3.3 Licensee agrees to comply with all laws pertaining to the
Intellectual Property. This provision includes compliance with marking
requirements.
3.4 Licensee shall not, either during the term of this Agreement
or thereafter, use any trademark or tradename confusingly similar to the
Intellectual Property.
<PAGE> 2
ARTICLE 4
QUALITY CONTROLS
4.1 Licensee agrees to deliver samples of all materials which bear
the Intellectual Property to Licensor for Licensor's approval and acceptance
prior to the use of such materials by Licensee. Licensor has 5 business days to
approve in writing the submitted materials. If Licensor has not notified
Licensee of its disapproval in writing within 5 business days, such materials
will be automatically assumed to have been approved by Licensor.
4.2 Licensee agrees not to alter, change, modify or supplement any
materials bearing the Intellectual Property without Licensor's prior written
consent.
4.3 Licensee acknowledges that the Intellectual Property is of
substantial value to Licensor and Licensee will fully comply with the
specifications, directions, and standards of quality imposed by Licensor from
time to time to preserve, maintain and enhance the reputation and goodwill in
the Intellectual Property developed by Licensor and its affiliates. Licensee
shall ensure that all materials on which the Intellectual Property is used or
associated therewith will meet all specifications, directions, and standards of
quality imposed by Licensor and will satisfy in performance, quality,
construction and use the reasonable requirements of Licensor and shall, upon
notice from Licensor, give Licensor or its authorized representative, free
access at any reasonable time to the premises of Licensee for the purpose of
ensuring that Licensee is observing these obligations.
4.4 Should Licensor notify Licensee that any use of the
Intellectual Property fails to comply with Licensor's specifications,
directions or standards of quality for such use, Licensee shall promptly
proceed to correct any defects in accordance with instructions from Licensor.
Failure to correct such defects will result in the termination of this
Agreement.
4.5 All use of the Intellectual Property by Licensee and its
affiliates shall conform with proper practices, as applicable. Licensee shall
take all reasonable actions to assist Licensor in protecting the Intellectual
Property.
4.6 Licensee shall use the Intellectual Property in the form
stipulated by Licensor and shall observe any reasonable directions given by
Licensor as to colors and sizes of the representations of the Intellectual
Property and their manner and disposition.
4.7 All material on or in relation to which Licensee proposes to
use the Intellectual Property shall bear a legible statement that identifies
Licensor as the owner of the Intellectual Property.
4.8 Licensee shall not associate any of the Intellectual Property
with any unauthorized trademark or tradename.
2
<PAGE> 3
ARTICLE 5
OWNERSHIP OF INTELLECTUAL PROPERTY
5.1 Licensee acknowledges that Licensor owns all right, title and
interest in and to the Intellectual Property and any registrations that have
issued or may issue thereon. Licensee agrees that it will not take, directly or
indirectly, any action which Licensee knows, or has reasonable cause to believe,
might weaken any of the Intellectual Property, impair any rights of Licensor in
and to such Intellectual Property, or create any rights adverse to those of
Licensor in the Intellectual Property.
5.2 Licensee undertakes not to do or permit to be done any act
which Licensee knows, or has reasonable cause to believe, would or might
jeopardize Licensor's rights in any Intellectual Property or registrations
thereof or which might prejudice the right or title of Licensor to any of the
Intellectual Property.
5.3 Licensee will not make any representation or do any act which
may be taken to indicate that it has any right, title or interest in or to the
ownership or use of any of the Intellectual Property except as specifically
allowed in this Agreement and Licensee acknowledges that nothing contained in
this Agreement shall give Licensee any right, title or interest in or to the
Intellectual Property save as granted hereby.
5.4 All rights in the Intellectual Property, other than those
specifically granted herein, are reserved by Licensor for its own use and
benefit.
5.5 Licensee shall cooperate with Licensor, including providing
any necessary samples, specimens, or affidavits of use, as required by Licensor
to secure, establish, maintain, and enforce Licensor's right and title in the
Intellectual Property. Licensor has the sole authority to register the
Intellectual Property.
ARTICLE 6
INFRINGEMENT
6.1 Licensee shall, as soon as it becomes aware thereof, give
Licensor in writing full particulars of any use or proposed use by any other
person, firm or company of a tradename, trademark or trade dress of goods or
mode of promotion or advertising which amounts or might amount either to
infringement of Licensor's rights in relation to any of the Intellectual
Property.
6.2 If Licensee becomes aware that any other person, firm or
company alleges that any of the Intellectual Property is invalid or that use of
the Intellectual Property is otherwise attacked or attackable, Licensee shall
immediately give Licensor full particulars in writing thereof and shall make no
comment or admission to any third party in respect thereof.
6.3 Upon notification of Licensor of such infringement or
misappropriation, Licensor and Licensee shall take counsel together on the
action to be taken against the infringing third party. Such action may be
brought either jointly by Licensor and Licensee in which case the expenses,
benefits, or damages resulting therefrom shall be equally shared between the
parties; or by Licensee, who shall bear the expenses and risks or collect the
damages due, if any, if such action is taken by Licensee singly with the prior
approval of Licensor.
3
<PAGE> 4
6.4 The parties shall cooperate fully with each other and perform
such acts or execute such documents as one party may request of the other party
to assist the requesting party in any suit or legal proceedings to protect the
Intellectual Property.
6.5 Licensee may not settle any suit or action without the written
consent of Licensor.
ARTICLE 7
TERM AND TERMINATION
7.1 This Agreement may be terminated by Licensor, in its sole
discretion, at any time following the termination of the Management Agreement.
7.2 In the event of any breach or default by Licensee in any of
the terms and conditions of this Agreement or the Management Agreements,
Licensor may terminate this Agreement by giving written notice of such
termination to Licensee.
7.3 In the event of default or termination of this Agreement,
Licensee shall cease and desist from all use of the Intellectual Property in any
way without the written consent of Licensor, and, within 90 days of such
termination, Licensee will deliver to Licensor, or its duly authorized
representatives, all materials upon which the Intellectual Property appears, and
furthermore, Licensee will not at any time adopt or use without Licensor's prior
consent, any word or mark which is similar to or likely to be confused with any
of the Intellectual Property.
7.4 Licensor may terminate this Agreement if Licensee becomes
insolvent, has a receiver appointed over the whole or any part of its assets,
enters into any debt reorganization with its creditors, or declares bankruptcy,
by giving notice to Licensee of its intention to terminate. In any of the
foregoing events, such terminations shall be effective immediately upon notice.
7.5 In the event of termination of this Agreement, Licensee agrees
to abide by all obligations which, from the context hereof, are intended to
survive the termination of this Agreement, including but not limited to Article
5, Article 6, Article 7, Article 8 and Article 9.
7.6 Should this Agreement be terminated for any reason, Licensee
shall not be able to claim from Licensor any damages or compensation for losses
or expenses incurred or lost profits.
ARTICLE 8
GENERAL PROVISIONS
8.1 Licensor assumes no liability to Licensee or to any third
parties with respect to any claim based on the sale, alleged defects in, or use
of goods or services provided by Licensee in association with the Intellectual
Property.
8.2 This Agreement is entered in connection with, and as a
condition to, Licensee entering into the Management Agreement. This Agreement
sets forth the
4
<PAGE> 5
entire agreement of the parties with respect to the subject matter hereof and
supersedes all previous representations, agreements, understandings or
negotiations, oral or written, with respect to the subject matter herein.
8.3 If any of the provisions of this Agreement are determined to
be invalid or unenforceable, such invalidity or unenforceability will not
invalidate or render unenforceable the remainder of this Agreement, but rather
the entire agreement will be construed as if not containing the particular
invalid or unenforceable provision or provisions, and the rights and
obligations of the parties hereto shall be construed and enforced accordingly.
The parties hereto acknowledge that if any provision of this Agreement is
determined to be invalid or unenforceable, it is their desire and intention
that such provision be reformed and construed in such manner that it will, to
the maximum practicable, be deemed to be valid and enforceable.
8.4 Licensee shall not assign or delegate any rights or
obligations under this Agreement without the prior written consent of Licensor.
8.5 No modification, addition to, or amendment of this Agreement
shall be binding upon a party unless made in writing and signed by an
authorized representative of both parties.
8.6 The waiver by Licensor of any breach of this Agreement by
Licensee shall not be effective unless in writing and no such waiver shall
operate or be construed as a waiver of the same or any other existing or future
breach.
8.7 This Agreement will be governed by, construed and enforced in
accordance with the laws of the State of Texas.
ARTICLE 9
NOTICES
Any notices required or permitted to be given under this Agreement
shall be deemed sufficiently given if hand delivered with receipt acknowledged,
or mailed by certified or registered mail, postage prepaid, or mailed by an
internationally recognized overnight delivery service addressed to the party to
be notified at its address shown below, or to such other person or at such
other address as may be furnished in writing to the other party hereto.
(a) If to Licensor: AMRESCO, INC.
Attn: General Counsel
700 North Pearl Street
Suite 2400, LB 342
Dallas, Texas 75201
(214) 953-7700
(b) If to Licensee: AMRESCO Capital Trust
Attn: General Counsel
700 North Pearl Street
Suite 2400, LB 342
Dallas, Texas 75201
(214) 953-7700
5
<PAGE> 6
IN WITNESS WHEREOF, the undersigned have caused their duly authorized
representatives to execute this Agreement in the capacity shown below.
LICENSOR:
AMRESCO, INC.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
LICENSEE:
AMRESCO CAPITAL TRUST
By:
---------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
6
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 4 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 28, 1998
