<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-14029
AMRESCO CAPITAL TRUST
(Exact name of Registrant as specified in its charter)
TEXAS 75-2744858
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 N. PEARL STREET, SUITE 2400, LB 342,
DALLAS, TEXAS 75201-7424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 953-7700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
10,015,111 shares of common stock, $.01 par value per share,
as of August 1, 1999.
<PAGE> 2
AMRESCO CAPITAL TRUST
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 ...................................... 3
Consolidated Statements of Income - For the Three and Six Months Ended June 30, 1999, the Three Months
Ended June 30, 1998 and the Period from February 2, 1998 (Date of Initial Capitalization) through
June 30, 1998......................................................................................... 4
Consolidated Statement of Changes in Shareholders' Equity - For the Six Months Ended June
30, 1999.............................................................................................. 5
Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 1999 and the Period from
February 2, 1998 (Date of Initial Capitalization) through June 30, 1998............................... 6
Notes to Consolidated Financial Statements.............................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 26
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 27
Item 5. Other Information................................................................................ 27
Item 6. Exhibits and Reports on Form 8-K................................................................. 28
SIGNATURE ................................................................................................ 29
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMRESCO CAPITAL TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, 1999 December 31,
(unaudited) 1998
------------- ------------
<S> <C> <C>
ASSETS
Mortgage loans, net ................................................................ $ 114,506 $ 96,976
Acquisition, development and construction loan arrangements accounted for as real
estate or investments in joint ventures ......................................... 34,987 39,550
---------- ----------
Total loan investments ............................................................. 149,493 136,526
Allowance for loan losses .......................................................... (2,048) (1,368)
---------- ----------
Total loan investments, net of allowance for losses ................................ 147,445 135,158
Commercial mortgage-backed securities - available for sale (at fair value) ......... 26,099 28,754
Real estate, net of accumulated depreciation of $297 and $56, respectively ......... 40,223 10,273
Investments in unconsolidated partnerships and subsidiary .......................... 11,696 3,271
Receivables and other assets ....................................................... 5,431 3,681
Cash and cash equivalents .......................................................... 3,770 9,789
---------- ----------
TOTAL ASSETS .................................................................... $ 234,664 $ 190,926
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and other liabilities .............................................. $ 2,103 $ 941
Amounts due to affiliates ........................................................... 5,968 6,268
Repurchase agreement ................................................................ 10,393 --
Line of credit ...................................................................... 59,338 39,338
Non-recourse debt on real estate .................................................... 26,998 7,500
Dividends payable ................................................................... -- 4,002
---------- ----------
TOTAL LIABILITIES ............................................................... 104,800 58,049
---------- ----------
Minority interests .................................................................. 500 2,611
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 49,650,000 shares authorized, no shares issued ..... -- --
Series A junior participating preferred stock, $.01 par value, 350,000 shares
authorized, no shares issued .................................................... -- --
Common stock, $.01 par value, 200,000,000 shares authorized, 10,015,111 and
10,006,111 shares issued and outstanding, respectively .......................... 100 100
Additional paid-in capital .......................................................... 140,998 140,941
Unearned stock compensation ......................................................... (435) (848)
Accumulated other comprehensive income (loss) ....................................... (9,296) (6,475)
Distributions in excess of accumulated earnings ..................................... (2,003) (3,452)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY ...................................................... 129,364 130,266
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................................... $ 234,664 $ 190,926
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Period from
February 2,
Three Months Ended Six Months 1998
June 30, Ended through
------------------------- June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Interest income on mortgage loans .......................... $ 3,878 $ 140 $ 6,935 $ 140
Income from commercial mortgage-backed securities .......... 934 37 1,848 37
Operating income from real estate .......................... 831 17 1,177 17
Equity in earnings of unconsolidated subsidiary,
partnerships and other real estate ventures .............. 64 160 134 160
Interest income from short-term investments ................ 36 907 122 907
---------- ---------- ---------- ----------
TOTAL REVENUES ........................................... 5,743 1,261 10,216 1,261
---------- ---------- ---------- ----------
EXPENSES:
Interest expense ........................................... 1,069 -- 1,658 --
Management fees ............................................ 415 193 1,003 193
General and administrative ................................. 259 198 782 198
Depreciation ............................................... 211 3 297 3
Participating interest in mortgage loans ................... 644 -- 829 --
Provision for loan losses .................................. 438 110 1,180 110
---------- ---------- ---------- ----------
TOTAL EXPENSES ........................................... 3,036 504 5,749 504
---------- ---------- ---------- ----------
INCOME BEFORE GAINS .......................................... 2,707 757 4,467 757
Gain associated with repayment of ADC loan arrangement .... -- -- 584 --
---------- ---------- ---------- ----------
NET INCOME ................................................... $ 2,707 $ 757 $ 5,051 $ 757
========== ========== ========== ==========
EARNINGS PER COMMON SHARE:
Basic ..................................................... $ 0.27 $ 0.14 $ 0.50 $ 0.23
========== ========== ========== ==========
Diluted ................................................... $ 0.27 $ 0.14 $ 0.50 $ 0.23
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ..................................................... 10,000 5,495 10,000 3,356
========== ========== ========== ==========
Diluted ................................................... 10,012 5,498 10,009 3,358
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock
$.01 Par Value Accumulated Distributions
--------------------- Additional Unearned Other in Excess of Total
Number of Paid-in Stock Comprehensive Accumulated Shareholders'
Shares Amount Capital Compensation Income (Loss) Earnings Equity
------------ ------ ---------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999...... 10,006,111 $100 $140,941 $(848) $(6,475) $ (3,452) $ 130,266
Issuance of trust managers'
restricted shares............. 9,000 -- 91 (91) --
Issuance of warrants............ 400 400
Decrease in fair value of
compensatory options ......... (434) 434 --
Amortization of unearned trust
manager compensation.......... 45 45
Amortization of compensatory
options ...................... 25 25
Dividends declared
($0.36 per common share)...... (3,602) (3,602)
Unrealized loss on securities
available for sale............ (2,821) (2,821)
Net income...................... 5,051 5,051
---------- ---- -------- ----- ------- -------- ---------
Balance at June 30, 1999...... 10,015,111 $100 $140,998 $(435) $(9,296) $ (2,003) $ 129,364
========== ==== ======== ===== ======= ======== =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Period from
Six Months February 2,
Ended 1998
June 30, through
1999 June 30, 1998
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................ $ 5,051 $ 757
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses .......................................................... 1,180 110
Depreciation ....................................................................... 297 3
Gain associated with repayment of ADC loan arrangement ............................. (584) --
Amortization of prepaid assets ..................................................... 117 46
Discount amortization on commercial mortgage-backed securities ..................... (170) --
Amortization of compensatory stock options and unearned trust manager
compensation ..................................................................... 70 95
Amortization of loan commitment fees ............................................... (324) (10)
Receipt of loan commitment fees .................................................... 186 568
Increase in receivables and other assets ........................................... (1,191) (615)
Decrease (increase) in interest receivable related to commercial
mortgage-backed securities ....................................................... 4 (96)
Increase in accounts payable and other liabilities ................................. 1,162 924
Increase in amounts due to affiliates .............................................. 984 139
Increase in deferred income ........................................................ -- 294
Equity in undistributed earnings of unconsolidated subsidiary, partnerships
and other real estate ventures ................................................... (134) (160)
Distributions from unconsolidated subsidiary and other real estate venture ......... 201 69
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..................................... 6,849 2,124
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in mortgage loans ......................................................... (31,778) (22,113)
Investments in ADC loan arrangements .................................................. (15,191) (14,100)
Sale of mortgage loan to affiliate .................................................... 4,585 --
Principal collected on mortgage loans ................................................. 8,072 --
Principal and interest collected on ADC loan arrangement .............................. 11,513 --
Investments in real estate ............................................................ (30,191) --
Investments in unconsolidated partnerships and subsidiary ............................. (2,334) (3,501)
Purchase of commercial mortgage-backed securities ..................................... -- (11,882)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ......................................... (55,324) (51,596)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of credit ......................................... 20,000 --
Proceeds from borrowings under repurchase agreement ................................... 11,795 --
Repayment of borrowings under repurchase agreement .................................... (1,402) --
Proceeds from financing provided by affiliate ......................................... 725 --
Proceeds from non-recourse debt on real estate ........................................ 19,498 --
Deferred financing costs associated with line of credit ............................... (120) --
Deferred financing costs associated with non-recourse debt on real estate ............. (436) --
Net proceeds from issuance of common stock ............................................ -- 139,717
Dividends paid to common shareholders ................................................. (7,604) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ..................................... 42,456 139,717
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................................... (6,019) 90,245
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................................... 9,789 --
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................. $ 3,770 $ 90,245
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid, net of amount capitalized .............................................. $ 1,369 $ --
============ ============
Income taxes paid ..................................................................... $ 25 $ --
============ ============
Minority interest contributions associated with ADC loan arrangements ................. $ -- $ 500
============ ============
Minority interest distribution associated with ADC loan arrangement ................... $ 2,111 $ --
============ ============
Receivables transferred in satisfaction of amounts due to affiliate ................... $ 280 $ --
============ ============
Amounts due to affiliate discharged in connection with sale of mortgage loan .......... $ 1,729 $ --
============ ============
Issuance of warrants in connection with line of credit ................................ $ 400 $ --
============ ============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. ORGANIZATION AND RELATIONSHIPS
AMRESCO Capital Trust (the "Company"), a real estate investment trust ("REIT"),
was organized under the laws of the State of Texas. The Company was formed to
take advantage of certain mid- to high-yield lending and investment
opportunities in real estate related assets, including various types of
commercial mortgage loans (including, among others, participating loans,
mezzanine loans, acquisition loans, construction loans, rehabilitation loans
and bridge loans), commercial mortgage-backed securities ("CMBS"), commercial
real estate, equity investments in joint ventures and/or partnerships, and
certain other real estate related assets. The Company was initially capitalized
on February 2, 1998 and commenced operations on May 12, 1998, concurrent with
the completion of its initial public offering ("IPO") of 9,000,000 common
shares and private placement of 1,000,011 common shares.
Pursuant to the terms of a Management Agreement dated as of May 12, 1998 and
subject to the direction and oversight of the Board of Trust Managers, the
Company's day-to-day operations are managed by AMREIT Managers, L.P. (the
"Manager"), an affiliate of AMRESCO, INC. (together with its affiliated
entities, the "AMRESCO Group"). For its services, the Manager is entitled to
receive a base management fee equal to 1% per annum of the Company's Average
Invested Non-Investment Grade Assets, as defined, and 0.5% per annum of the
Company's Average Invested Investment Grade Assets, as defined. In addition to
the base management fee, the Manager is entitled to receive incentive
compensation in an amount equal to 25% of the dollar amount by which Funds From
Operations (as defined by the National Association of Real Estate Investment
Trusts), as adjusted, exceeds a certain threshold. The Manager is also entitled
to receive reimbursement for its costs of providing certain services to the
Company. The base management fee, reimbursable expenses and incentive fee, if
any, are payable quarterly in arrears. During the three and six months ended
June 30, 1999, base management fees charged to the Company totaled $511,000 and
$958,000, respectively. Reimbursable expenses charged to the Company during
these periods totaled $70,000 and $104,000, respectively. During the three
months ended June 30, 1998 and the period from February 2, 1998 (date of
initial capitalization) through June 30, 1998, base management fees charged to
the Company totaled $123,000; reimbursable expenses charged to the Company
during these periods totaled $16,000. Since its inception, no incentive fees
have been charged to the Company. Immediately after the closing of the IPO, the
Manager was granted options to purchase 1,000,011 common shares; 70% of the
options are exercisable at an option price of $15.00 per share and the
remaining 30% of the options are exercisable at an option price of $18.75 per
share. During the three and six months ended June 30, 1999, management fees
included compensatory option charges totaling $(96,000) and $45,000,
respectively. During the three months ended June 30, 1998 and the period from
February 2, 1998 (date of initial capitalization) through June 30, 1998,
management fees included compensatory option charges totaling $70,000.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10,
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting
principles for complete financial statements. The consolidated financial
statements include the accounts of the Company, its wholly-owned subsidiaries
and a majority-owned partnership. The Company accounts for its investment in
AMREIT II, Inc., a taxable subsidiary, using the equity method of accounting,
and thus reports its share of income or loss based on its ownership interest.
The Company uses the equity method of accounting due to the non-voting nature
of its ownership interest and because the Company is entitled to substantially
all of the economic benefits of ownership of AMREIT II, Inc. The Company owns
non-controlling interests in two partnerships; the Company accounts for these
investments using the equity method of accounting and thus reports its share of
income or loss based on its ownership interests. The accompanying financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 (the "10-K"). The notes to
the financial statements included herein highlight significant changes to the
notes included in the 10-K.
7
<PAGE> 8
In the opinion of management, the accompanying consolidated financial
statements include all adjustments (consisting of normal and recurring
accruals) necessary for a fair presentation of the interim financial
statements. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for the entire fiscal year or
any other interim period.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities at the date of the
financial statements and revenues and expenses for the reporting period.
Significant estimates include the valuation of commercial mortgage-backed
securities, the allowance for loan losses and the determination of the fair
value of certain share option awards and warrants. Actual results may differ
from those estimates.
Certain prior period amounts have been reclassified to conform with the current
period's presentation.
3. LOAN INVESTMENTS
During the three months ended June 30, 1999, the Company originated one loan
and two of the Company's loans were fully repaid. During the six months ended
June 30, 1999, four of the Company's loans were fully repaid, one loan
origination was closed and one loan was sold to AMRESCO Commercial Finance,
Inc. ("ACFI"), a member of the AMRESCO Group; additionally, one loan was
reclassified, net of a $500,000 charge-off, to investment in unconsolidated
subsidiary following the subsidiary's acquisition (through foreclosure on
February 25, 1999) of the partnership interests of one of the Company's
borrowers. As of June 30, 1999, the Company's loan investments are summarized
as follows (dollars in thousands):
<TABLE>
<CAPTION>
Amount
Outstanding at
Date of Initial Scheduled Collateral Commitment June 30,
Investment Maturity Location Property Type Position Amount 1999
- ------------------ ----------------- -------------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien $14,700 $13,032
June 1, 1998 June 1, 2001 Houston, TX Office First Lien 11,800 10,353
June 12, 1998 June 30, 2000 Pearland, TX Apartment First Lien 12,827 10,987
June 17, 1998 June 30, 2000 San Diego, CA R&D/Bio-Tech First Lien 5,560 4,570
June 19, 1998 June 18, 2000 Houston, TX Office First Lien 24,000 14,016
June 22, 1998 June 19, 2000 Wayland, MA Office First Lien 45,000 36,951
July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests 10,068 7,017
July 2, 1998 June 30, 2000 Washington, D.C. Office First Lien 7,000 5,882
July 10, 1998 July 31, 2000 Pasadena, TX Apartment First Lien 3,350 2,900
September 1, 1998 February 28, 2001 Los Angeles, CA Mixed Use First Lien 18,419 17,418
September 30,1998 Various San Antonio, TX/ Residential First Lien 8,400 2,536
Sunnyvale, TX Lots
September 30, 1998 October 7, 1999 Ft. Worth, TX Apartment Ptrshp Interests 2,650 2,649
September 30, 1998 December 31, 1999 Dallas, TX Medical Office First Lien 3,015 2,596
September 30, 1998 September 22, 1999 Norwood, MA Industrial/Office First Lien 8,765 8,195
October 1, 1998 December 31, 1999 Richardson, TX Office First Lien 567 300
May 18, 1999 May 19, 2001 Irvine, CA Office First Lien 15,260 12,883
-------- --------
$191,381 $152,285
======== ========
<CAPTION>
Interest Interest
Pay Accrual
Rate Rate
- --------- --------
<C> <C>
10.0% 12.0%
12.0% 12.0%
10.0% 11.5%
10.0% 13.5%
12.0% 12.0%
10.5% 10.5%
10.0% 15.0%
10.5% 10.5%
10.0% 14.0%
10.0% 12.0%
10.0% 14.0%
10.5% 16.0%
10.0% 13.0%
10.0% 12.5%
9.3% 15.0%
10.0% 12.0%
</TABLE>
At June 30, 1999, amounts outstanding under construction loans,
acquisition/rehabilitation loans, acquisition loans, land development loans and
bridge loans totaled $40,684,000, $47,017,000, $53,553,000, $2,836,000 and
$8,195,000, respectively.
8
<PAGE> 9
Three of the 16 loan investments provide the Company with the opportunity for
profit participation in excess of the contractual interest accrual rates. The
loan investments are classified as follows (in thousands):
<TABLE>
<CAPTION>
Loan Amount Balance Sheet Amount
Outstanding at at
June 30, 1999 June 30, 1999
-------------- --------------------
<S> <C> <C>
Mortgage loans, net ................................... $ 115,695 $ 114,506
Real estate, net ...................................... 29,573 28,740
Investment in real estate venture ................... 7,017 6,247
--------- ---------
Total ADC loan arrangements ........................ 36,590 34,987
--------- ---------
Total loan investments ................................ $ 152,285 149,493
=========
Allowance for loan losses ............................. (2,048)
---------
Total loan investments, net of allowance for losses ... $ 147,445
=========
</TABLE>
The differences between the outstanding loan amounts and the balance sheet
amounts are due primarily to loan commitment fees, interest fundings, minority
interests, capitalized interest and accumulated depreciation.
ADC loan arrangements accounted for as real estate consisted of the following
at June 30, 1999 (in thousands):
<TABLE>
<S> <C>
Land ............................. $ 4,648
Buildings and improvements ....... 4,377
Construction in progress ......... 19,815
--------
Total ......................... 28,840
Less: Accumulated depreciation ... (100)
--------
$ 28,740
========
</TABLE>
A summary of activity for mortgage loans and ADC loan arrangements accounted
for as real estate or investments in joint ventures is as follows (in
thousands):
<TABLE>
<S> <C>
Balance at December 31, 1998 .......... $136,791
Investments in loans................... 48,052
Collections of principal .............. (19,405)
Cost of mortgage sold ................. (6,314)
Foreclosure (partnership interests) ... (6,839)
--------
Balance at June 30, 1999 .............. $152,285
========
</TABLE>
The activity in the allowance for loan losses was as follows (in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1998 .......... $ 1,368
Provision for losses .................. 1,180
Charge-offs ........................... (500)
Recoveries ............................ -
---------
Balance at June 30, 1999............... $ 2,048
========
</TABLE>
As of June 30, 1999, the Company had outstanding commitments to fund
approximately $39,096,000 under 16 loans, of which $990,000 is reimbursable by
ACFI. The Company is obligated to fund these commitments to the extent that the
borrowers are not in violation of any of the conditions established in the loan
agreements. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee if amounts are repaid
to the Company during certain prepayment lock-out periods. A portion of the
commitments could expire without being drawn upon and therefore the total
commitment amounts do not necessarily represent future cash requirements.
9
<PAGE> 10
4. REAL ESTATE
On April 30, 1999, the Company (through a majority-owned partnership) acquired
interests in three newly constructed, grocery-anchored shopping centers in the
Dallas/Fort Worth (Texas) area. These properties, which were acquired by
subsidiary partnerships at an aggregate purchase price of $30.2 million,
include an 86,516 square foot facility in Flower Mound, Texas, a 61,440 square
foot facility in Fort Worth, Texas and an 85,611 square foot facility in
Grapevine, Texas. In connection with these acquisitions, the subsidiary
partnerships which hold title to these assets obtained non-recourse financing
aggregating $19.5 million from an unaffiliated third party (Note 5).
Immediately prior to the closing, the Company contributed $11.4 million of
capital to the partnership. The proceeds from this contribution were used to
fund the balance of the purchase price, to pay costs associated with the
financing and to provide initial working capital to the title-holding
partnerships.
Real estate, which is comprised entirely of amounts derived from the Company's
partnership investment, consisted of the following at June 30, 1999 and
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Land ............................. $ 11,285 $ 2,353
Buildings and improvements ....... 29,235 7,976
-------- --------
Total ......................... 40,520 10,329
Less: Accumulated depreciation ... (297) (56)
-------- --------
$ 40,223 $ 10,273
======== ========
</TABLE>
In connection with the partnership's procurement of third party financing, the
Company was required to post two irrevocable standby letters of credit totaling
$1,084,000. The letters of credit, which were cancelled on May 4, 1999, were
collateralized by certificates of deposit in a like amount; the certificates of
deposit mature on August 31, 1999. Concurrent with the cancellation and as a
replacement for a portion thereof related to the financing for an additional
acquisition, the Company posted an irrevocable standby letter of credit in the
amount of $304,000. This letter of credit, which expires on September 15, 1999,
is collateralized by a $304,000 certificate of deposit which matures on
September 30, 1999. The certificates of deposit aggregating $1,388,000 at June
30, 1999 are included in receivables and other assets in the consolidated
balance sheet.
5. DEBT AND FINANCING FACILITIES
Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $400 million Interim Warehouse and Security Agreement (the "Line
of Credit") with Prudential Securities Credit Corporation ("PSCC"). Subject to
certain limitations, borrowings under the facility can be used to finance the
Company's structured loan and equity real estate investments. Prior to the
modifications discussed below, borrowings under the Line of Credit bore
interest at rates ranging from LIBOR plus 1% per annum to LIBOR plus 2% per
annum depending upon the type of asset, its loan-to-value ratio and the advance
rate selected by the Company. Advance rates on eligible assets ranged from 50%
to 95% depending upon the asset's characteristics.
Effective as of May 4, 1999, the Company (and certain of its subsidiaries)
entered into an Amended and Restated Interim Warehouse and Security Agreement
(the "Amended Line of Credit") with PSCC; the agreement amended the Company's
existing Line of Credit. The Amended Line of Credit includes the following
modifications: (1) a reduction in the size of the committed facility from $400
million to $300 million; (2) the elimination of the requirement that assets
financed with proceeds from the facility must be securitizable; (3) a reduction
in the amount of capital the Company must fund with respect to construction and
rehabilitation loans before PSCC is required to begin advancing funds; (4) an
extension of the maturity date from July 1, 2000 to November 3, 2000; and (5)
the modification to, and addition of, certain sublimits on certain types of
loans and assets. Under the Amended Line of Credit, borrowings bear interest at
LIBOR plus 1.25% per annum to the extent such borrowings do not exceed the
Company's Tangible Net Worth, as defined; borrowings in excess of the Company's
Tangible Net Worth bear interest at LIBOR plus 3%. At June 30, 1999, the
weighted average interest rate under this facility was 6.19%.
As compensation for entering into the Amended Line of Credit and extending the
maturity date, the Company granted warrants to Prudential Securities
Incorporated, an affiliate of PSCC, to purchase 250,002 common shares of
beneficial
10
<PAGE> 11
interest at $9.83 per share. The exercise price represents the average closing
market price of the Company's common shares for the ten-day period ending on
May 3, 1999. The warrants were issued in lieu of a commitment fee or other cash
compensation. The estimated fair value of the warrants, totaling $400,000, was
measured at the grant date and is being amortized to interest expense over the
18-month term of the facility using the straight-line method.
Borrowings under the facility are secured by a first lien security interest on
all assets funded with proceeds from the Amended Line of Credit. The Amended
Line of Credit contains several covenants; among others, the more significant
covenants include the maintenance of a $100 million consolidated Tangible Net
Worth, subject to adjustment in connection with any future equity offerings;
maintenance of a Coverage Ratio, as defined, of not less than 1.4 to 1; and
limitation of Total Indebtedness, as defined, to no more than 400% of
shareholders' equity.
On July 2, 1999, the Company terminated its existing $33.6 million (notional)
interest rate cap agreement at a loss of $4,000. Concurrently, the Company
entered into a new cap agreement to reduce the impact that rising interest
rates would have on its floating rate indebtedness. The new agreement, which
became effective on August 1, 1999, has a notional amount of $59.0 million.
Until its expiration on November 1, 2000, the agreement entitles the Company to
receive from the counterparty the amounts, if any, by which one month LIBOR
exceeds 6.25%. The premium paid for this cap, totaling $110,000, will be
amortized on a straight-line basis over the life of the agreement as an
adjustment of interest incurred.
Three consolidated title-holding partnerships are indebted under the terms of
three non-recourse loan agreements with Jackson National Life Insurance
Company. The loans, aggregating $19,498,000, bear interest at 6.68% per annum.
The loans require interest only payments through January 1, 2002; thereafter,
interest and principal payments are due based upon 25-year amortization
schedules. The loans, which mature on January 1, 2014, prohibit any prepayment
of the outstanding principal prior to January 1, 2006. Thereafter, prepayment
is permitted at any time, in whole or in part, upon payment of a yield
maintenance premium of at least 1% of the then outstanding principal balance.
Obligations under various financing arrangements were as follows at June 30,
1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Repurchase agreement......................... $10,393 $ --
Line of credit............................... 59,338 39,338
Non-recourse debt on real estate............. 26,998 7,500
------- -------
$96,729 $46,838
======= =======
</TABLE>
6. STOCK-BASED COMPENSATION
As of June 30, 1999, the estimated fair value of the options granted to the
Manager and certain employees of the AMRESCO Group approximated $0.71 per
share. The fair value of the options granted was estimated at June 30, 1999
using the Cox-Ross-Rubinstein option pricing model with the following
assumptions: risk free interest rates ranging from 5.97% to 6.17%; expected
lives ranging from four to seven years; expected volatility of 35%; and
dividend yield of 12%. During the three months ended June 30, 1999,
compensation cost associated with these options was adjusted to reflect the
decline in fair value approximating $0.39 per share. During the three and six
months ended June 30, 1999, the three months ended June 30, 1998 and the period
from February 2, 1998 (date of initial capitalization) through June 30, 1998,
management fees and general and administrative expenses included the following
compensatory option charges (in thousands):
<TABLE>
<CAPTION>
Period from
February 2,
Three Months Ended Six Months 1998
June 30, Ended through
------------------- June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Management fees ....................... $ (96) $ 70 $ 45 $ 70
General and administrative expenses ... (47) 14 (20) 14
----- ----- ----- -----
$(143) $ 84 $ 25 $ 84
===== ===== ===== =====
</TABLE>
11
<PAGE> 12
In lieu of cash compensation for their services and participation at regularly
scheduled meetings of the Board of Trust Managers, the Company granted 2,250
restricted common shares to each of its four independent trust managers on May
11, 1999. The associated compensation cost is being recognized over the
one-year service period.
At June 30, 1999, 505,506 shares were available for grant in the form of
restricted common shares or options to purchase common shares.
7. EARNINGS PER SHARE
A reconciliation of the numerator and denominator used in computing basic
earnings per share and diluted earnings per share for the three and six months
ended June 30, 1999, the three months ended June 30, 1998 and the period from
February 2, 1998 (date of initial capitalization) through June 30, 1998, is as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Period from
February 2,
Three Months Ended Six Months 1998
June 30, Ended through
------------------- June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income available to common shareholders ......... $ 2,707 $ 757 $ 5,051 $ 757
======= ======= ======= =======
Weighted average common shares outstanding .......... 10,000 5,495 10,000 3,356
======= ======= ======= =======
Basic earnings per common share ..................... $ 0.27 $ 0.14 $ 0.50 $ 0.23
======= ======= ======= =======
Weighted average common shares outstanding .......... 10,000 5,495 10,000 3,356
Effect of dilutive securities
Restricted shares .................................. 11 3 8 2
Net effect of assumed exercise of stock options .... 1 -- 1 --
------- ------- ------- -------
Adjusted weighted average shares outstanding ........ 10,012 5,498 10,009 3,358
======= ======= ======= =======
Diluted earnings per common share ................... $ 0.27 $ 0.14 $ 0.50 $ 0.23
======= ======= ======= =======
</TABLE>
Options and warrants to purchase 1,479,511 and 250,002 shares, respectively, of
common stock were outstanding at June 30, 1999. Options related to 1,473,511
shares and the warrants were not included in the computation of diluted
earnings per share because the exercise prices related thereto were greater
than the average market price of the Company's common shares. The Company was
initially capitalized on February 2, 1998 with the sale of 100 shares to
AMRESCO, INC. The Company had no earnings prior to the commencement of its
operations on May 12, 1998. No options or warrants were outstanding during the
period from February 2, 1998 through May 11, 1998. When calculated for the
period from May 12, 1998 (inception of operations) through June 30, 1998, the
Company's basic and diluted earnings were $0.08 per common share.
8. LEASING ACTIVITIES
As of June 30, 1999, the future minimum lease payments to be received by the
Company (through a majority-owned partnership) under noncancellable operating
leases, which expire on various dates through 2024, are as follows (in
thousands):
<TABLE>
<S> <C>
1999 .......................... $ 1,849
2000 .......................... 3,736
2001 .......................... 3,753
2002 .......................... 3,779
2003 .......................... 3,752
2004 and thereafter ........... 56,548
--------
$ 73,417
========
</TABLE>
Approximately 85% of the future minimum lease payments disclosed above are due
from a regional grocer.
12
<PAGE> 13
9. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
except those resulting from investments by, and distributions to, its owners.
Other comprehensive income includes unrealized gains and losses on marketable
securities classified as available-for-sale. Comprehensive income during the
three and six months ended June 30, 1999, the three months ended June 30, 1998
and the period from February 2, 1998 (date of initial capitalization) through
June 30, 1998, is as follows (in thousands):
<TABLE>
<CAPTION>
Period from
February 2,
Three Months Ended Six Months 1998
June 30, Ended through
------------------- June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
Net income ........................................... $ 2,707 $ 757 $ 5,051 $ 757
Unrealized losses on securities available for sale ... (1,918) -- (2,821) --
------- ------- ------- -------
Comprehensive income ................................. $ 789 $ 757 $ 2,230 $ 757
======= ======= ======= =======
</TABLE>
The unrealized losses on securities available for sale had no impact on the
Company's taxable income or cash flow.
10. SEGMENT INFORMATION
The Company, as an investor in real estate related assets, operates in only one
reportable segment. Within this segment, the Company makes asset allocation
decisions based upon its diversification strategies and changes in market
conditions. The Company does not have, nor does it rely upon, any major
customers. All of the Company's investments are secured directly or indirectly
by real estate properties located in the United States; accordingly, all of its
revenues were derived from U.S. operations.
11. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires
that an entity recognize all derivatives as either assets or liabilities in its
balance sheet and that it measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) is dependent upon the intended use of the derivative and the resulting
designation. SFAS No. 133 generally provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of (1) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (2) the earnings effect of the hedged
forecasted transaction. In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
("SFAS No. 137"). SFAS No. 137 deferred the effective date of SFAS No. 133 such
that it is now effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000, although earlier application is encouraged. The Company
has not yet assessed the impact that SFAS No. 133 will have on its financial
condition or results of operations.
13
<PAGE> 14
12. SUBSEQUENT EVENTS
On July 22, 1999, the Company declared a dividend of $0.39 per share; the
dividend is payable on August 16, 1999 to shareholders of record on July 31,
1999.
On July 29, 1999, the Company originated a $5,213,000 first lien loan for the
acquisition and conversion of a research and development facility in Lexington,
Massachusetts; the initial advance under this loan totaled approximately
$2,541,000.
Effective as of August 4, 1999, the Company entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Impac Commercial Holdings, Inc. ("ICH").
Pursuant to the Merger Agreement, ICH will be merged with and into the Company,
with the Company as the surviving entity (the "Merger"), and each outstanding
share of common stock of ICH will be converted into 0.66094 of a common share of
the Company. Also pursuant to this agreement, the holder of the outstanding
shares of Series B 8.5% Cumulative Convertible Preferred Stock of ICH ("ICH
Preferred Stock") will convert all of such shares into 1,683,635 shares of
common stock of ICH or, if such conversion does not occur prior to the effective
time of the Merger, all of the shares of ICH Preferred Stock will be converted
into 1,112,782 common shares of the Company. The Merger will be accounted for
under the purchase method of accounting. After the Merger, the Company will have
approximately 16.7 million common shares outstanding. The parties anticipate
that the Merger will be completed in the fourth quarter of 1999. The
transactions contemplated by the Merger Agreement are subject to approval by the
shareholders of the Company and ICH.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
AMRESCO Capital Trust (the "Company") is a real estate investment trust ("REIT")
which was formed in early 1998 to take advantage of certain mid- to high-yield
lending and investment opportunities in real estate related assets, including
various types of commercial mortgage loans (including, among others,
participating loans, mezzanine loans, acquisition loans, construction loans,
rehabilitation loans and bridge loans), commercial mortgage-backed securities
("CMBS"), commercial real estate, equity investments in joint ventures and/or
partnerships, and certain other real estate related assets. Subject to the
direction and oversight of the Board of Trust Managers, the Company's day-to-day
operations are managed by AMREIT Managers, L.P. (the "Manager"), an affiliate of
AMRESCO, INC. (together with its affiliated entities, the "AMRESCO Group").
The Company commenced operations on May 12, 1998 concurrent with the completion
of its initial public offering of 9,000,000 common shares and private placement
of 1,000,011 common shares with AMREIT Holdings, Inc., a wholly-owned subsidiary
of AMRESCO, INC. To date, the Company's investment activities have been focused
in three primary areas: loan investments, CMBS and equity investments in real
estate. The Company expects that its mid- to high-yield loan investments and, to
a lesser extent, equity investments in real estate, will continue to comprise a
substantial portion of its investment portfolio. Similarly, the Company expects
to continue to have 15% to 20% of its invested capital (comprising equity and
proceeds from its two credit facilities) allocated to CMBS.
The Company's investment activities increased during the second quarter of 1999
following the completion (in early May) of modifications to the Company's line
of credit facility. During the quarter, the Company closed one new loan
investment (a $15.3 million commitment, of which $12.9 million was funded
initially) and it approved two additional loan commitments; one of the two
approved loans closed in late July and the other, to be secured by a Canadian
property, is expected to close during the third quarter. Additionally, the
Company advanced $17.4 million under structured loan commitments it had closed
on or prior to December 31, 1998. Loan repayments during the three months ended
June 30, 1999 totaled $6.8 million. During the six months ended June 30, 1999,
advances under structured loan investments totaled $48.1 million while
repayments totaled $19.4 million. Finally, the Company's aggregate capital
contributions to partnerships which hold title to real estate increased from
$4.8 million at March 31, 1999 to $16.2 million at June 30, 1999 as a result of
the Company's acquisition (through a majority-owned partnership) of interests in
three newly constructed, grocery-anchored shopping centers in the Dallas/Fort
Worth (Texas) area. No commercial mortgage-backed securities were acquired
during the recently ended quarter.
The Company believes it has operated and it intends to continue to operate in a
manner so as to continue to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"). As such, the Company has distributed and it
intends to continue to distribute at least 95% of its REIT taxable income
annually.
The Company may experience high volatility in financial statement net income and
tax basis income from quarter to quarter and year to year, primarily as a result
of fluctuations in interest rates, borrowing costs, reinvestment opportunities,
prepayment rates and favorable and unfavorable credit related events (e.g.,
profit participations or credit losses). Additionally, the Company's accounting
for certain real estate loan arrangements as either real estate or joint venture
investments may contribute to volatility in financial statement net income.
Because changes in interest rates may significantly affect the Company's
activities, the operating results of the Company will depend, in large part,
upon the ability of the Company to manage its interest rate, prepayment and
credit risks, while maintaining its status as a REIT.
The following discussion of results of operations and liquidity and capital
resources should be read in conjunction with the consolidated financial
statements and notes thereto included in "Item 1. Financial Statements".
15
<PAGE> 16
RESULTS OF OPERATIONS
Under generally accepted accounting principles, net income for the three and six
months ended June 30, 1999 was $2,707,000 and $5,051,000, respectively, or $0.27
and $0.50 per common share, respectively. The Company's primary sources of
revenue for the three and six months ended June 30, 1999, totaling $5,743,000
and $10,216,000, respectively, were as follows:
o $3,996,000 and $7,160,000, respectively, from loan investments. As certain
of the Company's loan investments are accounted for as either real estate
or joint venture investments for financial reporting purposes, these
revenues are included in the consolidated statement of income for the three
and six months ended June 30, 1999 as follows: interest income on mortgage
loans - $3,878,000 and $6,935,000, respectively; and operating income from
real estate - $118,000 and $225,000, respectively. The loan investments
earn interest at accrual rates ranging from 10.5% to 16% per annum as of
June 30, 1999.
o $934,000 and $1,848,000, respectively, from investments in CMBS.
o $713,000 and $952,000, respectively, of operating income from real estate
owned by the Company (through a majority-owned partnership).
Additionally, the Company realized a gain of $584,000 during the three months
ended March 31, 1999 in connection with the repayment of an ADC loan
arrangement. The gain was comprised principally of interest income earned at the
accrual rate over the life of the loan investment. No gains were realized
during the three months ended June 30, 1999.
The Company incurred expenses of $3,036,000 and $5,749,000, respectively, during
the three and six months ended June 30, 1999, consisting primarily of the
following:
o $415,000 and $1,003,000, respectively, of management fees, including
$511,000 and $958,000, respectively, of base management fees payable to the
Manager pursuant to the Management Agreement and $(96,000) and $45,000,
respectively, of expense associated with compensatory options granted to
the Manager. No incentive fees were incurred during either period.
o $259,000 and $782,000, respectively, of general and administrative costs,
including $0 and $200,000, respectively, of resolution costs associated
with a non-performing loan, $103,000 and $199,000, respectively, for
professional services, $58,000 and $117,000, respectively, for directors
and officers' insurance, $70,000 and $104,000, respectively, of
reimbursable costs pursuant to the Management Agreement, $(47,000) and
$(20,000), respectively, related to compensatory options granted to certain
members of the AMRESCO Group and $23,000 and $45,000, respectively, related
to restricted stock awards to the Company's Independent Trust Managers.
o $1,069,000 and $1,658,000, respectively, of interest expense (net of
capitalized interest totaling $235,000 and $386,000, respectively)
associated with the Company's credit facilities and four non-recourse loans
secured by real estate.
o $438,000 and $1,180,000, respectively, of provision for loan losses. During
the three months ended March 31, 1999, the Company charged-off $500,000
against an existing allowance for losses related to the non-performing loan
referred to above. This loan is discussed further in this section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the sub-heading "Loan Investments".
The Company's policy is to distribute at least 95% of its REIT taxable income to
shareholders each year; to that end, dividends are paid quarterly. Tax basis
income differs from income reported for financial reporting purposes due
primarily to differences in methods of accounting for ADC loan arrangements and
stock-based compensation awards and the nondeductibility, for tax purposes, of
the Company's loan loss reserve (for a discussion of ADC loan arrangements, see
the notes to the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year
16
<PAGE> 17
ended December 31, 1998). As a result of these accounting differences, net
income under generally accepted accounting principles is not necessarily an
indicator of distributions to be made by the Company. The following dividends
have been declared in 1999:
<TABLE>
<CAPTION>
Dividend
Declaration Record Payment per
Date Date Date Common Share
------------------ ------------------ -------------------- ----------------
<S> <C> <C> <C> <C>
First Quarter April 22, 1999 April 30, 1999 May 17, 1999 $ 0.36
Second Quarter July 22, 1999 July 31, 1999 August 16, 1999 0.39
------
$ 0.75
======
</TABLE>
For federal income tax purposes, all dividends declared to date should be
treated as ordinary income to the Company's shareholders.
The Company was initially capitalized through the sale of 100 common shares to
AMRESCO, INC. on February 2, 1998 and it commenced operations on May 12, 1998
concurrent with the completion of its initial public offering of 9,000,000
common shares and private placement of 1,000,011 common shares with AMREIT
Holdings, Inc., a wholly-owned subsidiary of AMRESCO, INC. At June 30, 1998,
$52.0 million of the $139.7 million of net proceeds received from the issuance
of its common shares had been invested in structured finance arrangements and
commercial mortgage-backed securities; the remaining net proceeds were fully
invested during the third quarter of 1998. As of June 30, 1998, the Company had
advanced $36.7 million under seven commercial mortgage loan commitments. During
its initial 50-day period of operations, the Company, either directly or through
its unconsolidated taxable subsidiary, acquired three commercial mortgage-backed
securities at an aggregate purchase price of $15.3 million. The following
comparisons are reflective of the fact that during the entire three and six
months ended June 30, 1999, the Company's net proceeds from the issuance of its
common shares were fully invested and it (and its consolidated partnerships) had
outstanding borrowings under several credit facilities. By contrast, during the
three months ended June 30, 1998 and the period from February 2, 1998 (date of
initial capitalization) through June 30, 1998, the Company had operations for
only 50 days (from May 12, 1998 through June 30, 1998) and it had not fully
invested its net proceeds from the issuance of its common shares nor had it
begun to borrow under its credit facilities.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
The Company's revenues increased 355%, from $1,261,000 to $5,743,000, due
primarily to increases in interest income derived from mortgage loan
investments, income from commercial mortgage-backed securities, and operating
income from real estate; as of June 30, 1998, the Company had not made any
equity investments in real estate. The higher revenues were attributable to new
loan originations and acquisitions, acquisitions of CMBS and real estate, and
additional fundings under commitments which were closed during the Company's
initial 50-day period of operations. During the three months ended June 30,
1999, the average book value of the Company's assets, excluding cash and cash
equivalents, approximated $205 million. Excluding cash and cash equivalents, the
Company had no assets on May 11, 1998. By June 30, 1998, the Company had
accumulated assets with a book value of approximately $52.0 million, excluding
cash and cash equivalents of $90.2 million. Interest income on short-term
investments declined from the comparable period in 1998 as the uninvested
portion of the net proceeds received from the issuance of the Company's common
shares were temporarily invested during such period in short-term investments.
The Company's expenses increased 502%, from $504,000 to $3,036,000, due
primarily to the fact that the Company incurred borrowing costs (including
participating interest in mortgage loans) during the three months ended June 30,
1999; during the comparable period in 1998, no such costs were incurred.
Additionally, base management fees were higher as a result of the Company's
larger asset base upon which the fee is calculated. The Company's loan loss
provision was higher as a result of significantly higher loan balances. Finally,
depreciation expense increased as a result of several real estate acquisitions
which were closed in October 1998 and April 1999.
For the reasons cited above, income before gains and net income increased 258%,
from $757,000 to $2,707,000.
17
<PAGE> 18
Six Months Ended June 30, 1999 Compared to Period from February 2, 1998 (Date of
Initial Capitalization) through June 30, 1998
For the reasons described above, the Company's revenues increased 710%, from
$1,261,000 to $10,216,000, and its expenses increased 1040%, from $504,000 to
$5,749,000. Income before gains increased 490%, from $757,000 to $4,467,000, and
net income increased 567%, from $757,000 to $5,051,000. In addition to the
factors cited above, net income increased partially as a result of a gain
realized in connection with the repayment of an ADC loan arrangement.
Loan Investments
During the three months ended June 30, 1999, the Company originated one new loan
(a $15.3 million first lien commitment) and two of the Company's loans
aggregating $5.1 million in then outstanding balances were fully repaid; the
initial advance under the new loan totaled approximately $12.9 million. During
the six months ended June 30, 1999, four of the Company's loans were fully
repaid, one loan origination was closed and one loan was sold to AMRESCO
Commercial Finance, Inc. ("ACFI"), a member of the AMRESCO Group; additionally,
one loan was reclassified, net of a $500,000 charge-off, to investment in
unconsolidated subsidiary following the subsidiary's acquisition (through
foreclosure on February 25, 1999) of the partnership interests of one of the
Company's borrowers. In connection with the loan sale, amounts due to ACFI were
reduced by $2.0 million; as of June 30, 1999, amounts due to ACFI totaled $5.4
million. The proceeds from the four loan repayments and the loan sale totaled
$22.3 million, including accrued interest, a profit participation and a
prepayment fee aggregating $1.0 million. Principal collections on certain of the
Company's other loan investments totaled $1.7 million and $2.7 million during
the three and six months ended June 30, 1999, respectively. During the three and
six months ended June 30, 1999, the Company advanced $17.4 million and $35.2
million, respectively, under loan commitments it had closed on or prior to
December 31, 1998.
Excluding the loan classified as an investment in unconsolidated subsidiary, the
Company has 16 loans representing $191.4 million in aggregate commitments; as of
June 30, 1999, $152.3 million had been advanced under these facilities. A
portion of the commitments may expire without being drawn upon and therefore the
total commitment amounts do not necessarily represent future cash requirements.
After giving effect to ACFI's economic interest (as described in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998), commitments
and amounts outstanding totaled approximately $185.7 million and $147.6 million,
respectively, at June 30, 1999. At June 30, 1999, ACFI's contingent obligation
for additional advances which may be required to be made under certain of the
Company's loans approximated $990,000.
Based upon the amounts outstanding under these facilities and after giving
effect to the contractual right sold to ACFI, the Company's portfolio of
commercial mortgage loans had a weighted average interest pay rate of 10.6% and
a weighted average interest accrual rate of 11.8% as of June 30, 1999. Five of
the 16 loans provide for profit participation above the contractual accrual
rate; two of these five facilities are included in the pool of loans in which
ACFI has a contractual right to collect certain excess proceeds. The Company's
loan investments are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Amount
Outstanding at
Date of Initial Scheduled Collateral Commitment June 30,
Investment Maturity Location Property Type Position Amount 1999 (c)
- -------------------- ------------------- ---------------- ------------------ ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien $ 14,700 $ 13,032
June 1, 1998 June 1, 2001 Houston, TX Office First Lien 11,800 10,353
June 12, 1998 June 30, 2000 Pearland, TX Apartment First Lien 12,827 10,987 (b)
June 17, 1998 June 30, 2000 San Diego, CA R&D/Bio-Tech First Lien 5,560 4,570 (b)
June 19, 1998 June 18, 2000 Houston, TX Office First Lien 24,000 14,016 (b)
June 22, 1998 June 19, 2000 Wayland, MA Office First Lien 45,000 36,951
July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests 10,068 7,017 (a)
July 2, 1998 June 30, 2000 Washington, D.C. Office First Lien 7,000 5,882
July 10, 1998 July 31, 2000 Pasadena, TX Apartment First Lien 3,350 2,900
September 1, 1998 February 28, 2001 Los Angeles, CA Mixed Use First Lien 18,419 17,418
September 30, 1998 Various San Antonio, TX/ Residential Lots First Lien 8,400 2,536
Sunnyvale, TX
September 30, 1998 October 7, 1999 Ft. Worth, TX Apartment Ptrshp Interests 2,650 2,649
September 30, 1998 December 31, 1999 Dallas, TX Medical Office First Lien 3,015 2,596
September 30, 1998 September 22, 1999 Norwood, MA Industrial/Office First Lien 8,765 8,195
October 1, 1998 December 31, 1999 Richardson, TX Office First Lien 567 300
May 18, 1999 May 19, 2001 Irvine, CA Office First Lien 15,260 12,883
--------- ---------
191,381 152,285
ACFI's Economic Interest (5,698) (4,708)
--------- ---------
$ 185,683 (d) $ 147,577 (d)
========= =========
<CAPTION>
Interest Interest
Date of Initial Pay Accrual
Investment Rate Rate
- ------------------------ --------- -----------
<S> <C> <C>
May 12, 1998 10.0% 12.0%
June 1, 1998 12.0% 12.0%
June 12, 1998 10.0% 11.5%
June 17, 1998 10.0% 13.5%
June 19, 1998 12.0% 12.0%
June 22, 1998 10.5% 10.5%
July 1, 1998 10.0% 15.0%
July 2, 1998 10.5% 10.5%
July 10, 1998 10.0% 14.0%
September 1, 1998 10.0% 12.0%
September 30, 1998 10.0% 14.0%
September 30, 1998 10.5% 16.0%
September 30, 1998 10.0% 13.0%
September 30, 1998 10.0% 12.5%
October 1, 1998 9.3% 15.0%
May 18, 1999 10.0% 12.0%
</TABLE>
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<PAGE> 19
(a) Accounted for as investment in joint venture for financial reporting
purposes.
(b) Accounted for as real estate for financial reporting purposes.
(c) For all loan investments, payments of interest only are due monthly at the
interest pay rate. All principal and all remaining accrued and unpaid
interest are due at the scheduled maturities of the loans.
(d) Amounts exclude the loan which was reclassified to investment in
unconsolidated subsidiary during the three months ended March 31, 1999.
The Company provides financing through certain real estate loan arrangements
that, because of their nature, qualify either as real estate or joint venture
investments for financial reporting purposes (see notes [a] and [b] accompanying
the table above). As of June 30, 1999, loan investments representing
approximately $52,455,000 in aggregate commitments were accounted for as either
real estate or joint venture interests; approximately $36,590,000 had been
advanced to borrowers under the related agreements. For a discussion of these
loan arrangements, see the Company's consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
A mezzanine (second lien) loan with an outstanding balance of $6,839,000 and a
recorded investment of $6,659,000 was over 30 days past due as of December 31,
1998. The allowance for loan losses related to this investment totaled $500,000
at December 31, 1998. On February 25, 1999, an unconsolidated taxable subsidiary
of the Company assumed control of the borrower (a partnership) through
foreclosure of the partnership interests. In addition to the second lien
mortgage, the property is encumbered by a $17 million first lien mortgage
provided by an unaffiliated third party. During the first quarter, the Company
charged-off $500,000 against the allowance for losses related to this
investment. Should the Company incur an actual loss on this investment, tax
basis income would be adversely affected.
At June 30, 1999, the Company's commercial mortgage loan commitments were
geographically dispersed in three states and the District of Columbia: Texas
(48%); Massachusetts (27%); California (21%); and Washington, D.C. (4%). The
underlying collateral for these loans was comprised of the following property
types: office (69%); multifamily (10%); mixed use (10%); residential (4%);
industrial (3%); R&D/Bio-Tech (3%); and medical office (1%). Acquisition loans,
acquisition/rehabilitation loans, construction loans, single-family lot
development loans and bridge loans comprised 34%, 30%, 29%, 5% and 2% of the
portfolio, respectively. Eighty-five percent of the portfolio is comprised of
first lien loans while the balance of the portfolio (15%) is secured by second
liens and/or partnership interests. The percentages reflected above are based
upon committed loan amounts and give effect to ACFI's economic interest.
Additionally, the percentages exclude the loan which was reclassified to
investment in unconsolidated subsidiary during the first quarter of 1999.
Until the loan investment portfolio becomes larger, geographic and product type
concentrations are expected. The Company expects to see more diversification
both geographically and by product type as the loan portfolio grows. Geographic
and product type concentrations present additional risks, particularly if there
is a deterioration in the general condition of the real estate market or in the
sub-market in which the loan collateral is located, or if demand for a
particular product type does not meet expectations due to adverse market
conditions that are different from those projected by the Company. In an effort
to reduce concentration risks, the Company is targeting transactions which will
more broadly diversify its loan investment portfolio.
Commercial Mortgage-backed Securities
As of June 30, 1999, the Company holds five commercial mortgage-backed
securities ("CMBS") which were acquired at an aggregate purchase price of $34.5
million. All of these securities were acquired on or before September 1, 1998.
Due an increase in comparable-term U.S. Treasury rates and increasing spreads in
the CMBS market during the three and six months ended June 30, 1999, the value
of the Company's CMBS holdings declined by $1,915,000 and $2,822,000,
respectively; accordingly, the Company recorded an unrealized loss of $1,915,000
and $2,822,000, respectively, on its CMBS portfolio during the three and six
months ended June 30, 1999. Additionally, during the three and six months ended
June 30, 1999 the Company recorded an unrealized loss of $3,000 and an
unrealized gain of $1,000, respectively, net of tax effects, related to one
commercial mortgage-backed security owned by its unconsolidated taxable
subsidiary; the security held by this subsidiary has an investment rating of
"B-". As these securities are classified as available for sale, the aggregate
unrealized loss was reported as a component of accumulated other comprehensive
income (loss) in shareholders' equity for financial reporting purposes. The
cumulative unrealized losses (totaling $9.3 million) have had no impact on the
Company's taxable income or cash flow. Management intends to retain these
investments for the foreseeable future. Excluding the potential tax effects
associated with the security held by the Company's unconsolidated taxable
subsidiary, the weighted average unleveraged yield over the
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<PAGE> 20
expected life of these investments is expected to approximate 11.4%. The
Company's direct CMBS investments are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Percentage of
Security Aggregate Aggregate Total Based
Rating Amortized Cost Fair Value on Fair Value
------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
BB- $ 4,248 $ 3,429 13%
B 19,590 15,736 60%
B- 11,328 6,934 27%
-------- -------- ----
$ 35,166 $ 26,099 100%
======== ======== ====
</TABLE>
The Company's estimated returns on its CMBS investments are based upon a number
of assumptions that are subject to certain business and economic risks and
uncertainties including, but not limited to, the timing and magnitude of
prepayments and credit losses on the underlying mortgage loans that may result
from general and/or localized real estate market factors. These risks and
uncertainties are in many ways similar to those affecting the Company's
commercial mortgage loans. These risks and uncertainties may cause the actual
yields to differ materially from expected yields.
In February 1999, the Company contributed $0.7 million to a newly formed
investment partnership with Olympus Real Estate Corporation. The partnership,
which is 5% owned by the Company, acquired several classes of subordinated CMBS
at an aggregate purchase price of $12.7 million. Currently, the Company does not
expect to make any additional investments in the partnership.
Equity Investments in Real Estate
On March 2, 1999, the Company acquired a 49% limited partner interest in a
partnership which owns a 116,000 square foot office building in Richardson,
Texas. The property is encumbered by a first lien mortgage with an outstanding
balance of $13.8 million at June 30, 1999. The Company contributed $1.4 million
of capital to the partnership.
On April 30, 1999, the Company (through a majority-owned partnership) acquired
interests in three newly constructed, grocery-anchored shopping centers in the
Dallas/Fort Worth (Texas) area. These properties, which were acquired by three
subsidiary partnerships at an aggregate purchase price of $30.2 million, include
an 86,516 square foot facility in Flower Mound, Texas, a 61,440 square foot
facility in Fort Worth, Texas and an 85,611 square foot facility in Grapevine,
Texas. In connection with these acquisitions, the three title-holding
partnerships obtained non-recourse financing aggregating $19.5 million from an
unaffiliated third party. Immediately prior to the closing, the Company
contributed $11.4 million of capital to the partnership. The proceeds from this
contribution were used to fund the balance of the purchase price, to pay costs
associated with the financing and to provide initial working capital to the
title-holding partnerships. With this transaction, the Company has now
contributed a total of $16.2 million of capital to partnerships that hold title
to real estate. The non-recourse loans bear interest at 6.68% per annum and
require interest only payments through January 1, 2002; thereafter, interest and
principal payments are due based upon 25-year amortization schedules.
The loans mature on January 1, 2014.
The Company, (through the majority-owned partnership), expects to acquire a
fifth center, an 87,540 square foot facility in Richardson, Texas, during the
third quarter of 1999 following the completion of construction and satisfaction
of certain other closing conditions. The fifth center is expected to be acquired
at a purchase price of approximately $10.8 million; it is anticipated that this
acquisition will be financed with a $3.2 million equity contribution from the
Company and $7.6 million of third party non-recourse financing.
Ultimately, the Company expects to construct an additional 62,000 square feet of
side-store space; this development is expected to occur at the three recently
acquired properties and at the fifth center (following the acquisition thereof).
It is currently anticipated that the development costs will be financed with an
additional $1 million equity contribution from the Company and $3.8 million of
third party financing proceeds.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to execute its business strategy, particularly the growth
of its investment and loan portfolio, depends to a significant degree on its
ability to obtain additional capital. The Company's principal demands for
liquidity are cash for operations, including funds for its lending activities
and other investments, interest expense associated with
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<PAGE> 21
its indebtedness, debt repayments and distributions to its shareholders. In the
near term, the Company's principal sources of liquidity are the funds available
to it under its financing facilities described below.
Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $400 million credit facility (the "Line of Credit") with
Prudential Securities Credit Corporation ("PSCC"). Subject to PSCC's approval on
an asset by asset basis, borrowings under the facility can be used to finance
the Company's structured loan and equity real estate investments. As a result of
the dislocation in the capital markets in mid to late 1998, PSCC became more
restrictive in the application of its approval rights with respect to financing
for new investments sought by the Company; accordingly, very few new investments
were consummated during the fourth quarter of 1998 and the first quarter of
1999. Prior to the modifications discussed below, borrowings under the Line of
Credit bore interest at rates ranging from LIBOR plus 1% per annum to LIBOR plus
2% per annum. At December 31, 1998, $39,338,000 had been borrowed under the Line
of Credit. To reduce the impact that rising interest rates would have on this
floating rate indebtedness, the Company entered into an interest rate cap
agreement which became effective on January 1, 1999; the agreement had a
notional amount of $33,600,000 and was scheduled to expire on July 1, 2000. The
agreement entitled the Company to receive from a counterparty the amounts, if
any, by which one month LIBOR exceeded 6.0%. Prior to its termination (as
described below), no payments were due from the counterparty as one month LIBOR
had not exceeded 6.0%. On July 2, 1999, the agreement was terminated and
replaced with an interest rate cap agreement which became effective on August 1,
1999. The new agreement, which was entered into to more closely match the then
outstanding borrowings, has a notional amount of $59,000,000. Until its
expiration on November 1, 2000, the agreement entitles the Company to receive
from a counterparty the amounts, if any, by which one month LIBOR exceeds 6.25%.
There are no margin requirements associated with interest rate caps and
therefore there is no liquidity risk associated with this particular hedging
instrument.
Effective as of May 4, 1999, the Company (and certain of its subsidiaries)
entered into an Amended and Restated Interim Warehouse and Security Agreement
(the "Amended Line of Credit") with PSCC; the agreement amended the Company's
existing line of credit. The Amended Line of Credit includes the following
modifications: (1) a reduction in the size of the committed facility from $400
million to $300 million; (2) the elimination of the requirement that assets
financed with proceeds from the facility must be securitizable; (3) a reduction
in the amount of capital the Company must fund with respect to construction and
rehabilitation loans before PSCC is required to begin advancing funds; (4) an
extension of the maturity date from July 1, 2000 to November 3, 2000; and (5)
the modification to, and addition of, certain sublimits on certain types of
loans and assets. Under the Amended Line of Credit, borrowings bear interest at
LIBOR plus 1.25% per annum to the extent such borrowings do not exceed the
Company's Tangible Net Worth, as defined; borrowings in excess of the Company's
Tangible Net Worth bear interest at LIBOR plus 3%. Borrowings are secured by a
first lien security interest in all assets funded with proceeds from the Amended
Line of Credit. At June 30, 1999, $59,338,000 had been borrowed under the
Amended Line of Credit. The weighted average interest rate at June 30, 1999 was
6.19%.
Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $100 million Master Repurchase Agreement (the "Repurchase
Agreement") with PSCC; subsequently, PSCC was replaced by Prudential-Bache
International, Ltd. ("PBI"), an affiliate of PSCC, as lender. Borrowings under
the Repurchase Agreement can be used to finance a portion of the Company's
portfolio of mortgage-backed securities. The Repurchase Agreement provides that
the Company may borrow a varying percentage of the market value of the purchased
mortgage-backed securities, depending on the credit quality of such securities.
Borrowings under the Repurchase Agreement bear interest at rates ranging from
LIBOR plus 0.20% per annum to LIBOR plus 1.5% per annum depending upon the
advance rate and the credit quality of the securities being financed. Borrowings
under the facility are secured by an assignment to PBI of all mortgage-backed
securities funded with proceeds from the Repurchase Agreement. The Repurchase
Agreement matures on June 30, 2000. At June 30, 1999, $10,393,000 was
outstanding under the Repurchase Agreement. At December 31, 1998, there were no
outstanding borrowings under this facility. The weighted average interest rate
at June 30, 1999 was 6.36%.
Under the terms of the Amended Line of Credit and the Repurchase Agreement, PSCC
and PBI, respectively, retain the right to mark the underlying collateral to
market value. A reduction in the value of its pledged assets may require the
Company to provide additional collateral or fund margin calls. From time to
time, the Company may be required to provide such additional collateral or fund
margin calls.
The Company believes that the funds available under its two credit facilities
will be sufficient to meet the Company's liquidity and capital requirements
through the maturity date of the Amended Line of Credit. The Company believes
that the Amended Line of Credit will provide it with more flexibility, which in
turn will allow it to utilize favorable financing terms in connection with the
origination of investments and enable it to resume the growth of its assets,
albeit at a slower
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<PAGE> 22
rate than was achieved in the second and third quarters of 1998. The Company,
however, remains subject to capital constraints. In particular, the Company's
ability to raise additional capital through the public equity and debt markets
continues to be severely limited. The Company is continuing its efforts to
obtain additional secured loan facilities that would better match the duration
of its assets. Additionally, these efforts are designed to provide alternatives
to the Amended Line of Credit and, ultimately, to replace it. However, there can
be no assurances that the Company will be able to obtain renewal or additional
financing on acceptable terms.
Management currently believes that the dislocation in the capital markets will
not extend long-term; however, its duration is impossible to predict at this
time. In the near term, the Company believes it will be constrained from
accessing the public equity markets. In addition, new issues of long-term public
unsecured debt will be difficult to obtain and, in any event, will likely not be
available to the Company at a reasonable cost. Additional secured debt beyond
the Company's Amended Line of Credit will also be difficult to obtain and may
not be offered at a reasonable cost. Aside from limiting the Company's access to
additional capital in the near term to fund growth, the Company has been
relatively insulated from the effects of the dislocation in the capital markets.
While the market value of the Company's CMBS holdings has declined, the Company
invested in these bonds for the long term yields that they are expected to
produce. Management believes that the current market dislocation presents
significant investment opportunities for selective acquisitions of CMBS and that
the fundamental value of the real estate mortgages underlying these bonds has
been largely unaffected to date, although general economic conditions could
adversely impact real estate values in the future.
REIT STATUS
Management believes that the Company is operated in a manner that will enable it
to continue to qualify as a REIT for federal income tax purposes. As a REIT, the
Company will not pay income taxes at the trust level on any taxable income which
is distributed to its shareholders, although AMREIT II, Inc., its "Non-Qualified
REIT Subsidiary", may be subject to tax at the corporate level. Qualification
for treatment as a REIT requires the Company to meet certain criteria, including
certain requirements regarding the nature of its ownership, assets, income and
distributions of taxable income. The Company may, however, be subject to tax at
normal corporate rates on any ordinary income or capital gains not distributed.
YEAR 2000 ISSUE
General
Many of the world's computers, software programs and other equipment using
microprocessors or embedded chips currently have date fields that use two digits
rather than four digits to define the applicable year. These computers, programs
and chips may be unable to properly interpret dates beyond the year 1999; for
example, computer software that has date sensitive programming using a two-digit
format may recognize a date using "00" as the year 1900 rather than the year
2000. This inability to properly process dates is commonly referred to as the
"Year 2000 issue", the "Year 2000 problem" or "Millennium Bug." Such errors
could potentially result in a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar normal business activities, which,
in turn, could lead to disruptions in the Company's operations or performance.
All of the Company's information technology infrastructure is provided by the
Manager, and the Manager's systems are supplied by AMRESCO, INC. The Company's
assessments of the cost and timeliness of completion of Year 2000 modifications
set forth below are based on representations made to the Company and the best
estimates of the individuals within or engaged by AMRESCO, INC. charged with
handling the Year 2000 issue, which estimates were derived using numerous
assumptions relating to future events, including, without limitation, the
continued availability of certain internal and external resources and third
party readiness plans. Furthermore, as the AMRESCO, INC. Year 2000 initiative
(described below) progresses, AMRESCO, INC., the Manager and the Company
continue to revise estimates of the likely problems and costs associated with
the Year 2000 issue and to adapt contingency plans. However, there can be no
assurance that any estimate or assumption will prove to be accurate.
The AMRESCO, INC. Year 2000 Initiative
AMRESCO, INC. is conducting a comprehensive Year 2000 initiative with respect to
its internal business-critical systems, including those upon which the Company
depends. This initiative encompasses information technology ("IT") systems and
applications, as well as non-IT systems and equipment with embedded technology,
such as fax machines and
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<PAGE> 23
telephone systems, which may be impacted by the Year 2000 issue.
Business-critical systems encompass internal accounting systems, including
general ledger, accounts payable and financial reporting applications; cash
management systems; loan servicing systems; and decision support systems; as
well as the underlying technology required to support the software. The
initiative includes assessing, remediating or replacing, testing and upgrading
the business-critical IT systems of AMRESCO, INC. with the assistance of a
consulting firm that specializes in Year 2000 readiness. Based upon a review of
the completed and planned stages of the initiative, and the testing done to
date, AMRESCO, INC. does not anticipate any material difficulties in achieving
Year 2000 readiness with respect to its internal business-critical systems used
in connection with the operations of the Manager or the Company, and the Company
has received a written representation from AMRESCO, INC. that Year 2000
readiness was achieved by December 1998 with respect to all its internal
business-critical systems used in connection with the operations of the Manager
or the Company.
In addition to the internal IT systems and non-IT systems of AMRESCO, INC., the
Company may be at risk from Year 2000 failures caused by or occurring to third
parties. These third parties can be classified into two groups. The first group
includes borrowers, significant business partners, lenders, vendors and other
service providers with whom the Company, the Manager or AMRESCO, INC. has a
direct contractual relationship. The second group, while encompassing certain
members of the first group, is comprised of third parties providing services or
functions to large segments of society, both domestically and internationally,
such as airlines, utilities and national stock exchanges.
As is the case with most other companies, the actions the Company, the Manager
and AMRESCO, INC. can take to avoid any adverse effects from the failure of
companies, particularly those in the second group, to become Year 2000 ready is
extremely limited. However, AMRESCO, INC. has communicated with those companies
that have significant business relationships with AMRESCO, INC., the Manager or
the Company, particularly those in the first group, to determine their Year 2000
readiness status and the extent to which AMRESCO, INC., the Manager or the
Company could be affected by any of their Year 2000 readiness issues. In
connection with this process, AMRESCO, INC. has sought to obtain written
representations and other independent confirmations of Year 2000 readiness from
the third parties with whom AMRESCO, INC., the Manager or the Company has
material contracts. Responses from all third parties having material contracts
with AMRESCO, INC., the Manager or the Company have not been received, nor is it
likely that responses will be received from all such third parties. In addition
to contacting these third parties, where there are direct interfaces between the
systems of AMRESCO, INC. and the systems of these third parties in the first
group, AMRESCO, INC. conducted testing in the second quarter of 1999 in
conformance with the guidelines of the Federal Financial Institutions
Examination Council. Based on responses received and testing to date, it is not
currently anticipated that AMRESCO, INC., the Manager or the Company will be
materially affected by any third party Year 2000 readiness issues in connection
with the operations of the Manager or the Company.
For all business-critical systems interfaces used in connection with the
operations of the Manager and the Company, AMRESCO, INC. advised the Company
that readiness was achieved by December 31, 1998. Replacement providers believed
to be compliant have been identified for significant third party providers that
did not complete their Year 2000 initiatives.
There can be no assurance that the systems of AMRESCO, INC. or those of third
parties will not experience adverse effects after December 31, 1999.
Furthermore, there can be no assurance that a failure to convert by another
company, or a conversion that is not compatible with the systems of AMRESCO,
INC. or those of other companies on which the systems of AMRESCO, INC. rely,
would not have a material adverse effect on the Company.
Under the terms of the Company's Management Agreement with the Manager, all of
the costs associated with addressing the Company's Year 2000 issue are to be
borne by the Manager. Therefore, the Company does not anticipate that it will
incur material expenditures in connection with any modifications necessary to
achieve Year 2000 readiness.
Potential Risks
In addition to the internal systems of AMRESCO, INC. and the systems and
embedded technology of third parties with whom AMRESCO, INC., the Manager and
the Company do business, there is a general uncertainty regarding the overall
success of global remediation efforts relating to the Year 2000 issue, including
those efforts of providers of services to large segments of society, as
described above in the second group. Due to the interrelationships on a global
scale that may be impacted by the Year 2000 issue, there could be short-term
disruptions in the capital or real estate markets or longer-term disruptions
that would affect the overall economy.
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<PAGE> 24
Due to the general uncertainty with respect to how this issue will affect
businesses and governments, it is not possible to list all potential problems or
risks associated with the Year 2000 issue. However, some examples of problems or
risks to the Company that could result from the failure by third parties to
adequately deal with the Year 2000 issue include:
o in the case of lenders, the potential for liquidity stress due to
disruptions in funding flows;
o in the case of exchanges and clearing agents, the potential for funding
disruptions and settlement failures;
o in the case of counter parties, accounting and financial difficulties to
those parties that may expose the Company to increased credit risk; and
o in the case of vendors or providers, service failures or interruptions,
such as failures of power, telecommunications and the embedded technology
in building systems (such as HVAC, sprinkler and fire suppression,
elevators, alarm monitoring and security, and building and parking garage
access).
With respect to the Company's loan portfolios, risks due to the potential
failure of third parties to be ready to deal with the Year 2000 issue include:
o potential borrower defaults resulting from increased expenses or legal
claims related to failures of embedded technology in building systems,
such as HVAC, sprinkler and fire suppression, elevators, alarm monitoring
and security, and building and parking garage access;
o potential reductions in collateral value due to failure of one or more of
the building systems;
o interruptions in cash flow due to borrowers being unable to obtain timely
lease payments from tenants or incomplete or inaccurate accounting of
rents;
o potential borrower defaults resulting from computer failures of retail
systems of major tenants in retail commercial real estate properties such
as shopping malls and strip shopping centers;
o construction delays resulting from contractors' failure to be Year 2000
ready and increased costs of construction associated with upgrading
building systems to be Year 2000 compliant; and
o delays in reaching projected occupancy levels due to construction delays,
interruptions in service or other market factors.
These risks are also applicable to the Company's portfolio of CMBS as these
securities are dependent upon the pool of mortgage loans underlying them. If the
investors in these types of securities demand higher returns in recognition of
these potential risks, the market value of any CMBS portfolio of the Company
also could be adversely affected.
Additionally, the Company has made equity investments in a partnership that will
ultimately own interests in five grocery-anchored shopping centers and in a
partnership which owns a suburban office building. These operations will be
subject to many of the risks set forth above. Although the Company intends to
monitor Year 2000 readiness, there can be no guarantee that all building systems
will be Year 2000 compliant.
The Company believes that the risks most likely to affect the Company adversely
relate to the failure of third parties, including its borrowers and sources of
capital, to achieve Year 2000 readiness. If its borrowers' systems fail, the
result could be a delay in making payments to the Company or the complete
business failure of such borrowers. The failure, although believed to be
unlikely, of the Company's sources of capital to achieve Year 2000 readiness
could result in the Company being unable to obtain the funds necessary to
continue its normal business operations.
Some of the risks associated with the Year 2000 issue may be mitigated through
insurance maintained or purchased by the Company, its affiliates, its business
partners, borrowers and vendors. However, the scope of insurance coverage in
addressing these potential issues under existing policies has yet to be tested,
and the economic impact on the solvency of the insurers has not been explored.
Therefore, no assurance can be given that insurance coverage will be available
or, if it
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<PAGE> 25
is available, that it will be available on a cost-effective basis or that it
will cover all or a significant portion of any potential loss.
Business Continuity/Disaster Recovery Plan
AMRESCO, INC. currently has a business continuity/disaster recovery plan that
includes business resumption processes that do not rely on computer systems and
the maintenance of hard copy files, where appropriate. The business
continuity/disaster recovery plan is monitored and updated as potential Year
2000 readiness issues of AMRESCO, INC. and third parties are specifically
identified. Due to the inability to predict all of the potential problems that
may arise in connection with the Year 2000 issue, there can be no assurance that
all contingencies will be adequately addressed by such plan.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q are not based on historical facts
and are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company intends that
forward-looking statements be subject to such Act and any similar state or
federal laws. Forward-looking statements, which are based on various
assumptions, include statements regarding the intent, belief or current
expectations of the Company, its Manager, and their respective Trustees or
directors and officers, and may be identified by reference to a future period or
periods or by use of forward-looking terminology such as "intends," "may,"
"could," "will," "believe," "expect," "anticipate," "plan," or similar terms or
variations of those terms or the negative of those terms. Actual results could
differ materially from those set forth in forward-looking statements due to
risks, uncertainties and changes with respect to a variety of factors,
including, but not limited to, changes in international, national, regional or
local economic environments, changes in prevailing interest rates, credit and
prepayment risks, basis and asset/liability risks, spread risk, event risk,
conditions which may affect public securities and debt markets generally or the
markets in which the Company operates, the Year 2000 issue, the availability of
and costs associated with obtaining adequate and timely sources of liquidity,
dependence on existing sources of funding, the size and liquidity of the
secondary market for commercial mortgage-backed securities, geographic or
product type concentrations of assets (temporary or otherwise), hedge mismatches
with liabilities, other factors generally understood to affect the real estate
acquisition, mortgage and leasing markets and securities investments, changes in
federal income tax laws and regulations, and other risks described from time to
time in the Company's SEC reports and filings, including its registration
statement on Form S-11 and periodic reports on Form 10-Q, Form 8-K and Form
10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a party to various financial instruments which are subject to
market risk. These instruments include mortgage loan investments, investments in
commercial mortgage-backed securities ("CMBS") and certain of the Company's
borrowing facilities. The Company is also a party to an interest rate cap
agreement which it entered into in order to mitigate the market risk exposure
associated with its credit facilities. The Company's financial instruments
involve, to varying degrees, elements of interest rate risk. Additionally, the
Company's investment portfolio, which is comprised of both financial instruments
(mortgage loans and CMBS) and equity investments in real estate, is subject to
real estate market risk. The Company is a party to certain other financial
instruments, including trade receivables and payables and amounts due to
affiliates which, due to their short-term nature, are not subject to market
risk. For a discussion of market risk exposures, reference is made to Item 7A.
"Quantitative and Qualitative Disclosures About Market Risk" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998. The market risk
exposures described therein have not materially changed since December 31, 1998;
accordingly, no additional discussion or analysis is provided in this Form 10-Q.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of Shareholders was held on May 11, 1999. There were
8,461,410 shares present in person or by proxy, which constituted 84.5% of the
shares entitled to vote at the meeting. The matters voted upon and the results
of such votes were as follows:
(i) Election of Robert L. Adair III (7,172,986 shares voted in
favor and 1,288,424 shares withheld) and John C. Deterding
(7,172,716 shares voted in favor and 1,288,694 shares
withheld) as Trust Managers for a three year term.
(ii) Approval and ratification of the appointment by the Board
of Trust Managers of Deloitte & Touche LLP as the Company's
independent public accountants for the 1999 fiscal year
with 8,430,385 shares voted in favor, 7,875 shares voted
against and 23,150 shares abstained.
(iii) Approval of an amendment to Article 2 of the AMRESCO
Capital Trust 1998 Share Option and Award Plan to increase
the aggregate number of common shares of beneficial
interest reserved for issuance thereunder by 500,000 with
5,715,897 shares voted in favor, 2,324,963 shares voted
against and 420,550 shares abstained.
ITEM 5. OTHER INFORMATION
Effective as of August 4, 1999, the Company entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Impac Commercial Holdings, Inc. ("ICH").
Pursuant to the Merger Agreement, ICH will be merged with and into the Company,
with the Company as the surviving entity (the "Merger"), and each outstanding
share of common stock of ICH will be converted into 0.66094 of a common share of
the Company. Also pursuant to the Merger Agreement, the holder of the
outstanding shares of Series B 8.5% Cumulative Convertible Preferred Stock of
ICH ("ICH Preferred Stock") will convert all of such shares into 1,683,635
shares of common stock of ICH or, if such conversion does not occur prior to the
effective time of the Merger, all of the shares of ICH Preferred Stock will be
converted into 1,112,782 common shares of the Company. The transactions
contemplated by the Merger Agreement are subject to approval by the shareholders
of the Company and ICH.
A copy of the Merger Agreement is attached as an exhibit to this report.
27
<PAGE> 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Exhibit Index
Exhibit No.
2.1 Agreement and Plan of Merger, dated as of August
4, 1999, by and between the Company and Impac
Commercial Holdings, Inc.
4.1 Rights Agreement, dated as of February 25, 1999,
between the Company and The Bank of New York, as
Rights Agent, which includes: as Exhibit A
thereto, the Form of Statement of Designation of
Series A Junior Participating Preferred Shares,
par value $.01 per share, of the Company; as
Exhibit B thereto, the Form of Right Certificate;
and as Exhibit C thereto, the Summary of Rights to
Purchase Preferred Shares (filed as Exhibit 1 to
the Registrant's Current Report on Form 8-K dated
February 25, 1999, which exhibit is incorporated
herein by reference).
10.1 Amended and Restated Interim Warehouse and
Security Agreement dated as of May 4, 1999, by and
among Prudential Securities Credit Corporation and
AMRESCO Capital Trust, AMREIT I, Inc., AMREIT II,
Inc., ACT Equities, Inc. and ACT Holdings, Inc.
(filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1999, which exhibit is
incorporated herein by reference).
10.2 Warrant Agreement dated as of May 4, 1999 between
AMRESCO Capital Trust and Prudential Securities
Incorporated (filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999, which
exhibit is incorporated herein by reference).
27 Financial Data Schedule.
(b) Reports on Form 8-K. The following reports on Form 8-K were
filed with respect to events occurring during the quarterly
period for which this report is filed:
None.
28
<PAGE> 29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMRESCO CAPITAL TRUST
Registrant
Date: August 16, 1999 By: /s/Thomas J. Andrus
---------------------------
Thomas J. Andrus
Executive Vice President
and Chief Financial Officer
29
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of August 4, 1999, by
and between the Company and Impac Commercial Holdings, Inc.
4.1 Rights Agreement, dated as of February 25, 1999, between the
Company and The Bank of New York, as Rights Agent, which
includes: as Exhibit A thereto, the Form of Statement of
Designation of Series A Junior Participating Preferred Shares,
par value $.01 per share, of the Company; as Exhibit B thereto,
the Form of Right Certificate; and as Exhibit C thereto, the
Summary of Rights to Purchase Preferred Shares (filed as
Exhibit 1 to the Registrant's Current Report on Form 8-K dated
February 25, 1999, which exhibit is incorporated herein by
reference).
10.1 Amended and Restated Interim Warehouse and Security Agreement
dated as of May 4, 1999, by and among Prudential Securities
Credit Corporation and AMRESCO Capital Trust, AMREIT I, Inc.,
AMREIT II, Inc., ACT Equities, Inc. and ACT Holdings, Inc.
(filed as Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1999, which
exhibit is incorporated herein by reference).
10.2 Warrant Agreement dated as of May 4, 1999 between AMRESCO
Capital Trust and Prudential Securities Incorporated (filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1999, which exhibit is
incorporated herein by reference).
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
AGREEMENT AND PLAN OF MERGER
Dated as of August 4, 1999
by and between
IMPAC COMMERCIAL HOLDINGS, INC.
and
AMRESCO CAPITAL TRUST
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
THE MERGER................................................................................1
SECTION 1.1 The Merger.............................................................1
SECTION 1.2 Closing................................................................2
SECTION 1.3 Effective Time.........................................................2
SECTION 1.4 Effects of the Merger..................................................2
SECTION 1.5 Declaration of Trust and Bylaws........................................2
SECTION 1.6 Board of Trust Managers................................................2
SECTION 1.7 Officers...............................................................2
ARTICLE II
TREATMENT OF SHARES.......................................................................3
SECTION 2.1 Effect on Outstanding Shares...........................................3
SECTION 2.2 Exchange of Certificates...............................................3
SECTION 2.3 Options................................................................5
SECTION 2.4 Dividends..............................................................5
SECTION 2.5 No Fractional Shares...................................................6
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACT.....................................................7
SECTION 3.1 Organization, Standing and Corporate Power.............................7
SECTION 3.2 Subsidiaries...........................................................7
SECTION 3.3 Capital Structure......................................................7
SECTION 3.4 Authority; Noncontravention; Consents..................................8
SECTION 3.5 SEC Documents.........................................................10
SECTION 3.6 Financial Statements..................................................10
SECTION 3.7 Absence of Certain Changes or Events..................................10
SECTION 3.8 No Undisclosed Liabilities............................................10
SECTION 3.9 No Defaults...........................................................10
SECTION 3.10 Taxes.................................................................11
SECTION 3.11 Employee Matters......................................................12
SECTION 3.12 Affiliate Transactions................................................13
SECTION 3.13 Financial Advisors....................................................13
SECTION 3.14 Registration Statement and Proxy Statement............................14
SECTION 3.15 Vote Required.........................................................14
SECTION 3.16 Anti-Takeover Statutes................................................14
SECTION 3.17 Full Disclosure.......................................................14
SECTION 3.18 Litigation............................................................14
SECTION 3.19 Compliance with Laws..................................................15
SECTION 3.20 Indebtedness..........................................................15
SECTION 3.21 Insurance.............................................................15
SECTION 3.22 Investment Company Act................................................15
</TABLE>
(i)
<PAGE> 3
<TABLE>
<S> <C>
SECTION 3.23 Material Contracts....................................................16
SECTION 3.24 Mortgage Backed Securities............................................16
SECTION 3.25 Environmental Laws and Regulations....................................17
SECTION 3.26 Properties............................................................18
SECTION 3.27 Mortgage Loans........................................................20
SECTION 3.28 Actions Taken Regarding the ACT Rights Plan...........................21
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ICH....................................................21
SECTION 4.1 Organization, Standing and Corporate Power............................21
SECTION 4.2 Subsidiaries..........................................................21
SECTION 4.3 Capital Structure.....................................................22
SECTION 4.4 Authority; Noncontravention; Consents.................................23
SECTION 4.5 SEC Documents.........................................................24
SECTION 4.6 Financial Statements..................................................24
SECTION 4.7 Absence of Certain Changes or Events..................................24
SECTION 4.8 No Undisclosed Liabilities............................................24
SECTION 4.9 No Defaults...........................................................25
SECTION 4.10 Taxes.................................................................25
SECTION 4.11 Employee Matters......................................................26
SECTION 4.12 Affiliate Transactions................................................27
SECTION 4.13 Financial Advisors....................................................27
SECTION 4.14 Registration Statement and Proxy Statement............................28
SECTION 4.15 Vote Required.........................................................28
SECTION 4.16 Anti-Takeover Statutes................................................28
SECTION 4.17 Full Disclosure.......................................................28
SECTION 4.18 Litigation............................................................29
SECTION 4.19 Compliance with Laws..................................................29
SECTION 4.20 Indebtedness..........................................................29
SECTION 4.21 Insurance.............................................................29
SECTION 4.22 Investment Company Act................................................29
SECTION 4.23 Material Contracts....................................................30
SECTION 4.24 Mortgage Backed Securities............................................30
SECTION 4.25 Environmental Laws and Regulations....................................31
SECTION 4.26 Properties............................................................31
SECTION 4.27 Mortgage Loans........................................................33
SECTION 4.28 Actions Taken Regarding the ICH Rights Plan...........................34
ARTICLE V
COVENANTS................................................................................34
SECTION 5.1 Conduct of Business by ACT............................................34
SECTION 5.2 Conduct of Business by ICH............................................36
SECTION 5.3 Other Actions.........................................................38
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE VI
ADDITIONAL COVENANTS.....................................................................39
SECTION 6.1 Preparation of the Registration Statement and the Proxy Statement;
Shareholder Meetings..................................................39
SECTION 6.2 Access to Information; Confidentiality................................40
SECTION 6.3 Commercially Reasonable Efforts; Notification.........................40
SECTION 6.4 Affiliates............................................................41
SECTION 6.5 Tax Treatment.........................................................41
SECTION 6.6 Board of Trust Managers...............................................41
SECTION 6.7 Board Recommendations.................................................41
SECTION 6.8 Acquisition Proposals.................................................43
SECTION 6.9 Public Announcements..................................................43
SECTION 6.10 Letters of Accountants................................................44
SECTION 6.11 Indemnification.......................................................44
SECTION 6.12 Transfer and Gains Taxes..............................................46
SECTION 6.13 Coordination of Dividends.............................................46
ARTICLE VII
CONDITIONS PRECEDENT.....................................................................46
SECTION 7.1 Conditions to Each Party's Obligation To Effect the Merger............46
SECTION 7.2 Conditions to Obligations of ICH......................................47
SECTION 7.3 Conditions to Obligations of ACT......................................48
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER........................................................50
SECTION 8.1 Termination...........................................................50
SECTION 8.2 Expenses; Termination Fee.............................................52
SECTION 8.3 Effect of Termination.................................................54
SECTION 8.4 Amendment.............................................................54
SECTION 8.5 Extension; Waiver.....................................................54
ARTICLE IX
GENERAL PROVISIONS.......................................................................54
SECTION 9.1 Nonsurvival of Representations and Warranties.........................54
SECTION 9.2 Notices...............................................................54
SECTION 9.3 Certain Definitions...................................................55
SECTION 9.4 Interpretation........................................................56
SECTION 9.5 Counterparts..........................................................56
SECTION 9.6 Entire Agreement; No Third-Party Beneficiaries........................56
SECTION 9.7 Governing Law.........................................................56
SECTION 9.8 Assignment............................................................56
SECTION 9.9 Severability..........................................................57
SECTION 9.10 Attorneys' Fees.......................................................57
</TABLE>
(iii)
<PAGE> 5
EXHIBITS:
Exhibit A Trust Managers of the Surviving Entity
Exhibit B Officers of the Surviving Entity
Exhibit C Form of Affiliate Letter
Exhibit D Form of Amended and Restated Management Agreement
Exhibit E Form of ACT Legal Opinion
Exhibit F Form of ICH Legal Opinion
SCHEDULES:
Schedule 3.2 Subsidiaries
Schedule 3.3 Capitalization
Schedule 3.4 Noncontravention; Consents
Schedule 3.7 Absence of Certain Changes or Events
Schedule 3.8 Undisclosed Liabilities
Schedule 3.9 Defaults
Schedule 3.10(a)-(b) Taxes
Schedule 3.11 Employee Matters
Schedule 3.11(a) Benefit Plans
Schedule 3.12 Affiliate Transactions
Schedule 3.18 Litigation
Schedule 3.19 Compliance with Laws
Schedule 3.20 Indebtedness
Schedule 3.23 Material Contracts
Schedule 3.24(a)-(g) Mortgage Backed Securities
Schedule 3.25(a)-(b) Environmental Matters
Schedule 3.26(a)-(b) Properties
Schedule 3.27(a)-(c) Mortgage Loans
Schedule 4.2 Subsidiaries
Schedule 4.4 Noncontravention; Consents
Schedule 4.7 Absence of Certain Changes or Events
Schedule 4.8 Undisclosed Liabilities
Schedule 4.9 Defaults
Schedule 4.10(a)-(b) Taxes
Schedule 4.11 Employee Matters
Schedule 4.11(a) Benefit Plans
Schedule 4.12 Affiliate Transactions
Schedule 4.18 Litigation
Schedule 4.19 Compliance with Laws
Schedule 4.20 Indebtedness
Schedule 4.23 Material Contracts
Schedule 4.24(a)-(g) Mortgage Backed Securities
Schedule 4.25(a)-(b) Environmental Matters
Schedule 4.26(a)-(b) Properties
Schedule 4.27(a)-(b) Mortgage Loans
Schedule 5.1 Conduct of Business by ACT
Schedule 5.2 Conduct of Business by ICH
Schedule 9.3 Persons with "Knowledge" of ACT or ICH
(iv)
<PAGE> 6
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Acquisition Agreement 6.7(b)
Acquisition Proposal 6.8
Affiliate 9.3
Agreement Preamble
ACT Preamble
ACT Benefit Plans 3.11(a)
ACT Common Shares Recitals
ACT Disclosure Letter 9.3
ACT ERISA Affiliate 3.11(a)
ACT Financial Advisors 3.13
ACT First Quarter 10-Q 3.11(c)
ACT Material Contracts 3.23(a)
ACT MBS 3.24(a)
ACT MBS Certificates 3.24(a)
ACT Mortgage Files 3.27(a)
ACT Mortgage Loans 3.27(a)
ACT Mortgage Notes 3.27(a)
ACT 1998 Form 10-K 3.20(e)
ACT Option Plan 3.3
ACT Options 3.3
ACT Permitted Liens 3.26(a)
ACT Preferred Shares 3.3
ACT Principal MBS Agreements 3.24(b)
ACT Properties 3.26(a)
ACT Rights Plan 3.3
ACT SEC Documents 3.5
ACT Shareholder Approval 3.4(a)
ACT Shareholder Meeting 6.1(b)
ACT Warrants 3.3
Alternative Transaction 6.7(b)
Anti-Takeover Statutes 3.16
Average Closing Price 7.3(h)
Base Amount 8.2(e)
Certificates 2.2(b)
Code Recitals
Closing Balance Sheet 7.3(h)
Closing Cash Amount 7.3(h)
Closing Date 1.2
Confidentiality Agreements 6.2
Effective Time 1.3
</TABLE>
(v)
<PAGE> 7
<TABLE>
<S> <C>
Environmental Claim 3.25(c)
Environmental Laws 3.25(c)
ERISA 3.11(a)
Exchange Act 3.4(c)
Exchange Agent 2.2(a)
Exchange Ratio 2.1(b)
Expense Fee Base Amount 8.2(e)
Final ICH Dividend 2.4(a)
GAAP 3.6
Governmental Entity 3.4(c)
Hazardous Materials 3.25(c)
HSR Act 3.4(c)
ICH Preamble
ICH Benefit Plans 4.11(a)
ICH Common Stock 2.1(a)
ICH Disclosure Letter 9.3
ICH ERISA Affiliate 4.11(a)
ICH First Quarter 10-Q 4.11(c)
ICH Material Contracts 4.23(a)
ICH MBS 4.24(a)
ICH MBS Certificates 4.24(a)
ICH 1998 Form 10-K 3.20
ICH Mortgage Files 4.27(a)
ICH Mortgage Loans 4.27(a)
ICH Mortgage Notes 4.27(a)
ICH Option Plan 2.3
ICH Options 2.3
ICH Permitted Liens 4.26(a)
ICH Principal MBS Agreements 4.24(b)
ICH Properties 4.26(a)
ICH Rights Plan 4.3
ICH SEC Documents 4.5
ICH Series A Common Stock 4.3
ICH Series A Preferred Stock 4.3
ICH Series B Preferred Stock 2.1(a)
ICH Stock 2.1(a)
ICH Stockholder Approval 4.4(a)
ICH Stockholder Meeting 6.1(c)
Indebtedness 3.20
Indemnified Liabilities 6.11(a)
Indemnified Parties 6.11(a)
IRS 3.10(b)
Knowledge 9.3
</TABLE>
(vi)
<PAGE> 8
<TABLE>
<S> <C>
Laws 3.4(b)
Liabilities 3.8
Liens 3.2
Maryland Articles of Merger 1.3
Material Adverse Effect 9.3
Maximum Premium 6.11(c)
MBS 3.24(a)
Merger Recitals
MGCL 1.1
Person 9.3
Property Restrictions 3.26(a)
Proxy Statement 3.4(c)
Purchase Agreement Recitals
Qualifying Income 8.2(e)
Registration Statement 3.4
Regulatory Entity 3.25(c)
REIT Recitals
REIT Requirements 8.2(e)
SEC 3.4(c)
Securities Act 3.5
Shareholder Approvals 4.4(a)
Subsequent Determination 6.7(b)
Subsidiary 9.3
Superior Proposal 6.7(b)
Surviving Entity 1.1
Taxes 3.10(a)
Termination Expenses 8.2(e)
Termination Fee 8.2(e)
Termination Fee Tax Opinion 8.2(e)
Texas Articles of Merger 1.3
Trading Day 7.3(h)
Transfer and Gains Tax 6.12
TREITA 1.1
</TABLE>
(vii)
<PAGE> 9
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of August
4, 1999 is made and entered into by and between Impac Commercial Holdings, Inc.,
a Maryland corporation ("ICH"), and AMRESCO Capital Trust, a Texas real estate
investment trust ("ACT").
WHEREAS, the Board of Directors of ICH and the Board of Trust Managers
of ACT have approved the merger of ICH with and into ACT, with ACT being the
surviving entity (the "Merger"), upon the terms and subject to the conditions
set forth in this Agreement;
WHEREAS, it is intended that, for federal income tax purposes, the
Merger will qualify as a reorganization under the provisions of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, pursuant to a Purchase Agreement, dated as of the date hereof
(the "Purchase Agreement"), FIC Management, Inc., a Delaware corporation,
agreed, among other things, that it or its designee will purchase (i) 1,500,011
and 100 common shares of beneficial interest, par value $.01 per share (the "ACT
Common Shares"), of ACT from AMREIT Holdings, Inc. and AMRESCO, INC.,
respectively, and (ii) the Management Agreement, dated as of May 12, 1998,
between ACT and AMREIT Managers, L.P. and the Management Agreement, dated as of
February 2, 1998, between AMREIT Managers, L.P. and OLY/ACT L.P.;
WHEREAS, ACT, as the surviving entity in the Merger, intends that,
following the Merger, ACT will continue to be subject to taxation as a real
estate investment trust (a "REIT") within the meaning of the Code; and
WHEREAS, each of the parties hereto desires to make certain
representations, warranties, covenants and agreements in connection with this
Agreement.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties hereto,
intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions
set forth in this Agreement, at the Effective Time (as defined below), ICH shall
be merged with and into ACT in accordance with the Maryland General Corporation
Law (the "MGCL") and the Texas Real Estate Investment Trust Act, as amended (the
"TREITA"). ACT shall be the surviving entity in the Merger and shall continue
its existence under the TREITA. ACT after the Effective Time is sometimes
referred to herein as the "Surviving Entity." From and after the Effective Time,
the identity and separate corporate existence of ICH shall cease and the
Surviving Entity shall succeed to and assume all the rights and obligations of
ICH.
<PAGE> 10
SECTION 1.2 Closing. The closing of the Merger will take place as soon
as practicable following the satisfaction or waiver of the conditions set forth
in Article VII (the "Closing Date") at such time, date and place as is agreed to
by the parties hereto.
SECTION 1.3 Effective Time. As soon as practicable following the
satisfaction or waiver of the conditions set forth in Article VII, the parties
shall file articles of merger or other appropriate documents (the "Maryland
Articles of Merger") executed in accordance with the MGCL and articles of merger
or other appropriate documents (the "Texas Articles of Merger") executed in
accordance with the TREITA and shall make all other filings or recordings
required under the MGCL or the TREITA. The Merger shall become effective upon
the later of (i) the filing of the Maryland Articles of Merger with the State
Department of Assessments and Taxation of Maryland in accordance with the MGCL
and (ii) the filing of the Texas Articles of Merger with the County Clerk of the
County of Dallas, Texas, or at such later time that the parties hereto have
agreed upon and designated in such filings in accordance with applicable law
(the date and time the Merger becomes effective being the "Effective Time"), it
being understood that the parties shall cause the Effective Time to occur on the
Closing Date.
SECTION 1.4 Effects of the Merger. The Merger shall have the effects
set forth in the MGCL and the TREITA. Among other effects of the Merger, upon
consummation of the Merger, the Surviving Entity shall succeed to all powers and
rights of ICH and shall be liable for all obligations and responsibilities of
ICH.
SECTION 1.5 Declaration of Trust and Bylaws. At the Effective Time, the
declaration of trust and the bylaws of ACT shall be the declaration of trust and
the bylaws of the Surviving Entity, respectively, except that, if approved by
the separate vote of at least two-thirds of the outstanding ACT Common Shares,
the name of the entity specified therein shall be "Hilltop Investment Trust"
and, if not so approved, the name of the entity specified therein shall be
"AMRESCO Capital Trust."
SECTION 1.6 Board of Trust Managers. ACT shall take all actions
necessary to cause the trust managers comprising its Board of Trust Managers at
the Effective Time to be comprised of eight trust managers. The trust managers
of the Surviving Entity immediately following the Effective Time shall be the
persons named on Exhibit A hereto, all of whom shall serve in such classes as
are noted on Exhibit A and shall serve in accordance with the TREITA and the
Surviving Entity's bylaws. If, prior to the Effective Time, any of the persons
named on Exhibit A shall decline or be unable to serve as a trust manager, ACT
(if the person is a current trust manager of ACT) or ICH (if such person is a
current director of ICH) shall designate another person to serve in such
person's stead, which person shall be reasonably acceptable to the other party.
2
<PAGE> 11
SECTION 1.7 Officers. The officers of ACT immediately following the
Effective Time shall be the persons named on Exhibit B hereto, all of whom shall
serve until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
ARTICLE II
TREATMENT OF SHARES
SECTION 2.1 Effect on Outstanding Shares. By virtue of the Merger and
without any action on the part of the holder of any shares of capital stock of
ICH or ACT:
(a) At the Effective Time, each share of common stock, par
value $.01 per share ("ICH Common Stock"), of ICH and each share of Series B 8
1/2% Cumulative Convertible Preferred Stock, par value $.01 per share ("ICH
Series B Preferred Stock" and, together with ICH Common Stock, "ICH Stock"), of
ICH owned by any of its Subsidiaries (as defined below) shall, automatically and
without any action on the part of the holder thereof, be canceled and retired
and all rights in respect thereof shall cease to exist without any conversion
thereof or payment therefor.
(b) At the Effective Time, each share of ICH Common Stock
outstanding immediately prior to the Effective Time (other than as provided in
Section 2.1(a) or any shares of ICH Common Stock owned by ACT or any of its
Subsidiaries) shall, automatically and without any action on the part of the
holder thereof, cease to be outstanding and be converted into 0.66094 (the
"Exchange Ratio") of an ACT Common Share, plus cash for any fractional ACT
Common Share as provided in Section 2.5. If prior to the Effective Time the
outstanding shares of ICH Common Stock shall have been increased, decreased,
changed into or exchanged for a different number or kind of shares or securities
as a result of a reorganization, recapitalization, reclassification, stock
dividend, stock split, reverse stock split or other similar change in ICH's
capitalization, then an appropriate and proportionate adjustment shall be made
in the Exchange Ratio.
(c) Prior to the Effective Time, the holder of the outstanding
shares of ICH Series B Preferred Stock shall convert all of such shares into
1,683,635 shares of ICH Common Stock; provided, however, that if such conversion
does not occur prior to the Effective Time, each share of ICH Series B Preferred
Stock outstanding immediately prior to the Effective Time (other than as
provided in Section 2.1(a) or any shares of ICH Series B Preferred Stock owned
by ACT or any of its Subsidiaries) shall, automatically and without any action
on the part of the holder thereof, cease to be outstanding and be converted into
1,112,782 ACT Common Shares.
SECTION 2.2 Exchange of Certificates.
(a) Prior to the Effective Time, ACT shall appoint The Bank of
New York or another exchange agent mutually acceptable to ACT and ICH to act as
exchange agent (the "Exchange Agent") in the Merger.
3
<PAGE> 12
(b) At or prior to the Effective Time, ACT shall provide to
the Exchange Agent, for the benefit of the holders of shares of ICH Stock,
certificates representing ACT Common Shares issuable in exchange for
certificates representing outstanding shares of ICH Stock pursuant to Section
2.1 ("Certificates") and an estimated amount in cash sufficient to satisfy ACT's
obligations under Section 2.5.
(c) As soon as reasonably practicable after the Effective Time
and in no event later than ten business days thereafter, the Exchange Agent
shall mail to each holder of record of shares of ICH Stock whose shares were
converted into ACT Common Shares pursuant to Section 2.1 (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in a form and have such other
provisions as ACT may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
evidencing ACT Common Shares. Upon surrender of a Certificate for cancellation
to the Exchange Agent or to such other agent or agents as may be appointed by
ACT, together with such letter of transmittal, duly executed, and such other
documents as may reasonably be required by the Exchange Agent, the holder of
such Certificate shall be entitled to receive in exchange therefor a certificate
representing the number of whole ACT Common Shares to which the holder is
entitled and an amount of cash in lieu of any fractional ACT Common Share in
accordance with Section 2.5, and the Certificate so surrendered shall forthwith
be canceled. In the event of a transfer of ownership of shares of ICH Stock that
is not registered in the transfer records of ICH, payment may be made to a
Person (as defined below) other than the Person in whose name the Certificate so
surrendered is registered if such Certificate shall be properly endorsed or
otherwise be in proper form for transfer and the Person requesting such payment
either shall pay any transfer or other taxes required by reason of such payment
being made to a Person other than the registered holder of such Certificate or
establish to the satisfaction of ACT that such tax or taxes have been paid or
are not applicable. Until surrendered as contemplated by this Section 2.2, each
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender such whole number of ACT Common
Shares provided by Section 2.1 and an amount in cash in lieu of any fractional
ACT Common Share in accordance with Section 2.5. No interest will be paid or
will accrue on the consideration payable upon the surrender of any Certificate
or on any cash payable pursuant to Section 2.4 or Section 2.5.
(d) All ACT Common Shares delivered, and cash in lieu of any
fractional shares thereof paid, upon the surrender of Certificates in accordance
with the terms of this Article II shall be deemed to have been paid in full
satisfaction of all rights pertaining to such shares. There shall be no further
registration of transfers on the stock transfer books of ICH or its transfer
agent of the shares of ICH Stock that were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to the
Surviving Entity for any reason, they shall be canceled and exchanged as
provided in this Article II.
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(e) None of ICH, ACT or the Exchange Agent shall be liable to
any Person in respect of any shares or funds delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law. All
Certificates and funds held by the Exchange Agent for payment to the holders of
unsurrendered Certificates that remain unclaimed for six months after the
Effective Time shall be redelivered by the Exchange Agent to ACT, upon demand,
and any holders of Certificates who have not theretofore complied with Section
2.2(c) shall thereafter look only to the Surviving Entity for delivery of any
shares or funds, subject to applicable escheat and other similar laws.
SECTION 2.3 Options. To the extent that acceleration by ICH of the
exercisability of any outstanding option to purchase shares of ICH Common Stock
("ICH Options") is permitted but not required by the applicable governing
instrument, then ICH shall not elect to cause such acceleration to occur. In
connection therewith, at the Effective Time, to the extent not prohibited by the
terms of the relevant governing instrument, each ICH Option that is outstanding
and unexercised immediately prior thereto shall cease to represent a right to
acquire shares of ICH Common Stock and shall be converted automatically into an
option to purchase ACT Common Shares in an amount and at an exercise price
determined as provided below (and otherwise subject to the terms of ICH's Stock
Option and Awards Plan (the "ICH Option Plan"), and the agreements evidencing
grants thereunder, including, subject to the provisions of the first sentence of
this Section 2.3, the accelerated vesting of ICH Options that shall occur in
connection with and by virtue of the Merger as and to the extent required by the
ICH Option Plan or such agreements):
(a) the number of shares of ICH Common Stock to be subject to
the option shall be equal to the product of the number of shares of ICH Common
Stock subject to the original option and the Exchange Ratio, provided that any
fraction of an ACT Common Share resulting from such multiplication shall be
rounded down to the nearest whole share; and
(b) the exercise price per share of ICH Common Stock under the
option shall be equal to the exercise price per share of ICH Common Stock under
the original option divided by the Exchange Ratio, provided that such exercise
price shall be rounded up to the nearest whole cent.
The adjustment provided herein with respect to ICH Options that are "incentive
stock options" (as defined in Section 422 of the Code) shall be and is intended
to be effected in a manner that is consistent with Section 424(a) of the Code
and, to the extent it is not so consistent, Section 424(a) shall override
anything to the contrary contained herein. The duration and other terms of the
new option shall be the same as the original option except that all references
to ICH shall be deemed to be references to the Surviving Entity.
SECTION 2.4 Dividends.
(a) To the extent necessary to satisfy the requirements of
Section 857(a)(1) of
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the Code for the taxable year of ICH ending at the Effective Time, ICH shall
declare and pay a dividend (the "Final ICH Dividend") to holders of shares of
ICH Stock, the record and payment dates for which shall be on or before the
close of business on the last business day prior to the Effective Time, in an
amount sufficient to permit ICH to satisfy such requirements. If ICH determines
it necessary to declare the Final ICH Dividend, and such Final ICH Dividend is
not paid in the ordinary course of business, consistent with past practice, as
provided in Section 5.2(a)(i) hereof, it shall notify ACT at least ten days
prior to the date for the ICH Stockholder Meeting (as defined below), and ACT
shall declare a dividend per ACT Common Share, the record date for which shall
be the close of business on the last business day prior to the Effective Time,
in an amount per share equal to the quotient obtained by dividing (x) the Final
ICH Dividend per share of ICH Stock paid by ICH by (y) the Exchange Ratio.
(b) No dividends or other distributions with respect to ACT
Common Shares with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to the ACT Common Shares
represented thereby, and no cash payment in lieu of fractional shares shall be
paid to any such holder pursuant to Section 2.5, in each case until the
surrender of such Certificate in accordance with this Article II. Subject to the
effect of applicable escheat laws, as soon as reasonably practicable following
surrender of any such Certificate there shall be paid to the holder of such
Certificate, without interest, (i) at the time of such surrender, the amount of
any cash payable in lieu of any fractional ACT Common Share to which such holder
is entitled pursuant to Section 2.5 and (ii) if such Certificate is exchangeable
for one or more whole ACT Common Shares, (x) at the time of such surrender the
amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole ACT Common Shares and
(y) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and with a payment date subsequent to such surrender payable with
respect to such whole ACT Common Shares.
(c) Notwithstanding any provision of this Article II to the
contrary, dividends shall be paid by ICH pro rata with respect to each
outstanding share of beneficial interest within a particular class of ICH Stock
and dividends shall be paid by ACT pro rata with respect to each outstanding
share of beneficial interest of ACT within a particular class in accordance with
the requirements of Section 562(c) of the Code (including, as necessary, by
transferring cash to an appropriate paying agent), and no dividend payments
shall accrue to the benefit of ACT or ICH for failure of a former holder of ICH
Stock to surrender any certificate representing any share of ICH Stock.
SECTION 2.5 No Fractional Shares. Notwithstanding any other provision
of this Agreement, no certificates or scrip for fractional ACT Common Shares
shall be issued upon the surrender for exchange of Certificates and no dividend
or distribution or any other right with respect to ACT Common Shares shall
relate to any fractional security, and such fractional interests shall not
entitle the holder thereof to vote or to any other rights of a shareholder. In
lieu of any such fractional shares, each holder of shares of ICH Stock who would
otherwise have
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been entitled to a fraction of an ACT Common Share upon surrender of
Certificates for exchange pursuant to this Article II shall be entitled to
receive from the Exchange Agent a cash payment (without interest) in lieu of
such fractional share equal to such fraction multiplied by the average closing
price per ACT Common Share on The Nasdaq Stock Market during the five trading
days immediately following the Effective Time.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACT
ACT represents and warrants to ICH as follows:
SECTION 3.1 Organization, Standing and Corporate Power. ACT is duly
organized under the TREITA and has the requisite power and authority to carry on
its business as now being conducted. ACT is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such qualification
or licensing necessary, other than in such jurisdictions where the failure to be
so qualified or licensed, individually or in the aggregate, would not have a
Material Adverse Effect (as defined below) on ACT.
SECTION 3.2 Subsidiaries. Schedule 3.2 to the ACT Disclosure Letter (as
defined below) sets forth each Subsidiary of ACT and the direct and/or indirect
ownership interest therein of ACT and (A) all the outstanding shares of capital
stock of each Subsidiary of ACT that is a corporation have been validly issued
and are fully paid and nonassessable, are owned by ACT or one of its
Subsidiaries free and clear of all pledges, claims, liens, charges, encumbrances
and security interests of any kind or nature whatsoever (collectively, "Liens")
and (B) all equity interests in each of ACT's Subsidiaries that is a
partnership, joint venture, limited liability company or trust are owned by ACT
or one or more of its Subsidiaries free and clear of all Liens. Except for the
capital stock of or other equity or ownership interests in ACT's Subsidiaries,
and except as set forth on Schedule 3.2 to the ACT Disclosure Letter, ACT does
not own, directly or indirectly, any capital stock or other ownership interest
in any Person. Each Subsidiary of ACT that is a corporation is duly incorporated
and validly existing under the laws of its jurisdiction of incorporation and has
the requisite corporate power and authority to carry on its business as now
being conducted, and each such Subsidiary that is a partnership, limited
liability company or trust is duly organized and validly existing under the laws
of its jurisdiction of organization and has the requisite power and authority to
carry on its business as now being conducted. Each Subsidiary of ACT is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed,
individually or in the aggregate, would not have a Material Adverse Effect on
ACT.
SECTION 3.3 Capital Structure. The authorized capital stock of ACT
consists of 200,000,000 ACT Common Shares and 50,000,000 preferred shares of
beneficial interest, par
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value $.01 per share ("ACT Preferred Shares"), of which 350,000 are designated
as Series A Junior Participating Preferred Shares, par value $.01 per share. On
the date hereof, (i) 10,015,111 ACT Common Shares and no ACT Preferred Shares
were issued and outstanding, (ii) no ACT Common Shares or ACT Preferred Shares
were held by ACT in its treasury, (iii) 505,506 ACT Common Shares were reserved
for issuance in connection with the AMRESCO Capital Trust 1998 Share Option and
Award Plan (the "ACT Option Plan"), (iv) 1,479,511 ACT Common Shares were
issuable upon exercise of outstanding options to purchase ACT Common Shares
("ACT Options") and (v) 250,002 ACT Common Shares were issuable upon exercise of
outstanding warrants to purchase ACT Common Shares ("ACT Warrants"). On the date
hereof, except as set forth above in this Section 3.3, no capital shares or
other voting securities of ACT were issued, reserved for issuance or
outstanding. There are no outstanding share appreciation rights relating to the
capital shares of ACT. All outstanding capital shares of ACT are duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. The ACT Common Shares to be issued pursuant hereto have been
duly authorized by ACT and, when issued, sold and delivered in accordance with
this Agreement, will be validly issued, fully paid and nonassessable and not
subject to preemptive rights. There are no bonds, debentures, notes or other
indebtedness of ACT having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matter on which
shareholders of ACT may vote. Except for the ACT Options, ACT Warrants and the
rights issuable under the Rights Agreement, dated as of February 25, 1999,
between ACT and The Bank of New York, as rights agent (the "ACT Rights Plan"),
and for the transactions contemplated hereby, there are no outstanding
securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which ACT or any of its Subsidiaries
is a party or by which such entity is bound, obligating ACT or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional capital shares, voting securities or other ownership interests
of ACT or any of its Subsidiaries or obligating ACT or any of its Subsidiaries
to issue, grant, extend or enter into any such security, option, warrant, call,
right, commitment, agreement, arrangement or undertaking. Except as set forth on
Schedule 3.3 to the ACT Disclosure Letter, there are no outstanding contractual
obligations of ACT or any of its Subsidiaries to repurchase, redeem or otherwise
acquire any capital shares of ACT or any capital shares, voting securities or
other ownership interests in any Subsidiary of ACT or make any material
investment (in the form of a loan, capital contribution or otherwise) to any
Person.
SECTION 3.4 Authority; Noncontravention; Consents.
(a) ACT has the requisite power and authority to enter into
this Agreement and, subject to approval of this Agreement by the vote of the
holders of the ACT Common Shares required to approve this Agreement and the
transactions contemplated hereby (the "ACT Shareholder Approval"), to consummate
the transactions contemplated hereby to which ACT is a party. The execution and
delivery of this Agreement by ACT and the consummation by ACT of the
transactions contemplated hereby to which ACT is a party have been duly
authorized by all necessary action on the part of ACT, subject to approval of
this Agreement pursuant to the ACT Shareholder Approval. This Agreement has been
duly executed and delivered by ACT and,
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assuming the due authorization, execution and delivery hereof by ICH,
constitutes valid and binding obligations of ACT, enforceable against ACT in
accordance with its terms, except that such enforceability may be limited by (i)
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or (ii) general principles
of equity (regardless of whether enforcement is sought in a proceeding in equity
or at law).
(b) Except as set forth in Schedule 3.4 to the ACT Disclosure
Letter, the execution and delivery of this Agreement by ACT do not, and the
consummation of the transactions contemplated hereby to which ACT is a party and
compliance by ACT with the provisions of this Agreement will not, conflict with,
or result in any violation of, or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to loss of a material benefit under, or result
in the creation of any Lien upon any of the properties or assets of ACT or any
of its Subsidiaries under, (i) the declaration of trust or the bylaws of ACT or
the comparable charter or organizational documents or partnership or similar
agreement (as the case may be) of any of its Subsidiaries, each as amended or
supplemented as of the date of this Agreement, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, reciprocal easement agreement, lease
or other agreement, instrument, permit, concession, contract, franchise or
license applicable to ACT or any of its Subsidiaries or their respective
properties or assets or (iii) subject to the governmental filings and other
matters referred to in the following sentence, any judgment, order, decree,
statute, law, ordinance, rule or regulation (collectively, "Laws") applicable to
ACT or any of its Subsidiaries, their respective properties or assets, other
than, in the case of clause (ii) or (iii), any such conflicts, violations,
defaults, rights or Liens that individually or in the aggregate would not (x)
have a Material Adverse Effect on ACT or (y) prevent the consummation of the
Merger.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, any federal, state or local government
or any court, administrative or regulatory agency or commission or other
governmental authority or agency, domestic or foreign (a "Governmental Entity"),
is required by or with respect to ACT or any of its Subsidiaries in connection
with the execution and delivery of this Agreement by ACT or the consummation by
ACT of the transactions contemplated hereby, except for (i) the filing by any
Person in connection with any of the transactions contemplated hereby of a
pre-merger notification and report form under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), to the extent applicable,
(ii) the filing with the Securities and Exchange Commission (the "SEC") of (x) a
joint proxy statement relating to the approval by ACT's and ICH's shareholders
of the transactions contemplated by this Agreement (as amended or supplemented
from time to time, the "Proxy Statement"), (y) a registration statement on Form
S- 4 (or other appropriate form) in connection with the registration of the ACT
Common Shares to be issued in the Merger (as amended or supplemented from time
to time, the "Registration Statement") and (z) such reports under Section 13(a)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as may
be required in connection with this Agreement and the transactions contemplated
hereby, (iii) the filing of Maryland Articles of Merger with the State
Department of Assessments and Taxation of Maryland and the Texas Articles of
Merger with the
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County Clerk of the County of Dallas, Texas and (iv) such other consents,
approvals, orders, authorizations, registrations, declarations, licenses and
filings (A) as are set forth in Schedule 3.4 to the ACT Disclosure Letter, (B)
as may be required under (x) federal, state or local environmental laws or (y)
the "blue sky" laws of various states or (C) which, if not obtained or made,
would not prevent or delay in any material respect the consummation of any of
the transactions contemplated hereby or otherwise prevent ACT from performing
its obligations under this Agreement in any material respect or have,
individually or in the aggregate, a Material Adverse Effect on ACT.
SECTION 3.5 SEC Documents. ACT has timely filed all required reports,
schedules, forms, statements and other documents (collectively, including all
exhibits and schedules thereto and documents incorporated therein by reference,
the "ACT SEC Documents") with the SEC. All of the ACT SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act of
1933, as amended (the "Securities Act"), and the Exchange Act and, in each case,
the rules and regulations promulgated thereunder applicable to such ACT SEC
Documents. None of the ACT SEC Documents at the time of filing and effectiveness
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except to the extent such statements have been modified or
superseded by later ACT SEC Documents.
SECTION 3.6 Financial Statements. The consolidated financial statements
of ACT included in the ACT SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles ("GAAP") (except, in the case of
unaudited statements, as permitted by Form 10-Q of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly presented, in accordance with the applicable
requirements of GAAP, the consolidated financial position of ACT as of the dates
thereof and the consolidated results of operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).
SECTION 3.7 Absence of Certain Changes or Events. Except as disclosed
in the ACT SEC Documents or in Schedule 3.7 to the ACT Disclosure Letter, since
the date of the most recent financial statements included in the ACT SEC
Documents and to the date of this Agreement, there has not been any change that
would have a Material Adverse Effect on ACT, nor has there been any occurrence
or circumstance that with the passage of time would reasonably be expected to
result in such a change, whether or not arising from transactions in the
ordinary course of business.
SECTION 3.8 No Undisclosed Liabilities. Except (a) as set forth in the
ACT SEC Documents filed prior to the date of this Agreement, (b) as set forth in
Schedule 3.8 to the
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ACT Disclosure Letter, (c) as incurred in the ordinary course of the business of
ACT, (d) for the expenses incurred in connection with the transactions
contemplated hereby or (e) for liabilities or obligations relating to
contractual obligations, indebtedness, litigation or other matters that are
covered by other representations and warranties in this Agreement or otherwise
identified in the ACT Disclosure Letter, neither ACT nor any of its Subsidiaries
has any liabilities or obligations, whether arising out of contract, tort,
statute or otherwise ("Liabilities"). The reserves reflected on ACT's balance
sheet dated March 31, 1999 and the balance sheet dated December 31, 1998, as
included, in each case, in the ACT SEC Documents, are appropriate and reasonable
and have been calculated in a manner consistent with past practice.
SECTION 3.9 No Defaults. Except as disclosed in Schedule 3.9 to the ACT
Disclosure Letter, neither ACT nor any of its Subsidiaries is in violation or
default under any provision of its declaration of trust, certificate of
incorporation, bylaws, partnership agreement or other organizational documents,
as applicable, or is in breach of or default with respect to any provision of
any agreement, judgment, decree, order, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which it is a party
or by which it or any of its properties are bound; and there does not exist any
state of facts that would constitute an event of default on the part of any of
ACT or its Subsidiaries as defined in such documents that, with notice or lapse
of time or both, would constitute a default, other than such violations or
defaults that in the aggregate would not have a Material Adverse Effect on ACT.
SECTION 3.10 Taxes.
(a) ACT and each of its Subsidiaries has (A) filed all Tax
returns and reports required to be filed by it (after giving effect to any
filing extension properly granted by a Governmental Entity having authority to
do so) and all such returns and reports are accurate and complete in all
material respects; and (B) paid (or ACT has paid on its behalf) all Taxes shown
on such returns and reports as required to be paid by it, and, except as
disclosed in the ACT SEC Documents or in Schedule 3.10(a) to the ACT Disclosure
Letter, the most recent financial statements contained in the ACT SEC Documents
reflect an adequate reserve for all material Taxes payable by ACT (and by those
Subsidiaries of ACT whose financial statements are contained therein) for all
taxable periods and portions thereof through the date of such financial
statements. True, correct and complete copies of all federal, state and local
Tax returns and reports for ACT and each of its Subsidiaries, and all written
communications relating thereto, have been delivered or made available to
representatives of ICH. Since the date of the most recent financial statements
included in the ACT SEC Documents, ACT has incurred no liability for taxes under
Sections 857(b), 860(c) or 4981 of the Code, and neither ACT nor any of its
Subsidiaries has incurred any material liability for Taxes other than in the
ordinary course of business. To the Knowledge of ACT, no event has occurred, and
no condition or circumstance exists, which presents a material risk that any
material Tax described in the preceding sentence will be imposed upon ACT.
Except as set forth on Schedule 3.10(a) to the ACT Disclosure Letter, to the
Knowledge of ACT, no deficiencies for any Taxes have been proposed, asserted or
assessed against ACT or any of its Subsidiaries, and no requests for waivers of
the time to assess any such Taxes are pending. As used in this Agreement,
"Taxes" shall include all federal, state,
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local and foreign income, property, sales, excise and other taxes, tariffs or
governmental charges of any nature whatsoever, together with penalties, interest
or additions to Tax with respect thereto.
(b) ACT (A) for all taxable years commencing with December 31,
1998 has been subject to taxation as a REIT within the meaning of the Code and
has satisfied all requirements to qualify as a REIT for such years, (B) has
operated, and intends to continue to operate, in such a manner as to qualify as
a REIT for the tax year ending on December 31, 1999, and (C) has not taken or
omitted to take any action which would reasonably be expected to result in a
challenge to its status as a REIT, and to ACT's Knowledge, no such challenge is
pending or threatened. Each Subsidiary of ACT that is a partnership, joint
venture or limited liability company has been since its formation and continues
to be treated for federal income tax purposes as a partnership and not as a
corporation or an association taxable as a corporation. Except as set forth on
Schedule 3.10(b) to the ACT Disclosure Letter, each Subsidiary of ACT that is a
corporation for federal income tax purposes has been since its formation, and
continues to be treated for federal income tax purposes as, a "qualified REIT
subsidiary" as defined in Section 856(i) of the Code. Except as set forth on
Schedule 3.10(b) to the ACT Disclosure Letter, neither ACT nor any of its
Subsidiaries holds any asset (x) the disposition of which would be subject to
rules similar to Section 1374 of the Code as a result of an election under
Internal Revenue Service ("IRS") Notice 88-19 or (y) that is subject to a
consent filed pursuant to Section 341(f) of the Code and the regulations
thereunder.
SECTION 3.11 Employee Matters. Except as set forth in Schedule 3.11 to
the ACT Disclosure Letter:
(a) Schedule 3.11(a) to the ACT Disclosure Letter contains a
true and complete list of each employee benefit plan, policy or agreement
covering employees, former employees or directors of any of ACT or its
Subsidiaries or their beneficiaries, or providing benefits to such persons in
respect of services provided to any such entity, including without limitation
any employee benefit plans within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and any
employment, retention, severance or change in control agreement, in each case
that is sponsored, maintained or contributed to or required to be contributed to
by ACT or its Subsidiaries or by any trade or business, whether or not
incorporated (an "ACT ERISA Affiliate") that, together with any of such
Subsidiaries, would be deemed a "single employer" within the meaning of Section
4001(b) of ERISA (collectively, the "ACT Benefit Plans"). Other than as set
forth in Schedule 3.11(a) to the ACT Disclosure Letter, since December 31, 1998,
there have been no new plans adopted, nor changes, additions or modification to
any ACT Benefit Plan. As of the date hereof, neither ACT nor any of its
Subsidiaries has any plans to adopt, change, add or modify any ACT Benefit Plan,
nor has any such entity communicated with any current or former employer with
respect thereto.
(b) With respect to each ACT Benefit Plan, ACT has previously
delivered or made available to ICH or its representatives true and complete
copies of the following: (i) the
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plan document and all amendments thereto (or, if such plan is unwritten, a true
and complete summary of its terms); (ii) any related trust or other funding
vehicle; (iii) if applicable, the two most recent IRS Forms 5500 and related
attachments; (iv) if applicable, the most recent IRS determination letter; and
(v) any material correspondence or employee communications.
(c) All contributions and other payments required to have been
made by ACT or one of its Subsidiaries to any ACT Benefit Plan (or to any Person
pursuant to the terms thereof) have been made or the amount of such payment or
contribution obligation has been reflected in the financial statements in ACT's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (the "ACT
First Quarter 10-Q").
(d) Each of the ACT Benefit Plans intended to be "qualified"
within the meaning of Section 401(a) or Section 501(c)(9) of the Code has been
determined by the IRS to be so qualified, and no circumstances exist that could
reasonably be expected to result in the revocation of any such determination.
Each of the ACT Benefit Plans is and has been operated in all material respects
in compliance with its terms and all applicable laws, rules and regulations
governing such plan, including, without limitation, ERISA and the Code.
(e) With respect to the ACT Benefit Plans, individually and in
the aggregate, no event has occurred, there does not now exist any condition or
set of circumstances, that could reasonably be expected to subject ACT, any of
its Subsidiaries or any ACT ERISA Affiliate to any material liability arising
under the Code, ERISA or any other applicable law, or under any indemnity
agreement to which ACT, any of its Subsidiaries or any ACT ERISA Affiliate is a
party, excluding liability relating to benefit claims and funding obligations
payable in the ordinary course.
(f) Other than continuation coverage required to be provided
under Section 4980B of the Code or Part 6 of Title I of ERISA or otherwise as
provided by state law, none of the ACT Benefit Plans that are "welfare plans,"
within the meaning of Section 3(1) of ERISA, provides for any benefits with
respect to current or former employees for periods extending beyond their
retirement or other termination of service, other than benefits the full cost of
which is borne by such former employees.
(g) Except as otherwise disclosed to ICH, the consummation of
the Merger will not, either alone or in combination with another event
undertaken by ACT or any of its Subsidiaries prior to the date hereof, (i)
entitle any current or former employee, agent, independent contractor or officer
of ACT or its Subsidiaries to severance pay, unemployment compensation or any
other payment, (ii) accelerate the time of payment or vesting or increase the
amount of compensation due any such employee, officer, agent or independent
contractor or (iii) constitute a "change in control" under any ACT Benefit Plan.
SECTION 3.12 Affiliate Transactions. Except as set forth in the ACT SEC
Documents or in Schedule 3.12 to the ACT Disclosure Letter, there is no
transaction and no
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transaction is now proposed, to which ACT or its Subsidiaries is or is to be a
party in which any current shareholder (holding in excess of 5% of the ACT
Common Shares or any securities convertible into or exchangeable for such
shares), trust manager, director or executive officer of ACT or its Subsidiaries
has a direct or indirect interest.
SECTION 3.13 Financial Advisors. No broker, investment banker,
financial advisor or other Person, other than Prudential Securities Incorporated
and Deutsche Banc Alex. Brown (collectively, the "ACT Financial Advisors"), the
fees and expenses of which have previously been disclosed to ICH and will be
paid by ACT, is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated
hereby based upon arrangements made by or on behalf of ACT or any of its
Affiliates. Substantially concurrently herewith, ACT's Board of Trust Managers
has received the opinion of each of the ACT Financial Advisors to the effect
that, as of the date thereof, the Exchange Ratio is fair from a financial point
of view.
SECTION 3.14 Registration Statement and Proxy Statement. The
information supplied or to be supplied by ACT or its Subsidiaries for inclusion
in (a) the Registration Statement will not, either at the time it is filed with
the SEC or at the time it becomes effective under the Securities Act, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading or (b) the Proxy Statement, including any amendment and supplement
thereto, will not, either at the date mailed to shareholders of ACT or at the
time of the ACT Shareholder Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Registration Statement and the
Proxy Statement will each comply as to form in all material respects with all
applicable laws, including the provisions of the Securities Act and the Exchange
Act and the rules and regulations promulgated thereunder, except that no
representation is made by ACT with respect to information supplied by ICH for
inclusion therein.
SECTION 3.15 Vote Required. The affirmative vote of at least a majority
of the outstanding ACT Common Shares is the only vote of the holders of any
class or series of ACT's capital shares necessary (under applicable law or
otherwise) to approve this Agreement and the transactions contemplated hereby;
provided, however, that the amendment to ACT's Declaration of Trust to change
the name of the Surviving Entity shall require the affirmative vote of at least
two-thirds of the outstanding ACT Common Shares.
SECTION 3.16 Anti-Takeover Statutes. ACT has taken all action
necessary, if any, to exempt the transactions contemplated hereby from the
operation of any "fair price," "moratorium," "control share acquisition" or any
other anti-takeover statute or similar statute enacted under state or federal
laws or similar statutes or regulations ("Anti-Takeover Statutes").
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SECTION 3.17 Full Disclosure. To the Knowledge of ACT, ACT has not
failed to disclose to ICH any fact material to the business, properties,
prospects, operations, financial condition or results of operations of ICH and
its Subsidiaries, taken as a whole. To the Knowledge of ACT, no representation
or warranty by ACT contained in this Agreement and no statement contained in any
document (including historical financial statements and the ACT Disclosure
Letter), certificate or other writing furnished or to be furnished by ACT to ICH
or any of its representatives pursuant to the provisions hereof or in connection
with the transactions contemplated hereby, contains or will contain any untrue
statement of material fact or omits or will omit to state any material fact
necessary, in light of the circumstances under which it was made, in order to
make the statements herein or therein not misleading. Notwithstanding the
foregoing or any other provision herein, ACT has made no representation or
warranty with respect to any financial or other projections made by ACT.
SECTION 3.18 Litigation. Except as disclosed in ACT SEC Documents filed
with the SEC prior to the date hereof or in Schedule 3.18 to the ACT Disclosure
Letter, there is no suit, action or proceeding pending, threatened in writing
or, to ACT's Knowledge, otherwise threatened against or affecting ACT or any
Subsidiary of ACT that, individually or in the aggregate, could reasonably be
expected to (A) have a Material Adverse Effect on ACT or (B) materially delay or
prevent the consummation of any of the transactions contemplated hereby, nor is
there any judgment, decree, injunction, rule or order of any Governmental Entity
or arbitrator outstanding against ACT or any Subsidiary of ACT or any of their
respective properties or assets having, or which, insofar as reasonably can be
foreseen, in the future would have, any such effect.
SECTION 3.19 Compliance with Laws. Except as disclosed in ACT SEC
Documents filed with the SEC prior to the date hereof or as set forth in
Schedule 3.19 to the ACT Disclosure Letter, to the knowledge of ACT, neither ACT
nor any of its Subsidiaries has violated or failed to comply with any statute,
law, ordinance, regulation, rule, judgment, decree or order of any Governmental
Entity applicable to its business, properties or operations, and neither ACT nor
any of its Subsidiaries has received notification of asserted present or past
violation or failure to comply, except for violations and failures to comply
that would not, individually or in the aggregate, be reasonably likely to result
in a Material Adverse Effect on ACT.
SECTION 3.20 Indebtedness. Except as filed (or incorporated by
reference) as an exhibit to ACT's Annual Report on Form 10-K for the year ended
December 31, 1998 (the "ACT 1998 Form 10-K"), Schedule 3.20 to the ACT
Disclosure Letter sets forth (x) a list of all loan or credit agreements, notes,
bonds, mortgages, indentures and other agreements and instruments pursuant to
which any indebtedness of ACT or any of its Subsidiaries, other than
indebtedness payable to ACT or one of its Subsidiaries, in an aggregate
principal amount in excess of $100,000 per item is outstanding or may be
incurred and (y) the respective principal amounts outstanding thereunder on July
1, 1999. For purposes of this Section 3.20 and Section 4.20, "Indebtedness"
shall mean, with respect to any Person, without duplication, (A) all
indebtedness
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of such Person for borrowed money, whether secured or unsecured, (B) all
obligations of such Person under conditional sale or other title retention
agreements relating to property purchased by such Person, (C) all capitalized
lease obligations of such Person, (D) all obligations of such Person under
interest rate or currency hedging transactions (valued at the termination value
thereof) and (E) all guarantees of such Person of any such indebtedness of any
other Person.
SECTION 3.21 Insurance. ACT and its Subsidiaries maintain fire and
casualty, general liability, business interruption, product liability,
professional liability and sprinkler and water damage insurance policies with
reputable insurance carriers, which ACT reasonably believes provide full and
adequate coverage for all normal risks incident to the business of ACT and its
Subsidiaries and their respective properties and assets.
SECTION 3.22 Investment Company Act. Neither ACT nor any of its
Subsidiaries is (i) except as disclosed in the ACT SEC Documents, an "investment
company" or a company "controlled" by an investment company within the meaning
of the Investment Company Act of 1940, as amended, (ii) a "holding company" or a
"subsidiary company" of a holding company or an "affiliate" thereof within the
meaning of the Public Utility Holding Company Act of 1935, as amended, or (iii)
subject to regulation under the Federal Power Act or the Interstate Commerce
Act.
SECTION 3.23 Material Contracts.
(a) Except as set forth in Schedule 3.23 to the ACT Disclosure
Letter and other than contracts or agreements that are required to be filed and
have been filed (or incorporated by reference) as an exhibit to the ACT 1998
Form 10-K (the "ACT Material Contracts"), there are no contracts or agreements
that would have been required to be filed as an exhibit to an Annual Report on
Form 10-K that are material to the business, properties, assets, financial
position or results of operations of ACT and its Subsidiaries.
(b) The ACT Material Contracts are in full force and effect
and are valid and enforceable, in accordance with their terms, obligations of
ACT or its Subsidiaries, as the case may be, except that such enforceability may
be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or (ii)
general principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law), and there are no breaches or defaults
thereunder by ACT or its Subsidiaries which, individually or in the aggregate,
would be reasonably likely to have a Material Adverse Effect on ACT, and no
event has occurred that with the lapse of time or the giving of notice or both
would constitute a breach or default thereunder by ACT or its Subsidiaries which
would reasonably be expected to have a Material Adverse Effect on ACT.
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SECTION 3.24 Mortgage Backed Securities.
(a) Except as set forth on Schedule 3.24(a) to the ACT
Disclosure Letter, ACT or one of its Subsidiaries is and shall be the sole owner
of each of the mortgage backed securities ("MBS") identified in Schedule 3.24(a)
to the ACT Disclosure Letter ("ACT MBS") and the related certificates and other
instruments evidencing ownership of the ACT MBS (the "ACT MBS Certificates"),
free and clear of any adverse claims, Liens, pledges, assignments, charges or
security interests of any nature (including, without limitation, Liens arising
under the federal tax laws or ERISA), other than Liens pursuant to repurchase
agreements or other warehouse financing.
(b) Except as set forth in Schedule 3.24(b) to the ACT
Disclosure Letter, neither ACT or any of its Subsidiaries is in default in the
performance of any of its obligations, whether as special servicer or otherwise,
under any pooling and servicing agreements, trust and servicing agreements,
trust agreements, servicing agreements or other similar documents providing for
the creation of the MBS or the servicing of the mortgage loans underlying the
MBS (the "ACT Principal MBS Agreements") and has not received any notice of any
default by any master or special servicer of any ACT MBS.
(c) Except as set forth in Schedule 3.24(c) to the ACT
Disclosure Letter, for all ACT MBS, ACT has delivered to ICH a copy of each
prospectus, offering circular or private placement memorandum relating to such
ACT MBS.
(d) Except as set forth in Schedule 3.24(d) to the ACT
Disclosure Letter, there are no agreements (other than the ACT Principal MBS
Agreements) between ACT or any of its Subsidiaries and the master servicer or
any special servicer with respect to any series of ACT MBS.
(e) Except as set forth in Schedule 3.24(e) to the ACT
Disclosure Letter, there are no agreements between ACT or any of its
Subsidiaries and other holders of any below investment grade ACT MBS.
(f) Except as set forth in Schedule 3.24(f) to the ACT
Disclosure Letter with respect to each issue of the ACT MBS, ACT or one of its
Subsidiaries, as the holder of the majority of the controlling class, has not
waived any rights as to any specially serviced mortgage loan.
(g) Except as set forth in Schedule 3.24(g) to the ACT
Disclosure Letter, with respect to each issue of the ACT MBS, ACT has not
determined that any specially serviced assets have become corrected assets and
has not received any written notice of any specially serviced assets which have
become corrected assets.
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SECTION 3.25 Environmental Laws and Regulations.
(a) Except as set forth in Schedule 3.25(a) to the ACT
Disclosure Letter or disclosed by ACT in the ACT SEC Documents filed prior to
the date hereof, ACT and ACT's Subsidiaries are in compliance with all
applicable Environmental Laws (which compliance includes, but is not limited to,
the possession by ACT and ACT's Subsidiaries of all permits and other
governmental authorizations required under applicable Environmental Laws, and
compliance with the terms and conditions thereof), except where the failure to
be in compliance, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect on ACT. Except as set forth in
Schedule 3.25(a) to the ACT Disclosure Letter or disclosed by ACT in the ACT SEC
Documents, since January 1, 1998 and prior to the date of this Agreement,
neither ACT nor any of its Subsidiaries has received any written communication,
whether from a Governmental Entity, citizens' group, employee or otherwise,
alleging that ACT or any of ACT's Subsidiaries is not in such compliance, except
where failures to be in compliance, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect on ACT.
(b) Except as set forth in Schedule 3.25(b) to the ACT
Disclosure Letter or disclosed by ACT in the ACT SEC Documents, there is no
Environmental Claim pending or threatened in writing against ACT or any of ACT's
Subsidiaries.
(c) As used in this Section 3.25 and Section 4.25:
(i) "Environmental Claim" means any and all
administrative, regulatory or judicial actions, suits, demands, demand letters,
directives, orders, claims, Liens, investigations, proceedings or notices of
noncompliance or violation by any person or entity (including any governmental
authority) alleging potential liability (including, without limitation,
potential responsibility for or liability for enforcement, investigatory costs,
cleanup costs, governmental response costs, removal costs, remediation costs,
natural resources damages, property damages, personal injury, bodily injury,
wrongful death or penalties) arising our of, based on or resulting from (A) the
presence, Release or threatened Release of any Hazardous Materials at any
location, whether or not owned, leased or managed by ACT or ICH or any of their
Subsidiaries, as the case may be; or (B) circumstances that form the basis of
any violation or alleged violation of any Environmental Law;
(ii) "Environmental Laws" means all federal, state
and local laws, rules and regulations relating to pollution, the environment
(including, without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata) or protection of human health and safety,
including, without limitation, laws and regulations relating to Releases or
threatened Releases of Hazardous Materials, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials;
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(iii) "Regulatory Entity" means any court or tribunal
of competent jurisdiction in any jurisdiction or any foreign, Federal, state or
municipal governmental, regulatory or other administrative agency, department,
commission, board, bureau, political subdivision or other authority or
instrumentality; and
(iv) "Hazardous Materials" means (A) any petroleum or
petroleum products, radioactive materials, asbestos in any form that is or could
become friable, urea formaldehyde foam insulation and transformers or other
equipment that contain dielectric fluid containing polychlorinated biphenyls
("PCBs"); (B) any chemicals, materials or substances which are now defined as or
included in the definition of "hazardous substances," "hazardous wastes,"
"hazardous materials," "extremely hazardous wastes," "restricted hazardous
wastes," "toxic substances," "toxic pollutants," or words of similar import
under any Environmental Law and (C) any other chemical, material, substance or
waste, exposure to which is now prohibited, limited or regulated under any
Environmental Law in a jurisdiction in which ACT or ICH or any of their
Subsidiaries, as the case may be, operate.
SECTION 3.26 Properties.
(a) ACT or one of its Subsidiaries owns fee simple title (or
where indicated, leasehold estates) to each of the real properties identified in
the ACT SEC Documents or in Schedule 3.26 to the ACT Disclosure Letter (the "ACT
Properties"), which are all of the real estate properties owned by them, in each
case (except as provided below or as set forth on Schedule 3.26 to the ACT
Disclosure Letter) free and clear of Liens. The ACT Properties are not subject
to any rights of way, written agreements, laws, ordinances and regulations
affecting building use or occupancy in the applicable jurisdiction
(collectively, "Property Restrictions") or Liens, except for ACT Permitted
Liens. For purposes of this Agreement, "ACT Permitted Liens" means (i) Liens and
Property Restrictions set forth in the ACT SEC Documents, (ii) Liens and
Property Restrictions set forth in the ACT Disclosure Letter, (iii) Property
Restrictions imposed or promulgated by law or any governmental body or authority
generally with respect to real property, including zoning regulations, and
listed in the ACT Disclosure Letter, (iv) Liens and Property Restrictions
disclosed on existing title reports or existing surveys (in either case copies
of which title reports and surveys have been delivered or made available to ICH
and listed in the ACT Disclosure Letter), and (v) mechanics', carriers',
workmen's, repairmen's and materialmens' liens and other Liens, Property
Restrictions and other limitations of any kind, if any, which, individually or
in the aggregate, are not substantial in amount and do not materially detract
from the value of or materially interfere with the use of any of the ACT
Properties as currently contemplated subject thereto or affected thereby. Except
as provided in Schedule 3.26 to the ACT Disclosure Letter, valid policies of
title insurance have been issued insuring ACT's or its Subsidiary's fee simple
title or leasehold estate to the ACT Properties in amounts at least equal to the
fair market value of such ACT Properties at the time of the issuance of such
policy, subject only to the matters disclosed above or in the ACT Disclosure
Letter, and such policies are, at the date hereof, in full force and effect and
no material claim has been made against any such policy. Except as provided in
Schedule 3.26 to the ACT Disclosure Letter, ACT has no Knowledge (i) that any
certificate, permit or license from any Governmental Entity having jurisdiction
over
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any of the ACT Properties or any agreement, easement or other right which is
necessary to permit the lawful use and operation of the buildings and
improvements on any of the ACT Properties as currently contemplated or which is
necessary to permit the lawful use and operation of all driveways, roads and
other means of egress and ingress to and from any of the ACT Properties has not
been obtained and is not in full force and effect, or of any pending threat of
modification or cancellation of any of same; (ii) of any written notice of any
violation of any federal, state or municipal law, ordinance, order, regulation
or requirement materially and adversely affecting any of the ACT Properties
issued by any Governmental Entity; (iii) of any material structural defects
relating to any ACT Property; (iv) of any ACT Property whose building systems
are not in working order in any material respect; (v) of any physical damage to
any ACT Property for which there is no insurance in effect covering the cost of
the restoration; (vi) of any current renovation or uninsured restoration to any
ACT Property the cost of which exceeds $50,000 or (vii) of items referred to in
the foregoing clauses (iii), (iv), (v) and (vi) which in the aggregate for ACT
and its Subsidiaries would not be reasonably likely to result in a Material
Adverse Effect on ACT. Except as provided in Schedule 3.26 to the ACT Disclosure
Letter, neither ACT nor any of its Subsidiaries has received any notice to the
effect that (A) any condemnation or rezoning proceedings are pending or
threatened with respect to any of the ACT Properties, (B) any zoning, building
or similar law, code, ordinance, order or regulation is or will be violated by
the continued maintenance, operation or use of any buildings or other
improvements on any of the ACT Properties or (C) a default exists or, with
notice or lapse of time, or both, will exist under any lease (including any
ground lease), mortgage, deed of trust or related document regarding an ACT
Property or that any ACT Property is being foreclosed upon.
(b) All material leases and subleases for which ACT or any of
its Subsidiaries is lessor or lessee (or sublessee) are identified in the ACT
SEC Documents or in Schedule 3.26(b) to the ACT Disclosure Letter. Except as
disclosed on Schedule 3.26(b) to the ACT Disclosure Letter, each such lease is
in full force and effect and neither ACT nor any of its Subsidiaries has notice
of any defense to the obligations of the lessor or lessee (or sublessee), as the
case may be, thereunder or any material claim asserted or threatened by any
person or entity, and except as disclosed on Schedule 3.26(b) to the ACT
Disclosure Letter, the lessor or lessee (or sublessee), as the case may be,
under each such lease or sublease has complied with its obligations under such
lease or sublease in all material respects and neither ACT nor any of its
Subsidiaries has Knowledge that a material default exists, or with notice or
lapse of time or both, will exist by the lessee (or sublessee) or lessor under
such lease.
SECTION 3.27 Mortgage Loans.
(a) Except as set forth in Schedule 3.27(a) to the ACT
Disclosure Letter, ACT or one of its Subsidiaries is the sole owner of each of
the mortgage loans reflected in the most recent financial statements included in
the ACT SEC Documents or made or acquired since such date (the "ACT Mortgage
Loans") and is the sole owner or beneficiary of or under the related notes (the
"ACT Mortgage Notes"), deeds of trust, mortgages, security agreements,
guaranties, indemnities, financing statements, assignments, endorsement, bonds,
letters of credit, accounts,
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insurance contracts and policies, credit reports, tax returns, appraisals,
environmental reports, escrow documents, participation agreements (if
applicable), loan files, servicing files and all other documents evidencing or
securing the ACT Mortgage Loans (the "ACT Mortgage Files"), except (i) any ACT
Mortgage Loans disposed of in the ordinary course since the date of such
financial statements, and (ii) to the extent any ACT Mortgage Loan is prepaid in
full or subject to a completed foreclosure action (or non-judicial proceeding or
deed in lieu of foreclosure) in which case ACT or one of its Subsidiaries shall
be the sole owner of the real property securing such foreclosed loan or shall
have received the proceeds of such action to which ACT or such Subsidiary was
entitled, in each case free and clear of any adverse claims or Liens.
(b) Except as set forth in Schedule 3.27(b) to the ACT
Disclosure Letter, to the Knowledge of ACT, (i) the lien of each ACT Mortgage is
subject only to "Permitted Exceptions" which consist of the following: (A) ACT
Permitted Liens; (B) covenants, conditions, restrictions, reservations, rights,
Liens, easements, encumbrances, encroachments, and other matters affecting title
acceptable to prudent mortgage lending institutions generally; (C) rights of
tenants with no options to purchase or rights of first refusal to purchase,
except as disclosed in the ACT Mortgage File; and (D) other matters which, in
the aggregate, would not be reasonably likely to result in a Material Adverse
Effect on ACT; (ii) each ACT Mortgage Loan has generally been serviced in
accordance with the terms of the related mortgage note and pooling and servicing
agreements and otherwise in accordance with industry accepted servicing
practices except for events that, individually or in the aggregate, would not be
reasonably likely to result in a Material Adverse Effect on ACT; and (iii) there
is no delinquency in the payments of principal and interest required to be made
under the terms of any ACT Mortgage Loan in excess of 30 days beyond the
applicable due date that has occurred since origination or in any other payments
required to be made under the terms of any ACT Mortgage Loan (inclusive of any
applicable grace or cure period) that would be reasonably likely to result in a
Material Adverse Effect on ACT.
(c) Except as set forth in Schedule 3.27(c) to the ACT
Disclosure Letter or in the applicable ACT Mortgage File, ACT has no Knowledge
of (i) any written notice asserting any offset, defense (including the defense
of usury), claim (including claims of lender liability), counterclaim, or right
to rescission with respect to any ACT Mortgage Loan, ACT Mortgage Note or other
related agreements, (ii) any uncured monetary default in excess of 30 days or
event of acceleration existing under any ACT Mortgage or the related ACT
Mortgage Note or (iii) any uncured non-monetary default, breach, violation or
event of acceleration existing beyond the applicable grace or cure period under
any ACT Mortgage or the related ACT Mortgage Note, except for notices,
violations, breaches, defaults or events of acceleration that would not,
individually or in the aggregate, be reasonably likely to result in a Material
Adverse Effect on ACT.
SECTION 3.28 Actions Taken Regarding the ACT Rights Plan. ACT has
taken, or shall take prior to the Closing Date, all action necessary to amend
the ACT Rights Plan to ensure that the execution and delivery of this Agreement
and the Purchase Agreement, the taking of any
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other action or combination of actions or the consummation of the transactions
contemplated hereby or thereby do not and will not result in the grant of any
rights to any Person to exercise or receive a distribution of rights
certificates thereunder or acquire any property in respect of rights thereunder.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ICH
ICH represents and warrants to ACT as follows:
SECTION 4.1 Organization, Standing and Corporate Power. ICH is a
corporation, duly organized and validly existing under the MGCL and has the
requisite power and authority to carry on its business as now being conducted.
ICH is duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed,
individually or in the aggregate, would not have a Material Adverse Effect (as
defined below) on ICH.
SECTION 4.2 Subsidiaries. Schedule 4.2 to the ICH Disclosure Letter (as
defined below) sets forth each Subsidiary of ICH and the direct and/or indirect
ownership interest therein of ICH and (A) all the outstanding shares of capital
stock of each Subsidiary of ICH that is a corporation have been validly issued
and are fully paid and nonassessable, are owned by ICH or one of its
Subsidiaries free and clear of all Liens and (B) all equity interests in each of
ICH's Subsidiaries that is a partnership, joint venture, limited liability
company or trust are owned by ICH or one or more of its Subsidiaries free and
clear of all Liens. Except for the capital stock of or other equity or ownership
interests in ICH's Subsidiaries, and except as set forth on Schedule 4.2 to the
ICH Disclosure Letter, ICH does not own, directly or indirectly, any capital
stock or other ownership interest in any Person. Each Subsidiary of ICH that is
a corporation is duly incorporated and validly existing under the laws of its
jurisdiction of incorporation and has the requisite corporate power and
authority to carry on its business as now being conducted, and each such
Subsidiary that is a partnership, limited liability company or trust is duly
organized and validly existing under the laws of its jurisdiction of
organization and has the requisite power and authority to carry on its business
as now being conducted. Each Subsidiary of ICH is duly qualified or licensed to
do business and is in good standing in each jurisdiction in which the nature of
its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions where the
failure to be so qualified or licensed, individually or in the aggregate, would
not have a Material Adverse Effect on ICH.
SECTION 4.3 Capital Structure. The authorized capital stock of ICH
consists of 46,217,295 shares of ICH Common Stock of which 3,782,705 shares are
designated as Class A Common Stock, par value $.01 per share ("ICH Series A
Common Stock"), and 10,000,000 shares of preferred stock, par value $.01 per
share, of which 1,000,000 shares are designated as Series A Junior Participating
Preferred Stock, par value $.01 per share ("ICH Series A Preferred
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Stock"), and 479,999 shares are designated as ICH Series B Preferred Stock. On
the date hereof, (i) 8,418,200 shares of ICH Common, no shares of ICH Series A
Common Stock, 479,999 shares of ICH Series B Preferred Stock and no shares of
ICH Series A Preferred Stock were issued and outstanding, (ii) no shares of ICH
Common Stock, ICH Series A Common Stock, ICH Series B Preferred Stock, ICH
Series A Preferred Stock or ICH Preferred Stock were held by ICH in its
treasury, (iii) 632,500 shares of ICH Common Stock were reserved for issuance in
connection with the ICH Option Plan, (iv) 1,683,635 shares of ICH Common Stock
were reserved for issuance in connection with the conversion of ICH Series B
Preferred Stock and (v) 328,831 shares of ICH Common Stock were issuable upon
exercise of outstanding ICH Options. On the date hereof, except as set forth
above in this Section 4.3, no capital shares or other voting securities of ICH
were issued, reserved for issuance or outstanding. There are no outstanding
share appreciation rights relating to the capital shares of ICH. All outstanding
capital shares of ICH are duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. There are no bonds,
debentures, notes or other indebtedness of ICH having the right to vote (or
convertible into, or exchangeable for, securities having the right to vote) on
any matter on which shareholders of ICH may vote. Except for the ICH Options and
the rights issuable under the Rights Plan, dated as of October 7, 1998, between
ICH and BankBoston, N.A., as rights agent (the "ICH Rights Plan"), there are no
outstanding securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which ICH or any of its
Subsidiaries is a party or by which such entity is bound, obligating ICH or any
of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, additional capital shares, voting securities or other ownership
interests of ICH or any of its Subsidiaries or obligating ICH or any of its
Subsidiaries to issue, grant, extend or enter into any such security, option,
warrant, call, right, commitment, agreement, arrangement or undertaking. There
are no outstanding contractual obligations of ICH or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any capital shares of ICH or any capital
shares, voting securities or other ownership interests in any Subsidiary of ICH
or make any material investment (in the form of a loan, capital contribution or
otherwise) to any Person.
SECTION 4.4 Authority; Noncontravention; Consents.
(a) ICH has the requisite power and authority to enter into
this Agreement and, subject to approval of this Agreement by the votes of the
holders of shares of ICH Common Stock and, if not previously converted, ICH
Series B Preferred Stock required to approve this Agreement and the transactions
contemplated hereby (the "ICH Stockholder Approval" and, together with the ACT
Shareholder Approval, the "Shareholder Approvals"), to consummate the
transactions contemplated hereby to which ICH is a party. The execution and
delivery of this Agreement by ICH and the consummation by ICH of the
transactions contemplated hereby to which ICH is a party have been duly
authorized by all necessary action on the part of ICH, subject to approval of
this Agreement pursuant to the ICH Stockholder Approval. This Agreement has been
duly executed and delivered by ICH and, assuming the due authorization,
execution and delivery hereof by ACT, constitutes valid and binding obligations
of ICH, enforceable against ICH in accordance with its terms, except that such
enforceability may be
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limited by (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or (ii)
general principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law).
(b) Except as set forth in Schedule 4.4 to the ICH Disclosure
Letter, the execution and delivery of this Agreement by ICH do not, and the
consummation of the transactions contemplated hereby to which ICH is a party and
compliance by ICH with the provisions of this Agreement will not, conflict with,
or result in any violation of, or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to loss of a material benefit under, or result
in the creation of any Lien upon any of the properties or assets of ICH or any
of its Subsidiary under, (i) articles of incorporation or bylaws of ICH or the
comparable charter or organizational documents or partnership or similar
agreement (as the case may be) of any other of ICH's Subsidiaries, each as
amended or supplemented to the date of this Agreement, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, reciprocal easement agreement, lease
or other agreement, instrument, permit, concession, franchise or license
applicable to ICH or any other of ICH's Subsidiaries or their respective
properties or assets or (iii) subject to the governmental filings and other
matters referred to in the following sentence, any Laws applicable to ICH or any
of ICH's Subsidiaries or their respective properties or assets, other than, in
the case of clause (ii) or (iii), any such conflicts, violations, defaults,
rights or Liens that individually or in the aggregate would not (x) have a
Material Adverse Effect on ICH or (y) prevent the consummation of the Merger.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required by
or with respect to ICH or any of ICH's Subsidiaries in connection with the
execution and delivery of this Agreement or the consummation by ICH of any of
the transactions contemplated hereby, except for (i) the filing by any Person in
connection with any of the transactions contemplated hereby of a pre-merger
notification and report form under the HSR Act to the extent applicable, (ii)
the filing with the SEC of (x) the Proxy Statement and (y) such reports under
Section 13 (a) of the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated by this Agreement, (iii) the filing
of the Maryland Articles of Merger with the State Department of Assessments and
Taxation of Maryland and the Texas Articles of Merger with the County Clerk of
the County of Dallas, Texas and (iv) such other consents, approvals, orders,
authorizations, registrations, declarations, licenses and filings as are set
forth in Schedule 4.4 to the ICH Disclosure Letter or (A) as may be required
under (x) federal, state or local environmental laws or (y) the "blue sky" laws
of various states or (B) which, if not obtained or made, would not prevent or
delay in any material respect the consummation of any of the Merger or otherwise
prevent ICH from performing its obligations under this Agreement in any material
respect or have, individually or in the aggregate, a Material Adverse Effect on
ICH.
SECTION 4.5 SEC Documents. ICH has timely filed all required reports,
schedules, forms, statements and other documents (collectively, including all
exhibits and
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schedules thereto and documents incorporated therein by reference, the "ICH SEC
Documents") with the SEC. All of the ICH SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the Exchange
Act and, in each case, the rules and regulations promulgated thereunder
applicable to such ICH SEC Documents. None of the ICH SEC Documents at the time
of filing and effectiveness contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading, except to the extent such statements have been
modified or superseded by later ICH SEC Documents.
SECTION 4.6 Financial Statements. The consolidated financial statements
of ICH included in the ICH SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with GAAP (except, in the case of unaudited statements, as permitted by Form
10-Q of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the consolidated financial
position of ICH as of the dates thereof and the consolidated results of
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).
SECTION 4.7 Absence of Certain Changes or Events. Except as disclosed
in the ICH SEC Documents or in Schedule 4.7 to the ICH Disclosure Letter, since
the date of the most recent financial statements included in the ICH SEC
Documents and to the date of this Agreement, there has not been any change that
would have a Material Adverse Effect on ICH, nor has there been any occurrence
or circumstance that with the passage of time would reasonably be expected to
result in such a change, whether or not arising from transactions in the
ordinary course of business.
SECTION 4.8 No Undisclosed Liabilities. Except (a) as set forth in the
ICH SEC Documents filed prior to the date of this Agreement, (b) as set forth in
Schedule 4.8 to the ICH Disclosure Letter, (c) as incurred in the ordinary
course of the business of ICH, (d) for the expenses incurred in connection with
the transactions contemplated hereby or (e) for liabilities or obligations
relating to contractual obligations, indebtedness, litigation or other matters
that are covered by other representations and warranties in this Agreement or
otherwise identified in the ICH Disclosure Letter, neither ICH nor any of its
Subsidiaries has any Liabilities. The reserves reflected on ICH's balance sheet
dated March 31, 1999 and the balance sheet dated December 31, 1998, as included,
in each case, in the ICH SEC Documents, are appropriate and reasonable and have
been calculated in a manner consistent with past practice.
SECTION 4.9 No Defaults. Except as disclosed in Schedule 4.9 to the ICH
Disclosure Letter, neither ICH nor any of its Subsidiaries is in violation or
default under any provision of its declaration of trust, certificate of
incorporation, bylaws, partnership agreement or
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other organizational documents, as applicable, or is in breach of or default
with respect to any provision of any agreement, judgment, decree, order,
mortgage, deed of trust, lease, franchise, license, indenture, permit or other
instrument to which it is a party or by which it or any of its properties are
bound; and there does not exist any state of facts that would constitute an
event of default on the part of any of ICH or its Subsidiaries as defined in
such documents that, with notice or lapse of time or both, would constitute a
default, other than such violations or defaults that in the aggregate would not
have a Material Adverse Effect on ICH.
SECTION 4.10 Taxes.
(a) ICH and each of its Subsidiaries has (A) filed all Tax
returns and reports required to be filed by it (after giving effect to any
filing extension properly granted by a Governmental Entity having authority to
do so) and all such returns and reports are accurate and complete in all
material respects; and (B) paid (or ICH has paid on its behalf) all Taxes shown
on such returns and reports as required to be paid by it, and, except as
disclosed in the ICH SEC Documents or in Schedule 4.10(a) to the ICH Disclosure
Letter, the most recent financial statements contained in the ICH SEC Documents
reflect an adequate reserve for all material Taxes payable by ICH (and by those
Subsidiaries of ICH whose financial statements are contained therein) for all
taxable periods and portions thereof through the date of such financial
statements. True, correct and complete copies of all federal, state and local
Tax returns and reports for ICH and each of its Subsidiaries, and all written
communications relating thereto, have been delivered or made available to
representatives of ACT. Since the date of the most recent financial statements
included in the ICH SEC Documents, ICH has incurred no liability for taxes under
Sections 857(b), 860(c) or 4981 of the Code, and neither ICH nor any of its
Subsidiaries has incurred any material liability for Taxes other than in the
ordinary course of business. To the Knowledge of ICH, no event has occurred, and
no condition or circumstance exists, which presents a material risk that any
material Tax described in the preceding sentence will be imposed upon ICH.
Except as set forth on Schedule 4.10(a) to the ICH Disclosure Letter, to the
Knowledge of ICH, no deficiencies for any Taxes have been proposed, asserted or
assessed against ICH or any of its Subsidiaries, and no requests for waivers of
the time to assess any such Taxes are pending.
(b) ICH (A) for all taxable years commencing with December 31,
1997 has been subject to taxation as a REIT within the meaning of the Code and
has satisfied all requirements to qualify as a REIT for such years, (B) has
operated, and intends to continue to operate, in such a manner as to qualify as
a REIT for the tax year ending upon the Closing Date, and (C) has not taken or
omitted to take any action which would reasonably be expected to result in a
challenge to its status as a REIT, and to ICH's Knowledge, no such challenge is
pending or threatened. Each Subsidiary of ICH that is a partnership, joint
venture or limited liability company has been since its formation and continues
to be treated for federal income tax purposes as a partnership and not as a
corporation or an association taxable as a corporation. Except as set forth on
Schedule 4.10(b) to the ICH Disclosure Letter, each Subsidiary of ICH that is a
corporation for federal income tax purposes has been since its formation, and
continues to be
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treated for federal income tax purposes as, a "qualified REIT subsidiary" as
defined in Section 856(i) of the Code. Except as set forth on Schedule 4.10(b)
to the ICH Disclosure Letter, neither ICH nor any of its Subsidiaries holds any
asset (x) the disposition of which would be subject to rules similar to Section
1374 of the Code as a result of an election under IRS Notice 88-19 or (y) that
is subject to a consent filed pursuant to Section 341(f) of the Code and the
regulations thereunder.
SECTION 4.11 Employee Matters. Except as set forth in Schedule 4.11 to
the ICH Disclosure Letter:
(a) Schedule 4.11(a) to the ICH Disclosure Letter contains a
true and complete list of each employee benefit plan, policy or agreement
covering employees, former employees or directors of any of ICH or its
Subsidiaries or their beneficiaries, or providing benefits to such persons in
respect of services provided to any such entity, including without limitation
any employee benefit plans within the meaning of Section 3(3) of ERISA and any
employment, retention, severance or change in control agreement, in each case
that is sponsored, maintained or contributed to or required to be contributed to
by ICH or its Subsidiaries or by any trade or business, whether or not
incorporated (an "ICH ERISA Affiliate") that, together with any of such
Subsidiaries, would be deemed a "single employer" within the meaning of Section
4001(b) of ERISA (collectively, the "ICH Benefit Plans"). Other than as set
forth in Schedule 4.11(a) to the ICH Disclosure Letter, since December 31, 1998,
there have been no new plans adopted, nor changes, additions or modification to
any ICH Benefit Plan. As of the date hereof, neither ICH nor any of its
Subsidiaries has any plans to adopt, change, add or modify any ICH Benefit Plan,
nor has any such entity communicated with any current or former employee with
respect thereto.
(b) With respect to each ICH Benefit Plan, ICH has previously
delivered or made available to ACT or its representatives true and complete
copies of the following: (i) the plan document and all amendments thereto (or,
if such plan is unwritten, a true and complete summary of its terms); (ii) any
related trust or other funding vehicle; (iii) if applicable, the two most recent
IRS Forms 5500 and related attachments; (iv) if applicable, the most recent IRS
determination letter; and (v) any material correspondence or employee
communications.
(c) All material contributions and other payments required to
have been made by ICH or one of its Subsidiaries to any ICH Benefit Plan (or to
any Person pursuant to the terms thereof) have been made or the amount of such
payment or contribution obligation has been reflected in the financial
statements in ICH's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 (the "ICH First Quarter 10-Q").
(d) Each of the ICH Benefit Plans intended to be "qualified"
within the meaning of Section 401(a) or Section 501(c)(9) of the Code has been
determined by the IRS to be so qualified, and no circumstances exist that could
reasonably be expected to result in the revocation of any such determination.
Each of the ICH Benefit Plans is and has been operated in
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all material respects in compliance with its terms and all applicable laws,
rules and regulations governing such plan, including, without limitation, ERISA
and the Code.
(e) With respect to the ICH Benefit Plans, individually and in
the aggregate, no event has occurred, there does not now exist any condition or
set of circumstances, that could reasonably be expected to subject ICH, any of
its Subsidiaries or any ICH ERISA Affiliate to any material liability arising
under the Code, ERISA or any other applicable law, or under any indemnity
agreement to which ICH, any of its Subsidiaries or any ICH ERISA Affiliate is a
party, excluding liability relating to benefit claims and funding obligations
payable in the ordinary course.
(f) Other than continuation coverage required to be provided
under Section 4980B of the Code or Part 6 of Title I of ERISA or otherwise as
provided by state law, none of the ICH Benefit Plans that are "welfare plans,"
within the meaning of Section 3(1) of ERISA, provides for any benefits with
respect to current or former employees for periods extending beyond their
retirement or other termination of service, other than benefits the full cost of
which is borne by such former employees.
(g) Except as otherwise disclosed to ACT, the consummation of
the Merger will not, either alone or in combination with another event
undertaken by ICH or any of its Subsidiaries prior to the date hereof, (i)
entitle any current or former employee, agent, independent contractor or officer
of ICH or its Subsidiaries to severance pay, unemployment compensation or any
other payment, (ii) accelerate the time of payment or vesting or increase the
amount of compensation due any such employee, officer, agent or independent
contractor or (iii) constitute a "change in control" under any ICH Benefit Plan.
SECTION 4.12 Affiliate Transactions. Except as set forth in the ICH SEC
Documents or in Schedule 4.12 to the ICH Disclosure Letter, there is no
transaction and no transaction is now proposed, to which ICH or its Subsidiaries
is or is to be a party in which any current shareholder (holding in excess of 5%
of the shares of ICH Common Stock or any securities convertible into or
exchangeable for such shares), director or executive officer of ICH or its
Subsidiaries has a direct or indirect interest.
SECTION 4.13 Financial Advisors. No broker, investment banker,
financial advisor or other Person, other than Banc of America Securities LLC and
Jolson Merchant Partners, LLC, the fees and expenses of which have previously
been disclosed to ACT and will be paid by ICH, is entitled to any broker's,
finder's, financial advisor's or other similar fee or commission in connection
with the transactions contemplated hereby based upon arrangements made by or on
behalf of ICH or any of its Affiliates. Substantially concurrently herewith, the
ICH Board of Directors has received the opinion of Banc of America Securities
LLC to the effect that, on the date thereof, the consideration to be received by
holders (other than Fortress Investment Group and its affiliates) of shares of
ICH Common Stock pursuant to this Agreement is fair from a financial point of
view to such holders.
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SECTION 4.14 Registration Statement and Proxy Statement. The
information supplied or to be supplied by ICH or its Subsidiaries for inclusion
in (a) the Registration Statement will not, either at the time it is filed with
the SEC or at the time it becomes effective under the Securities Act, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading or (b) the Proxy Statement, including any amendment and supplement
thereto, will not, either at the date mailed to shareholders of ICH or at the
time of the ICH Stockholder Meeting (as defined below), contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Registration
Statement and the Proxy Statement will each comply as to form in all material
respects with all applicable laws, including the provisions of the Securities
Act and the Exchange Act and the rules and regulations promulgated thereunder,
except that no representation is made by ICH with respect to information
supplied by ACT for inclusion therein.
SECTION 4.15 Vote Required. The (i) affirmative vote of at least a
majority of the outstanding shares of ICH Common Stock and, if not previously
converted, ICH Series B Preferred Stock, voting together as a single class (with
each share of ICH Series B Preferred Stock entitled to the number of votes equal
to the number of shares of ICH Common Stock into which it is convertible as of
the record date for the ICH Stockholder Meeting), and (ii) if not previously
converted, the affirmative vote of two-thirds of the outstanding shares of ICH
Series B Preferred Stock, voting separately as a class are the only votes of the
holders of any class or series of ICH's capital shares necessary (under
applicable law or otherwise) to approve this Agreement and the transactions
contemplated hereby.
SECTION 4.16 Anti-Takeover Statutes. ICH has taken all action
necessary, if any, to exempt the transactions contemplated hereby from the
operation of any Anti-Takeover Statutes.
SECTION 4.17 Full Disclosure. To the Knowledge of ICH, ICH has not
failed to disclose to ACT any fact material to the business, properties,
prospects, operations, financial condition or results of operations of ICH and
its Subsidiaries, taken as a whole. To the Knowledge of ICH, no representation
or warranty by ICH contained in this Agreement and no statement contained in any
document (including historical financial statements and the ICH Disclosure
Letter), certificate or other writing furnished or to be furnished by ICH to ACT
or any of its representatives pursuant to the provisions hereof or in connection
with the transactions contemplated hereby, contains or will contain any untrue
statement of material fact or omits or will omit to state any material fact
necessary, in light of the circumstances under which it was made, in order to
make the statements herein or therein not misleading. Notwithstanding the
foregoing or any other provision herein, ICH has made no representation or
warranty with respect to any financial or other projections made by ICH.
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SECTION 4.18 Litigation. Except as disclosed in ICH SEC Documents filed
with the SEC prior to the date hereof or in Schedule 4.18 to the ICH Disclosure
Letter, there is no suit, action or proceeding pending, threatened in writing
or, to ICH's Knowledge, otherwise threatened against or affecting ICH or any
Subsidiary of ICH that, individually or in the aggregate, could reasonably be
expected to (A) have a Material Adverse Effect on ICH or (B) materially delay or
prevent the consummation of any of the transactions contemplated hereby, nor is
there any judgment, decree, injunction, rule or order of any Governmental Entity
or arbitrator outstanding against ICH or any Subsidiary of ICH or any of their
respective properties or assets having, or which, insofar as reasonably can be
foreseen, in the future would have, any such effect.
SECTION 4.19 Compliance with Laws. Except as disclosed in the ICH SEC
Documents filed with the SEC prior to the date hereof or as set forth in
Schedule 4.19 to the ICH Disclosure Letter, to the Knowledge of ICH, neither ICH
nor any of its Subsidiaries has violated or failed to comply with any statute,
law, ordinance, regulation, rule, judgment, decree or order of any Governmental
Entity applicable to its business, properties or operations, and neither ICH nor
any of its Subsidiaries has received notification of asserted present or past
violation or failure to comply, except for violations and failures to comply
that would not, individually or in the aggregate, be reasonably likely to result
in a Material Adverse Effect on ICH.
SECTION 4.20 Indebtedness. Except as filed (or incorporated by
reference) as an Exhibit to ICH's Annual Report on Form 10-K for the year ended
December 31, 1998 (the "ICH 1998 Form 10-K"), Schedule 4.20 to the ICH
Disclosure Letter sets forth (x) a list of all loan or credit agreements, notes,
bonds, mortgages, indentures and other agreements and instruments pursuant to
which any indebtedness of ICH or any of its Subsidiaries, other than
indebtedness payable to ICH or one of its Subsidiaries, in an aggregate
principal amount in excess of $100,000 per item is outstanding or may be
incurred and (y) the respective principal amounts outstanding thereunder on July
1, 1999.
SECTION 4.21 Insurance. ICH and its Subsidiaries maintain fire and
casualty, general liability, business interruption, product liability,
professional liability and sprinkler and water damage insurance policies with
reputable insurance carriers, which ICH reasonably believes provide full and
adequate coverage for all normal risks incident to the business of ICH and its
Subsidiaries and their respective properties and assets.
SECTION 4.22 Investment Company Act. Neither ICH nor any of its
Subsidiaries is (i) except as disclosed in the ICH SEC Documents, an "investment
company" or a company "controlled" by an investment company within the meaning
of the Investment Company ACT of 1940, as amended, (ii) a "holding company" or a
"subsidiary company" of a holding company or an "affiliate" thereof within the
meaning of the Public Utility Holding Company Act of 1935, as amended, or (iii)
subject to regulation under the Federal Power Act or the Interstate Commerce
Act.
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SECTION 4.23 Material Contracts.
(a) Except as set forth in Schedule 4.23(a) to the ICH
Disclosure Letter and other than contracts or agreements that are required to be
filed and have been filed (or incorporated by reference) as an exhibit to the
ICH 1998 Form 10-K (the "ICH Material Contracts"), there are no contracts or
agreements that would have been required to be filed as an exhibit to an Annual
Report on Form 10-K that are material to the business, properties, assets,
financial position or results of operations of ICH and its Subsidiaries.
(b) The ICH Material Contracts are in full force and effect
and are valid and enforceable, in accordance with their terms, obligations of
ICH or its Subsidiaries, as the case may be, enforceable against ICH in
accordance with its terms, except that such enforceability may be limited by (i)
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or (ii) general principles
of equity (regardless of whether enforcement is sought in a proceeding in equity
or at law), and there are no breaches or defaults thereunder by ICH which,
individually or in the aggregate, would be reasonably likely to have a Material
Adverse Effect on ICH, and no event has occurred that with the lapse of time or
the giving of notice or both would constitute a breach or default thereunder by
the ICH which constitutes a Material Adverse Effect on ICH.
SECTION 4.24 Mortgage Backed Securities.
(a) Except as set forth on Schedule 3.24(a) to the ICH
Disclosure Letter, ICH or one of its Subsidiaries is and shall be the sole owner
of each of the MBS identified in Schedule 4.24(a) to the ICH Disclosure Letter
("ICH MBS") and the related certificates and other instruments evidencing
ownership of the ICH MBS (the "ICH MBS Certificates"), free and clear of any
adverse claims, Liens, pledges, assignments, charges or security interests of
any nature (including, without limitation, Liens arising under the federal tax
laws or ERISA), other than Liens pursuant to repurchase agreements or other
warehouse financing.
(b) Except as set forth in Schedule 4.24(b) to the ICH
Disclosure Letter, neither ICH nor any of its Subsidiaries is in default in the
performance of any of its obligations, whether as special servicer or otherwise,
under any pooling and servicing agreements, trust and servicing agreements,
trust agreements, servicing agreements or other similar documents providing for
the creation of the ICH MBS or the servicing of the mortgage loans underlying
the ICH MBS (the "ICH Principal MBS Agreements") and has not received any notice
of any default by any master or special servicer of any ICH MBS.
(c) Except as set forth in Schedule 4.24(c) to the ICH
Disclosure Letter, for all ICH MBS, ICH has delivered or made available to ACT a
copy of each prospectus, offering circular or private placement memorandum
relating to such ICH MBS.
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(d) Except as set forth in Schedule 4.24(d) to the ICH
Disclosure Letter, there are no agreements (other than the ICH Principal MBS
Agreements) between ICH or any of its Subsidiaries and the master servicer or
any special servicer with respect to any series of ICH MBS.
(e) Except as set forth in Schedule 4.24(e) to the ICH
Disclosure Letter, there are no agreements between the ICH or any of its
Subsidiaries and other holders of any below investment grade ICH MBS.
(f) Except as set forth in Schedule 4.24(f) to the ICH
Disclosure Letter with respect to each issue of the ICH MBS, ICH or one of its
Subsidiaries, as the holder of the majority of the controlling class, has not
waived any rights as to any specially serviced mortgage loan.
(g) Except as set forth in Schedule 4.24(g) to the ICH
Disclosure Letter, with respect to each issue of the ICH MBS, ICH has not
determined that any specially serviced assets have become corrected assets and
has not received any written notice of any specially serviced assets which have
become corrected assets.
SECTION 4.25 Environmental Laws and Regulations.
(a) Except as set forth in Schedule 4.25(a) to the ICH
Disclosure Letter or disclosed by ICH in the ICH SEC Documents filed prior to
the date hereof, ICH and ICH's Subsidiaries are in compliance with all
applicable Environmental Laws (which compliance includes, but is not limited to,
the possession by ICH and ICH's Subsidiaries of all permits and other
governmental authorizations required under applicable Environmental Laws, and
compliance with the terms and conditions thereof), except where failures to be
in compliance, individually or in the aggregate, would not reasonably be
expected have a Material Adverse Effect on ICH. Except as set forth in Schedule
4.25(a) to the ICH Disclosure Letter or disclosed by ICH in the ICH SEC
Documents, since January 1, 1998 and prior to the date of this Agreement,
neither ICH nor any of the Subsidiaries has received any written communication,
whether from a Governmental Entity, citizens' group, employee or otherwise,
alleging that ICH or any of its Subsidiaries is not in such compliance, except
where failures to be in compliance, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect on ICH.
(b) Except as set forth in Schedule 4.25(b) to the ICH
Disclosure Letter or disclosed by ICH in the ICH SEC Documents, there is no
Environmental Claim pending or threatened in writing against ICH or any of ICH's
Subsidiaries.
SECTION 4.26 Properties.
(a) ICH or one of its Subsidiaries owns fee simple title (or
where indicated, leasehold estates) to each of the real properties identified in
the ICH SEC Documents or in
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Schedule 4.26(a) of the ICH Disclosure Letter (the "ICH Properties"), which are
all of the real estate properties owned by them, in each case (except as
provided below or as set forth on Schedule 4.26(a) of the ICH Disclosure Letter)
free and clear of Liens. The ICH Properties are not subject to any Property
Restrictions or Liens, except for ICH Permitted Liens. For purposes of this
Agreement, "ICH Permitted Liens" means (i) Liens and Property Restrictions as
set forth in the ICH SEC Documents, (ii) Liens and Property Restrictions set
forth in the ICH Disclosure Letter, (iii) Property Restrictions imposed or
promulgated by law or any governmental body or authority generally with respect
to real property, including zoning regulations, and listed in the ICH Disclosure
Letter, (iv) Liens and Property Restrictions disclosed on existing title reports
or existing surveys (in either case copies of which title reports and surveys
have been delivered or made available to ACT and listed in the ICH Disclosure
Letter), and (v) mechanics', carriers', workmen's, repairmen's and materialmens'
liens and other Liens, Property Restrictions and other limitations of any kind,
if any, which, individually or in the aggregate, are not substantial in amount
and do not materially detract from the value of or materially interfere with the
use of any of the ICH Properties as currently contemplated subject thereto or
affected thereby. Except as provided in Schedule 4.26(a) of the ICH Disclosure
Letter, valid policies of title insurance have been issued insuring ICH's or its
applicable Subsidiary's fee simple title or leasehold estate to the ICH
Properties in amounts at least equal to the fair market value of such ICH
Properties at the time of the issuance of such policy, subject only to the
matters disclosed above or in the ICH Disclosure Letter, and such policies are,
at the date hereof, in full force and effect and no material claim has been made
against any such policy. Except as provided in Schedule 4.26(a) of the ICH
Disclosure Letter, ICH has no Knowledge (i) that any certificate, permit or
license from any Governmental Entity having jurisdiction over any of the ICH
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on any of
the ICH Properties as currently contemplated or which is necessary to permit the
lawful use and operation of all driveways, roads and other means of egress and
ingress to and from any of the ICH Properties has not been obtained and is not
in full force and effect, or of any pending threat of modification or
cancellation of any of same; (ii) of any written notice of any violation of any
federal, state or municipal law, ordinance, order, regulation or requirement
materially and adversely affecting any of the ICH Properties issued by any
Governmental Entity; (iii) of any material structural defects relating to any
ICH Property; (iv) of any ICH Property whose building systems are not in working
order in any material respect; (v) of any physical damage to any ICH Property
for which there is no insurance in effect covering the cost of the restoration;
(vi) of any current renovation or uninsured restoration to any ICH Property the
cost of which exceeds $50,000; or (vii) of items referred to in the foregoing
clauses (iii), (iv), (v) and (vi) which in the aggregate for ICH and its
Subsidiaries would not be reasonably likely to result in a Material Adverse
Effect on ICH. Except as provided in Schedule 4.27(a) of ICH's Disclosure
Letter, neither ICH nor any of its Subsidiaries has received any notice to the
effect that (A) any condemnation or rezoning proceedings are pending or
threatened with respect to any of the ICH Properties, (B) any zoning, building
or similar law, code, ordinance, order or regulation is or will be violated by
the continued maintenance, operation or use of any buildings or other
improvements on any of the ICH Properties or (C) a default exists or, with
notice or lapse of time, or both, will exist under any lease (including any
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ground lease), mortgage, deed of trust or related document regarding an ICH
Property or that any ICH Property is being foreclosed upon.
(b) All material leases and subleases for which ICH or any of
its Subsidiaries is lessor or lessee (or sublessee) are identified in the ICH
SEC Documents or in Schedule 4.26(b) to the ICH Disclosure Letter. Except as
disclosed on Schedule 4.26(b) of the ICH Disclosure Letter, each such lease is
in full force and effect and neither ICH nor any of its Subsidiaries has notice
of any defense to the obligations of the lessor or lessee (or sublessee), as the
case may be, thereunder or any material claim asserted or threatened by any
person or entity, and except as disclosed on Schedule 4.26(b) of the ICH
Disclosure Letter, the lessor or lessee (or sublessee), as the case may be,
under each such lease or sublease has complied with its obligations under such
lease or sublease in all material respects and neither ICH nor any of its
Subsidiaries has Knowledge that a material default exists, or with notice or
lapse of time or both, will exist by the lessee (or sublessee) under such lease.
SECTION 4.27 Mortgage Loans.
(a) Except as set forth in Schedule 4.27(a) of the ICH
Disclosure Letter, ICH or one of its Subsidiaries is the sole owner of each of
the mortgage loans reflected in the most recent financial statements included in
the ICH SEC Documents or made or acquired since such date (the "ICH Mortgage
Loans") and is the sole owner or beneficiary of or under the related notes (the
"ICH Mortgage Notes"), deeds of trust, mortgages, security agreements,
guaranties, indemnities, financing statements, assignments, endorsement, bonds,
letters of credit, accounts, insurance contracts and policies, credit reports,
tax returns, appraisals, environmental reports, escrow documents, participation
agreements (if applicable), loan files, servicing files and all other documents
evidencing or securing the ICH Mortgage Loans (the "ICH Mortgage Files"), except
(i) any ICH Mortgage Loans disposed of in the ordinary course since the date of
such financial statements, and (ii) to the extent any ICH Mortgage Loan is
prepaid in full or subject to a completed foreclosure action (or non-judicial
proceeding or deed in lieu of foreclosure) in which case ICH or one of its
Subsidiaries shall be the sole owner of the real property securing such
foreclosed loan or shall have received the proceeds of such action to which ICH
or such Subsidiary was entitled, in each case free and clear of any adverse
claims or Liens.
(b) Except as set forth in Schedule 4.27(b) of the ICH
Disclosure Letter, to the Knowledge of ICH, (i) the lien of each ICH Mortgage is
subject only to "Permitted Exceptions" which consist of the following: (A) ICH
Permitted Liens; (B) covenants, conditions, restrictions, reservations, rights,
Liens, easements, encumbrances, encroachments, and other matters affecting title
acceptable to prudent mortgage lending institutions generally; (C) rights of
tenants with no options to purchase or rights of first refusal to purchase,
except as disclosed in the ICH Mortgage File; and (D) other matters which, in
the aggregate, would not be reasonably likely to result in a Material Adverse
Effect on ICH; (ii) each ICH Mortgage Loan has generally been serviced in
accordance with the terms of the related mortgage note and pooling and servicing
agreements and otherwise in accordance with industry accepted servicing
practices except for events that,
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individually or in the aggregate, would not be reasonably likely to result in a
Material Adverse Effect on ICH; and (iii) there is no delinquency in the
payments of principal and interest required to be made under the terms of any
ICH Mortgage Loan in excess of 30 days beyond the applicable due date that has
occurred since origination or in any other payments required to be made under
the terms of any ICH Mortgage Loan (inclusive of any applicable grace or cure
period) that would be reasonably likely to result in a Material Adverse Effect
on ICH.
(c) Except as set forth in Schedule 4.27(c) of the ICH
Disclosure Letter or in the applicable ICH Mortgage File, ICH has no Knowledge
of (i) any written notice asserting any offset, defense (including the defense
of usury), claim (including claims of lender liability), counterclaim, or right
to rescission with respect to any ICH Mortgage Loan, ICH Mortgage Note or other
related agreements, (ii) any uncured monetary default in excess of 30 days or
event of acceleration existing under any ICH Mortgage or the related ICH
Mortgage Note or (iii) any uncured non-monetary default, breach, violation or
event of acceleration existing beyond the applicable grace or cure period under
any ICH Mortgage or the related ICH Mortgage Note, except for notices,
violations, breaches, defaults or events of acceleration that would not,
individually or in the aggregate, be reasonably likely to result in a Material
Adverse Effect on ICH.
SECTION 4.28 Actions Taken Regarding the ICH Rights Plan. ICH has
taken, or shall take prior to the Closing Date, all action necessary to amend
the ICH Rights Plan to ensure that the execution and delivery of this Agreement
and the Purchase Agreement, the taking of any other action or combination of
actions or the consummation of the transactions contemplated hereby or thereby
do not and will not result in the grant of any rights to any Person to exercise
or receive a distribution of rights certificates thereunder or acquire any
property in respect of rights thereunder.
ARTICLE V
COVENANTS
SECTION 5.1 Conduct of Business by ACT. During the period from the date
of this Agreement to the Effective Time, ACT shall, and shall cause (or, in the
case of its Subsidiaries that ACT does not control, shall use commercially
reasonable efforts to cause) its Subsidiaries each to, carry on its businesses
in the usual, regular and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent therewith, use commercially
reasonable efforts to preserve intact its current business organization,
goodwill and ongoing businesses. Without limiting the generality of the
foregoing, the following additional restrictions shall apply. During the period
from the date of this Agreement to the Effective Time, except as expressly
permitted or contemplated by this Agreement, as shall be consented by ICH (which
consent shall not be unreasonably withheld) or as set forth in Schedule 5.1 to
the ACT Disclosure Letter, ACT shall not and shall cause (or, in the case of its
Subsidiaries that it does not control, shall use commercially reasonable efforts
to cause) its Subsidiaries not to (and not to authorize or commit or agree to):
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(a) (i) except for dividends paid on ACT Common Shares in the
ordinary course of ACT's business, consistent with past practice, declare, set
aside or pay any dividends on, or make any other distributions in respect of any
of ACT's capital shares, (ii) split, combine or reclassify any capital stock or
other partnership interests or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of such
capital shares or partnership interests or (iii) purchase, redeem or otherwise
acquire any capital shares of ACT or any options, warrants or rights to acquire,
or security convertible into, such capital shares or partnership interests;
(b) except in connection with the exercise of stock options or
issuance of shares pursuant to stock rights outstanding on the date of this
Agreement, issue, deliver or sell, or grant any option or other right in respect
of, any capital shares, any other voting securities (including partnership
interests) of ACT or any of its Subsidiaries or any securities convertible into,
or any rights, warrants or options to acquire, any such shares, voting
securities or convertible securities except to ACT or one of its Subsidiaries;
(c) except as otherwise contemplated by this Agreement, amend
the declaration of trust or articles or certificate of incorporation, bylaws,
partnership agreement or other comparable charter or organizational documents of
ACT or any of its Subsidiaries;
(d) merge or consolidate with any Person;
(e) except as contractually required pursuant to the terms of
agreements existing on the date hereof, in any transaction or series of related
transactions involving capital, securities or other assets or indebtedness of
ACT, its Subsidiaries, or any combination thereof in excess of $100,000: (i)
acquire or agree to acquire by merging or consolidating with, or by purchasing
all or a substantial portion of the equity securities or all or substantially
all of the assets of, or by any other manner, any business or any corporation,
partnership, limited liability company, joint venture, association, business
trust or other business organization or division thereof or interest therein;
(ii) subject to any Lien or sell, lease or otherwise dispose of any material
assets or assign or encumber the right to receive income, dividends,
distributions and the like except pursuant to contracts or agreements in effect
at the date of this Agreement and set forth on Schedule 5.1 to the ACT
Disclosure Letter; (iii) make or agree to make any new capital expenditures,
except in accordance with budgets relating to ACT or its Subsidiaries that have
been previously delivered to ICH; or (iv) incur any indebtedness for borrowed
money or guarantee any such indebtedness of another Person, issue or sell any
debt securities or warrants or other rights to acquire any debt securities of
ACT, guarantee any debt securities of another Person, enter into any "keep well"
or other agreement to maintain any financial statement condition of another
person or enter into any arrangement having the economic effect of any of the
foregoing, prepay or refinance any indebtedness or make any loans, advances or
capital contributions to, or investments in, any other Person;
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(f) make or rescind any Tax election (unless required by law
or necessary to preserve ACT's status as a REIT or the status of any of its
Subsidiary as a partnership for federal income tax purposes or as a "qualified
REIT subsidiary" under Section 856(i) of the Code, as the case may be);
(g) (i) change in any material manner any of its methods,
principles or practices of accounting or (ii) settle or compromise any claim,
action, suit, litigation, proceeding, arbitration, investigation, audit or
controversy relating to Taxes, except in the case of settlements or compromises
relating to Taxes on real property in an amount not to exceed, individually or
in the aggregate, $100,000, or change any of its methods of reporting income or
deductions for federal income Tax purposes from those employed in the
preparation of its federal income Tax return for the most recently completed
taxable year except, in the case of clause (i), as may be required by the SEC,
applicable law or GAAP;
(h) adopt any new employee benefit plan, incentive plan,
severance plan, stock option or similar plan, grant new stock appreciation
rights or amend any existing plan or rights, except such changes as are required
by law or which are not more favorable to participants than provisions presently
in effect;
(i) except as contractually required pursuant to the terms of
agreements existing on the date hereof, pay, discharge, settle or satisfy any
claims, liabilities or objections (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction in
the ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the notes
thereto) of ACT included in the ACT SEC Documents or incurred in the ordinary
course of business consistent with past practice;
(j) settle any shareholder derivative or class action claims
arising out of or in connection with any of the transactions contemplated
hereby; and
(k) enter into any new agreements or arrangements with Persons
that are Affiliates or, as of the date hereof, are executive officers, directors
or trust managers of ACT or any of its Subsidiaries.
SECTION 5.2 Conduct of Business by ICH. During the period from the date
of this Agreement to the Effective Time, ICH shall, and shall cause (or, in the
case of its Subsidiaries that ICH does not control, shall use commercially
reasonable efforts to cause) its Subsidiaries each to, carry on its businesses
in the usual, regular and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent therewith, use commercially
reasonable efforts to preserve intact its current business organization,
goodwill and ongoing businesses. Without limiting the generality of the
foregoing, the following additional restrictions shall apply. During the period
from the date of this Agreement to the Effective Time, except as expressly
permitted or contemplated by this Agreement, as shall be
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consented by ACT (which consent shall not be unreasonably withheld) or as set
forth in Schedule 5.2 to the ICH Disclosure Letter, ICH shall not and shall
cause (or, in the case of its Subsidiaries that it does not control, shall use
commercially reasonable efforts to cause) its Subsidiaries not to (and not to
authorize or commit or agree to):
(a) (i) except for dividends paid on ICH Common Stock or ICH
Series B Preferred Stock in the ordinary course of ICH's business, consistent
with past practice, declare, set aside or pay any dividends on, or make any
other distributions in respect of any of ICH's capital shares other than the
dividend required to be paid pursuant to Section 2.4(a), (ii) split, combine or
reclassify any capital stock or other partnership interests or issue or
authorize the issuance of any other securities in respect of, in lieu of or in
substitution for shares of such capital shares or partnership interests or (iii)
purchase, redeem or otherwise acquire any capital shares of ICH or any options,
warrants or rights to acquire, or security convertible into, such capital shares
or partnership interests;
(b) except in connection with the exercise of stock options or
issuance of shares pursuant to stock rights outstanding on the date of this
Agreement, issue, deliver or sell, or grant any option or other right in respect
of, any capital shares, any other voting securities (including partnership
interests) of ICH or any of its Subsidiaries or any securities convertible into,
or any rights, warrants or options to acquire, any such shares, voting
securities or convertible securities except to ICH or one of its Subsidiaries;
(c) except as otherwise contemplated by this Agreement, amend
the declaration of trust or articles or certificate of incorporation, bylaws,
partnership agreement or other comparable charter or organizational documents of
ICH or any of its Subsidiaries;
(d) merge or consolidate with any Person;
(e) except as contractually required pursuant to the terms of
agreements existing on the date hereof, or as otherwise contemplated by Section
7.3(h) hereof, in any transaction or series of related transactions involving
capital, securities or other assets or indebtedness of ICH, its Subsidiaries, or
any combination thereof in excess of $100,000: (i) acquire or agree to acquire
by merging or consolidating with, or by purchasing all or a substantial portion
of the equity securities or all or substantially all of the assets of, or by any
other manner, any business or any corporation, partnership, limited liability
company, joint venture, association, business trust or other business
organization or division thereof or interest therein; (ii) subject to any Lien
or sell, lease or otherwise dispose of any material assets or assign or encumber
the right to receive income, dividends, distributions and the like except
pursuant to contracts or agreements in effect at the date of this Agreement and
set forth on Schedule 5.2 to the ICH Disclosure Letter; (iii) make or agree to
make any new capital expenditures, except in accordance with budgets relating to
ICH or its Subsidiaries that have been previously delivered to ICH; or (iv)
incur any indebtedness for borrowed money or guarantee any such indebtedness of
another Person, issue or sell any debt securities or warrants or other rights to
acquire any debt
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securities of ICH, guarantee any debt securities of another Person, enter into
any "keep well" or other agreement to maintain any financial statement condition
of another person or enter into any arrangement having the economic effect of
any of the foregoing, prepay or refinance any indebtedness or make any loans,
advances or capital contributions to, or investments in, any other Person;
(f) make or rescind any Tax election (unless required by law
or necessary to preserve ICH's status as a REIT or the status of any of its
Subsidiary as a partnership for federal income tax purposes or as a "qualified
REIT subsidiary" under Section 856(i) of the Code, as the case may be);
(g) (i) change in any material manner any of its methods,
principles or practices of accounting or (ii) settle or compromise any claim,
action, suit, litigation, proceeding, arbitration, investigation, audit or
controversy relating to Taxes, except in the case of settlements or compromises
relating to Taxes on real property in an amount not to exceed, individually or
in the aggregate, $100,000, or change any of its methods of reporting income or
deductions for federal income Tax purposes from those employed in the
preparation of its federal income Tax return for the most recently completed
taxable year except, in the case of clause (i), as may be required by the SEC,
applicable law or GAAP;
(h) adopt any new employee benefit plan, incentive plan,
severance plan, stock option or similar plan, grant new stock appreciation
rights or amend any existing plan or rights, except such changes as are required
by law or which are not more favorable to participants than provisions presently
in effect;
(i) except as contractually required pursuant to the terms of
agreements existing on the date hereof, pay, discharge, settle or satisfy any
claims, liabilities or objections (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction in
the ordinary course of business consistent with past practice in accordance with
their terms, of liabilities reflected or reserved against in, or contemplated
by, the most recent consolidated financial statements (or the notes thereto) of
ICH included in the ICH SEC Documents or incurred in the ordinary course of
business consistent with past practice;
(j) settle any shareholder derivative or class action claims
arising out of or in connection with any of the transactions contemplated
hereby; and
(k) enter into any new agreements or arrangements with Persons
that are Affiliates or, as of the date hereof, are executive officers or
directors of ICH or any of its Subsidiaries.
SECTION 5.3 Other Actions. Each of ACT and ICH shall not, and shall use
commercially reasonable efforts to cause its respective Subsidiaries and joint
ventures not to, take any action that would result in (i) any of the
representations and warranties of such party
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(without giving effect to any "Knowledge" qualification) set forth in this
Agreement that are qualified as to materiality becoming untrue, (ii) any of such
representations and warranties (without giving effect to any "Knowledge"
qualification) that are not so qualified becoming untrue in any material respect
or (iii) any of the conditions to the Merger set forth in Article VII not being
satisfied.
ARTICLE VI
ADDITIONAL COVENANTS
SECTION 6.1 Preparation of the Registration Statement and the Proxy
Statement; Shareholder Meetings.
(a) As soon as practicable following the date of this
Agreement, ACT and ICH shall prepare and file with the SEC a preliminary Proxy
Statement in form and substance reasonably satisfactory to each of ICH and ACT,
and ACT shall prepare and file with the SEC the Registration Statement, in which
the Proxy Statement will be included as a prospectus. Each of ACT and ICH shall
use its reasonable commercial efforts to (i) respond to any comments of the SEC
and (ii) have the Registration Statement declared effective under the Securities
Act and the rules and regulations promulgated thereunder as promptly as
practicable after such filing and to keep the Registration Statement effective
as long as is reasonably necessary to consummate the Merger. Each of ACT and ICH
will use its reasonable commercial efforts to cause the Proxy Statement to be
mailed to its respective shareholders as promptly as practicable after the
Registration Statement is declared effective under the Securities Act. Each
party will notify the other promptly of the receipt of any comments from the SEC
and of any request by the SEC for amendments or supplements to the Registration
Statement or the Proxy Statement or for additional information and will supply
the other with copies of all correspondence between such party or any of its
representatives and the SEC, with respect to the Registration Statement or the
Proxy Statement. Whenever any event occurs which is required to be set forth in
an amendment or supplement to the Registration Statement or the Proxy Statement,
ICH or ACT, as the case may be, shall promptly inform the other of such
occurrences and cooperate in filing with the SEC and/or mailing to the
shareholders of ICH and ACT such amendment or supplement. The Proxy Statement
shall, subject to Section 6.7(b), include the recommendations of the Board of
Directors of ICH and the Board of Trust Managers of ACT in favor of approval of
this Agreement and the transactions contemplated hereby. ACT also shall take any
action required to be taken under any applicable state securities or "blue sky"
laws in connection with the issuance of the ACT Common Shares pursuant to the
Merger, and ICH shall furnish all information concerning ICH and the holders of
shares of ICH Common Stock and rights to acquire such shares pursuant to the ICH
Option Plan as may be reasonably requested in connection with any such action.
ACT will use its reasonable commercial efforts to obtain, prior to the effective
date of the Registration Statement, all necessary state securities or "blue sky"
permits or approvals required to carry out the transactions contemplated hereby.
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(b) ACT will, as soon as practicable following the date of
this Agreement (but in no event sooner than 30 days following the date the Proxy
Statement is mailed to the shareholders of ACT), duly call, give notice of,
convene and hold a meeting of its shareholders (the "ACT Shareholder Meeting")
for the purpose of obtaining the ACT Shareholder Approval. Subject to Sections
6.1(a) and 6.7, ACT will, through its Board of Trust Managers, recommend to its
shareholders approval of this Agreement and the transactions contemplated
hereby.
(c) ICH will, as soon as practicable following the date of
this Agreement (but in no event sooner than 30 days following the date the Proxy
Statement is mailed to the stockholders of ICH), duly call, give notice of,
convene and hold a meeting of its stockholders (the "ICH Stockholder Meeting")
for the purpose of obtaining the ICH Stockholder Approval. Subject to Sections
6.1(a) and 6.7, ICH will, through its Board of Directors, recommend to its
stockholders approval of this Agreement and the transactions contemplated
hereby.
SECTION 6.2 Access to Information; Confidentiality. Subject to the
requirements of confidentiality agreements with third parties, each of ACT and
ICH shall, and shall cause each of its respective Subsidiaries and joint
ventures to, afford to the other party and to the officers, employees,
accountants, counsel, financial advisors and other representatives of such other
party, reasonable access during normal business hours during the period prior to
the Effective Time to all their respective properties, books, contracts,
commitments, personnel and records and, during such period, each of ACT and ICH
shall, and shall cause each of its respective Subsidiaries to, furnish promptly
to the other party (a) a copy of each report, schedule, registration statement
and other document filed by it during such period pursuant to the requirements
of federal or state securities laws and (b) all other information concerning its
business, properties and personnel as such other party may reasonably request.
Each of ACT and ICH will hold, and will use commercially reasonable efforts to
cause its and its respective Subsidiaries and joint ventures' officers,
employees, accountants, counsel, financial advisors and other representatives
and Affiliates to hold, any nonpublic information in confidence to the extent
required by, and in accordance with, and will comply with the provisions of the
letter agreements between ACT and ICH (the "Confidentiality Agreements").
SECTION 6.3 Commercially Reasonable Efforts; Notification.
(a) Subject to the terms and conditions herein provided, ACT
and ICH shall: (i) to the extent required, promptly make their respective
filings and thereafter make any other required submissions under the HSR Act
with respect to the Merger; (ii) use commercially reasonable efforts to
cooperate with one another in (A) determining which filings are required to be
made prior to the Effective Time with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States, the several states
and foreign jurisdictions and any third parties in connection with the execution
and delivery of this Agreement, and the consummation of the transactions
contemplated by such agreements and (B) timely making all such filings and
timely seeking all such consents, approvals, permits and authorizations; (iii)
use
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commercially reasonable efforts to obtain in writing any consents required from
third parties to effectuate the Merger, such consents to be in reasonably
satisfactory form to ACT and ICH; and (iv) use commercially reasonable efforts
to take, or cause to be taken, all other action and do, or cause to be done, all
other things necessary, proper or appropriate to consummate and make effective
the transactions contemplated by this Agreement. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purpose of this Agreement, the proper officers and directors or trust managers,
as the case may be, of ACT and ICH shall use commercially reasonable efforts to
take all such necessary action.
(b) ACT shall give prompt notice to ICH, and ICH shall give
prompt notice to ACT, if (i) any representation or warranty made by it contained
in this Agreement that is qualified as to materiality becoming untrue or
inaccurate in any respect or any such representation or warranty that is not so
qualified becoming untrue or inaccurate in any material respect or (ii) the
failure by it to comply with or satisfy in any material respect any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement.
SECTION 6.4 Affiliates. Prior to the Closing Date, ICH shall deliver to
ACT a letter identifying all Persons who are, at the time this Agreement is
submitted for approval to the stockholders of ICH, "affiliates" of ICH for
purposes of Rule 145 under the Securities Act. ICH shall use its commercially
reasonable efforts to cause each such Person to deliver to ACT on or prior to
the Closing Date a written agreement substantially in the form attached as
Exhibit C hereto.
SECTION 6.5 Tax Treatment. Each of ICH and ACT shall use its
commercially reasonable efforts to cause the Merger to qualify as a
reorganization under the provisions of Sections 368(a) of the Code and to obtain
the opinions of counsel referred to in Sections 7.2(e) and 7.3(e).
SECTION 6.6 Board of Trust Managers. ACT shall take all steps necessary
to change the number of trust managers of ACT from seven trust managers to eight
trust managers effective as of the Effective Time and to fill the vacancies in
accordance with Section 1.6.
SECTION 6.7 Board Recommendations.
(a) In connection with the Merger and the Shareholder
Approvals, the Board of Trust Managers of ACT and the Board of Directors of ICH
shall (i) subject to Section 6.7(b) hereof, recommend to the holders of ACT
Common Shares and ICH Stock, respectively, to vote in favor of the Merger and
use all commercially reasonable efforts to obtain the necessary approvals by the
shareholders of ACT and the stockholders of ICH, as the case may be, of this
Agreement and (ii) otherwise comply with all legal requirements applicable to
such approval.
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(b) Neither the Board of Trust Managers of ACT nor the Board
of Directors of ICH nor any committee thereof shall, except as expressly
permitted by this Section 6.7 (b), (i) withdraw, qualify or modify, or propose
publicly to withdraw, qualify or modify, in a manner adverse to the other party
to this Agreement, the approval or recommendation of their respective Boards or
such committees of the Merger or this Agreement, (ii) approve or recommend, or
propose publicly to approve or recommend, any transaction involving an
Acquisition Proposal (as defined below) from a third party (an "Alternative
Transaction"), or (iii) cause ACT or ICH, as the case may be, to enter into any
letter of intent, agreement in principle, acquisition agreement or other similar
agreement (each, an "Acquisition Agreement") related to any Alternative
Transaction. Notwithstanding the foregoing, if the Board of Trust Managers of
ACT or the Board of Directors of ICH, as the case may be, determines in good
faith, after such Board has received a Superior Proposal (as defined below), in
compliance with Section 6.8, and after receiving advice from outside counsel as
to its fiduciary duties to its respective shareholders or stockholders, as the
case may be, under applicable law, such Board may (subject to this Section
6.7(b)) inform its shareholders or stockholders, as the case may be, that it no
longer believes that the Merger is advisable and no longer recommends approval
of the Merger (a "Subsequent Determination") and enter into an Acquisition
Agreement with respect to a Superior Proposal, but only at a time that is after
the third business day following receipt by the other party to this Agreement of
written notice advising such other party that such Board has received a Superior
Proposal. Such written notice shall specify the material terms and conditions of
such Superior Proposal, identify the person making such Superior Proposal and
state that such Board intends to make a Subsequent Determination. During such
three-business day period, the party intending to make such Subsequent
Determination shall provide an opportunity for the other party hereto to propose
such adjustments to the terms and conditions of this Agreement as would enable
the party intending to make such Subsequent Determination to proceed with its
recommendation to its shareholders or stockholders, as the case may be, without
a Subsequent Determination; provided, however, that the acceptance of any such
proposed adjustment shall be at the sole discretion of the Board that has
received a Superior Proposal, exercised in good faith, and this Agreement shall
be amended to reflect any such accepted adjustments. ACT and ICH hereby
acknowledge and agree that the other party hereto may enter into an Acquisition
Agreement with respect to a Superior Proposal in accordance with this Section
6.7, whether or not this Agreement is terminated, and that, in the event that
either ACT or ICH enters into an Acquisition Agreement with respect to a
Superior Proposal in accordance with this Section 6.7(b), neither the other
party hereto nor the parties to such Acquisition Agreement may propose or enter
into any adjustments to the terms and conditions of this Agreement or such
Acquisition Agreement, respectively. Notwithstanding the foregoing, unless this
Agreement is earlier terminated in accordance with its terms, this Agreement and
the Merger shall be submitted to the shareholders of ACT and the stockholders of
ICH whether or not the their respective Boards have made a Subsequent
Determination. For purposes of this Agreement, a "Superior Proposal" means any
proposal (on its most recently amended or modified terms, if amended or
modified) made by a third party to enter into an Alternative Transaction that
the Board of Trust Managers of ACT or the Board of Directors of ICH, as the case
may be, determines in its good faith judgment (based on, among other things, the
written advice of an independent financial advisor) to be more favorable to its
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respective shareholders or stockholders, as the case may be, than the Merger,
taking into account all relevant factors (including whether, in the good faith
judgment of such Board, after obtaining the advice of such independent financial
advisor, the third party is reasonably able to finance the transaction, and any
proposed changes to this Agreement that may be proposed by the other party
hereto in response to such Alternative Transaction). Nothing contained in this
Section 6.7 or any other provision hereof shall prohibit either ACT or ICH or
their respective Boards from (x) taking and disclosing to their shareholders or
stockholders, as the case may be, pursuant to Rules 14d-9 and 14e-2 promulgated
under the Exchange Act a position with respect to a tender or exchange offer by
a third party, which is consistent with its obligations hereunder, or (y) making
such disclosure to their shareholders or stockholders, as the case may be, as,
in the good faith judgment of the applicable Board after receiving advice from
outside counsel, is consistent with its obligations hereunder and is required by
applicable law; provided that ACT and ICH may not, except as provided by this
Section 6.7, withdraw, qualify or modify, in a manner adverse to the other party
hereto, the approval or recommendation of its board of trust managers or board
of directors, respectively, of the Merger or this Agreement.
SECTION 6.8 Acquisition Proposals. Each of ACT and ICH shall not, nor
shall it authorize or permit any of its Subsidiaries or agents, affiliates,
employees, advisors or representatives to, directly or indirectly, (a) solicit,
initiate or encourage the submission of any Acquisition Proposal or (b)
participate in or encourage any discussion or negotiations regarding, or furnish
to any person any non-public information with respect to, or take any other
action to facilitate any inquiries or the making of, any proposal that
constitutes, or may reasonably be expected to lead to, any Acquisition Proposal;
provided, however, that the foregoing shall not prohibit the ACT Board of Trust
Managers or the ICH Board of Directors, as the case may be, from furnishing
information to, or entering into discussions or negotiations with, any person or
entity that makes an unsolicited Acquisition Proposal to the extent that (A) the
ACT Board of Trust Managers or the ICH Board of Directors, as the case may be,
based upon the advice of outside legal counsel, determines in good faith that
such action is required for it to comply with its fiduciary obligations to its
shareholders or stockholders, as the case may be, under applicable Texas or
Maryland law, as the case may be, (B) prior to taking such action, ACT or ICH,
as the case may be, receives from such person or entity an executed agreement in
reasonably customary form relating to the confidentiality of information to be
provided to such person or entity and (C) the applicable Board concludes in good
faith, after receiving advice from its independent financial advisor, that the
Acquisition Proposal is a Superior Proposal. The party hereto receiving such
unsolicited Acquisition Proposal shall provide immediate oral and written notice
to the other party hereto of (a) the receipt of any such Acquisition Proposal or
any inquiry which could reasonably be expected to lead to any Acquisition
Proposal, (b) the material terms and conditions of such Acquisition Proposal or
inquiry, (c) the identity of such person or entity making any such Acquisition
Proposal or inquiry, (d) its intention to furnish information to, or enter into
discussions or negotiations with, such person or entity and (e) subject to the
fiduciary duties of its Board under applicable law, shall continue to keep such
other party informed of the status and details of any such Acquisition Proposal
or inquiry. For purposes of this Agreement, "Acquisition Proposal" means any
bona fide proposal with respect to a merger, consolidation,
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share exchange, tender offer or similar transaction involving ACT or ICH, as the
case may be, or any purchase or other acquisition of all or any significant
portion of the assets of such party or any equity interest in such party.
SECTION 6.9 Public Announcements. ICH and ACT will consult with each
other before issuing, and provide each other the opportunity to review and
comment upon, any press release or other public statement with respect to the
transactions contemplated hereby and shall not issue any such press release or
make any such public statement prior to such consultation, except as may be
required by applicable law, court process or by obligations pursuant to any
listing agreement with any national securities exchange. The parties agree that
the initial press release to be issued with respect to the transactions
contemplated hereby will be in the form agreed to by the parties hereto prior to
the execution of this Agreement.
SECTION 6.10 Letters of Accountants.
(a) ACT shall use its commercially reasonable efforts to cause
to be delivered to ICH "comfort" letters of Deloitte & Touche LLP, ACT's
independent public accountants, dated and delivered the date on which the
Registration Statement shall become effective and as of the Effective Time, and
addressed to ICH, in form and substance reasonably satisfactory to ICH and
reasonably customary in scope and substance for letters delivered by independent
public accountants in connection with transactions such as those contemplated by
this Agreement.
(b) ICH shall use its commercially reasonable efforts to cause
to be delivered to ACT "comfort" letters of KPMG LLP, ICH's independent public
accountants, dated the date on which the Registration Statement shall become
effective and as of the Effective Time, and addressed to ACT, in form and
substance reasonably satisfactory to ACT and reasonably customary in scope and
substance for letters delivered by independent public accountants in connection
with transactions such as those contemplated by this Agreement.
SECTION 6.11 Indemnification.
(a) To the extent, if any, not provided by an existing right
of indemnification or other agreement or policy, ACT shall indemnify, defend and
hold harmless each person who is now or has been at any time prior to the date
hereof or who becomes prior to the Effective Time, an officer, trust manager or
director of ICH or any of its Subsidiaries (the "Indemnified Parties") against
all losses, claims, damages, costs, expenses (including reasonable attorneys'
fees and expenses), liabilities or judgments or amounts that are paid in
settlement of, with the approval of the indemnifying party (which approval shall
not be unreasonably withheld), or otherwise in connection with any threatened or
actual claim, action, suit proceeding or investigation based on or arising out
of the fact that such person is or was a director or officer of ICH or any of
its Subsidiaries at or prior to the Effective Time, including matters based on
or arising out of or pertaining to this Agreement or the transactions
contemplated hereby ("Indemnified Liabilities"), in each case to the full extent
ICH would have been permitted under applicable law and its
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charter documents to indemnify the Indemnified Parties (and ACT shall pay
expenses in advance of the final disposition of any such action or proceeding to
each Indemnified Party to the full extent permitted by law subject to the
limitations set forth in the fourth sentence of this Section 6.11 (a)). Any
Indemnified Parties proposing to assert the right to be indemnified under this
Section 6.11 shall, promptly after receipt of notice of commencement of any
action against such Indemnified Parties in respect of which a claim is to be
made under this Section 6.11 against ACT, notify ACT of the commencement of such
action, enclosing a copy of all papers served. If any such action is brought
against any of the Indemnified Parties and such Indemnified Parties notify ACT
of its commencement, ACT will be entitled to participate in and, to the extent
that ACT elects by delivering written notice to such Indemnified Parties
promptly after receiving notice of the commencement of the action from the
Indemnified Parties, to assume the defense of the action and after notice from
it to the Indemnified Parties of its election to assume the defense, ACT will
not be liable to the Indemnified Parties for any legal or other expenses except
as provided below. If ACT assumes the defense, ACT shall have the right to
settle such action without the consent of the Indemnified Parties; provided,
however, that ACT shall be required to obtain such consent (which consent shall
not be unreasonably withheld) if the settlement includes any admission of
wrongdoing on the part of the Indemnified Parties or any decree or restriction
on the Indemnified Parties; provided, further, that ACT, in the defense of any
such action shall not, except with the consent of the Indemnified Parties (which
consent shall not be unreasonably withheld), consent to entry of any judgment or
enter into any settlement that does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such Indemnified Parties of a release
from all liability with respect to such action. The Indemnified Parties will
have the right to employ their own counsel in any such action, but the fees,
expenses and other charges of such counsel will be at the expense of such
Indemnified Parties unless (i) the employment of counsel by the Indemnified
Parties has been authorized in writing by ACT, (ii) the Indemnified Parties have
reasonably concluded (based on written advice of counsel) that there may be
legal defenses available to them that are different from or in addition to those
available to ACT, (iii) a conflict or potential conflict exists (based on
written advice of counsel to the Indemnified Parties) between the Indemnified
Parties and ACT (in which case ACT will not have the right to direct the defense
of such action on behalf of the Indemnified Parties) or (iv) ACT has not in fact
employed counsel to assume the defense of such action within a reasonable time
after receiving notice of the commencement of the action, in each of which cases
the reasonable fees, disbursements and other charges of counsel will be at the
expense of ACT. It is understood that ACT shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for the
reasonable fees, disbursements and other charges of more than one separate firm
admitted to practice in such jurisdiction at any one time from all such
Indemnified Parties unless (a) the employment of more than one counsel has been
authorized in writing by ACT, (b) any of the Indemnified Parties have reasonably
concluded (based on advice of counsel) that there may be legal defenses
available to them that are different from or in addition to those available to
other Indemnified Parties or (c) a conflict or potential conflict exists (based
on advice of counsel to the Indemnified Parties) between any of the Indemnified
Parties and the other Indemnified Parties, in each case of which ACT shall be
obligated to pay the reasonable and appropriate fees and expenses of such
additional counsel or counsels. ACT
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will not be liable for any settlement of any action or claim effected without
its written consent (which consent shall not be unreasonably withheld).
(b) In the event that ACT or any of it respective successors
or assigns (i) consolidates with or merges into any other Person and shall not
be the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any Person, then, and in each such case the successors and assigns of such
entity shall assume the obligations set forth in this Section 6.11, which
obligations are expressly intended to be for the irreversible benefit of, and
shall be enforceable by, each Indemnified Party covered hereby.
(c) For a period of six years from the Effective Date, ACT
shall use its commercially reasonable efforts to provide that portion of
directors' and officers' liability insurance that serves to reimburse the
persons currently covered by either ACT's or ICH's directors' and officers'
liability insurance policy with respect to claims against such officers, trust
managers and directors arising from facts or events which occurred before the
Effective Time, which insurance shall contain at least the same coverage, and
contain terms and conditions that in all material respects are no less
advantageous, as that coverage currently provided by ICH; provided, however,
that (i) such officers, trust managers and directors may be required to make
application and provide customary representations and warranties to ACT's
insurance carrier for the purpose of obtaining such insurance; (ii) such
coverage will have a single aggregate limit of liability for such six-year
period in an amount not less than the annual aggregate limit of liability of
such coverage currently provided by ICH and (iii) in no event shall ACT be
required to expend or maintain or procure insurance coverage pursuant to this
Section 6.11(c) in any amount per annum in excess of 150% of its annual premiums
for the twelve-month period ended December 31, 1998 (the "Maximum Premium") with
respect to such insurance, or, if the cost of such coverage exceeds the Maximum
Premium, the maximum amount of coverage that can be purchased for the Maximum
Premium.
(d) The provisions of this Section 6.11 are intended to be for
the benefit of, and shall be enforceable by, each Indemnified Party, his or her
heirs and his or her personal representatives and shall be binding on all
successors and assigns of ACT.
SECTION 6.12 Transfer and Gains Taxes. ACT and ICH shall cooperate in
the preparation, execution and filing of all returns, questionnaires,
applications or other documents regarding any real property transfer or gains,
sales, use, transfer, value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees and any similar taxes which become
payable in connection with, and are solely and directly related to, the
transactions contemplated hereby (together with any related interest, penalties
or additions to tax, "Transfer and Gains Taxes"). From and after the Effective
Time, ACT or ICH shall cause the Surviving Entity to pay or cause to be paid,
without deduction or withholding from any amounts payable to the holders of ICH
Stock, all Transfer and Gains Taxes (other than any such taxes that are solely
the liability of the holders of ICH Stock under applicable state law).
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SECTION 6.13 Coordination of Dividends. Each of ACT and ICH shall
coordinate with the other regarding the declaration and payment of dividends in
respect of ACT Common Shares and ICH Stock and the record dates and payment
dates relating thereto, it being the intention of ACT and ICH that any holder of
ACT Common Shares or ICH Stock, as the case may be, shall not receive two
dividends, or fail to receive one dividend, for any single calender quarter with
respect to such holder's ACT Common Shares or ICH Stock.
ARTICLE VII
CONDITIONS PRECEDENT
SECTION 7.1 Conditions to Each Party's Obligation To Effect the Merger.
The respective obligation of each party to effect the Merger and to consummate
the other transactions contemplated hereby contemplated to occur on the Closing
Date is subject to the satisfaction or waiver on or prior to the Effective Time
of the following conditions:
(a) The Merger set forth in this Agreement shall have been
approved and adopted by the Shareholder Approvals.
(b) The New York Stock Exchange or The Nasdaq Stock Market
shall have approved for listing the ACT Common Shares to be issued in the
Merger, subject to official notice of issuance.
(c) The Registration Statement shall have become effective
under the Securities Act and shall not be the subject of any stop order or
proceedings by the SEC seeking a stop order.
(d) No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or other
legal restraint or prohibition preventing the consummation of the Merger or any
of the other transactions contemplated hereby shall be in effect.
(e) ACT shall have received all state securities or "blue sky"
permits and other authorizations necessary to issue the ACT Common Shares
pursuant to this Agreement.
(f) The transactions contemplated by the Purchase Agreement
shall have been consummated prior to, or are being consummated simultaneously
with, the Merger.
(g) All material actions by or in respect of or filings with
any Governmental Entity required for the consummation of the transactions
contemplated hereby shall have been obtained or made.
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(h) The management agreement of ACT with FIC Management, Inc.
to be effective at the Effective Time shall be amended and restated to read
substantially in the form of Exhibit D hereto.
SECTION 7.2 Conditions to Obligations of ICH. The obligations of ICH to
effect the Merger and to consummate the other transactions contemplated hereby
contemplated to occur on the Closing Date are further subject to the following
conditions, any one or more of which may be waived by ICH:
(a) The representations and warranties of ACT set forth in
this Agreement shall be true and correct as of the Closing Date, as though made
on and as of the Closing Date, except to the extent the representation or
warranty is expressly limited by its terms to another date, and ICH shall have
received a certificate (which certificate may be qualified by Knowledge to the
same extent as such representations and warranties of ACT contained herein are
so qualified) signed on behalf of ACT by its chief executive officer or chief
financial officer to such effect. This condition shall be deemed satisfied
unless any or all breaches of ACT's representations and warranties in this
Agreement (without giving effect to any materiality qualification or limitation)
could reasonably be expected to have a Material Adverse Effect on ACT.
(b) ACT shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Effective Time, and ICH shall have received a certificate signed on behalf
of ACT by its chief executive officer or its chief financial officer to such
effect.
(c) Since the date of this Agreement, there shall have been no
change that could reasonably be expected to have a Material Adverse Effect on
ACT, and ICH shall have received a certificate signed on behalf of ACT by its
chief executive officer or chief financial officer to such effect.
(d) ICH shall have received an opinion of Locke Liddell & Sapp
LLP, counsel to ACT, dated as of the Closing Date, reasonably satisfactory to
ICH, that, commencing with its taxable year ended December 31, 1998 through the
Closing Date, ACT was organized in conformity with the requirements for
qualification as a REIT under the Code and has so qualified during such period,
and that, after giving effect to the transactions contemplated hereby, ACT's
proposed method of operation will enable it to continue to meet the requirements
for qualification and taxation as a REIT under the Code during such period (with
customary exceptions, assumptions and qualifications and based upon customary
representations).
(e) ICH shall have received an opinion dated as of the Closing
Date from Skadden, Arps, Slate, Meagher & Flom LLP, counsel to ICH, to the
effect that the Merger will qualify as a reorganization under the provisions of
Section 368(a) of the Code (with customary exceptions, assumptions,
qualifications and based upon customary representations).
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(f) All consents and waivers (including, without limitation,
waivers of rights of first refusal) from third parties necessary in connection
with the consummation of the transactions contemplated hereby shall have been
obtained, other than such consents and waivers from third parties, which, if not
obtained, would not result, individually or in the aggregate, in a Material
Adverse Effect on ICH or ACT.
(g) ICH shall have received an opinion from Locke Liddell &
Sapp LLP, legal counsel to ACT, substantially in the form attached hereto as
Exhibit E (with customary exceptions, assumptions, qualifications and based upon
customary representations).
SECTION 7.3 Conditions to Obligations of ACT. The obligation of ACT to
effect the Merger and to consummate the other transactions contemplated thereby
contemplated to occur on the Closing Date is further subject to the following
conditions, any one or more of which may be waived by ACT:
(a) The representations and warranties of ICH set forth in
this Agreement shall be true and correct as of the Closing Date, as though made
on and as of the Closing Date, except to the extent the representation or
warranty is expressly limited by its terms to another date, and ACT shall have
received a certificate (which certificate may be qualified by Knowledge to the
same extent as the representations and warranties of ICH contained herein are so
qualified) signed on behalf of ICH by its chief executive officer or chief
financial officer to such effect. This condition shall be deemed satisfied
unless any or all breaches of ICH's representations and warranties in this
Agreement (without giving effect to any materiality qualification or limitation)
could reasonably be expected to have a Material Adverse Effect on ICH.
(b) ICH shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Effective Time, and ACT shall have received a certificate signed on behalf
of ICH by its chief executive officer or chief financial officer to such effect.
(c) Since the date of this Agreement, there shall have been no
change that could reasonably be expected to have a Material Adverse Effect on
ICH, and ACT shall have received a certificate signed on behalf of ICH by its
chief executive officer or chief financial officer to such effect.
(d) ACT shall have received an opinion of Brown & Wood LLP,
tax counsel to ICH, dated as of the Closing Date, reasonably satisfactory to
ACT, that, commencing with its taxable year ended December 31, 1997 through the
Closing Date, ICH was organized in conformity with the requirements for
qualification as a REIT under the Code and has so qualified during such period
(with customary exceptions, assumptions and qualifications and based upon
customary representations). Locke Liddell & Sapp LLP will be entitled to rely
upon such opinion in connection with its opinion to be delivered pursuant to
Section 7.2(d).
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(e) ACT shall have received an opinion dated as of the Closing
Date from Locke Liddell & Sapp LLP, counsel to ACT, to the effect that the
Merger will qualify as a reorganization under the provisions of Section 368(a)
of the Code (with customary exceptions, assumptions, qualifications and based
upon customary representations).
(f) All consents and waivers (including, without limitation,
waivers or rights of first refusal) from third parties necessary in connection
with the consummation of the transactions contemplated hereby shall have been
obtained, other than such consents and waivers from third parties, which, if not
obtained, would not result, individually or in the aggregate, in a Material
Adverse Effect on ICH or ACT.
(g) ACT shall have received an opinion from Skadden, Arps,
Slate, Meagher & Flom LLP, legal counsel to ICH, or local Maryland counsel to
ICH acceptable to ACT, substantially in the form attached hereto as Exhibit F
(with customary exceptions, assumptions, qualifications and based upon customary
representations).
(h) Either (x) the Average Closing Price shall be equal to or
greater than $7.40 or (y) ICH Aggregate Cash shall be not less than $75,000,000.
For purposes of this condition, "ICH Aggregate Cash" shall mean the aggregate of
the cash and cash equivalents as shown on the consolidated balance sheet of ICH
prepared in accordance with GAAP and certified by the chief financial officer of
ICH (the "Closing Balance Sheet"), dated as of the fifth Trading Day prior to
the Closing Date (the "Closing Cash Amount"), and shall (i) include $25,000,000
attributable to the Impac CMB Trust 1998-C1 asset and the net value (after
deducting related debt) from the Interest Only Securities (as defined therein),
(ii) exclude cash or cash equivalents obtained by ICH from sales of SPSA 1995-2
or USGI 1992-1 or as a result of a transaction that results in a Lien being
placed on any asset of ICH or its Subsidiaries (other than Liens existing on the
date of this Agreement in respect of (A) up to $2,710,000 of repo financing
relating to Interest Only Securities and (B) up to $1,944,000 of repo financing
relating to the USGI 1992-1) without ACT's prior written consent (which consent
may be withheld in ACT's sole discretion) and (iii) include the cost of any
future investments made by ICH after the date hereof that have been specifically
approved by ACT. Also for purposes of this condition, "Average Closing Price"
shall mean the average of the closing prices per share of ICH Common Stock on
the American Stock Exchange as reported by the Wall Street Journal for the 20
consecutive Trading Days ending on the fifth Trading Day prior to the Closing
Date; and "Trading Day" shall mean any day on which shares of ICH Common Stock
are traded on the American Stock Exchange.
(i) The Closing Cash Amount as of the Effective Time shall be
equal to or greater than the amount shown on the Closing Balance Sheet, and ACT
shall have received a certificate signed on behalf of ICH by its chief financial
officer to such effect.
(j) The optional termination described in the Impac CMB Trust
1998-C1 documents owned by ICH shall have been sold.
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ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1 Termination. This Agreement may be terminated at any time
prior to the filing of the Maryland Articles of Merger with the State Department
of Assessments and Taxation of Maryland and the filing of the Texas Articles of
Merger with the County Clerk of the County of Dallas, Texas, whether before or
after either of the Shareholder Approvals are obtained:
(a) by the mutual written consent of the Boards of Directors
or Trust Managers, as the case may be, of ICH and ACT;
(b) by ICH or ACT, if (i) the Effective Time shall not have
occurred before December 31, 1999, (ii) any Governmental Entity, the consent of
which is a condition to the obligations of ICH and ACT to consummate the
transactions contemplated hereby shall have determined not to grant its consent
and all appeals of such determination shall have been taken and have been
unsuccessful or (iii) any court of competent jurisdiction shall have issued a
judgment, order or decree (other than a temporary restraining order)
restraining, enjoining or otherwise prohibiting the transactions contemplated
hereby and such judgment, order or decree shall have become final and
nonappealable; provided, however, that the right to terminate this Agreement
pursuant to clause (i) shall not be available to any party whose failure to
fulfill any obligation under this Agreement has been the cause of, or resulted
in, the failure of the Effective Time to occur on or before such date;
(c) by ICH or ACT, if at the ACT Shareholder Meeting
(including any adjournment or postponement thereof) called pursuant to Section
6.1(b), the requisite vote of the holders of ACT Common Shares with respect to
the Merger shall not have been obtained;
(d) by ICH or ACT, if at the ICH Stockholder Meeting
(including any adjournment or postponement thereof) called pursuant to Section
6.1(c), the requisite vote of the holders of shares of ICH Stock shall not have
been obtained;
(e) by ICH, if (i) there has been a material breach by ACT of
any representation, warranty, covenant, obligation or agreement set forth in
this Agreement, which breach has not been cured within ten business days
following receipt by ACT of notice of such breach, except for Sections 6.7 and
6.8 hereof as to which any breach thereof by ACT, without regard to materiality,
shall allow ICH to terminate this Agreement, or if any representation or
warranty of ACT shall have become untrue, in either case such that the
conditions set forth in Sections 7.2(a) or 7.2(b), as the case may be, would be
incapable of being satisfied by December 31, 1999 (as otherwise extended in
accordance with this Agreement); (ii) upon a failure of the condition set forth
in Section 7.2(c); (iii) the Board of Trust Managers of ACT shall have withdrawn
or modified in a manner adverse to ICH its approval or recommendation of the
Merger or this Agreement in order to permit ACT to execute a definitive
agreement providing for
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the transactions contemplated by a Superior Proposal; or (iv) the Board of
Directors of ICH shall have withdrawn or modified in a manner adverse to ACT its
approval or recommendation of the transactions contemplated by this Agreement in
order to permit ICH to execute a definitive agreement providing for the
transactions contemplated by a Superior Proposal; provided, however, that the
right to terminate this Agreement pursuant to this Section 8.1(e) shall not be
available to ICH if it, at such time, is in material breach of any
representation, warranty, covenant or agreement set forth herein; or
(f) by ACT, if (i) there has been a material breach by ICH of
any representation, warranty, covenant, obligation or agreement set forth in
this Agreement, which breach has not been cured within ten business days
following receipt by ICH of notice of such breach, except for Sections 6.7 and
6.8 hereof as to which any breach thereof by ICH, without regard to materiality,
shall allow ACT to terminate this Agreement, or if any representation or
warranty of ICH shall have become untrue, in either case such that the
conditions set forth in Sections 7.3(a) or 7.3(b), as the case may be, would be
incapable of being satisfied by December 31, 1999 (as otherwise extended in
accordance with this Agreement); (ii) upon a failure of the condition set forth
in Sections 7.3(c) or 7.3(h); (iii) the Board of Directors of ICH shall have
withdrawn or modified in a manner adverse to ACT its approval or recommendation
of the Merger or this Agreement in order to permit ICH to execute a definitive
agreement providing for the transactions contemplated by a Superior Proposal; or
(iv) the Board of Trust Managers of ACT shall have withdrawn or modified in a
manner adverse to ICH its approval or recommendation of the transactions
contemplated by this Agreement in order to permit ACT to execute a definitive
agreement providing for the transactions contemplated by a Superior Proposal;
provided, however, that the right to terminate this Agreement pursuant to this
Section 8.1(f) shall not be available to ACT if it, at such time, is in material
breach of any representation, warranty, covenant or agreement set forth herein.
SECTION 8.2 Expenses; Termination Fee.
(a) Except as otherwise specified in this Section 8.2 or
agreed in writing by the parties, all out-of-pocket costs and expenses incurred
in connection with this Agreement and the transactions contemplated hereby shall
be paid by the party incurring such cost or expense, except that those expenses
incurred in connection with the printing and mailing of the Proxy Statement and
the Registration Statement, as well as the filing fee related thereto, shall be
shared equally by ACT and ICH.
(b) If this Agreement is terminated pursuant to Sections
8.1(c), 8.1(e)(i), 8.1(e)(ii), 8.1(e)(iii) or 8.1(f)(iv), and if ACT is not
entitled to terminate this Agreement by reason of Sections 8.1(b), 8.1(d),
8.1(f)(i), 8.1(f)(ii) or 8.1(f)(iii), then, in addition to any other rights or
remedies that may be available, ACT shall promptly (and in any event within two
business days of receipt by ACT of written notice from ICH) pay to ICH (by wire
transfer of immediately available funds to an account designated by ICH) the
Termination Fee and the Termination Expenses (as each such term is defined
below). No termination of this Agreement
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pursuant to this Section 8.2 (b) shall be effective until receipt by ICH of the
Termination Fee and the Termination Expenses.
(c) If this Agreement terminated pursuant to Sections 8.1(d),
8.1(f)(i), 8.1(f)(ii), 8.1(f)(iii) or 8.1(e)(iv), and if ICH is not entitled to
terminate this Agreement by reason of Sections 8.1(b), 8.1(c), 8.1(e)(i),
8.1(e)(ii) or 8.1(e)(iii), then, in addition to any other rights or remedies
that may be available, ICH shall promptly (and in any event within two business
days of receipt by ICH of written notice from ACT) pay to ACT (by wire transfer
of immediately available funds to an account designated by ACT) the Termination
Fee and the Termination Expenses. No termination of this Agreement pursuant to
this Section 8.2 (c) shall be effective until receipt by ACT of the Termination
Fee and the Termination Expenses.
(d) The payment of the Termination Fee shall be compensation
and liquidated damages for the loss suffered by ACT or ICH, as the case may be,
as the result of the failure of the Merger to be consummated and to avoid the
difficulty of determining damages under the circumstances and neither ACT nor
ICH shall have any other liability to the other, other than as specified in this
Section 8.2.
(e) As used herein:
(i) The "Termination Fee" shall be an amount equal to
the lesser of (x) $5,000,000 (the "Base Amount") and (y) the sum of (A) the
maximum amount that can be paid to ICH or ACT without causing it to fail to meet
the requirements of Sections 856(c) (2) and (3) of the Code determined as if the
payment of such amount did not constitute income described in Sections 856(c)
(2) (A)-(H) and 856(c) (3) (A)-(I) of the Code ("Qualifying Income"), as
determined by independent accountants to ICH or ACT, as the case may be, and (B)
in the event that ICH or ACT, as the case may be, receives an opinion from
outside counsel (the "Termination Tax Opinion") to the effect that receipt of
the Base Amount would either constitute Qualifying Income or would be excluded
from gross income within the meaning of Sections 856(c) (2) and (3) of the Code
(the "REIT Requirements") or that the receipt of the remaining balance of the
Base Amount following the receipt of and pursuant to such opinion would not be
deemed constructively received prior thereto, the Base Amount less the amount
payable under clause (A) above. A party's obligation to pay any unpaid portion
of the Termination Fee shall terminate five years from the date of this
Agreement. In the event that ICH or ACT, as the case may be, is not able to
receive the full Base Amount, the other party shall place the unpaid amount in
escrow and shall not release any portion thereof unless and until ICH or ACT, as
the case may be, receives any one or combination of the following: (i) a letter
from its independent accountants indicating the maximum amount that can be paid
at that time without causing it to fail to meet the REIT Requirements or (ii) a
Termination Tax Opinion, in which event ICH or ACT, as the case may be, shall
pay to the other party the lesser of the unpaid Base Amount or the maximum
amount stated in the letter referred to in (i) above or, as applicable, the
Termination Tax Opinion.
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(ii) The "Termination Expenses" shall be an amount
equal to the lesser of (x) out-of-pocket expenses incurred by the recipient
thereof in connection with this Agreement and the transactions contemplated
hereby (including, without limitation, all attorneys', accountants' and
investment bankers' fees and expenses) but in no event in an amount greater than
$250,000 (the "Expense Fee Base Amount") and (y) the sum of (A) the maximum
amount that can be paid to ICH or ACT, as the case may be, without causing it to
fail to meet the requirements of Sections 856(c) (2) and (3) of the Code
determined as if the payment of such amount did not constitute Qualifying
Income, as determined by independent accountants to ICH or ACT, as the case may
be, and (B) in the event ICH or ACT, as the case may be, receives a Termination
Tax Opinion to the effect that the receipt by ICH or ACT, as the case may be, of
the Expense Fee Base Amount would either constitute Qualifying Income or would
be excluded from gross income within the meaning of the REIT Requirements or
that receipt by ICH or ACT, as the case may be, of the remaining balance of the
Expense Fee Base Amount following the receipt of and pursuant to such opinion
would not be deemed constructively received prior thereto, the Expense Fee Base
Amount less the amount payable under clause (A) above. In the event that ICH or
ACT, as the case may be, is not able to receive the full Expense Fee Base
Amount, such party shall place the unpaid amount in escrow and shall not release
any portion thereof to the other party unless and until ICH or ACT, as the case
may be, receives any one or combination of the following: (i) a letter from its
independent accountants indicating the maximum amount that can be paid at that
time without causing it to fail to meet the REIT Requirements or (ii) a
Termination Tax Opinion, in which event ICH or ACT, as the case may be, shall
pay to the other party the lesser of the unpaid Expense Fee Base Amount or the
maximum amount stated in the letter referred to in the immediately preceding
clause (i) above or, as applicable, the Termination Tax Opinion.
SECTION 8.3 Effect of Termination. In the event of termination of this
Agreement by either ACT or ICH as provided in Section 8.1, this Agreement shall
forthwith become void and have no effect, without any liability or obligation on
the part of ICH or ACT, other than the last sentence of Section 6.2, Section 8.2
and this Section 8.3. Notwithstanding the foregoing, no party shall be relieved
from liability for any willful, material breach of this Agreement.
SECTION 8.4 Amendment. This Agreement may be amended by the parties in
writing by action of their respective Boards of Directors or Trust Managers, as
the case may be, at any time before or after any Shareholder Approvals are
obtained and prior to the filing of the Maryland Articles of Merger with the
State Department of Assessments and Taxation of Maryland and the filing of the
Texas Articles of Merger with the County Clerk of the County of Dallas, Texas;
provided, however, that, after the Shareholder Approvals are obtained, no such
amendment, modification or supplement shall alter the amount or change the form
of the consideration to be delivered to ACT's shareholders or alter or change
any of the terms or conditions of this Agreement if such alteration or change
would adversely affect ACT's shareholders or ICH's stockholders, in each case
without further approval of such affected Persons.
55
<PAGE> 64
SECTION 8.5 Extension; Waiver. At any time prior to the Effective Time,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other party, (b) waive any inaccuracies in the
representations and warranties of the other party contained in this Agreement or
in any document delivered pursuant to this Agreement or (c) subject to the
proviso of Section 8.4, waive compliance with any of the agreements or
conditions of the other party contained in this Agreement. Any agreement on the
part of a party to any such extension or waiver shall be valid only if set forth
in an instrument in writing signed on behalf of such party. The failure of any
party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of those rights.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 9.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
SECTION 9.2 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, sent by overnight courier (providing proof of
delivery) to the parties or sent by telecopy (providing confirmation of
transmission) at the following addresses or telecopy numbers (or at such other
address or telecopy number for a party as shall be specified by like notice):
(a) if to ICH, to
Impac Commercial Holdings
c/o FIC Management, Inc.
1301 Avenue of the Americas
New York, NY 10019
Attention: Randal A. Nardone
Telecopy: (212) 798-6120
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
Attention: J. Gregory Milmoe
Telecopy: (212) 735-2000
56
<PAGE> 65
(b) if to ACT, to
AMRESCO Capital Trust
700 North Pearl Street, Suite 2400
Dallas, Texas 75201
Attention: Jonathan S. Pettee
Telecopy: (214) 953-7817
with a copy to:
Locke Liddell & Sapp LLP
2001 Ross Avenue, Suite 2300
Dallas, Texas 75201
Attention: Bryan L. Goolsby
Telecopy: (214) 740-8800
SECTION 9.3 Certain Definitions. For purposes of this Agreement:
An "Affiliate" of any Person means another Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first Person.
"ACT Disclosure Letter" means the letter previously delivered to ICH by
ACT disclosing certain information in connection with this Agreement.
"ICH Disclosure Letter" means the letter previously delivered to ACT by
ICH disclosing certain information in connection with this Agreement.
"Knowledge" where used herein with respect to ACT shall mean the actual
knowledge of the persons named in Schedule 9.3 to the ACT Disclosure Letter and
where used with respect to ICH shall mean the actual knowledge of the persons
named in Schedule 9.3 to the ICH Disclosure Letter.
"Material Adverse Effect," with respect to any Person, shall mean a
material adverse effect (or any development that, insofar as reasonably can be
foreseen, in the future is reasonably likely to have a material adverse effect)
on the business, assets, financial or other condition, results of operations or
prospects of such Person and its Subsidiaries, taken as a whole.
"Person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity.
"Subsidiary" of any Person means any Affiliate controlled by such
Person directly or indirectly through one or more intermediaries.
57
<PAGE> 66
SECTION 9.4 Interpretation. When a reference is made in this Agreement
to a Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."
SECTION 9.5 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
SECTION 9.6 Entire Agreement; No Third-Party Beneficiaries. This
Agreement, the Confidentiality Agreements and the other agreements entered into
in connection with the transactions contemplated hereby (a) constitute the
entire agreement and supersede all prior agreements and understandings, both
written and oral, between the parties with respect to the subject matter of this
Agreement and (b) except for the provisions of Article II and Section 6.11, are
not intended to confer upon any Person other than the parties hereto any rights
or remedies.
SECTION 9.7 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflict of
laws thereof.
SECTION 9.8 Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned or delegated, in
whole or in part, by operation of law or otherwise by either of the parties
without the prior written consent of the other party. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
SECTION 9.9 Severability. If any provision of this Agreement is held to
be illegal, invalid or unenforceable under any current or future law, and if the
rights or obligations of the parties under this Agreement would not be
materially and adversely affected thereby, such provision shall be fully
separable, and this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part thereof,
the remaining provisions of this Agreement shall remain in full force and effect
and shall not be affected by the illegal, invalid or unenforceable provision or
by its severance therefrom. In lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as a part of this Agreement, a
legal, valid and enforceable provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible, and the parties hereto
request the court or any arbitrator to whom disputes relating to this Agreement
are submitted to reform the otherwise illegal, invalid or unenforceable
provision in accordance with this Section 9.9.
58
<PAGE> 67
SECTION 9.10 Attorneys' Fees. If any action at law or equity, including
an action for declaratory judgement, is brought to enforce or interpret any
provision of this Agreement, the prevailing party shall be entitled to recover
reasonable attorneys' fees and expenses from the other party, which fees and
expenses shall be in addition to any other relief that may be rewarded.
59
<PAGE> 68
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
IMPAC COMMERCIAL HOLDINGS, INC.
By: /s/ Randal A. Nardone
--------------------------------
Name: Randal A. Nardone
Title: Chief Operating Officer
AMRESCO CAPITAL TRUST
By: /s/ Jonathan S.Pettee
--------------------------------
Name: Jonathan S. Pettee
Title: President
60
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