-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HrvZet+ZP3quBi8miz7ApKBCybRzXOhDc2UfIOxggH7/95hn/kuABVIi4cBIjIPZ xyN7SFNVnlBqyREr/53wCA== 0000950134-98-008916.txt : 19981116 0000950134-98-008916.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950134-98-008916 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMRESCO CAPITAL TRUST CENTRAL INDEX KEY: 0001054337 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 752744858 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14029 FILM NUMBER: 98749394 BUSINESS ADDRESS: STREET 1: 700 NORTH PEARL STREET STREET 2: SUITE 2400 LB 342 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2149537700 MAIL ADDRESS: STREET 1: 700 NORTH PEARL STREET STREET 2: SUITE 2400 LB 342 CITY: DALLAS STATE: TX ZIP: 75201 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1998 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 September 30, 1998 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: 10,006,111 shares of common stock, $.01 par value per share, as of November 9, 1998. Page 1 2 AMRESCO CAPITAL TRUST INDEX
Page No. ---------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - September 30, 1998 and February 2, 1998 3 Consolidated Statements of Income - For the Three Months Ended September 30, 1998 and the Period from February 2, 1998 (Date of Initial Capitalization) 4 through September 30, 1998 Consolidated Statement of Changes in Shareholders' Equity - For the Period from February 2, 1998 (Date of Initial Capitalization) through September 5 30, 1998 Consolidated Statement of Cash Flows - For the Period from February 2, 1998 (Date of Initial Capitalization) through September 30, 1998 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 24 Item 6. Exhibits and Reports on Form 8-K 25 SIGNATURE 27
Page 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) AMRESCO CAPITAL TRUST CONSOLIDATED BALANCE SHEETS (UNAUDITED; DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
September 30, February 2, 1998 1998 ------------- ------------- ASSETS Mortgage loans, net ........................................................ $ 79,657 $ -- Commercial mortgage-backed securities - available for sale (at fair value) . 30,685 -- Real estate, net of accumulated depreciation of $24 ........................ 19,806 -- Investments in unconsolidated subsidiary and other real estate ventures .... 15,184 -- Receivables and other assets ............................................... 1,662 -- Cash and cash equivalents .................................................. 3,885 1 ------------- ------------- TOTAL ASSETS .......................................................... $ 150,879 $ 1 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Accounts payable and other liabilities ................................... $ 6,416 $ -- Repurchase agreement ..................................................... 5,123 -- ------------- ------------- TOTAL LIABILITIES ...................................................... 11,539 -- ------------- ------------- Minority interests ....................................................... 2,611 -- ------------- ------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value, 50,000,000 shares authorized, no shares issued ................................................................. -- -- Common stock, $.01 par value, 200,000,000 shares authorized, 10,006,111 and 100 shares issued and outstanding ................................. 100 -- Additional paid-in capital ............................................... 142,191 1 Unearned stock compensation .............................................. (2,289) -- Accumulated unrealized losses on securities available for sale ........... (4,301) -- Retained earnings ........................................................ 1,028 -- ------------- ------------- TOTAL SHAREHOLDERS' EQUITY ............................................. 136,729 1 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................. $ 150,879 $ 1 ============= =============
See notes to consolidated financial statements. Page 3 4 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND THE PERIOD FROM FEBRUARY 2, 1998 (DATE OF INITIAL CAPITALIZATION) THROUGH SEPTEMBER 30, 1998 (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
Period from February 2, Three Months 1998 Ended through September 30, September 30, 1998 1998 -------------- -------------- REVENUES: Interest income on mortgage loans ................................... $ 1,188 $ 1,328 Income from commercial mortgage-backed securities ................... 560 597 Operating income from real estate ................................... 91 108 Equity in unconsolidated subsidiary and other real estate ventures .. 326 486 Interest income from short-term investments ......................... 827 1,734 -------------- -------------- TOTAL REVENUES .................................................... 2,992 4,253 -------------- -------------- EXPENSES: Interest expense .................................................... 1 1 Management fees ..................................................... 439 632 General and administrative .......................................... 755 953 Depreciation ........................................................ 21 24 Participating interest in mortgage loans ............................ 3 3 Provision for loan losses ........................................... 501 611 -------------- -------------- TOTAL EXPENSES .................................................... 1,720 2,224 -------------- -------------- NET INCOME ............................................................ $ 1,272 $ 2,029 ============== ============== EARNINGS PER COMMON SHARE: Basic .............................................................. $ 0.12 $ 0.34 ============== ============== Diluted ............................................................ $ 0.12 $ 0.34 ============== ============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic .............................................................. 10,000 5,892 ============== ============== Diluted ............................................................ 10,006 5,896 ============== ==============
See notes to consolidated financial statements. Page 4 5 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE PERIOD FROM FEBRUARY 2, 1998 (DATE OF INITIAL CAPITALIZATION) THROUGH SEPTEMBER 30, 1998 (UNAUDITED; DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock Accumulated $.01 Par Value Unrealized ------------------------ Losses on Additional Unearned Securities Total Number of Paid-in Stock Available Retained Shareholders' Shares Amount Capital Compensation For Sale Earnings Equity ------------- --------- ----------- -------------- ------------ -------- ------------- Initial capitalization, February 2, 1998............... 100 - $1 $1 Additional paid-in capital, February 11, 1998.............. - - 25 25 Issuance of common shares through IPO, net of offering expenses, May 12, 1998......... 9,000,000 $90 124,601 124,691 Issuance of common shares through Private Placement, May 12, 1998................... 1,000,011 10 14,990 15,000 Issuance of trust managers' restricted shares.............. 6,000 - 90 $(90) - Compensatory options granted..... 2,484 (2,484) - Amortization of unearned trust manager compensation .......... 33 33 Amortization of compensatory options ....................... 252 252 Unrealized loss on securities available for sale............. $(4,301) (4,301) Distributions paid to common shareholders................... $(1,001) (1,001) Net income....................... 2,029 2,029 ---------- ---- -------- ------- ------- ------ -------- Balance at September 30, 1998.... 10,006,111 $100 $142,191 $(2,289) $(4,301) $1,028 $136,729 ========== ==== ======== ======= ======= ====== ========
See notes to consolidated financial statements. Page 5 6 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM FEBRUARY 2, 1998 (DATE OF INITIAL CAPITALIZATION) THROUGH SEPTEMBER 30, 1998 (UNAUDITED; DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ...................................................................... $ 2,029 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .................................................... 611 Depreciation ................................................................. 24 Amortization of prepaid assets ............................................... 104 Discount amortization on CMBS ................................................ (54) Compensatory stock options ................................................... 252 Amortization of unearned trust manager compensation .......................... 33 Amortization of loan commitment fees ......................................... (74) Receipt of loan commitment fees .............................................. 1,220 Increase in receivables and other assets ..................................... (1,766) Increase in CMBS interest receivable ......................................... (377) Increase in accounts payable and other liabilities ........................... 1,396 Equity in undistributed earnings of unconsolidated subsidiary and other real estate ventures ........................................................... (486) Distributions from unconsolidated subsidiary and other real estate ventures .. 513 --------- NET CASH PROVIDED BY OPERATING ACTIVITIES ............................... 3,425 --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of mortgage loans ................................................... (25,807) Investments in mortgage loans ................................................... (55,607) Purchase of commercial mortgage-backed securities ............................... (34,480) Investments in real estate ...................................................... (17,219) Investments in unconsolidated subsidiary and other real estate ventures ......... (15,286) --------- NET CASH USED IN INVESTING ACTIVITIES ................................... (148,399) --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock ...................................... 139,717 Proceeds from borrowings under repurchase agreement ............................. 5,123 Proceeds from other financing ................................................... 5,020 Distributions paid to common shareholders ....................................... (1,001) --------- NET CASH PROVIDED BY FINANCING ACTIVITIES ............................... 148,859 --------- NET INCREASE IN CASH AND CASH EQUIVALENTS .......................................... 3,885 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................................... -- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................... $ 3,885 ========= SUPPLEMENTAL INFORMATION: Minority interest contributions associated with ADC arrangements ................ $ 2,611 =========
See notes to consolidated financial statements. Page 6 7 AMRESCO CAPITAL TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED SEPTEMBER 30, 1998 1. ORGANIZATION AND RELATIONSHIPS AMRESCO Capital Trust (the "Company"), a real estate investment trust ("REIT"), was organized under the laws of the State of Texas. The Company was formed to take advantage of certain mid- to high-yield lending and investment opportunities in real estate related assets, including various types of commercial mortgage loans (including, among others, participating loans, mezzanine loans, construction loans, rehabilitation loans and bridge loans), mortgage-backed securities ("MBS"), commercial real estate, equity investments in joint ventures and/or partnerships, and certain other real estate related assets. The Company commenced operations on May 12, 1998, concurrent with the completion of its initial public offering ("IPO") of 9,000,000 common shares and private placement of 1,000,011 common shares (the "Private Placement"). Pursuant to the terms of a Management Agreement dated as of May 12, 1998 and subject to the direction and oversight of the Board of Trust Managers, the Company's day-to-day operations are managed by AMREIT Managers, L.P. (the "Manager"), an affiliate of AMRESCO, INC. ("AMRESCO") (together with its affiliated entities, the "AMRESCO Group"). For its services, the Manager is entitled to receive a base management fee equal to 1% per annum of the Company's Average Invested Non-Investment Grade Assets, as defined, and 0.5% per annum of the Company's Average Invested Investment Grade Assets, as defined. In addition to the base management fee, the Manager is entitled to receive incentive compensation in an amount equal to 25% of the dollar amount by which Funds From Operations (as defined by the National Association of Real Estate Investment Trusts), as adjusted, exceeds a certain threshold. The base management fee and the incentive fee, if any, are payable quarterly in arrears. During the three months ended September 30, 1998 and the period from May 12, 1998 (inception of operations) through September 30, 1998, base management fees charged to the Company totaled $298,000 and $421,000, respectively. No incentive fees were charged to the Company during either period. The Manager has 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. AMREIT Holdings, Inc. ("Holdings"), a member of the AMRESCO Group, currently owns 1,500,011 shares, or approximately 15% of the Company's outstanding common stock. Holdings acquired 1,000,011 shares at the IPO price of $15.00 per share pursuant to the Private Placement; the remaining 500,000 shares were acquired through the IPO. AMRESCO owns 100 shares of the Company's outstanding common shares; these shares were acquired on February 2, 1998 in connection with the initial capitalization of the Company. Subject to certain limited exceptions, AMRESCO has granted to the Company a right of first refusal with respect to the first $100 million of targeted mortgage loan investments which are identified by or to any member of the AMRESCO Group during any calendar quarter and all MBS (other than MBS issued in securitizations sponsored in whole or in part by any member of the AMRESCO Group). Additionally, the Company has entered into a Correspondent Agreement with Holliday Fenoglio Fowler ("HFF"), a member of the AMRESCO Group, pursuant to which HFF presents to the Company (on a non-exclusive basis) investment opportunities identified by HFF which meet the investment criteria and objectives of the Company. 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 and its wholly-owned subsidiaries. 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 because a majority of the voting common stock of AMREIT II, Inc. is owned by the Manager and because the Company is entitled to substantially all of the economic benefits of ownership of AMREIT II, Inc. The accompanying financial statements should be read in conjunction with the Company's February 2, 1998 audited balance sheet and notes thereto included in the Company's prospectus dated May 6, 1998 (the Page 7 8 "Prospectus"). The notes to the financial statements included herein highlight significant changes to the notes included in the Prospectus. 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 ended September 30, 1998 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 provision for loan losses and the determination of the fair value of certain share option awards. Actual results may differ from those estimates and assumptions. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ADC ARRANGEMENTS The Company provides financing through certain real estate loan arrangements that, because of their nature, qualify as either real estate or joint venture investments for financial reporting purposes. Using the guidance set forth in the Third Notice to Practitioners issued by the AICPA in February 1986 entitled "ADC Arrangements" (the "Third Notice"), the Company evaluates each investment to determine whether loan, joint venture or real estate accounting is appropriate; such determination affects the Company's balance sheet classification of these investments and the recognition of revenues derived therefrom. The Third Notice was issued to address those real estate acquisition, development and construction arrangements where a lender has virtually the same risks and potential rewards as those of owners or joint venturers. EITF 86-21, "Application of the AICPA Notice to Practitioners regarding Acquisition, Development, and Construction Arrangements to Acquisition of an Operating Property" expanded the applicability of the Third Notice to loans on operating real estate. The Company accounts for its loan investments classified as real estate in accordance with the provisions of Statement OF Financial Accounting Standards ("SFAS") No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects", SFAS No. 66, "Accounting for Sales of Real Estate" and SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Accordingly, costs associated with the acquisition, development and construction of a real estate project are capitalized as a cost of that project during its construction period. When a real estate project is substantially completed and held available for occupancy, rental revenues and operating costs are recognized as they accrue. Depreciation on buildings and improvements is provided under the straight-line method over an estimated useful life of 39 years for office and industrial buildings and 27.5 years for multi-family projects. Maintenance and repair costs are charged to operations as incurred, while significant capital improvements and replacements are capitalized. Leasing commissions and leasehold improvements are deferred and amortized over the terms of the related leases. Other deferred charges are amortized over terms applicable to the expenditure. The Company accounts for its loan investments classified as joint ventures in accordance with the provisions of Statement of Position 78-9, "Accounting for Investments in Real Estate Ventures" and thus reports its share of income or loss under the equity method of accounting based on its preferential ownership interest. MORTGAGE LOANS Mortgage loans are stated at face value, net of deferred commitment fees and associated direct costs, if any, and net of an allowance for loan losses. In accordance with the provisions of SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases", loan commitment fees and incremental direct costs, if any, are deferred and recognized over the life of the loan as an adjustment of yield using the interest method. Page 8 9 PROVISION FOR LOAN LOSSES The Company provides for estimated loan losses by establishing an allowance for losses through a charge to earnings. Management performs a periodic evaluation of the allowance with consideration given to economic conditions and trends, collateral values and other relevant factors. COMMERCIAL MORTGAGE-BACKED SECURITIES The Company's investments in commercial mortgage-backed securities ("CMBS") are classified as available for sale and are carried at estimated fair value as determined by quoted market rates when available, otherwise by discounting estimated cash flows at current market rates. Any unrealized gains or losses are excluded from earnings and reported as a separate component of shareholders' equity in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". If a decline in fair value is deemed to be other than temporary, it is charged to earnings during the period such determination is made. Income from CMBS is recognized based on the effective interest method using the anticipated yield over the expected life of the investments. CASH AND CASH EQUIVALENTS Cash and cash equivalents consists of cash on hand and highly liquid investments with maturities of three months or less at the date of purchase. At September 30, 1998, cash and cash equivalents includes restricted cash of $542,000. The restricted cash serves as collateral for an irrevocable standby letter of credit in a like amount which was issued on behalf of a partnership in which the Company, through certain of its subsidiaries, has a controlling interest. The letter of credit, which expires on July 15, 1999, was issued in connection with the partnership's procurement of permanent financing. STOCK-BASED COMPENSATION The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its stock option awards to the extent an election is available. Accordingly, the Company will, in its annual Form 10-K, make pro forma disclosures of net income and earnings per common share as if the fair value based method of accounting defined in SFAS No. 123, "Accounting for Stock-Based Compensation" had been applied. EARNINGS PER COMMON SHARE Earnings per common share ("EPS") is computed using the guidance in SFAS No. 128, "Earnings Per Share". Under SFAS No. 128, the Company is required to present both basic and diluted EPS on the face of its consolidated statement of income. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS gives effect to all dilutive potential common shares that were outstanding during the period. INCOME TAXES The Company intends to qualify and will elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its initial taxable year ended December 31, 1998. As a result, the Company will generally not be subject to federal income tax on that portion of its ordinary income or capital gain that is currently distributed to its shareholders if it distributes at least 95% of its annual REIT taxable income and it complies with a number of other organizational and operational requirements. Accordingly, no provision for income taxes has been made in the consolidated financial statements. DISTRIBUTIONS The Company intends to make quarterly distributions to its shareholders which will be designed to allow the Company to qualify as a REIT under the Code. Earnings and profits, which will determine the taxability of distributions to shareholders, differs from income reported for financial reporting purposes due primarily to differences in methods of accounting for ADC arrangements and stock-based compensation awards and the nondeductibility, for tax purposes, of the Company's loan loss reserve. As a result, net income under generally accepted accounting principles is not necessarily an indicator of distributions to be made by the Company. Page 9 10 4. INVESTMENT ACTIVITY Concurrent with the commencement of its operations on May 12, 1998, the Company acquired two loans from AMRESCO Funding Corporation, a member of the AMRESCO Group. Additionally, the Company originated nine loans during the period from May 12, 1998 through September 30, 1998. On September 30, 1998, the Company acquired eight loans from AMRESCO Commercial Finance, Inc. ("ACFI"), a member of the AMRESCO Group, at an aggregate cash purchase price of $34,292,000, including accrued interest of $812,000. Immediately following the purchase, the Company sold to ACFI a contractual right to collect from the Company an amount equal to the economic equivalent of all amounts collected from five of the loans in excess of (i) $17,958,000 and (ii) a return on this amount, or so much of it as is outstanding from time to time, equal to 12% per annum. The aggregate cash sales price of $5,020,000 had the effect of reducing the Company's credit exposure with respect to such loans. As additional consideration, ACFI agreed to immediately reimburse the Company for any additional advances which are required to be made under the five loan agreements. At September 30, 1998, ACFI's contingent obligation for these additional advances approximated $2,116,000. The proceeds received from ACFI are accounted for as a financing and are included in other liabilities as of September 30, 1998. The Company's loan investments are summarized as follows (dollars in thousands):
Amount Outstanding at Interest Date of Initial Collateral Commitment September 30, Interest Accrual Investment Location Position Amount 1998 Pay Rate Rate - ------------------------- -------------------- --------------- ------------------ ----------------- ------------ ------------ May 12, 1998 Columbus, OH Second Lien $ 7,000 $ 5,839 15.0% 15.0% May 12, 1998 Richardson, TX Second Lien 14,700 3,816 10.0% 12.0% June 1, 1998 Houston, TX First Lien 11,800 9,857 12.0% 12.0% June 12, 1998 Pearland, TX First Lien 12,827 2,185 10.0% 11.5% June 17, 1998 San Diego, CA First Lien 5,560 3,991 10.0% 13.5% June 19, 1998 Houston, TX First Lien 24,000 3,725 12.0% 12.0% June 22, 1998 Wayland, MA First Lien 45,000 17,132 10.5% 10.5% July 1, 1998 Dallas, TX Ptrshp Interests 10,068 6,283 10.0% 15.0% July 2, 1998 Washington, D.C. First Lien 7,000 5,351 10.5% 10.5% July 10, 1998 Pasadena, TX First Lien 3,350 2,038 10.0% 14.0% September 1, 1998 Los Angeles, CA First Lien 18,419 17,413 10.0% 12.0% September 30, 1998 Richardson, TX First Lien 13,001 7,674 10.0% 14.0% September 30, 1998 San Antonio, TX First Lien 3,266 1,554 22.0% 22.0% September 30, 1998 San Antonio, TX First Lien 8,400 1,949 10.0% 14.0% September 30, 1998 Galveston, TX First Lien 3,664 3,664 10.0% 15.0% September 30, 1998 Ft. Worth, TX Ptrshp Interests 2,650 2,587 10.5% 16.0% September 30, 1998 Austin, TX First Lien 6,325 6,247 10.0% 16.0% September 30, 1998 Dallas, TX First Lien 3,015 2,364 10.0% 13.0% September 30, 1998 Norwood, MA First Lien 8,765 7,441 10.0% 12.5% -------- -------- $208,810 $111,110 ======== ========
Eight of the nineteen loans provide for profit participation above the contractual accrual rate; four of these eight facilities are included in the pool of loans in which ACFI has a contractual right to collect certain excess proceeds, as described above. The loan investments are classified as follows (dollars in thousands):
Loan Amount Balance Sheet Outstanding at Amount at September 30, 1998 September 30, 1998 ------------------ ------------------ Mortgage loans, net $ 81,413 $ 79,657 Real estate, net 17,575 19,806 Investment in real estate ventures 12,122 11,726 -------- -------- $111,110 $111,189 ======== ========
Page 10 11 The differences between the outstanding loan amounts and the balance sheet amounts are due primarily to loan commitment fees, the allowance for loan losses, minority interests and accumulated depreciation. At September 30, 1998, mortgage loans are presented net of an allowance for loan losses of $611,000. Real estate, which is comprised entirely of amounts arising under ADC arrangements, consisted of the following at September 30, 1998 (dollars in thousands): Land $6,118 Buildings and improvements 3,194 Construction in progress 10,518 ------- Total 19,830 Less: Accumulated depreciation (24) ------- $19,806 =======
As of September 30, 1998, the Company has outstanding commitments to fund approximately $97.7 million under 19 loan agreements, of which $2.1 million 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. During the period from May 12, 1998 (inception of operations) through September 30, 1998, the Company, either directly or through its unconsolidated subsidiary, acquired six commercial mortgage-backed securities at an aggregate purchase price of $37.9 million. 5. 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 "Warehouse Line") with Prudential Securities Credit Corporation ("PSCC"). Borrowings under the facility can be used to finance the Company's structured loan and equity real estate investments. Borrowings under the Warehouse Line bear interest at rates ranging from LIBOR plus 1% per annum to LIBOR plus 2% per annum depending upon the type of asset, its loan-to-value ratio and the advance rate selected by the Company. Advance rates on eligible assets range from 50% to 95% depending upon the asset's characteristics. Borrowings under the facility are secured by a first lien security interest on all assets funded with proceeds from the Warehouse Line. The Warehouse Line contains several covenants; among others, the more significant covenants include the maintenance of a minimum consolidated tangible net worth, maintenance of a minimum coverage ratio, and a limitation on total indebtedness. The Warehouse Line matures on July 1, 2000. At September 30, 1998, there had been no borrowings under the Warehouse Line. 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 a first lien security interest on all mortgage-backed securities funded with proceeds from the Repurchase Agreement. The Repurchase Agreement matures on June 30, 2000. At September 30, 1998, $5,123,000 had been borrowed under the Repurchase Agreement; these borrowings were fully repaid on October 23, 1998 with proceeds from the Warehouse Line. The weighted average interest rate at September 30, 1998 was 6.47%. Under the terms of the Warehouse Line 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. Page 11 12 6. SHARE OPTION AWARDS Under the Company's 1998 Share Option and Award Plan, the Company may grant restricted common shares and options to purchase common shares in amounts up to an aggregate of 15% of the Company's outstanding common shares (or 1,500,017 common shares). On May 12, 1998, the Company granted to its trust managers and officers non-qualified options to purchase 352,000 common shares at an exercise price of $15.00 per share (the IPO price). The options vest ratably over a four-year period beginning one year after the date of grant. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for these awards. As the awards had no intrinsic value at the grant date, no compensation cost has been recognized. On May 12, 1998, the Company granted to the Manager and certain other members of the AMRESCO Group non-qualified options to purchase 1,000,011 and 141,500 common shares, respectively. Seventy percent of the Manager's options and those options awarded to the other members of the AMRESCO Group are exercisable at $15.00 per share (the IPO price); the remaining thirty percent of the Manager's options are exercisable at an option price of $18.75 per share. The options vest in four equal installments on May 12, 1999, May 12, 2000, May 12, 2001 and May 12, 2002. The Company accounts for these options under SFAS No. 123, "Accounting for Stock-Based Compensation"; accordingly, compensation cost, which was measured at the grant date based upon the estimated fair value of the share options granted, is being recognized over the four-year vesting period. The fair value of the options granted was estimated using the Cox-Ross-Rubinstein option pricing model with the following assumptions: risk free interest rates ranging from 5.43% to 5.71%; expected lives ranging from one to ten years; expected volatility of 25%; and dividend yield of 8%. As of September 30, 1998, 17,000 options had been forfeited by other members of the AMRESCO Group. During the three months ended September 30, 1998, management fees and general and administrative expenses included compensatory option charges totaling $141,000 and $27,000, respectively. During the period from May 12, 1998 (inception of operations) through September 30, 1998, management fees and general and administrative expenses included compensatory option charges totaling $211,000 and $41,000, respectively. In lieu of cash compensation, the Company granted 6,000 restricted common shares to its four independent trust managers on May 12, 1998. The associated compensation cost is being recognized over the one-year service period. 7. COMMON STOCK The Company was initially capitalized through the sale of 100 common shares to AMRESCO on February 2, 1998. On May 12, 1998, the Company completed its IPO of 9,000,000 shares of common stock. Concurrently, the Private Placement of 1,000,011 common shares was completed with Holdings. The net proceeds from the IPO and the Private Placement, after the underwriters' discount and offering expenses, aggregated approximately $139.7 million. The price to the public and to Holdings was $15.00 per share and the proceeds to the Company from the IPO and the Private Placement were $14.00 per share (after the underwriter's discount and advisory fee) and $15.00 per share, respectively. Page 12 13 8. 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 months ended September 30, 1998 and the period from February 2, 1998 (date of initial capitalization) through September 30, 1998, is as follows (in thousands, except per share data):
Period from Three Months February 2, 1998 Ended through September 30, 1998 September 30, 1998 --------------- --------------- Net income available to common shareholders $ 1,272 $ 2,029 =============== =============== Weighted average common shares outstanding 10,000 5,892 =============== =============== Basic earnings per common share $ 0.12 $ 0.34 =============== =============== Weighted average common shares outstanding 10,000 5,892 Effect of dilutive securities: Restricted shares 6 4 Net effect of assumed exercise of stock options -- -- =============== =============== Adjusted weighted average shares outstanding 10,006 5,896 =============== =============== Diluted earnings per common share $ 0.12 $ 0.34 =============== ===============
Options to purchase 1,176,508 shares of common stock at $15.00 per share and 300,003 shares of common stock at $18.75 per share were outstanding during the period from May 12, 1998 (inception of operations) through September 30, 1998 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the Company's common shares. The options, which expire on May 12, 2008, were still outstanding as of September 30, 1998. The Company had no earnings prior to the commencement of its operations on May 12, 1998. When calculated for the period from May 12, 1998 (inception of operations) through September 30, 1998, the Company's basic and diluted earnings were $0.20 per common share. 9. COMPREHENSIVE INCOME At its inception, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). 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. SFAS No. 130 requires that all items recognized under accounting standards as components of comprehensive income be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. SFAS No. 130 also requires that an entity classify items of other comprehensive income by their nature in a financial statement. Other comprehensive income includes unrealized gains and losses on marketable securities classified as available-for-sale. During the three months ended September 30, 1998, total nonowner changes in equity aggregated $(3,029,000) and were comprised of net income of $1,272,000 and an unrealized loss on securities available for sale of $4,301,000. For the period from February 2, 1998 (date of initial capitalization) through September 30, 1998, total nonowner changes in equity aggregated $(2,272,000) and were comprised of net income and an unrealized loss on securities available for sale of $2,029,000 and $4,301,000, respectively. The unrealized loss on securities available for sale had no impact on the Company's taxable income or cash flow. Page 13 14 10. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in its balance sheet and that it measure those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) is dependent upon the intended use of the derivative and the resulting designation. SFAS No. 133 generally provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of (1) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (2) the earnings effect of the hedged forecasted transaction. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, although earlier application is encouraged. The Company expects to adopt the provisions of SFAS No. 133 upon its initial use of derivative instruments. As of September 30, 1998, no such instruments were being utilized by the Company. 11. SUBSEQUENT EVENTS On October 1, 1998, the Company originated a $566,000 first lien loan secured by a certain tract of land in Richardson, Texas; the initial advance under this loan totaled approximately $300,000. The Company also committed to provide additional first lien financing of $14,363,000 to the borrower. If the borrower exercises its option to utilize this financing, the proceeds therefrom will be used for the construction of an office building on such land. The existing loan is due and payable on January 1, 1999; however, if the borrower elects to exercise its option on the additional financing, it may also elect to extend the term of the land loan. On October 22, 1998, the Company declared a dividend of $0.24 per share; the dividend is payable on November 16, 1998 to shareholders of record on October 31, 1998. During the three months ended September 30, 1998, the Company entered into a partnership that will ultimately acquire interests in five newly constructed, grocery-anchored shopping centers in the Dallas/Fort Worth (Texas) area. On October 23, 1998, the partnership acquired an interest in the first of these five centers, an 82,730 square foot facility in Arlington, Texas. In connection with this acquisition, the Company contributed $3.4 million of capital to the partnership. The acquisitions of the remaining four centers, which are subject to certain closing conditions, will require an additional equity investment of approximately $13.5 million. The Company anticipates that the remaining four centers will be acquired during the second quarter of 1999. Page 14 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 to take advantage of certain mid- to high-yield lending and investment opportunities in real estate related assets, including various types of commercial mortgage loans (including, among others, participating loans, mezzanine loans, construction loans, rehabilitation loans and bridge loans), mortgage-backed securities, 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 ("IPO") of 9,000,000 common shares and private placement of 1,000,011 common shares with AMREIT Holdings, Inc., a member of the AMRESCO Group (the "Private Placement"). At September 30, 1998, the $139.7 million of net proceeds received from the issuance of its common shares had been fully invested in structured finance arrangements and commercial mortgage-backed securities. The Company is currently evaluating a variety of potential investments. Given the recent dislocation in the capital markets, as discussed further in the Liquidity and Capital Resources section below, the Company is also evaluating a number of alternative financing sources. The Company will elect to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), and as such, is required to distribute at least 95% of its REIT taxable income annually, subject to certain adjustments. It is expected that the cash for such distributions will be generated from the Company's day-to-day operations, although the Company may also borrow funds to make distributions. The Company may experience high volatility in net income from quarter to quarter and year to year, primarily as a result of fluctuations in interest rates, borrowing costs, reinvestment opportunities and prepayment rates. 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. RESULTS OF OPERATIONS The Company commenced operations on May 12, 1998. Net income for the three months ended September 30, 1998 and the period from May 12, 1998 through September 30, 1998 was $1,272,000 and $2,029,000, respectively, or $0.12 and $0.20 per common share, respectively. The Company had no income during the period from February 2, 1998 (date of initial capitalization) through May 11, 1998. The Company's primary sources of revenue for the three months ended September 30, 1998 and the period from May 12, 1998 through September 30, 1998, totaling $2,992,000 and $4,253,000, respectively, were as follows: o $1,188,000 and $1,328,000 of interest income, respectively, on mortgage loans; the loans earn interest at accrual rates ranging from 10.5% to 22% per annum o $827,000 and $1,734,000 of other interest income, respectively, generated primarily from the temporary investment of proceeds from the IPO and Private Placement o $560,000 and $597,000, respectively, from investments in commercial mortgage-backed securities o $326,000 and $486,000, respectively, from equity in the earnings of its unconsolidated subsidiary and mortgage loans accounted for as joint venture investments (for a discussion of loans accounted for as joint venture investments, see the notes to the consolidated financial statements included in Item 1 above). Revenue increased as funds from the IPO were more fully invested in real estate related assets. Page 15 16 The Company incurred expenses of $1,720,000 and $2,224,000 for the three months ended September 30, 1998 and the period from May 12, 1998 through September 30, 1998, respectively, consisting primarily of the following: o $439,000 and $632,000, respectively, of management fees, including $298,000 and $421,000, respectively, of base management fees payable to the Manager pursuant to the Management Agreement and $141,000 and $211,000, respectively, of expense associated with compensatory options granted to the Manager. No incentive fees were incurred during either of these periods. o $755,000 and $953,000, respectively, of general and administrative costs, including approximately $400,000 and $400,000, respectively, of due diligence costs associated with an abandoned transaction, $126,000 and $201,000, respectively, for professional services, $58,000 and $104,000, respectively, for directors and officers' insurance, $80,000 and $96,000, respectively, of reimbursable costs pursuant to the Management Agreement, $27,000 and $41,000, respectively, related to compensatory options granted to certain members of the AMRESCO Group and $0 and $13,000, respectively, of organizational expenses. o $501,000 and $611,000, respectively, of loan loss reserves. No loan losses were incurred by the Company during the period. The Company's policy is to distribute at least 95% of its REIT taxable income to shareholders each year. Tax basis income differs from income reported for financial reporting purposes due primarily to differences in methods of accounting for ADC arrangements and stock-based compensation awards and the nondeductibility, for tax purposes, of the Company's loan loss reserve (for a discussion of ADC arrangements, see the notes to the consolidated financial statements included in Item 1 above). As a result, net income under generally accepted accounting principles is not necessarily an indicator of distributions to be made by the Company. To date, the following dividends have been declared:
Dividend per Declaration Record Payable Common Date Date Date Share ------------------ ------------------ -------------------- ---------------- Period from May 12, 1998 through June 30, 1998 July 23, 1998 July 31, 1998 August 17, 1998 $0.10 Third Quarter October 22, 1998 October 31, 1998 November 16, 1998 $0.24
For federal income tax purposes, all dividends declared to date should be treated as ordinary income to the Company's shareholders. The Company expects to declare its fourth quarter dividend on December 15, 1998; it is anticipated that this dividend will be payable on January 27, 1999 to shareholders of record on December 31, 1998. During the three months ended September 30, 1998, the Company added 12 loans, representing $87.9 million in aggregate commitments, to its portfolio; four of these loans were originated by the Company while eight of the loans were acquired from AMRESCO Commercial Finance, Inc. ("ACFI"), a member of the AMRESCO Group. As of September 30, 1998, the Company's structured finance portfolio was comprised of 19 commercial mortgage loans aggregating $208.8 million in commitments; $111.1 million had been advanced under these facilities at September 30, 1998. After giving effect to ACFI's economic interest (as further described below), commitments and amounts outstanding totaled $202.3 million and $106.8 million, respectively, at September 30, 1998. The eight loans were acquired from ACFI on September 30, 1998 pursuant to two separate agreements. The first agreement provided for the purchase of three loans at an aggregate cash purchase price of $11,314,000, including accrued interest of $137,000. The second agreement provided for the purchase of five loans at an aggregate cash purchase price of $22,978,000, including accrued interest of $675,000. Immediately following the purchase of the five loans, the Company sold to ACFI a contractual right to collect from the Company an amount equal to the economic equivalent of all amounts collected from the five loans in excess of (i) $17,958,000 and (ii) a return on this amount, or so much of it as is outstanding from time to time, equal to 12% per annum. The aggregate cash sales price of $5,020,000 had the effect of reducing the Company's credit exposure with respect to such loans. The sales price was comprised of $4,345,000 which had the effect of reducing the Company's net investment in such loans; the balance of the sales price, or $675,000, equated to the amount of interest which was accrued under the five loan agreements as of September 30, 1998. As additional consideration, ACFI agreed to immediately reimburse the Company for any additional advances which are required to be made under the five loan agreements. At September 30, 1998, ACFI's contingent obligation for these additional advances approximated $2,116,000. Page 16 17 Based upon the amounts committed 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 11.0% and a weighted average interest accrual rate of 12.3% as of September 30, 1998. Except for the loans purchased from ACFI on September 30, 1998, the borrowers paid a commitment fee to the Company that is in addition to interest payments due under the terms of the loan agreements. Commitment fees are deferred and recognized over the life of the loan as an adjustment of yield or, in those cases where loan investments are classified as either real estate or joint ventures, such fees are deferred and recognized upon the disposition of the investment. Eight of the nineteen loans provide for profit participation above the contractual accrual rate; four of these eight facilities are included in the pool of loans in which ACFI has a contractual right to collect certain excess proceeds, as described above. The Company's loan investments are summarized as follows (dollars in thousands):
Amount Outstanding at Interest Date of Initial Collateral Commitment September 30, Interest Accrual Investment Location Position Amount 1998 Pay Rate Rate - ------------------------- -------------------- --------------- ------------------ ----------------- ------------ ------------ May 12, 1998 Columbus, OH Second Lien $7,000 $5,839 15.0% 15.0% May 12, 1998 Richardson, TX Second Lien 14,700 3,816 10.0% 12.0% June 1, 1998 Houston, TX First Lien 11,800 9,857 12.0% 12.0% June 12, 1998 Pearland, TX First Lien 12,827 2,185 10.0% 11.5% June 17, 1998 San Diego, CA First Lien 5,560 3,991 10.0% 13.5% June 19, 1998 Houston, TX First Lien 24,000 3,725 12.0% 12.0% June 22, 1998 Wayland, MA First Lien 45,000 17,132 10.5% 10.5% July 1, 1998 Dallas, TX Ptrshp Interests 10,068 6,283 10.0% 15.0% July 2, 1998 Washington, D.C. First Lien 7,000 5,351 10.5% 10.5% July 10, 1998 Pasadena, TX First Lien 3,350 2,038 10.0% 14.0% September 1, 1998 Los Angeles, CA First Lien 18,419 17,413 10.0% 12.0% September 30, 1998 Richardson, TX First Lien 13,001 7,674 10.0% 14.0% September 30, 1998 San Antonio, TX First Lien 3,266 1,554 22.0% 22.0% September 30, 1998 San Antonio, TX First Lien 8,400 1,949 10.0% 14.0% September 30, 1998 Galveston, TX First Lien 3,664 3,664 10.0% 15.0% September 30, 1998 Ft. Worth, TX Ptrshp Interests 2,650 2,587 10.5% 16.0% September 30, 1998 Austin, TX First Lien 6,325 6,247 10.0% 16.0% September 30, 1998 Dallas, TX First Lien 3,015 2,364 10.0% 13.0% September 30, 1998 Norwood, MA First Lien 8,765 7,441 10.0% 12.5% -------- -------- 208,810 111,110 ACFI's Economic Interest (6,461) (4,345) -------- -------- $202,349 $106,765 ======== ========
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. As of September 30, 1998, loan investments representing approximately $72,456,000 in aggregate commitments are accounted for as either real estate or joint venture interests; approximately $29,697,000 had been advanced to borrowers under the related agreements. For a discussion of these loan arrangements, see the notes to the consolidated financial statements in Item 1 above. At September 30, 1998, the Company's commercial mortgage loan commitments were concentrated in four states and the District of Columbia: Texas (56%); Massachusetts (26%); California (12%); Ohio (3%); and Washington, D.C. (3%). The underlying collateral for these loans was comprised of the following property types: office (63%); mixed use (13%); multifamily (11%); residential (6%); industrial (3%); R&D/Bio-Tech (3%); and medical office (1%). Construction loans, acquisition/rehabilitation loans, acquisition loans, single-family lot development loans and bridge loans comprised 33%, 31%, 27%, 6% and 3% of the portfolio, respectively. Eighty-three percent of the portfolio is comprised of first lien loans while the balance of the portfolio (17%) 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. Until the 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 Page 17 18 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 investment portfolio. During the three months ended September 30, 1998, the Company acquired three commercial mortgage-backed securities at an aggregate purchase price of $22.6 million. As of September 30, 1998, the Company, either directly or through its unconsolidated subsidiary, holds six commercial mortgage-backed securities ("CMBS") which were acquired at an aggregate purchase price of $37.9 million. Due to the significant widening of spreads in the CMBS market, the Company recorded an unrealized loss of $4.3 million on its CMBS portfolio as of September 30, 1998. As these securities are classified as available for sale, the unrealized loss was reported as a separate component of shareholders' equity for financial reporting purposes. The unrealized loss had no impact on the Company's taxable income or cash flow. Management intends to retain these investments for the foreseeable future. As of September 30, 1998, CMBS investments comprised 15% of the Company's aggregate commitments. Excluding the potential tax effects associated with one of the securities held by the Company's unconsolidated subsidiary, the weighted average unleveraged yield over the expected life of these investments is expected to approximate 11.6%. Including the security held by its unconsolidated subsidiary, the Company's CMBS investments are summarized as follows (dollars in thousands):
Percentage of Aggregate Aggregate Total Based Rating Amortized Cost Fair Value on Fair Value ------------------ ----------------- ------------------ ---------------- Double BB- $4,219 $4,002 12% Single B 19,454 17,253 50% Single B- 14,716 12,833 38% ------- ------- --- $38,389 $34,088 100% ======= ======= ===
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. During the three months ended September 30, 1998, the Company entered into a partnership that will ultimately acquire interests in five newly constructed, grocery-anchored shopping centers in the Dallas/Fort Worth (Texas) area. On October 23, 1998, the partnership acquired an interest in the first of these five centers, an 82,730 square foot facility in Arlington, Texas. In connection with this acquisition, the Company contributed $3.4 million of capital to the partnership. The acquisitions of the remaining four centers, which are subject to certain closing conditions, will require an additional equity investment of approximately $13.5 million. The Company anticipates that the remaining four centers will be acquired during the second quarter of 1999. 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 its indebtedness, debt repayments and distributions to its shareholders. In the near term, the Company's principal sources of liquidity are the funds available under the Warehouse Line and Repurchase Agreement described below. Effective as of July 1, 1998, the Company (and certain of its subsidiaries) entered into a $400 million warehouse facility (the "Warehouse Line") 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. Borrowings under the Warehouse Line bear interest at rates ranging from LIBOR plus 1% per annum to LIBOR plus 2% per annum and are secured by a first lien security interest in all assets funded with proceeds from the Warehouse Line. The Warehouse Line matures on July 1, 2000. At September 30, 1998, there had been no borrowings under the Warehouse Line. Page 18 19 The Company (and certain of its subsidiaries) also entered into a $100 million repurchase agreement (the "Repurchase Agreement") with PSCC effective as of July 1, 1998; subsequently, PSCC was replaced by Prudential-Bache International, Ltd., 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. The Repurchase Agreement matures on June 30, 2000. At September 30, 1998, approximately $5.1 million had been borrowed under the Repurchase Agreement; these borrowings were fully repaid on October 23, 1998 with proceeds from the Warehouse Line, thereby eliminating the potential for collateral margin calls. The weighted average interest rate at September 30, 1998 was 6.47%. The Company believes that the funds available under its Warehouse Line and Repurchase Agreement will be sufficient to meet the Company's liquidity and committed capital requirements into 1999. To fund future growth, the Company will need to raise additional funds for operations through future public or private equity and debt offerings and/or by leveraging its investments, primarily through additional secured and unsecured financings, and other borrowing arrangements. The capital market fluctuations that occurred during the third quarter of 1998 have, at least in the near term, potentially diminished the Company's access to additional capital and have restricted its ability to expand its asset base. These capital market fluctuations began in Russia and Asia and grew to include a global investor flight to low risk investments. During the quarter, spreads on high yield and mortgage-backed bonds widened significantly resulting in a marked decline in the market value of CMBS and a general lessening of liquidity for the lower rated classes of CMBS. Substantial margin calls related to certain hedge positions were brought on by steep declines in U.S. Treasury rates. The combination of spread widening and hedge losses created severe liquidity problems for some companies, including many companies within the mortgage REIT sector. As of September 30, 1998, no hedging instruments were being utilized by the Company. 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 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 existing Warehouse Line 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, the Company has been relatively insulated from the effects of the dislocation in the capital markets. While the Company's portfolio of CMBS has declined in value, 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 at this time, although general economic conditions could adversely impact real estate values in the future. As a result of these trends, PSCC has indicated to the Company that it will be much more restrictive in the application of its approval rights under the Warehouse Line with respect to financing for new investments sought by the Company. While the Company believes that sufficient availability under the Warehouse Line and Repurchase Agreement exist to meet all of the Company's existing commitments, potential restrictions on financing for new investments will limit future growth. As a result of these uncertainties, the Company's assets will grow more slowly than was originally forecast for 1999. However, in view of the uncertainties in the capital markets, management believes that it is more prudent to maintain low leverage and greater liquidity. Therefore, it is unlikely that the Company will add additional assets if such addition were to result in a debt to equity ratio exceeding 2 to 1. As of September 30, 1998, the Company's debt to equity ratio was 0.04 to 1. The Company also intends to closely monitor any financing that may be placed on the Company's existing CMBS portfolio in an effort to minimize the risk of margin calls. Despite the uncertainties in the public debt and equity markets, management believes that there are other potential sources of capital available to entities like the Company. Management is actively exploring the availability of capital from these other sources and the costs associated therewith. However, there can be no assurances that such capital will become available at a reasonable cost. Page 19 20 REIT STATUS Management believes that the Company is operated in a manner that will enable it 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 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, and the Company has received a written representation from AMRESCO, INC. that AMRESCO, INC. expects that Year 2000 readiness will be achieved by December 1998 with respect to virtually 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. Page 20 21 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. is in the process of communicating 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. is seeking 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. 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. plans to conduct 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. For all business-critical systems interfaces, readiness is scheduled to be achieved by December 31, 1998. Significant third party service providers that have not completed their Year 2000 initiative by March 31, 1999 are scheduled to be replaced with comparable firms that are believed to be compliant. AMRESCO, INC. anticipates that this portion of its Year 2000 initiative will be completed within the scheduled time periods. There can be no assurance that the systems of AMRESCO, INC. or those of third parties will be timely converted. 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. 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). Page 21 22 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 an equity investment in a partnership that will ultimately own interests in five to-be-built grocery-anchored shopping centers. These operations will be subject to many of the risks set forth above. As construction plans are developed and construction progresses, the Company will review the measures taken by the developer and general contractor to make all of the building systems Year 2000 ready. However, there can be no guarantee that all building systems will be Year 2000 ready upon completion of construction. 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 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. Page 22 23 FORWARD-LOOKING STATEMENTS Certain statements contained herein 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, 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), 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. Page 23 24 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. SALE OF SECURITIES The Company was initially capitalized through the sale of 100 of its common shares of beneficial interest, par value $.01 per share (the "Common Shares"), to AMRESCO on February 2, 1998 for $1,000. On February 11, 1998, AMRESCO contributed additional capital of $25,000 to the Company; no additional shares were issued to AMRESCO in connection with this contribution. On May 12, 1998, concurrent with the completion of its IPO of 9,000,000 Common Shares, the Company sold 1,000,011 Common Shares to Holdings, a member of the AMRESCO Group, at the IPO price of $15.00 per share, or $15,000,165 in aggregate cash consideration, pursuant to the Private Placement. The Common Shares sold in the Private Placement and those sold in connection with the Company's initial capitalization were sold without registration under the Securities Act in reliance on the exemption provided by Section 4 (2) thereof. USE OF PROCEEDS The Company's Registration Statement (File No. 333-45543) registering the 9,000,000 Common Shares sold in the IPO was declared effective by the Securities and Exchange Commission on May 6, 1998. The IPO commenced on May 6, 1998 and closed on May 12, 1998, with the sale of all of the Company's registered shares at the offering price of $15.00 per share, or $135,000,000 in aggregate gross proceeds. Prudential Securities Incorporated, Credit Suisse First Boston, ABN AMRO Incorporated, J.C. Bradford & Co., NationsBanc Montgomery Securities LLC and Piper Jaffray Inc. served as the principal underwriters for the public offering. When combined with the aggregate proceeds received from the unregistered sale of securities to AMRESCO and Holdings totaling $26,000 and $15,000,165, respectively, the Company's aggregate gross proceeds from the sales of its Common Shares totaled $150,026,165. From the effective date of the Registration Statement through September 30, 1998, the Company incurred the following expenses in connection with the IPO and other sales of securities: Underwriting discounts and commissions $ 7,969,000 Finders' fees -- Expenses paid to or for underwriters (advisory fee) 1,012,000 Other expenses 1,328,000 ----------- Total expenses $10,309,000 ===========
After deducting these expenses, net proceeds to the Company totaled approximately $139,717,000 (inclusive of the 100 shares sold to AMRESCO and the 1,000,011 shares sold to Holdings for aggregate consideration of $15,026,165). As of September 30, 1998, the Company had fully invested these proceeds. From the effective date of the Registration Statement through September 30, 1998, the Company made investments as follows: Acquisition of mortgage loans $ 25,807,000 Investments in mortgage loans 55,607,000 Purchase of CMBS 34,480,000 Investments in real estate 17,219,000 Investments in unconsolidated subsidiary and other real estate ventures 15,286,000 ------------ $148,399,000 ============
All such payments relating to these investments were direct or indirect payments to others, except for $6,290,000 which was paid to AMRESCO Funding Corporation ("AFC") and $34,292,000 which was paid to AMRESCO Commercial Finance, Inc. ("ACFI") for the acquisition of two and eight loans, respectively. The two loans acquired from AFC on May 12, 1998 are more fully described in the Company's Registration Statement (such loans being referred to therein as "Loan One" and "Loan Four", respectively). The eight loans acquired from ACFI on September 30, 1998 are more fully described in the Company's Current Report on Form 8-K dated September 30, 1998 (such loans being referred to therein as "Package 1" and "Package 2", respectively). Page 24 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits and Exhibit Index Exhibit No. 2.1 Sale and Assignment Agreement by and between AMRESCO Commercial Finance, Inc. and AMREIT I, Inc. dated effective as of September 30, 1998 relating to three loans (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated September 30, 1998, which exhibit is incorporated herein by reference). 2.2 Sale and Assignment Agreement by and between AMRESCO Commercial Finance, Inc. and AMREIT I, Inc. dated effective as of September 30, 1998 relating to five loans (filed as Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated September 30, 1998, which exhibit is incorporated herein by reference). 2.3 Economics Equivalents and Funding Agreement by and between AMRESCO Commercial Finance, Inc. and AMREIT I, Inc. dated effective as of September 30, 1998 (filed as Exhibit 2.3 to the Registrant's Current Report on Form 8-K dated September 30, 1998, which exhibit is incorporated herein by reference). 3.1 Amended and Restated Declaration of Trust of the Registrant (filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-11 (Registration No. 333-45543), which exhibit is incorporated herein by reference). 3.2 First Amendment to Amended and Restated Declaration of Trust of the Registrant (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated May 12, 1998, which exhibit is incorporated herein by reference). 3.3 Second Amendment to Amended and Restated Declaration of Trust of the Registrant (filed as Exhibit 3.2 to the Registrant's Current Report on Form 8-K dated May 12, 1998, which exhibit is incorporated herein by reference). 3.4 Form of Bylaws of the Registrant (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-11 (Registration No. 333-45543), which exhibit is incorporated herein by reference). 10.1 Interim Warehouse and Security Agreement dated as of July 1, 1998 by and among Prudential Securities Credit Corporation and AMRESCO Capital Trust, AMREIT I, Inc. and AMREIT II, Inc. 10.2 Master Repurchase Agreement dated as of July 1, 1998 between Prudential-Bache International, Ltd. and AMRESCO Capital Trust, AMREIT CMBS I, Inc., AMREIT RMBS I, Inc. and AMREIT II, Inc. 11 Computation of Per Share Earnings. 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: (i) Form 8-K dated June 19, 1998 and filed with the Commission on July 6, 1998, reporting (a) the origination of a $24,000,000 nonrecourse construction loan and the origination of a $45,000,000 nonrecourse acquisition and construction loan under Item 2 of such form and (b) the origination of three other loans under Item 5 of such form. Page 25 26 (ii) Form 8-K/A filed with the Commission on August 3, 1998, amending Form 8-K dated May 12, 1998, reporting the acquisition of a $7,000,000 nonrecourse loan and a $14,700,000 nonrecourse loan under Item 2 of such form. (iii) Form 8-K dated September 30, 1998 and filed with the Commission on October 15, 1998, reporting (a) under Item 2 of such form, the acquisition from an affiliate of the Registrant of (i) a package of loans for a purchase price of approximately $11,313,916 and (ii) another package of loans for a purchase price of approximately $ 22,978,251 and (b) under Item 5 of such form, the origination of four other loans. Page 26 27 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: November 13, 1998 By: /s/Thomas J. Andrus ------------------------------ Thomas J. Andrus Executive Vice President and Chief Financial Officer Page 27 28 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- 2.1 Sale and Assignment Agreement by and between AMRESCO Commercial Finance, Inc. and AMREIT I, Inc. dated effective as of September 30, 1998 relating to three loans (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated September 30, 1998, which exhibit is incorporated herein by reference). 2.2 Sale and Assignment Agreement by and between AMRESCO Commercial Finance, Inc. and AMREIT I, Inc. dated effective as of September 30, 1998 relating to five loans (filed as Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated September 30, 1998, which exhibit is incorporated herein by reference). 2.3 Economics Equivalents and Funding Agreement by and between AMRESCO Commercial Finance, Inc. and AMREIT I, Inc. dated effective as of September 30, 1998 (filed as Exhibit 2.3 to the Registrant's Current Report on Form 8-K dated September 30, 1998, which exhibit is incorporated herein by reference). 3.1 Amended and Restated Declaration of Trust of the Registrant (filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-11 (Registration No. 333-45543), which exhibit is incorporated herein by reference). 3.2 First Amendment to Amended and Restated Declaration of Trust of the Registrant (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated May 12, 1998, which exhibit is incorporated herein by reference). 3.3 Second Amendment to Amended and Restated Declaration of Trust of the Registrant (filed as Exhibit 3.2 to the Registrant's Current Report on Form 8-K dated May 12, 1998, which exhibit is incorporated herein by reference). 3.4 Form of Bylaws of the Registrant (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-11 (Registration No. 333-45543), which exhibit is incorporated herein by reference). 10.1 Interim Warehouse and Security Agreement dated as of July 1, 1998 by and among Prudential Securities Credit Corporation and AMRESCO Capital Trust, AMREIT I, Inc. and AMREIT II, Inc. 10.2 Master Repurchase Agreement dated as of July 1, 1998 between Prudential-Bache International, Ltd. and AMRESCO Capital Trust, AMREIT CMBS I, Inc., AMREIT RMBS I, Inc. and AMREIT II, Inc. 11 Computation of Per Share Earnings. 27 Financial Data Schedule.
EX-10.1 2 INTERIM WAREHOUSE AND SECURITY AGREEMENT 1 EXHIBIT 10.1 - ------------------------------------------------------------------------------- INTERIM WAREHOUSE AND SECURITY AGREEMENT by and among PRUDENTIAL SECURITIES CREDIT CORPORATION as Lender and AMRESCO CAPITAL TRUST and AMREIT I, INC. and AMREIT II, INC. as, individually and collectively, Borrower Dated as of July 1, 1998 - ------------------------------------------------------------------------------- 2
TABLE OF CONTENTS Page Section I. The Loan............................................................................. 1 Section II. Loan Files and Custodian............................................................. 9 Section III. Representations, Warranties and Covenants............................................ 9 Section IV. Mandatory Partial Prepayment of Loan................................................. 13 Section V. Release of Loan Files Following Payment of Loan...................................... 15 Section VI. Servicing............................................................................ 15 Section VII. No Oral Modifications; Successors and Assigns; Assignment of Collateral........................................................................... 16 Section VIII. Reports.............................................................................. 16 Section IX. Events of Default.................................................................... 18 Section X. Remedies Upon Default................................................................ 20 Section XI. Indemnification...................................................................... 20 Section XII. Periodic Due Diligence Review........................................................ 21 Section XIII. Power of Attorney.................................................................... 22 Section XIV. Choice of Law; Agreement Constitutes Security Agreement.............................. 22 Section XV. Lender May Act Through Affiliates.................................................... 22 Section XVI. Notices.............................................................................. 22 Section XVII. Severability......................................................................... 24 Section XVIII. Counterparts......................................................................... 24 Section XIX. Additional Borrowers................................................................. 24 Section XX. No Exclusivity....................................................................... 24 Section XXI. Joint and Several Liability.......................................................... 24
i 3 Appendix I Certain Definitions Appendix II Representations and Warranties Exhibit A Form of Secured Note Exhibit B Form of Opinion Exhibit C Form of Credit Increase Confirmation and Note Amendment Exhibit D Form of Funding Notice Exhibit E Delivery Obligations Related to Wet-Ink Eligible Assets ii 4 INTERIM WAREHOUSE AND SECURITY AGREEMENT THIS INTERIM WAREHOUSE AND SECURITY AGREEMENT, dated as of July 1, 1998 (as amended or otherwise modified from time to time, this "Agreement") is by and among PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware corporation, having an office at 1220 N. Market Street, Wilmington, Delaware 19801 (the "Lender") and AMRESCO CAPITAL TRUST, a Texas real estate investment trust ("ACT"), AMREIT I, INC., a Delaware corporation ("AMREIT I") and AMREIT II, INC., a Nevada corporation ("AMREIT II"), each having its principal office at 700 North Pearl Street, Suite 2400, Dallas, Texas 75201 (individually and collectively, the "Borrower"). WHEREAS, the Lender intends to lend and the Borrower intends to borrow up to $400,000,000 to provide interim warehouse financing of Eligible Assets (as defined herein); and WHEREAS, the Lender's affiliate, Prudential Securities Incorporated ("PSI") pursuant to the Securitization Agreement (as defined herein) will be engaged as the placement agent or the underwriter, as the case may be (such role, the "Manager Role"), for each initial securitization (each such initial securitization is hereinafter referred to as the "First Securitization") involving the public or private placement of securities relating to the Pledged Eligible Assets (as defined herein) (the First Securitization and any subsequent securitization a "Securitization") to be sponsored by the Borrower (or by an Affiliate thereof) and collateralized by some or all of the Pledged Eligible Assets. Capitalized terms used herein and not otherwise specifically defined herein are defined in Appendix I hereto. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the parties hereto hereby agree as follows: Section I. The Loan. Subject to the terms of this Agreement: 1. Maximum Loan Amount. The Lender agrees to lend to the Borrower up to a maximum of $400,000,000 under this Agreement (such borrowing, the "Loan") to be made in one or more advances (each, an "Advance"); provided, however, that the aggregate outstanding Advances made in connection with one or more Construction Loans shall not exceed $150,000,000 at any one time without the prior written consent of the Lender. The Borrower agrees that the Loan shall be used to warehouse certain commercial mortgage loans and commercial real estate assets, including, but not limited to, Wet-Ink Eligible Assets, Mortgage Loans, Construction Loans, Mezzanine Loans, Bridge Loans, Rehabilitation Loans, Participating Loans, and Other Real Estate Assets as may be allowed hereunder or as otherwise approved in writing by the Lender (all of the foregoing described loans and other assets, collectively, "Eligible Assets"), provided that all Eligible Assets have been originated in accordance with the 1 5 Borrower's approved underwriting guidelines or otherwise have been approved by the Lender and such Eligible Assets are eligible to be included in a Securitization or other exit strategy, in each case as reasonably determined by Lender. The Eligible Assets to be pledged to the Lender hereunder shall be identified by the Borrower to the Lender in writing from time to time. Any Eligible Asset for which an Advance is made hereunder is hereinafter referred to as a "Pledged Eligible Asset." 2. Advances. (a) Each Advance shall be made, pursuant to the terms of this Agreement on a date prior to the Maturity Date referred to below (each such date, a "Funding Date"); provided that: (i) not later than (A) five Business Days prior to the proposed Funding Date for an Initial Advance, the Borrower shall deliver to the Lender a written underwriting transmittal in form satisfactory to Lender (an "Underwriting Transmittal") for each Eligible Asset proposed to be pledged in connection with such Initial Advance, and (B) two Business Days prior to the proposed Funding Date for an Initial Advance, the Borrower shall deliver to the Lender (i) a written notice (a "Funding Notice") in the form of Exhibit D hereto and (ii) a schedule, via facsimile, in a mutually satisfactory form to be agreed upon between the Borrower and the Lender, detailing certain specified characteristics of the Eligible Assets proposed to be pledged in connection with such Initial Advance (each such schedule, a "Commercial Loan/Asset Schedule"); (ii) the representations, warranties and covenants of the Borrower set forth in this Agreement shall be true and correct on and as of such Funding Date as if made on and as of such date; (iii) no Event of Default shall have occurred and be continuing or would exist after the making of the Advance on such Funding Date; (iv) the Lender shall have received (A) in connection with each Initial Advance other than an Advance relating to a Wet-Ink Eligible Asset, by no later than 12:00 noon (New York City time) on the related Funding Date, a certificate from the Custodian referred to below to the effect that it has reviewed the loan files relating to the Eligible Assets being pledged in connection with the Advance being made on such Funding Date and has found no material deficiencies in such loan files (the "Custodian's Certification") and (B) prior to the first Advance under this Agreement relating to a Pledged Eligible Asset, one or more legal opinion(s) from counsel (which may be in-house counsel) to the Borrower in the form of Exhibit B attached hereto and an executed copy of the Secured Note in the form of Exhibit A attached hereto; (v) for Eligible Assets other than Wet-Ink Eligible Assets, the Borrower shall have delivered or caused to be delivered to the Custodian all required documents with respect to the Eligible Assets being pledged to the Lender hereunder on such 2 6 Funding Date and for Wet-Ink Eligible Assets, the Borrower shall deliver or cause to be delivered to the Custodian all required documents with respect to such Wet- Ink Eligible Assets in accordance with the time frames and as specified in Exhibit E attached hereto; (vi) for Wet-Ink Eligible Assets, the Borrower shall have delivered facsimile copies of the following documents, each of which shall have been deposited in escrow with the title company: the certification that the Borrower has received all loan documents described in the closing instruction letter to the title company; the executed promissory note with an assignment of such note from Borrower to Lender; an assignment of the mortgage from Borrower to Lender; and a signed copy of the closing instruction letter in a form mutually agreeable to Borrower and Lender. (vii) prior to the first Advance under this Agreement relating to a Pledged Eligible Asset, the Lender shall have received a complete and up-to-date copy of the Borrower's underwriting guidelines and closing procedures and Lender shall have approved such guidelines and closing procedures and, prior to each Advance, the Lender shall have approved all changes or modifications thereto, if any, that, in the reasonable judgment of the Lender, may result in a material relaxation of the standards or requirements contained in Borrower's underwriting guidelines or the closing procedures; (viii) prior to the first Advance under this Agreement relating to a Pledged Eligible Asset, the Lender shall have received a Secretary's Certificate of each Borrower, with copies of (A) ACT's Declaration of Trust and as to AMREIT I and AMREIT II, each such Borrower's respective certificate of incorporation, (B) the Borrowers' by-laws, and (c) a good standing certificate for each of the Borrowers (other than ACT); (ix) with respect to each Eligible Asset other than Wet-Ink Eligible Assets to be funded on each Funding Date, Lender shall have given its prior approval to allow an Advance with respect to such Eligible Asset and, to the extent not otherwise specified in this Agreement, established an Advance Rate for such Eligible Asset; (x) with respect to any Advance relating to Pledged Eligible Assets after the Initial Advance, Lender shall have received (a) a Funding Notice at least two Business Days prior to the date requested for funding such Advance, and (b) no change shall have occurred with respect to any material fact contained in the Underwriting Transmittal relating to the Pledged Eligible Asset; and (xi) to the extent described in Section IV(c) hereof, no notice described in said Section IV(c) shall have been received by the Lender. 3 7 (b) On any Funding Date relating to a Wet-Ink Eligible Asset, Lender will make an Advance for the amount requested by Borrower in a Funding Notice that includes a representation and warranty that such Wet-Ink Eligible Asset (i) has been underwritten in general accordance with Borrower's underwriting guidelines or meets current market parameters for securitization of such Wet-Ink Eligible Asset and (ii) is not a Construction Loan, provided, however, that the Advance Rate with respect to any such Advance shall be (x) 70% for any Wet-Ink Eligible Asset with a committed loan or investment amount of $25,000,000 or less and (Y) 50% for any Wet-Ink Eligible Asset with a committed loan or investment amount greater than $25,000,000 and provided, further, that the maximum amount of Advances outstanding at any one time that the Lender has either already funded or committed to fund without Lender's approval shall not exceed $50,000,000. (c) Lender agrees to approve or disapprove any Eligible Asset within five Business Days of receipt by Lender of the Underwriting Transmittal and the information and documents required in Section I(2); provided, however, that Lender shall have no obligation to make the first Advance under this Agreement in connection with any Funding Notice until Lender or Custodian, as applicable, shall also have received the documents required in Sections I(2)(I), (iv)(B), (vii) and (viii). Lender shall approve or disapprove such Eligible Asset within five Business Days and shall promptly confirm in writing any such decision not to finance such Eligible Loan. To the extent that an Advance has been made under Section (I)(2)(b) with respect to a Wet-Ink Eligible Asset, Lender shall fund the difference between an Advance for such Wet-Ink Eligible Asset determined in accordance with the provisions of Section I(3)(c) and the amount of the Advance previously made with respect to such Asset within two Business Days of a request therefor from Borrower. (d) Construction Loans and Other Real Estate Assets will be evaluated on an individual basis, with no minimum Advance Rate or Advanced Amount being committed to by Lender; provided, however, if approved by Lender for funding, the Advance Rate applicable to any Construction Loan or Other Real Estate Asset shall be not less than 50% of Budgeted Costs (as defined herein) (the "Minimum Advance Rate"). Notwithstanding the amount advanced by Borrower to the underlying mortgagor/borrower on a Construction Loan or Other Real Estate Asset, the only portion thereof that will qualify for consideration of an Advance by Lender is that portion representing the total construction budget (including interest carry and budgeted soft costs, but excluding any developer profit to the borrower or any affiliate of the borrower or the cost of any land in excess of the purchase price thereof) of the project or other asset, as applicable (collectively, "Budgeted Costs"), as further described in the underwriting guidelines. The Maximum Advanced Amount on Construction Loans will not exceed (i) 75% of Budgeted Costs where the underlying mortgagor/borrower is funding 5% or more of Budgeted Costs or (ii) 71.25% of the Budgeted Costs where the underlying mortgagor/borrower is funding less than 5% of Budgeted Costs. Lender shall not be obligated to make an Advance relating to a Construction Loan or Other Real Estate Assets more frequently than once in any calendar month, nor to make any Advance prior to Borrower and/or the underlying mortgagor/borrower having funded an amount which in the aggregate equals the difference between (x) Budgeted Costs approved by Lender and (y) the approved Advanced Amount. 4 8 (e) For any Pledged Eligible Asset with a Debt Service Coverage Ratio of less than 1.0, the Advance Rate for such Pledged Eligible Asset shall not exceed 80% of the Market Value of the loan and shall be deemed to be under Advance Rate Schedule A of Table I for purposes of determining the Applicable Interest Rate Spread. (f) In the event that Lender does not give its approval to any Eligible Asset for which an Advance is requested hereunder, or the Lender approves such Eligible Asset for an Advanced Amount or with an Advance Rate less than that requested by Borrower, Lender will make a good faith effort to review and discuss with Borrower the circumstances causing Lender to disapprove the proposed Eligible Asset or reduce the Advanced Amount or Advance Rate in order to try to resolve any differences between Lender and Borrower. The provisions of this Section 2(f) shall not impose any affirmative obligation on the part of Lender to resolve such differences. 3. Interest; Facilities Fee. (a) The Loan shall accrue interest daily on its outstanding principal amount, with interest calculated for the actual number of days elapsed based on a 360-day year. The interest rate (the "Interest Rate") on the Loan shall be (except as otherwise provided in Section X(D) hereof) the Applicable Interest Rate Spread plus LIBOR as determined by Lender as of 11:00 a.m. New York time on the Eurodollar Business Day immediately preceding each of (i) the related Funding Date and (ii) the first day of each succeeding calendar month. Interest which accrues during each calendar month shall be payable on the fifth Business Day of the following month with any outstanding interest due and payable in its entirety on the Maturity Date or, if extended, the Extended Maturity Date, or if earlier, the date of termination of this Agreement. "LIBOR" means (i) the rate (expressed as a percentage per annum) for one-month deposit in U.S. dollars that appears on Telerate Page 3750 as of 11:00 a.m., New York City time on the applicable Eurodollar Business Day for such period or (ii) if such rate does not appear on Telerate Page 3750 as of 11:00 a.m. New York City time, on the applicable Eurodollar Business Day, the rate (expressed as a percentage per annum) for one-month deposit in U.S. dollars as reported by Morgan Guaranty Trust Company of New York or its successor(or such other prime bank in the London Interbank market as Lender shall designate). "Eurodollar Business Day" means a Business Day in New York on which commercial banks are open for international business (including dealings in deposits in U.S. dollars) in London. (b) The Applicable Interest Rate Spread shall mean, as to each Pledged Eligible Asset, the applicable basis point spread ("BPS") determined by taking the LTV for the Eligible Asset and the Applicable Interest Rate Spread corresponding to such LTV from the following Table I based upon the Advance Rate Schedule selected by Borrower: 5 9 TABLE I APPLICABLE INTEREST RATE SPREAD
Basis Point Spread Basis Point Spread Maximum LTV Advance Rate Schedule A Advance Rate Schedule B ----------- ----------------------- ----------------------- 80% 100 BPS 100 BPS 85% 110 BPS 100 BPS 90% 125 BPS 100 BPS 95% 150 BPS 100 BPS 100% 150 BPS 100 BPS
Notwithstanding the foregoing, during any time that the cumulative balance of all Advanced Amounts outstanding on Construction Loans exceeds $60,000,000 ("Tranche B Floor"), the Applicable Interest Rate Spread shall mean the following:
Advanced Amount Applicable Interest Rate Spread --------------- ------------------------------- Tranche A = $0-$60,000,000 X = Determined in accordance with Table I above Tranche B - In excess of Y = 200 BPS $60,000,000
The initial Applicable Interest Rate Spread will be determined as to an Advance related to a Construction Loan on the applicable Funding Date based on the cumulative balance of all Advanced Amounts related to Construction Loans as of such date, and will be adjusted, if mandated by the provisions below, on the first day of each succeeding calendar month based on the cumulative balance of all Advanced Amounts related to Construction Loans as of such date. For example: On June 15, the cumulative balance of all Advanced Amounts related to Construction Loans is $50,000,000. On June 16, an additional Advance of $20,000,000 is made and the cumulative balance increases to $70,000,000. The initial Applicable Interest Rate Spread on $10,000,000 of such Advance (Tranche A) is X, and Y on the other $10,000,000 (Tranche B). If the cumulative balance of all Advanced Amounts related to Construction Loans is $65,000,000 on July 1, the Applicable Interest Rate Spread on $5,000,000 of the $10,000,000 Tranche B portion of such Advance described above is adjusted to X, such that $15,000,000 of such Advance is then allocated to Tranche A, and the Applicable Interest Rate Spread on the remaining $5,000,000 continues to be Y and that portion of the Advance continues to be allocated to Tranche B. If on August 1, the cumulative balance of all Advanced Amounts related to Construction Loans is $30,000,000, the Applicable Interest Rate Spread on all related Advances will be X. 6 10 The amount of each Advance with respect to a Pledged Eligible Asset (such amount, the "Advanced Amount") shall equal the amount agreed upon by Lender and Borrower, provided, however that for Construction Loans and Other Real Estate Assets, the Advance Amount shall not be less than the Minimum Advance Rate. The obligation to fund any Advance Amount on Loans with more than one Advance shall not arise until the borrower/mortgagor has funded the portion of Budgeted Costs required to be funded by the borrower/mortgagor and the Borrower has funded the difference between the Advanced Amount and the amount of the Pledged Eligible Asset, provided, however, that the Advanced Amount, when added to the sum of all prior Advances relating to such Pledged Eligible Asset shall not exceed the lesser of (i) for Construction Loans, 75% of the Budgeted Costs, or (ii) the product obtained by multiplying the Market Value (or if less, the par amount of such Pledged Eligible Asset) by the Advance Rate; or (iii) the Eligible Asset Value of such Pledged Eligible Asset. (c) For purposes of this Agreement: Advance Rate means, with respect to each Eligible Asset (excluding Construction Loans and other Real Estate Assets and subject to the terms of the immediately succeeding paragraph), the applicable rate determined in accordance with the following Table II:
TABLE II APPLICABLE ADVANCE RATE Advance Rate Schedule A Advance Rate Schedule B ---------- ---------- Maximum LTV 80% 95% 95% 85% 93% 87% 90% 90% 80% 95% 85% 75% 100% 80% 70%
Notwithstanding the foregoing, for any Pledged Eligible Asset with a Debt Service Coverage Ratio of less than 1.0, the Advance Rate for such Pledged Eligible Asset shall not exceed 80% of the Market Value of the Pledged Eligible Asset and shall be deemed to be under Advance Rate Schedule A of Table I for purposes of determining the Applicable Interest Rate Spread. 4. Maturity and Prepayment. (a) The Loan evidenced hereby shall mature on the Maturity Date (or if extended, the Extended Maturity Date) and all amounts outstanding hereunder shall be due and payable on each Maturity Date or Extended Maturity Date. If the 7 11 Loan is not extended by means of a Credit Increase Confirmation and Note Amendment, the Loan shall immediately and automatically become due and payable without any further action by the Lender on the Maturity Date or any Extended Maturity Date, and in the event of non-payment in full on such Maturity Date or Extended Maturity Date the Lender may exercise all rights and remedies available to it as the holder of a first perfected security interest under the Uniform Commercial Code of the State of New York (the "New York UCC"). Notwithstanding the foregoing, unless otherwise extended in writing by Lender, all Advances made with respect to any Pledged Eligible Asset and any accrued and unpaid interest thereon are due and payable in full on or before the earlier of this Maturity Date and the date which is 9 months after the Funding of the Initial Advance with respect to such Pledged Eligible Asset, provided, however, such period shall be 18 months for Advances made within 9 months of the effective date of this Agreement, unless such date is extended by the Lender, in its sole discretion. (b) The Loan is pre-payable at any time without premium or penalty, in whole or in part; provided, that in connection with any prepayment of the Loan in part (other than any prepayment pursuant to Section I(4)(a), Section IV(A) or (B) or any prepayment resulting from a payment in full of the Pledged Eligible Asset by the underlying borrower, in which case such Pledged Eligible Assets shall be released by the Lender upon payment in full of the related Advance), Pledged Eligible Assets may not be removed from this facility with the result that, in the Lender's sole discretion a Collateral Deficiency Situation would then exist unless the Borrower cures such Collateral Deficiency Situation in accordance with the provisions of Section IV(D). If the Borrower intends to prepay the Loan in whole or in substantial part from a source other than the proceeds of a Securitization, payment in full by the underlying borrower, or as a result of some other exit strategy approved by Lender, the Borrower shall give two Business Days' written notice to the Lender. Any principal repayments received from any underlying borrower shall be paid directly to the Lender in an amount that equals the Advance Rate applicable to such Pledged Eligible Asset times the principal repayment; provided, however, at the Borrower's written election and unless otherwise provided to the contrary by Lender, any principal repayments received by the Borrower may be applied against any unfunded Advance Amount applicable to a Pledged Eligible Asset which the Lender is otherwise obligated to advance to Borrower in accordance with this Agreement. Any written notice by the Borrower with respect to such scheduled amortization payments shall specify which Pledged Eligible Asset such prepayment is being applied towards. Any amounts pre-paid under this Agreement prior to each Maturity Date may be re-borrowed, subject to the terms and conditions of this Agreement, until such Maturity Date. In the event that the Loan is extended beyond its then scheduled Maturity Date by means of a Credit Increase Confirmation and Note Amendment, the factors set forth in the definitions of "Advanced Amount," "Collateral Deficiency Situation" and "Restoration Amount" may be revised by the Lender in its sole and reasonable discretion. 5. Break-up Fee. Subject to the terms and conditions of the Securitization Agreement, Lender may be entitled to a break-up fee with respect to the disposition of Pledged Eligible Assets, including securitizations involving such assets as well as the sale and transfer of such assets. 8 12 6. Secured Note. The Loan shall be evidenced by the secured promissory note of the Borrower in the form attached hereto as Exhibit A (the "Secured Note"). Section II. Loan Files and Custodian. The Borrower shall deliver to Bank One, Texas, N.A., as custodian on behalf of the Lender, or such other custodian that may be mutually agreeable to the Lender and the Borrower from time to time (the "Custodian"), with respect to each Pledged Eligible Asset, the documents and instruments listed in Section 2 of that certain Custodial Agreement, dated as of July 1, 1998 (as amended and modified from time to time, the "Custodial Agreement"), among the Lender, the Borrower and the Custodian. The Pledged Eligible Assets, the documents and instruments evidencing and relating to the Pledged Eligible Assets (collectively, the "Commercial Loan/Asset Files"), the collateral securing such Pledged Eligible Assets, together with any proceeds thereof, are hereinafter referred to as the "Collateral". The Borrower hereby pledges all of its right, title and interest in and to the Collateral to the Lender to secure the repayment of principal of and interest on the Loan and all other amounts owing by the Borrower to the Lender hereunder or under any other agreement or arrangement now existing or hereinafter entered into among such parties (collectively, the "Secured Obligations"). Section III. Representations, Warranties and Covenants. A. The Borrower represents and warrants to the Lender that, except as otherwise disclosed and approved by Lender: 1. Each Borrower has been duly organized and is validly existing as (i) with respect to ACT, a real estate investment trust duly organized under the laws of the State of Texas, (ii) with respect to AMREIT I, a corporation duly organized and in good standing under the laws of the State of Delaware, and (iii) with respect to AMREIT II, a corporation duly organized and in good standing under the laws of the State of Nevada. 2. Each Borrower is duly licensed or is otherwise qualified in each state in which it transacts business to the extent required under applicable law except where the failure to take such action would not (either individually or in the aggregate) have a Material Adverse Effect and is not in default of such state's applicable laws, rules and regulations. Each Borrower has the requisite power and authority and legal right to own and grant a lien on all of its right, title and interest in and to the Collateral, and to execute and deliver, engage in the transactions contemplated by, and perform and observe the terms and conditions of, this Agreement, the Custodial Agreement and the Secured Note. 3. At all times after the Custodian has received a Pledged Eligible Asset from the Borrower and until payment in full of the Loan, a Borrower will not knowingly and intentionally commit any act in violation of applicable laws, or regulations promulgated with respect thereto. 4. Each Borrower is solvent and no condition exists under any mortgage, borrowing agreement or other instrument or agreement pertaining to indebtedness for borrowed money to which any Borrower is a party which (either individually or in the aggregate) has caused, or 9 13 would be reasonably likely to cause, a Material Adverse Effect, and the execution, delivery and performance by the Borrowers of this Agreement, the Secured Note and the Custodial Agreement do not conflict with any term or provision of the declaration of trust or certificate of incorporation, as applicable, or by-laws of the Borrowers or any law, rule, regulation, order, judgment, writ, injunction or decree applicable to the respective Borrowers of any court, regulatory body, administrative agency or governmental body having jurisdiction over the Borrowers and will not result in any violation of any such mortgage, instrument or agreement. 5. All financial statements or certificates of any Borrower, any Affiliate of the Borrowers or any of its officers furnished to the Lender are true and complete in all material respects and do not omit to disclose any material liabilities or other facts relevant to the Borrowers' or such Affiliate's condition. All such financial statements (other than any financial statements prepared to show Borrower's taxable income) have been prepared in accordance with GAAP; provided, that interim financial statements shall not be required to and may not include footnotes. 6. No consent, approval, authorization or order of, registration or filing with, or notice to any governmental authority or court is required under applicable law in connection with the execution, delivery and performance by any Borrower of this Agreement, the Secured Note or the Custodial Agreement. 7. Except as otherwise disclosed to and approved by Lender prior to the Initial Advance or disclosed to Lender for clause (C) below, there is no action, proceeding or investigation pending with respect to which any Borrower has received service of process or, to the best of any Borrower's knowledge, threatened against it before any court, administrative agency or other tribunal (A) asserting the invalidity of this Agreement, the Secured Note or the Custodial Agreement, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement, the Secured Note or the Custodial Agreement, or (C) which if determined against any Borrower would materially and adversely affect the validity or collectability of the Pledged Eligible Assets or the performance by the Borrower of its obligations under, or the validity or enforceability of, this Agreement, the Secured Note or the Custodial Agreement. 8. Except as otherwise disclosed to and approved by Lender prior to the Initial Advance, and, after the Initial Advance, as disclosed to Lender from time to time (and subject to Lender's rights hereunder to declare a Collateral Deficiency Situation), there is no action, proceeding or investigation pending with respect to which any Borrower has received service of process, or to the best of Borrower's knowledge, threatened against it before any court, administrative agency or other tribunal challenging the enforceability of any material mortgage loan document relating to a Pledged Eligible Asset or raising a defense to the exercise of any remedies under such mortgage loan documents. 9. Except as otherwise disclosed to and approved by Lender, no event has occurred which has caused a Material Adverse Effect since the date set forth in the financial statements supplied to the Lender. 10 14 10. This Agreement, the Secured Note and the Custodial Agreement have been duly authorized, executed and delivered by each Borrower, all requisite trust or corporate action, as applicable, having been taken, and each is valid, binding and enforceable against the respective Borrower in accordance with its terms except as such enforcement may be affected by bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance, redemption or other similar laws affecting the enforcement of creditor's rights generally, or by general principles of equity. B. With respect to every Pledged Eligible Asset, the Borrower represents and warrants to the Lender that except as otherwise disclosed to and approved by Lender prior to the Initial Advance: 1. Such Pledged Eligible Asset and all accompanying collateral documents obtained and required to be obtained in connection with the Pledged Eligible Assets are complete and authentic and all signatures thereon are genuine. 2. Such Pledged Eligible Asset arose from a bona fide loan or contract, as applicable, complying in all material respects with all applicable State and Federal laws and regulations, and is not subject to any valid defense, set-off or counterclaim. 3. Except as set forth in Section III(B)(9) below, no default has occurred in any provisions of such Pledged Eligible Asset. 4. With respect to such Pledged Eligible Asset, all amounts represented to be payable on the related Promissory Note or other contract are, in fact, payable pursuant to the provisions of such Promissory Note or other contract. 5. To the best of the Borrower's knowledge, any property subject to any security interest given in connection with such Pledged Eligible Asset is not subject to any other encumbrances other than "permitted encumbrances" that may be allowed under the Borrower's underwriting guidelines approved by the Lender or as described in the Underwriting Transmittal. 6. The Borrower holds good and indefeasible title to, and is the sole owner of, such Pledged Eligible Asset and as of the related Funding Date, such Pledged Eligible Asset is not subject to any liens, charges, mortgages, encumbrances or rights of any person other than Lender except (a) such liens that are to be released simultaneously with the pledge to the Lender hereunder or (b) as has otherwise been approved by the Lender in writing. 7. Each Pledged Eligible Asset conforms to the description thereof as set forth on the related Commercial Loan/Asset Schedule delivered to the Custodian and the Lender. 8. All applicable disclosures required by the Real Estate Settlement Procedures Act, by Regulation X promulgated thereunder and by Regulation Z of the Board of Governors of the Federal Reserve System promulgated pursuant to the statute commonly known as the Truth-in- 11 15 Lending Act and the Notice of the Right of Rescission required by said statute and regulation have been properly made and given. 9. Except as otherwise disclosed in the Underwriting Transmittal, as of the first Funding Date under this Agreement or any subsequent Funding Date, such Pledged Eligible Asset is not 31 or more days delinquent as of the last payment due date for such Pledged Eligible Asset and since inception such Pledged Eligible Asset has not been 31 or more days delinquent on more than one occasion. 10. The Pledged Eligible Assets do not have characteristics which are materially worse than those of other similar Eligible Assets financed by the Borrower during the twelve-month period preceding the first Funding Date under this Agreement. 11. To the extent applicable, the representations and warranties set forth in Appendix II are true in all material respects as to the Pledged Eligible Assets as of the date of closing of each such Pledged Eligible Asset except as disclosed in the related Underwriting Transmittal prepared and delivered by the Borrower. 12. Each Pledged Eligible Asset was originated pursuant to the Borrower's written underwriting guidelines (including any amendments and modifications thereto) heretofore provided to, and approved by, the Lender, except for such material exceptions which have been disclosed to, and where required hereunder pre-approved by, the Lender in the Underwriting Transmittal. 13. On the applicable Funding Date for any Advance funded pursuant to Section I(2)(b) without the Lender's approval as provided in such section, Borrower will have sufficient cash, cash-equivalent reserves or additional borrowing capacity through an alternate borrowing facility to repay the amount of such Advance if Lender determines in its reasonable judgment that such Pledged Eligible Asset does not meet the Borrower's underwriting guidelines. C. The Borrower covenants with the Lender that, during the term of this facility: 1. Tangible Net Worth. ACT, on a consolidated basis, shall maintain Tangible Net Worth and a schedule showing Tangible Net Worth (and shall deliver prior to the first Advance under this Agreement, a schedule showing Tangible Net Worth) in an amount not less than the sum of (i) $100 million, plus (ii) seventy-five percent (75%) of the net cash proceeds of any equity subsequently raised by Borrower in any public or private offering, as of the last day of any calendar quarter. 2. REIT Status. ACT shall conduct its business so as to qualify as a real estate investment trust ("REIT") as defined in Section 856 of the Code, shall elect to be taxed as a REIT for its taxable year ending December 31, 1998. The Borrower does not know of any currently existing event or condition which would cause or is reasonably likely to cause the Company to fail to qualify as a REIT. If Borrower does, however, at any point decide to forego qualification as a REIT under the Code, the Lender shall have no further obligation to fund 12 16 additional Advances, provided, however, that all Advances outstanding shall not be accelerated solely for failure of this covenant. 3. Underwriter. Subject to the provisions of Section I(5), PSI shall have the right to be engaged in the Manager Role during the term of this Agreement as provided in the Securitization Agreement. 4. Licenses. With respect to each state in which the Borrower is not licensed or otherwise qualified to do business, upon (i) meeting the requirements which make it subject to such licensing or qualification in any such state or (ii) the advice of counsel that the Borrower become licensed or qualified, the Borrower shall either (x) become licensed or otherwise become qualified to do business in each such state or (y) cease doing business in such state relating to Pledged Eligible Assets subject to this Agreement except in either instance described in (x) or (y) the failure to take such action would not (either individually or in the aggregate) have a Material Adverse Effect. 5. Coverage Ratio. ACT, on a consolidated basis, shall not permit the Coverage Ratio at the end of any calendar quarter to be less than 1.4 to 1. 6. Leverage Ratio. The Total Indebtedness of Borrower shall not exceed, at the end of any calendar quarter, 400% of shareholders' equity, as determined in accordance with GAAP. 7. Delivery of Documents. If requested by lender the Borrower will deliver to Lender copies of each of the documents to be delivered to the custodian under the Custodial Agreement and the Lender shall be entitled to rely on each of the representations and warranties in favor of the Custodian contained therein. 8. Standard Loan Documents. The Borrower will use, or cause to be used, standard loan documents for each Pledged Eligible Asset, in form and substance satisfactory to the Lender, modified, as necessary in the reasonable opinion of Borrower and consistent with institutional lending documentation to conform to terms of the transaction involved, provided that such loan documents contain customary provisions in institutional loan documents protective of Lender's interests under such loan documents and which are adequate for the realization against the collateral securing the Mortgage Loan, subject to any limitations imposed by (a) bankruptcy, reorganization, fraudulent conveyance, moratorium, redemption or other similar laws affecting the enforcement of creditor's rights generally and (b) general equity principles (regardless of whether such enforcement is considered in a proceeding in equity or in law). Section IV. Mandatory Partial Prepayment of Loan. A. Upon discovery by the Borrower or the Lender of any breach of any of the representations, warranties or covenants set forth in this Agreement, the party discovering such breach shall promptly give notice of such discovery to the other. The Lender has the right to require, in its unreviewable discretion, the Borrower to repay the Loan in part with respect to 13 17 any Pledged Eligible Asset (i) as to which there has been a material breach of one or more of the representations, warranties or covenants listed in Section III(B) preceding (notwithstanding any qualification therein as to the Borrower's knowledge) or (ii) which is not a Construction Loan, Rehabilitation Loan, a Mezzanine Loan or Other Real Estate Asset and is determined by the Lender to be unacceptable for inclusion in any Securitization. B. If any Pledged Eligible Asset, as indicated on any Supplemental Commercial Loan/Asset Schedule delivered pursuant to Section VII(A) hereof or otherwise, becomes 31 or more days delinquent, Lender may require the Borrower to prepay the Loan in part with respect to such Pledged Eligible Asset, or, with the Lender's consent, deliver a qualifying substitute Eligible Asset in its place. Any such Pledged Eligible Asset which becomes 31 or more days delinquent will be subject to an immediate re-determination of its Market Value. At the request of the Borrower, upon delivery of a qualifying substitute Eligible Asset or payment in full of all Advances related to such delinquent Pledged Eligible Asset, the Lender agrees to cause to be released from the lien hereof the Pledged Eligible Asset and the documents described as Mortgage Documents in the Custodial Agreement. C. If, on any date other than a Funding Date, the Lender determines that a Collateral Deficiency Situation exists, the Lender shall so notify the Borrower, and the Borrower, within ten Business Days (five (5) Business Days to the extent the Collateral Deficiency Situation relates to a Pledged Eligible Asset which was not subject to Lender's separate approval rights as provided in Section I(2)(b)), shall either (i) pay to the Lender the Restoration Amount or (ii) deliver to the Custodian on behalf of the Lender additional Eligible Assets having an aggregate Market Value at least equal to the Restoration Amount. In the event that the Lender determines that a Collateral Deficiency Situation exists due to a reduction in the Market Value of one or more of the Pledged Eligible Assets, Lender will make a good faith effort to review and discuss with the Borrower the circumstances causing a Collateral Deficiency Situation to exist (but only if such circumstances are related to issues other than changes in interest rates, mortgage whole loan trading yield spreads, or securitization issuance/trading yield spreads) and to attempt to resolve any difference of opinion in such Market Value with Borrower within the period specified above. D. Additional Advances for Excess Collateral. In the event that Borrower has a good faith belief that the Eligible Asset Value of a Pledged Eligible Asset has increased as a result of an increase in its DSCR or other means supportable by Borrower and agreed to by Lender in its sole discretion, so long as no Default or Event of Default has occurred and is continuing: 1. Borrower may prepare a Request for Additional Advance in a form satisfactory to Lender ("Request for Additional Advance"), specifying (i) the Pledged Eligible Asset(s) and Advance Amount for which an Advance is sought and the requested Funding Date, (ii) the Borrower's determination of the new Eligible Asset Value and DSCR with respect to such Pledged Eligible Asset, and (iii) an Underwriting Transmittal supporting the increase in Eligible Asset Value and DSCR. 14 18 2. Borrower may transmit the Request for Additional Advance by facsimile transmission to Lender. Upon review of the Request for Additional Advance and confirmation that, after giving effect to the requested Additional Advance, Lender determines that a Collateral Deficiency situation will not exist the Lender may, in its sole discretion, decide to approve the Additional Advance and countersign the Request for Additional Advance and may advance funds in the amount set forth in such Request for Additional Advance. In the event that the Lender's assessment of the Market Value of the Pledged Eligible assets would alter the information set forth in any Request for Additional Advance, the Lender shall promptly notify the Borrower in writing of such assessment. 3. The Lender shall not be obligated to countersign a Request for Additional Advance. E. Hedging. Lender will advise PSI to recommend and provide quotes for Interest Rate Protection Agreements in connection with Pledged Eligible Assets and Eligible Assets in process. Any Interest Rate Protection Agreements shall be priced "at market" and subject to a "check away" mechanism. In determining whether a Collateral Deficiency Situation exists, Lender will offset any increase in fair market value of any Interest Rate Protection Agreements in which Lender has been granted a first-lien security interest against any decrease in Market Value relating to the Pledged Eligible Assets, and Lender shall offset any increase in Market Value of the Pledged Eligible Assets against any Hedge Loss related to Interest Rate Protection Agreements in which Lender has been granted a first-lien security interest. Section V. Release of Loan Files Following Payment of Loan. The Lender agrees to cause to be released from the lien hereof the Pledged Eligible Assets and the documents described as Mortgage Documents in the Custodial Agreement at the request of the Borrower upon payment in full of the Loan, or, if a partial payment of the Loan occurs, the Pledged Eligible Assets and the related documents held by the Custodian relating to the Advances being repaid associated with such Pledged Eligible Assets; provided, that, with respect to payments in full of any Pledged Eligible Asset, the Borrower agrees to (i) provide the Lender with a copy of a report from the Borrower, as servicer, or a subservicer of Borrower, or a certification indicating that such Pledged Eligible Asset has been paid in full and (ii) pay to the Lender in full all outstanding Advances with respect to such Pledged Eligible Asset (subject to the Borrower's rights under Section I(4)(b)). The Lender agrees to release such lien within one Business Day after receipt of both (i) and (ii) from the immediately preceding sentence. Section VI. Servicing. The Borrower shall service or cause the Pledged Eligible Assets to be serviced (i) in accordance with the provisions of the Management Agreement executed in connection with the servicing of the Eligible Assets and (ii) with the degree of skill and care consistent with that which the Borrower customarily exercises with respect to similar Eligible Assets owned, managed, or serviced by it and all applicable industry standards. The Borrower shall (i) comply with all applicable Federal and State laws and regulations, (ii) maintain all State and Federal licenses, except where the failure to take such action would not (either individually or in the aggregate) have a Material Adverse Effect, necessary for it to perform its servicing 15 19 responsibilities hereunder and (iii) not impair the rights of the Lender in any Pledged Eligible Assets or any payment thereunder. Section VII. No Oral Modifications; Successors and Assigns; Assignment of Collateral. No provisions of this Agreement shall be waived or modified except by a writing duly signed by the authorized agents of the Lender and the Borrower. This Agreement shall be binding upon the successors and assigns of the parties hereto. Borrower acknowledges and agrees that Lender may re-pledge, enter into repurchase transactions, and otherwise re-hypothecate (including the granting of participation interests therein, provided that any such participation and re-hypothecation does not materially increase any obligation of Borrower hereunder) the Collateral for the Loan; provided, that no such act shall in any way affect the Borrower's rights to the Collateral. Section VIII. Reports. A. The Borrower shall provide the Lender with a report (a "Supplemental Commercial Loan/Asset Schedule") (i) on the date any additional or substitute Eligible Assets are delivered pursuant to Section IV(B) or Section IV(D) hereof and at least (a) two Business Days before each Funding Date for any Eligible Asset other than a Wet-Ink Eligible Asset and (b) the 15th day of the month, and (ii) within two Business Days following any request by the Lender or any affiliate thereof for such a schedule. Such Supplemental Commercial Loan/Asset Schedule will contain information concerning (a) the Pledged Eligible Assets then held in this warehouse facility, (b) any Eligible Assets proposed to be delivered to the facility on the next Funding Date or in connection with the cure of a Collateral Deficiency Situation pursuant to Section IV(B) or Section IV(D) hereof and (c) the portfolio performance data with respect to all Pledged Eligible Assets, including, without limitation, any outstanding delinquencies, prepayments in whole or in part and any repurchases by the Borrower, and shall be in a format as may be agreed upon by the Borrower and the Lender from time to time. The Borrower shall also provide to the Lender every two weeks a pipeline report, indicating the status of pending transactions, including transactions for which a term sheet or other proposal has been submitted, the status of all deals in which commitments have been granted, the expected closing/funding date, and which loans included on such list the Borrower anticipates will become Pledged Eligible Assets, in a form satisfactory to Lender. Each such report in this paragraph shall be transmitted by the Borrower to the Lender via facsimile, except for each monthly report which shall be transmitted by the Borrower to the Lender either via modem or on a computer disk or tape. B. The Borrower shall furnish to Lender (x) promptly, copies of any material and adverse notices (including, without limitation, notices of defaults, breaches, potential defaults or potential breaches) given to or received from the Borrower's or any Affiliate's other lenders, (y) immediately, notice of the occurrence of any "Event of Default" hereunder or of any situation which the Borrower, with the passage of time, reasonably expects to develop into an "Event of Default" hereunder and (z) the following: 16 20 (i) consolidated audited financial statements of ACT within 120 days of the end of each calendar year, together with a calculation showing Tangible Net Worth; (ii) unaudited financial statements of AMREIT II within 120 days of such Borrower's fiscal year end, certified by such Borrower's Chief Financial Officer or Controller, or the Chief Financial Officer, Treasurer of Controller of AMREIT Managers, L.P. (the "Manager"); (iii) within 60 days after the end of each calendar quarter consolidated unaudited financial statements of ACT, and unaudited financial statements for AMREIT II, respectively, for each of such Borrower's first three quarters of each fiscal year together with a calculation showing Tangible Net Worth; (iv) quarterly and annual consolidated and consolidating financial statements of ACT within five Business Days of their release; and (v) copies of all 10-Ks, registration statements and other "corporate finance" SEC filings (other than 8-Ks) by the Borrower and its Affiliates, within fifteen Business Days of their filing with the SEC; provided, that, ACT will provide Lender with a copy of ACT's annual 10-K filed with the SEC no later than 120 days after the end of the year. All required financial statements, information and reports shall be prepared in accordance with GAAP, or, if applicable to SEC filings, SEC accounting regulations; provided, that interim financial statements do not need to include footnotes. C. In conjunction with the delivery of each of the financial statements to be delivered by the Borrower pursuant to Sections VIII(B)(I) through (v), the Borrower shall deliver to the Lender an officer's certificate of the Borrower certifying that, as of the date of delivery of such financial statements, the Borrower is in compliance with all the terms of this Agreement including, without limitation, each of the covenants set forth in Section III(C). D. Lender covenants and agrees to preserve the confidentiality of any financial data concerning Borrower, any Affiliate of Borrower, or any Borrower's businesses or operations or any information with respect to which Borrower or any Affiliate has (a) an obligation of confidentiality to a third party (to the extent such obligation has been disclosed to Lender) or (b) informed Lender of the confidential nature of the specific information, except to the extent Lender is required to disclose such information pursuant to any applicable law, rule, regulation or order of any governmental authority; provided that (i) any information contained in any annual report, or any Form 10-K, Form 10-Q or Form 8-K reports (if any) which have been delivered to the SEC, or any annual or quarterly reports to the stockholders of Borrower subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, proxy material delivered to the stockholders of any Borrower or any report delivered to the SEC, or any other information that is in the public domain or has become publicly known, shall not in any event be deemed confidential, and (ii) Lender may make any information received by it available (A) to a transferee of or participant in any interest in the Secured Note, provided that such transferee or participant agrees in writing to be bound by the provisions of this Section 17 21 VIII(D), (B) to any accountants or other professionals engaged by Lender, provided that each such accountant or professional agrees to be bound by the provisions of this Section VII(D), or (c) in connection with the enforcement of this Agreement or any litigation in connection therewith. Further, Lender agrees that, during the term of this Agreement it will not intentionally use the information provided by Borrower and not otherwise generally known or obtainable through sources other than Borrower to take any action to personally, by telephone or mail, solicit any underlying borrower for any purpose which is in conflict with the services and products which Borrower is providing or can provide with Borrower's current products and services to such underlying borrower, including to refinance loans made by Borrower to such underlying borrower, without the prior written consent of Borrower. Section IX. Events of Default. Each of the following shall constitute an "Event of Default" hereunder: A. Failure of the Borrower to (i) make any payment of interest or principal which has become due, whether by acceleration or otherwise, under the terms of the Secured Note, this Agreement, any other warehouse and security agreement or any other document evidencing or securing indebtedness of the Borrower to the Lender or to any affiliate of the Lender or any other lender, unless in each instance the indebtedness was specifically non-recourse by its terms and Borrower and the lender under such indebtedness are not in litigation as a result of such loan default, (ii) pay or deliver any Restoration Amount within the time period specified in Section (IV)(c), or (iii) make a payment of any other amount payable under the terms of this Agreement or the Secured Note and such default shall have remained unremedied for five Business Days after notice thereof by Lender. B. A final judgment or judgments for the payment of money in excess of $5,000,000 in the aggregate shall be rendered against the Borrower or any of its Qualified or Non-Qualified REIT Subsidiaries by one or more courts, administrative tribunals or other bodies having jurisdiction and the same shall not be discharged (or provision shall not be made for such discharge), bonded or paid, or a stay of execution thereof shall not be procured, within 60 days from the date of entry thereof, and the Borrower or any such Qualified REIT Subsidiary and NonQualified REIT Subsidiary shall not, within said period of 60 days, or such longer period during which execution of the same shall have been stayed or bonded, appeal therefrom and cause the execution thereof to be stayed during such appeal. C. Assignment or attempted assignment by the Borrower of this Agreement or any rights hereunder, without first obtaining the specific written consent of Lender, or the granting by the Borrower of any security interest, lien or other encumbrance on any Pledged Eligible Assets to any person other than the Lender. D. The filing by the Borrower of a petition for liquidation, reorganization, arrangement or adjudication as a bankrupt or similar relief under the bankruptcy, insolvency or similar laws of the United States or any state or territory thereof or of any foreign jurisdiction; the failure of the Borrower to secure dismissal of any such petition filed against it within 60 days of such filing; the making of any general assignment by the Borrower for the benefit of 18 22 creditors; the appointment of a receiver or trustee for the Borrower, or for any part of the Borrower's; the institution by the Borrower of any other type of insolvency proceeding (under the Bankruptcy Code or otherwise) or of any formal or informal proceeding, for the dissolution or liquidation of, settlement of claims against, or winding up of the affairs of, the Borrower; the institution of any such proceeding against the Borrower if the Borrower shall fail to secure dismissal thereof within 60 days thereafter; the consent by the Borrower to any type of insolvency proceeding against the Borrower (under the Bankruptcy Code or otherwise); the occurrence of any event or existence of any condition which could be the ground, basis or cause for any proceeding or petition described in this Section IX. E. Any material adverse change in the financial condition of the Borrower or the existence of any other condition which, in the Lender's sole determination reasonably exercised, constitutes an impairment of the Borrower's ability to perform its obligations under this Agreement or the Secured Note and which condition is not remedied within ten (10) days after written notice to the Borrower thereof or, if the conditions cannot be fully remedied within said ten (10) days, substantial progress has not been made within said ten (10) days toward remedy of the condition. For purposes of this Section IX(E), a breach of any financial covenant set forth in Sections III(C)(1), (5) and (6) shall be deemed to be a material adverse change in the financial condition of the Borrower constituting an impairment of the Borrower's ability to perform its obligations under this Agreement. F. Failure by the Borrower to service the Pledged Eligible Assets in substantial compliance with the servicing requirements set forth in Section VI hereof and such failure continues unremedied for a period of thirty days after notice thereof from Lender. G. Except as set forth in Section IX(E), above, a material breach by the Borrower of any representation, warranty or covenant set forth herein or in any Funding Notice, in the form of Exhibit D attached hereto, delivered by the Borrower to the Lender, and such breach relating to any other covenant herein remains unremedied for a period of 30 days after notice thereof from Lender or, if such breach is not reasonably susceptible to cure with such 30-day period, such longer period as may be reasonably required (but in no event in excess of 120 days in the aggregate) to cure such breach as long as Borrower has commenced such cure within the 30-day period and diligently prosecutes same to the satisfaction of Lender, or a use by the Borrower of the proceeds of the Loan for a purpose other than as set forth in Section I(1) hereof. H. Except with respect to non-recourse obligations of Borrower as provided in Section IX(A), any "event of default" under any agreement between the Borrower and the Lender or any affiliate of the Lender, after the expiration of any applicable grace or cure periods set forth in such agreement, including, without limitation, defaults under the Securitization Agreement or the Custodial Agreement. 19 23 Section X. Remedies Upon Default. A. Upon the happening of one or more Events of Default, the Lender may (x) refuse to make further Advances hereunder and (y) immediately declare the principal of the Secured Note then outstanding to be immediately due and payable, together with all interest thereon and fees and expenses accruing under this Agreement; provided, that upon the occurrence of the Event of Default referred to in Section IX(D), such amounts shall immediately and automatically become due and payable without any further action by any person or entity. Upon such declaration or such automatic acceleration, the balance then outstanding on the Secured Note shall become immediately due and payable without presentation, demand or further notice of any kind to the Borrower. B. Upon the happening of one or more Events of Default, the Lender shall have the right to obtain physical possession, and to commence an action to obtain physical possession, of all files of the Borrower relating to the Collateral and all documents relating to the Collateral which are then or may thereafter come in to the possession of the Borrower or any third party acting for the Borrower. The Lender shall be entitled to specific performance of all agreements of the Borrower contained in this Agreement. The Borrower and the Lender hereby acknowledge that the Lender's right to obtain physical possession of the Collateral is deemed for all purposes to be equivalent to the rights of "seizure of property or maintenance or continuation of perfection of an interest in property" as specified under Bankruptcy Code Sections 362(b) and 546(b)(2). C. Upon the happening of one or more Events of Default, the Lender shall have the right to direct all servicers and/or subservicers then servicing any Pledged Eligible Assets to remit all collections on the Pledged Eligible Assets to the Lender, and if any such payments are received by the Borrower, the Borrower shall not commingle the amounts received with other funds of the Borrower and shall promptly pay them over to the Lender. In addition, the Lender shall have the right to dispose of the Collateral as provided herein, or as provided in the other documents executed in connection herewith, or in any commercially reasonable manner, or as provided by law. Such disposition may be on either a servicing-released or a servicing-retained basis. The Lender shall be entitled to place the Pledged Eligible Assets which it recovers after any default in a pool for issuance of asset-backed securities at the then-prevailing price for such securities and to sell such securities for such prevailing price in the open market as a commercially reasonable disposition of Collateral, subject to the applicable requirements of the New York UCC. The Lender shall also be entitled to sell any or all of such Eligible Assets individually for the prevailing price as a commercially reasonable disposition of Collateral subject to the applicable requirements of the New York UCC. The specification in this Section of manners of disposition of collateral as being commercially reasonable shall not preclude the use of other commercially reasonable methods (as contemplated by the New York UCC) at the option of the Lender. D. Following the occurrence and during the continuance of an Event of Default, interest shall accrue on the Loan at a default interest rate of LIBOR plus 5.00%. Section XI. Indemnification. (a) The Borrower agrees to hold the Lender harmless from and indemnifies the Lender against all liabilities, losses, damages, judgments, costs and expenses 20 24 of any kind which may be imposed on, incurred by, or asserted against the Lender relating to or arising out of this Agreement, the Secured Note, the Custodial Agreement or any transaction contemplated hereby or thereby resulting from anything other than the Lender's gross negligence or willful misconduct (b) The Borrower shall reimburse the Lender for any of the Lender's reasonable out-of-pocket costs and expenses incurred in connection with the negotiation, execution and enforcement of this Agreement, the Secured Note and the Custodial Agreement, the Securitization Agreement and the transactions contemplated hereby and thereby including, without limitation, due diligence review costs, reasonable attorney's fees and, subject to Section XII below, any other costs and expenses incurred by the Lender in determining the acceptability to the Lender of (i) any Eligible Assets. (c) The Borrower shall indemnify and hold Lender harmless against all liabilities, losses, damages, judgments, costs and expenses of any kind which may be imposed on, or asserted against the Lender and relating to arising out of any Hedge Loss or other loss relating to any hedging instrument, except for losses caused by the Lender's negligence or willful misconduct. The Borrower's obligations under this Section XI(c) shall be secured by the Collateral. (d) The Borrower's agreements in this Section shall survive the payment in full of the Secured Note and the expiration or termination of this Agreement. The Borrower hereby acknowledges that, notwithstanding the fact that the Secured Note is secured by the Collateral, the obligations of the Borrower under the Secured Note are recourse obligations of the Borrower. Section XII. Periodic Due Diligence Review. Lender has the right to perform continuing due diligence reviews with respect to the Pledged Eligible Asset and for purposes of verifying compliance with the representations, warranties and specifications made hereunder, or otherwise, and each of the Borrowers agree that upon reasonable (but no less than one (1) Business Day's) prior notice to the Borrower, the Lender or its authorized representatives will be permitted during normal business hours to examine, inspect, and make copies and extracts of, the Commercial Loan Asset Files and any and all documents, records, agreements, instrument or information relating to such Pledged Eligible Asset in the possession or under the control of any Borrower and/or the Custodian. The Lender shall use reasonable efforts to perform each such due diligence review within three Business Days. The Borrower shall also make available to the Lender a knowledgeable financial or accounting officer for the purpose of answering questions respecting the Commercial Loan Asset Files and the Pledged Eligible Assets. Without limiting the generality of the foregoing, the Borrowers acknowledge that the Lender may make Advances to the Borrower based solely upon the information provided by the Borrower to the Lender in the Underwriting Transmittal and/or the Commercial Loan/Asset Schedule and the representations, warranties and covenants contained herein, and that the Lender, at its option, has the right at any time to conduct a partial or complete due diligence review on some or all of the Pledged Eligible Assets securing such Loan, including without limitation conducting a property site inspection and otherwise regenerating the information used 21 25 to originate such Mortgage Loan. The Borrower agrees to cooperate with the Lender in connection with such underwriting, including, but not limited to, providing the Lender with access to any and all documents, records, agreements, instruments or information relating to such Pledged Eligible Assets in the possession, or under the control, of the Borrower. Subject to any applicable Due Diligence Cap, the Borrower further agrees that the Borrower shall reimburse the Lender for any and all out-of-pocket costs and expenses incurred by the Lender in connection with the Lender's activities pursuant to this Section XII ("Due Diligence Costs"); and (ii) in the event that a Default or an Event of Default shall have occurred, the Borrower shall reimburse the Lender for all Due Diligence Costs and no such Due Diligence Cap (as herein defined) shall apply. For Pledged Eligible Assets over $15,000,000, all Construction Loans and all loans with a Debt Service Coverage Ratio below 1.0 to 1.0, the due diligence cap shall be the actual cost, not to exceed $1,500 per real property asset securing such Pledged Eligible Asset. For all other Pledged Eligible Assets, the annual due diligence cap shall be the actual cost, not to exceed $5,000 in the aggregate. The limitations on due diligence set forth in this paragraph is referred to as the "Due Diligence Cap." Moreover, Borrower shall provide any additional information in connection with each Pledged Eligible Asset that Lender reasonably requests. Section XIII. Power of Attorney. The Borrower hereby authorizes the Lender, at the Borrower's expense, to file such financing statement or statements relating to the Collateral without the Borrower's signature thereon as the Lender at its option may deem appropriate, and appoints the Lender as the Borrower's agent and attorney-in-fact to execute any such financing statement or statements in the Borrower's name and to perform all other acts which the Lender deems appropriate to perfect and continue the security interest granted hereby and to protect, preserve and realize upon the Collateral, including, but not limited to, the right to endorse notes, complete blanks in documents, transfer servicing, and sign assignments on behalf of the Borrower as its agent and attorney-in-fact. This power of attorney is coupled with an interest and is irrevocable without the Lender's consent. Notwithstanding the foregoing, the power of attorney hereby granted may be exercised only during the occurrence and continuance of an Event of Default hereunder. Section XIV. Choice of Law; Agreement Constitutes Security Agreement. This Agreement shall be governed by the laws of the State of New York (without regard to choice of law principles thereof), and shall constitute a security agreement within the meaning of the New York UCC. THE PARTIES HERETO AGREE THAT ANY ACTION OR PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS AGREEMENT OR THE SECURED NOTE SHALL BE COMMENCED IN THE SUPREME COURT OF THE STATE OF NEW YORK, OR IN THE DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK. Section XV. Lender May Act Through Affiliates. The Lender may, from time to time, designate one or more affiliates for the purpose of performing any action hereunder. Section XVI. Notices. All demands, notices and communications relating to this Agreement shall be in writing and shall be deemed to have been duly given if mailed, by 22 26 registered or certified mail, return receipt requested, or by overnight courier, or, if by other means, when received by the other party or parties at the address shown below, or such other address as may hereafter be furnished to the other party or parties by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee (as evidenced, in the case of registered or certified mail, by the date noted on the return receipt). If to the Borrower: AMRESCO CAPITAL TRUST 700 North Pearl Street Suite 2400 Dallas, Texas 75201 Attention: Michael L. McCoy, General Counsel Phone Number: 214-953-7733 Fax Number: 214-953-7757 If to the Lender and/or Prudential Securities Credit Corporation: Prudential Securities Incorporated Investment Banking One New York, 18th Floor New York, New York 10292 Attention: Peter Riemenschneider Phone Number: 212-778-4282 Fax Number: 212-778-5099 With copies to: Prudential Securities Incorporated One Seaport Plaza, 30th Floor New York, New York 10292-2018 Attention: Frederick Robustelli, Esq. Phone Number: 212 214-6813 Fax Number: 212-214-7938 and Prudential Securities Incorporated One Seaport Plaza, 27th Floor New York, New York 10292 Attention: Elizabeth Castagna Phone Number: 212-214-7775 Fax Number: 212-214-7572 and 23 27 Prudential Securities Incorporated One New York Plaza, 15th Floor New York, New York 10292-2015 Attention: Jeff Theodorou Phone Number: 212-778-7444 Fax Number: 212-778-3293 and Peter T. Healy, Esq. O'Melveny & Myers LLP 275 Battery Street, 26th Floor San Francisco, California 94111 Phone Number: 415-984-8700 Fax Number: 415-984-8701 Section XVII. Severability. Any provision of this Agreement which is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or non-authorization, without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. Section XVIII. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, and all such counterparts shall together constitute one and the same instrument. Section XIX. Additional Borrowers. Lender acknowledges that from time to time ACT may need to form additional Qualified REIT Subsidiaries and/or Non-Qualified REIT Subsidiaries. Upon delivery of a written notice of formation of subsidiaries and an explanation of the purpose for such subsidiaries, Lender agrees to allow such subsidiaries to be added as a Borrower for purposes of financing Eligible Assets. Section XX. No Exclusivity. Lender acknowledges that this Agreement may not be the exclusive source to Borrower for interim financing for Eligible Assets and that Borrower may have other interim warehouse facilities. Lender's rights with respect to any Securitization extends only to Pledged Eligible Assets financed pursuant to this Agreement. Section XXI. Joint and Several Liability. Any liability of a Borrower under this Agreement or any certificate or other agreement delivered in connection herewith shall be the joint and several liability of ACT, AMREIT I, and AMREIT II and any other Subsidiary that is or becomes a Borrower. 24 28 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. AMRESCO CAPITAL TRUST By: /s/ THOMAS J. ANDRUS ---------------------------- Name: Thomas J. Andrus -------------------------- Title: Executive Vice President ----------------------------- and Chief Financial Officer ----------------------------- AMREIT I, INC. By: /s/ THOMAS J. ANDRUS ---------------------------- Name: Thomas J. Andrus -------------------------- Title: Executive Vice President ---------------------------- and Chief Financial Officer ---------------------------- AMREIT II, INC. By: /s/ THOMAS J. ANDRUS ---------------------------- Name: Thomas J. Andrus -------------------------- Title: Executive Vice President ---------------------------- and Chief Financial Officer ---------------------------- PRUDENTIAL SECURITIES CREDIT CORPORATION By: /s/ JEFF K. FRENCH ---------------------------- Name: Jeff K. French -------------------------- Title: Vice President ------------------------- 25 29 Appendix I Certain Definitions. The following capitalized terms are either defined below or in the corresponding sections specified below: "ACT" means AMRESCO Capital Trust. "Advance" - Section I(1). "Advanced Amount" - Section I(3)(b). "Advance Rate" - Sections I(2)(b) and I(3)(c). "Affiliate" means, when used with reference to a specified person, (i) any person that directly or indirectly controls or is controlled by or is under common control with the specified person, (ii) any person that is an officer of, partner in or trustee of, or serves in a similar capacity with respect to, the specified person or of which the specified person is an officer, partner or trustee, or with respect to which the specified person serves in a similar capacity, and (iii) any person that, directly or indirectly, is the beneficial owner of 5% or more of any class of equity securities of the specified person or which the specified person is directly or indirectly the owner of 5% or more of any class of equity securities; provided, however, that ACT will not be treated as an Affiliate of the Manager and its Affiliates and provided further that with respect to Borrower, Affiliate shall not include any Non-Qualified REIT Subsidiary, joint venture, partnership limited liability company, UPREIT, DOWNREIT or structure unless such entity becomes Borrower hereunder. "Agreement" - Introductory Clause. "AMREIT I" means the wholly-owned Qualified REIT Subsidiary of ACT. "AMREIT II" means the Non-Qualified REIT Subsidiary of ACT. "AMREIT Managers, L.P." means the Manager of ACT. "Applicable Interest Rate Spread" - Section I(3)(b). "Borrower" means individually and collectively, ACT, AMREIT I and AMREIT II. "BPS" - Section I(3)(b). "Bridge Loan" means a Mortgage Loan used for temporary financing. "Budgeted Costs" - Section I(2)(a) Appendix I-1 30 "Business Day" means any day other than (i) a Saturday or Sunday, or (ii) a day on which banking institutions in the State of New York or State of Texas or State of Georgia are authorized or obligated by law or executive order to be closed. "Code" means the Internal Revenue Code of 1986, as amended. "Collateral" - Section II. "Collateral Deficiency Situation" shall be deemed to be existing as of any day on which (a) the outstanding principal amount of the Loan as of such day exceeds, by more than $250,000, (b) the sum of the applicable Advance Rate for each Pledged Eligible Asset times the lesser of (i) the outstanding principal balance of each such Pledged Eligible Asset and (ii) the Market Value of each such Pledged Eligible Asset. "Commercial Loan/Asset Files" - Section II. "Commercial Loan/Asset Schedule" - Section I(2)(a)(I). "Construction Loan" means a Mortgage Loan the proceeds of which are to be used to finance the costs of the initial construction of real property. "Coverage Ratio" means, with respect to Borrower, on a consolidated basis, a ratio of Borrower's earnings before interest, taxes, depreciation and amortization, to scheduled interest on Total Indebtedness. "Custodial Agreement" - Section II. "Custodian" - Section II. "Custodian's Certification" - Section I(2)(iv). "Debt Service Coverage Ratio" or "DSCR" means, with respect to any Mortgage Loan, the number reflected on the Commercial Loan/Asset Schedule as being the ratio of (i) any interest reserve funded or to be funded by Borrower (up to a maximum of one year) in connection with a Mortgage Loan, plus net operating income of the Mortgaged Property securing the Mortgage Loan, as determined by Borrower in accordance with its underwriting guidelines, to (ii) debt service at the current pay rate on the Mortgage Loan; provided, however, that at the expiration of the period provided for in Borrower's Underwriting Transmittal for the Mortgaged Property to achieve a stabilized occupancy, the DSCR, to the extent necessary to calculate the Eligible Asset Value or for any other purpose hereunder, will be based upon the actual net income of the Mortgaged Property. "Due Diligence Cap" - Section XII. "Due Diligence Costs" - Section XII. Appendix I-2 31 "Eligible Asset Value" means, with respect to any Eligible Asset, the product of LTV for such Eligible Asset multiplied by the value of collateral related to such Eligible Asset as determined by Borrower. "Eligible Assets" - Section I(1). "Event of Default" - Section IX. "Eurodollar Business Day" - Section I(3)(a) "Extended Maturity Date" means, one or more dates to which the Maturity Date is extended as specified in a Credit Increase Confirmation and Note Amendment. "First Securitization" - Recitals. "Funding Date" - Section I(2). "Funding Notice" - Section I(2)(a)(I). "GAAP" means, generally accepted accounting principles consistently applied as in effect at the time of the application of the provisions of this Agreement. "Hedge Loss" shall mean, with respect to any Interest Rate Protection Agreement entered into by the Borrower with the Lender or any Affiliate thereof (in either case, the "Hedging Counterparty") the amount, if any, owed thereunder by Borrower to the Hedging Counterparty as of any date of determination, in the aggregate, minus the sum of (a) all Hedge Losses previously paid by the Borrower to the Hedging Counterparty in connection with such Interest Rate Protection Agreement, if any, and (b) any amount the Borrower has received from the Hedging Counterparty with respect to such Interest Rate Protection Agreements. "Initial Advance" means the first Advance relating to a Pledged Eligible Asset, such as a Construction Loan or Rehabilitation Loan, for which more than one Advance may be made. "Interest in Real Property" mean, among other things, an interest in Mortgage Loans or land and improvements thereon, such as buildings or other inherently permanent structures (including items that are structural components of such buildings or structures), a leasehold of real property, and an option to acquire real property (or a leasehold of real property). An "interest in real property" also generally includes an interest in Mortgage Loans secured by controlling equity interests in entities treated as partnerships for federal income tax purposes that own real property, to the extent that the principal balance of the mortgage does not exceed the fair market value of the real property that is allocable to the equity interest. "Interest Rate" - Section I(3)(a). Appendix I-3 32 "Interest Rate Protection Agreement" shall mean, with respect to any or all of the Mortgage Loans, any short sale of US Treasury Security, or futures or forward contract, or mortgage related security, or Eurodollar futures contract, or options related contract, or interest rate swap, cap or collar agreement or similar arrangements providing for protection against fluctuations in interest rates or the exchange of nominal interest obligations, either generally or under specific contingencies, entered into by the Borrower and the Lender, PSI, an Affiliate of Lender or PSI, or a third party reasonably acceptable to the Lender. "Investment Grade" means securities rated AAA through BBB - (or equivalent rating) by any of Standard & Poor's Rating Services, a division of the McGraw-Hill Companies, Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. "Lender" means Prudential Securities Credit Corporation "LIBOR" - Section I(3)(a). "Loan" - Section I(1). "LTV" means the number specified in the Commercial Loan/Asset Schedule as the percentage determined by dividing the maximum committed loan or investment amount by the value of the collateral related to such loan or investment as determined by Borrower. "Management Agreement" means the Management Agreement dated as of May 12, 1998 by and between ACT and the Manager. "Manager" means AMREIT Managers, L.P. "Manager Role" - Recitals. "Market Value" means, as of any date in respect of an Eligible Asset or Pledged Eligible Asset, the price at which such Eligible Asset or Pledged Eligible Asset (together with any Interest Rate Protection associated with such asset) could be sold in an orderly manner, as determined in good faith by the Lender in its sole and reasonable discretion. "Maturity Date" means the earlier to occur of (a) July 1, 2000 and (b) 60 days following the termination of the Securitization Agreement by Borrower; provided, that, in the Lender's sole discretion and upon the Borrower's written request, the Lender may extend the term of this Agreement. Each Maturity Date may be extended by the Lender, in the Lender's sole and unreviewable discretion, on any date by the execution and delivery of a Credit Increase Confirmation and Note Amendment in the form of Exhibit C hereto. "Material Adverse Effect" shall mean a material adverse change regarding (a) the Property, business, operations, financial condition or prospects of the Borrower, (b) the ability of the Borrower to perform its obligations under any of the Loan Documents to which it is a party, (c) the validity or enforceability of any of the Loan Documents, (d) the rights and Appendix I-4 33 remedies of the Lender under any of the Loan Documents, (e) the timely payment of the principal of or interest on the Loans or other amounts payable in connection therewith or (f) the Collateral. "Mezzanine Loan" means a commercial real estate loan the repayment of which is subordinated to a senior Mortgage Loan and which is secured either by a second lien mortgage or a pledge of the ownership interests of the borrower (such loans can also take the form of a joint venture interest in or equity investment in the borrower). "Minimum Advance Rate" - Section I(2)(d). "Mortgage Loan" means a commercial loan secured by real property and a Mezzanine Loan(s). "Mortgaged Property" means the real property and improvements securing a Mortgage Loan. "Non-Qualified REIT Subsidiary" means any corporation in which ACT owns 10% or less of the voting shares in such corporation. "New York UCC" - Section I(4)(a). "Other Real Estate Asset" means, with respect to any Pledged Eligible Asset, a real estate asset of the Company which is not a Mortgage Loan, Mezzanine Loan, Rehabilitation Loan, Construction Loan or Wet-Ink Eligible Asset. "Participating Loan" means a Mortgage Loan that entitles the lender to the receipt of interest at a stated rate, plus a percentage of the pledged real estate's revenues or cash flow, or a specified percentage or fixed amount of the net proceeds from any sale of the property, which Participating Loan may be a Mezzanine Loan, Construction Loan, Rehabilitation Loan, Bridge Loan or other Mortgage Loan. "Pledged Eligible Assets" means, as of any date of determination, any Eligible Assets then held by the Custodian on behalf of the Lender to secure the Loan. "PSI" means Prudential Securities Incorporated. "Qualified REIT Subsidiary" means any corporation if 100 percent of the stock of such is held by ACT at all times during such corporation's existence or otherwise satisfies Section 856(I)(2) of the Code. "Rehabilitation Loan" means a Mortgage Loan, the proceeds of which are used to finance the acquisition and renovation or rehabilitation of existing real property. "REIT" means a real estate investment trust, as defined under Section 856 of the Code. Appendix I-5 34 "REMIC" means a real estate mortgage investment conduit. "Request for Additional Advance" - Section IV(B)(1). "Restoration Amount" means, as of any date of determination, the amount, if any, by which (i) the outstanding principal amount of the Loan as of such date (including accrued interest thereon) exceeds (ii) the sum of the applicable Advance Rate for each Pledged Eligible Asset times the lesser of (1) the Market Value of each Pledged Eligible Asset), and (2) the outstanding principal balance of each such Pledged Eligible Asset. "SEC" means the U.S. Securities and Exchange Commission. "Secured Note" - Section I(6). "Secured Obligations" - Section II. "Securitization" - Recitals. "Securitization Agreement" means the agreement executed as of even date herewith between Borrower and PSI regarding the securitization of some of the Pledged Eligible Assets. "Supplemental Commercial Loan/Asset Schedule" - Section VIII(A). "Tangible Net Worth" means, for any calendar quarter, total shareholder's equity reflected in ACT's financial statements on a consolidated basis prepared in accordance with GAAP less goodwill, patents, trademarks, copyrights, franchises and any other items which would be treated as intangibles under GAAP. A schedule of Tangible Net Worth shall be prepared by Borrower within 60 days after the end of each calendar quarter and such schedule shall be delivered to Lender. Lender shall have 10 days to disapprove of such schedule by citing any specific defects in a written notice to Borrower. Borrower shall then have 10 days to cure all such defects. If Borrower cures such defects in Lender's reasonable discretion, such schedule shall be deemed approved by Lender. "Total Indebtedness" means, for any period, the aggregate indebtedness of Borrower during such period computed in accordance with GAAP less (i) the amount of any non-specific balance sheet reserves maintained in accordance with GAAP, (ii) obligations under any Interest Rate Protection Agreement, (iii) loan or investment commitments or loan take-out agreements issued by Borrower in the ordinary course of its business, (iv) obligations to indemnify parties involved in Securitization or the underwriting and placement (whether publicly or privately) of ACT's shares of beneficial interest or other indemnities made in the ordinary course of business, (v) endorsements for collection or deposit in the ordinary course of Borrower's business, and (vi) obligations for which Borrower is not the obligor but which are required to be included on Borrower's financial statements by GAAP. "Underwriting Transmittal" - Section I(2)(I). Appendix I-6 35 "Wet-Ink Eligible Assets" means an Eligible Asset (other than a Construction Loan or Other Real Estate Asset) which (a) is secured by a first lien or second lien on, or partnership or limited liability company interests in, multifamily or commercial real estate; (b) has a DSCR of 1.0 or greater; (c) has a total committed loan or investment amount less than or equal to $40,000,000; and (d) is pledged to the Lender simultaneously with the origination or acquisition thereof by Borrower, which origination or acquisition is financed in part or in whole with an Advance made directly to Borrower or an approved settlement agent. A Mortgage Loan shall cease to be a Wet-Ink Eligible Asset upon the Custodian's receipt and verification by the Custodian of the related Commercial Loan/Asset File (including all related mortgage loan documents) and Lender's subsequent approval thereof. Appendix I-7 36 Appendix II REPRESENTATIONS AND WARRANTIES REGARDING ALL PLEDGED ELIGIBLE ASSETS 1. As to each Pledged Eligible Asset, Borrower hereby represents and warrants to Lender that as of the related Closing Date; provided however, that any such representation and warranty may be modified as set forth in, or an exception thereto may be contained in, the executed Underwriting Transmittal in effect for such Pledged Eligible Asset: (a) Commercial Loan/Asset Schedule. The information set forth in the related Commercial Loan/Asset Schedule is true, complete and correct in all material respects. (b) Origination. Such Pledged Eligible Asset complied, on the date such asset was originated ("Closing Date"), in all material respects with all terms conditions and requirements of the Borrower's underwriting and closing guidelines as approved by Lender, (the "Guidelines") then in effect, except as disclosed by Borrower in writing in the list of exceptions included in the Underwriting Transmittal and approved by Lender. (c) Disbursement of Proceeds. The closing of such Pledged Eligible Asset was in compliance, in all material respects, with Borrower's Guidelines then in effect except as disclosed in writing in the list of exceptions included in the related Commercial Loan/Asset File or the Underwriting Transmittal and thereby approved by Lender, and the proceeds, or the applicable portion thereof, of such Pledged Eligible Asset have been disbursed in accordance with the related loan documents ("Pledged Asset Documents"). Except as disclosed in writing in the list of exceptions included in the related Underwriting Transmittal, any and all requirements imposed by Borrower as to the status of any on-site or off-site improvements related to the related real property ("Property") and the disbursement of any escrow funds therefor have been complied with as of the date of the Underwriting Transmittal. All costs, fees and expenses incurred in connection with the origination and closing of such Pledged Eligible Asset, including, without limitation, recording costs and fees, have been paid to the appropriate Person or arrangements have been made for their payment to the appropriate Person on a timely basis by the related mortgagor or borrower, and the related mortgagor is not entitled to any refund of any amounts paid or due under the related promissory note or contract or the related mortgage, if any, except for a refund of a cost, fee or expense related to the origination or closing of such Pledged Eligible Asset which borrower is obligated to pay, and has made arrangements to pay, in full on a timely basis. (d) Documents Valid. Each representation and warranty of Borrower set forth in Section IIIB of this Agreement or this Appendix to this Agreement, to the extent related to the enforceability of any instrument, agreement or other document or as to offsets, defenses, counterclaims or rights of rescission related to such enforceability is qualified to the extent that (i) enforcement may be limited (A) by bankruptcy, insolvency, reorganization fraudulent conveyance, redemption, moratorium or other similar laws affecting the enforcement of creditors' rights generally, (B) by general principles of equity (regardless of whether such Appendix II-1 37 enforcement is considered in a proceeding in equity or at law), and (c) by any applicable anti-deficiency law or statute, and (ii) such instrument, agreement or other document contains certain provisions which may be unenforceable in accordance with their terms, in whole or in part, but the unenforceability of such provisions will not (A) cause the related note or contract or mortgage, if any, to be void, (B) invalidate the related borrower's obligation to pay interest on, and repay the principal of, the related Pledged Eligible Asset in accordance with the payment terms of the related note or contract, the related mortgage, if any, and other written agreements delivered to Borrower in connection therewith, (c) invalidate the obligation of any related guarantor to pay guaranteed obligations with respect to interest on, and the principal of, the related Pledged Eligible Asset in accordance with the payment terms of such guarantor's written guaranty, (D) impair the mortgagee's right to accelerate and demand payment of the interest on, and principal of, the related Pledged Eligible Asset upon the occurrence of a legally enforceable default, or (E) impair the mortgagee's right to realize against the related Property, if any, by judicial or, if applicable, nonjudicial foreclosure except as provided in any subordination agreement and subject to applicable law. (e) Pledge of Security Interest; Note or Contract Endorsement. The related pledge of Lender's security interest in the related collateral documents ("Security Documents") is in recordable or otherwise appropriate form and constitutes Borrower's legal, valid and binding assignment to Lender of any related mortgage, assignment of leases and rents and/or other collateral. Borrower's endorsement and delivery of the related note or contract in accordance with the terms of this Agreement constitutes Borrower's legal, valid and binding assignment to Lender of such note or contract, and together with the related assignment of Security Documents legally and validly conveys all right, title and interest of Borrower in such Pledged Eligible Asset to Lender. (f) No Modification, Release or Satisfaction. Neither the Security Documents nor the related note or contract has been impaired, waived, modified, altered, satisfied, canceled or subordinated or rescinded by Borrower, and the related Property has not been released from the lien of such Security Documents or the lien of the senior lender and the related mortgagor has not been released by Borrower from its obligations under such Security Documents, in whole or in any part, in each such event in a manner which materially interferes with the benefits of the security intended to be provided by such Security Documents except as provided in the loan documents or as set forth on the respective Underwriting Transmittal. No instrument has been executed by Borrower that would effect any such waiver, modification, alteration, satisfaction, cancellation, subordination, rescission or release, with the exception of the written instruments (i) which are a part of the related Commercial Loan/Asset File, (ii) which have been recorded if necessary to protect the interests of Lender, and (iii) the substance of which is included in the list of exceptions in such Underwriting Transmittal. (g) Escrow Deposits. All escrow deposits and other escrow payments required under the related Pledged Asset Documents to be paid to Borrower prior to the Funding Date have been paid to, and are in the possession of, or under the control of, or have been applied in accordance with their intended purposes by, Borrower or its agent. Appendix II-2 38 (h) No Buydowns or Third Party Advances. Borrower has not, directly or indirectly, advanced funds, induced or solicited any payment from a Person other than the related obligor or, to the best of Borrower's knowledge, received any payment from a Person other than such obligor, for the payment of any amount required under the related note or contract or Security Documents, except for (a) interest accruing from the date of such note or contract or date of disbursement of the Pledged Eligible Asset proceeds, whichever is later, to the date which precedes by 30 days the first due date under the related promissory note or contract, (b) interest paid pursuant to any interest reserve specified in the Underwriting Transmittal or (c) payments from any tax, insurance or other reserves specified in the Underwriting Transmittal. The Pledged Asset Documents contain no provisions pursuant to which monthly payments are (x) paid or partially paid with funds deposited in any separate account established by borrower, the related mortgagor or anyone on behalf of such mortgagor, or (y) paid by any source other than such mortgagor (except provisions pertaining to a related guarantor's obligations under the terms of such guarantor's written guaranty) and contain no similar provision which may constitute a "buydown" provision unless disclosed in the Underwriting Transmittal. (i) No Condemnation or Damages. To the best of Borrower's knowledge, there are no proceedings pending or threatened for the total or partial condemnation of the related Property as of the applicable closing date, except for any proceedings as to partial condemnation which are disclosed in writing in the list of exceptions included in such Underwriting Transmittal. To the best of Borrower's knowledge, each Pledged Eligible Asset is being used for the purpose(s) set forth in the Underwriting Transmittal and is in good repair and free of any damage, waste or defective condition that would materially or adversely affect the value of the property as security for a Pledged Eligible Asset or for the use the property was intended at the time of the origination of the Pledged Eligible Asset. (j) Title Survey; Improvements. The related Commercial Loan/Asset File includes an ALTA/ACSM Land Title Survey with respect to the related Property or, if an ALTA/ACSM Land Title Survey is not available or as otherwise approved in writing by Lender an as-built survey with respect to such Property which satisfied the requirements of the title insurance company for its deletion of the standard general exceptions for encroachments, boundary and other survey matters and for easements not shown by the public records from the related title insurance policy as required by the Guidelines. In either such event, such survey has been certified by the surveyor to Borrower if a mortgagee, or the owner of the Property if Borrower is not the mortgagee and the title insurance company in accordance with the applicable requirements of the Guidelines and satisfies the other applicable requirements set forth in the Guidelines, except as disclosed in writing in the list of exceptions included in such Underwriting Transmittal. In reliance on the survey and the Title Policy (defined below), except for encroachments and similar matters which do not materially and adversely affect such Property as security for such Pledged Eligible Asset or which are disclosed in writing in the list of exceptions included in such Underwriting Transmittal, (i) none of the improvements which were included for the purpose of determining the value of such Property at the time of the origination of such Pledged Eligible Asset lie outside the boundaries and building restriction lines of such Property, (ii) no improvements on adjoining properties materially encroach upon such Property, Appendix II-3 39 and (iii) to the best of Borrower's knowledge (based upon a representation or opinion obtained from the related mortgagor), no improvements located on or forming a part of such Property are in violation of any applicable zoning and building laws or ordinances. (k) Compliance with Laws. To the best of Borrower's knowledge (based upon a representation or opinion obtained from the related mortgagor), (i) the related Property complies, in all material respects, with all laws and regulations pertaining to the use and occupancy thereof, other than applicable zoning and building laws and regulations (addressed in Section 1.(j) above) and Environmental Laws (as defined and addressed in Sections (t) and (u) below) and all applicable insurance requirements, and (ii) the related mortgagor has obtained or will obtain all inspections, licenses, permits, authorizations and certificates necessary for such compliance, including but not limited to, certificates of occupancy and fire underwriter certificates. Borrower has not received notification from any governmental authority that such Property is in material non-compliance with such laws or regulations, is being used, operated or occupied unlawfully or has failed to have or obtain such inspections, licenses or certificates, as the case may be. (l) Title Insurance. The related Property (excluding any related personal property) is covered by an ALTA lender's or owner's title insurance policy or, if an ALTA lender's or owner's title insurance policy is unavailable, another state-approved form of lenders title insurance policy issued by a qualified insurer, in an amount not less than the stated original principal amount of such Pledged Eligible Asset (a "Title Policy") and, if the Pledged Eligible Asset is a loan, insuring that the related mortgage is a valid lien on such Property with a priority corresponding to the priority stated in its Underwriting Transmittal, subject to the Permitted Exceptions described in Subsection 2(a) below. Borrower has not taken, or omitted to take, any action, and, to the best of Borrower's knowledge, no other Person has taken, or omitted to take, any action, that would materially impair the coverage benefits of any such title insurance policy. Such title policy does not include the general exception for intervening liens which appeared in the commitment for such title insurance. (m) Hazard Insurance. The related Property is insured by a fire and extended perils insurance policy, issued by a commercial insurer, providing coverage against loss or damage sustained by reason of fire, lightning, windstorm, hail, explosion, riot, riot attending a strike, civil commotion, aircraft, vehicles and smoke and, to the extent required by Borrower consistent with the Guidelines then in effect against earthquake and other risks insured against for which Persons operating like properties in the locality of such Property obtain insurance, in an amount not less than the lesser of (i) the full replacement cost of all improvements to such Property, and (ii) the outstanding principal balance of such Pledged Eligible Asset, but in any event in an amount sufficient to avoid the operation of any co-insurance provisions contained in such insurance policy. The related mortgage contains provisions requiring the related mortgagor to maintain business interruption and/or rental continuation coverage sufficient to protect against loss for such period as shall be consistent with the requirements of the Guidelines under a policy issued by a qualified insurer. If any improvement on such Property is located in an area identified by the Federal Emergency Management Agency as having special flood hazards under the National Flood Insurance Act of 1968, as amended, such Property is insured by a flood Appendix II-4 40 insurance policy, issued by a qualified insurer, meeting the current requirements of the Federal Insurance Administration in an amount not less than the lesser of (A) the stated principal amount of the related promissory note or contract, and (B) the maximum amount of insurance available under the Flood Disaster Protection Act of 1973, as amended. In the event Borrower is the mortgagee, each such insurance policy includes a lender's loss payable endorsement in favor of Borrower and requires the insurer to endeavor to provide at least 30 days' prior written notice to Borrower of termination or cancellation, and no such notice has been received by Borrower. To the best of Borrower's knowledge, such insurance policies are in full force and effect. To the best of Borrower's knowledge, all premiums due and payable on such insurance policies prior to the Funding Date have been paid and nothing has occurred that would materially impair the benefits of coverage thereunder. In connection with the placement of any such insurance, no commission, fee or other compensation has been or will be received by Borrower or, to the best of Borrower's knowledge, any officer, director or employee of Borrower. The related mortgage, if any, obligates the related mortgagor to maintain all such insurance and, at such mortgagor's failure to do so, authorizes the mortgagee to maintain such insurance at such mortgagor's cost and expense and to seek reimbursement therefor from such mortgagor. (n) Proceeds of Mortgage Loan. To the best of Borrower's knowledge, the proceeds of such Pledged Eligible Asset have not been and shall not be applied to satisfy, in whole or in part, any debt owing by the related mortgagor to an affiliate of Borrower with respect to the origination of such Pledged Eligible Asset whereby such affiliate has taken or will take (i) a discounted pay-off of such debt in connection with such application, or (ii) a subordinated lien on any property securing such debt or an equity interest in the related mortgagor in connection with such application unless, in any such case, such fact is disclosed in the list of exceptions included in the related Commercial Loan/Asset File. (o) Customary Provisions. The related promissory note or contract or the related mortgage contains customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the practical realization against the related Property of the benefits of the security. (p) Pledged Eligible Asset Terms. The interest rate on such promissory note constituting a Mortgage Loan Document or contract is as set forth in the Commercial Loan/Asset Schedule; provided, however, that if such promissory note or contract relates to an adjustable rate note, the mechanism by which the interest rate is adjusted shall be set forth in the Commercial Loan/Asset Schedule. Except as specified in the Underwriting Transmittal relating to an accrual rate of interest in excess of a required pay rate of interest, the related Mortgage Loan Documents do not provide for any negative amortization. The related mortgage, if any, provides for the appointment of a receiver for rents, or the mortgagee's entry into possession of the related Property to collect rents, in connection with an event of default or acceleration. (q) Inspection. Consistent with the provisions of the Guidelines, Borrower has inspected or has caused the related Property to be inspected in connection with the origination of such Pledged Eligible Asset no earlier than six months prior to the initial Funding Date. Appendix II-5 41 (r) No Notice of Bankruptcy. Borrower has no knowledge nor has it received any notice that the related Mortgagor is a debtor in any state or federal bankruptcy or insolvency proceeding. (s) Access Routes. Based upon the information provided Borrower in the Pledged Asset Documents, at the Closing Date of such Pledged Eligible Asset, (i) the underlying borrower had sufficient rights with respect to amenities, ingress and egress and similar matters to support the intended use described in the Underwriting Transmittal, and (ii) to the best of Borrower's knowledge, such Property was receiving or has access to adequate services from public or private water, sewer and other utilities. (t) Environmental Assessment. In connection with the origination of such Pledged Eligible Asset, a Phase I environmental assessment and report and, if recommended by the Phase I report, a Phase II environmental assessment and report with respect to the related Mortgage Property were obtained from an independent environmental engineer or consultant; and such report(s) did not indicate the existence of conditions or circumstances respecting such Property that would (i) constitute or result in a material violation of any applicable Environmental Law, (ii) impose any material constraint on the operation of such Property or require material change in the use thereof, or (iii) require clean-up, remedial action or other response with respect to Hazardous Materials on or affecting such Property under any applicable Environmental Law, with the exception of conditions or circumstances (A) which such report(s) indicated could be cleaned up, remediated or brought into compliance with applicable Environmental Law by the taking of certain actions, and (B) either (1) for which a hold-back or other escrow of funds, if any, not less than the costs of taking such clean-up, remediation or compliance actions as estimated in such report(s) has been created to be held by Borrower or an escrow agent until such clean-up, remediation or compliance actions have been taken, (2) for which an environmental insurance policy in an amount satisfactory to Borrower has been obtained by the related mortgagor or an indemnity for such costs has been obtained from a potentially culpable party, or (3) such clean-up, remediation or compliance actions in compliance with applicable Environmental Law have been completed prior to the related Funding Date, or (4) for which other arrangements disclosed to Lender have been made. For purposes of this Agreement, the term "Hazardous Materials" shall include, without limitation, gasoline, petroleum products, explosives, radioactive materials, polychlorinated biphenyls or related or similar materials, asbestos or any material containing asbestos, and any other substance or material as may be defined as a hazardous or toxic substance under any applicable Environmental Law; and the term "Environmental Law" shall mean any environmental law ordinance, rule, regulation or order of a federal, state or local governmental authority including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. 9601 et seq), the Hazardous Material Transportation Act, as amended (49 U.S.C. 1801 et seq,), the Resource Conservation and Recovery Act, as amended (42 U.S.C. 6901 et seq,), the Federal Water Pollution Control Act, as amended (33 U.S.C. 12S1 et seq.,), the Clean Air Act (42 U.S.C. 7401 et seq.), as amended, and the regulations promulgated pursuant thereto. Appendix II-6 42 (u) Notice of Environmental Problem. Except for the notices, if any, described in the list of exceptions included in the related Underwriting Transmittal and furnished to the environmental engineer or consultant in connection with its assessment(s) described in Section (t) above (and addressed by such engineer or consultant in such assessments), Borrower has not received actual notice from: (i) any federal, state or other governmental authority of (A) any failure of the related Property to comply with any applicable Environmental Laws, or (B) any known or threatened release of Hazardous Materials on or from such Property in violation of Environmental Laws; or (ii) the related mortgagor that (A) such mortgagor has received any such notice from any such governmental authority, (B) such Property fails to comply with Environmental Laws, or (C) there is any known or threatened release of Hazardous Materials on or from such Property in violation of Environmental Laws. (v) No Untrue Information. No statement, report or other document furnished by or on behalf of Borrower or any affiliate thereof in writing (including writings in electronic form) pursuant to this Agreement relating to such Pledged Eligible Asset contains any untrue statement by Borrower or any affiliate thereof of any material fact or an omission by Borrower or any Affiliate thereof of a material fact necessary to make the statements contained therein not misleading. Based upon its review of its files and such inquiry as is customary by a prudent commercial mortgage lender, Borrower does not know or have reason to know that any such statement, report or other document furnished by or on behalf of Borrower or any Affiliate thereof in writing (including writings in electronic form) pursuant to this Agreement relating to such Pledged Eligible Asset incorporating any statement, report or other document furnished to Borrower by any underlying borrower or any other Person contains any untrue statement by any other Person of any material fact or an omission of a material fact necessary to make the statements contained therein not misleading. 2. As to each Pledged Eligible Asset which constitutes a Mortgage Loan or other Pledged Eligible Asset, if applicable, and is secured by an interest in real property, Borrower hereby represents and warrants to Lender that as of the related Funding Date; provided however, that any such representation and warranty maybe modified as set forth in, or an exception thereto may be contained in, the executed Underwriting Transmittal in effect for such Pledged Eligible Asset: (a) Lien Position. The related mortgage is a valid, subsisting and enforceable lien on the related Property (including all buildings and improvements on such Property and all installations and mechanical, electrical, plumbing, heating and air conditioning systems located in or annexed to such buildings, and all additions, alterations and replacements made at any time prior to the related Funding Date with respect to the foregoing, but excluding any related personal property), which Property is free and clear of all encumbrances and liens having priority over the lien of such Mortgage, except for (i) any liens of a prior lender described in the Title Policy and Underwriting Transmittal, (ii) liens for real estate taxes and special assessments not yet due and payable, (iii) covenants, conditions and restrictions, rights of way, easements and other matters of public record as of the date of recording of such mortgage which do not materially and adversely (1) affect the value of such Property, and (2) interfere with the related mortgagor's use of such Property for the intended purposes therefor, (iv) leases and Appendix II-7 43 subleases pertaining to such Property which Borrower, in accordance with the Guidelines, did not require to be subordinated to the lien of such mortgage, and (iv) other matters to which like properties are commonly subject which do not, individually or in the aggregate, materially interfere with the benefits of the security intended to be provided by such Mortgage ("Permitted Exceptions"). Any security agreement, chattel mortgage or equivalent document related to and delivered in connection with the related Pledged Eligible Asset establishes and creates a valid, subsisting and enforceable lien on and a security interest in the property described therein, and Borrower has full right to sell and assign the same to Lender. (b) No Taxes or Assessments. All taxes and governmental assessments which became due and owing prior to the Funding Date in respect of the related Property (excluding any related personal property) and which, if left unpaid, would be or might become, a lien on such Property having priority over the related mortgage, have been paid or an escrow of funds in an amount sufficient to cover such taxes and assessments has been established. (c) No Mechanics Liens. In reliance on the related Title Policy and to the best of Borrower's knowledge, the related Property (excluding any related personal property) is free and clear of any mechanics' and materialmen's liens or liens in the nature thereof, and no rights are outstanding that, under law, could give rise to any such liens, any of which liens are or may be prior to, or equal with, the lien of the related mortgage, except those which are insured against by the Title Policy. (d) UCC Financing Statements. One or more Uniform Commercial Code financing statements covering all furniture, fixtures, equipment and other personal property in which Mortgagor has an interest (i) which are collateral under the related Security Documents executed and delivered in connection with such Pledged Eligible Asset, and (ii) in which a security interest can be perfected by the filing of Uniform Commercial Code financial statement(s) under applicable law have been filed or recorded (or have been sent for filing or recording) in all Uniform Commercial Code filing offices necessary to the perfection of a security interest in such furniture, fixtures, equipment and other personal property under applicable law. (e) Property Leased to Tenants. As to each Pledged Eligible Asset other than a multifamily property secured by a Property which is subject to one or more leases that are relied on for purposes of determining the DSCR of such loan, Borrower has obtained estoppel certificates from tenants (or, at a minimum, tenants occupying 90% of the net leased area relied on in determining the DSCR, but specifically including any such tenant who leases 25% or more of the net leasable are of the Mortgage Property), and other information with respect to the leases ("Leases") relating to such Property in which the underlying borrower is the landlord or lessor thereunder (including copies thereof) and the tenants with such Leases as required by the Guidelines, and based upon such investigation by Borrower: (i) To the best of Borrower's knowledge, the related mortgagor is complying, in all material respects, with each lease pertaining to the Property except as Appendix II-8 44 disclosed in writing in the list of exceptions included in the related Underlying Transmittal. (ii) Except as disclosed in writing in the list of exceptions included in the related Underwriting Transmittal, no Lease with respect to 10% or more of the net leasable area of such Property requires the landlord to rebuild or repair any damages or destruction to the leased premises or to compensate the tenant for any condemnation affecting the leased premises. (iii) Except as disclosed in writing in the list of exceptions included in the related Underwriting Transmittal, to the best of Borrower's knowledge, (A) no Lease with respect to 10% or more of the net leasable area of such Property contains an option to purchase or any right of a tenant to terminate the Lease or vacate the leased premises prior to expiration of the lease term, (B) each Lease is in full force and effect, (C) each tenant is current in the payment of rent due under each Lease of 10% or more of the net leasable area of such Property and has not paid the remaining rents more than one month in advance, and (D) such Commercial Loan/Asset File contains true and complete copies of each Lease, as amended. (f) Mortgage Loans Secured by Ground Lease. With respect to each Pledged Eligible Asset that is secured in whole or in part by the interest of a related mortgagor as a lessee under a ground lease of the related Property (a "Ground Lease"), either (i) the ground lessor's related fee interest in such Property (the "Fee Interest") is subject to or subordinate to the lien of the related mortgage as set forth in the Commercial Loan/Asset Schedule, or (ii): (A) such Ground Lease is in full force and effect and such Ground Lease or a memorandum thereof has been duly recorded; such Ground Lease does not prohibit the interest of the related lessee thereunder from being encumbered by the related mortgage; and there have been no material changes in the terms of any such Ground Lease except as set forth in written instruments which are part of the related Commercial Loan/Asset File; (B) except as may be indicated in the related Title Policy referred to in Section 1.(l) above, such Ground Lease is not subject to any liens or encumbrances superior to, or of equal priority with, the related mortgage, other than the related Fee Interest; (C) the related lessee's interest in such Ground Lease may be transferred to Lender and its successors and assigns through foreclosure of the related Mortgage or conveyance in lieu of foreclosure and, thereafter, may be transferred to another Person by Lender and its successors and assigns upon notice to, but without the consent of, the related lessor (or, if any such consent is required, either (1) it has been obtained prior to the Funding Date, or (2) it will not to be unreasonably withheld); Appendix II-9 45 (D) the related lessor is required to give notice of any default under such Ground Lease by the related lessee to the Borrower either under the terms of such Ground Lease (the related lessor having received notice of the related mortgage) or under the terms of a separate written agreement binding upon the related lessor; (E) except as disclosed in writing in the list of exceptions included in the related Underwriting Transmittal, before the related lessor may terminate such Ground Lease because of a default thereunder by the related lessee, Borrower is entitled, under the terms of such Ground Lease or a separate written agreement binding upon the related lessor, to receive notice of such default and to cure or, alternatively, to commence proceedings to foreclose the related mortgage plus a reasonable opportunity to cure such default after foreclosure or a conveyance in lieu of foreclosure if Borrower pursues foreclosure in good faith and with due diligence; (F) except as expressly approved by Lender in writing, the currently effective term of such Ground Lease (excluding any extension or renewal which is not binding on the lessor thereunder) extends not less than ten years beyond the maturity date of the related Pledged Eligible Asset; (G) except as expressly approved by Lender in writing, under the terms of such Ground Lease and the related Mortgage, taken together, any related property insurance proceeds other than in respect of a total or substantially total loss or taking, would be applied either (1) to the repair or restoration of the damaged portion of the related Property, with the mortgagee or a trustee or escrow agent appointed by it having the right to hold and disburse such proceeds as the repair or restoration progresses (except where such mortgage provides that the related mortgagor or its agent may hold and disburse such proceeds), or (2) to the payment of the outstanding principal balance of such Pledged Eligible Asset together with any accrued interest thereon; (H) such Ground Lease does not impose any restrictions on subletting which Borrower considered to be commercially unreasonable at the time of origination of such Pledged Eligible Asset; and (I) Borrower has not received any notice and otherwise has no knowledge that (1) the lessor under such Ground Lease is asserting a default by the lessee or an event of default thereunder, or (2) any event has occurred which, with the passage of time, the giving of notice, or both (other than rental or other payments being due, but not yet delinquent), would result in a default or an event of default under the terms of such Ground Lease. (g) Deed of Trust. With respect to each related mortgage that is a deed of trust or trust deed, a trustee, duly qualified under applicable law to serve as such, has either been properly designated and currently so serves or may be substituted in accordance with applicable law. Except in connection with a trustee's sale after default by the related mortgagor Appendix II-10 46 or in connection with the release of the related Property following the payment of such Pledged Eligible Asset in full, no fees or expenses are payable by Lender to such trustee. (h) Type of Property. The related Property consists of an estate in fee simple or leasehold estate in real property and improvements thereon as set forth in the Commercial Loan/Asset Schedule. (i) Mortgage Acceleration Provisions. The related mortgage contains a provision for the acceleration of the payment of the unpaid principal balance of such Pledged Eligible Asset in the event that the related Property is sold or transferred without the prior written consent of the mortgagee thereunder, except as provided in any subordination agreement contained in the Commercial Loan/Asset File. (j) No Additional Collateral. The related promissory note or contract is not, and has not been, secured by any collateral except the lien of the related mortgage and the Security interest of any related Security Documents assigned pursuant to the related assignment to Lender. Except for any cross-collateralizations described in the Underwriting Transmittal, such mortgage was not given as collateral or security for the performance of obligations of any Person other than the related mortgagor. (k) Assignment of Leases and Rents. Any related assignment of leases and rents incorporated within the related mortgage or set forth in a separate document creates a valid assignment of, or security interest in, the right to receive all payments due under the related Leases, if any, with a priority corresponding to the priority stated in the Underwriting Transmittal and subject to the effect of bankruptcy, insolvency, reorganization, receivership, moratorium or other laws relating to or affecting the rights of creditors generally and general principles of equity (regardless of whether considered in a proceeding in equity or at law); and no Person other than the related mortgagor owns any interest in the right to receive any payments due under such Leases that is superior to or of equal priority with the mortgagee's interest therein. (l) Default, Breach and Acceleration. There is no monetary default, breach, violation or event of acceleration existing under the related Pledged Eligible Asset or the related documents to such Pledged Eligible Asset and no event (other than a failure to make payments due but not yet delinquent) which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a monetary default, breach, violation or event of acceleration. In addition, to the best of Borrower's knowledge there is no non-monetary default, breach, violation or event of acceleration. Appendix II-11 47 Exhibit A SECURED NOTE Dated as of ___________________, 1998 FOR VALUE RECEIVED, the undersigned, AMRESCO CAPITAL TRUST, a real estate investment trust organized under the laws of the State of Texas, AMREIT I, INC., a Delaware corporation, and AMREIT II, INC., a Delaware corporation, each having an address at 700 North Pearl Street, Suite 2400, Dallas, Texas 75201 (individually and collectively, the "Borrower"), jointly and severally, promise to pay to the order of PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware corporation, whose address is One New York Plaza, New York, New York 10292 (the "Lender"), on or before each Maturity Date the amount then outstanding (including accrued interest at the rate(s) set forth in the Agreement) under that certain Interim Warehouse and Security Agreement, dated as of July 1, 1998, between the Borrower and the Lender (as amended from time to time, the "Agreement"). Initially, the maximum principal amount which may be outstanding is $400,000,000 (subject to certain limitations as set forth therein). Capitalized terms used herein and not defined herein shall have their respective meanings as set forth in the Agreement. The holder of this Note is authorized to record the date and amount of each Advance and the date and amount of each repayment of principal thereof on the schedule to be maintained by the Lender (which schedule may be obtained upon Borrower's request), and any such recordation shall constitute prima facie evidence of the accuracy of the amount so recorded; provided that the failure of the holder hereof to make such recordation (or any error in such recordation) shall not affect the obligations of the Borrower hereunder or under the Agreement. MAXIMUM RATE OF INTEREST: It is intended that the rate of interest herein shall never exceed the maximum rate, if any, which may be legally charged on the Loan evidenced by this Note ("Maximum Rate"), and if the provisions for interest contained in this Note would result in a rate higher than the Maximum Rate, interest shall nevertheless be limited to the Maximum Rate and any amounts which may be paid toward interest in excess of the Maximum Rate shall be applied to the reduction of principal, or, at the option of the Lender, returned to the Borrower. DUE DATE: The Loan evidenced hereby not paid before each Maturity Date shall be due and payable on each Maturity Date. PLACE OF PAYMENT: All payments hereon shall be made, and all notices to the Lender required or authorized hereby shall be given, at the office of the Lender at the address designated in the heading of this Note, or to such other place as the Lender may from time to time direct by written notice to the Borrower. PAYMENT AND EXPENSES OF COLLECTION: All amounts payable hereunder are payable by wire transfer in immediately available funds to the account number specified by the Exhibit A-1 48 Lender, in lawful money of the United States. Payments remitted by the Borrower via wire transfer initiated after 1:00 p.m. New York City time shall be deemed to be received on the next Business Day. The Borrower agrees to pay all costs of collection when incurred, including, without limiting the generality of the foregoing, reasonable attorneys' fees through appellate proceedings, and to perform and comply with each of the covenants, conditions, provisions and agreements contained in every instrument now evidencing or securing said indebtedness. SECURITY: This Note is issued pursuant to the Agreement and is secured by a pledge of the Collateral described therein. Notwithstanding the pledge of the Collateral, the Borrower hereby acknowledges, admits and agrees that the Borrower's obligations under this Note are recourse obligations of the Borrower to which the Borrower pledges its full faith and credit. DEFAULTS: Upon the happening of an Event of Default (as defined in the Agreement), the Lender shall have all rights and remedies set forth in the Agreement. The failure to exercise any of the rights and remedies set forth in the Agreement shall not constitute a waiver of the right to exercise the same or any other option at any subsequent time in respect of the same event or any other event. The acceptance by the Lender of any payment hereunder which is less than payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of the foregoing rights and remedies at that time or at any subsequent time or nullify any prior exercise of any such rights and remedies without the express consent of Lender, except as and to the extent otherwise provided by law. WAIVERS: The Borrower waives diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayments of this Note, and expressly agree that this Note, or any payment hereunder, may be extended from time to time, and consent to the acceptance of further collateral, the release of any collateral for this Note, the release of any party primarily or secondarily liable hereon, and that it will not be necessary for the Lender, in order to enforce payment of this Note, to first institute or exhaust Lender's remedies against the Borrower or any other party liable hereon or against any collateral for this Note. None of the foregoing shall affect the liability of the Borrower. No extension of time for the payment of this Note, or an installment hereof, made by agreement by the Lender with any person now or hereafter liable for the payment of this Note, shall affect the liability under this Note of the Borrower, even if the Borrower is not a party to such agreement; provided, however, the Lender and the Borrower, by written agreement between them, may affect the liability of the Borrower. TERMINOLOGY: If more than one party joins in the execution of this Note, the covenants and agreements herein contained shall be the joint and several obligation of each and all of them and of their respective heirs, executors, administrators, successors and assigns, and relative words herein shall be read as if written in the plural when appropriate. Any reference herein to the Lender shall be deemed to include and apply to every subsequent holder of this Note. Words of masculine or neuter import shall be read as if written in the neuter or masculine or feminine when appropriate. Exhibit A-2 49 AGREEMENT: Reference is made to the Agreement for provisions as to Advances, rates of interest, mandatory principal repayments, collateral and acceleration. If there is any conflict between the terms of this Note and the terms of the Agreement, the terms of the Agreement shall control. APPLICABLE LAW: THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK, THE LAWS OF WHICH THE BORROWER HEREBY EXPRESSLY ELECTS TO APPLY TO THIS NOTE. THE BORROWER AGREES THAT ANY ACTION OR PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS NOTE MAY BE COMMENCED IN THE SUPREME COURT OF THE STATE OF NEW YORK, OR IN THE DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK. Exhibit A-3 50 AMRESCO CAPITAL TRUST By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- AMREIT I, INC. By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- AMREIT II, INC. By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- Exhibit A-4 51 Exhibit B ______, 1998 [Custodian] - ------------------------- - ------------------------- - ------------------------- Re: Interim Funding Arrangement for Eligible Assets Gentlemen: I am the counsel to AMRESCO Capital Trust, a Texas real estate investment trust, AMREIT I, Inc., a Nevada corporation and AMREIT II, a Delaware corporation (individually and collectively, the "Borrower"). I have represented the Borrower in connection with the execution and delivery of the following documents: (i) Interim Warehouse and Security Agreement, dated as of ___________________, 1998 (the "Interim Warehouse and Security Agreement"), by and between the Borrower and Prudential Securities Credit Corporation (the "Lender"); (ii) Secured Note executed as of ___________________, 1998 by the Borrower in favor of the Lender (the "Note"); (iii) Custodial Agreement, dated as of ___________________, 1998 (the "Custodial Agreement"), among the Lender, the Borrower and ____________ (the "Custodian"); and (iv) Securitization Agreement, dated as of ______, 1998 by and between the Borrower and Prudential Securities Incorporated. Capitalized terms used herein, but not defined herein, shall have the meanings assigned to them in the Interim Warehouse and Security Agreement. I have examined executed copies of the Interim Warehouse and Security Agreement, the Note, and the Custodial Agreement. I have also examined originals or photostatic or certified copies of all such corporate records of the Borrower and such certificates of public officials, certificates of corporate officers, and other documents, and such questions of law, as I have deemed appropriate and necessary as a basis for the opinions hereinafter expressed. In making my examination and rendering the opinions herein expressed, I have made the following assumptions: I) each party to each of the Interim Warehouse and Security Agreement and the Custodial Agreement (other than the Borrower) has the power to enter into and perform all of its obligations thereunder, (ii) the due authorization, execution and delivery of each of the Exhibit B-1 52 Interim Warehouse and Security Agreement and the Custodial Agreement by all parties thereto (other than the Borrower), and (iii) the validity and binding effect on all parties thereto (other than the Borrower) of each of the Interim Warehouse and Security Agreement and the Custodial Agreement. The opinions expressed below with respect to enforceability are subject to the following additional qualifications: (a) The effect of insolvency, reorganization, moratorium, conservatorship, receivership, or other similar laws relating to or affecting the rights of creditors generally in the event of insolvency, reorganization, moratorium or receivership. (b) The application of general principles of equity, including, but not limited to, the right of specific performance (regardless of whether enforceability is considered in a proceeding in equity or at law). (c) The unenforceability of provisions to the effect that failure to exercise or delay in exercising rights or remedies will not operate as a waiver of any such rights or remedies, or to the effect that provisions therein may only be waived in writing to the extent that an oral agreement has been entered into modifying such provisions. I am licensed to practice law in the State of Texas. For purposes of this opinion, I have assumed the laws of the State of Texas are substantially similar to the laws of the State of New York and the laws of the State of Texas. Subject to such assumption, each opinion hereinafter set forth is an opinion concerning only the law of the State of Texas and New York, the corporate laws of Texas, Nevada and Delaware and applicable federal law. All opinions expressed herein are based on laws, regulations and policy guidelines currently enforced and may be affected by future changes in law. Furthermore, no opinion is expressed herein regarding the applicable federal securities, state Blue Sky, legal investment or real estate syndication laws. Based upon the foregoing, and subject to the last paragraph hereof, I am of the opinion that: 1. The Interim Warehouse and Security Agreement, the Note, and the Custodial Agreement and the Securitization Agreement each constitutes the valid, legal and binding agreement of the Borrower, and each is enforceable against the Borrower in accordance with its terms. 2. No consent, approval, authorization or order of, registration or filing with, or notice to, any governmental authority or court is required under federal laws or the laws of the States of Texas or New York for the execution, delivery and performance of the Interim Warehouse and Security Agreement, the Note, the Custodial Agreement or the Securitization Agreement, as applicable, by the Borrower, except such of which as have been obtained. Exhibit B-2 53 3. The execution, delivery and performance by the Borrower of the Interim Warehouse and Security Agreement, the Note, the Custodial Agreement and the Securitization Agreement, does not conflict with or result in a breach of, or constitute a default under any law, rule or regulation of the federal government or of the States of Texas or New York. 4. The execution, delivery and performance of the Interim Warehouse and Security Agreement, the Note and the Custodial Agreement and the Securitization Agreement by the Borrower will not result in a default under any mortgage, borrowing agreement, or other instrument or agreement pertaining to indebtedness for borrowed money to which the Borrower is a party. 5. Upon the execution of the Interim Warehouse and Security Agreement, a valid security interest in the Eligible Assets and the proceeds thereof is granted to the Lender, which security interest would be a valid, first-priority, perfected security interest with respect to such Eligible Assets and the proceeds thereof upon the delivery of the Commercial Loan/Asset Files to the Custodian. 6. Attached as Exhibit "A" and incorporated by reference herein is a listing of states in which the Borrower is licensed as a mortgage lender or maintains a comparable license. Attached as Exhibit "B" and incorporated by reference herein is a listing of states in which the Borrower has qualified to do business. This Opinion is furnished by me as counsel to the Borrower and is solely for the benefit of the addressees hereof; except that this Opinion may be relied upon by any holder in due course of the Note. Yours truly, Exhibit B-3 54 Exhibit C CREDIT INCREASE CONFIRMATION AND NOTE AMENDMENT Dated ________________ Reference is made to (x) the Interim Warehouse and Security Agreement, dated as of ___________________, 1998 (the "Interim Warehouse Agreement"), by and between Prudential Securities Credit Corporation (the "Lender"), and AMRESCO Capital Trust, AMREIT I, Inc. and AMREIT II, Inc. (collectively, the "Borrower") and (y) the Secured Note, dated as of ___________________, 1998 (the "Note"), from the Borrower to the Lender. Capitalized terms used and not otherwise defined herein shall have the meaning ascribed to such terms in the Interim Warehouse Agreement. Section 1. (a) The "Maturity Date" referenced in the Interim Warehouse Agreement and in the Note shall be ___________________________. (b) [Any other changes.] Section 2. As amended by Section 1 hereof all provisions of the Interim Warehouse Agreement and of the Note are reconfirmed as of the date hereof. The Borrower hereby reconfirms and remakes as of the date hereof each and every of its representations, warranties and covenants set forth in the Interim Warehouse Agreement and the Note. Exhibit C-1 55 IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written. AMRESCO CAPITAL TRUST By: ----------------------------------------- Name: --------------------------------------- Title: ------------------------------------- AMREIT I, INC. By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- AMREIT II, INC. By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- PRUDENTIAL SECURITIES CREDIT CORPORATION By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- Exhibit C-2 56 Approval as to Legality I, , counsel to the Borrower hereby confirm that: I delivered, on ___________________, 1998, the opinion letter, a copy of which is attached hereto (the "Opinion Letter") relating to the Interim Warehouse Agreement and the Note. I have represented the Borrower in connection with its execution and delivery of the Credit Increase Confirmation and Note Amendment (the "Confirmation") to which this Approval as to Legality is attached. I hereby extend, as of the date hereof, the opinions set forth in the Opinion Letter to cover both the Confirmation itself as well as the transactions described on the Confirmation and confirm, as of the date hereof, and subject to any and all assumptions and qualifications set forth therein, the opinions set forth in the Opinion Letter. Yours truly, ---------------------------------------- Dated: ------------------------- Exhibit C-3 57 Exhibit D FUNDING NOTICE _________ __, 199_ Prudential Securities Credit Corporation One New York Plaza New York, NY 10292 Re: Interim Warehouse and Security Agreement dated as of ___________________, 1998 ("Agreement") Gentlemen: Reference is made to the Agreement for defined terms used herein. Pursuant to Section I(2)(I) of the Agreement, this letter constitutes notice that the undersigned desires to obtain an Advance in the principal amount of $____________, with respect to the Eligible Assets shown on the attached Commercial Loan/Asset Schedule. Attached as Schedule I hereto is the calculation of the Advanced Amount in accordance with the Agreement including a breakdown of each calculation required to determine such Advanced Amount. The Borrower further represents, warrants and certifies that: (1) the undersigned has no notice or knowledge of any Event of Default; (2) the representations, warranties and covenants in the Agreement relating to the Eligible Assets shown on the attached Commercial Loan/Asset Schedule are true and correct as of the date hereof and shall be true and correct on the date of the Advance requested herein, before and after giving effect thereto; and (3) each of the conditions precedent to an Advance listed in Section I(2) of the Agreement has been satisfied as of the date hereof. [Insert for Wet-Ink Fundings: Additionally, borrower represents, warrants and certifies that (i) none of the Eligible Assets are Construction Loans or Other Real Estate Assets, (ii) the Eligible Assets have been underwritten in general accordance with Borrower's underwriting guidelines or meet current market accordance with Borrower's underwriting guidelines or meet current market parameters for Securitization of such Eligible Assets), (ii) the eligible Assets meet the definition of a Wet-Ink Eligible Asset; and (iv) the aggregate advances for all Wet-Ink Eligible Assets that have not been subsequently approved by Lender does not exceed $50,000,000.] [Insert Appropriate Borrower Name] Exhibit D - 1 58 AMRESCO CAPITAL TRUST By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- AMREIT I, INC. By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- AMREIT II, INC. By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- Exhibit D - 2 59 Exhibit E Delivery Obligation Related to Wet-Ink Eligible Assets 1. Phase I Environmental Report meeting current ASTM specifications. 2. Phase II Environment Report (if recommended by the Phase I Report) 3. An engineering and structural report (unless waived by Lender). Each study, report or review will be based on a statement of work mutually acceptable to Lender and the Borrower, to the extent practical. 4. Comprehensive underwriting memorandum, including, at a minimum, the following: a property description; an analysis of the historical and projected property operating performance; rent roll; maps; photographs; lease and sale comparables; and borrower organization and financial information. Exhibit E-1 EX-10.2 3 MASTER REPURCHASE AGREEMENT DATED JULY 1, 1998 1 THE BOND MARKET TRADE ASSOCIATION MASTER REPURCHASE AGREEMENT SEPTEMBER 1996 VERSION BETWEEN: PRUDENTIAL-BACHE INTERNATIONAL, LTD. AND DATED AS OF JULY 1, 1998 AMRESCO CAPITAL TRUST, AMREIT CMBS I, INC., AMREIT RMBS I, INC. AND AMREIT II, INC. 1. Applicability From time to time the parties hereto may enter into transactions in which one party ("Seller") agrees to transfer to the other ("Buyer") securities or other assets ("Securities") against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Securities at a date certain or on demand, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a "Transaction" and, unless otherwise agreed in writing, shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex I hereto and in any other annexes identified herein or therein as applicable hereunder. 2. Definitions (a) "Act of Insolvency", with respect to any party, (i) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, moratorium, dissolution, delinquency or similar law, or such party seeking the appointment or election of a receiver, conservator, trustee, custodian or similar official for such party or any substantial part of its property, or the convening of any meeting of creditors for purposes of commencing any such case or proceeding or seeking such an appointment or election, (ii) the commencement of any such case or proceeding against such party, or another seeking such an appointment or election, or the filing against a party of an application for a protective decree under the provisions of the Securities Investor Protection Act of 1970, which (A) is consented to or not timely contested by such party, (B) results in the entry of an order for relief, such an appointment or election, the issuance of such a protective decree or the entry of an order having a similar effect, or (C) is not dismissed within 15 days, (iii) the making by such party of a general assignment for the benefit of creditors, or (iv) the admission in writing by such party of such party's inability to pay such party's debts as they become due; (b) "Additional Purchased Securities", Securities provided by Seller to Buyer pursuant to Paragraph 4(a) hereof; (c) "Buyer's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of the Buyer's Margin Percentage to the Repurchase Price for such Transaction as of such date; (d) "Buyer's Margin Percentage", with respect to any Transaction as of any date, a percentage (which may be equal to the Seller's Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction; (e) "Confirmation", the meaning specified in Paragraph 3(b) hereof; (f) "Income", with respect to any Security at any time, any principal thereof and all interest, dividends or other distributions thereon; (g) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof; (h) "Margin Excess", the meaning specified in Paragraph 4(b) hereof; (i) "Margin Notice Deadline", the time agreed to by the parties in the relevant Confirmation, Annex I hereto or otherwise as the deadline for giving notice requiring same-day satisfaction of margin maintenance obligations as provided in Paragraph 4 hereof (or, in the absence of any such agreement, the deadline for such purposes established in accordance with market practice); (j) "Market Value", with respect to any Securities as of any date, the price for such Securities on such date obtained from a generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source, plus accrued Income to the extent not included therein (other than any income credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to market practice for such Securities); 2 (k) "Price Differential", with respect to any Transaction as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360-day-per-year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the date of determination (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction); (l) "Pricing Rate", the per annum percentage rate for determination of the Price Differential; (m) "Prime Rate", the prime rate of U.S. commercial banks as published in The Wall Street Journal (or, if more than one such rate is published, the average of such rates); (n) "Purchase Date", the date on which Purchased Securities are to be transferred by Seller to Buyer; (o) "Purchase Price", (i) on the Purchase Date, the price at which Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter, except where Buyer and Seller agree otherwise, such price increased by the amount of any cash transferred by Buyer to Seller pursuant to Paragraph 4(b) hereof and decreased by the amount of any cash transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to reduce Seller's obligations under clause (ii) of Paragraph 5 hereof; (p) "Purchased Securities", the Securities transferred by Seller to Buyer in a Transaction hereunder, and any Securities substituted therefor in accordance with Paragraph 9 hereof. The term "Purchased Securities" with respect to any Transaction at any time also shall include Additional Purchased Securities delivered pursuant to Paragraph 4(a) hereof and shall exclude Securities returned pursuant to Paragraph 4(b) hereof; (q) "Repurchase Date", the date on which Seller is to repurchase the Purchased Securities from Buyer, including any date determined by application of the provisions of Paragraph 3(c) or 11 hereof; (r) "Repurchase Price", the price at which Purchased Securities are to be transferred from Buyer to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase Price and the Price Differential as of the date of such determination; (s) "Seller's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of the Seller's Margin Percentage to the Repurchase Price for such Transaction as of such date; (t) "Seller's Margin Percentage", with respect to any Transaction as of any date, a percentage (which may be equal to the Buyer's Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction. 3. Initiation; Confirmation; Termination (a) An agreement to enter into a Transaction may be made orally or in writing at the initiation of either Buyer or Seller. On the Purchase Date for the Transaction, the Purchased Securities shall be transferred to Buyer or its agent against the transfer of the Purchase Price to an account of Seller. (b) Upon agreeing to enter into a Transaction hereunder, Buyer or Seller (or both), as shall be agreed, shall promptly deliver to the other party a written confirmation of each Transaction (a "Confirmation"). The Confirmation shall describe the Purchased Securities (including CUSIP number, if any), Identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction, and (v) any additional terms or conditions of the Transaction not inconsistent with this Agreement. The Confirmation, together with this Agreement, shall constitute conclusive evidence of the terms agreed between Buyer and Seller with respect to the Transaction to which the Confirmation relates, unless with respect to the Confirmation specific objection is made promptly after receipt thereof. In the event of any conflict between the terms of such Confirmation and this Agreement, this Agreement shall prevail. (c) In the case of Transactions terminable upon demand, such demand shall be made by Buyer or Seller, no later than such time as is customary in accordance with market practice, by telephone or otherwise on or prior to the business day on which such termination will be effective. On the date specified in such demand, or on the date fixed for termination in the case of Transactions having a fixed term, termination of the Transactions will be effected by transfer to Seller or its agent of the Purchased Securities and any income in respect thereof received by Buyer (and not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against the transfer of the Repurchase Price to an account of Buyer. 4. Margin Maintenance (a) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Buyer is less than the aggregate Buyer's Margin Amount for all such Transactions (a "Margin Deficit"), then Buyer may by notice to Seller require Seller in such Transactions, at Seller's option, to transfer to Buyer cash or additional Securities reasonably acceptable to Buyer ("Additional Purchased Securities"), so that the cash and aggregate Market Value of the Purchased Securities, including any such Additional Purchased Securities, will thereupon equal or exceed such aggregate Buyer's Margin Amount (decreased by the amount of any Margin Deficit as of such date arising from any Transactions in which such Buyer is acting as Seller). (b) If at any time the aggregate Market Value of all Purchase Securities subject to all Transactions in which a particular party hereto is acting as Seller exceeds the aggregate Seller's Margin Amount for all such Transactions at such time (a "Margin Excess"), then Seller may by notice to Buyer require Buyer in such Transactions, at Buyer's option, to transfer cash or Purchased Securities to Seller, so that the aggregate Market Value of the Purchased Securities, after deduction of any such cash or any Purchased Securities so transferred, will thereupon not exceed such aggregate Seller's Margin Amount (increased by the amount of any Margin Excess as of such date arising from any Transactions in which such Seller is acting as Buyer). (c) If any notice is given by Buyer or Seller under subparagraph (a) or (b) of this Paragraph at or before the Margin Notice Deadline on any business day, the party receiving such notice shall transfer cash or Additional Purchased 2 3 Securities as provided in such subparagraph no later than the close of business in the relevant market on such day. If any such notice is given after the Margin Notice Deadline, the party receiving such notice shall transfer such cash or Securities no later than the close of business in the relevant market on the next business day following such notice. (d) Any cash transferred pursuant to this Paragraph shall be attributed to such Transactions as shall be agreed upon by Buyer and Seller. (e) Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer or Seller (or both) under subparagraphs (a) and (b) of this Paragraph may be exercised only where a Margin Deficit or Margin Excess, as the case may be, exceeds a specified dollar amount or a specified percentage of the Repurchase Prices for such Transactions (which amount or percentage shall be agreed to by Buyer and Seller prior to entering into any such Transactions). (f) Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer and Seller under subparagraphs (a) and (b) of this Paragraph to require the elimination of a Margin Deficit or a Margin Excess, as the case may be, may be exercised whenever such a Margin Deficit or a Margin Excess exists with respect to any single Transaction hereunder (calculated without regard to any other Transaction outstanding under this Agreement). 5. Income Payments Seller shall be entitled to receive an amount equal to all Income paid or distributed on or in respect of the Securities that is not otherwise received by Seller, to the full extent it would be so entitled if the Securities had not been sold to Buyer. Buyer shall, as the parties may agreed with respect to any Transaction (or, in the absence of any such agreement, as Buyer shall reasonably determine in its discretion), on the date such Income is paid or distributed either (i) transfer to or credit to the account of Seller such Income with respect to any Purchased Securities subject to such Transaction or (ii) with respect to Income paid in cash, apply the Income payment or payments to reduce the amount, if any, to be transferred to Buyer by Seller upon termination of such Transaction. Buyer shall not be obligated to take any action pursuant to the preceding sentence (A) to the extent that such action would result in the creation of a Margin Deficit, unless prior thereto or simultaneously therewith Seller transfers to Buyer cash or Additional Purchased Securities sufficient to eliminate such Margin Deficit, or (B) if an Event of Default with respect to Seller has occurred and is then continuing at the time such Income is paid or distributed. 6. Security Interest Although the parties intend that all Transactions hereunder be sales and purchases and not loans, in the event any such Transactions are deemed to be loans, Seller shall be deemed to have pledged to Buyer as security for the performance by Seller of its obligations under each such Transaction, and shall be deemed to have granted to Buyer a security interest in, all of the Purchased Securities with respect to all Transactions hereunder and all Income thereon and other proceeds thereof. 7. Payment and Transfer Unless otherwise mutually agreed, all transfers of funds hereunder shall be in immediately available funds. All Securities transferred by one party hereto to the other party (i) shall be in suitable form for transfer or shall be accompanied by duly executed instruments of transfer or assignment in blank and such other documentation as the party receiving possession may reasonably request, (ii) shall be transferred on the book-entry system of a Federal Reserve Bank, or (iii) shall be transferred by any other method mutually acceptable to Seller and Buyer. 8. Segregation of Purchased Securities To the extent required by applicable law, all Purchased Securities in the possession of Seller shall be segregated from other securities in its possession and shall be identified as subject to this Agreement. Segregation may be accomplished by appropriate identification on the books and records of the holder, including a financial or securities intermediary or a clearing corporation. All of Seller's interest in the Purchased Securities shall pass to Buyer on the Purchase Date and, unless otherwise agreed by Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Securities or otherwise selling, transferring, pledging or hypothecating the Purchased Securities, but no such transaction shall relieve Buyer of its obligations to transfer Purchased Securities to Seller pursuant to Paragraph 3, 4 or 11 hereof, or of Buyer's obligation to credit or pay Income to, or apply Income to the obligations of, Seller pursuant to Paragraph 5 hereof. ------------------------------------------------------------------------ REQUIRED DISCLOSURE FOR TRANSACTIONS IN WHICH THE SELLER RETAINS CUSTODY OF THE PURCHASED SECURITIES Seller is not permitted to substitute other securities for those subject to this Agreement and therefore must keep Buyer's securities segregated at all times, unless in this Agreement Buyer grants Seller the right to substitute other securities. If Buyer grants the right to substitute, this means that Buyer's securities will likely be commingled with Seller's own securities during the trading day. Buyer is advised that, during any trading day that Buyer's securities are commingled with Seller's securities, they [will]* [may]** be subject to liens granted by Seller to [its clearing bank]* [third parties]** and may be used by Seller for deliveries on other securities transactions. Whenever the securities are commingled, Seller's ability to resegregate substitute securities for Buyer will be subject to Seller's ability to satisfy [the clearing]* [any]** lien or to obtain substitute securities. ------------------------------------------------------------------------ *Language to be used under 17 C.F.R. 403.4(e) If Seller is a government securities broker or dealer other than a financial Institution. **Language to be used under 17 C.F.R. 403.5(d) If seller is a financial Institution. 3 4 9. Substitution (a) Seller may, subject to agreement with and acceptance by Buyer, substitute other Securities for any Purchased Securities. Such substitution shall be made by transfer to Buyer of such other Securities and transfer to Seller of such Purchased Securities. After substitution, the substituted Securities shall be deemed to be Purchased Securities. (b) In Transactions in which Seller retains custody of Purchased Securities, the parties expressly agree that Buyer shall be deemed, for purposes of subparagraph (a) of this Paragraph, to have agreed to and accepted in this Agreement substitution by Seller of other Securities for Purchased Securities; provided, however, that such other Securities shall have a Market Value at least equal to the Market Value of the Purchased Securities for which they are substituted. 10. Representations Each of Buyer and Seller represents and warrants to the other that (i) it is duly authorized to execute and deliver this Agreement, to enter into Transactions contemplated hereunder and to perform its obligations hereunder and has taken all necessary action to authorize such execution, delivery and performance, (ii) it will engage in such Transactions as principal (or, if agreed in writing, in the form of an annex hereto or otherwise, in advance of any Transaction by the other party hereto, as agent for a disclosed principal), (iii) the person signing this Agreement on its behalf is duly authorized to do so on its behalf (or on behalf of any such disclosed principal), (iv) it has obtained all authorizations of any governmental body required in connection with this Agreement and the Transactions hereunder and such authorizations are in full force and effect and (v) the execution, delivery and performance of this Agreement and the Transactions hereunder will not violate any law, ordinance, charter, by-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected. On the Purchase Date for any Transaction Buyer and Seller shall each be deemed to repeat all the foregoing representations made by it. 11. Events of Default In the event that (i) Seller fails to transfer or Buyer fails to purchase Purchased Securities upon the applicable Purchase Date, (ii) Seller fails to repurchase or Buyer fails to transfer Purchased Securities upon the applicable Repurchase Date, (iii) Seller or Buyer fails to comply with Paragraph 4 hereof, (iv) Buyer fails, after one business day's notice, to comply with Paragraph 5 hereof, (v) an Act of Insolvency occurs with respect to Seller or Buyer, (vi) any representation made by Seller or Buyer shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated, or (vii) Seller or Buyer shall admit to the other its inability to, or its intention not to, perform any of its obligations hereunder (each an "Event of Default"): (a) The nondefaulting party may, at its option (which options shall be deemed to have been exercised immediately upon the of an Act of Insolvency), declare an Event of Default to have occurred hereunder and, upon the exercise or deemed exercise of such option, the Repurchase Date for each Transaction hereunder shall, if it has not already occurred, be deemed immediately to occur (except that, in the event that the Purchase Date for any Transaction has not yet occurred as of the date of such exercise or deemed exercise, such Transaction shall be deemed immediately canceled). The nondefaulting party shall (except upon the occurrence of an Act of Insolvency) give notice to the defaulting party of the exercise of such option as promptly as practicable. (b) In all Transactions in which the defaulting party is acting as Seller, if the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, (i) the defaulting party's obligations in such Transactions to repurchase all Purchased Securities, at the Repurchase Price therefor on the Repurchase Date determined in accordance with subparagraph (a) of this Paragraph, shall thereupon become immediately due and payable, (ii) all Income paid after such exercise or deemed exercise shall be retained by the nondefaulting party and applied to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder, and (iii) the defaulting party shall immediately deliver to the nondefaulting party any Purchased Securities subject to such Transactions then in the defaulting party's possession or control. (c) In all Transactions in which the defaulting party is acting as Buyer, upon tender by the nondefaulting party of payment of the aggregate Repurchase Prices for all such Transactions, all right, title and interest in and entitlement to all Purchased Securities subject to such Transactions shall be deemed transferred to the nondefaulting party, and the defaulting party shall deliver all such Purchased Securities to the nondefaulting party. (d) If the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, the nondefaulting party, without prior notice to the defaulting party, may: (i) as to Transactions in which the defaulting party is acting as Seller, (A) immediately sell, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, any or all Purchased Securities subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Securities, to give the defaulting party credit for such Purchased Securities in an amount equal to the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source, against the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder; and (ii) as to Transactions in which the defaulting party is acting as Buyer, (A) immediately purchase, in a recognized market (or otherwise in a commercially reasonably manner) at such price or prices as the nondefaulting party may reasonable deem satisfactory, securities ("Replacement Securities") of the same class and amount as any Purchased Securities that are not delivered by the defaulting party to the nondefaulting party as required hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Securities, to be deemed to have purchased Replacement Securities at the price therefor on such date, obtained from a generally recognized source or the most recent closing offer quotation from such a source. 4 5 Unless otherwise provided in Annex I, the parties acknowledge and agree that (1) the Securities subject to any Transaction hereunder are instruments traded in a recognized market, (2) in the absence of a generally recognized source for prices or bid or offer quotations for any Security, the nondefaulting party may establish the source therefor in its sole discretion and (3) all prices, bids and offers shall be determined together with accrued Income (except to the extent contrary to market practice with respect to the relevant Securities). (e) As to Transactions in which the defaulting party is acting as Buyer, the defaulting party shall be liable to the nondefaulting party for any excess of the price paid (or deemed paid) by the nondefaulting party for Replacement Securities over the Repurchase Price for the Purchased Securities replaced thereby and for any amounts payable by the defaulting party under Paragraph 5 hereof or otherwise hereunder. (f) For purposes of this Paragraph 11, the Repurchase Price for each Transaction hereunder in respect of which the defaulting party is acting as Buyer shall not increase above the amount of such Repurchase Price for such Transaction determined as of the date of the exercise or deemed exercise by the nondefaulting party of the option referred to in subparagraph (a) of this Paragraph. (g) The defaulting party shall be liable to the nondefaulting party for (i) the amount of all reasonable legal or other expenses incurred by the nondefaulting party in connection with or as a result of an Event of Default, (ii) damages in an amount equal to the cost (including all fees, expenses and commissions) of entering into replacement transactions and entering into or terminating hedge transactions in connection with or as a result of an Event of Default, and (iii) any other loss, damage, cost or expense directly arising or resulting from the occurrence of an Event of Default in respect of a Transaction. (h) To the extent permitted by applicable law, the defaulting party shall be liable to the nondefaulting party for interest on any amounts owing by the defaulting party hereunder, from the date the defaulting party becomes liable for such amounts hereunder until such amounts are (i) paid in full by the defaulting party or (ii) satisfied in full by the exercise of the nondefaulting party's rights hereunder. Interest on any sum payable by the defaulting party to the nondefaulting party under this Paragraph 11(h) shall be at a rate equal to the greater of the Pricing Rate for the relevant Transaction or the Prime Rate. (i) The nondefaulting party shall have, in addition to its rights hereunder, any rights otherwise available to it under any other agreement or applicable law. 12. Single Agreement Buyer and Seller acknowledge that, and have entered hereinto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and have been made in consideration of each other. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted. 13. Notices and Other Communications Any and all notices, statements, demands or other communications hereunder may be given by a party to the other by mail, facsimile, telegraph, messenger or otherwise to the address specified in Annex II hereto, or so sent to such party at any other place specified in a notice of change of address hereafter received by the other. All notices, demands and requests hereunder may be made orally, to be confirmed promptly in writing, or by other communication as specified in the preceding sentence. 14. Entire Agreement; Severability This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for Repurchase Transactions. Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement. 15. Non-assignability; Termination (a) The rights and obligations of the parties under this Agreement and under any Transaction shall not be assigned by either party without the prior written consent of the other party, and any such assignment without the prior written consent of the other party shall be null and void. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. This Agreement may be terminated by either party upon giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any Transactions then outstanding. (b) Subparagraph (a) of this Paragraph 15 shall not preclude a party from assigning, charging or otherwise dealing with all or any part of its interest in any sum payable to it under Paragraph 11 hereof. 16. Governing Law This Agreement shall be governed by the laws of the State of New York without giving effect to the conflict of law principles thereof. 17. No Waivers, Etc. No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event 5 6 of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. Without limitation on any of the foregoing, the failure to give a notice pursuant to Paragraph 4(a) or 4(b) hereof will not constitute a waiver of any right to do so at a later date. 18. Use of Employee Plan Assets (a) If assets of an employee benefit plan subject to any provision of the Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be used by either party hereto (the "Plan Party") in a Transaction, the Plan Party shall so notify the other party prior to the Transaction. The Plan Party shall represent in writing to the other party that the Transaction does not constitute a prohibited Transaction under ERISA or is otherwise exempt therefrom, and the other party may proceed in reliance thereon but shall not be required so to proceed. (b) Subject to the last sentence of subparagraph (a) of this Paragraph, any such Transaction shall proceed only if Seller furnishes or has furnished to Buyer its most recent available audited statement of its financial condition and its most recent subsequent unaudited statement of its financial condition. (c) By entering into a Transaction pursuant to this Paragraph, Seller shall be deemed (i) to represent to Buyer that since the date of Seller's latest such financial statements, there has been no material adverse change in Seller's financial condition which Seller has not disclosed to Buyer, and (ii) to agree to provide Buyer with future audited and unaudited statements of its financial condition as they are issued, so long as it is a Seller in any outstanding Transaction involving a Plan Party. 19. Intent (a) The parties recognize that each Transaction is a "repurchase agreement" as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Securities subject to such Transaction or the term of such Transaction would render such definition inapplicable), and a "securities contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended (except insofar as the type of assets subject to such Transaction would render such definition inapplicable). (b) It is understood that either party's right to liquidate Securities delivered to it in connection with Transactions hereunder or to exercise any other remedies pursuant to Paragraph 11 hereof is a contractual right to liquidate such Transaction as described in Sections 555 and 559 of Title 11 of the United States Code, as amended. (c) The parties agree and acknowledge that if a party hereto is an "insured depository institution," as such term is defined in the Federal Deposit Insurance Act, as amended ("FDIA"), then each Transaction hereunder is a "qualified financial contract," as that term is defined in FDIA and any rules, orders or policy statements thereunder (except insofar as the type of assets subject to such Transaction would render such definition inapplicable). (d) It is understood that this Agreement constitutes a "netting contract" as defined in and subject to Title IV of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and each payment entitlement and payment obligation under any Transaction hereunder shall constitute a "covered contractual payment entitlement" or "covered contractual payment obligation", respectively, as defined in and subject to FDICIA (except insofar as one or both of the parties is not a "financial institution" as that term is defined in FDICIA). 20. Disclosure Relating to Certain Federal Protections The parties acknowledge that they have been advised that: (a) In the case of Transactions in which one of the parties is a broker or dealer registered with the Securities and Exchange Commission ("SEC") under Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the Securities Investor Protection Corporation has taken the position that the provisions of the Securities Investor Protection Act of 1970 ("SIPA") do not protect the other party with respect to any Transaction hereunder; (b) In the case of Transactions in which one of the parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to the other party with respect to any Transaction hereunder; and (c) In the case of Transactions in which one of the parties is a financial institution, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable. PRUDENTIAL-BACHE INTERNATIONAL, LTD. By: /s/ PAUL McCORMICK -------------------------------------- Title: V.P. ----------------------------------- Date: 9/30/98 ------------------------------------ [SIGNATURES CONTINUE] 7 AMRESCO CAPITAL TRUST By: /s/ JOHN JUMONVILLE -------------------------------------- Title: V.P. ----------------------------------- Date: 9/15/98 ------------------------------------ AMREIT RMBS I, INC. By: /s/ JOHN JUMONVILLE -------------------------------------- Title: V.P. ----------------------------------- Date: 9/15/98 ------------------------------------ AMREIT CMBS I, INC. By: /s/ JOHN JUMONVILLE -------------------------------------- Title: V.P. ----------------------------------- Date: 9/15/98 ------------------------------------ AMREIT II, INC. By: /s/ JOHN JUMONVILLE -------------------------------------- Title: V.P. ----------------------------------- Date: 9/15/98 ------------------------------------ 8 ANNEX I This Annex I forms a part of the Master Repurchase Agreement dated as of July 1, 1998 (the "Agreement") between (A) PRUDENTIAL-BACHE INTERNATIONAL, LTD. ("Buyer") and (B) AMREIT CAPITAL TRUST, AMREIT CMBS I, INC., AMREIT RMBS I, INC., and AMREIT II, INC. (collectively "Seller"). Capitalized terms used but not defined in this Annex I shall have the meanings ascribed to them in the Agreement. 1. Other Applicable Annexes. The following Annexes also form a part of the Agreement: (a) Annex II Names and Addresses for Communication between Parties (b) Annex III (International Transactions) (c) Annex IV (Party Acting as Agent) (d) Annex V (Margin for Forward Transactions) 2. For purposes of the Agreement, the following terms shall have the meanings hereto ascribed: (a) "Advance Rate" means, with respect to each Eligible Asset, the applicable rate determined in accordance with Schedule I attached hereto. (b) "Aggregate Purchase Price" at any time means the sum of the Purchase Prices of all outstanding Purchased Securities (or with respect to the sublimits specified below, the sum of the Purchase Prices of all outstanding Purchased Securities of the type described); provided, however, that the Aggregate Purchase Price shall not exceed $60,000,000 for any CMBS rated "BB" or below by any Rating Agency (as hereinafter defined) and shall not exceed $40,000,000 for any CMBS rated B or below by any Rating Agency. (c) "Business Day" means any day other than (i) a Saturday or Sunday, or (ii) a day on which banking institutions in the State of New York or the State of Texas are authorized or obligated by law or executive order to be closed. (d) "CMBS" means commercial or multifamily mortgage backed securities. (e) "Eligible Assets" means (i) CMBS rated "AAA" through "B-" by any of Standard & Poor's Rating Services, a division of the McGraw-Hill Companies, Duff & Phelps Credit Rating Co., Fitch IBCA, Inc. or Moody's Investor Services (collectively, the "Rating Agencies"), and (ii) RMBS rated "AAA" through "B" by any of the Rating Agencies. 9 (f) "Eurodollar Business Day" means a Business Day in New York on which commercial banks are open for international business (including dealings in deposits in U.S. dollars) in London. (g) "LIBOR" means (i) the rate (expressed as a percentage per annum) for one-month deposit in U.S. dollars that appears on Telerate Page 3750 as of 11:00 a.m., New York City time on the applicable Eurodollar Business Day for such period or (ii) if such rate does not appear on Telerate Page 3750 as of 11:00 a.m. New York City time, on the applicable Eurodollar Business Day, the rate (expressed as a percentage per annum) for one-month deposit in U.S. dollars as reported by Morgan Guaranty Trust Company of New York (or such other prime bank as Buyer shall designate). (h) "Margin Notice Deadline" means 10:00 a.m. New York City time. (i) "RMBS" means a series of one- to four-family residential mortgage backed securities. 3. The definition of "Market Value" in Section 2(j) is amended by adding thereto after "a generally recognized source agreed to by the Parties" the following: "(and, in the absence of such agreement, as reasonably determined by Buyer in accordance with commercially reasonable standards)". 4. Notwithstanding the definition of Purchase Price in Paragraph 2 of the Agreement and the provisions of Paragraph 4 of the Agreement (i) the Purchase Price will not be increased or decreased by the amount of any cash transferred by one party to the other pursuant to Paragraph 4 of the Agreement, and (ii) the transfer of such cash shall be treated as if it constituted a transfer of Purchased Securities (with a Market Value equal to the U.S. dollar amount of such cash) pursuant to Paragraph 4(a) or (b), as the case may be. 5. The Purchase Price for the Purchased Securities for each Transaction will be the product of the applicable Advance Rate(s) multiplied by the Market Value of such Purchased Securities. The Pricing Rate for each Transaction, as adjusted from month to month, will be the sum of (i) the pricing spread expressed as basis points corresponding to the applicable Advance Rate and type of Securities (either CMBS or RMBS) involved, all as determined in accordance with Schedule I and (ii) LIBOR as determined by Buyer as of 11:00 a.m. on the second Eurodollar Business Day immediately preceding each of (x) the related Purchase Date and (y) the first day of each succeeding calendar month. Purchased Securities shall be limited to Eligible Assets and the Aggregate Purchase Price shall not exceed $100,000,000 at any time. 6. Subparagraph (e) of Paragraph 4 of the Agreement is amended by adding the following at the end thereof: 2 10 "Unless otherwise changed in writing by Buyer, with respect to subparagraphs (a) and (b) of this Paragraph 4 the Margin Deficit and Margin Excess must exceed 2% of the aggregate Market Value of Purchased Securities before either Seller or Buyer, as applicable, shall be required to transfer any funds or Securities." 7. Notwithstanding anything to the contrary provided in Paragraph 11 or any other Paragraph of this Agreement should an Event of Default under Paragraph 11 exist with respect to Seller that is not cured within any applicable cure period, Buyer's sole recourse shall be limited to exercising its rights with respect to the Purchased Securities and any Income related thereto, and Seller's liability for any amounts owed to Buyer under this Agreement shall be limited to the Purchased Securities. 8. The following paragraphs (c) and (d) shall be added to Paragraph 9 of the Agreement: "(c) In the case of any Transaction for which the Repurchase Date is other than the Business Day immediately following the Purchase Date and with respect to which Seller does not have any existing right to substitute substantially the same Securities for the Purchased Securities, Seller shall have the right, subject to the provisions of this sentence, upon notice to Buyer, which notice shall be given at or prior to 10 a.m. (New York City time) on such Business Day, to substitute substantially the same Securities for any Purchased Securities; provided, however, that Buyer may elect, by the close of business on the Business Day notice is received, or by the close of the next Business Day if notice is given after 10 a.m. (New York City time) on such day, not to accept such substitution. In the event such substitution is accepted by Buyer, such substitution shall be made by Seller's transfer to Buyer of such other Securities and Buyer's transfer to Seller of such Purchased Securities, and after such substitution, the substituted Securities shall be deemed to be Purchased Securities. In the event Buyer elects not to accept such substitution, Seller shall have the unilateral right, at its option, to terminate the Transaction by paying to Buyer the Repurchase Price. (d) In the event Seller exercises its right to substitute or terminate under subparagraph (c), Seller shall be obligated to pay to Buyer, by the close of the Business Day of such substitution or termination, as the case may be, an amount equal to (A) Buyer's actual cost (including all fees, expenses and commissions) of (i) entering into replacement transactions; (ii) entering into or terminating hedge transactions; and/or (ii) terminating transactions or substituting securities in like transactions with third parties in connection with or as a result of such substitution or termination, and (B) to the extent Buyer determines not to enter into replacement transaction, the loss incurred by Buyer directly arising or resulting from such substitution or termination. The foregoing amounts shall be solely determined and calculated by Buyer in good faith." 9. Paragraph 13 of the Agreement is amended by deleting the text thereof and replacing it with the following: 3 11 "Any notice or communication with respect to the Agreement will be sufficiently given to a party if it is in writing and delivered in person, sent by certified or registered mail (airmail, if overseas) or the equivalent (with return receipt requested) or by overnight courier requiring a signature by the recipient or given by telecopier or telex (with answer back receipt) at the address or telecopy number for such parties set forth on Annex II hereto. A notice or communication will be effective: 1. if delivered by hand or sent by overnight courier, on the day and time it is delivered; 2. if sent by telex, on the day recipient answer back is received; 3. if sent by telecopier, on the day it is sent and its receipt is confirmed; 4. if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested) three days after dispatch if the recipient's address for notice is in the same country as the place of dispatch or otherwise seven days after dispatch; or 5. if given by telephone and confirmed by one of the preceding forms of notice no later than the next Business Day on the date given by telephone. either party may by notice to the other change the address or telecopier number or telex number at which notices or communications are to be given to it." 10. Paragraph 15(a) of the Agreement is amended by deleting the period at the end of the first sentence thereof and adding the following: "; provided, however, Buyer's consent to the assignment of this Agreement shall not be required for an assignment by Seller to any wholly-owned subsidiary of AMRESCO Capital Trust, a Texas real estate investment trust (such assignee the "Permitted Assignee") if (i) Seller shall provide Buyer with written notice of such assignment and (ii) the Permitted Assignee shall execute and deliver to Buyer a written agreement, reasonably satisfactory to Seller and Buyer, wherein the Permitted Assignee accepts the assignment and assumes all obligations of Seller under this Agreement." No such assignment shall relieve the assignor of any liability hereunder. 11. The Agreement is amended by deleting the last sentence of Paragraph 15(a) and inserting the following: "The term of this Agreement shall be for a period of two years, commencing July 1, 1998, unless sooner terminated following an Event of Default by written notice from the nondefaulting party." 4 12 12. The Agreement is amended by adding the following Paragraph 21: "21. CONFLICT. In the event of any conflict between the terms of this Agreement and any Annex hereto (including, without limitation, this Annex I), the terms of such Annex shall prevail." PRUDENTIAL-BACHE INTERNATIONAL, LTD. AMREIT CMBS I, INC. By: /s/ PAUL McCORMICK By: /s/ JOHN JUMONVILLE -------------------------- -------------------------------- Paul McCormick John Jumonville Title: V.P. Title: V.P. ----------------------- --------------------------- Date: 9/30/98 Date: 9/15/98 ----------------------- --------------------------- AMRESCO CAPITAL TRUST AMREIT II, INC. By: /s/ JOHN JUMONVILLE By: /s/ JOHN JUMONVILLE -------------------------- -------------------------------- John Jumonville John Jumonville Title: V.P. Title: V.P. ----------------------- --------------------------- Date: 9/15/98 Date: 9/15/98 ----------------------- --------------------------- AMREIT RMBS I, INC. By: /s/ JOHN JUMONVILLE -------------------------- John Jumonville Title: V.P. ----------------------- Date: 9/15/98 ----------------------- 13 SCHEDULE I TO ANNEX I Advance Rates and Pricing Spread Pricing Grid
Ratings Advance CMBS Advance RMBS Rate Rate AAA 95% 20 95% 37.5 IO 90% 20 80% 100 AA 95% 20 95% 37.5 A 80% 20 80% 50 BBB 80% 25 80% 62.5 BB 75% 100 75% 75 B 70% 135 70% 125 B- 60% 150 60% 150
14 ANNEX II Names and Address for Communications Between Parties AMRESCO Capital Trust 700 North Pearl Street Suite 2400, LB 342 Dallas, Texas 75201-7424 Telephone: 214-953-7733 Facsimile: 214-953-7757 Attention: President and General Counsel PRUDENTIAL-BACHE INTERNATIONAL, LTD. 9 Devonshire Square London EC2M 4HP, England Attention: Paul McCormack, Vice President Telephone: 011-44-171-548 4500 15 ANNEX III INTERNATIONAL TRANSACTIONS This Annex III (including any Schedules hereto) forms a part of the Master Repurchase Agreement dated as of July 1, 1998 (the "Agreement") between PRUDENTIAL-BACHE INTERNATIONAL, LTD. and AMRESCO CAPITAL TRUST, AMREIT CMBS I, INC., AMREIT RMBS I, INC. and AMREIT II, INC. Capitalized terms used but not defined in this Annex III shall have the meaning ascribed to them in the Agreement. 1. Definitions. For purposes of the Agreement and this Annex III: (a) The following terms shall have the following meanings: "Base Currency", United States dollar or such other currency as Buyer and Seller may agree in the Confirmation with respect to any International Transaction or otherwise in writing; "Business Day" or "business day": (i) relation to any International Transaction which (A) involves an International Security and (B) is to be settled through CEDEL or Euroclear, a day on which CEDEL or, as the case may be, Euroclear is open to settle business in the currency in which the Purchase Price and the Repurchase Price are denominated; (ii) in relation to any International Transaction which (A) involves an International Security and (B) is to be settled through a settlement system other than CEDEL or Euroclear, a day on which that settlement system is open to settle such International Transaction; (iii) in relation to any International Transaction which involves a delivery of Securities not falling within (i) or (ii) above, a day on which banks are open for business in the place where delivery of the relevant Securities is to be effected; and (iv) in relation to any International Transaction which involves an obligation to make a payment not falling within (i) or (ii) above, a day other than a Saturday or Sunday on which banks are open for business in the principal financial center of the country of which the currency in which the payment is denominated is the official currency and, if different, in the place where any account designated by the parties for the making or receipt of the payment is situated (or, in the case of ECU, a day on which ECU clearing operates); "CEDEL", CEDEL Bank, socie'te anonyme; "Contractual Currency", the currency in which the International Securities subject to any International Transaction are denominated or such other currency as may be specified in the Confirmation with respect to any International Transaction; "Euroclear", Morgan Guaranty Trust Company of New York, Brussels Branch, as operator of the Euroclear System; "International Security", any Security that (i) is denominated in a currency other than United States dollars or (ii) is capable of being cleared through a clearing facility outside the United States or (iii) is issued by an issuer organized under the laws of a jurisdiction other than the United States (or any political subdivision thereof); "International Transaction", any Transaction involving (i) an International Security or (ii) a party organized under the laws of a jurisdiction other than the United States (or any political subdivision thereof) or having its principal place of business outside the United States or (iii) a branch or office outside the United States designated in Annex I by a party organized under the laws of the United States (or any political subdivision thereof) as an office through which that party may act; "LIBOR", in relation to any sum in any currency, the offered rate for deposits for such sum in such currency for a period of three months which appears on the Reuters Screen LIBO page as of 11:00 A.M., London time, on the date on which it is to be determined (or, if more than one such rate appears, the arithmetic mean of such rates); "Spot Rate", where an amount in one currency is to be converted into a second currency on any 16 date, the spot rate of exchange of a comparable amount quoted by Buyer and Seller, for the sale by such bank of such second currency against a purchase by it of such first currency. (b) Notwithstanding Paragraph 2 of the Agreement, the term "Prime Rate" shall mean, with respect to any International Transaction, LIBOR plus a spread, as may be specified in the Confirmation with respect to any International Transaction or otherwise in writing. 2. Manner of Transfer. All transfers of International Securities (i) shall be in suitable form for transfer and accompanied by duly executed instruments of transfer or assignment in blank (where required for transfer) and such other documentation as the transferee may reasonably request, or (ii) shall be transferred through the book-entry system of Euroclear or CEDEL, or (iii) shall be transferred through any other agreed securities clearing system or (iv) shall be transferred by any other method mutually acceptable to Seller and Buyer. 3. Contractual Currency. (a) Unless otherwise mutually agreed, all funds transferred in respect of the Purchase Price or the Repurchase Price in any International Transaction shall be in the Contractual Currency. (b) Notwithstanding subparagraph (a) of this Paragraph 3, the payee of any payment may, at its option, accept tender thereof in any other currency; provided, however, that, to the extent permitted by applicable law, the obligation of the payor to make such payment will be discharge only to the extent of the amount of the Contractual Currency that such payee may, consistent with normal banking procedures, purchase with such other currency (after deduction of any premium and costs of exchange) for delivery within the customary delivery period for spot transactions in respect of the relevant currency. (c) If for any reason the amount in the Contractual Currency so received, including amounts received after conversion of any recovery under any judgment or order expressed in a currency other than the Contractual Currency, falls short of the amount in the Contractual Currency due in respect of the Agreement, the party required to make the payment shall (unless an Event of Default has occurred and such party is the nondefaulting party) as a separate and independent obligation (which shall not merge with any judgment or any payment or any partial payment or enforcement of payment) and to the extent permitted by applicable law, immediately pay such additional amount in the Contractual Currency as may be necessary to compensate for the shortfall. (d) If for any reason the amount of the Contractual Currency received by one party hereto exceeds the amount in the Contractual Currency due such party in respect of the Agreement, then (unless an Event of Default has occurred and such party is the nondefaulting party) the party receiving the payment shall refund promptly the amount of such excess. 4. Notices. Any and all notices, statements, demands or other communications with respect to International Transactions shall be given in accordance with Paragraph 13 of the Agreement and shall be in the English language. 5. Taxes. (a) Transfer taxes, stamp taxes and all similar costs with respect to the transfer of Securities shall be paid by Seller. (b) (i) Unless otherwise agreed, all money payable by on party (the "Payor") to the other (the "Payee") in respect of any International Transaction shall be paid free and clear of, and without withholding or deduction for, any taxes or duties of whatsoever nature imposed, levied, collected, withheld or assessed by any authority having power to tax (a "Tax"), unless the withholding or deduction of such Tax is required by law. In that even, unless otherwise agreed, Payor shall pay such additional amounts as will result in the net amounts receivable by Payee (after taking account of such withholding or deduction) being equal to such amounts as would have been received by Payee had no such Tax been required to be withheld or deducted; provided that for purposes of Paragraphs 5 and 6 the term "Tax" shall not include any Tax that would not have been imposed but for the existence of any present or former connection between Payee and the jurisdiction imposing such Tax other than the mere receipt of payment from Payor or the performance of Payee's obligations under an International Transaction. The parties acknowledge and agree, for the avoidance of doubt, that the amount of Income required to be transferred, credited or applied by Buyer for the benefit of Seller under Paragraph 5 of the Agreement shall be determined without taking into account ant Tax required to be withheld or deducted from such Income, unless otherwise agreed. 17 (ii) In the case of any Tax required to be withheld or deducted from any money payable to a party hereto acting as Payee by the other party hereto acting as Payor, Payee agrees to deliver to Payor (or, if applicable, to the authority imposing the Tax) any certificate or document reasonably requested by Payor that would entitle Payee to an exemption from, or reduction in the rate of, withholding or deduction of Tax from money payable by Payor to Payee. (iii) Each party hereto agrees to notify the other party of any circumstance known or reasonably known to it (other than a Change of Tax Law, as defined in Paragraph 6 hereof) that causes a certificate or document provided by it pursuant to subparagraph (b)(ii) of this Paragraph to fail to be true. (iv) Notwithstanding subparagraph (b)(i) of this Paragraph, no additional amounts shall be payable by Payor to Payee in respect of an International Transaction to the extent that such additional amounts are payable as a result of a failure by Payee to comply with its obligations under subparagraph (b)(ii) or (b)(iii) of this Paragraph with respect to such International Transaction. 6. Tax Event. (a) This Paragraph 6 shall apply if either party notifies the other, with respect to a Tax required to be collected by withholding or deduction that - (i) any action taken by a taxing authority or brought in a court of competent jurisdiction after the date of an International Transaction is entered into, regardless of whether such action is taken or brought with respect to a party to the Agreement; or (ii) a change in the fiscal or regulatory regime after the date of International Transaction is entered into, (each, a "Change of Tax Law") has or will, in the notifying party's reasonable opinion, have a materiel adverse effect on such party in the context of an International Transaction. (b) If so requested by the other party, the notifying party will furnish the other party with an opinion of a suitably qualified adviser that an event referred to in subparagraph (a)(i) or (a)(ii) of this Paragraph 6 has occurred and affects the notifying party. (c) Where this Paragraph 6 applies, the party giving the notice referred to in subparagraph (a) above may, subject to subparagraph (d) below, terminate the International Transaction effective from a date specified in the notice, not being earlier (unless so agreed by the other party) than 30 days after the date of such notice, by nominating such date as the Repurchase Date. (d) If the party receiving the notice referred to in subparagraph (a) of this Paragraph 6 so elects, it may override such notice by giving a counter-notice to the other party. If a counter-notice is given, the party which gives such counter-notice will be deemed to have agreed to indemnify the other party against the adverse effect referred to in subparagraph (a) of this Paragraph 6 so far as it relates to the relevant International Transaction and the original Repurchase Date will continue to apply. (e) Where an International Transaction is terminated as described in this Paragraph 6, the party which has given the notice to terminate shall indemnify the other party against any reasonable legal and other professional expenses incurred by the other party by reason of the termination, but the other party may not claim any sum constituting consequential loss or damage in respect of a termination in accordance with this Paragraph 6. (f) This Paragraph 6 is without prejudice to Paragraph 5 of this Annex III; but an obligation to pay additional amounts pursuant to Paragraph 5 of this Annex III may, where appropriate, be a circumstance which causes this Paragraph 6 to apply. 7. Margin. In the calculation of "Margin Deficit" and "Margin Excess" pursuant to Paragraph 4 of the Agreement, all sums not denominated in the Base Currency shall be deemed to be converted into the Base Currency at the Spot Rate on the date of such calculation. 8. Events of Default. (a) In addition to the Events of Default set forth in Paragraph 11 of the Agreement, it shall be an additional "Event of Default" if either party fails, after on business day's notice, to perform any covenant or obligation required to 18 be performed by it under this Annex III, including, without limitation, the payment of taxes or additional amounts as required by Paragraph 5 of this Annex III. (b) In addition to the other rights of a nondefaulting party under Paragraph 11 of the Agreement, following an Event of Default, the nondefaulting party may, at any time at its option, effect the conversion of any currency into a different currency of its choice at the Spot Rate on the date of the exercise of such option and offset obligations of the defaulting party denominated in different currencies against each other. 19 SCHEDULE III.A INTERNATIONAL TRANSACTIONS RELATING TO [RELEVANT COUNTRY] This Schedule III.A forms a part of Annex III to the Master Repurchase Agreement dated as of __________________, 19____ (the "Agreement" between ____________________________ and __________________________________. Capitalized terms used but not defined in this Schedule III.A shall have the meaning ascribed to them in Annex III. [Insert provisions applicable to relevant country] 20 ANNEX IV PARTY ACTING AS AGENT This Annex IV forms a part of the Master Repurchase Agreement dated as of JULY 1, 1998 (the "Agreement") between PRUDENTIAL-BACHE INTERNATIONAL, LTD. and AMRESCO CAPITAL TRUST, AMREIT CMBS I, INC., AMREIT RMBS I, INC. and AMREIT II, INC. This Annex IV sets forth the terms and conditions governing all transactions in which a party selling securities or buying securities, as the case may be )"Agent"), in a Transaction is acting as agent for one or more third parties (each, a "Principal"). Capitalized terms used but not defined in this Annex IV shall have the meanings ascribed to them in the Agreement. 1. Additional Representations. In addition to the representations set forth in Paragraph 10 of the Agreement, Agent hereby makes the following representations, which shall continue during the term of any Transaction: Principal has duly authorized Agent to execute and deliver the Agreement on its behalf, has the power to so authorize Agent and to enter into the Transactions contemplated by the Agreement and to perform the obligations of Seller or Buyer, as the case may be, under such Transactions, and has taken all necessary action to authorize such execution and delivery by Agent and such performance by it. 2. Identification of Principals. Agent agrees (a) to provide the other party, prior to the date on which the parties agree to enter into any transaction under the Agreement, with a written list of Principals for which it intends to act as Agent (which list may be amended in writing from time to time with the consent of the other party), and (b) to provide the other party, before the close of business on the next business day after orally agreeing to enter into a Transaction, with notice of the specific Principal or Principals for whom it is acting in connection with such Transaction. If (i) Agent fails to identify such Principal or Principals prior to the close of business on such next business day or (ii) the other party shall determine in its sole discretion that any Principal or Principals identified by Agent are not acceptable to it, the other party may reject and rescind any Transaction with such Principal or Principals, return to Agent any Purchased Securities or portion of the Purchase Price, as the case may be, previously transferred to the other party and refuse any further performance under such Transaction, and Agent shall immediately return to the other party any portion of the Purchase Price or Purchased Securities, as the case may be, previously transferred to Agent in connection with such Transaction; provided, however, that (A) the other party shall promptly (and in any event within one business day) notify Agent of its determination to reject and rescind such Transaction and (B) to the extent that any performance was rendered by any party under any Transaction rejected by the other party, such party shall remain entitled to any Price Differential or other amounts that would have been payable to it with respect to such performance if such Transaction had not been rejected. The other party acknowledges that Agent shall not have any obligation to provide it with confidential information regarding the financial status of its Principals; Agent agrees, however, that it will assist the other party in obtaining from Agent's Principals such information regarding the financial status of such Principals as the other party may reasonably request. 3. Limitation of Agent's Liability. The parties expressly acknowledge that if the representations of Agent under the Agreement, including this Annex IV, are true and correct in all material respects during the term of any Transaction and Agent otherwise complies with the provisions of this Annex IV, then (a) Agent's obligations under the Agreement shall not include a guarantee of performance by its Principal or Principals and (b) the other party's remedies shall not include a right of set off in respect of rights or obligations, if any, of Agent arising in other transaction in which Agent is acting as principal. 4. Multiple Principals. (a) In the event that Agent proposes to act for more than one Principal hereunder, Agent and the other party shall elect whether (i) to treat Transactions under the Agreement as transactions entered into on behalf of separate Principals or (ii) to aggregate such Transactions as if they were transactions by a single Principal. Failure to make such an election in writing shall be deemed an election to treat Transactions under the Agreement as transactions on behalf of separate Principals. (b) In the event that Agent and the other party elect (or are deemed to elect) to treat Transactions under the Agreement as transaction on behalf of separate Principals, the parties agree that (i) Agent will provide the other party, together with the notice described in Paragraph 2(b) of this Annex IV, notice specifying the portion of each Transaction allocable to the account of each of the Principals for which it is acting (to the extent that any such Transaction is allocable to the account of more than one Principal); (ii) the portion of any individual Transaction allocable to each Principal shall be deemed a separate Transaction under the Agreement; (iii) the 21 margin maintenance obligations of Buyer and Seller under Paragraph 4 of the Agreement shall be determined on a Transaction-by-Transaction basis (unless the parties agree to determine such obligations on a Principal-by-Principal basis); and (iv) Buyer's and Seller's remedies under the Agreement had entered into a separate Agreement with the other party on behalf of each of its Principals. (c) In the event that Agent and the other party elect to treat Transactions under the Agreement as if they were transactions by a single Principal, the parties agree that (i) Agent's notice under Paragraph 2(b) of this Annex IV need only identify the names of its Principals but not the portion of each Transaction allocable to each Principal's account; (ii) the margin maintenance obligations of Buyer and Seller under Paragraph 4 of the Agreement shall, subject to any greater requirement imposed by applicable law, be determined on an aggregate basis for all Transactions entered into by Agent on behalf of any Principal, and (iii) buyer's and Seller's remedies upon the occurrence of an Event of Default shall be determined as if all Principals were a single Seller or Buyer, as the case may be. (d) Notwithstanding any other provision of the Agreement (including, without limitation, this Annex IV), the parties agree that any Transactions by Agent on behalf of an employee benefit plan under ERISA shall be treated as Transactions on behalf of separate Principals in accordance with Paragraph 4(b) of this Annex IV (and all margin maintenance obligations of the parties shall be determined on a Transaction-by-Transaction basis). 5. Interpretation of Terms. All references to "Seller" or "Buyer", as the case may be, in the Agreement shall, subject to the provisions of this Annex IV (including, among other provisions, the limitations on Agent's liability in Paragraph 3 of this Annex IV), be construed to reflect that (i) each Principal shall have, in connection with any Transaction or Transactions entered into by Agent on its behalf, the entering into such Transaction or Transactions with the other party under the Agreement, and (ii) Agent's Principal or Principals have designated Agent as their sole agent for performance of Seller's obligations to Buyer or buyer's obligations to Seller, as the case may be, and for receipt of performance by Buyer of its obligations to Seller or Seller of its obligations to Buyer, as the case may be, in connection with any Transaction or Transactions under the Agreement (including, among other things, as Agent for each Principal in connection with transfers of Securities, cash or other property and as agent for giving and receiving all notices under the Agreement). Both Agent and its Principal or Principals shall be deemed "parties" to the Agreement and all references to a "party" or "either party" in the Agreement shall be deemed revised accordingly (and any Act of Insolvency with respect to Agent or any other Event of Default by Agent under Paragraph 11 of the Agreement shall be deemed an Event of Default by Seller or Buyer, as the case may be). 22 ANNEX V MARGIN FOR FORWARD TRANSACTIONS This Annex V forms a part of the Master Repurchase Agreement dated as of JULY 1, 1998 (the "Agreement") between PRUDENTIAL-BACHE INTERNATIONAL, LTD. CORPORATION and AMRESCO CAPITAL TRUST, AMREIT CMBS I, INC., AMREIT RMBS I, INC. and AMREIT II, INC. Capitalized terms used but not defined in this Annex V shall have the meanings ascribed to them in the Agreement. 1. Definitions. For purposed of the Agreement and this Annex V, the following terms shall have the following meanings: "Forward Exposure", the amount of loss a party would incur upon canceling a Forward Transaction and entering into a replacement transaction, determined in accordance with market practice or as otherwise agreed by the parties; "Forward Transaction", any Transaction agreed to by the parties as to which the Purchase Date has not yet occurred; "Net Forward Exposure", the aggregate amount of a party's Forward Exposure to the other party under all Forward Transaction hereunder reduced by the aggregate amount of any Forward Exposure of the other party to such party under all Forward Transactions hereunder; "Net Unsecured Forward Exposure", a party's Net Forward Exposure reduced by the Market Value of any Forward Collateral transferred to such party (and not returned) pursuant to Paragraph 2 of this Annex V. 2. Margin Maintenance. (a) If at any time a party (the "In-the-Money Party") shall have a Net Unsecured Forward Exposure to the other party (the "Out-of-the-Money Party") under one or more Forward Transactions, the In-the-Money Party may by notice to the Out-of-the- Money Party Securities require the Out-of-the-Money Party to transfer to the In-the- Money Party Securities or cash reasonably acceptable to the In-the-Money Party (together with any in come thereon and proceeds thereof, "Forward Collateral") having a Market Value sufficient to eliminate such Net Unsecured Forward Exposure. the Out-of-the-Money Party may by notice to the In-the-Money Party require the In-the-Money Party to transfer to the Out-of-the-Money Party Forward Collateral having a Market Value that exceeds the In-the-Money Party's Net Forward Exposure ("Excess Forward Collateral Amount"). The rights of the parties under this subparagraph shall be in addition to their rights under subparagraphs (a) and (b) of Paragraph 4 and any other provisions of the Agreement. (b) The parties may agree, with respect to any or all Forward Transactions hereunder, that the respective rights of the parties under subparagraph (a) of this Paragraph may be exercised only where a Net Unsecured Forward exposure or Excess Forward Collateral Amount, as the case may be, exceeds a specified dollar amount or other specified threshold for such Forward transactions (which amount or threshold shall be agreed to by the parties prior to entering into any such Forward Transactions). (c) The parties may agree, with respect to any or all Forward Transaction hereunder, that the respective rights of the parties under subparagraph (a) of this Paragraph to require the elimination of a Net Unsecured Forward Exposure or Excess Forward collateral Amount, as the case may be, may be exercised whenever such a Net Unsecured Forward Exposure or Excess Forward Collateral Amount exists with respect to any single Forward Transaction hereunder (calculated without regard to any other Forward Transaction outstanding hereunder). (d) The parties may agree, with respect to any or all Forward Transaction hereunder, that (i) one party shall transfer to the other party Forward Collateral having a Market Value equal to a specified dollar amount or other specified threshold no later than the Margin Notice Deadline on the day such Forward Transaction is entered into by the parties or (ii) one party shall not be required to make any transfer, the Market Value of the Forward Collateral held by such party would be less than a specified dollar amount or other specified threshold (which amount or threshold shall be agreed to by the parties prior to entering into any such Forward Transactions). (e) If any notice is given by a party to the other under subparagraph (a) of this Paragraph at or before the Margin Notice Deadline on any business day, the party receiving such notice shall transfer Forward Collateral as 23 provided in such subparagraph no later than the close of business in the relevant market on such business day. If any such notice is given after the Margin Notice Deadline, the party receiving such notice shall transfer such Forward Collateral no later than the close of business in the relevant market on the next business day. (f) Upon the occurrence of the Purchase Date for any Forward Transaction and the performance by the parties of their respective obligations to transfer cash and Securities on such date, any Forward Collateral in respect of such Forward Transaction, together with any Income thereon and proceeds thereof, shall be transferred by the party holding such Forward Collateral to the other party; provided, however, that neither party shall be required to transfer such Forward Collateral to the other if such transfer would result in the creation of a Net Unsecured Forward Exposure of the transferor. (g) The Pledgor (as defined below) of Forward Collateral may, subject to agreement with and acceptance by the Pledgee (as defined below) thereof, substitute other Securities reasonably acceptable to the Pledgee for any Securities Forward Collateral. Such substitution shall be made by transfer to the Pledgee of such other Securities and transfer to the Pledgor of such Securities Forward Collateral. After substitution, the substituted Securities shall constitute Forward Collateral. 3. Security Interest. (a) In addition to the rights granted to the parties under Paragraph 6 of the Agreement, each party ("Pledgor") hereby pledges to the other party ("Pledgee") as security for the performance of its obligations hereunder, and grants Pledgee a security interest in and right of setoff against, any Forward Collateral and any other cash, Securities or property, and all proceeds of any of the foregoing, transferred by or on behalf of Pledgor or due from Pledgee to Pledgor in connection with the Agreement and the Forward Transactions hereunder. (b) Unless otherwise agreed by the parties, a party to whom Forward Collateral has been transferred shall have the right to engage in repurchase transaction with Forward collateral or otherwise sell, transfer, pledge or hypothecate Forward Collateral, including in respect of loans or other extensions of credit to such party that may be in amounts greater than the forward Collateral such party is entitled to as security for obligations hereunder, and that may extend for periods of time longer that the periods during which such party is entitled to Forward Collateral as security for obligations hereunder, provided, however, that no such transaction shall relieve such party of its obligations to transfer Forward Collateral pursuant to Paragraph 2 or 4 of this Annex V or Paragraph 11 of the Agreement. 4. Events of Default. (a) In addition to the Events of Default set forth in Paragraph 11 of the Agreement, it shall be an additional "Event of Default" if either party fails, after one business day's notice, to perform any covenant or obligation required to be performed by it under Paragraph 2 or any other provision of this Annex. (b) In addition to the other rights of a nondefaulting party under Paragraphs 11 and 12 of the Agreement, if the nondefaulting party exercised or is deemed to have exercised the option referred to in Paragraph 11(a) of the Agreement: (i) The nondefaulting party, without prior notice to the defaulting party, may (A) immediately sell, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, any or all price or prices as the nondefaulting party may reasonably deem satisfactory, any or all Forward Collateral subject to any or all Forward Transactions hereunder and apply the proceeds thereof to any amounts owing by the defaulting party hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Forward Collateral in an amount equal to the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such source, against any amounts owing by the defaulting party hereunder. 24 (ii) Any Forward Collateral held by the defaulting party, together with any Income thereon and proceeds thereof, shall be immediately transferred by the defaulting party to the nondefaulting party. The nondefaulting party may, as its option (which option shall be deemed to have been exercised immediately upon the occurrence of an Act of Insolvency), and without prior notice to the defaulting party, (i) immediately purchase, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, securities ("Replacement Securities") of the same party to the nondefaulting party as required hereunder or (ii) in its sole discretion elect, in lieu of purchasing Replacement Securities, to be deemed to have purchased Replacement Securities at the price therefor on such date, obtained from a generally recognized source or the most recent closing offer quotation from such a source, whereupon the defaulting party shall be liable for the price of such Replacement Securities together with the amount of any cash Forward Collateral not delivered by the defaulting party to the nondefaulting party as required hereunder. Unless otherwise provided in Annex I, the parties acknowledge and agree that (1) the Forward Collateral subject to any Forward transaction hereunder are instruments traded in a recognized market, (2) in the absence of a generally recognized source for prices or bid quotations for any Forward Collateral, the non-defaulting party may establish the source therefor in its sole discretion and (3) all prices and bids shall be determined together with accrued Income (except to the extent contrary to market practice with respect to the relevant Forward Collateral). 5. No Waivers, Etc. Without limitation of the provisions of Paragraph 17 of the Agreement, the failure to give a notice pursuant to subparagraph (a), (b), (c) or (d) of Paragraph 2 of this Annex V will not constitute a waiver of any right to do so at a later date. EX-11 4 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 AMRESCO CAPITAL TRUST EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
Period from February 2, Three Months 1998 Ended through September 30, September 30, 1998 1998 --------------- --------------- Basic: Net income available to common shareholders $ 1,272 $ 2,029 =============== =============== Weighted average common shares outstanding 10,000 5,892 =============== =============== Basic earnings per common share $ 0.12 $ 0.34 =============== =============== Diluted: Net income available to common shareholders $ 1,272 $ 2,029 =============== =============== Weighted average common shares outstanding 10,000 5,892 Effect of dilutive securities: Restricted shares 6 4 Net effect of assumed exercise of stock options -- -- --------------- --------------- Adjusted weighted average common shares outstanding 10,006 5,896 =============== =============== Diluted earnings per common share $ 0.12 $ 0.34 =============== ===============
EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 JUL-01-1998 SEP-30-1998 3,885 30,685 1,662 0 0 0 19,830 24 150,879 1,396 0 0 0 100 136,629 150,879 0 2,992 0 0 1,218 501 1 1,272 0 1,272 0 0 0 1,272 0.12 0.12
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