-----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, VsBhPPviCe9QJpHq0THaN9IZwiZXMaKPxAK+wHL4U/6b0Q1K/1J3VxeakDhl5nRb hdulVS8HEtF/Ao+u4Yf4XA== 0000950134-99-007578.txt : 19990817 0000950134-99-007578.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950134-99-007578 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99693489 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 JUNE 30, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-14029 AMRESCO CAPITAL TRUST (Exact name of Registrant as specified in its charter) TEXAS 75-2744858 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 N. PEARL STREET, SUITE 2400, LB 342, DALLAS, TEXAS 75201-7424 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 953-7700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 10,015,111 shares of common stock, $.01 par value per share, as of August 1, 1999. 2 AMRESCO CAPITAL TRUST INDEX
Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 ...................................... 3 Consolidated Statements of Income - For the Three and Six Months Ended June 30, 1999, the Three Months Ended June 30, 1998 and the Period from February 2, 1998 (Date of Initial Capitalization) through June 30, 1998......................................................................................... 4 Consolidated Statement of Changes in Shareholders' Equity - For the Six Months Ended June 30, 1999.............................................................................................. 5 Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 1999 and the Period from February 2, 1998 (Date of Initial Capitalization) through June 30, 1998............................... 6 Notes to Consolidated Financial Statements.............................................................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 26 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.............................................. 27 Item 5. Other Information................................................................................ 27 Item 6. Exhibits and Reports on Form 8-K................................................................. 28 SIGNATURE ................................................................................................ 29
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMRESCO CAPITAL TRUST CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
June 30, 1999 December 31, (unaudited) 1998 ------------- ------------ ASSETS Mortgage loans, net ................................................................ $ 114,506 $ 96,976 Acquisition, development and construction loan arrangements accounted for as real estate or investments in joint ventures ......................................... 34,987 39,550 ---------- ---------- Total loan investments ............................................................. 149,493 136,526 Allowance for loan losses .......................................................... (2,048) (1,368) ---------- ---------- Total loan investments, net of allowance for losses ................................ 147,445 135,158 Commercial mortgage-backed securities - available for sale (at fair value) ......... 26,099 28,754 Real estate, net of accumulated depreciation of $297 and $56, respectively ......... 40,223 10,273 Investments in unconsolidated partnerships and subsidiary .......................... 11,696 3,271 Receivables and other assets ....................................................... 5,431 3,681 Cash and cash equivalents .......................................................... 3,770 9,789 ---------- ---------- TOTAL ASSETS .................................................................... $ 234,664 $ 190,926 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Accounts payable and other liabilities .............................................. $ 2,103 $ 941 Amounts due to affiliates ........................................................... 5,968 6,268 Repurchase agreement ................................................................ 10,393 -- Line of credit ...................................................................... 59,338 39,338 Non-recourse debt on real estate .................................................... 26,998 7,500 Dividends payable ................................................................... -- 4,002 ---------- ---------- TOTAL LIABILITIES ............................................................... 104,800 58,049 ---------- ---------- Minority interests .................................................................. 500 2,611 ---------- ---------- COMMITMENTS AND CONTINGENCIES (NOTE 3) SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value, 49,650,000 shares authorized, no shares issued ..... -- -- Series A junior participating preferred stock, $.01 par value, 350,000 shares authorized, no shares issued .................................................... -- -- Common stock, $.01 par value, 200,000,000 shares authorized, 10,015,111 and 10,006,111 shares issued and outstanding, respectively .......................... 100 100 Additional paid-in capital .......................................................... 140,998 140,941 Unearned stock compensation ......................................................... (435) (848) Accumulated other comprehensive income (loss) ....................................... (9,296) (6,475) Distributions in excess of accumulated earnings ..................................... (2,003) (3,452) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY ...................................................... 129,364 130,266 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................................... $ 234,664 $ 190,926 ========== ==========
See notes to consolidated financial statements. 3 4 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
Period from February 2, Three Months Ended Six Months 1998 June 30, Ended through ------------------------- June 30, June 30, 1999 1998 1999 1998 ---------- ---------- ---------- ----------- REVENUES: Interest income on mortgage loans .......................... $ 3,878 $ 140 $ 6,935 $ 140 Income from commercial mortgage-backed securities .......... 934 37 1,848 37 Operating income from real estate .......................... 831 17 1,177 17 Equity in earnings of unconsolidated subsidiary, partnerships and other real estate ventures .............. 64 160 134 160 Interest income from short-term investments ................ 36 907 122 907 ---------- ---------- ---------- ---------- TOTAL REVENUES ........................................... 5,743 1,261 10,216 1,261 ---------- ---------- ---------- ---------- EXPENSES: Interest expense ........................................... 1,069 -- 1,658 -- Management fees ............................................ 415 193 1,003 193 General and administrative ................................. 259 198 782 198 Depreciation ............................................... 211 3 297 3 Participating interest in mortgage loans ................... 644 -- 829 -- Provision for loan losses .................................. 438 110 1,180 110 ---------- ---------- ---------- ---------- TOTAL EXPENSES ........................................... 3,036 504 5,749 504 ---------- ---------- ---------- ---------- INCOME BEFORE GAINS .......................................... 2,707 757 4,467 757 Gain associated with repayment of ADC loan arrangement .... -- -- 584 -- ---------- ---------- ---------- ---------- NET INCOME ................................................... $ 2,707 $ 757 $ 5,051 $ 757 ========== ========== ========== ========== EARNINGS PER COMMON SHARE: Basic ..................................................... $ 0.27 $ 0.14 $ 0.50 $ 0.23 ========== ========== ========== ========== Diluted ................................................... $ 0.27 $ 0.14 $ 0.50 $ 0.23 ========== ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic ..................................................... 10,000 5,495 10,000 3,356 ========== ========== ========== ========== Diluted ................................................... 10,012 5,498 10,009 3,358 ========== ========== ========== ==========
See notes to consolidated financial statements. 4 5 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock $.01 Par Value Accumulated Distributions --------------------- Additional Unearned Other in Excess of Total Number of Paid-in Stock Comprehensive Accumulated Shareholders' Shares Amount Capital Compensation Income (Loss) Earnings Equity ------------ ------ ---------- ------------ ------------- -------------- ------------- Balance at January 1, 1999...... 10,006,111 $100 $140,941 $(848) $(6,475) $ (3,452) $ 130,266 Issuance of trust managers' restricted shares............. 9,000 -- 91 (91) -- Issuance of warrants............ 400 400 Decrease in fair value of compensatory options ......... (434) 434 -- Amortization of unearned trust manager compensation.......... 45 45 Amortization of compensatory options ...................... 25 25 Dividends declared ($0.36 per common share)...... (3,602) (3,602) Unrealized loss on securities available for sale............ (2,821) (2,821) Net income...................... 5,051 5,051 ---------- ---- -------- ----- ------- -------- --------- Balance at June 30, 1999...... 10,015,111 $100 $140,998 $(435) $(9,296) $ (2,003) $ 129,364 ========== ==== ======== ===== ======= ======== =========
See notes to consolidated financial statements. 5 6 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
Period from Six Months February 2, Ended 1998 June 30, through 1999 June 30, 1998 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................................................ $ 5,051 $ 757 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .......................................................... 1,180 110 Depreciation ....................................................................... 297 3 Gain associated with repayment of ADC loan arrangement ............................. (584) -- Amortization of prepaid assets ..................................................... 117 46 Discount amortization on commercial mortgage-backed securities ..................... (170) -- Amortization of compensatory stock options and unearned trust manager compensation ..................................................................... 70 95 Amortization of loan commitment fees ............................................... (324) (10) Receipt of loan commitment fees .................................................... 186 568 Increase in receivables and other assets ........................................... (1,191) (615) Decrease (increase) in interest receivable related to commercial mortgage-backed securities ....................................................... 4 (96) Increase in accounts payable and other liabilities ................................. 1,162 924 Increase in amounts due to affiliates .............................................. 984 139 Increase in deferred income ........................................................ -- 294 Equity in undistributed earnings of unconsolidated subsidiary, partnerships and other real estate ventures ................................................... (134) (160) Distributions from unconsolidated subsidiary and other real estate venture ......... 201 69 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES ..................................... 6,849 2,124 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Investments in mortgage loans ......................................................... (31,778) (22,113) Investments in ADC loan arrangements .................................................. (15,191) (14,100) Sale of mortgage loan to affiliate .................................................... 4,585 -- Principal collected on mortgage loans ................................................. 8,072 -- Principal and interest collected on ADC loan arrangement .............................. 11,513 -- Investments in real estate ............................................................ (30,191) -- Investments in unconsolidated partnerships and subsidiary ............................. (2,334) (3,501) Purchase of commercial mortgage-backed securities ..................................... -- (11,882) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES ......................................... (55,324) (51,596) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings under line of credit ......................................... 20,000 -- Proceeds from borrowings under repurchase agreement ................................... 11,795 -- Repayment of borrowings under repurchase agreement .................................... (1,402) -- Proceeds from financing provided by affiliate ......................................... 725 -- Proceeds from non-recourse debt on real estate ........................................ 19,498 -- Deferred financing costs associated with line of credit ............................... (120) -- Deferred financing costs associated with non-recourse debt on real estate ............. (436) -- Net proceeds from issuance of common stock ............................................ -- 139,717 Dividends paid to common shareholders ................................................. (7,604) -- ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES ..................................... 42,456 139,717 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................................... (6,019) 90,245 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................................... 9,789 -- ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................. $ 3,770 $ 90,245 ============ ============ SUPPLEMENTAL INFORMATION: Interest paid, net of amount capitalized .............................................. $ 1,369 $ -- ============ ============ Income taxes paid ..................................................................... $ 25 $ -- ============ ============ Minority interest contributions associated with ADC loan arrangements ................. $ -- $ 500 ============ ============ Minority interest distribution associated with ADC loan arrangement ................... $ 2,111 $ -- ============ ============ Receivables transferred in satisfaction of amounts due to affiliate ................... $ 280 $ -- ============ ============ Amounts due to affiliate discharged in connection with sale of mortgage loan .......... $ 1,729 $ -- ============ ============ Issuance of warrants in connection with line of credit ................................ $ 400 $ -- ============ ============
See notes to consolidated financial statements. 6 7 AMRESCO CAPITAL TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 1. ORGANIZATION AND RELATIONSHIPS AMRESCO Capital Trust (the "Company"), a real estate investment trust ("REIT"), was organized under the laws of the State of Texas. The Company was formed to take advantage of certain mid- to high-yield lending and investment opportunities in real estate related assets, including various types of commercial mortgage loans (including, among others, participating loans, mezzanine loans, acquisition loans, construction loans, rehabilitation loans and bridge loans), commercial mortgage-backed securities ("CMBS"), commercial real estate, equity investments in joint ventures and/or partnerships, and certain other real estate related assets. The Company was initially capitalized on February 2, 1998 and commenced operations on May 12, 1998, concurrent with the completion of its initial public offering ("IPO") of 9,000,000 common shares and private placement of 1,000,011 common shares. Pursuant to the terms of a Management Agreement dated as of May 12, 1998 and subject to the direction and oversight of the Board of Trust Managers, the Company's day-to-day operations are managed by AMREIT Managers, L.P. (the "Manager"), an affiliate of AMRESCO, INC. (together with its affiliated entities, the "AMRESCO Group"). For its services, the Manager is entitled to receive a base management fee equal to 1% per annum of the Company's Average Invested Non-Investment Grade Assets, as defined, and 0.5% per annum of the Company's Average Invested Investment Grade Assets, as defined. In addition to the base management fee, the Manager is entitled to receive incentive compensation in an amount equal to 25% of the dollar amount by which Funds From Operations (as defined by the National Association of Real Estate Investment Trusts), as adjusted, exceeds a certain threshold. The Manager is also entitled to receive reimbursement for its costs of providing certain services to the Company. The base management fee, reimbursable expenses and incentive fee, if any, are payable quarterly in arrears. During the three and six months ended June 30, 1999, base management fees charged to the Company totaled $511,000 and $958,000, respectively. Reimbursable expenses charged to the Company during these periods totaled $70,000 and $104,000, respectively. During the three months ended June 30, 1998 and the period from February 2, 1998 (date of initial capitalization) through June 30, 1998, base management fees charged to the Company totaled $123,000; reimbursable expenses charged to the Company during these periods totaled $16,000. Since its inception, no incentive fees have been charged to the Company. Immediately after the closing of the IPO, the Manager was granted options to purchase 1,000,011 common shares; 70% of the options are exercisable at an option price of $15.00 per share and the remaining 30% of the options are exercisable at an option price of $18.75 per share. During the three and six months ended June 30, 1999, management fees included compensatory option charges totaling $(96,000) and $45,000, respectively. During the three months ended June 30, 1998 and the period from February 2, 1998 (date of initial capitalization) through June 30, 1998, management fees included compensatory option charges totaling $70,000. 2. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and a majority-owned partnership. The Company accounts for its investment in AMREIT II, Inc., a taxable subsidiary, using the equity method of accounting, and thus reports its share of income or loss based on its ownership interest. The Company uses the equity method of accounting due to the non-voting nature of its ownership interest and because the Company is entitled to substantially all of the economic benefits of ownership of AMREIT II, Inc. The Company owns non-controlling interests in two partnerships; the Company accounts for these investments using the equity method of accounting and thus reports its share of income or loss based on its ownership interests. The accompanying financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (the "10-K"). The notes to the financial statements included herein highlight significant changes to the notes included in the 10-K. 7 8 In the opinion of management, the accompanying consolidated financial statements include all adjustments (consisting of normal and recurring accruals) necessary for a fair presentation of the interim financial statements. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities at the date of the financial statements and revenues and expenses for the reporting period. Significant estimates include the valuation of commercial mortgage-backed securities, the allowance for loan losses and the determination of the fair value of certain share option awards and warrants. Actual results may differ from those estimates. Certain prior period amounts have been reclassified to conform with the current period's presentation. 3. LOAN INVESTMENTS During the three months ended June 30, 1999, the Company originated one loan and two of the Company's loans were fully repaid. During the six months ended June 30, 1999, four of the Company's loans were fully repaid, one loan origination was closed and one loan was sold to AMRESCO Commercial Finance, Inc. ("ACFI"), a member of the AMRESCO Group; additionally, one loan was reclassified, net of a $500,000 charge-off, to investment in unconsolidated subsidiary following the subsidiary's acquisition (through foreclosure on February 25, 1999) of the partnership interests of one of the Company's borrowers. As of June 30, 1999, the Company's loan investments are summarized as follows (dollars in thousands):
Amount Outstanding at Date of Initial Scheduled Collateral Commitment June 30, Investment Maturity Location Property Type Position Amount 1999 - ------------------ ----------------- -------------- -------------- ------------- ----------- ------------- May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien $14,700 $13,032 June 1, 1998 June 1, 2001 Houston, TX Office First Lien 11,800 10,353 June 12, 1998 June 30, 2000 Pearland, TX Apartment First Lien 12,827 10,987 June 17, 1998 June 30, 2000 San Diego, CA R&D/Bio-Tech First Lien 5,560 4,570 June 19, 1998 June 18, 2000 Houston, TX Office First Lien 24,000 14,016 June 22, 1998 June 19, 2000 Wayland, MA Office First Lien 45,000 36,951 July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests 10,068 7,017 July 2, 1998 June 30, 2000 Washington, D.C. Office First Lien 7,000 5,882 July 10, 1998 July 31, 2000 Pasadena, TX Apartment First Lien 3,350 2,900 September 1, 1998 February 28, 2001 Los Angeles, CA Mixed Use First Lien 18,419 17,418 September 30,1998 Various San Antonio, TX/ Residential First Lien 8,400 2,536 Sunnyvale, TX Lots September 30, 1998 October 7, 1999 Ft. Worth, TX Apartment Ptrshp Interests 2,650 2,649 September 30, 1998 December 31, 1999 Dallas, TX Medical Office First Lien 3,015 2,596 September 30, 1998 September 22, 1999 Norwood, MA Industrial/Office First Lien 8,765 8,195 October 1, 1998 December 31, 1999 Richardson, TX Office First Lien 567 300 May 18, 1999 May 19, 2001 Irvine, CA Office First Lien 15,260 12,883 -------- -------- $191,381 $152,285 ======== ======== Interest Interest Pay Accrual Rate Rate - --------- -------- 10.0% 12.0% 12.0% 12.0% 10.0% 11.5% 10.0% 13.5% 12.0% 12.0% 10.5% 10.5% 10.0% 15.0% 10.5% 10.5% 10.0% 14.0% 10.0% 12.0% 10.0% 14.0% 10.5% 16.0% 10.0% 13.0% 10.0% 12.5% 9.3% 15.0% 10.0% 12.0%
At June 30, 1999, amounts outstanding under construction loans, acquisition/rehabilitation loans, acquisition loans, land development loans and bridge loans totaled $40,684,000, $47,017,000, $53,553,000, $2,836,000 and $8,195,000, respectively. 8 9 Three of the 16 loan investments provide the Company with the opportunity for profit participation in excess of the contractual interest accrual rates. The loan investments are classified as follows (in thousands):
Loan Amount Balance Sheet Amount Outstanding at at June 30, 1999 June 30, 1999 -------------- -------------------- Mortgage loans, net ................................... $ 115,695 $ 114,506 Real estate, net ...................................... 29,573 28,740 Investment in real estate venture ................... 7,017 6,247 --------- --------- Total ADC loan arrangements ........................ 36,590 34,987 --------- --------- Total loan investments ................................ $ 152,285 149,493 ========= Allowance for loan losses ............................. (2,048) --------- Total loan investments, net of allowance for losses ... $ 147,445 =========
The differences between the outstanding loan amounts and the balance sheet amounts are due primarily to loan commitment fees, interest fundings, minority interests, capitalized interest and accumulated depreciation. ADC loan arrangements accounted for as real estate consisted of the following at June 30, 1999 (in thousands): Land ............................. $ 4,648 Buildings and improvements ....... 4,377 Construction in progress ......... 19,815 -------- Total ......................... 28,840 Less: Accumulated depreciation ... (100) -------- $ 28,740 ========
A summary of activity for mortgage loans and ADC loan arrangements accounted for as real estate or investments in joint ventures is as follows (in thousands): Balance at December 31, 1998 .......... $136,791 Investments in loans................... 48,052 Collections of principal .............. (19,405) Cost of mortgage sold ................. (6,314) Foreclosure (partnership interests) ... (6,839) -------- Balance at June 30, 1999 .............. $152,285 ========
The activity in the allowance for loan losses was as follows (in thousands): Balance at December 31, 1998 .......... $ 1,368 Provision for losses .................. 1,180 Charge-offs ........................... (500) Recoveries ............................ - --------- Balance at June 30, 1999............... $ 2,048 ========
As of June 30, 1999, the Company had outstanding commitments to fund approximately $39,096,000 under 16 loans, of which $990,000 is reimbursable by ACFI. The Company is obligated to fund these commitments to the extent that the borrowers are not in violation of any of the conditions established in the loan agreements. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee if amounts are repaid to the Company during certain prepayment lock-out periods. A portion of the commitments could expire without being drawn upon and therefore the total commitment amounts do not necessarily represent future cash requirements. 9 10 4. REAL ESTATE On April 30, 1999, the Company (through a majority-owned partnership) acquired interests in three newly constructed, grocery-anchored shopping centers in the Dallas/Fort Worth (Texas) area. These properties, which were acquired by subsidiary partnerships at an aggregate purchase price of $30.2 million, include an 86,516 square foot facility in Flower Mound, Texas, a 61,440 square foot facility in Fort Worth, Texas and an 85,611 square foot facility in Grapevine, Texas. In connection with these acquisitions, the subsidiary partnerships which hold title to these assets obtained non-recourse financing aggregating $19.5 million from an unaffiliated third party (Note 5). Immediately prior to the closing, the Company contributed $11.4 million of capital to the partnership. The proceeds from this contribution were used to fund the balance of the purchase price, to pay costs associated with the financing and to provide initial working capital to the title-holding partnerships. Real estate, which is comprised entirely of amounts derived from the Company's partnership investment, consisted of the following at June 30, 1999 and December 31, 1998 (in thousands):
June 30, 1999 December 31, 1998 ------------- ----------------- Land ............................. $ 11,285 $ 2,353 Buildings and improvements ....... 29,235 7,976 -------- -------- Total ......................... 40,520 10,329 Less: Accumulated depreciation ... (297) (56) -------- -------- $ 40,223 $ 10,273 ======== ========
In connection with the partnership's procurement of third party financing, the Company was required to post two irrevocable standby letters of credit totaling $1,084,000. The letters of credit, which were cancelled on May 4, 1999, were collateralized by certificates of deposit in a like amount; the certificates of deposit mature on August 31, 1999. Concurrent with the cancellation and as a replacement for a portion thereof related to the financing for an additional acquisition, the Company posted an irrevocable standby letter of credit in the amount of $304,000. This letter of credit, which expires on September 15, 1999, is collateralized by a $304,000 certificate of deposit which matures on September 30, 1999. The certificates of deposit aggregating $1,388,000 at June 30, 1999 are included in receivables and other assets in the consolidated balance sheet. 5. DEBT AND FINANCING FACILITIES Effective as of July 1, 1998, the Company (and certain of its subsidiaries) entered into a $400 million Interim Warehouse and Security Agreement (the "Line of Credit") with Prudential Securities Credit Corporation ("PSCC"). Subject to certain limitations, borrowings under the facility can be used to finance the Company's structured loan and equity real estate investments. Prior to the modifications discussed below, borrowings under the Line of Credit bore interest at rates ranging from LIBOR plus 1% per annum to LIBOR plus 2% per annum depending upon the type of asset, its loan-to-value ratio and the advance rate selected by the Company. Advance rates on eligible assets ranged from 50% to 95% depending upon the asset's characteristics. Effective as of May 4, 1999, the Company (and certain of its subsidiaries) entered into an Amended and Restated Interim Warehouse and Security Agreement (the "Amended Line of Credit") with PSCC; the agreement amended the Company's existing Line of Credit. The Amended Line of Credit includes the following modifications: (1) a reduction in the size of the committed facility from $400 million to $300 million; (2) the elimination of the requirement that assets financed with proceeds from the facility must be securitizable; (3) a reduction in the amount of capital the Company must fund with respect to construction and rehabilitation loans before PSCC is required to begin advancing funds; (4) an extension of the maturity date from July 1, 2000 to November 3, 2000; and (5) the modification to, and addition of, certain sublimits on certain types of loans and assets. Under the Amended Line of Credit, borrowings bear interest at LIBOR plus 1.25% per annum to the extent such borrowings do not exceed the Company's Tangible Net Worth, as defined; borrowings in excess of the Company's Tangible Net Worth bear interest at LIBOR plus 3%. At June 30, 1999, the weighted average interest rate under this facility was 6.19%. As compensation for entering into the Amended Line of Credit and extending the maturity date, the Company granted warrants to Prudential Securities Incorporated, an affiliate of PSCC, to purchase 250,002 common shares of beneficial 10 11 interest at $9.83 per share. The exercise price represents the average closing market price of the Company's common shares for the ten-day period ending on May 3, 1999. The warrants were issued in lieu of a commitment fee or other cash compensation. The estimated fair value of the warrants, totaling $400,000, was measured at the grant date and is being amortized to interest expense over the 18-month term of the facility using the straight-line method. Borrowings under the facility are secured by a first lien security interest on all assets funded with proceeds from the Amended Line of Credit. The Amended Line of Credit contains several covenants; among others, the more significant covenants include the maintenance of a $100 million consolidated Tangible Net Worth, subject to adjustment in connection with any future equity offerings; maintenance of a Coverage Ratio, as defined, of not less than 1.4 to 1; and limitation of Total Indebtedness, as defined, to no more than 400% of shareholders' equity. On July 2, 1999, the Company terminated its existing $33.6 million (notional) interest rate cap agreement at a loss of $4,000. Concurrently, the Company entered into a new cap agreement to reduce the impact that rising interest rates would have on its floating rate indebtedness. The new agreement, which became effective on August 1, 1999, has a notional amount of $59.0 million. Until its expiration on November 1, 2000, the agreement entitles the Company to receive from the counterparty the amounts, if any, by which one month LIBOR exceeds 6.25%. The premium paid for this cap, totaling $110,000, will be amortized on a straight-line basis over the life of the agreement as an adjustment of interest incurred. Three consolidated title-holding partnerships are indebted under the terms of three non-recourse loan agreements with Jackson National Life Insurance Company. The loans, aggregating $19,498,000, bear interest at 6.68% per annum. The loans require interest only payments through January 1, 2002; thereafter, interest and principal payments are due based upon 25-year amortization schedules. The loans, which mature on January 1, 2014, prohibit any prepayment of the outstanding principal prior to January 1, 2006. Thereafter, prepayment is permitted at any time, in whole or in part, upon payment of a yield maintenance premium of at least 1% of the then outstanding principal balance. Obligations under various financing arrangements were as follows at June 30, 1999 and December 31, 1998 (in thousands):
June 30, 1999 December 31, 1998 ------------- ----------------- Repurchase agreement......................... $10,393 $ -- Line of credit............................... 59,338 39,338 Non-recourse debt on real estate............. 26,998 7,500 ------- ------- $96,729 $46,838 ======= =======
6. STOCK-BASED COMPENSATION As of June 30, 1999, the estimated fair value of the options granted to the Manager and certain employees of the AMRESCO Group approximated $0.71 per share. The fair value of the options granted was estimated at June 30, 1999 using the Cox-Ross-Rubinstein option pricing model with the following assumptions: risk free interest rates ranging from 5.97% to 6.17%; expected lives ranging from four to seven years; expected volatility of 35%; and dividend yield of 12%. During the three months ended June 30, 1999, compensation cost associated with these options was adjusted to reflect the decline in fair value approximating $0.39 per share. During the three and six months ended June 30, 1999, the three months ended June 30, 1998 and the period from February 2, 1998 (date of initial capitalization) through June 30, 1998, management fees and general and administrative expenses included the following compensatory option charges (in thousands):
Period from February 2, Three Months Ended Six Months 1998 June 30, Ended through ------------------- June 30, June 30, 1999 1998 1999 1998 -------- -------- -------- -------- Management fees ....................... $ (96) $ 70 $ 45 $ 70 General and administrative expenses ... (47) 14 (20) 14 ----- ----- ----- ----- $(143) $ 84 $ 25 $ 84 ===== ===== ===== =====
11 12 In lieu of cash compensation for their services and participation at regularly scheduled meetings of the Board of Trust Managers, the Company granted 2,250 restricted common shares to each of its four independent trust managers on May 11, 1999. The associated compensation cost is being recognized over the one-year service period. At June 30, 1999, 505,506 shares were available for grant in the form of restricted common shares or options to purchase common shares. 7. EARNINGS PER SHARE A reconciliation of the numerator and denominator used in computing basic earnings per share and diluted earnings per share for the three and six months ended June 30, 1999, the three months ended June 30, 1998 and the period from February 2, 1998 (date of initial capitalization) through June 30, 1998, is as follows (in thousands, except per share data):
Period from February 2, Three Months Ended Six Months 1998 June 30, Ended through ------------------- June 30, June 30, 1999 1998 1999 1998 -------- -------- -------- -------- Net income available to common shareholders ......... $ 2,707 $ 757 $ 5,051 $ 757 ======= ======= ======= ======= Weighted average common shares outstanding .......... 10,000 5,495 10,000 3,356 ======= ======= ======= ======= Basic earnings per common share ..................... $ 0.27 $ 0.14 $ 0.50 $ 0.23 ======= ======= ======= ======= Weighted average common shares outstanding .......... 10,000 5,495 10,000 3,356 Effect of dilutive securities Restricted shares .................................. 11 3 8 2 Net effect of assumed exercise of stock options .... 1 -- 1 -- ------- ------- ------- ------- Adjusted weighted average shares outstanding ........ 10,012 5,498 10,009 3,358 ======= ======= ======= ======= Diluted earnings per common share ................... $ 0.27 $ 0.14 $ 0.50 $ 0.23 ======= ======= ======= =======
Options and warrants to purchase 1,479,511 and 250,002 shares, respectively, of common stock were outstanding at June 30, 1999. Options related to 1,473,511 shares and the warrants were not included in the computation of diluted earnings per share because the exercise prices related thereto were greater than the average market price of the Company's common shares. The Company was initially capitalized on February 2, 1998 with the sale of 100 shares to AMRESCO, INC. The Company had no earnings prior to the commencement of its operations on May 12, 1998. No options or warrants were outstanding during the period from February 2, 1998 through May 11, 1998. When calculated for the period from May 12, 1998 (inception of operations) through June 30, 1998, the Company's basic and diluted earnings were $0.08 per common share. 8. LEASING ACTIVITIES As of June 30, 1999, the future minimum lease payments to be received by the Company (through a majority-owned partnership) under noncancellable operating leases, which expire on various dates through 2024, are as follows (in thousands): 1999 .......................... $ 1,849 2000 .......................... 3,736 2001 .......................... 3,753 2002 .......................... 3,779 2003 .......................... 3,752 2004 and thereafter ........... 56,548 -------- $ 73,417 ========
Approximately 85% of the future minimum lease payments disclosed above are due from a regional grocer. 12 13 9. COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances except those resulting from investments by, and distributions to, its owners. Other comprehensive income includes unrealized gains and losses on marketable securities classified as available-for-sale. Comprehensive income during the three and six months ended June 30, 1999, the three months ended June 30, 1998 and the period from February 2, 1998 (date of initial capitalization) through June 30, 1998, is as follows (in thousands):
Period from February 2, Three Months Ended Six Months 1998 June 30, Ended through ------------------- June 30, June 30, 1999 1998 1999 1998 -------- -------- -------- ----------- Net income ........................................... $ 2,707 $ 757 $ 5,051 $ 757 Unrealized losses on securities available for sale ... (1,918) -- (2,821) -- ------- ------- ------- ------- Comprehensive income ................................. $ 789 $ 757 $ 2,230 $ 757 ======= ======= ======= =======
The unrealized losses on securities available for sale had no impact on the Company's taxable income or cash flow. 10. SEGMENT INFORMATION The Company, as an investor in real estate related assets, operates in only one reportable segment. Within this segment, the Company makes asset allocation decisions based upon its diversification strategies and changes in market conditions. The Company does not have, nor does it rely upon, any major customers. All of the Company's investments are secured directly or indirectly by real estate properties located in the United States; accordingly, all of its revenues were derived from U.S. operations. 11. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in its balance sheet and that it measure those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) is dependent upon the intended use of the derivative and the resulting designation. SFAS No. 133 generally provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of (1) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (2) the earnings effect of the hedged forecasted transaction. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 137 deferred the effective date of SFAS No. 133 such that it is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000, although earlier application is encouraged. The Company has not yet assessed the impact that SFAS No. 133 will have on its financial condition or results of operations. 13 14 12. SUBSEQUENT EVENTS On July 22, 1999, the Company declared a dividend of $0.39 per share; the dividend is payable on August 16, 1999 to shareholders of record on July 31, 1999. On July 29, 1999, the Company originated a $5,213,000 first lien loan for the acquisition and conversion of a research and development facility in Lexington, Massachusetts; the initial advance under this loan totaled approximately $2,541,000. Effective as of August 4, 1999, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Impac Commercial Holdings, Inc. ("ICH"). Pursuant to the Merger Agreement, ICH will be merged with and into the Company, with the Company as the surviving entity (the "Merger"), and each outstanding share of common stock of ICH will be converted into 0.66094 of a common share of the Company. Also pursuant to this agreement, the holder of the outstanding shares of Series B 8.5% Cumulative Convertible Preferred Stock of ICH ("ICH Preferred Stock") will convert all of such shares into 1,683,635 shares of common stock of ICH or, if such conversion does not occur prior to the effective time of the Merger, all of the shares of ICH Preferred Stock will be converted into 1,112,782 common shares of the Company. The Merger will be accounted for under the purchase method of accounting. After the Merger, the Company will have approximately 16.7 million common shares outstanding. The parties anticipate that the Merger will be completed in the fourth quarter of 1999. The transactions contemplated by the Merger Agreement are subject to approval by the shareholders of the Company and ICH. 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW AMRESCO Capital Trust (the "Company") is a real estate investment trust ("REIT") which was formed in early 1998 to take advantage of certain mid- to high-yield lending and investment opportunities in real estate related assets, including various types of commercial mortgage loans (including, among others, participating loans, mezzanine loans, acquisition loans, construction loans, rehabilitation loans and bridge loans), commercial mortgage-backed securities ("CMBS"), commercial real estate, equity investments in joint ventures and/or partnerships, and certain other real estate related assets. Subject to the direction and oversight of the Board of Trust Managers, the Company's day-to-day operations are managed by AMREIT Managers, L.P. (the "Manager"), an affiliate of AMRESCO, INC. (together with its affiliated entities, the "AMRESCO Group"). The Company commenced operations on May 12, 1998 concurrent with the completion of its initial public offering of 9,000,000 common shares and private placement of 1,000,011 common shares with AMREIT Holdings, Inc., a wholly-owned subsidiary of AMRESCO, INC. To date, the Company's investment activities have been focused in three primary areas: loan investments, CMBS and equity investments in real estate. The Company expects that its mid- to high-yield loan investments and, to a lesser extent, equity investments in real estate, will continue to comprise a substantial portion of its investment portfolio. Similarly, the Company expects to continue to have 15% to 20% of its invested capital (comprising equity and proceeds from its two credit facilities) allocated to CMBS. The Company's investment activities increased during the second quarter of 1999 following the completion (in early May) of modifications to the Company's line of credit facility. During the quarter, the Company closed one new loan investment (a $15.3 million commitment, of which $12.9 million was funded initially) and it approved two additional loan commitments; one of the two approved loans closed in late July and the other, to be secured by a Canadian property, is expected to close during the third quarter. Additionally, the Company advanced $17.4 million under structured loan commitments it had closed on or prior to December 31, 1998. Loan repayments during the three months ended June 30, 1999 totaled $6.8 million. During the six months ended June 30, 1999, advances under structured loan investments totaled $48.1 million while repayments totaled $19.4 million. Finally, the Company's aggregate capital contributions to partnerships which hold title to real estate increased from $4.8 million at March 31, 1999 to $16.2 million at June 30, 1999 as a result of the Company's acquisition (through a majority-owned partnership) of interests in three newly constructed, grocery-anchored shopping centers in the Dallas/Fort Worth (Texas) area. No commercial mortgage-backed securities were acquired during the recently ended quarter. The Company believes it has operated and it intends to continue to operate in a manner so as to continue to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). As such, the Company has distributed and it intends to continue to distribute at least 95% of its REIT taxable income annually. The Company may experience high volatility in financial statement net income and tax basis income from quarter to quarter and year to year, primarily as a result of fluctuations in interest rates, borrowing costs, reinvestment opportunities, prepayment rates and favorable and unfavorable credit related events (e.g., profit participations or credit losses). Additionally, the Company's accounting for certain real estate loan arrangements as either real estate or joint venture investments may contribute to volatility in financial statement net income. Because changes in interest rates may significantly affect the Company's activities, the operating results of the Company will depend, in large part, upon the ability of the Company to manage its interest rate, prepayment and credit risks, while maintaining its status as a REIT. The following discussion of results of operations and liquidity and capital resources should be read in conjunction with the consolidated financial statements and notes thereto included in "Item 1. Financial Statements". 15 16 RESULTS OF OPERATIONS Under generally accepted accounting principles, net income for the three and six months ended June 30, 1999 was $2,707,000 and $5,051,000, respectively, or $0.27 and $0.50 per common share, respectively. The Company's primary sources of revenue for the three and six months ended June 30, 1999, totaling $5,743,000 and $10,216,000, respectively, were as follows: o $3,996,000 and $7,160,000, respectively, from loan investments. As certain of the Company's loan investments are accounted for as either real estate or joint venture investments for financial reporting purposes, these revenues are included in the consolidated statement of income for the three and six months ended June 30, 1999 as follows: interest income on mortgage loans - $3,878,000 and $6,935,000, respectively; and operating income from real estate - $118,000 and $225,000, respectively. The loan investments earn interest at accrual rates ranging from 10.5% to 16% per annum as of June 30, 1999. o $934,000 and $1,848,000, respectively, from investments in CMBS. o $713,000 and $952,000, respectively, of operating income from real estate owned by the Company (through a majority-owned partnership). Additionally, the Company realized a gain of $584,000 during the three months ended March 31, 1999 in connection with the repayment of an ADC loan arrangement. The gain was comprised principally of interest income earned at the accrual rate over the life of the loan investment. No gains were realized during the three months ended June 30, 1999. The Company incurred expenses of $3,036,000 and $5,749,000, respectively, during the three and six months ended June 30, 1999, consisting primarily of the following: o $415,000 and $1,003,000, respectively, of management fees, including $511,000 and $958,000, respectively, of base management fees payable to the Manager pursuant to the Management Agreement and $(96,000) and $45,000, respectively, of expense associated with compensatory options granted to the Manager. No incentive fees were incurred during either period. o $259,000 and $782,000, respectively, of general and administrative costs, including $0 and $200,000, respectively, of resolution costs associated with a non-performing loan, $103,000 and $199,000, respectively, for professional services, $58,000 and $117,000, respectively, for directors and officers' insurance, $70,000 and $104,000, respectively, of reimbursable costs pursuant to the Management Agreement, $(47,000) and $(20,000), respectively, related to compensatory options granted to certain members of the AMRESCO Group and $23,000 and $45,000, respectively, related to restricted stock awards to the Company's Independent Trust Managers. o $1,069,000 and $1,658,000, respectively, of interest expense (net of capitalized interest totaling $235,000 and $386,000, respectively) associated with the Company's credit facilities and four non-recourse loans secured by real estate. o $438,000 and $1,180,000, respectively, of provision for loan losses. During the three months ended March 31, 1999, the Company charged-off $500,000 against an existing allowance for losses related to the non-performing loan referred to above. This loan is discussed further in this section of Management's Discussion and Analysis of Financial Condition and Results of Operations under the sub-heading "Loan Investments". The Company's policy is to distribute at least 95% of its REIT taxable income to shareholders each year; to that end, dividends are paid quarterly. Tax basis income differs from income reported for financial reporting purposes due primarily to differences in methods of accounting for ADC loan arrangements and stock-based compensation awards and the nondeductibility, for tax purposes, of the Company's loan loss reserve (for a discussion of ADC loan arrangements, see the notes to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year 16 17 ended December 31, 1998). As a result of these accounting differences, net income under generally accepted accounting principles is not necessarily an indicator of distributions to be made by the Company. The following dividends have been declared in 1999:
Dividend Declaration Record Payment per Date Date Date Common Share ------------------ ------------------ -------------------- ---------------- First Quarter April 22, 1999 April 30, 1999 May 17, 1999 $ 0.36 Second Quarter July 22, 1999 July 31, 1999 August 16, 1999 0.39 ------ $ 0.75 ======
For federal income tax purposes, all dividends declared to date should be treated as ordinary income to the Company's shareholders. The Company was initially capitalized through the sale of 100 common shares to AMRESCO, INC. on February 2, 1998 and it commenced operations on May 12, 1998 concurrent with the completion of its initial public offering of 9,000,000 common shares and private placement of 1,000,011 common shares with AMREIT Holdings, Inc., a wholly-owned subsidiary of AMRESCO, INC. At June 30, 1998, $52.0 million of the $139.7 million of net proceeds received from the issuance of its common shares had been invested in structured finance arrangements and commercial mortgage-backed securities; the remaining net proceeds were fully invested during the third quarter of 1998. As of June 30, 1998, the Company had advanced $36.7 million under seven commercial mortgage loan commitments. During its initial 50-day period of operations, the Company, either directly or through its unconsolidated taxable subsidiary, acquired three commercial mortgage-backed securities at an aggregate purchase price of $15.3 million. The following comparisons are reflective of the fact that during the entire three and six months ended June 30, 1999, the Company's net proceeds from the issuance of its common shares were fully invested and it (and its consolidated partnerships) had outstanding borrowings under several credit facilities. By contrast, during the three months ended June 30, 1998 and the period from February 2, 1998 (date of initial capitalization) through June 30, 1998, the Company had operations for only 50 days (from May 12, 1998 through June 30, 1998) and it had not fully invested its net proceeds from the issuance of its common shares nor had it begun to borrow under its credit facilities. Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 The Company's revenues increased 355%, from $1,261,000 to $5,743,000, due primarily to increases in interest income derived from mortgage loan investments, income from commercial mortgage-backed securities, and operating income from real estate; as of June 30, 1998, the Company had not made any equity investments in real estate. The higher revenues were attributable to new loan originations and acquisitions, acquisitions of CMBS and real estate, and additional fundings under commitments which were closed during the Company's initial 50-day period of operations. During the three months ended June 30, 1999, the average book value of the Company's assets, excluding cash and cash equivalents, approximated $205 million. Excluding cash and cash equivalents, the Company had no assets on May 11, 1998. By June 30, 1998, the Company had accumulated assets with a book value of approximately $52.0 million, excluding cash and cash equivalents of $90.2 million. Interest income on short-term investments declined from the comparable period in 1998 as the uninvested portion of the net proceeds received from the issuance of the Company's common shares were temporarily invested during such period in short-term investments. The Company's expenses increased 502%, from $504,000 to $3,036,000, due primarily to the fact that the Company incurred borrowing costs (including participating interest in mortgage loans) during the three months ended June 30, 1999; during the comparable period in 1998, no such costs were incurred. Additionally, base management fees were higher as a result of the Company's larger asset base upon which the fee is calculated. The Company's loan loss provision was higher as a result of significantly higher loan balances. Finally, depreciation expense increased as a result of several real estate acquisitions which were closed in October 1998 and April 1999. For the reasons cited above, income before gains and net income increased 258%, from $757,000 to $2,707,000. 17 18 Six Months Ended June 30, 1999 Compared to Period from February 2, 1998 (Date of Initial Capitalization) through June 30, 1998 For the reasons described above, the Company's revenues increased 710%, from $1,261,000 to $10,216,000, and its expenses increased 1040%, from $504,000 to $5,749,000. Income before gains increased 490%, from $757,000 to $4,467,000, and net income increased 567%, from $757,000 to $5,051,000. In addition to the factors cited above, net income increased partially as a result of a gain realized in connection with the repayment of an ADC loan arrangement. Loan Investments During the three months ended June 30, 1999, the Company originated one new loan (a $15.3 million first lien commitment) and two of the Company's loans aggregating $5.1 million in then outstanding balances were fully repaid; the initial advance under the new loan totaled approximately $12.9 million. During the six months ended June 30, 1999, four of the Company's loans were fully repaid, one loan origination was closed and one loan was sold to AMRESCO Commercial Finance, Inc. ("ACFI"), a member of the AMRESCO Group; additionally, one loan was reclassified, net of a $500,000 charge-off, to investment in unconsolidated subsidiary following the subsidiary's acquisition (through foreclosure on February 25, 1999) of the partnership interests of one of the Company's borrowers. In connection with the loan sale, amounts due to ACFI were reduced by $2.0 million; as of June 30, 1999, amounts due to ACFI totaled $5.4 million. The proceeds from the four loan repayments and the loan sale totaled $22.3 million, including accrued interest, a profit participation and a prepayment fee aggregating $1.0 million. Principal collections on certain of the Company's other loan investments totaled $1.7 million and $2.7 million during the three and six months ended June 30, 1999, respectively. During the three and six months ended June 30, 1999, the Company advanced $17.4 million and $35.2 million, respectively, under loan commitments it had closed on or prior to December 31, 1998. Excluding the loan classified as an investment in unconsolidated subsidiary, the Company has 16 loans representing $191.4 million in aggregate commitments; as of June 30, 1999, $152.3 million had been advanced under these facilities. A portion of the commitments may expire without being drawn upon and therefore the total commitment amounts do not necessarily represent future cash requirements. After giving effect to ACFI's economic interest (as described in the Company's Annual Report on Form 10-K for the year ended December 31, 1998), commitments and amounts outstanding totaled approximately $185.7 million and $147.6 million, respectively, at June 30, 1999. At June 30, 1999, ACFI's contingent obligation for additional advances which may be required to be made under certain of the Company's loans approximated $990,000. Based upon the amounts outstanding under these facilities and after giving effect to the contractual right sold to ACFI, the Company's portfolio of commercial mortgage loans had a weighted average interest pay rate of 10.6% and a weighted average interest accrual rate of 11.8% as of June 30, 1999. Five of the 16 loans provide for profit participation above the contractual accrual rate; two of these five facilities are included in the pool of loans in which ACFI has a contractual right to collect certain excess proceeds. The Company's loan investments are summarized as follows (dollars in thousands):
Amount Outstanding at Date of Initial Scheduled Collateral Commitment June 30, Investment Maturity Location Property Type Position Amount 1999 (c) - -------------------- ------------------- ---------------- ------------------ ---------------- ---------- ---------------- May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien $ 14,700 $ 13,032 June 1, 1998 June 1, 2001 Houston, TX Office First Lien 11,800 10,353 June 12, 1998 June 30, 2000 Pearland, TX Apartment First Lien 12,827 10,987 (b) June 17, 1998 June 30, 2000 San Diego, CA R&D/Bio-Tech First Lien 5,560 4,570 (b) June 19, 1998 June 18, 2000 Houston, TX Office First Lien 24,000 14,016 (b) June 22, 1998 June 19, 2000 Wayland, MA Office First Lien 45,000 36,951 July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests 10,068 7,017 (a) July 2, 1998 June 30, 2000 Washington, D.C. Office First Lien 7,000 5,882 July 10, 1998 July 31, 2000 Pasadena, TX Apartment First Lien 3,350 2,900 September 1, 1998 February 28, 2001 Los Angeles, CA Mixed Use First Lien 18,419 17,418 September 30, 1998 Various San Antonio, TX/ Residential Lots First Lien 8,400 2,536 Sunnyvale, TX September 30, 1998 October 7, 1999 Ft. Worth, TX Apartment Ptrshp Interests 2,650 2,649 September 30, 1998 December 31, 1999 Dallas, TX Medical Office First Lien 3,015 2,596 September 30, 1998 September 22, 1999 Norwood, MA Industrial/Office First Lien 8,765 8,195 October 1, 1998 December 31, 1999 Richardson, TX Office First Lien 567 300 May 18, 1999 May 19, 2001 Irvine, CA Office First Lien 15,260 12,883 --------- --------- 191,381 152,285 ACFI's Economic Interest (5,698) (4,708) --------- --------- $ 185,683 (d) $ 147,577 (d) ========= ========= Interest Interest Date of Initial Pay Accrual Investment Rate Rate - ------------------------ --------- ----------- May 12, 1998 10.0% 12.0% June 1, 1998 12.0% 12.0% June 12, 1998 10.0% 11.5% June 17, 1998 10.0% 13.5% June 19, 1998 12.0% 12.0% June 22, 1998 10.5% 10.5% July 1, 1998 10.0% 15.0% July 2, 1998 10.5% 10.5% July 10, 1998 10.0% 14.0% September 1, 1998 10.0% 12.0% September 30, 1998 10.0% 14.0% September 30, 1998 10.5% 16.0% September 30, 1998 10.0% 13.0% September 30, 1998 10.0% 12.5% October 1, 1998 9.3% 15.0% May 18, 1999 10.0% 12.0%
18 19 (a) Accounted for as investment in joint venture for financial reporting purposes. (b) Accounted for as real estate for financial reporting purposes. (c) For all loan investments, payments of interest only are due monthly at the interest pay rate. All principal and all remaining accrued and unpaid interest are due at the scheduled maturities of the loans. (d) Amounts exclude the loan which was reclassified to investment in unconsolidated subsidiary during the three months ended March 31, 1999. The Company provides financing through certain real estate loan arrangements that, because of their nature, qualify either as real estate or joint venture investments for financial reporting purposes (see notes [a] and [b] accompanying the table above). As of June 30, 1999, loan investments representing approximately $52,455,000 in aggregate commitments were accounted for as either real estate or joint venture interests; approximately $36,590,000 had been advanced to borrowers under the related agreements. For a discussion of these loan arrangements, see the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. A mezzanine (second lien) loan with an outstanding balance of $6,839,000 and a recorded investment of $6,659,000 was over 30 days past due as of December 31, 1998. The allowance for loan losses related to this investment totaled $500,000 at December 31, 1998. On February 25, 1999, an unconsolidated taxable subsidiary of the Company assumed control of the borrower (a partnership) through foreclosure of the partnership interests. In addition to the second lien mortgage, the property is encumbered by a $17 million first lien mortgage provided by an unaffiliated third party. During the first quarter, the Company charged-off $500,000 against the allowance for losses related to this investment. Should the Company incur an actual loss on this investment, tax basis income would be adversely affected. At June 30, 1999, the Company's commercial mortgage loan commitments were geographically dispersed in three states and the District of Columbia: Texas (48%); Massachusetts (27%); California (21%); and Washington, D.C. (4%). The underlying collateral for these loans was comprised of the following property types: office (69%); multifamily (10%); mixed use (10%); residential (4%); industrial (3%); R&D/Bio-Tech (3%); and medical office (1%). Acquisition loans, acquisition/rehabilitation loans, construction loans, single-family lot development loans and bridge loans comprised 34%, 30%, 29%, 5% and 2% of the portfolio, respectively. Eighty-five percent of the portfolio is comprised of first lien loans while the balance of the portfolio (15%) is secured by second liens and/or partnership interests. The percentages reflected above are based upon committed loan amounts and give effect to ACFI's economic interest. Additionally, the percentages exclude the loan which was reclassified to investment in unconsolidated subsidiary during the first quarter of 1999. Until the loan investment portfolio becomes larger, geographic and product type concentrations are expected. The Company expects to see more diversification both geographically and by product type as the loan portfolio grows. Geographic and product type concentrations present additional risks, particularly if there is a deterioration in the general condition of the real estate market or in the sub-market in which the loan collateral is located, or if demand for a particular product type does not meet expectations due to adverse market conditions that are different from those projected by the Company. In an effort to reduce concentration risks, the Company is targeting transactions which will more broadly diversify its loan investment portfolio. Commercial Mortgage-backed Securities As of June 30, 1999, the Company holds five commercial mortgage-backed securities ("CMBS") which were acquired at an aggregate purchase price of $34.5 million. All of these securities were acquired on or before September 1, 1998. Due an increase in comparable-term U.S. Treasury rates and increasing spreads in the CMBS market during the three and six months ended June 30, 1999, the value of the Company's CMBS holdings declined by $1,915,000 and $2,822,000, respectively; accordingly, the Company recorded an unrealized loss of $1,915,000 and $2,822,000, respectively, on its CMBS portfolio during the three and six months ended June 30, 1999. Additionally, during the three and six months ended June 30, 1999 the Company recorded an unrealized loss of $3,000 and an unrealized gain of $1,000, respectively, net of tax effects, related to one commercial mortgage-backed security owned by its unconsolidated taxable subsidiary; the security held by this subsidiary has an investment rating of "B-". As these securities are classified as available for sale, the aggregate unrealized loss was reported as a component of accumulated other comprehensive income (loss) in shareholders' equity for financial reporting purposes. The cumulative unrealized losses (totaling $9.3 million) have had no impact on the Company's taxable income or cash flow. Management intends to retain these investments for the foreseeable future. Excluding the potential tax effects associated with the security held by the Company's unconsolidated taxable subsidiary, the weighted average unleveraged yield over the 19 20 expected life of these investments is expected to approximate 11.4%. The Company's direct CMBS investments are summarized as follows (dollars in thousands):
Percentage of Security Aggregate Aggregate Total Based Rating Amortized Cost Fair Value on Fair Value ------------- ------------------ ----------------- ---------------- BB- $ 4,248 $ 3,429 13% B 19,590 15,736 60% B- 11,328 6,934 27% -------- -------- ---- $ 35,166 $ 26,099 100% ======== ======== ====
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. In February 1999, the Company contributed $0.7 million to a newly formed investment partnership with Olympus Real Estate Corporation. The partnership, which is 5% owned by the Company, acquired several classes of subordinated CMBS at an aggregate purchase price of $12.7 million. Currently, the Company does not expect to make any additional investments in the partnership. Equity Investments in Real Estate On March 2, 1999, the Company acquired a 49% limited partner interest in a partnership which owns a 116,000 square foot office building in Richardson, Texas. The property is encumbered by a first lien mortgage with an outstanding balance of $13.8 million at June 30, 1999. The Company contributed $1.4 million of capital to the partnership. On April 30, 1999, the Company (through a majority-owned partnership) acquired interests in three newly constructed, grocery-anchored shopping centers in the Dallas/Fort Worth (Texas) area. These properties, which were acquired by three subsidiary partnerships at an aggregate purchase price of $30.2 million, include an 86,516 square foot facility in Flower Mound, Texas, a 61,440 square foot facility in Fort Worth, Texas and an 85,611 square foot facility in Grapevine, Texas. In connection with these acquisitions, the three title-holding partnerships obtained non-recourse financing aggregating $19.5 million from an unaffiliated third party. Immediately prior to the closing, the Company contributed $11.4 million of capital to the partnership. The proceeds from this contribution were used to fund the balance of the purchase price, to pay costs associated with the financing and to provide initial working capital to the title-holding partnerships. With this transaction, the Company has now contributed a total of $16.2 million of capital to partnerships that hold title to real estate. The non-recourse loans bear interest at 6.68% per annum and require interest only payments through January 1, 2002; thereafter, interest and principal payments are due based upon 25-year amortization schedules. The loans mature on January 1, 2014. The Company, (through the majority-owned partnership), expects to acquire a fifth center, an 87,540 square foot facility in Richardson, Texas, during the third quarter of 1999 following the completion of construction and satisfaction of certain other closing conditions. The fifth center is expected to be acquired at a purchase price of approximately $10.8 million; it is anticipated that this acquisition will be financed with a $3.2 million equity contribution from the Company and $7.6 million of third party non-recourse financing. Ultimately, the Company expects to construct an additional 62,000 square feet of side-store space; this development is expected to occur at the three recently acquired properties and at the fifth center (following the acquisition thereof). It is currently anticipated that the development costs will be financed with an additional $1 million equity contribution from the Company and $3.8 million of third party financing proceeds. LIQUIDITY AND CAPITAL RESOURCES The Company's ability to execute its business strategy, particularly the growth of its investment and loan portfolio, depends to a significant degree on its ability to obtain additional capital. The Company's principal demands for liquidity are cash for operations, including funds for its lending activities and other investments, interest expense associated with 20 21 its indebtedness, debt repayments and distributions to its shareholders. In the near term, the Company's principal sources of liquidity are the funds available to it under its financing facilities described below. Effective as of July 1, 1998, the Company (and certain of its subsidiaries) entered into a $400 million credit facility (the "Line of Credit") with Prudential Securities Credit Corporation ("PSCC"). Subject to PSCC's approval on an asset by asset basis, borrowings under the facility can be used to finance the Company's structured loan and equity real estate investments. As a result of the dislocation in the capital markets in mid to late 1998, PSCC became more restrictive in the application of its approval rights with respect to financing for new investments sought by the Company; accordingly, very few new investments were consummated during the fourth quarter of 1998 and the first quarter of 1999. Prior to the modifications discussed below, borrowings under the Line of Credit bore interest at rates ranging from LIBOR plus 1% per annum to LIBOR plus 2% per annum. At December 31, 1998, $39,338,000 had been borrowed under the Line of Credit. To reduce the impact that rising interest rates would have on this floating rate indebtedness, the Company entered into an interest rate cap agreement which became effective on January 1, 1999; the agreement had a notional amount of $33,600,000 and was scheduled to expire on July 1, 2000. The agreement entitled the Company to receive from a counterparty the amounts, if any, by which one month LIBOR exceeded 6.0%. Prior to its termination (as described below), no payments were due from the counterparty as one month LIBOR had not exceeded 6.0%. On July 2, 1999, the agreement was terminated and replaced with an interest rate cap agreement which became effective on August 1, 1999. The new agreement, which was entered into to more closely match the then outstanding borrowings, has a notional amount of $59,000,000. Until its expiration on November 1, 2000, the agreement entitles the Company to receive from a counterparty the amounts, if any, by which one month LIBOR exceeds 6.25%. There are no margin requirements associated with interest rate caps and therefore there is no liquidity risk associated with this particular hedging instrument. Effective as of May 4, 1999, the Company (and certain of its subsidiaries) entered into an Amended and Restated Interim Warehouse and Security Agreement (the "Amended Line of Credit") with PSCC; the agreement amended the Company's existing line of credit. The Amended Line of Credit includes the following modifications: (1) a reduction in the size of the committed facility from $400 million to $300 million; (2) the elimination of the requirement that assets financed with proceeds from the facility must be securitizable; (3) a reduction in the amount of capital the Company must fund with respect to construction and rehabilitation loans before PSCC is required to begin advancing funds; (4) an extension of the maturity date from July 1, 2000 to November 3, 2000; and (5) the modification to, and addition of, certain sublimits on certain types of loans and assets. Under the Amended Line of Credit, borrowings bear interest at LIBOR plus 1.25% per annum to the extent such borrowings do not exceed the Company's Tangible Net Worth, as defined; borrowings in excess of the Company's Tangible Net Worth bear interest at LIBOR plus 3%. Borrowings are secured by a first lien security interest in all assets funded with proceeds from the Amended Line of Credit. At June 30, 1999, $59,338,000 had been borrowed under the Amended Line of Credit. The weighted average interest rate at June 30, 1999 was 6.19%. Effective as of July 1, 1998, the Company (and certain of its subsidiaries) entered into a $100 million Master Repurchase Agreement (the "Repurchase Agreement") with PSCC; subsequently, PSCC was replaced by Prudential-Bache International, Ltd. ("PBI"), an affiliate of PSCC, as lender. Borrowings under the Repurchase Agreement can be used to finance a portion of the Company's portfolio of mortgage-backed securities. The Repurchase Agreement provides that the Company may borrow a varying percentage of the market value of the purchased mortgage-backed securities, depending on the credit quality of such securities. Borrowings under the Repurchase Agreement bear interest at rates ranging from LIBOR plus 0.20% per annum to LIBOR plus 1.5% per annum depending upon the advance rate and the credit quality of the securities being financed. Borrowings under the facility are secured by an assignment to PBI of all mortgage-backed securities funded with proceeds from the Repurchase Agreement. The Repurchase Agreement matures on June 30, 2000. At June 30, 1999, $10,393,000 was outstanding under the Repurchase Agreement. At December 31, 1998, there were no outstanding borrowings under this facility. The weighted average interest rate at June 30, 1999 was 6.36%. Under the terms of the Amended Line of Credit and the Repurchase Agreement, PSCC and PBI, respectively, retain the right to mark the underlying collateral to market value. A reduction in the value of its pledged assets may require the Company to provide additional collateral or fund margin calls. From time to time, the Company may be required to provide such additional collateral or fund margin calls. The Company believes that the funds available under its two credit facilities will be sufficient to meet the Company's liquidity and capital requirements through the maturity date of the Amended Line of Credit. The Company believes that the Amended Line of Credit will provide it with more flexibility, which in turn will allow it to utilize favorable financing terms in connection with the origination of investments and enable it to resume the growth of its assets, albeit at a slower 21 22 rate than was achieved in the second and third quarters of 1998. The Company, however, remains subject to capital constraints. In particular, the Company's ability to raise additional capital through the public equity and debt markets continues to be severely limited. The Company is continuing its efforts to obtain additional secured loan facilities that would better match the duration of its assets. Additionally, these efforts are designed to provide alternatives to the Amended Line of Credit and, ultimately, to replace it. However, there can be no assurances that the Company will be able to obtain renewal or additional financing on acceptable terms. Management currently believes that the dislocation in the capital markets will not extend long-term; however, its duration is impossible to predict at this time. In the near term, the Company believes it will be constrained from accessing the public equity markets. In addition, new issues of long-term public unsecured debt will be difficult to obtain and, in any event, will likely not be available to the Company at a reasonable cost. Additional secured debt beyond the Company's Amended Line of Credit will also be difficult to obtain and may not be offered at a reasonable cost. Aside from limiting the Company's access to additional capital in the near term to fund growth, the Company has been relatively insulated from the effects of the dislocation in the capital markets. While the market value of the Company's CMBS holdings has declined, the Company invested in these bonds for the long term yields that they are expected to produce. Management believes that the current market dislocation presents significant investment opportunities for selective acquisitions of CMBS and that the fundamental value of the real estate mortgages underlying these bonds has been largely unaffected to date, although general economic conditions could adversely impact real estate values in the future. REIT STATUS Management believes that the Company is operated in a manner that will enable it to continue to qualify as a REIT for federal income tax purposes. As a REIT, the Company will not pay income taxes at the trust level on any taxable income which is distributed to its shareholders, although AMREIT II, Inc., its "Non-Qualified REIT Subsidiary", may be subject to tax at the corporate level. Qualification for treatment as a REIT requires the Company to meet certain criteria, including certain requirements regarding the nature of its ownership, assets, income and distributions of taxable income. The Company may, however, be subject to tax at normal corporate rates on any ordinary income or capital gains not distributed. YEAR 2000 ISSUE General Many of the world's computers, software programs and other equipment using microprocessors or embedded chips currently have date fields that use two digits rather than four digits to define the applicable year. These computers, programs and chips may be unable to properly interpret dates beyond the year 1999; for example, computer software that has date sensitive programming using a two-digit format may recognize a date using "00" as the year 1900 rather than the year 2000. This inability to properly process dates is commonly referred to as the "Year 2000 issue", the "Year 2000 problem" or "Millennium Bug." Such errors could potentially result in a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities, which, in turn, could lead to disruptions in the Company's operations or performance. All of the Company's information technology infrastructure is provided by the Manager, and the Manager's systems are supplied by AMRESCO, INC. The Company's assessments of the cost and timeliness of completion of Year 2000 modifications set forth below are based on representations made to the Company and the best estimates of the individuals within or engaged by AMRESCO, INC. charged with handling the Year 2000 issue, which estimates were derived using numerous assumptions relating to future events, including, without limitation, the continued availability of certain internal and external resources and third party readiness plans. Furthermore, as the AMRESCO, INC. Year 2000 initiative (described below) progresses, AMRESCO, INC., the Manager and the Company continue to revise estimates of the likely problems and costs associated with the Year 2000 issue and to adapt contingency plans. However, there can be no assurance that any estimate or assumption will prove to be accurate. The AMRESCO, INC. Year 2000 Initiative AMRESCO, INC. is conducting a comprehensive Year 2000 initiative with respect to its internal business-critical systems, including those upon which the Company depends. This initiative encompasses information technology ("IT") systems and applications, as well as non-IT systems and equipment with embedded technology, such as fax machines and 22 23 telephone systems, which may be impacted by the Year 2000 issue. Business-critical systems encompass internal accounting systems, including general ledger, accounts payable and financial reporting applications; cash management systems; loan servicing systems; and decision support systems; as well as the underlying technology required to support the software. The initiative includes assessing, remediating or replacing, testing and upgrading the business-critical IT systems of AMRESCO, INC. with the assistance of a consulting firm that specializes in Year 2000 readiness. Based upon a review of the completed and planned stages of the initiative, and the testing done to date, AMRESCO, INC. does not anticipate any material difficulties in achieving Year 2000 readiness with respect to its internal business-critical systems used in connection with the operations of the Manager or the Company, and the Company has received a written representation from AMRESCO, INC. that Year 2000 readiness was achieved by December 1998 with respect to all its internal business-critical systems used in connection with the operations of the Manager or the Company. In addition to the internal IT systems and non-IT systems of AMRESCO, INC., the Company may be at risk from Year 2000 failures caused by or occurring to third parties. These third parties can be classified into two groups. The first group includes borrowers, significant business partners, lenders, vendors and other service providers with whom the Company, the Manager or AMRESCO, INC. has a direct contractual relationship. The second group, while encompassing certain members of the first group, is comprised of third parties providing services or functions to large segments of society, both domestically and internationally, such as airlines, utilities and national stock exchanges. As is the case with most other companies, the actions the Company, the Manager and AMRESCO, INC. can take to avoid any adverse effects from the failure of companies, particularly those in the second group, to become Year 2000 ready is extremely limited. However, AMRESCO, INC. has communicated with those companies that have significant business relationships with AMRESCO, INC., the Manager or the Company, particularly those in the first group, to determine their Year 2000 readiness status and the extent to which AMRESCO, INC., the Manager or the Company could be affected by any of their Year 2000 readiness issues. In connection with this process, AMRESCO, INC. has sought to obtain written representations and other independent confirmations of Year 2000 readiness from the third parties with whom AMRESCO, INC., the Manager or the Company has material contracts. Responses from all third parties having material contracts with AMRESCO, INC., the Manager or the Company have not been received, nor is it likely that responses will be received from all such third parties. In addition to contacting these third parties, where there are direct interfaces between the systems of AMRESCO, INC. and the systems of these third parties in the first group, AMRESCO, INC. conducted testing in the second quarter of 1999 in conformance with the guidelines of the Federal Financial Institutions Examination Council. Based on responses received and testing to date, it is not currently anticipated that AMRESCO, INC., the Manager or the Company will be materially affected by any third party Year 2000 readiness issues in connection with the operations of the Manager or the Company. For all business-critical systems interfaces used in connection with the operations of the Manager and the Company, AMRESCO, INC. advised the Company that readiness was achieved by December 31, 1998. Replacement providers believed to be compliant have been identified for significant third party providers that did not complete their Year 2000 initiatives. There can be no assurance that the systems of AMRESCO, INC. or those of third parties will not experience adverse effects after December 31, 1999. Furthermore, there can be no assurance that a failure to convert by another company, or a conversion that is not compatible with the systems of AMRESCO, INC. or those of other companies on which the systems of AMRESCO, INC. rely, would not have a material adverse effect on the Company. Under the terms of the Company's Management Agreement with the Manager, all of the costs associated with addressing the Company's Year 2000 issue are to be borne by the Manager. Therefore, the Company does not anticipate that it will incur material expenditures in connection with any modifications necessary to achieve Year 2000 readiness. Potential Risks In addition to the internal systems of AMRESCO, INC. and the systems and embedded technology of third parties with whom AMRESCO, INC., the Manager and the Company do business, there is a general uncertainty regarding the overall success of global remediation efforts relating to the Year 2000 issue, including those efforts of providers of services to large segments of society, as described above in the second group. Due to the interrelationships on a global scale that may be impacted by the Year 2000 issue, there could be short-term disruptions in the capital or real estate markets or longer-term disruptions that would affect the overall economy. 23 24 Due to the general uncertainty with respect to how this issue will affect businesses and governments, it is not possible to list all potential problems or risks associated with the Year 2000 issue. However, some examples of problems or risks to the Company that could result from the failure by third parties to adequately deal with the Year 2000 issue include: o in the case of lenders, the potential for liquidity stress due to disruptions in funding flows; o in the case of exchanges and clearing agents, the potential for funding disruptions and settlement failures; o in the case of counter parties, accounting and financial difficulties to those parties that may expose the Company to increased credit risk; and o in the case of vendors or providers, service failures or interruptions, such as failures of power, telecommunications and the embedded technology in building systems (such as HVAC, sprinkler and fire suppression, elevators, alarm monitoring and security, and building and parking garage access). With respect to the Company's loan portfolios, risks due to the potential failure of third parties to be ready to deal with the Year 2000 issue include: o potential borrower defaults resulting from increased expenses or legal claims related to failures of embedded technology in building systems, such as HVAC, sprinkler and fire suppression, elevators, alarm monitoring and security, and building and parking garage access; o potential reductions in collateral value due to failure of one or more of the building systems; o interruptions in cash flow due to borrowers being unable to obtain timely lease payments from tenants or incomplete or inaccurate accounting of rents; o potential borrower defaults resulting from computer failures of retail systems of major tenants in retail commercial real estate properties such as shopping malls and strip shopping centers; o construction delays resulting from contractors' failure to be Year 2000 ready and increased costs of construction associated with upgrading building systems to be Year 2000 compliant; and o delays in reaching projected occupancy levels due to construction delays, interruptions in service or other market factors. These risks are also applicable to the Company's portfolio of CMBS as these securities are dependent upon the pool of mortgage loans underlying them. If the investors in these types of securities demand higher returns in recognition of these potential risks, the market value of any CMBS portfolio of the Company also could be adversely affected. Additionally, the Company has made equity investments in a partnership that will ultimately own interests in five grocery-anchored shopping centers and in a partnership which owns a suburban office building. These operations will be subject to many of the risks set forth above. Although the Company intends to monitor Year 2000 readiness, there can be no guarantee that all building systems will be Year 2000 compliant. The Company believes that the risks most likely to affect the Company adversely relate to the failure of third parties, including its borrowers and sources of capital, to achieve Year 2000 readiness. If its borrowers' systems fail, the result could be a delay in making payments to the Company or the complete business failure of such borrowers. The failure, although believed to be unlikely, of the Company's sources of capital to achieve Year 2000 readiness could result in the Company being unable to obtain the funds necessary to continue its normal business operations. Some of the risks associated with the Year 2000 issue may be mitigated through insurance maintained or purchased by the Company, its affiliates, its business partners, borrowers and vendors. However, the scope of insurance coverage in addressing these potential issues under existing policies has yet to be tested, and the economic impact on the solvency of the insurers has not been explored. Therefore, no assurance can be given that insurance coverage will be available or, if it 24 25 is available, that it will be available on a cost-effective basis or that it will cover all or a significant portion of any potential loss. Business Continuity/Disaster Recovery Plan AMRESCO, INC. currently has a business continuity/disaster recovery plan that includes business resumption processes that do not rely on computer systems and the maintenance of hard copy files, where appropriate. The business continuity/disaster recovery plan is monitored and updated as potential Year 2000 readiness issues of AMRESCO, INC. and third parties are specifically identified. Due to the inability to predict all of the potential problems that may arise in connection with the Year 2000 issue, there can be no assurance that all contingencies will be adequately addressed by such plan. FORWARD-LOOKING STATEMENTS Certain statements contained in this Form 10-Q are not based on historical facts and are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company intends that forward-looking statements be subject to such Act and any similar state or federal laws. Forward-looking statements, which are based on various assumptions, include statements regarding the intent, belief or current expectations of the Company, its Manager, and their respective Trustees or directors and officers, and may be identified by reference to a future period or periods or by use of forward-looking terminology such as "intends," "may," "could," "will," "believe," "expect," "anticipate," "plan," or similar terms or variations of those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to risks, uncertainties and changes with respect to a variety of factors, including, but not limited to, changes in international, national, regional or local economic environments, changes in prevailing interest rates, credit and prepayment risks, basis and asset/liability risks, spread risk, event risk, conditions which may affect public securities and debt markets generally or the markets in which the Company operates, the Year 2000 issue, the availability of and costs associated with obtaining adequate and timely sources of liquidity, dependence on existing sources of funding, the size and liquidity of the secondary market for commercial mortgage-backed securities, geographic or product type concentrations of assets (temporary or otherwise), hedge mismatches with liabilities, other factors generally understood to affect the real estate acquisition, mortgage and leasing markets and securities investments, changes in federal income tax laws and regulations, and other risks described from time to time in the Company's SEC reports and filings, including its registration statement on Form S-11 and periodic reports on Form 10-Q, Form 8-K and Form 10-K. 25 26 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is a party to various financial instruments which are subject to market risk. These instruments include mortgage loan investments, investments in commercial mortgage-backed securities ("CMBS") and certain of the Company's borrowing facilities. The Company is also a party to an interest rate cap agreement which it entered into in order to mitigate the market risk exposure associated with its credit facilities. The Company's financial instruments involve, to varying degrees, elements of interest rate risk. Additionally, the Company's investment portfolio, which is comprised of both financial instruments (mortgage loans and CMBS) and equity investments in real estate, is subject to real estate market risk. The Company is a party to certain other financial instruments, including trade receivables and payables and amounts due to affiliates which, due to their short-term nature, are not subject to market risk. For a discussion of market risk exposures, reference is made to Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The market risk exposures described therein have not materially changed since December 31, 1998; accordingly, no additional discussion or analysis is provided in this Form 10-Q. 26 27 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 1999 Annual Meeting of Shareholders was held on May 11, 1999. There were 8,461,410 shares present in person or by proxy, which constituted 84.5% of the shares entitled to vote at the meeting. The matters voted upon and the results of such votes were as follows: (i) Election of Robert L. Adair III (7,172,986 shares voted in favor and 1,288,424 shares withheld) and John C. Deterding (7,172,716 shares voted in favor and 1,288,694 shares withheld) as Trust Managers for a three year term. (ii) Approval and ratification of the appointment by the Board of Trust Managers of Deloitte & Touche LLP as the Company's independent public accountants for the 1999 fiscal year with 8,430,385 shares voted in favor, 7,875 shares voted against and 23,150 shares abstained. (iii) Approval of an amendment to Article 2 of the AMRESCO Capital Trust 1998 Share Option and Award Plan to increase the aggregate number of common shares of beneficial interest reserved for issuance thereunder by 500,000 with 5,715,897 shares voted in favor, 2,324,963 shares voted against and 420,550 shares abstained. ITEM 5. OTHER INFORMATION Effective as of August 4, 1999, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Impac Commercial Holdings, Inc. ("ICH"). Pursuant to the Merger Agreement, ICH will be merged with and into the Company, with the Company as the surviving entity (the "Merger"), and each outstanding share of common stock of ICH will be converted into 0.66094 of a common share of the Company. Also pursuant to the Merger Agreement, the holder of the outstanding shares of Series B 8.5% Cumulative Convertible Preferred Stock of ICH ("ICH Preferred Stock") will convert all of such shares into 1,683,635 shares of common stock of ICH or, if such conversion does not occur prior to the effective time of the Merger, all of the shares of ICH Preferred Stock will be converted into 1,112,782 common shares of the Company. The transactions contemplated by the Merger Agreement are subject to approval by the shareholders of the Company and ICH. A copy of the Merger Agreement is attached as an exhibit to this report. 27 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits and Exhibit Index Exhibit No. 2.1 Agreement and Plan of Merger, dated as of August 4, 1999, by and between the Company and Impac Commercial Holdings, Inc. 4.1 Rights Agreement, dated as of February 25, 1999, between the Company and The Bank of New York, as Rights Agent, which includes: as Exhibit A thereto, the Form of Statement of Designation of Series A Junior Participating Preferred Shares, par value $.01 per share, of the Company; as Exhibit B thereto, the Form of Right Certificate; and as Exhibit C thereto, the Summary of Rights to Purchase Preferred Shares (filed as Exhibit 1 to the Registrant's Current Report on Form 8-K dated February 25, 1999, which exhibit is incorporated herein by reference). 10.1 Amended and Restated Interim Warehouse and Security Agreement dated as of May 4, 1999, by and among Prudential Securities Credit Corporation and AMRESCO Capital Trust, AMREIT I, Inc., AMREIT II, Inc., ACT Equities, Inc. and ACT Holdings, Inc. (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999, which exhibit is incorporated herein by reference). 10.2 Warrant Agreement dated as of May 4, 1999 between AMRESCO Capital Trust and Prudential Securities Incorporated (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999, which exhibit is incorporated herein by reference). 27 Financial Data Schedule. (b) Reports on Form 8-K. The following reports on Form 8-K were filed with respect to events occurring during the quarterly period for which this report is filed: None. 28 29 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMRESCO CAPITAL TRUST Registrant Date: August 16, 1999 By: /s/Thomas J. Andrus --------------------------- Thomas J. Andrus Executive Vice President and Chief Financial Officer 29 30 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------ ----------- 2.1 Agreement and Plan of Merger, dated as of August 4, 1999, by and between the Company and Impac Commercial Holdings, Inc. 4.1 Rights Agreement, dated as of February 25, 1999, between the Company and The Bank of New York, as Rights Agent, which includes: as Exhibit A thereto, the Form of Statement of Designation of Series A Junior Participating Preferred Shares, par value $.01 per share, of the Company; as Exhibit B thereto, the Form of Right Certificate; and as Exhibit C thereto, the Summary of Rights to Purchase Preferred Shares (filed as Exhibit 1 to the Registrant's Current Report on Form 8-K dated February 25, 1999, which exhibit is incorporated herein by reference). 10.1 Amended and Restated Interim Warehouse and Security Agreement dated as of May 4, 1999, by and among Prudential Securities Credit Corporation and AMRESCO Capital Trust, AMREIT I, Inc., AMREIT II, Inc., ACT Equities, Inc. and ACT Holdings, Inc. (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999, which exhibit is incorporated herein by reference). 10.2 Warrant Agreement dated as of May 4, 1999 between AMRESCO Capital Trust and Prudential Securities Incorporated (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999, which exhibit is incorporated herein by reference). 27 Financial Data Schedule.
EX-2.1 2 AGREEEMENT & PLAN OF MERGER DATED AUGUST 4, 1999 1 AGREEMENT AND PLAN OF MERGER Dated as of August 4, 1999 by and between IMPAC COMMERCIAL HOLDINGS, INC. and AMRESCO CAPITAL TRUST 2 TABLE OF CONTENTS ARTICLE I THE MERGER................................................................................1 SECTION 1.1 The Merger.............................................................1 SECTION 1.2 Closing................................................................2 SECTION 1.3 Effective Time.........................................................2 SECTION 1.4 Effects of the Merger..................................................2 SECTION 1.5 Declaration of Trust and Bylaws........................................2 SECTION 1.6 Board of Trust Managers................................................2 SECTION 1.7 Officers...............................................................2 ARTICLE II TREATMENT OF SHARES.......................................................................3 SECTION 2.1 Effect on Outstanding Shares...........................................3 SECTION 2.2 Exchange of Certificates...............................................3 SECTION 2.3 Options................................................................5 SECTION 2.4 Dividends..............................................................5 SECTION 2.5 No Fractional Shares...................................................6 ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACT.....................................................7 SECTION 3.1 Organization, Standing and Corporate Power.............................7 SECTION 3.2 Subsidiaries...........................................................7 SECTION 3.3 Capital Structure......................................................7 SECTION 3.4 Authority; Noncontravention; Consents..................................8 SECTION 3.5 SEC Documents.........................................................10 SECTION 3.6 Financial Statements..................................................10 SECTION 3.7 Absence of Certain Changes or Events..................................10 SECTION 3.8 No Undisclosed Liabilities............................................10 SECTION 3.9 No Defaults...........................................................10 SECTION 3.10 Taxes.................................................................11 SECTION 3.11 Employee Matters......................................................12 SECTION 3.12 Affiliate Transactions................................................13 SECTION 3.13 Financial Advisors....................................................13 SECTION 3.14 Registration Statement and Proxy Statement............................14 SECTION 3.15 Vote Required.........................................................14 SECTION 3.16 Anti-Takeover Statutes................................................14 SECTION 3.17 Full Disclosure.......................................................14 SECTION 3.18 Litigation............................................................14 SECTION 3.19 Compliance with Laws..................................................15 SECTION 3.20 Indebtedness..........................................................15 SECTION 3.21 Insurance.............................................................15 SECTION 3.22 Investment Company Act................................................15
(i) 3 SECTION 3.23 Material Contracts....................................................16 SECTION 3.24 Mortgage Backed Securities............................................16 SECTION 3.25 Environmental Laws and Regulations....................................17 SECTION 3.26 Properties............................................................18 SECTION 3.27 Mortgage Loans........................................................20 SECTION 3.28 Actions Taken Regarding the ACT Rights Plan...........................21 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ICH....................................................21 SECTION 4.1 Organization, Standing and Corporate Power............................21 SECTION 4.2 Subsidiaries..........................................................21 SECTION 4.3 Capital Structure.....................................................22 SECTION 4.4 Authority; Noncontravention; Consents.................................23 SECTION 4.5 SEC Documents.........................................................24 SECTION 4.6 Financial Statements..................................................24 SECTION 4.7 Absence of Certain Changes or Events..................................24 SECTION 4.8 No Undisclosed Liabilities............................................24 SECTION 4.9 No Defaults...........................................................25 SECTION 4.10 Taxes.................................................................25 SECTION 4.11 Employee Matters......................................................26 SECTION 4.12 Affiliate Transactions................................................27 SECTION 4.13 Financial Advisors....................................................27 SECTION 4.14 Registration Statement and Proxy Statement............................28 SECTION 4.15 Vote Required.........................................................28 SECTION 4.16 Anti-Takeover Statutes................................................28 SECTION 4.17 Full Disclosure.......................................................28 SECTION 4.18 Litigation............................................................29 SECTION 4.19 Compliance with Laws..................................................29 SECTION 4.20 Indebtedness..........................................................29 SECTION 4.21 Insurance.............................................................29 SECTION 4.22 Investment Company Act................................................29 SECTION 4.23 Material Contracts....................................................30 SECTION 4.24 Mortgage Backed Securities............................................30 SECTION 4.25 Environmental Laws and Regulations....................................31 SECTION 4.26 Properties............................................................31 SECTION 4.27 Mortgage Loans........................................................33 SECTION 4.28 Actions Taken Regarding the ICH Rights Plan...........................34 ARTICLE V COVENANTS................................................................................34 SECTION 5.1 Conduct of Business by ACT............................................34 SECTION 5.2 Conduct of Business by ICH............................................36 SECTION 5.3 Other Actions.........................................................38
(ii) 4 ARTICLE VI ADDITIONAL COVENANTS.....................................................................39 SECTION 6.1 Preparation of the Registration Statement and the Proxy Statement; Shareholder Meetings..................................................39 SECTION 6.2 Access to Information; Confidentiality................................40 SECTION 6.3 Commercially Reasonable Efforts; Notification.........................40 SECTION 6.4 Affiliates............................................................41 SECTION 6.5 Tax Treatment.........................................................41 SECTION 6.6 Board of Trust Managers...............................................41 SECTION 6.7 Board Recommendations.................................................41 SECTION 6.8 Acquisition Proposals.................................................43 SECTION 6.9 Public Announcements..................................................43 SECTION 6.10 Letters of Accountants................................................44 SECTION 6.11 Indemnification.......................................................44 SECTION 6.12 Transfer and Gains Taxes..............................................46 SECTION 6.13 Coordination of Dividends.............................................46 ARTICLE VII CONDITIONS PRECEDENT.....................................................................46 SECTION 7.1 Conditions to Each Party's Obligation To Effect the Merger............46 SECTION 7.2 Conditions to Obligations of ICH......................................47 SECTION 7.3 Conditions to Obligations of ACT......................................48 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER........................................................50 SECTION 8.1 Termination...........................................................50 SECTION 8.2 Expenses; Termination Fee.............................................52 SECTION 8.3 Effect of Termination.................................................54 SECTION 8.4 Amendment.............................................................54 SECTION 8.5 Extension; Waiver.....................................................54 ARTICLE IX GENERAL PROVISIONS.......................................................................54 SECTION 9.1 Nonsurvival of Representations and Warranties.........................54 SECTION 9.2 Notices...............................................................54 SECTION 9.3 Certain Definitions...................................................55 SECTION 9.4 Interpretation........................................................56 SECTION 9.5 Counterparts..........................................................56 SECTION 9.6 Entire Agreement; No Third-Party Beneficiaries........................56 SECTION 9.7 Governing Law.........................................................56 SECTION 9.8 Assignment............................................................56 SECTION 9.9 Severability..........................................................57 SECTION 9.10 Attorneys' Fees.......................................................57
(iii) 5 EXHIBITS: Exhibit A Trust Managers of the Surviving Entity Exhibit B Officers of the Surviving Entity Exhibit C Form of Affiliate Letter Exhibit D Form of Amended and Restated Management Agreement Exhibit E Form of ACT Legal Opinion Exhibit F Form of ICH Legal Opinion SCHEDULES: Schedule 3.2 Subsidiaries Schedule 3.3 Capitalization Schedule 3.4 Noncontravention; Consents Schedule 3.7 Absence of Certain Changes or Events Schedule 3.8 Undisclosed Liabilities Schedule 3.9 Defaults Schedule 3.10(a)-(b) Taxes Schedule 3.11 Employee Matters Schedule 3.11(a) Benefit Plans Schedule 3.12 Affiliate Transactions Schedule 3.18 Litigation Schedule 3.19 Compliance with Laws Schedule 3.20 Indebtedness Schedule 3.23 Material Contracts Schedule 3.24(a)-(g) Mortgage Backed Securities Schedule 3.25(a)-(b) Environmental Matters Schedule 3.26(a)-(b) Properties Schedule 3.27(a)-(c) Mortgage Loans Schedule 4.2 Subsidiaries Schedule 4.4 Noncontravention; Consents Schedule 4.7 Absence of Certain Changes or Events Schedule 4.8 Undisclosed Liabilities Schedule 4.9 Defaults Schedule 4.10(a)-(b) Taxes Schedule 4.11 Employee Matters Schedule 4.11(a) Benefit Plans Schedule 4.12 Affiliate Transactions Schedule 4.18 Litigation Schedule 4.19 Compliance with Laws Schedule 4.20 Indebtedness Schedule 4.23 Material Contracts Schedule 4.24(a)-(g) Mortgage Backed Securities Schedule 4.25(a)-(b) Environmental Matters Schedule 4.26(a)-(b) Properties Schedule 4.27(a)-(b) Mortgage Loans Schedule 5.1 Conduct of Business by ACT Schedule 5.2 Conduct of Business by ICH Schedule 9.3 Persons with "Knowledge" of ACT or ICH (iv) 6 INDEX OF DEFINED TERMS
Term Section - ---- ------- Acquisition Agreement 6.7(b) Acquisition Proposal 6.8 Affiliate 9.3 Agreement Preamble ACT Preamble ACT Benefit Plans 3.11(a) ACT Common Shares Recitals ACT Disclosure Letter 9.3 ACT ERISA Affiliate 3.11(a) ACT Financial Advisors 3.13 ACT First Quarter 10-Q 3.11(c) ACT Material Contracts 3.23(a) ACT MBS 3.24(a) ACT MBS Certificates 3.24(a) ACT Mortgage Files 3.27(a) ACT Mortgage Loans 3.27(a) ACT Mortgage Notes 3.27(a) ACT 1998 Form 10-K 3.20(e) ACT Option Plan 3.3 ACT Options 3.3 ACT Permitted Liens 3.26(a) ACT Preferred Shares 3.3 ACT Principal MBS Agreements 3.24(b) ACT Properties 3.26(a) ACT Rights Plan 3.3 ACT SEC Documents 3.5 ACT Shareholder Approval 3.4(a) ACT Shareholder Meeting 6.1(b) ACT Warrants 3.3 Alternative Transaction 6.7(b) Anti-Takeover Statutes 3.16 Average Closing Price 7.3(h) Base Amount 8.2(e) Certificates 2.2(b) Code Recitals Closing Balance Sheet 7.3(h) Closing Cash Amount 7.3(h) Closing Date 1.2 Confidentiality Agreements 6.2 Effective Time 1.3
(v) 7 Environmental Claim 3.25(c) Environmental Laws 3.25(c) ERISA 3.11(a) Exchange Act 3.4(c) Exchange Agent 2.2(a) Exchange Ratio 2.1(b) Expense Fee Base Amount 8.2(e) Final ICH Dividend 2.4(a) GAAP 3.6 Governmental Entity 3.4(c) Hazardous Materials 3.25(c) HSR Act 3.4(c) ICH Preamble ICH Benefit Plans 4.11(a) ICH Common Stock 2.1(a) ICH Disclosure Letter 9.3 ICH ERISA Affiliate 4.11(a) ICH First Quarter 10-Q 4.11(c) ICH Material Contracts 4.23(a) ICH MBS 4.24(a) ICH MBS Certificates 4.24(a) ICH 1998 Form 10-K 3.20 ICH Mortgage Files 4.27(a) ICH Mortgage Loans 4.27(a) ICH Mortgage Notes 4.27(a) ICH Option Plan 2.3 ICH Options 2.3 ICH Permitted Liens 4.26(a) ICH Principal MBS Agreements 4.24(b) ICH Properties 4.26(a) ICH Rights Plan 4.3 ICH SEC Documents 4.5 ICH Series A Common Stock 4.3 ICH Series A Preferred Stock 4.3 ICH Series B Preferred Stock 2.1(a) ICH Stock 2.1(a) ICH Stockholder Approval 4.4(a) ICH Stockholder Meeting 6.1(c) Indebtedness 3.20 Indemnified Liabilities 6.11(a) Indemnified Parties 6.11(a) IRS 3.10(b) Knowledge 9.3
(vi) 8 Laws 3.4(b) Liabilities 3.8 Liens 3.2 Maryland Articles of Merger 1.3 Material Adverse Effect 9.3 Maximum Premium 6.11(c) MBS 3.24(a) Merger Recitals MGCL 1.1 Person 9.3 Property Restrictions 3.26(a) Proxy Statement 3.4(c) Purchase Agreement Recitals Qualifying Income 8.2(e) Registration Statement 3.4 Regulatory Entity 3.25(c) REIT Recitals REIT Requirements 8.2(e) SEC 3.4(c) Securities Act 3.5 Shareholder Approvals 4.4(a) Subsequent Determination 6.7(b) Subsidiary 9.3 Superior Proposal 6.7(b) Surviving Entity 1.1 Taxes 3.10(a) Termination Expenses 8.2(e) Termination Fee 8.2(e) Termination Fee Tax Opinion 8.2(e) Texas Articles of Merger 1.3 Trading Day 7.3(h) Transfer and Gains Tax 6.12 TREITA 1.1
(vii) 9 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of August 4, 1999 is made and entered into by and between Impac Commercial Holdings, Inc., a Maryland corporation ("ICH"), and AMRESCO Capital Trust, a Texas real estate investment trust ("ACT"). WHEREAS, the Board of Directors of ICH and the Board of Trust Managers of ACT have approved the merger of ICH with and into ACT, with ACT being the surviving entity (the "Merger"), upon the terms and subject to the conditions set forth in this Agreement; WHEREAS, it is intended that, for federal income tax purposes, the Merger will qualify as a reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, pursuant to a Purchase Agreement, dated as of the date hereof (the "Purchase Agreement"), FIC Management, Inc., a Delaware corporation, agreed, among other things, that it or its designee will purchase (i) 1,500,011 and 100 common shares of beneficial interest, par value $.01 per share (the "ACT Common Shares"), of ACT from AMREIT Holdings, Inc. and AMRESCO, INC., respectively, and (ii) the Management Agreement, dated as of May 12, 1998, between ACT and AMREIT Managers, L.P. and the Management Agreement, dated as of February 2, 1998, between AMREIT Managers, L.P. and OLY/ACT L.P.; WHEREAS, ACT, as the surviving entity in the Merger, intends that, following the Merger, ACT will continue to be subject to taxation as a real estate investment trust (a "REIT") within the meaning of the Code; and WHEREAS, each of the parties hereto desires to make certain representations, warranties, covenants and agreements in connection with this Agreement. NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I THE MERGER SECTION 1.1 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time (as defined below), ICH shall be merged with and into ACT in accordance with the Maryland General Corporation Law (the "MGCL") and the Texas Real Estate Investment Trust Act, as amended (the "TREITA"). ACT shall be the surviving entity in the Merger and shall continue its existence under the TREITA. ACT after the Effective Time is sometimes referred to herein as the "Surviving Entity." From and after the Effective Time, the identity and separate corporate existence of ICH shall cease and the Surviving Entity shall succeed to and assume all the rights and obligations of ICH. 10 SECTION 1.2 Closing. The closing of the Merger will take place as soon as practicable following the satisfaction or waiver of the conditions set forth in Article VII (the "Closing Date") at such time, date and place as is agreed to by the parties hereto. SECTION 1.3 Effective Time. As soon as practicable following the satisfaction or waiver of the conditions set forth in Article VII, the parties shall file articles of merger or other appropriate documents (the "Maryland Articles of Merger") executed in accordance with the MGCL and articles of merger or other appropriate documents (the "Texas Articles of Merger") executed in accordance with the TREITA and shall make all other filings or recordings required under the MGCL or the TREITA. The Merger shall become effective upon the later of (i) the filing of the Maryland Articles of Merger with the State Department of Assessments and Taxation of Maryland in accordance with the MGCL and (ii) the filing of the Texas Articles of Merger with the County Clerk of the County of Dallas, Texas, or at such later time that the parties hereto have agreed upon and designated in such filings in accordance with applicable law (the date and time the Merger becomes effective being the "Effective Time"), it being understood that the parties shall cause the Effective Time to occur on the Closing Date. SECTION 1.4 Effects of the Merger. The Merger shall have the effects set forth in the MGCL and the TREITA. Among other effects of the Merger, upon consummation of the Merger, the Surviving Entity shall succeed to all powers and rights of ICH and shall be liable for all obligations and responsibilities of ICH. SECTION 1.5 Declaration of Trust and Bylaws. At the Effective Time, the declaration of trust and the bylaws of ACT shall be the declaration of trust and the bylaws of the Surviving Entity, respectively, except that, if approved by the separate vote of at least two-thirds of the outstanding ACT Common Shares, the name of the entity specified therein shall be "Hilltop Investment Trust" and, if not so approved, the name of the entity specified therein shall be "AMRESCO Capital Trust." SECTION 1.6 Board of Trust Managers. ACT shall take all actions necessary to cause the trust managers comprising its Board of Trust Managers at the Effective Time to be comprised of eight trust managers. The trust managers of the Surviving Entity immediately following the Effective Time shall be the persons named on Exhibit A hereto, all of whom shall serve in such classes as are noted on Exhibit A and shall serve in accordance with the TREITA and the Surviving Entity's bylaws. If, prior to the Effective Time, any of the persons named on Exhibit A shall decline or be unable to serve as a trust manager, ACT (if the person is a current trust manager of ACT) or ICH (if such person is a current director of ICH) shall designate another person to serve in such person's stead, which person shall be reasonably acceptable to the other party. 2 11 SECTION 1.7 Officers. The officers of ACT immediately following the Effective Time shall be the persons named on Exhibit B hereto, all of whom shall serve until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. ARTICLE II TREATMENT OF SHARES SECTION 2.1 Effect on Outstanding Shares. By virtue of the Merger and without any action on the part of the holder of any shares of capital stock of ICH or ACT: (a) At the Effective Time, each share of common stock, par value $.01 per share ("ICH Common Stock"), of ICH and each share of Series B 8 1/2% Cumulative Convertible Preferred Stock, par value $.01 per share ("ICH Series B Preferred Stock" and, together with ICH Common Stock, "ICH Stock"), of ICH owned by any of its Subsidiaries (as defined below) shall, automatically and without any action on the part of the holder thereof, be canceled and retired and all rights in respect thereof shall cease to exist without any conversion thereof or payment therefor. (b) At the Effective Time, each share of ICH Common Stock outstanding immediately prior to the Effective Time (other than as provided in Section 2.1(a) or any shares of ICH Common Stock owned by ACT or any of its Subsidiaries) shall, automatically and without any action on the part of the holder thereof, cease to be outstanding and be converted into 0.66094 (the "Exchange Ratio") of an ACT Common Share, plus cash for any fractional ACT Common Share as provided in Section 2.5. If prior to the Effective Time the outstanding shares of ICH Common Stock shall have been increased, decreased, changed into or exchanged for a different number or kind of shares or securities as a result of a reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar change in ICH's capitalization, then an appropriate and proportionate adjustment shall be made in the Exchange Ratio. (c) Prior to the Effective Time, the holder of the outstanding shares of ICH Series B Preferred Stock shall convert all of such shares into 1,683,635 shares of ICH Common Stock; provided, however, that if such conversion does not occur prior to the Effective Time, each share of ICH Series B Preferred Stock outstanding immediately prior to the Effective Time (other than as provided in Section 2.1(a) or any shares of ICH Series B Preferred Stock owned by ACT or any of its Subsidiaries) shall, automatically and without any action on the part of the holder thereof, cease to be outstanding and be converted into 1,112,782 ACT Common Shares. SECTION 2.2 Exchange of Certificates. (a) Prior to the Effective Time, ACT shall appoint The Bank of New York or another exchange agent mutually acceptable to ACT and ICH to act as exchange agent (the "Exchange Agent") in the Merger. 3 12 (b) At or prior to the Effective Time, ACT shall provide to the Exchange Agent, for the benefit of the holders of shares of ICH Stock, certificates representing ACT Common Shares issuable in exchange for certificates representing outstanding shares of ICH Stock pursuant to Section 2.1 ("Certificates") and an estimated amount in cash sufficient to satisfy ACT's obligations under Section 2.5. (c) As soon as reasonably practicable after the Effective Time and in no event later than ten business days thereafter, the Exchange Agent shall mail to each holder of record of shares of ICH Stock whose shares were converted into ACT Common Shares pursuant to Section 2.1 (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in a form and have such other provisions as ACT may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates evidencing ACT Common Shares. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by ACT, together with such letter of transmittal, duly executed, and such other documents as may reasonably be required by the Exchange Agent, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing the number of whole ACT Common Shares to which the holder is entitled and an amount of cash in lieu of any fractional ACT Common Share in accordance with Section 2.5, and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of shares of ICH Stock that is not registered in the transfer records of ICH, payment may be made to a Person (as defined below) other than the Person in whose name the Certificate so surrendered is registered if such Certificate shall be properly endorsed or otherwise be in proper form for transfer and the Person requesting such payment either shall pay any transfer or other taxes required by reason of such payment being made to a Person other than the registered holder of such Certificate or establish to the satisfaction of ACT that such tax or taxes have been paid or are not applicable. Until surrendered as contemplated by this Section 2.2, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender such whole number of ACT Common Shares provided by Section 2.1 and an amount in cash in lieu of any fractional ACT Common Share in accordance with Section 2.5. No interest will be paid or will accrue on the consideration payable upon the surrender of any Certificate or on any cash payable pursuant to Section 2.4 or Section 2.5. (d) All ACT Common Shares delivered, and cash in lieu of any fractional shares thereof paid, upon the surrender of Certificates in accordance with the terms of this Article II shall be deemed to have been paid in full satisfaction of all rights pertaining to such shares. There shall be no further registration of transfers on the stock transfer books of ICH or its transfer agent of the shares of ICH Stock that were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Entity for any reason, they shall be canceled and exchanged as provided in this Article II. 4 13 (e) None of ICH, ACT or the Exchange Agent shall be liable to any Person in respect of any shares or funds delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. All Certificates and funds held by the Exchange Agent for payment to the holders of unsurrendered Certificates that remain unclaimed for six months after the Effective Time shall be redelivered by the Exchange Agent to ACT, upon demand, and any holders of Certificates who have not theretofore complied with Section 2.2(c) shall thereafter look only to the Surviving Entity for delivery of any shares or funds, subject to applicable escheat and other similar laws. SECTION 2.3 Options. To the extent that acceleration by ICH of the exercisability of any outstanding option to purchase shares of ICH Common Stock ("ICH Options") is permitted but not required by the applicable governing instrument, then ICH shall not elect to cause such acceleration to occur. In connection therewith, at the Effective Time, to the extent not prohibited by the terms of the relevant governing instrument, each ICH Option that is outstanding and unexercised immediately prior thereto shall cease to represent a right to acquire shares of ICH Common Stock and shall be converted automatically into an option to purchase ACT Common Shares in an amount and at an exercise price determined as provided below (and otherwise subject to the terms of ICH's Stock Option and Awards Plan (the "ICH Option Plan"), and the agreements evidencing grants thereunder, including, subject to the provisions of the first sentence of this Section 2.3, the accelerated vesting of ICH Options that shall occur in connection with and by virtue of the Merger as and to the extent required by the ICH Option Plan or such agreements): (a) the number of shares of ICH Common Stock to be subject to the option shall be equal to the product of the number of shares of ICH Common Stock subject to the original option and the Exchange Ratio, provided that any fraction of an ACT Common Share resulting from such multiplication shall be rounded down to the nearest whole share; and (b) the exercise price per share of ICH Common Stock under the option shall be equal to the exercise price per share of ICH Common Stock under the original option divided by the Exchange Ratio, provided that such exercise price shall be rounded up to the nearest whole cent. The adjustment provided herein with respect to ICH Options that are "incentive stock options" (as defined in Section 422 of the Code) shall be and is intended to be effected in a manner that is consistent with Section 424(a) of the Code and, to the extent it is not so consistent, Section 424(a) shall override anything to the contrary contained herein. The duration and other terms of the new option shall be the same as the original option except that all references to ICH shall be deemed to be references to the Surviving Entity. SECTION 2.4 Dividends. (a) To the extent necessary to satisfy the requirements of Section 857(a)(1) of 5 14 the Code for the taxable year of ICH ending at the Effective Time, ICH shall declare and pay a dividend (the "Final ICH Dividend") to holders of shares of ICH Stock, the record and payment dates for which shall be on or before the close of business on the last business day prior to the Effective Time, in an amount sufficient to permit ICH to satisfy such requirements. If ICH determines it necessary to declare the Final ICH Dividend, and such Final ICH Dividend is not paid in the ordinary course of business, consistent with past practice, as provided in Section 5.2(a)(i) hereof, it shall notify ACT at least ten days prior to the date for the ICH Stockholder Meeting (as defined below), and ACT shall declare a dividend per ACT Common Share, the record date for which shall be the close of business on the last business day prior to the Effective Time, in an amount per share equal to the quotient obtained by dividing (x) the Final ICH Dividend per share of ICH Stock paid by ICH by (y) the Exchange Ratio. (b) No dividends or other distributions with respect to ACT Common Shares with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the ACT Common Shares represented thereby, and no cash payment in lieu of fractional shares shall be paid to any such holder pursuant to Section 2.5, in each case until the surrender of such Certificate in accordance with this Article II. Subject to the effect of applicable escheat laws, as soon as reasonably practicable following surrender of any such Certificate there shall be paid to the holder of such Certificate, without interest, (i) at the time of such surrender, the amount of any cash payable in lieu of any fractional ACT Common Share to which such holder is entitled pursuant to Section 2.5 and (ii) if such Certificate is exchangeable for one or more whole ACT Common Shares, (x) at the time of such surrender the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole ACT Common Shares and (y) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to such surrender and with a payment date subsequent to such surrender payable with respect to such whole ACT Common Shares. (c) Notwithstanding any provision of this Article II to the contrary, dividends shall be paid by ICH pro rata with respect to each outstanding share of beneficial interest within a particular class of ICH Stock and dividends shall be paid by ACT pro rata with respect to each outstanding share of beneficial interest of ACT within a particular class in accordance with the requirements of Section 562(c) of the Code (including, as necessary, by transferring cash to an appropriate paying agent), and no dividend payments shall accrue to the benefit of ACT or ICH for failure of a former holder of ICH Stock to surrender any certificate representing any share of ICH Stock. SECTION 2.5 No Fractional Shares. Notwithstanding any other provision of this Agreement, no certificates or scrip for fractional ACT Common Shares shall be issued upon the surrender for exchange of Certificates and no dividend or distribution or any other right with respect to ACT Common Shares shall relate to any fractional security, and such fractional interests shall not entitle the holder thereof to vote or to any other rights of a shareholder. In lieu of any such fractional shares, each holder of shares of ICH Stock who would otherwise have 6 15 been entitled to a fraction of an ACT Common Share upon surrender of Certificates for exchange pursuant to this Article II shall be entitled to receive from the Exchange Agent a cash payment (without interest) in lieu of such fractional share equal to such fraction multiplied by the average closing price per ACT Common Share on The Nasdaq Stock Market during the five trading days immediately following the Effective Time. ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACT ACT represents and warrants to ICH as follows: SECTION 3.1 Organization, Standing and Corporate Power. ACT is duly organized under the TREITA and has the requisite power and authority to carry on its business as now being conducted. ACT is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed, individually or in the aggregate, would not have a Material Adverse Effect (as defined below) on ACT. SECTION 3.2 Subsidiaries. Schedule 3.2 to the ACT Disclosure Letter (as defined below) sets forth each Subsidiary of ACT and the direct and/or indirect ownership interest therein of ACT and (A) all the outstanding shares of capital stock of each Subsidiary of ACT that is a corporation have been validly issued and are fully paid and nonassessable, are owned by ACT or one of its Subsidiaries free and clear of all pledges, claims, liens, charges, encumbrances and security interests of any kind or nature whatsoever (collectively, "Liens") and (B) all equity interests in each of ACT's Subsidiaries that is a partnership, joint venture, limited liability company or trust are owned by ACT or one or more of its Subsidiaries free and clear of all Liens. Except for the capital stock of or other equity or ownership interests in ACT's Subsidiaries, and except as set forth on Schedule 3.2 to the ACT Disclosure Letter, ACT does not own, directly or indirectly, any capital stock or other ownership interest in any Person. Each Subsidiary of ACT that is a corporation is duly incorporated and validly existing under the laws of its jurisdiction of incorporation and has the requisite corporate power and authority to carry on its business as now being conducted, and each such Subsidiary that is a partnership, limited liability company or trust is duly organized and validly existing under the laws of its jurisdiction of organization and has the requisite power and authority to carry on its business as now being conducted. Each Subsidiary of ACT is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed, individually or in the aggregate, would not have a Material Adverse Effect on ACT. SECTION 3.3 Capital Structure. The authorized capital stock of ACT consists of 200,000,000 ACT Common Shares and 50,000,000 preferred shares of beneficial interest, par 7 16 value $.01 per share ("ACT Preferred Shares"), of which 350,000 are designated as Series A Junior Participating Preferred Shares, par value $.01 per share. On the date hereof, (i) 10,015,111 ACT Common Shares and no ACT Preferred Shares were issued and outstanding, (ii) no ACT Common Shares or ACT Preferred Shares were held by ACT in its treasury, (iii) 505,506 ACT Common Shares were reserved for issuance in connection with the AMRESCO Capital Trust 1998 Share Option and Award Plan (the "ACT Option Plan"), (iv) 1,479,511 ACT Common Shares were issuable upon exercise of outstanding options to purchase ACT Common Shares ("ACT Options") and (v) 250,002 ACT Common Shares were issuable upon exercise of outstanding warrants to purchase ACT Common Shares ("ACT Warrants"). On the date hereof, except as set forth above in this Section 3.3, no capital shares or other voting securities of ACT were issued, reserved for issuance or outstanding. There are no outstanding share appreciation rights relating to the capital shares of ACT. All outstanding capital shares of ACT are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. The ACT Common Shares to be issued pursuant hereto have been duly authorized by ACT and, when issued, sold and delivered in accordance with this Agreement, will be validly issued, fully paid and nonassessable and not subject to preemptive rights. There are no bonds, debentures, notes or other indebtedness of ACT having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matter on which shareholders of ACT may vote. Except for the ACT Options, ACT Warrants and the rights issuable under the Rights Agreement, dated as of February 25, 1999, between ACT and The Bank of New York, as rights agent (the "ACT Rights Plan"), and for the transactions contemplated hereby, there are no outstanding securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which ACT or any of its Subsidiaries is a party or by which such entity is bound, obligating ACT or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional capital shares, voting securities or other ownership interests of ACT or any of its Subsidiaries or obligating ACT or any of its Subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking. Except as set forth on Schedule 3.3 to the ACT Disclosure Letter, there are no outstanding contractual obligations of ACT or any of its Subsidiaries to repurchase, redeem or otherwise acquire any capital shares of ACT or any capital shares, voting securities or other ownership interests in any Subsidiary of ACT or make any material investment (in the form of a loan, capital contribution or otherwise) to any Person. SECTION 3.4 Authority; Noncontravention; Consents. (a) ACT has the requisite power and authority to enter into this Agreement and, subject to approval of this Agreement by the vote of the holders of the ACT Common Shares required to approve this Agreement and the transactions contemplated hereby (the "ACT Shareholder Approval"), to consummate the transactions contemplated hereby to which ACT is a party. The execution and delivery of this Agreement by ACT and the consummation by ACT of the transactions contemplated hereby to which ACT is a party have been duly authorized by all necessary action on the part of ACT, subject to approval of this Agreement pursuant to the ACT Shareholder Approval. This Agreement has been duly executed and delivered by ACT and, 8 17 assuming the due authorization, execution and delivery hereof by ICH, constitutes valid and binding obligations of ACT, enforceable against ACT in accordance with its terms, except that such enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or (ii) general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). (b) Except as set forth in Schedule 3.4 to the ACT Disclosure Letter, the execution and delivery of this Agreement by ACT do not, and the consummation of the transactions contemplated hereby to which ACT is a party and compliance by ACT with the provisions of this Agreement will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of ACT or any of its Subsidiaries under, (i) the declaration of trust or the bylaws of ACT or the comparable charter or organizational documents or partnership or similar agreement (as the case may be) of any of its Subsidiaries, each as amended or supplemented as of the date of this Agreement, (ii) any loan or credit agreement, note, bond, mortgage, indenture, reciprocal easement agreement, lease or other agreement, instrument, permit, concession, contract, franchise or license applicable to ACT or any of its Subsidiaries or their respective properties or assets or (iii) subject to the governmental filings and other matters referred to in the following sentence, any judgment, order, decree, statute, law, ordinance, rule or regulation (collectively, "Laws") applicable to ACT or any of its Subsidiaries, their respective properties or assets, other than, in the case of clause (ii) or (iii), any such conflicts, violations, defaults, rights or Liens that individually or in the aggregate would not (x) have a Material Adverse Effect on ACT or (y) prevent the consummation of the Merger. (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any federal, state or local government or any court, administrative or regulatory agency or commission or other governmental authority or agency, domestic or foreign (a "Governmental Entity"), is required by or with respect to ACT or any of its Subsidiaries in connection with the execution and delivery of this Agreement by ACT or the consummation by ACT of the transactions contemplated hereby, except for (i) the filing by any Person in connection with any of the transactions contemplated hereby of a pre-merger notification and report form under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), to the extent applicable, (ii) the filing with the Securities and Exchange Commission (the "SEC") of (x) a joint proxy statement relating to the approval by ACT's and ICH's shareholders of the transactions contemplated by this Agreement (as amended or supplemented from time to time, the "Proxy Statement"), (y) a registration statement on Form S- 4 (or other appropriate form) in connection with the registration of the ACT Common Shares to be issued in the Merger (as amended or supplemented from time to time, the "Registration Statement") and (z) such reports under Section 13(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as may be required in connection with this Agreement and the transactions contemplated hereby, (iii) the filing of Maryland Articles of Merger with the State Department of Assessments and Taxation of Maryland and the Texas Articles of Merger with the 9 18 County Clerk of the County of Dallas, Texas and (iv) such other consents, approvals, orders, authorizations, registrations, declarations, licenses and filings (A) as are set forth in Schedule 3.4 to the ACT Disclosure Letter, (B) as may be required under (x) federal, state or local environmental laws or (y) the "blue sky" laws of various states or (C) which, if not obtained or made, would not prevent or delay in any material respect the consummation of any of the transactions contemplated hereby or otherwise prevent ACT from performing its obligations under this Agreement in any material respect or have, individually or in the aggregate, a Material Adverse Effect on ACT. SECTION 3.5 SEC Documents. ACT has timely filed all required reports, schedules, forms, statements and other documents (collectively, including all exhibits and schedules thereto and documents incorporated therein by reference, the "ACT SEC Documents") with the SEC. All of the ACT SEC Documents (other than preliminary material), as of their respective filing dates, complied in all material respects with all applicable requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the Exchange Act and, in each case, the rules and regulations promulgated thereunder applicable to such ACT SEC Documents. None of the ACT SEC Documents at the time of filing and effectiveness contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except to the extent such statements have been modified or superseded by later ACT SEC Documents. SECTION 3.6 Financial Statements. The consolidated financial statements of ACT included in the ACT SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles ("GAAP") (except, in the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly presented, in accordance with the applicable requirements of GAAP, the consolidated financial position of ACT as of the dates thereof and the consolidated results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). SECTION 3.7 Absence of Certain Changes or Events. Except as disclosed in the ACT SEC Documents or in Schedule 3.7 to the ACT Disclosure Letter, since the date of the most recent financial statements included in the ACT SEC Documents and to the date of this Agreement, there has not been any change that would have a Material Adverse Effect on ACT, nor has there been any occurrence or circumstance that with the passage of time would reasonably be expected to result in such a change, whether or not arising from transactions in the ordinary course of business. SECTION 3.8 No Undisclosed Liabilities. Except (a) as set forth in the ACT SEC Documents filed prior to the date of this Agreement, (b) as set forth in Schedule 3.8 to the 10 19 ACT Disclosure Letter, (c) as incurred in the ordinary course of the business of ACT, (d) for the expenses incurred in connection with the transactions contemplated hereby or (e) for liabilities or obligations relating to contractual obligations, indebtedness, litigation or other matters that are covered by other representations and warranties in this Agreement or otherwise identified in the ACT Disclosure Letter, neither ACT nor any of its Subsidiaries has any liabilities or obligations, whether arising out of contract, tort, statute or otherwise ("Liabilities"). The reserves reflected on ACT's balance sheet dated March 31, 1999 and the balance sheet dated December 31, 1998, as included, in each case, in the ACT SEC Documents, are appropriate and reasonable and have been calculated in a manner consistent with past practice. SECTION 3.9 No Defaults. Except as disclosed in Schedule 3.9 to the ACT Disclosure Letter, neither ACT nor any of its Subsidiaries is in violation or default under any provision of its declaration of trust, certificate of incorporation, bylaws, partnership agreement or other organizational documents, as applicable, or is in breach of or default with respect to any provision of any agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which it is a party or by which it or any of its properties are bound; and there does not exist any state of facts that would constitute an event of default on the part of any of ACT or its Subsidiaries as defined in such documents that, with notice or lapse of time or both, would constitute a default, other than such violations or defaults that in the aggregate would not have a Material Adverse Effect on ACT. SECTION 3.10 Taxes. (a) ACT and each of its Subsidiaries has (A) filed all Tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Entity having authority to do so) and all such returns and reports are accurate and complete in all material respects; and (B) paid (or ACT has paid on its behalf) all Taxes shown on such returns and reports as required to be paid by it, and, except as disclosed in the ACT SEC Documents or in Schedule 3.10(a) to the ACT Disclosure Letter, the most recent financial statements contained in the ACT SEC Documents reflect an adequate reserve for all material Taxes payable by ACT (and by those Subsidiaries of ACT whose financial statements are contained therein) for all taxable periods and portions thereof through the date of such financial statements. True, correct and complete copies of all federal, state and local Tax returns and reports for ACT and each of its Subsidiaries, and all written communications relating thereto, have been delivered or made available to representatives of ICH. Since the date of the most recent financial statements included in the ACT SEC Documents, ACT has incurred no liability for taxes under Sections 857(b), 860(c) or 4981 of the Code, and neither ACT nor any of its Subsidiaries has incurred any material liability for Taxes other than in the ordinary course of business. To the Knowledge of ACT, no event has occurred, and no condition or circumstance exists, which presents a material risk that any material Tax described in the preceding sentence will be imposed upon ACT. Except as set forth on Schedule 3.10(a) to the ACT Disclosure Letter, to the Knowledge of ACT, no deficiencies for any Taxes have been proposed, asserted or assessed against ACT or any of its Subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending. As used in this Agreement, "Taxes" shall include all federal, state, 11 20 local and foreign income, property, sales, excise and other taxes, tariffs or governmental charges of any nature whatsoever, together with penalties, interest or additions to Tax with respect thereto. (b) ACT (A) for all taxable years commencing with December 31, 1998 has been subject to taxation as a REIT within the meaning of the Code and has satisfied all requirements to qualify as a REIT for such years, (B) has operated, and intends to continue to operate, in such a manner as to qualify as a REIT for the tax year ending on December 31, 1999, and (C) has not taken or omitted to take any action which would reasonably be expected to result in a challenge to its status as a REIT, and to ACT's Knowledge, no such challenge is pending or threatened. Each Subsidiary of ACT that is a partnership, joint venture or limited liability company has been since its formation and continues to be treated for federal income tax purposes as a partnership and not as a corporation or an association taxable as a corporation. Except as set forth on Schedule 3.10(b) to the ACT Disclosure Letter, each Subsidiary of ACT that is a corporation for federal income tax purposes has been since its formation, and continues to be treated for federal income tax purposes as, a "qualified REIT subsidiary" as defined in Section 856(i) of the Code. Except as set forth on Schedule 3.10(b) to the ACT Disclosure Letter, neither ACT nor any of its Subsidiaries holds any asset (x) the disposition of which would be subject to rules similar to Section 1374 of the Code as a result of an election under Internal Revenue Service ("IRS") Notice 88-19 or (y) that is subject to a consent filed pursuant to Section 341(f) of the Code and the regulations thereunder. SECTION 3.11 Employee Matters. Except as set forth in Schedule 3.11 to the ACT Disclosure Letter: (a) Schedule 3.11(a) to the ACT Disclosure Letter contains a true and complete list of each employee benefit plan, policy or agreement covering employees, former employees or directors of any of ACT or its Subsidiaries or their beneficiaries, or providing benefits to such persons in respect of services provided to any such entity, including without limitation any employee benefit plans within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and any employment, retention, severance or change in control agreement, in each case that is sponsored, maintained or contributed to or required to be contributed to by ACT or its Subsidiaries or by any trade or business, whether or not incorporated (an "ACT ERISA Affiliate") that, together with any of such Subsidiaries, would be deemed a "single employer" within the meaning of Section 4001(b) of ERISA (collectively, the "ACT Benefit Plans"). Other than as set forth in Schedule 3.11(a) to the ACT Disclosure Letter, since December 31, 1998, there have been no new plans adopted, nor changes, additions or modification to any ACT Benefit Plan. As of the date hereof, neither ACT nor any of its Subsidiaries has any plans to adopt, change, add or modify any ACT Benefit Plan, nor has any such entity communicated with any current or former employer with respect thereto. (b) With respect to each ACT Benefit Plan, ACT has previously delivered or made available to ICH or its representatives true and complete copies of the following: (i) the 12 21 plan document and all amendments thereto (or, if such plan is unwritten, a true and complete summary of its terms); (ii) any related trust or other funding vehicle; (iii) if applicable, the two most recent IRS Forms 5500 and related attachments; (iv) if applicable, the most recent IRS determination letter; and (v) any material correspondence or employee communications. (c) All contributions and other payments required to have been made by ACT or one of its Subsidiaries to any ACT Benefit Plan (or to any Person pursuant to the terms thereof) have been made or the amount of such payment or contribution obligation has been reflected in the financial statements in ACT's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (the "ACT First Quarter 10-Q"). (d) Each of the ACT Benefit Plans intended to be "qualified" within the meaning of Section 401(a) or Section 501(c)(9) of the Code has been determined by the IRS to be so qualified, and no circumstances exist that could reasonably be expected to result in the revocation of any such determination. Each of the ACT Benefit Plans is and has been operated in all material respects in compliance with its terms and all applicable laws, rules and regulations governing such plan, including, without limitation, ERISA and the Code. (e) With respect to the ACT Benefit Plans, individually and in the aggregate, no event has occurred, there does not now exist any condition or set of circumstances, that could reasonably be expected to subject ACT, any of its Subsidiaries or any ACT ERISA Affiliate to any material liability arising under the Code, ERISA or any other applicable law, or under any indemnity agreement to which ACT, any of its Subsidiaries or any ACT ERISA Affiliate is a party, excluding liability relating to benefit claims and funding obligations payable in the ordinary course. (f) Other than continuation coverage required to be provided under Section 4980B of the Code or Part 6 of Title I of ERISA or otherwise as provided by state law, none of the ACT Benefit Plans that are "welfare plans," within the meaning of Section 3(1) of ERISA, provides for any benefits with respect to current or former employees for periods extending beyond their retirement or other termination of service, other than benefits the full cost of which is borne by such former employees. (g) Except as otherwise disclosed to ICH, the consummation of the Merger will not, either alone or in combination with another event undertaken by ACT or any of its Subsidiaries prior to the date hereof, (i) entitle any current or former employee, agent, independent contractor or officer of ACT or its Subsidiaries to severance pay, unemployment compensation or any other payment, (ii) accelerate the time of payment or vesting or increase the amount of compensation due any such employee, officer, agent or independent contractor or (iii) constitute a "change in control" under any ACT Benefit Plan. SECTION 3.12 Affiliate Transactions. Except as set forth in the ACT SEC Documents or in Schedule 3.12 to the ACT Disclosure Letter, there is no transaction and no 13 22 transaction is now proposed, to which ACT or its Subsidiaries is or is to be a party in which any current shareholder (holding in excess of 5% of the ACT Common Shares or any securities convertible into or exchangeable for such shares), trust manager, director or executive officer of ACT or its Subsidiaries has a direct or indirect interest. SECTION 3.13 Financial Advisors. No broker, investment banker, financial advisor or other Person, other than Prudential Securities Incorporated and Deutsche Banc Alex. Brown (collectively, the "ACT Financial Advisors"), the fees and expenses of which have previously been disclosed to ICH and will be paid by ACT, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of ACT or any of its Affiliates. Substantially concurrently herewith, ACT's Board of Trust Managers has received the opinion of each of the ACT Financial Advisors to the effect that, as of the date thereof, the Exchange Ratio is fair from a financial point of view. SECTION 3.14 Registration Statement and Proxy Statement. The information supplied or to be supplied by ACT or its Subsidiaries for inclusion in (a) the Registration Statement will not, either at the time it is filed with the SEC or at the time it becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading or (b) the Proxy Statement, including any amendment and supplement thereto, will not, either at the date mailed to shareholders of ACT or at the time of the ACT Shareholder Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Registration Statement and the Proxy Statement will each comply as to form in all material respects with all applicable laws, including the provisions of the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder, except that no representation is made by ACT with respect to information supplied by ICH for inclusion therein. SECTION 3.15 Vote Required. The affirmative vote of at least a majority of the outstanding ACT Common Shares is the only vote of the holders of any class or series of ACT's capital shares necessary (under applicable law or otherwise) to approve this Agreement and the transactions contemplated hereby; provided, however, that the amendment to ACT's Declaration of Trust to change the name of the Surviving Entity shall require the affirmative vote of at least two-thirds of the outstanding ACT Common Shares. SECTION 3.16 Anti-Takeover Statutes. ACT has taken all action necessary, if any, to exempt the transactions contemplated hereby from the operation of any "fair price," "moratorium," "control share acquisition" or any other anti-takeover statute or similar statute enacted under state or federal laws or similar statutes or regulations ("Anti-Takeover Statutes"). 14 23 SECTION 3.17 Full Disclosure. To the Knowledge of ACT, ACT has not failed to disclose to ICH any fact material to the business, properties, prospects, operations, financial condition or results of operations of ICH and its Subsidiaries, taken as a whole. To the Knowledge of ACT, no representation or warranty by ACT contained in this Agreement and no statement contained in any document (including historical financial statements and the ACT Disclosure Letter), certificate or other writing furnished or to be furnished by ACT to ICH or any of its representatives pursuant to the provisions hereof or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of material fact or omits or will omit to state any material fact necessary, in light of the circumstances under which it was made, in order to make the statements herein or therein not misleading. Notwithstanding the foregoing or any other provision herein, ACT has made no representation or warranty with respect to any financial or other projections made by ACT. SECTION 3.18 Litigation. Except as disclosed in ACT SEC Documents filed with the SEC prior to the date hereof or in Schedule 3.18 to the ACT Disclosure Letter, there is no suit, action or proceeding pending, threatened in writing or, to ACT's Knowledge, otherwise threatened against or affecting ACT or any Subsidiary of ACT that, individually or in the aggregate, could reasonably be expected to (A) have a Material Adverse Effect on ACT or (B) materially delay or prevent the consummation of any of the transactions contemplated hereby, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against ACT or any Subsidiary of ACT or any of their respective properties or assets having, or which, insofar as reasonably can be foreseen, in the future would have, any such effect. SECTION 3.19 Compliance with Laws. Except as disclosed in ACT SEC Documents filed with the SEC prior to the date hereof or as set forth in Schedule 3.19 to the ACT Disclosure Letter, to the knowledge of ACT, neither ACT nor any of its Subsidiaries has violated or failed to comply with any statute, law, ordinance, regulation, rule, judgment, decree or order of any Governmental Entity applicable to its business, properties or operations, and neither ACT nor any of its Subsidiaries has received notification of asserted present or past violation or failure to comply, except for violations and failures to comply that would not, individually or in the aggregate, be reasonably likely to result in a Material Adverse Effect on ACT. SECTION 3.20 Indebtedness. Except as filed (or incorporated by reference) as an exhibit to ACT's Annual Report on Form 10-K for the year ended December 31, 1998 (the "ACT 1998 Form 10-K"), Schedule 3.20 to the ACT Disclosure Letter sets forth (x) a list of all loan or credit agreements, notes, bonds, mortgages, indentures and other agreements and instruments pursuant to which any indebtedness of ACT or any of its Subsidiaries, other than indebtedness payable to ACT or one of its Subsidiaries, in an aggregate principal amount in excess of $100,000 per item is outstanding or may be incurred and (y) the respective principal amounts outstanding thereunder on July 1, 1999. For purposes of this Section 3.20 and Section 4.20, "Indebtedness" shall mean, with respect to any Person, without duplication, (A) all indebtedness 15 24 of such Person for borrowed money, whether secured or unsecured, (B) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person, (C) all capitalized lease obligations of such Person, (D) all obligations of such Person under interest rate or currency hedging transactions (valued at the termination value thereof) and (E) all guarantees of such Person of any such indebtedness of any other Person. SECTION 3.21 Insurance. ACT and its Subsidiaries maintain fire and casualty, general liability, business interruption, product liability, professional liability and sprinkler and water damage insurance policies with reputable insurance carriers, which ACT reasonably believes provide full and adequate coverage for all normal risks incident to the business of ACT and its Subsidiaries and their respective properties and assets. SECTION 3.22 Investment Company Act. Neither ACT nor any of its Subsidiaries is (i) except as disclosed in the ACT SEC Documents, an "investment company" or a company "controlled" by an investment company within the meaning of the Investment Company Act of 1940, as amended, (ii) a "holding company" or a "subsidiary company" of a holding company or an "affiliate" thereof within the meaning of the Public Utility Holding Company Act of 1935, as amended, or (iii) subject to regulation under the Federal Power Act or the Interstate Commerce Act. SECTION 3.23 Material Contracts. (a) Except as set forth in Schedule 3.23 to the ACT Disclosure Letter and other than contracts or agreements that are required to be filed and have been filed (or incorporated by reference) as an exhibit to the ACT 1998 Form 10-K (the "ACT Material Contracts"), there are no contracts or agreements that would have been required to be filed as an exhibit to an Annual Report on Form 10-K that are material to the business, properties, assets, financial position or results of operations of ACT and its Subsidiaries. (b) The ACT Material Contracts are in full force and effect and are valid and enforceable, in accordance with their terms, obligations of ACT or its Subsidiaries, as the case may be, except that such enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or (ii) general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law), and there are no breaches or defaults thereunder by ACT or its Subsidiaries which, individually or in the aggregate, would be reasonably likely to have a Material Adverse Effect on ACT, and no event has occurred that with the lapse of time or the giving of notice or both would constitute a breach or default thereunder by ACT or its Subsidiaries which would reasonably be expected to have a Material Adverse Effect on ACT. 16 25 SECTION 3.24 Mortgage Backed Securities. (a) Except as set forth on Schedule 3.24(a) to the ACT Disclosure Letter, ACT or one of its Subsidiaries is and shall be the sole owner of each of the mortgage backed securities ("MBS") identified in Schedule 3.24(a) to the ACT Disclosure Letter ("ACT MBS") and the related certificates and other instruments evidencing ownership of the ACT MBS (the "ACT MBS Certificates"), free and clear of any adverse claims, Liens, pledges, assignments, charges or security interests of any nature (including, without limitation, Liens arising under the federal tax laws or ERISA), other than Liens pursuant to repurchase agreements or other warehouse financing. (b) Except as set forth in Schedule 3.24(b) to the ACT Disclosure Letter, neither ACT or any of its Subsidiaries is in default in the performance of any of its obligations, whether as special servicer or otherwise, under any pooling and servicing agreements, trust and servicing agreements, trust agreements, servicing agreements or other similar documents providing for the creation of the MBS or the servicing of the mortgage loans underlying the MBS (the "ACT Principal MBS Agreements") and has not received any notice of any default by any master or special servicer of any ACT MBS. (c) Except as set forth in Schedule 3.24(c) to the ACT Disclosure Letter, for all ACT MBS, ACT has delivered to ICH a copy of each prospectus, offering circular or private placement memorandum relating to such ACT MBS. (d) Except as set forth in Schedule 3.24(d) to the ACT Disclosure Letter, there are no agreements (other than the ACT Principal MBS Agreements) between ACT or any of its Subsidiaries and the master servicer or any special servicer with respect to any series of ACT MBS. (e) Except as set forth in Schedule 3.24(e) to the ACT Disclosure Letter, there are no agreements between ACT or any of its Subsidiaries and other holders of any below investment grade ACT MBS. (f) Except as set forth in Schedule 3.24(f) to the ACT Disclosure Letter with respect to each issue of the ACT MBS, ACT or one of its Subsidiaries, as the holder of the majority of the controlling class, has not waived any rights as to any specially serviced mortgage loan. (g) Except as set forth in Schedule 3.24(g) to the ACT Disclosure Letter, with respect to each issue of the ACT MBS, ACT has not determined that any specially serviced assets have become corrected assets and has not received any written notice of any specially serviced assets which have become corrected assets. 17 26 SECTION 3.25 Environmental Laws and Regulations. (a) Except as set forth in Schedule 3.25(a) to the ACT Disclosure Letter or disclosed by ACT in the ACT SEC Documents filed prior to the date hereof, ACT and ACT's Subsidiaries are in compliance with all applicable Environmental Laws (which compliance includes, but is not limited to, the possession by ACT and ACT's Subsidiaries of all permits and other governmental authorizations required under applicable Environmental Laws, and compliance with the terms and conditions thereof), except where the failure to be in compliance, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on ACT. Except as set forth in Schedule 3.25(a) to the ACT Disclosure Letter or disclosed by ACT in the ACT SEC Documents, since January 1, 1998 and prior to the date of this Agreement, neither ACT nor any of its Subsidiaries has received any written communication, whether from a Governmental Entity, citizens' group, employee or otherwise, alleging that ACT or any of ACT's Subsidiaries is not in such compliance, except where failures to be in compliance, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on ACT. (b) Except as set forth in Schedule 3.25(b) to the ACT Disclosure Letter or disclosed by ACT in the ACT SEC Documents, there is no Environmental Claim pending or threatened in writing against ACT or any of ACT's Subsidiaries. (c) As used in this Section 3.25 and Section 4.25: (i) "Environmental Claim" means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, directives, orders, claims, Liens, investigations, proceedings or notices of noncompliance or violation by any person or entity (including any governmental authority) alleging potential liability (including, without limitation, potential responsibility for or liability for enforcement, investigatory costs, cleanup costs, governmental response costs, removal costs, remediation costs, natural resources damages, property damages, personal injury, bodily injury, wrongful death or penalties) arising our of, based on or resulting from (A) the presence, Release or threatened Release of any Hazardous Materials at any location, whether or not owned, leased or managed by ACT or ICH or any of their Subsidiaries, as the case may be; or (B) circumstances that form the basis of any violation or alleged violation of any Environmental Law; (ii) "Environmental Laws" means all federal, state and local laws, rules and regulations relating to pollution, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or protection of human health and safety, including, without limitation, laws and regulations relating to Releases or threatened Releases of Hazardous Materials, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials; 18 27 (iii) "Regulatory Entity" means any court or tribunal of competent jurisdiction in any jurisdiction or any foreign, Federal, state or municipal governmental, regulatory or other administrative agency, department, commission, board, bureau, political subdivision or other authority or instrumentality; and (iv) "Hazardous Materials" means (A) any petroleum or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid containing polychlorinated biphenyls ("PCBs"); (B) any chemicals, materials or substances which are now defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," or words of similar import under any Environmental Law and (C) any other chemical, material, substance or waste, exposure to which is now prohibited, limited or regulated under any Environmental Law in a jurisdiction in which ACT or ICH or any of their Subsidiaries, as the case may be, operate. SECTION 3.26 Properties. (a) ACT or one of its Subsidiaries owns fee simple title (or where indicated, leasehold estates) to each of the real properties identified in the ACT SEC Documents or in Schedule 3.26 to the ACT Disclosure Letter (the "ACT Properties"), which are all of the real estate properties owned by them, in each case (except as provided below or as set forth on Schedule 3.26 to the ACT Disclosure Letter) free and clear of Liens. The ACT Properties are not subject to any rights of way, written agreements, laws, ordinances and regulations affecting building use or occupancy in the applicable jurisdiction (collectively, "Property Restrictions") or Liens, except for ACT Permitted Liens. For purposes of this Agreement, "ACT Permitted Liens" means (i) Liens and Property Restrictions set forth in the ACT SEC Documents, (ii) Liens and Property Restrictions set forth in the ACT Disclosure Letter, (iii) Property Restrictions imposed or promulgated by law or any governmental body or authority generally with respect to real property, including zoning regulations, and listed in the ACT Disclosure Letter, (iv) Liens and Property Restrictions disclosed on existing title reports or existing surveys (in either case copies of which title reports and surveys have been delivered or made available to ICH and listed in the ACT Disclosure Letter), and (v) mechanics', carriers', workmen's, repairmen's and materialmens' liens and other Liens, Property Restrictions and other limitations of any kind, if any, which, individually or in the aggregate, are not substantial in amount and do not materially detract from the value of or materially interfere with the use of any of the ACT Properties as currently contemplated subject thereto or affected thereby. Except as provided in Schedule 3.26 to the ACT Disclosure Letter, valid policies of title insurance have been issued insuring ACT's or its Subsidiary's fee simple title or leasehold estate to the ACT Properties in amounts at least equal to the fair market value of such ACT Properties at the time of the issuance of such policy, subject only to the matters disclosed above or in the ACT Disclosure Letter, and such policies are, at the date hereof, in full force and effect and no material claim has been made against any such policy. Except as provided in Schedule 3.26 to the ACT Disclosure Letter, ACT has no Knowledge (i) that any certificate, permit or license from any Governmental Entity having jurisdiction over 19 28 any of the ACT Properties or any agreement, easement or other right which is necessary to permit the lawful use and operation of the buildings and improvements on any of the ACT Properties as currently contemplated or which is necessary to permit the lawful use and operation of all driveways, roads and other means of egress and ingress to and from any of the ACT Properties has not been obtained and is not in full force and effect, or of any pending threat of modification or cancellation of any of same; (ii) of any written notice of any violation of any federal, state or municipal law, ordinance, order, regulation or requirement materially and adversely affecting any of the ACT Properties issued by any Governmental Entity; (iii) of any material structural defects relating to any ACT Property; (iv) of any ACT Property whose building systems are not in working order in any material respect; (v) of any physical damage to any ACT Property for which there is no insurance in effect covering the cost of the restoration; (vi) of any current renovation or uninsured restoration to any ACT Property the cost of which exceeds $50,000 or (vii) of items referred to in the foregoing clauses (iii), (iv), (v) and (vi) which in the aggregate for ACT and its Subsidiaries would not be reasonably likely to result in a Material Adverse Effect on ACT. Except as provided in Schedule 3.26 to the ACT Disclosure Letter, neither ACT nor any of its Subsidiaries has received any notice to the effect that (A) any condemnation or rezoning proceedings are pending or threatened with respect to any of the ACT Properties, (B) any zoning, building or similar law, code, ordinance, order or regulation is or will be violated by the continued maintenance, operation or use of any buildings or other improvements on any of the ACT Properties or (C) a default exists or, with notice or lapse of time, or both, will exist under any lease (including any ground lease), mortgage, deed of trust or related document regarding an ACT Property or that any ACT Property is being foreclosed upon. (b) All material leases and subleases for which ACT or any of its Subsidiaries is lessor or lessee (or sublessee) are identified in the ACT SEC Documents or in Schedule 3.26(b) to the ACT Disclosure Letter. Except as disclosed on Schedule 3.26(b) to the ACT Disclosure Letter, each such lease is in full force and effect and neither ACT nor any of its Subsidiaries has notice of any defense to the obligations of the lessor or lessee (or sublessee), as the case may be, thereunder or any material claim asserted or threatened by any person or entity, and except as disclosed on Schedule 3.26(b) to the ACT Disclosure Letter, the lessor or lessee (or sublessee), as the case may be, under each such lease or sublease has complied with its obligations under such lease or sublease in all material respects and neither ACT nor any of its Subsidiaries has Knowledge that a material default exists, or with notice or lapse of time or both, will exist by the lessee (or sublessee) or lessor under such lease. SECTION 3.27 Mortgage Loans. (a) Except as set forth in Schedule 3.27(a) to the ACT Disclosure Letter, ACT or one of its Subsidiaries is the sole owner of each of the mortgage loans reflected in the most recent financial statements included in the ACT SEC Documents or made or acquired since such date (the "ACT Mortgage Loans") and is the sole owner or beneficiary of or under the related notes (the "ACT Mortgage Notes"), deeds of trust, mortgages, security agreements, guaranties, indemnities, financing statements, assignments, endorsement, bonds, letters of credit, accounts, 20 29 insurance contracts and policies, credit reports, tax returns, appraisals, environmental reports, escrow documents, participation agreements (if applicable), loan files, servicing files and all other documents evidencing or securing the ACT Mortgage Loans (the "ACT Mortgage Files"), except (i) any ACT Mortgage Loans disposed of in the ordinary course since the date of such financial statements, and (ii) to the extent any ACT Mortgage Loan is prepaid in full or subject to a completed foreclosure action (or non-judicial proceeding or deed in lieu of foreclosure) in which case ACT or one of its Subsidiaries shall be the sole owner of the real property securing such foreclosed loan or shall have received the proceeds of such action to which ACT or such Subsidiary was entitled, in each case free and clear of any adverse claims or Liens. (b) Except as set forth in Schedule 3.27(b) to the ACT Disclosure Letter, to the Knowledge of ACT, (i) the lien of each ACT Mortgage is subject only to "Permitted Exceptions" which consist of the following: (A) ACT Permitted Liens; (B) covenants, conditions, restrictions, reservations, rights, Liens, easements, encumbrances, encroachments, and other matters affecting title acceptable to prudent mortgage lending institutions generally; (C) rights of tenants with no options to purchase or rights of first refusal to purchase, except as disclosed in the ACT Mortgage File; and (D) other matters which, in the aggregate, would not be reasonably likely to result in a Material Adverse Effect on ACT; (ii) each ACT Mortgage Loan has generally been serviced in accordance with the terms of the related mortgage note and pooling and servicing agreements and otherwise in accordance with industry accepted servicing practices except for events that, individually or in the aggregate, would not be reasonably likely to result in a Material Adverse Effect on ACT; and (iii) there is no delinquency in the payments of principal and interest required to be made under the terms of any ACT Mortgage Loan in excess of 30 days beyond the applicable due date that has occurred since origination or in any other payments required to be made under the terms of any ACT Mortgage Loan (inclusive of any applicable grace or cure period) that would be reasonably likely to result in a Material Adverse Effect on ACT. (c) Except as set forth in Schedule 3.27(c) to the ACT Disclosure Letter or in the applicable ACT Mortgage File, ACT has no Knowledge of (i) any written notice asserting any offset, defense (including the defense of usury), claim (including claims of lender liability), counterclaim, or right to rescission with respect to any ACT Mortgage Loan, ACT Mortgage Note or other related agreements, (ii) any uncured monetary default in excess of 30 days or event of acceleration existing under any ACT Mortgage or the related ACT Mortgage Note or (iii) any uncured non-monetary default, breach, violation or event of acceleration existing beyond the applicable grace or cure period under any ACT Mortgage or the related ACT Mortgage Note, except for notices, violations, breaches, defaults or events of acceleration that would not, individually or in the aggregate, be reasonably likely to result in a Material Adverse Effect on ACT. SECTION 3.28 Actions Taken Regarding the ACT Rights Plan. ACT has taken, or shall take prior to the Closing Date, all action necessary to amend the ACT Rights Plan to ensure that the execution and delivery of this Agreement and the Purchase Agreement, the taking of any 21 30 other action or combination of actions or the consummation of the transactions contemplated hereby or thereby do not and will not result in the grant of any rights to any Person to exercise or receive a distribution of rights certificates thereunder or acquire any property in respect of rights thereunder. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ICH ICH represents and warrants to ACT as follows: SECTION 4.1 Organization, Standing and Corporate Power. ICH is a corporation, duly organized and validly existing under the MGCL and has the requisite power and authority to carry on its business as now being conducted. ICH is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed, individually or in the aggregate, would not have a Material Adverse Effect (as defined below) on ICH. SECTION 4.2 Subsidiaries. Schedule 4.2 to the ICH Disclosure Letter (as defined below) sets forth each Subsidiary of ICH and the direct and/or indirect ownership interest therein of ICH and (A) all the outstanding shares of capital stock of each Subsidiary of ICH that is a corporation have been validly issued and are fully paid and nonassessable, are owned by ICH or one of its Subsidiaries free and clear of all Liens and (B) all equity interests in each of ICH's Subsidiaries that is a partnership, joint venture, limited liability company or trust are owned by ICH or one or more of its Subsidiaries free and clear of all Liens. Except for the capital stock of or other equity or ownership interests in ICH's Subsidiaries, and except as set forth on Schedule 4.2 to the ICH Disclosure Letter, ICH does not own, directly or indirectly, any capital stock or other ownership interest in any Person. Each Subsidiary of ICH that is a corporation is duly incorporated and validly existing under the laws of its jurisdiction of incorporation and has the requisite corporate power and authority to carry on its business as now being conducted, and each such Subsidiary that is a partnership, limited liability company or trust is duly organized and validly existing under the laws of its jurisdiction of organization and has the requisite power and authority to carry on its business as now being conducted. Each Subsidiary of ICH is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed, individually or in the aggregate, would not have a Material Adverse Effect on ICH. SECTION 4.3 Capital Structure. The authorized capital stock of ICH consists of 46,217,295 shares of ICH Common Stock of which 3,782,705 shares are designated as Class A Common Stock, par value $.01 per share ("ICH Series A Common Stock"), and 10,000,000 shares of preferred stock, par value $.01 per share, of which 1,000,000 shares are designated as Series A Junior Participating Preferred Stock, par value $.01 per share ("ICH Series A Preferred 22 31 Stock"), and 479,999 shares are designated as ICH Series B Preferred Stock. On the date hereof, (i) 8,418,200 shares of ICH Common, no shares of ICH Series A Common Stock, 479,999 shares of ICH Series B Preferred Stock and no shares of ICH Series A Preferred Stock were issued and outstanding, (ii) no shares of ICH Common Stock, ICH Series A Common Stock, ICH Series B Preferred Stock, ICH Series A Preferred Stock or ICH Preferred Stock were held by ICH in its treasury, (iii) 632,500 shares of ICH Common Stock were reserved for issuance in connection with the ICH Option Plan, (iv) 1,683,635 shares of ICH Common Stock were reserved for issuance in connection with the conversion of ICH Series B Preferred Stock and (v) 328,831 shares of ICH Common Stock were issuable upon exercise of outstanding ICH Options. On the date hereof, except as set forth above in this Section 4.3, no capital shares or other voting securities of ICH were issued, reserved for issuance or outstanding. There are no outstanding share appreciation rights relating to the capital shares of ICH. All outstanding capital shares of ICH are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. There are no bonds, debentures, notes or other indebtedness of ICH having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matter on which shareholders of ICH may vote. Except for the ICH Options and the rights issuable under the Rights Plan, dated as of October 7, 1998, between ICH and BankBoston, N.A., as rights agent (the "ICH Rights Plan"), there are no outstanding securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which ICH or any of its Subsidiaries is a party or by which such entity is bound, obligating ICH or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional capital shares, voting securities or other ownership interests of ICH or any of its Subsidiaries or obligating ICH or any of its Subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking. There are no outstanding contractual obligations of ICH or any of its Subsidiaries to repurchase, redeem or otherwise acquire any capital shares of ICH or any capital shares, voting securities or other ownership interests in any Subsidiary of ICH or make any material investment (in the form of a loan, capital contribution or otherwise) to any Person. SECTION 4.4 Authority; Noncontravention; Consents. (a) ICH has the requisite power and authority to enter into this Agreement and, subject to approval of this Agreement by the votes of the holders of shares of ICH Common Stock and, if not previously converted, ICH Series B Preferred Stock required to approve this Agreement and the transactions contemplated hereby (the "ICH Stockholder Approval" and, together with the ACT Shareholder Approval, the "Shareholder Approvals"), to consummate the transactions contemplated hereby to which ICH is a party. The execution and delivery of this Agreement by ICH and the consummation by ICH of the transactions contemplated hereby to which ICH is a party have been duly authorized by all necessary action on the part of ICH, subject to approval of this Agreement pursuant to the ICH Stockholder Approval. This Agreement has been duly executed and delivered by ICH and, assuming the due authorization, execution and delivery hereof by ACT, constitutes valid and binding obligations of ICH, enforceable against ICH in accordance with its terms, except that such enforceability may be 23 32 limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or (ii) general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). (b) Except as set forth in Schedule 4.4 to the ICH Disclosure Letter, the execution and delivery of this Agreement by ICH do not, and the consummation of the transactions contemplated hereby to which ICH is a party and compliance by ICH with the provisions of this Agreement will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of ICH or any of its Subsidiary under, (i) articles of incorporation or bylaws of ICH or the comparable charter or organizational documents or partnership or similar agreement (as the case may be) of any other of ICH's Subsidiaries, each as amended or supplemented to the date of this Agreement, (ii) any loan or credit agreement, note, bond, mortgage, indenture, reciprocal easement agreement, lease or other agreement, instrument, permit, concession, franchise or license applicable to ICH or any other of ICH's Subsidiaries or their respective properties or assets or (iii) subject to the governmental filings and other matters referred to in the following sentence, any Laws applicable to ICH or any of ICH's Subsidiaries or their respective properties or assets, other than, in the case of clause (ii) or (iii), any such conflicts, violations, defaults, rights or Liens that individually or in the aggregate would not (x) have a Material Adverse Effect on ICH or (y) prevent the consummation of the Merger. (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to ICH or any of ICH's Subsidiaries in connection with the execution and delivery of this Agreement or the consummation by ICH of any of the transactions contemplated hereby, except for (i) the filing by any Person in connection with any of the transactions contemplated hereby of a pre-merger notification and report form under the HSR Act to the extent applicable, (ii) the filing with the SEC of (x) the Proxy Statement and (y) such reports under Section 13 (a) of the Exchange Act as may be required in connection with this Agreement and the transactions contemplated by this Agreement, (iii) the filing of the Maryland Articles of Merger with the State Department of Assessments and Taxation of Maryland and the Texas Articles of Merger with the County Clerk of the County of Dallas, Texas and (iv) such other consents, approvals, orders, authorizations, registrations, declarations, licenses and filings as are set forth in Schedule 4.4 to the ICH Disclosure Letter or (A) as may be required under (x) federal, state or local environmental laws or (y) the "blue sky" laws of various states or (B) which, if not obtained or made, would not prevent or delay in any material respect the consummation of any of the Merger or otherwise prevent ICH from performing its obligations under this Agreement in any material respect or have, individually or in the aggregate, a Material Adverse Effect on ICH. SECTION 4.5 SEC Documents. ICH has timely filed all required reports, schedules, forms, statements and other documents (collectively, including all exhibits and 24 33 schedules thereto and documents incorporated therein by reference, the "ICH SEC Documents") with the SEC. All of the ICH SEC Documents (other than preliminary material), as of their respective filing dates, complied in all material respects with all applicable requirements of the Securities Act and the Exchange Act and, in each case, the rules and regulations promulgated thereunder applicable to such ICH SEC Documents. None of the ICH SEC Documents at the time of filing and effectiveness contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except to the extent such statements have been modified or superseded by later ICH SEC Documents. SECTION 4.6 Financial Statements. The consolidated financial statements of ICH included in the ICH SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP (except, in the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly presented, in accordance with the applicable requirements of GAAP, the consolidated financial position of ICH as of the dates thereof and the consolidated results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). SECTION 4.7 Absence of Certain Changes or Events. Except as disclosed in the ICH SEC Documents or in Schedule 4.7 to the ICH Disclosure Letter, since the date of the most recent financial statements included in the ICH SEC Documents and to the date of this Agreement, there has not been any change that would have a Material Adverse Effect on ICH, nor has there been any occurrence or circumstance that with the passage of time would reasonably be expected to result in such a change, whether or not arising from transactions in the ordinary course of business. SECTION 4.8 No Undisclosed Liabilities. Except (a) as set forth in the ICH SEC Documents filed prior to the date of this Agreement, (b) as set forth in Schedule 4.8 to the ICH Disclosure Letter, (c) as incurred in the ordinary course of the business of ICH, (d) for the expenses incurred in connection with the transactions contemplated hereby or (e) for liabilities or obligations relating to contractual obligations, indebtedness, litigation or other matters that are covered by other representations and warranties in this Agreement or otherwise identified in the ICH Disclosure Letter, neither ICH nor any of its Subsidiaries has any Liabilities. The reserves reflected on ICH's balance sheet dated March 31, 1999 and the balance sheet dated December 31, 1998, as included, in each case, in the ICH SEC Documents, are appropriate and reasonable and have been calculated in a manner consistent with past practice. SECTION 4.9 No Defaults. Except as disclosed in Schedule 4.9 to the ICH Disclosure Letter, neither ICH nor any of its Subsidiaries is in violation or default under any provision of its declaration of trust, certificate of incorporation, bylaws, partnership agreement or 25 34 other organizational documents, as applicable, or is in breach of or default with respect to any provision of any agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which it is a party or by which it or any of its properties are bound; and there does not exist any state of facts that would constitute an event of default on the part of any of ICH or its Subsidiaries as defined in such documents that, with notice or lapse of time or both, would constitute a default, other than such violations or defaults that in the aggregate would not have a Material Adverse Effect on ICH. SECTION 4.10 Taxes. (a) ICH and each of its Subsidiaries has (A) filed all Tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Entity having authority to do so) and all such returns and reports are accurate and complete in all material respects; and (B) paid (or ICH has paid on its behalf) all Taxes shown on such returns and reports as required to be paid by it, and, except as disclosed in the ICH SEC Documents or in Schedule 4.10(a) to the ICH Disclosure Letter, the most recent financial statements contained in the ICH SEC Documents reflect an adequate reserve for all material Taxes payable by ICH (and by those Subsidiaries of ICH whose financial statements are contained therein) for all taxable periods and portions thereof through the date of such financial statements. True, correct and complete copies of all federal, state and local Tax returns and reports for ICH and each of its Subsidiaries, and all written communications relating thereto, have been delivered or made available to representatives of ACT. Since the date of the most recent financial statements included in the ICH SEC Documents, ICH has incurred no liability for taxes under Sections 857(b), 860(c) or 4981 of the Code, and neither ICH nor any of its Subsidiaries has incurred any material liability for Taxes other than in the ordinary course of business. To the Knowledge of ICH, no event has occurred, and no condition or circumstance exists, which presents a material risk that any material Tax described in the preceding sentence will be imposed upon ICH. Except as set forth on Schedule 4.10(a) to the ICH Disclosure Letter, to the Knowledge of ICH, no deficiencies for any Taxes have been proposed, asserted or assessed against ICH or any of its Subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending. (b) ICH (A) for all taxable years commencing with December 31, 1997 has been subject to taxation as a REIT within the meaning of the Code and has satisfied all requirements to qualify as a REIT for such years, (B) has operated, and intends to continue to operate, in such a manner as to qualify as a REIT for the tax year ending upon the Closing Date, and (C) has not taken or omitted to take any action which would reasonably be expected to result in a challenge to its status as a REIT, and to ICH's Knowledge, no such challenge is pending or threatened. Each Subsidiary of ICH that is a partnership, joint venture or limited liability company has been since its formation and continues to be treated for federal income tax purposes as a partnership and not as a corporation or an association taxable as a corporation. Except as set forth on Schedule 4.10(b) to the ICH Disclosure Letter, each Subsidiary of ICH that is a corporation for federal income tax purposes has been since its formation, and continues to be 26 35 treated for federal income tax purposes as, a "qualified REIT subsidiary" as defined in Section 856(i) of the Code. Except as set forth on Schedule 4.10(b) to the ICH Disclosure Letter, neither ICH nor any of its Subsidiaries holds any asset (x) the disposition of which would be subject to rules similar to Section 1374 of the Code as a result of an election under IRS Notice 88-19 or (y) that is subject to a consent filed pursuant to Section 341(f) of the Code and the regulations thereunder. SECTION 4.11 Employee Matters. Except as set forth in Schedule 4.11 to the ICH Disclosure Letter: (a) Schedule 4.11(a) to the ICH Disclosure Letter contains a true and complete list of each employee benefit plan, policy or agreement covering employees, former employees or directors of any of ICH or its Subsidiaries or their beneficiaries, or providing benefits to such persons in respect of services provided to any such entity, including without limitation any employee benefit plans within the meaning of Section 3(3) of ERISA and any employment, retention, severance or change in control agreement, in each case that is sponsored, maintained or contributed to or required to be contributed to by ICH or its Subsidiaries or by any trade or business, whether or not incorporated (an "ICH ERISA Affiliate") that, together with any of such Subsidiaries, would be deemed a "single employer" within the meaning of Section 4001(b) of ERISA (collectively, the "ICH Benefit Plans"). Other than as set forth in Schedule 4.11(a) to the ICH Disclosure Letter, since December 31, 1998, there have been no new plans adopted, nor changes, additions or modification to any ICH Benefit Plan. As of the date hereof, neither ICH nor any of its Subsidiaries has any plans to adopt, change, add or modify any ICH Benefit Plan, nor has any such entity communicated with any current or former employee with respect thereto. (b) With respect to each ICH Benefit Plan, ICH has previously delivered or made available to ACT or its representatives true and complete copies of the following: (i) the plan document and all amendments thereto (or, if such plan is unwritten, a true and complete summary of its terms); (ii) any related trust or other funding vehicle; (iii) if applicable, the two most recent IRS Forms 5500 and related attachments; (iv) if applicable, the most recent IRS determination letter; and (v) any material correspondence or employee communications. (c) All material contributions and other payments required to have been made by ICH or one of its Subsidiaries to any ICH Benefit Plan (or to any Person pursuant to the terms thereof) have been made or the amount of such payment or contribution obligation has been reflected in the financial statements in ICH's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (the "ICH First Quarter 10-Q"). (d) Each of the ICH Benefit Plans intended to be "qualified" within the meaning of Section 401(a) or Section 501(c)(9) of the Code has been determined by the IRS to be so qualified, and no circumstances exist that could reasonably be expected to result in the revocation of any such determination. Each of the ICH Benefit Plans is and has been operated in 27 36 all material respects in compliance with its terms and all applicable laws, rules and regulations governing such plan, including, without limitation, ERISA and the Code. (e) With respect to the ICH Benefit Plans, individually and in the aggregate, no event has occurred, there does not now exist any condition or set of circumstances, that could reasonably be expected to subject ICH, any of its Subsidiaries or any ICH ERISA Affiliate to any material liability arising under the Code, ERISA or any other applicable law, or under any indemnity agreement to which ICH, any of its Subsidiaries or any ICH ERISA Affiliate is a party, excluding liability relating to benefit claims and funding obligations payable in the ordinary course. (f) Other than continuation coverage required to be provided under Section 4980B of the Code or Part 6 of Title I of ERISA or otherwise as provided by state law, none of the ICH Benefit Plans that are "welfare plans," within the meaning of Section 3(1) of ERISA, provides for any benefits with respect to current or former employees for periods extending beyond their retirement or other termination of service, other than benefits the full cost of which is borne by such former employees. (g) Except as otherwise disclosed to ACT, the consummation of the Merger will not, either alone or in combination with another event undertaken by ICH or any of its Subsidiaries prior to the date hereof, (i) entitle any current or former employee, agent, independent contractor or officer of ICH or its Subsidiaries to severance pay, unemployment compensation or any other payment, (ii) accelerate the time of payment or vesting or increase the amount of compensation due any such employee, officer, agent or independent contractor or (iii) constitute a "change in control" under any ICH Benefit Plan. SECTION 4.12 Affiliate Transactions. Except as set forth in the ICH SEC Documents or in Schedule 4.12 to the ICH Disclosure Letter, there is no transaction and no transaction is now proposed, to which ICH or its Subsidiaries is or is to be a party in which any current shareholder (holding in excess of 5% of the shares of ICH Common Stock or any securities convertible into or exchangeable for such shares), director or executive officer of ICH or its Subsidiaries has a direct or indirect interest. SECTION 4.13 Financial Advisors. No broker, investment banker, financial advisor or other Person, other than Banc of America Securities LLC and Jolson Merchant Partners, LLC, the fees and expenses of which have previously been disclosed to ACT and will be paid by ICH, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of ICH or any of its Affiliates. Substantially concurrently herewith, the ICH Board of Directors has received the opinion of Banc of America Securities LLC to the effect that, on the date thereof, the consideration to be received by holders (other than Fortress Investment Group and its affiliates) of shares of ICH Common Stock pursuant to this Agreement is fair from a financial point of view to such holders. 28 37 SECTION 4.14 Registration Statement and Proxy Statement. The information supplied or to be supplied by ICH or its Subsidiaries for inclusion in (a) the Registration Statement will not, either at the time it is filed with the SEC or at the time it becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading or (b) the Proxy Statement, including any amendment and supplement thereto, will not, either at the date mailed to shareholders of ICH or at the time of the ICH Stockholder Meeting (as defined below), contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Registration Statement and the Proxy Statement will each comply as to form in all material respects with all applicable laws, including the provisions of the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder, except that no representation is made by ICH with respect to information supplied by ACT for inclusion therein. SECTION 4.15 Vote Required. The (i) affirmative vote of at least a majority of the outstanding shares of ICH Common Stock and, if not previously converted, ICH Series B Preferred Stock, voting together as a single class (with each share of ICH Series B Preferred Stock entitled to the number of votes equal to the number of shares of ICH Common Stock into which it is convertible as of the record date for the ICH Stockholder Meeting), and (ii) if not previously converted, the affirmative vote of two-thirds of the outstanding shares of ICH Series B Preferred Stock, voting separately as a class are the only votes of the holders of any class or series of ICH's capital shares necessary (under applicable law or otherwise) to approve this Agreement and the transactions contemplated hereby. SECTION 4.16 Anti-Takeover Statutes. ICH has taken all action necessary, if any, to exempt the transactions contemplated hereby from the operation of any Anti-Takeover Statutes. SECTION 4.17 Full Disclosure. To the Knowledge of ICH, ICH has not failed to disclose to ACT any fact material to the business, properties, prospects, operations, financial condition or results of operations of ICH and its Subsidiaries, taken as a whole. To the Knowledge of ICH, no representation or warranty by ICH contained in this Agreement and no statement contained in any document (including historical financial statements and the ICH Disclosure Letter), certificate or other writing furnished or to be furnished by ICH to ACT or any of its representatives pursuant to the provisions hereof or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of material fact or omits or will omit to state any material fact necessary, in light of the circumstances under which it was made, in order to make the statements herein or therein not misleading. Notwithstanding the foregoing or any other provision herein, ICH has made no representation or warranty with respect to any financial or other projections made by ICH. 29 38 SECTION 4.18 Litigation. Except as disclosed in ICH SEC Documents filed with the SEC prior to the date hereof or in Schedule 4.18 to the ICH Disclosure Letter, there is no suit, action or proceeding pending, threatened in writing or, to ICH's Knowledge, otherwise threatened against or affecting ICH or any Subsidiary of ICH that, individually or in the aggregate, could reasonably be expected to (A) have a Material Adverse Effect on ICH or (B) materially delay or prevent the consummation of any of the transactions contemplated hereby, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against ICH or any Subsidiary of ICH or any of their respective properties or assets having, or which, insofar as reasonably can be foreseen, in the future would have, any such effect. SECTION 4.19 Compliance with Laws. Except as disclosed in the ICH SEC Documents filed with the SEC prior to the date hereof or as set forth in Schedule 4.19 to the ICH Disclosure Letter, to the Knowledge of ICH, neither ICH nor any of its Subsidiaries has violated or failed to comply with any statute, law, ordinance, regulation, rule, judgment, decree or order of any Governmental Entity applicable to its business, properties or operations, and neither ICH nor any of its Subsidiaries has received notification of asserted present or past violation or failure to comply, except for violations and failures to comply that would not, individually or in the aggregate, be reasonably likely to result in a Material Adverse Effect on ICH. SECTION 4.20 Indebtedness. Except as filed (or incorporated by reference) as an Exhibit to ICH's Annual Report on Form 10-K for the year ended December 31, 1998 (the "ICH 1998 Form 10-K"), Schedule 4.20 to the ICH Disclosure Letter sets forth (x) a list of all loan or credit agreements, notes, bonds, mortgages, indentures and other agreements and instruments pursuant to which any indebtedness of ICH or any of its Subsidiaries, other than indebtedness payable to ICH or one of its Subsidiaries, in an aggregate principal amount in excess of $100,000 per item is outstanding or may be incurred and (y) the respective principal amounts outstanding thereunder on July 1, 1999. SECTION 4.21 Insurance. ICH and its Subsidiaries maintain fire and casualty, general liability, business interruption, product liability, professional liability and sprinkler and water damage insurance policies with reputable insurance carriers, which ICH reasonably believes provide full and adequate coverage for all normal risks incident to the business of ICH and its Subsidiaries and their respective properties and assets. SECTION 4.22 Investment Company Act. Neither ICH nor any of its Subsidiaries is (i) except as disclosed in the ICH SEC Documents, an "investment company" or a company "controlled" by an investment company within the meaning of the Investment Company ACT of 1940, as amended, (ii) a "holding company" or a "subsidiary company" of a holding company or an "affiliate" thereof within the meaning of the Public Utility Holding Company Act of 1935, as amended, or (iii) subject to regulation under the Federal Power Act or the Interstate Commerce Act. 30 39 SECTION 4.23 Material Contracts. (a) Except as set forth in Schedule 4.23(a) to the ICH Disclosure Letter and other than contracts or agreements that are required to be filed and have been filed (or incorporated by reference) as an exhibit to the ICH 1998 Form 10-K (the "ICH Material Contracts"), there are no contracts or agreements that would have been required to be filed as an exhibit to an Annual Report on Form 10-K that are material to the business, properties, assets, financial position or results of operations of ICH and its Subsidiaries. (b) The ICH Material Contracts are in full force and effect and are valid and enforceable, in accordance with their terms, obligations of ICH or its Subsidiaries, as the case may be, enforceable against ICH in accordance with its terms, except that such enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or (ii) general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law), and there are no breaches or defaults thereunder by ICH which, individually or in the aggregate, would be reasonably likely to have a Material Adverse Effect on ICH, and no event has occurred that with the lapse of time or the giving of notice or both would constitute a breach or default thereunder by the ICH which constitutes a Material Adverse Effect on ICH. SECTION 4.24 Mortgage Backed Securities. (a) Except as set forth on Schedule 3.24(a) to the ICH Disclosure Letter, ICH or one of its Subsidiaries is and shall be the sole owner of each of the MBS identified in Schedule 4.24(a) to the ICH Disclosure Letter ("ICH MBS") and the related certificates and other instruments evidencing ownership of the ICH MBS (the "ICH MBS Certificates"), free and clear of any adverse claims, Liens, pledges, assignments, charges or security interests of any nature (including, without limitation, Liens arising under the federal tax laws or ERISA), other than Liens pursuant to repurchase agreements or other warehouse financing. (b) Except as set forth in Schedule 4.24(b) to the ICH Disclosure Letter, neither ICH nor any of its Subsidiaries is in default in the performance of any of its obligations, whether as special servicer or otherwise, under any pooling and servicing agreements, trust and servicing agreements, trust agreements, servicing agreements or other similar documents providing for the creation of the ICH MBS or the servicing of the mortgage loans underlying the ICH MBS (the "ICH Principal MBS Agreements") and has not received any notice of any default by any master or special servicer of any ICH MBS. (c) Except as set forth in Schedule 4.24(c) to the ICH Disclosure Letter, for all ICH MBS, ICH has delivered or made available to ACT a copy of each prospectus, offering circular or private placement memorandum relating to such ICH MBS. 31 40 (d) Except as set forth in Schedule 4.24(d) to the ICH Disclosure Letter, there are no agreements (other than the ICH Principal MBS Agreements) between ICH or any of its Subsidiaries and the master servicer or any special servicer with respect to any series of ICH MBS. (e) Except as set forth in Schedule 4.24(e) to the ICH Disclosure Letter, there are no agreements between the ICH or any of its Subsidiaries and other holders of any below investment grade ICH MBS. (f) Except as set forth in Schedule 4.24(f) to the ICH Disclosure Letter with respect to each issue of the ICH MBS, ICH or one of its Subsidiaries, as the holder of the majority of the controlling class, has not waived any rights as to any specially serviced mortgage loan. (g) Except as set forth in Schedule 4.24(g) to the ICH Disclosure Letter, with respect to each issue of the ICH MBS, ICH has not determined that any specially serviced assets have become corrected assets and has not received any written notice of any specially serviced assets which have become corrected assets. SECTION 4.25 Environmental Laws and Regulations. (a) Except as set forth in Schedule 4.25(a) to the ICH Disclosure Letter or disclosed by ICH in the ICH SEC Documents filed prior to the date hereof, ICH and ICH's Subsidiaries are in compliance with all applicable Environmental Laws (which compliance includes, but is not limited to, the possession by ICH and ICH's Subsidiaries of all permits and other governmental authorizations required under applicable Environmental Laws, and compliance with the terms and conditions thereof), except where failures to be in compliance, individually or in the aggregate, would not reasonably be expected have a Material Adverse Effect on ICH. Except as set forth in Schedule 4.25(a) to the ICH Disclosure Letter or disclosed by ICH in the ICH SEC Documents, since January 1, 1998 and prior to the date of this Agreement, neither ICH nor any of the Subsidiaries has received any written communication, whether from a Governmental Entity, citizens' group, employee or otherwise, alleging that ICH or any of its Subsidiaries is not in such compliance, except where failures to be in compliance, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on ICH. (b) Except as set forth in Schedule 4.25(b) to the ICH Disclosure Letter or disclosed by ICH in the ICH SEC Documents, there is no Environmental Claim pending or threatened in writing against ICH or any of ICH's Subsidiaries. SECTION 4.26 Properties. (a) ICH or one of its Subsidiaries owns fee simple title (or where indicated, leasehold estates) to each of the real properties identified in the ICH SEC Documents or in 32 41 Schedule 4.26(a) of the ICH Disclosure Letter (the "ICH Properties"), which are all of the real estate properties owned by them, in each case (except as provided below or as set forth on Schedule 4.26(a) of the ICH Disclosure Letter) free and clear of Liens. The ICH Properties are not subject to any Property Restrictions or Liens, except for ICH Permitted Liens. For purposes of this Agreement, "ICH Permitted Liens" means (i) Liens and Property Restrictions as set forth in the ICH SEC Documents, (ii) Liens and Property Restrictions set forth in the ICH Disclosure Letter, (iii) Property Restrictions imposed or promulgated by law or any governmental body or authority generally with respect to real property, including zoning regulations, and listed in the ICH Disclosure Letter, (iv) Liens and Property Restrictions disclosed on existing title reports or existing surveys (in either case copies of which title reports and surveys have been delivered or made available to ACT and listed in the ICH Disclosure Letter), and (v) mechanics', carriers', workmen's, repairmen's and materialmens' liens and other Liens, Property Restrictions and other limitations of any kind, if any, which, individually or in the aggregate, are not substantial in amount and do not materially detract from the value of or materially interfere with the use of any of the ICH Properties as currently contemplated subject thereto or affected thereby. Except as provided in Schedule 4.26(a) of the ICH Disclosure Letter, valid policies of title insurance have been issued insuring ICH's or its applicable Subsidiary's fee simple title or leasehold estate to the ICH Properties in amounts at least equal to the fair market value of such ICH Properties at the time of the issuance of such policy, subject only to the matters disclosed above or in the ICH Disclosure Letter, and such policies are, at the date hereof, in full force and effect and no material claim has been made against any such policy. Except as provided in Schedule 4.26(a) of the ICH Disclosure Letter, ICH has no Knowledge (i) that any certificate, permit or license from any Governmental Entity having jurisdiction over any of the ICH Properties or any agreement, easement or other right which is necessary to permit the lawful use and operation of the buildings and improvements on any of the ICH Properties as currently contemplated or which is necessary to permit the lawful use and operation of all driveways, roads and other means of egress and ingress to and from any of the ICH Properties has not been obtained and is not in full force and effect, or of any pending threat of modification or cancellation of any of same; (ii) of any written notice of any violation of any federal, state or municipal law, ordinance, order, regulation or requirement materially and adversely affecting any of the ICH Properties issued by any Governmental Entity; (iii) of any material structural defects relating to any ICH Property; (iv) of any ICH Property whose building systems are not in working order in any material respect; (v) of any physical damage to any ICH Property for which there is no insurance in effect covering the cost of the restoration; (vi) of any current renovation or uninsured restoration to any ICH Property the cost of which exceeds $50,000; or (vii) of items referred to in the foregoing clauses (iii), (iv), (v) and (vi) which in the aggregate for ICH and its Subsidiaries would not be reasonably likely to result in a Material Adverse Effect on ICH. Except as provided in Schedule 4.27(a) of ICH's Disclosure Letter, neither ICH nor any of its Subsidiaries has received any notice to the effect that (A) any condemnation or rezoning proceedings are pending or threatened with respect to any of the ICH Properties, (B) any zoning, building or similar law, code, ordinance, order or regulation is or will be violated by the continued maintenance, operation or use of any buildings or other improvements on any of the ICH Properties or (C) a default exists or, with notice or lapse of time, or both, will exist under any lease (including any 33 42 ground lease), mortgage, deed of trust or related document regarding an ICH Property or that any ICH Property is being foreclosed upon. (b) All material leases and subleases for which ICH or any of its Subsidiaries is lessor or lessee (or sublessee) are identified in the ICH SEC Documents or in Schedule 4.26(b) to the ICH Disclosure Letter. Except as disclosed on Schedule 4.26(b) of the ICH Disclosure Letter, each such lease is in full force and effect and neither ICH nor any of its Subsidiaries has notice of any defense to the obligations of the lessor or lessee (or sublessee), as the case may be, thereunder or any material claim asserted or threatened by any person or entity, and except as disclosed on Schedule 4.26(b) of the ICH Disclosure Letter, the lessor or lessee (or sublessee), as the case may be, under each such lease or sublease has complied with its obligations under such lease or sublease in all material respects and neither ICH nor any of its Subsidiaries has Knowledge that a material default exists, or with notice or lapse of time or both, will exist by the lessee (or sublessee) under such lease. SECTION 4.27 Mortgage Loans. (a) Except as set forth in Schedule 4.27(a) of the ICH Disclosure Letter, ICH or one of its Subsidiaries is the sole owner of each of the mortgage loans reflected in the most recent financial statements included in the ICH SEC Documents or made or acquired since such date (the "ICH Mortgage Loans") and is the sole owner or beneficiary of or under the related notes (the "ICH Mortgage Notes"), deeds of trust, mortgages, security agreements, guaranties, indemnities, financing statements, assignments, endorsement, bonds, letters of credit, accounts, insurance contracts and policies, credit reports, tax returns, appraisals, environmental reports, escrow documents, participation agreements (if applicable), loan files, servicing files and all other documents evidencing or securing the ICH Mortgage Loans (the "ICH Mortgage Files"), except (i) any ICH Mortgage Loans disposed of in the ordinary course since the date of such financial statements, and (ii) to the extent any ICH Mortgage Loan is prepaid in full or subject to a completed foreclosure action (or non-judicial proceeding or deed in lieu of foreclosure) in which case ICH or one of its Subsidiaries shall be the sole owner of the real property securing such foreclosed loan or shall have received the proceeds of such action to which ICH or such Subsidiary was entitled, in each case free and clear of any adverse claims or Liens. (b) Except as set forth in Schedule 4.27(b) of the ICH Disclosure Letter, to the Knowledge of ICH, (i) the lien of each ICH Mortgage is subject only to "Permitted Exceptions" which consist of the following: (A) ICH Permitted Liens; (B) covenants, conditions, restrictions, reservations, rights, Liens, easements, encumbrances, encroachments, and other matters affecting title acceptable to prudent mortgage lending institutions generally; (C) rights of tenants with no options to purchase or rights of first refusal to purchase, except as disclosed in the ICH Mortgage File; and (D) other matters which, in the aggregate, would not be reasonably likely to result in a Material Adverse Effect on ICH; (ii) each ICH Mortgage Loan has generally been serviced in accordance with the terms of the related mortgage note and pooling and servicing agreements and otherwise in accordance with industry accepted servicing practices except for events that, 34 43 individually or in the aggregate, would not be reasonably likely to result in a Material Adverse Effect on ICH; and (iii) there is no delinquency in the payments of principal and interest required to be made under the terms of any ICH Mortgage Loan in excess of 30 days beyond the applicable due date that has occurred since origination or in any other payments required to be made under the terms of any ICH Mortgage Loan (inclusive of any applicable grace or cure period) that would be reasonably likely to result in a Material Adverse Effect on ICH. (c) Except as set forth in Schedule 4.27(c) of the ICH Disclosure Letter or in the applicable ICH Mortgage File, ICH has no Knowledge of (i) any written notice asserting any offset, defense (including the defense of usury), claim (including claims of lender liability), counterclaim, or right to rescission with respect to any ICH Mortgage Loan, ICH Mortgage Note or other related agreements, (ii) any uncured monetary default in excess of 30 days or event of acceleration existing under any ICH Mortgage or the related ICH Mortgage Note or (iii) any uncured non-monetary default, breach, violation or event of acceleration existing beyond the applicable grace or cure period under any ICH Mortgage or the related ICH Mortgage Note, except for notices, violations, breaches, defaults or events of acceleration that would not, individually or in the aggregate, be reasonably likely to result in a Material Adverse Effect on ICH. SECTION 4.28 Actions Taken Regarding the ICH Rights Plan. ICH has taken, or shall take prior to the Closing Date, all action necessary to amend the ICH Rights Plan to ensure that the execution and delivery of this Agreement and the Purchase Agreement, the taking of any other action or combination of actions or the consummation of the transactions contemplated hereby or thereby do not and will not result in the grant of any rights to any Person to exercise or receive a distribution of rights certificates thereunder or acquire any property in respect of rights thereunder. ARTICLE V COVENANTS SECTION 5.1 Conduct of Business by ACT. During the period from the date of this Agreement to the Effective Time, ACT shall, and shall cause (or, in the case of its Subsidiaries that ACT does not control, shall use commercially reasonable efforts to cause) its Subsidiaries each to, carry on its businesses in the usual, regular and ordinary course in substantially the same manner as heretofore conducted and, to the extent consistent therewith, use commercially reasonable efforts to preserve intact its current business organization, goodwill and ongoing businesses. Without limiting the generality of the foregoing, the following additional restrictions shall apply. During the period from the date of this Agreement to the Effective Time, except as expressly permitted or contemplated by this Agreement, as shall be consented by ICH (which consent shall not be unreasonably withheld) or as set forth in Schedule 5.1 to the ACT Disclosure Letter, ACT shall not and shall cause (or, in the case of its Subsidiaries that it does not control, shall use commercially reasonable efforts to cause) its Subsidiaries not to (and not to authorize or commit or agree to): 35 44 (a) (i) except for dividends paid on ACT Common Shares in the ordinary course of ACT's business, consistent with past practice, declare, set aside or pay any dividends on, or make any other distributions in respect of any of ACT's capital shares, (ii) split, combine or reclassify any capital stock or other partnership interests or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of such capital shares or partnership interests or (iii) purchase, redeem or otherwise acquire any capital shares of ACT or any options, warrants or rights to acquire, or security convertible into, such capital shares or partnership interests; (b) except in connection with the exercise of stock options or issuance of shares pursuant to stock rights outstanding on the date of this Agreement, issue, deliver or sell, or grant any option or other right in respect of, any capital shares, any other voting securities (including partnership interests) of ACT or any of its Subsidiaries or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities except to ACT or one of its Subsidiaries; (c) except as otherwise contemplated by this Agreement, amend the declaration of trust or articles or certificate of incorporation, bylaws, partnership agreement or other comparable charter or organizational documents of ACT or any of its Subsidiaries; (d) merge or consolidate with any Person; (e) except as contractually required pursuant to the terms of agreements existing on the date hereof, in any transaction or series of related transactions involving capital, securities or other assets or indebtedness of ACT, its Subsidiaries, or any combination thereof in excess of $100,000: (i) acquire or agree to acquire by merging or consolidating with, or by purchasing all or a substantial portion of the equity securities or all or substantially all of the assets of, or by any other manner, any business or any corporation, partnership, limited liability company, joint venture, association, business trust or other business organization or division thereof or interest therein; (ii) subject to any Lien or sell, lease or otherwise dispose of any material assets or assign or encumber the right to receive income, dividends, distributions and the like except pursuant to contracts or agreements in effect at the date of this Agreement and set forth on Schedule 5.1 to the ACT Disclosure Letter; (iii) make or agree to make any new capital expenditures, except in accordance with budgets relating to ACT or its Subsidiaries that have been previously delivered to ICH; or (iv) incur any indebtedness for borrowed money or guarantee any such indebtedness of another Person, issue or sell any debt securities or warrants or other rights to acquire any debt securities of ACT, guarantee any debt securities of another Person, enter into any "keep well" or other agreement to maintain any financial statement condition of another person or enter into any arrangement having the economic effect of any of the foregoing, prepay or refinance any indebtedness or make any loans, advances or capital contributions to, or investments in, any other Person; 36 45 (f) make or rescind any Tax election (unless required by law or necessary to preserve ACT's status as a REIT or the status of any of its Subsidiary as a partnership for federal income tax purposes or as a "qualified REIT subsidiary" under Section 856(i) of the Code, as the case may be); (g) (i) change in any material manner any of its methods, principles or practices of accounting or (ii) settle or compromise any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes, except in the case of settlements or compromises relating to Taxes on real property in an amount not to exceed, individually or in the aggregate, $100,000, or change any of its methods of reporting income or deductions for federal income Tax purposes from those employed in the preparation of its federal income Tax return for the most recently completed taxable year except, in the case of clause (i), as may be required by the SEC, applicable law or GAAP; (h) adopt any new employee benefit plan, incentive plan, severance plan, stock option or similar plan, grant new stock appreciation rights or amend any existing plan or rights, except such changes as are required by law or which are not more favorable to participants than provisions presently in effect; (i) except as contractually required pursuant to the terms of agreements existing on the date hereof, pay, discharge, settle or satisfy any claims, liabilities or objections (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business consistent with past practice or in accordance with their terms, of liabilities reflected or reserved against in, or contemplated by, the most recent consolidated financial statements (or the notes thereto) of ACT included in the ACT SEC Documents or incurred in the ordinary course of business consistent with past practice; (j) settle any shareholder derivative or class action claims arising out of or in connection with any of the transactions contemplated hereby; and (k) enter into any new agreements or arrangements with Persons that are Affiliates or, as of the date hereof, are executive officers, directors or trust managers of ACT or any of its Subsidiaries. SECTION 5.2 Conduct of Business by ICH. During the period from the date of this Agreement to the Effective Time, ICH shall, and shall cause (or, in the case of its Subsidiaries that ICH does not control, shall use commercially reasonable efforts to cause) its Subsidiaries each to, carry on its businesses in the usual, regular and ordinary course in substantially the same manner as heretofore conducted and, to the extent consistent therewith, use commercially reasonable efforts to preserve intact its current business organization, goodwill and ongoing businesses. Without limiting the generality of the foregoing, the following additional restrictions shall apply. During the period from the date of this Agreement to the Effective Time, except as expressly permitted or contemplated by this Agreement, as shall be 37 46 consented by ACT (which consent shall not be unreasonably withheld) or as set forth in Schedule 5.2 to the ICH Disclosure Letter, ICH shall not and shall cause (or, in the case of its Subsidiaries that it does not control, shall use commercially reasonable efforts to cause) its Subsidiaries not to (and not to authorize or commit or agree to): (a) (i) except for dividends paid on ICH Common Stock or ICH Series B Preferred Stock in the ordinary course of ICH's business, consistent with past practice, declare, set aside or pay any dividends on, or make any other distributions in respect of any of ICH's capital shares other than the dividend required to be paid pursuant to Section 2.4(a), (ii) split, combine or reclassify any capital stock or other partnership interests or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of such capital shares or partnership interests or (iii) purchase, redeem or otherwise acquire any capital shares of ICH or any options, warrants or rights to acquire, or security convertible into, such capital shares or partnership interests; (b) except in connection with the exercise of stock options or issuance of shares pursuant to stock rights outstanding on the date of this Agreement, issue, deliver or sell, or grant any option or other right in respect of, any capital shares, any other voting securities (including partnership interests) of ICH or any of its Subsidiaries or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities except to ICH or one of its Subsidiaries; (c) except as otherwise contemplated by this Agreement, amend the declaration of trust or articles or certificate of incorporation, bylaws, partnership agreement or other comparable charter or organizational documents of ICH or any of its Subsidiaries; (d) merge or consolidate with any Person; (e) except as contractually required pursuant to the terms of agreements existing on the date hereof, or as otherwise contemplated by Section 7.3(h) hereof, in any transaction or series of related transactions involving capital, securities or other assets or indebtedness of ICH, its Subsidiaries, or any combination thereof in excess of $100,000: (i) acquire or agree to acquire by merging or consolidating with, or by purchasing all or a substantial portion of the equity securities or all or substantially all of the assets of, or by any other manner, any business or any corporation, partnership, limited liability company, joint venture, association, business trust or other business organization or division thereof or interest therein; (ii) subject to any Lien or sell, lease or otherwise dispose of any material assets or assign or encumber the right to receive income, dividends, distributions and the like except pursuant to contracts or agreements in effect at the date of this Agreement and set forth on Schedule 5.2 to the ICH Disclosure Letter; (iii) make or agree to make any new capital expenditures, except in accordance with budgets relating to ICH or its Subsidiaries that have been previously delivered to ICH; or (iv) incur any indebtedness for borrowed money or guarantee any such indebtedness of another Person, issue or sell any debt securities or warrants or other rights to acquire any debt 38 47 securities of ICH, guarantee any debt securities of another Person, enter into any "keep well" or other agreement to maintain any financial statement condition of another person or enter into any arrangement having the economic effect of any of the foregoing, prepay or refinance any indebtedness or make any loans, advances or capital contributions to, or investments in, any other Person; (f) make or rescind any Tax election (unless required by law or necessary to preserve ICH's status as a REIT or the status of any of its Subsidiary as a partnership for federal income tax purposes or as a "qualified REIT subsidiary" under Section 856(i) of the Code, as the case may be); (g) (i) change in any material manner any of its methods, principles or practices of accounting or (ii) settle or compromise any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes, except in the case of settlements or compromises relating to Taxes on real property in an amount not to exceed, individually or in the aggregate, $100,000, or change any of its methods of reporting income or deductions for federal income Tax purposes from those employed in the preparation of its federal income Tax return for the most recently completed taxable year except, in the case of clause (i), as may be required by the SEC, applicable law or GAAP; (h) adopt any new employee benefit plan, incentive plan, severance plan, stock option or similar plan, grant new stock appreciation rights or amend any existing plan or rights, except such changes as are required by law or which are not more favorable to participants than provisions presently in effect; (i) except as contractually required pursuant to the terms of agreements existing on the date hereof, pay, discharge, settle or satisfy any claims, liabilities or objections (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business consistent with past practice in accordance with their terms, of liabilities reflected or reserved against in, or contemplated by, the most recent consolidated financial statements (or the notes thereto) of ICH included in the ICH SEC Documents or incurred in the ordinary course of business consistent with past practice; (j) settle any shareholder derivative or class action claims arising out of or in connection with any of the transactions contemplated hereby; and (k) enter into any new agreements or arrangements with Persons that are Affiliates or, as of the date hereof, are executive officers or directors of ICH or any of its Subsidiaries. SECTION 5.3 Other Actions. Each of ACT and ICH shall not, and shall use commercially reasonable efforts to cause its respective Subsidiaries and joint ventures not to, take any action that would result in (i) any of the representations and warranties of such party 39 48 (without giving effect to any "Knowledge" qualification) set forth in this Agreement that are qualified as to materiality becoming untrue, (ii) any of such representations and warranties (without giving effect to any "Knowledge" qualification) that are not so qualified becoming untrue in any material respect or (iii) any of the conditions to the Merger set forth in Article VII not being satisfied. ARTICLE VI ADDITIONAL COVENANTS SECTION 6.1 Preparation of the Registration Statement and the Proxy Statement; Shareholder Meetings. (a) As soon as practicable following the date of this Agreement, ACT and ICH shall prepare and file with the SEC a preliminary Proxy Statement in form and substance reasonably satisfactory to each of ICH and ACT, and ACT shall prepare and file with the SEC the Registration Statement, in which the Proxy Statement will be included as a prospectus. Each of ACT and ICH shall use its reasonable commercial efforts to (i) respond to any comments of the SEC and (ii) have the Registration Statement declared effective under the Securities Act and the rules and regulations promulgated thereunder as promptly as practicable after such filing and to keep the Registration Statement effective as long as is reasonably necessary to consummate the Merger. Each of ACT and ICH will use its reasonable commercial efforts to cause the Proxy Statement to be mailed to its respective shareholders as promptly as practicable after the Registration Statement is declared effective under the Securities Act. Each party will notify the other promptly of the receipt of any comments from the SEC and of any request by the SEC for amendments or supplements to the Registration Statement or the Proxy Statement or for additional information and will supply the other with copies of all correspondence between such party or any of its representatives and the SEC, with respect to the Registration Statement or the Proxy Statement. Whenever any event occurs which is required to be set forth in an amendment or supplement to the Registration Statement or the Proxy Statement, ICH or ACT, as the case may be, shall promptly inform the other of such occurrences and cooperate in filing with the SEC and/or mailing to the shareholders of ICH and ACT such amendment or supplement. The Proxy Statement shall, subject to Section 6.7(b), include the recommendations of the Board of Directors of ICH and the Board of Trust Managers of ACT in favor of approval of this Agreement and the transactions contemplated hereby. ACT also shall take any action required to be taken under any applicable state securities or "blue sky" laws in connection with the issuance of the ACT Common Shares pursuant to the Merger, and ICH shall furnish all information concerning ICH and the holders of shares of ICH Common Stock and rights to acquire such shares pursuant to the ICH Option Plan as may be reasonably requested in connection with any such action. ACT will use its reasonable commercial efforts to obtain, prior to the effective date of the Registration Statement, all necessary state securities or "blue sky" permits or approvals required to carry out the transactions contemplated hereby. 40 49 (b) ACT will, as soon as practicable following the date of this Agreement (but in no event sooner than 30 days following the date the Proxy Statement is mailed to the shareholders of ACT), duly call, give notice of, convene and hold a meeting of its shareholders (the "ACT Shareholder Meeting") for the purpose of obtaining the ACT Shareholder Approval. Subject to Sections 6.1(a) and 6.7, ACT will, through its Board of Trust Managers, recommend to its shareholders approval of this Agreement and the transactions contemplated hereby. (c) ICH will, as soon as practicable following the date of this Agreement (but in no event sooner than 30 days following the date the Proxy Statement is mailed to the stockholders of ICH), duly call, give notice of, convene and hold a meeting of its stockholders (the "ICH Stockholder Meeting") for the purpose of obtaining the ICH Stockholder Approval. Subject to Sections 6.1(a) and 6.7, ICH will, through its Board of Directors, recommend to its stockholders approval of this Agreement and the transactions contemplated hereby. SECTION 6.2 Access to Information; Confidentiality. Subject to the requirements of confidentiality agreements with third parties, each of ACT and ICH shall, and shall cause each of its respective Subsidiaries and joint ventures to, afford to the other party and to the officers, employees, accountants, counsel, financial advisors and other representatives of such other party, reasonable access during normal business hours during the period prior to the Effective Time to all their respective properties, books, contracts, commitments, personnel and records and, during such period, each of ACT and ICH shall, and shall cause each of its respective Subsidiaries to, furnish promptly to the other party (a) a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of federal or state securities laws and (b) all other information concerning its business, properties and personnel as such other party may reasonably request. Each of ACT and ICH will hold, and will use commercially reasonable efforts to cause its and its respective Subsidiaries and joint ventures' officers, employees, accountants, counsel, financial advisors and other representatives and Affiliates to hold, any nonpublic information in confidence to the extent required by, and in accordance with, and will comply with the provisions of the letter agreements between ACT and ICH (the "Confidentiality Agreements"). SECTION 6.3 Commercially Reasonable Efforts; Notification. (a) Subject to the terms and conditions herein provided, ACT and ICH shall: (i) to the extent required, promptly make their respective filings and thereafter make any other required submissions under the HSR Act with respect to the Merger; (ii) use commercially reasonable efforts to cooperate with one another in (A) determining which filings are required to be made prior to the Effective Time with, and which consents, approvals, permits or authorizations are required to be obtained prior to the Effective Time from, governmental or regulatory authorities of the United States, the several states and foreign jurisdictions and any third parties in connection with the execution and delivery of this Agreement, and the consummation of the transactions contemplated by such agreements and (B) timely making all such filings and timely seeking all such consents, approvals, permits and authorizations; (iii) use 41 50 commercially reasonable efforts to obtain in writing any consents required from third parties to effectuate the Merger, such consents to be in reasonably satisfactory form to ACT and ICH; and (iv) use commercially reasonable efforts to take, or cause to be taken, all other action and do, or cause to be done, all other things necessary, proper or appropriate to consummate and make effective the transactions contemplated by this Agreement. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purpose of this Agreement, the proper officers and directors or trust managers, as the case may be, of ACT and ICH shall use commercially reasonable efforts to take all such necessary action. (b) ACT shall give prompt notice to ICH, and ICH shall give prompt notice to ACT, if (i) any representation or warranty made by it contained in this Agreement that is qualified as to materiality becoming untrue or inaccurate in any respect or any such representation or warranty that is not so qualified becoming untrue or inaccurate in any material respect or (ii) the failure by it to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement; provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement. SECTION 6.4 Affiliates. Prior to the Closing Date, ICH shall deliver to ACT a letter identifying all Persons who are, at the time this Agreement is submitted for approval to the stockholders of ICH, "affiliates" of ICH for purposes of Rule 145 under the Securities Act. ICH shall use its commercially reasonable efforts to cause each such Person to deliver to ACT on or prior to the Closing Date a written agreement substantially in the form attached as Exhibit C hereto. SECTION 6.5 Tax Treatment. Each of ICH and ACT shall use its commercially reasonable efforts to cause the Merger to qualify as a reorganization under the provisions of Sections 368(a) of the Code and to obtain the opinions of counsel referred to in Sections 7.2(e) and 7.3(e). SECTION 6.6 Board of Trust Managers. ACT shall take all steps necessary to change the number of trust managers of ACT from seven trust managers to eight trust managers effective as of the Effective Time and to fill the vacancies in accordance with Section 1.6. SECTION 6.7 Board Recommendations. (a) In connection with the Merger and the Shareholder Approvals, the Board of Trust Managers of ACT and the Board of Directors of ICH shall (i) subject to Section 6.7(b) hereof, recommend to the holders of ACT Common Shares and ICH Stock, respectively, to vote in favor of the Merger and use all commercially reasonable efforts to obtain the necessary approvals by the shareholders of ACT and the stockholders of ICH, as the case may be, of this Agreement and (ii) otherwise comply with all legal requirements applicable to such approval. 42 51 (b) Neither the Board of Trust Managers of ACT nor the Board of Directors of ICH nor any committee thereof shall, except as expressly permitted by this Section 6.7 (b), (i) withdraw, qualify or modify, or propose publicly to withdraw, qualify or modify, in a manner adverse to the other party to this Agreement, the approval or recommendation of their respective Boards or such committees of the Merger or this Agreement, (ii) approve or recommend, or propose publicly to approve or recommend, any transaction involving an Acquisition Proposal (as defined below) from a third party (an "Alternative Transaction"), or (iii) cause ACT or ICH, as the case may be, to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement (each, an "Acquisition Agreement") related to any Alternative Transaction. Notwithstanding the foregoing, if the Board of Trust Managers of ACT or the Board of Directors of ICH, as the case may be, determines in good faith, after such Board has received a Superior Proposal (as defined below), in compliance with Section 6.8, and after receiving advice from outside counsel as to its fiduciary duties to its respective shareholders or stockholders, as the case may be, under applicable law, such Board may (subject to this Section 6.7(b)) inform its shareholders or stockholders, as the case may be, that it no longer believes that the Merger is advisable and no longer recommends approval of the Merger (a "Subsequent Determination") and enter into an Acquisition Agreement with respect to a Superior Proposal, but only at a time that is after the third business day following receipt by the other party to this Agreement of written notice advising such other party that such Board has received a Superior Proposal. Such written notice shall specify the material terms and conditions of such Superior Proposal, identify the person making such Superior Proposal and state that such Board intends to make a Subsequent Determination. During such three-business day period, the party intending to make such Subsequent Determination shall provide an opportunity for the other party hereto to propose such adjustments to the terms and conditions of this Agreement as would enable the party intending to make such Subsequent Determination to proceed with its recommendation to its shareholders or stockholders, as the case may be, without a Subsequent Determination; provided, however, that the acceptance of any such proposed adjustment shall be at the sole discretion of the Board that has received a Superior Proposal, exercised in good faith, and this Agreement shall be amended to reflect any such accepted adjustments. ACT and ICH hereby acknowledge and agree that the other party hereto may enter into an Acquisition Agreement with respect to a Superior Proposal in accordance with this Section 6.7, whether or not this Agreement is terminated, and that, in the event that either ACT or ICH enters into an Acquisition Agreement with respect to a Superior Proposal in accordance with this Section 6.7(b), neither the other party hereto nor the parties to such Acquisition Agreement may propose or enter into any adjustments to the terms and conditions of this Agreement or such Acquisition Agreement, respectively. Notwithstanding the foregoing, unless this Agreement is earlier terminated in accordance with its terms, this Agreement and the Merger shall be submitted to the shareholders of ACT and the stockholders of ICH whether or not the their respective Boards have made a Subsequent Determination. For purposes of this Agreement, a "Superior Proposal" means any proposal (on its most recently amended or modified terms, if amended or modified) made by a third party to enter into an Alternative Transaction that the Board of Trust Managers of ACT or the Board of Directors of ICH, as the case may be, determines in its good faith judgment (based on, among other things, the written advice of an independent financial advisor) to be more favorable to its 43 52 respective shareholders or stockholders, as the case may be, than the Merger, taking into account all relevant factors (including whether, in the good faith judgment of such Board, after obtaining the advice of such independent financial advisor, the third party is reasonably able to finance the transaction, and any proposed changes to this Agreement that may be proposed by the other party hereto in response to such Alternative Transaction). Nothing contained in this Section 6.7 or any other provision hereof shall prohibit either ACT or ICH or their respective Boards from (x) taking and disclosing to their shareholders or stockholders, as the case may be, pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange Act a position with respect to a tender or exchange offer by a third party, which is consistent with its obligations hereunder, or (y) making such disclosure to their shareholders or stockholders, as the case may be, as, in the good faith judgment of the applicable Board after receiving advice from outside counsel, is consistent with its obligations hereunder and is required by applicable law; provided that ACT and ICH may not, except as provided by this Section 6.7, withdraw, qualify or modify, in a manner adverse to the other party hereto, the approval or recommendation of its board of trust managers or board of directors, respectively, of the Merger or this Agreement. SECTION 6.8 Acquisition Proposals. Each of ACT and ICH shall not, nor shall it authorize or permit any of its Subsidiaries or agents, affiliates, employees, advisors or representatives to, directly or indirectly, (a) solicit, initiate or encourage the submission of any Acquisition Proposal or (b) participate in or encourage any discussion or negotiations regarding, or furnish to any person any non-public information with respect to, or take any other action to facilitate any inquiries or the making of, any proposal that constitutes, or may reasonably be expected to lead to, any Acquisition Proposal; provided, however, that the foregoing shall not prohibit the ACT Board of Trust Managers or the ICH Board of Directors, as the case may be, from furnishing information to, or entering into discussions or negotiations with, any person or entity that makes an unsolicited Acquisition Proposal to the extent that (A) the ACT Board of Trust Managers or the ICH Board of Directors, as the case may be, based upon the advice of outside legal counsel, determines in good faith that such action is required for it to comply with its fiduciary obligations to its shareholders or stockholders, as the case may be, under applicable Texas or Maryland law, as the case may be, (B) prior to taking such action, ACT or ICH, as the case may be, receives from such person or entity an executed agreement in reasonably customary form relating to the confidentiality of information to be provided to such person or entity and (C) the applicable Board concludes in good faith, after receiving advice from its independent financial advisor, that the Acquisition Proposal is a Superior Proposal. The party hereto receiving such unsolicited Acquisition Proposal shall provide immediate oral and written notice to the other party hereto of (a) the receipt of any such Acquisition Proposal or any inquiry which could reasonably be expected to lead to any Acquisition Proposal, (b) the material terms and conditions of such Acquisition Proposal or inquiry, (c) the identity of such person or entity making any such Acquisition Proposal or inquiry, (d) its intention to furnish information to, or enter into discussions or negotiations with, such person or entity and (e) subject to the fiduciary duties of its Board under applicable law, shall continue to keep such other party informed of the status and details of any such Acquisition Proposal or inquiry. For purposes of this Agreement, "Acquisition Proposal" means any bona fide proposal with respect to a merger, consolidation, 44 53 share exchange, tender offer or similar transaction involving ACT or ICH, as the case may be, or any purchase or other acquisition of all or any significant portion of the assets of such party or any equity interest in such party. SECTION 6.9 Public Announcements. ICH and ACT will consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other public statement with respect to the transactions contemplated hereby and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable law, court process or by obligations pursuant to any listing agreement with any national securities exchange. The parties agree that the initial press release to be issued with respect to the transactions contemplated hereby will be in the form agreed to by the parties hereto prior to the execution of this Agreement. SECTION 6.10 Letters of Accountants. (a) ACT shall use its commercially reasonable efforts to cause to be delivered to ICH "comfort" letters of Deloitte & Touche LLP, ACT's independent public accountants, dated and delivered the date on which the Registration Statement shall become effective and as of the Effective Time, and addressed to ICH, in form and substance reasonably satisfactory to ICH and reasonably customary in scope and substance for letters delivered by independent public accountants in connection with transactions such as those contemplated by this Agreement. (b) ICH shall use its commercially reasonable efforts to cause to be delivered to ACT "comfort" letters of KPMG LLP, ICH's independent public accountants, dated the date on which the Registration Statement shall become effective and as of the Effective Time, and addressed to ACT, in form and substance reasonably satisfactory to ACT and reasonably customary in scope and substance for letters delivered by independent public accountants in connection with transactions such as those contemplated by this Agreement. SECTION 6.11 Indemnification. (a) To the extent, if any, not provided by an existing right of indemnification or other agreement or policy, ACT shall indemnify, defend and hold harmless each person who is now or has been at any time prior to the date hereof or who becomes prior to the Effective Time, an officer, trust manager or director of ICH or any of its Subsidiaries (the "Indemnified Parties") against all losses, claims, damages, costs, expenses (including reasonable attorneys' fees and expenses), liabilities or judgments or amounts that are paid in settlement of, with the approval of the indemnifying party (which approval shall not be unreasonably withheld), or otherwise in connection with any threatened or actual claim, action, suit proceeding or investigation based on or arising out of the fact that such person is or was a director or officer of ICH or any of its Subsidiaries at or prior to the Effective Time, including matters based on or arising out of or pertaining to this Agreement or the transactions contemplated hereby ("Indemnified Liabilities"), in each case to the full extent ICH would have been permitted under applicable law and its 45 54 charter documents to indemnify the Indemnified Parties (and ACT shall pay expenses in advance of the final disposition of any such action or proceeding to each Indemnified Party to the full extent permitted by law subject to the limitations set forth in the fourth sentence of this Section 6.11 (a)). Any Indemnified Parties proposing to assert the right to be indemnified under this Section 6.11 shall, promptly after receipt of notice of commencement of any action against such Indemnified Parties in respect of which a claim is to be made under this Section 6.11 against ACT, notify ACT of the commencement of such action, enclosing a copy of all papers served. If any such action is brought against any of the Indemnified Parties and such Indemnified Parties notify ACT of its commencement, ACT will be entitled to participate in and, to the extent that ACT elects by delivering written notice to such Indemnified Parties promptly after receiving notice of the commencement of the action from the Indemnified Parties, to assume the defense of the action and after notice from it to the Indemnified Parties of its election to assume the defense, ACT will not be liable to the Indemnified Parties for any legal or other expenses except as provided below. If ACT assumes the defense, ACT shall have the right to settle such action without the consent of the Indemnified Parties; provided, however, that ACT shall be required to obtain such consent (which consent shall not be unreasonably withheld) if the settlement includes any admission of wrongdoing on the part of the Indemnified Parties or any decree or restriction on the Indemnified Parties; provided, further, that ACT, in the defense of any such action shall not, except with the consent of the Indemnified Parties (which consent shall not be unreasonably withheld), consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Parties of a release from all liability with respect to such action. The Indemnified Parties will have the right to employ their own counsel in any such action, but the fees, expenses and other charges of such counsel will be at the expense of such Indemnified Parties unless (i) the employment of counsel by the Indemnified Parties has been authorized in writing by ACT, (ii) the Indemnified Parties have reasonably concluded (based on written advice of counsel) that there may be legal defenses available to them that are different from or in addition to those available to ACT, (iii) a conflict or potential conflict exists (based on written advice of counsel to the Indemnified Parties) between the Indemnified Parties and ACT (in which case ACT will not have the right to direct the defense of such action on behalf of the Indemnified Parties) or (iv) ACT has not in fact employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of ACT. It is understood that ACT shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm admitted to practice in such jurisdiction at any one time from all such Indemnified Parties unless (a) the employment of more than one counsel has been authorized in writing by ACT, (b) any of the Indemnified Parties have reasonably concluded (based on advice of counsel) that there may be legal defenses available to them that are different from or in addition to those available to other Indemnified Parties or (c) a conflict or potential conflict exists (based on advice of counsel to the Indemnified Parties) between any of the Indemnified Parties and the other Indemnified Parties, in each case of which ACT shall be obligated to pay the reasonable and appropriate fees and expenses of such additional counsel or counsels. ACT 46 55 will not be liable for any settlement of any action or claim effected without its written consent (which consent shall not be unreasonably withheld). (b) In the event that ACT or any of it respective successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any Person, then, and in each such case the successors and assigns of such entity shall assume the obligations set forth in this Section 6.11, which obligations are expressly intended to be for the irreversible benefit of, and shall be enforceable by, each Indemnified Party covered hereby. (c) For a period of six years from the Effective Date, ACT shall use its commercially reasonable efforts to provide that portion of directors' and officers' liability insurance that serves to reimburse the persons currently covered by either ACT's or ICH's directors' and officers' liability insurance policy with respect to claims against such officers, trust managers and directors arising from facts or events which occurred before the Effective Time, which insurance shall contain at least the same coverage, and contain terms and conditions that in all material respects are no less advantageous, as that coverage currently provided by ICH; provided, however, that (i) such officers, trust managers and directors may be required to make application and provide customary representations and warranties to ACT's insurance carrier for the purpose of obtaining such insurance; (ii) such coverage will have a single aggregate limit of liability for such six-year period in an amount not less than the annual aggregate limit of liability of such coverage currently provided by ICH and (iii) in no event shall ACT be required to expend or maintain or procure insurance coverage pursuant to this Section 6.11(c) in any amount per annum in excess of 150% of its annual premiums for the twelve-month period ended December 31, 1998 (the "Maximum Premium") with respect to such insurance, or, if the cost of such coverage exceeds the Maximum Premium, the maximum amount of coverage that can be purchased for the Maximum Premium. (d) The provisions of this Section 6.11 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party, his or her heirs and his or her personal representatives and shall be binding on all successors and assigns of ACT. SECTION 6.12 Transfer and Gains Taxes. ACT and ICH shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications or other documents regarding any real property transfer or gains, sales, use, transfer, value added, stock transfer and stamp taxes, any transfer, recording, registration and other fees and any similar taxes which become payable in connection with, and are solely and directly related to, the transactions contemplated hereby (together with any related interest, penalties or additions to tax, "Transfer and Gains Taxes"). From and after the Effective Time, ACT or ICH shall cause the Surviving Entity to pay or cause to be paid, without deduction or withholding from any amounts payable to the holders of ICH Stock, all Transfer and Gains Taxes (other than any such taxes that are solely the liability of the holders of ICH Stock under applicable state law). 47 56 SECTION 6.13 Coordination of Dividends. Each of ACT and ICH shall coordinate with the other regarding the declaration and payment of dividends in respect of ACT Common Shares and ICH Stock and the record dates and payment dates relating thereto, it being the intention of ACT and ICH that any holder of ACT Common Shares or ICH Stock, as the case may be, shall not receive two dividends, or fail to receive one dividend, for any single calender quarter with respect to such holder's ACT Common Shares or ICH Stock. ARTICLE VII CONDITIONS PRECEDENT SECTION 7.1 Conditions to Each Party's Obligation To Effect the Merger. The respective obligation of each party to effect the Merger and to consummate the other transactions contemplated hereby contemplated to occur on the Closing Date is subject to the satisfaction or waiver on or prior to the Effective Time of the following conditions: (a) The Merger set forth in this Agreement shall have been approved and adopted by the Shareholder Approvals. (b) The New York Stock Exchange or The Nasdaq Stock Market shall have approved for listing the ACT Common Shares to be issued in the Merger, subject to official notice of issuance. (c) The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. (d) No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger or any of the other transactions contemplated hereby shall be in effect. (e) ACT shall have received all state securities or "blue sky" permits and other authorizations necessary to issue the ACT Common Shares pursuant to this Agreement. (f) The transactions contemplated by the Purchase Agreement shall have been consummated prior to, or are being consummated simultaneously with, the Merger. (g) All material actions by or in respect of or filings with any Governmental Entity required for the consummation of the transactions contemplated hereby shall have been obtained or made. 48 57 (h) The management agreement of ACT with FIC Management, Inc. to be effective at the Effective Time shall be amended and restated to read substantially in the form of Exhibit D hereto. SECTION 7.2 Conditions to Obligations of ICH. The obligations of ICH to effect the Merger and to consummate the other transactions contemplated hereby contemplated to occur on the Closing Date are further subject to the following conditions, any one or more of which may be waived by ICH: (a) The representations and warranties of ACT set forth in this Agreement shall be true and correct as of the Closing Date, as though made on and as of the Closing Date, except to the extent the representation or warranty is expressly limited by its terms to another date, and ICH shall have received a certificate (which certificate may be qualified by Knowledge to the same extent as such representations and warranties of ACT contained herein are so qualified) signed on behalf of ACT by its chief executive officer or chief financial officer to such effect. This condition shall be deemed satisfied unless any or all breaches of ACT's representations and warranties in this Agreement (without giving effect to any materiality qualification or limitation) could reasonably be expected to have a Material Adverse Effect on ACT. (b) ACT shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Effective Time, and ICH shall have received a certificate signed on behalf of ACT by its chief executive officer or its chief financial officer to such effect. (c) Since the date of this Agreement, there shall have been no change that could reasonably be expected to have a Material Adverse Effect on ACT, and ICH shall have received a certificate signed on behalf of ACT by its chief executive officer or chief financial officer to such effect. (d) ICH shall have received an opinion of Locke Liddell & Sapp LLP, counsel to ACT, dated as of the Closing Date, reasonably satisfactory to ICH, that, commencing with its taxable year ended December 31, 1998 through the Closing Date, ACT was organized in conformity with the requirements for qualification as a REIT under the Code and has so qualified during such period, and that, after giving effect to the transactions contemplated hereby, ACT's proposed method of operation will enable it to continue to meet the requirements for qualification and taxation as a REIT under the Code during such period (with customary exceptions, assumptions and qualifications and based upon customary representations). (e) ICH shall have received an opinion dated as of the Closing Date from Skadden, Arps, Slate, Meagher & Flom LLP, counsel to ICH, to the effect that the Merger will qualify as a reorganization under the provisions of Section 368(a) of the Code (with customary exceptions, assumptions, qualifications and based upon customary representations). 49 58 (f) All consents and waivers (including, without limitation, waivers of rights of first refusal) from third parties necessary in connection with the consummation of the transactions contemplated hereby shall have been obtained, other than such consents and waivers from third parties, which, if not obtained, would not result, individually or in the aggregate, in a Material Adverse Effect on ICH or ACT. (g) ICH shall have received an opinion from Locke Liddell & Sapp LLP, legal counsel to ACT, substantially in the form attached hereto as Exhibit E (with customary exceptions, assumptions, qualifications and based upon customary representations). SECTION 7.3 Conditions to Obligations of ACT. The obligation of ACT to effect the Merger and to consummate the other transactions contemplated thereby contemplated to occur on the Closing Date is further subject to the following conditions, any one or more of which may be waived by ACT: (a) The representations and warranties of ICH set forth in this Agreement shall be true and correct as of the Closing Date, as though made on and as of the Closing Date, except to the extent the representation or warranty is expressly limited by its terms to another date, and ACT shall have received a certificate (which certificate may be qualified by Knowledge to the same extent as the representations and warranties of ICH contained herein are so qualified) signed on behalf of ICH by its chief executive officer or chief financial officer to such effect. This condition shall be deemed satisfied unless any or all breaches of ICH's representations and warranties in this Agreement (without giving effect to any materiality qualification or limitation) could reasonably be expected to have a Material Adverse Effect on ICH. (b) ICH shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Effective Time, and ACT shall have received a certificate signed on behalf of ICH by its chief executive officer or chief financial officer to such effect. (c) Since the date of this Agreement, there shall have been no change that could reasonably be expected to have a Material Adverse Effect on ICH, and ACT shall have received a certificate signed on behalf of ICH by its chief executive officer or chief financial officer to such effect. (d) ACT shall have received an opinion of Brown & Wood LLP, tax counsel to ICH, dated as of the Closing Date, reasonably satisfactory to ACT, that, commencing with its taxable year ended December 31, 1997 through the Closing Date, ICH was organized in conformity with the requirements for qualification as a REIT under the Code and has so qualified during such period (with customary exceptions, assumptions and qualifications and based upon customary representations). Locke Liddell & Sapp LLP will be entitled to rely upon such opinion in connection with its opinion to be delivered pursuant to Section 7.2(d). 50 59 (e) ACT shall have received an opinion dated as of the Closing Date from Locke Liddell & Sapp LLP, counsel to ACT, to the effect that the Merger will qualify as a reorganization under the provisions of Section 368(a) of the Code (with customary exceptions, assumptions, qualifications and based upon customary representations). (f) All consents and waivers (including, without limitation, waivers or rights of first refusal) from third parties necessary in connection with the consummation of the transactions contemplated hereby shall have been obtained, other than such consents and waivers from third parties, which, if not obtained, would not result, individually or in the aggregate, in a Material Adverse Effect on ICH or ACT. (g) ACT shall have received an opinion from Skadden, Arps, Slate, Meagher & Flom LLP, legal counsel to ICH, or local Maryland counsel to ICH acceptable to ACT, substantially in the form attached hereto as Exhibit F (with customary exceptions, assumptions, qualifications and based upon customary representations). (h) Either (x) the Average Closing Price shall be equal to or greater than $7.40 or (y) ICH Aggregate Cash shall be not less than $75,000,000. For purposes of this condition, "ICH Aggregate Cash" shall mean the aggregate of the cash and cash equivalents as shown on the consolidated balance sheet of ICH prepared in accordance with GAAP and certified by the chief financial officer of ICH (the "Closing Balance Sheet"), dated as of the fifth Trading Day prior to the Closing Date (the "Closing Cash Amount"), and shall (i) include $25,000,000 attributable to the Impac CMB Trust 1998-C1 asset and the net value (after deducting related debt) from the Interest Only Securities (as defined therein), (ii) exclude cash or cash equivalents obtained by ICH from sales of SPSA 1995-2 or USGI 1992-1 or as a result of a transaction that results in a Lien being placed on any asset of ICH or its Subsidiaries (other than Liens existing on the date of this Agreement in respect of (A) up to $2,710,000 of repo financing relating to Interest Only Securities and (B) up to $1,944,000 of repo financing relating to the USGI 1992-1) without ACT's prior written consent (which consent may be withheld in ACT's sole discretion) and (iii) include the cost of any future investments made by ICH after the date hereof that have been specifically approved by ACT. Also for purposes of this condition, "Average Closing Price" shall mean the average of the closing prices per share of ICH Common Stock on the American Stock Exchange as reported by the Wall Street Journal for the 20 consecutive Trading Days ending on the fifth Trading Day prior to the Closing Date; and "Trading Day" shall mean any day on which shares of ICH Common Stock are traded on the American Stock Exchange. (i) The Closing Cash Amount as of the Effective Time shall be equal to or greater than the amount shown on the Closing Balance Sheet, and ACT shall have received a certificate signed on behalf of ICH by its chief financial officer to such effect. (j) The optional termination described in the Impac CMB Trust 1998-C1 documents owned by ICH shall have been sold. 51 60 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER SECTION 8.1 Termination. This Agreement may be terminated at any time prior to the filing of the Maryland Articles of Merger with the State Department of Assessments and Taxation of Maryland and the filing of the Texas Articles of Merger with the County Clerk of the County of Dallas, Texas, whether before or after either of the Shareholder Approvals are obtained: (a) by the mutual written consent of the Boards of Directors or Trust Managers, as the case may be, of ICH and ACT; (b) by ICH or ACT, if (i) the Effective Time shall not have occurred before December 31, 1999, (ii) any Governmental Entity, the consent of which is a condition to the obligations of ICH and ACT to consummate the transactions contemplated hereby shall have determined not to grant its consent and all appeals of such determination shall have been taken and have been unsuccessful or (iii) any court of competent jurisdiction shall have issued a judgment, order or decree (other than a temporary restraining order) restraining, enjoining or otherwise prohibiting the transactions contemplated hereby and such judgment, order or decree shall have become final and nonappealable; provided, however, that the right to terminate this Agreement pursuant to clause (i) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date; (c) by ICH or ACT, if at the ACT Shareholder Meeting (including any adjournment or postponement thereof) called pursuant to Section 6.1(b), the requisite vote of the holders of ACT Common Shares with respect to the Merger shall not have been obtained; (d) by ICH or ACT, if at the ICH Stockholder Meeting (including any adjournment or postponement thereof) called pursuant to Section 6.1(c), the requisite vote of the holders of shares of ICH Stock shall not have been obtained; (e) by ICH, if (i) there has been a material breach by ACT of any representation, warranty, covenant, obligation or agreement set forth in this Agreement, which breach has not been cured within ten business days following receipt by ACT of notice of such breach, except for Sections 6.7 and 6.8 hereof as to which any breach thereof by ACT, without regard to materiality, shall allow ICH to terminate this Agreement, or if any representation or warranty of ACT shall have become untrue, in either case such that the conditions set forth in Sections 7.2(a) or 7.2(b), as the case may be, would be incapable of being satisfied by December 31, 1999 (as otherwise extended in accordance with this Agreement); (ii) upon a failure of the condition set forth in Section 7.2(c); (iii) the Board of Trust Managers of ACT shall have withdrawn or modified in a manner adverse to ICH its approval or recommendation of the Merger or this Agreement in order to permit ACT to execute a definitive agreement providing for 52 61 the transactions contemplated by a Superior Proposal; or (iv) the Board of Directors of ICH shall have withdrawn or modified in a manner adverse to ACT its approval or recommendation of the transactions contemplated by this Agreement in order to permit ICH to execute a definitive agreement providing for the transactions contemplated by a Superior Proposal; provided, however, that the right to terminate this Agreement pursuant to this Section 8.1(e) shall not be available to ICH if it, at such time, is in material breach of any representation, warranty, covenant or agreement set forth herein; or (f) by ACT, if (i) there has been a material breach by ICH of any representation, warranty, covenant, obligation or agreement set forth in this Agreement, which breach has not been cured within ten business days following receipt by ICH of notice of such breach, except for Sections 6.7 and 6.8 hereof as to which any breach thereof by ICH, without regard to materiality, shall allow ACT to terminate this Agreement, or if any representation or warranty of ICH shall have become untrue, in either case such that the conditions set forth in Sections 7.3(a) or 7.3(b), as the case may be, would be incapable of being satisfied by December 31, 1999 (as otherwise extended in accordance with this Agreement); (ii) upon a failure of the condition set forth in Sections 7.3(c) or 7.3(h); (iii) the Board of Directors of ICH shall have withdrawn or modified in a manner adverse to ACT its approval or recommendation of the Merger or this Agreement in order to permit ICH to execute a definitive agreement providing for the transactions contemplated by a Superior Proposal; or (iv) the Board of Trust Managers of ACT shall have withdrawn or modified in a manner adverse to ICH its approval or recommendation of the transactions contemplated by this Agreement in order to permit ACT to execute a definitive agreement providing for the transactions contemplated by a Superior Proposal; provided, however, that the right to terminate this Agreement pursuant to this Section 8.1(f) shall not be available to ACT if it, at such time, is in material breach of any representation, warranty, covenant or agreement set forth herein. SECTION 8.2 Expenses; Termination Fee. (a) Except as otherwise specified in this Section 8.2 or agreed in writing by the parties, all out-of-pocket costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such cost or expense, except that those expenses incurred in connection with the printing and mailing of the Proxy Statement and the Registration Statement, as well as the filing fee related thereto, shall be shared equally by ACT and ICH. (b) If this Agreement is terminated pursuant to Sections 8.1(c), 8.1(e)(i), 8.1(e)(ii), 8.1(e)(iii) or 8.1(f)(iv), and if ACT is not entitled to terminate this Agreement by reason of Sections 8.1(b), 8.1(d), 8.1(f)(i), 8.1(f)(ii) or 8.1(f)(iii), then, in addition to any other rights or remedies that may be available, ACT shall promptly (and in any event within two business days of receipt by ACT of written notice from ICH) pay to ICH (by wire transfer of immediately available funds to an account designated by ICH) the Termination Fee and the Termination Expenses (as each such term is defined below). No termination of this Agreement 53 62 pursuant to this Section 8.2 (b) shall be effective until receipt by ICH of the Termination Fee and the Termination Expenses. (c) If this Agreement terminated pursuant to Sections 8.1(d), 8.1(f)(i), 8.1(f)(ii), 8.1(f)(iii) or 8.1(e)(iv), and if ICH is not entitled to terminate this Agreement by reason of Sections 8.1(b), 8.1(c), 8.1(e)(i), 8.1(e)(ii) or 8.1(e)(iii), then, in addition to any other rights or remedies that may be available, ICH shall promptly (and in any event within two business days of receipt by ICH of written notice from ACT) pay to ACT (by wire transfer of immediately available funds to an account designated by ACT) the Termination Fee and the Termination Expenses. No termination of this Agreement pursuant to this Section 8.2 (c) shall be effective until receipt by ACT of the Termination Fee and the Termination Expenses. (d) The payment of the Termination Fee shall be compensation and liquidated damages for the loss suffered by ACT or ICH, as the case may be, as the result of the failure of the Merger to be consummated and to avoid the difficulty of determining damages under the circumstances and neither ACT nor ICH shall have any other liability to the other, other than as specified in this Section 8.2. (e) As used herein: (i) The "Termination Fee" shall be an amount equal to the lesser of (x) $5,000,000 (the "Base Amount") and (y) the sum of (A) the maximum amount that can be paid to ICH or ACT without causing it to fail to meet the requirements of Sections 856(c) (2) and (3) of the Code determined as if the payment of such amount did not constitute income described in Sections 856(c) (2) (A)-(H) and 856(c) (3) (A)-(I) of the Code ("Qualifying Income"), as determined by independent accountants to ICH or ACT, as the case may be, and (B) in the event that ICH or ACT, as the case may be, receives an opinion from outside counsel (the "Termination Tax Opinion") to the effect that receipt of the Base Amount would either constitute Qualifying Income or would be excluded from gross income within the meaning of Sections 856(c) (2) and (3) of the Code (the "REIT Requirements") or that the receipt of the remaining balance of the Base Amount following the receipt of and pursuant to such opinion would not be deemed constructively received prior thereto, the Base Amount less the amount payable under clause (A) above. A party's obligation to pay any unpaid portion of the Termination Fee shall terminate five years from the date of this Agreement. In the event that ICH or ACT, as the case may be, is not able to receive the full Base Amount, the other party shall place the unpaid amount in escrow and shall not release any portion thereof unless and until ICH or ACT, as the case may be, receives any one or combination of the following: (i) a letter from its independent accountants indicating the maximum amount that can be paid at that time without causing it to fail to meet the REIT Requirements or (ii) a Termination Tax Opinion, in which event ICH or ACT, as the case may be, shall pay to the other party the lesser of the unpaid Base Amount or the maximum amount stated in the letter referred to in (i) above or, as applicable, the Termination Tax Opinion. 54 63 (ii) The "Termination Expenses" shall be an amount equal to the lesser of (x) out-of-pocket expenses incurred by the recipient thereof in connection with this Agreement and the transactions contemplated hereby (including, without limitation, all attorneys', accountants' and investment bankers' fees and expenses) but in no event in an amount greater than $250,000 (the "Expense Fee Base Amount") and (y) the sum of (A) the maximum amount that can be paid to ICH or ACT, as the case may be, without causing it to fail to meet the requirements of Sections 856(c) (2) and (3) of the Code determined as if the payment of such amount did not constitute Qualifying Income, as determined by independent accountants to ICH or ACT, as the case may be, and (B) in the event ICH or ACT, as the case may be, receives a Termination Tax Opinion to the effect that the receipt by ICH or ACT, as the case may be, of the Expense Fee Base Amount would either constitute Qualifying Income or would be excluded from gross income within the meaning of the REIT Requirements or that receipt by ICH or ACT, as the case may be, of the remaining balance of the Expense Fee Base Amount following the receipt of and pursuant to such opinion would not be deemed constructively received prior thereto, the Expense Fee Base Amount less the amount payable under clause (A) above. In the event that ICH or ACT, as the case may be, is not able to receive the full Expense Fee Base Amount, such party shall place the unpaid amount in escrow and shall not release any portion thereof to the other party unless and until ICH or ACT, as the case may be, receives any one or combination of the following: (i) a letter from its independent accountants indicating the maximum amount that can be paid at that time without causing it to fail to meet the REIT Requirements or (ii) a Termination Tax Opinion, in which event ICH or ACT, as the case may be, shall pay to the other party the lesser of the unpaid Expense Fee Base Amount or the maximum amount stated in the letter referred to in the immediately preceding clause (i) above or, as applicable, the Termination Tax Opinion. SECTION 8.3 Effect of Termination. In the event of termination of this Agreement by either ACT or ICH as provided in Section 8.1, this Agreement shall forthwith become void and have no effect, without any liability or obligation on the part of ICH or ACT, other than the last sentence of Section 6.2, Section 8.2 and this Section 8.3. Notwithstanding the foregoing, no party shall be relieved from liability for any willful, material breach of this Agreement. SECTION 8.4 Amendment. This Agreement may be amended by the parties in writing by action of their respective Boards of Directors or Trust Managers, as the case may be, at any time before or after any Shareholder Approvals are obtained and prior to the filing of the Maryland Articles of Merger with the State Department of Assessments and Taxation of Maryland and the filing of the Texas Articles of Merger with the County Clerk of the County of Dallas, Texas; provided, however, that, after the Shareholder Approvals are obtained, no such amendment, modification or supplement shall alter the amount or change the form of the consideration to be delivered to ACT's shareholders or alter or change any of the terms or conditions of this Agreement if such alteration or change would adversely affect ACT's shareholders or ICH's stockholders, in each case without further approval of such affected Persons. 55 64 SECTION 8.5 Extension; Waiver. At any time prior to the Effective Time, the parties may (a) extend the time for the performance of any of the obligations or other acts of the other party, (b) waive any inaccuracies in the representations and warranties of the other party contained in this Agreement or in any document delivered pursuant to this Agreement or (c) subject to the proviso of Section 8.4, waive compliance with any of the agreements or conditions of the other party contained in this Agreement. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. ARTICLE IX GENERAL PROVISIONS SECTION 9.1 Nonsurvival of Representations and Warranties. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time. This Section 9.1 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time. SECTION 9.2 Notices. All notices, requests, claims, demands and other communications under this Agreement shall be in writing and shall be deemed given if delivered personally, sent by overnight courier (providing proof of delivery) to the parties or sent by telecopy (providing confirmation of transmission) at the following addresses or telecopy numbers (or at such other address or telecopy number for a party as shall be specified by like notice): (a) if to ICH, to Impac Commercial Holdings c/o FIC Management, Inc. 1301 Avenue of the Americas New York, NY 10019 Attention: Randal A. Nardone Telecopy: (212) 798-6120 with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Attention: J. Gregory Milmoe Telecopy: (212) 735-2000 56 65 (b) if to ACT, to AMRESCO Capital Trust 700 North Pearl Street, Suite 2400 Dallas, Texas 75201 Attention: Jonathan S. Pettee Telecopy: (214) 953-7817 with a copy to: Locke Liddell & Sapp LLP 2001 Ross Avenue, Suite 2300 Dallas, Texas 75201 Attention: Bryan L. Goolsby Telecopy: (214) 740-8800 SECTION 9.3 Certain Definitions. For purposes of this Agreement: An "Affiliate" of any Person means another Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first Person. "ACT Disclosure Letter" means the letter previously delivered to ICH by ACT disclosing certain information in connection with this Agreement. "ICH Disclosure Letter" means the letter previously delivered to ACT by ICH disclosing certain information in connection with this Agreement. "Knowledge" where used herein with respect to ACT shall mean the actual knowledge of the persons named in Schedule 9.3 to the ACT Disclosure Letter and where used with respect to ICH shall mean the actual knowledge of the persons named in Schedule 9.3 to the ICH Disclosure Letter. "Material Adverse Effect," with respect to any Person, shall mean a material adverse effect (or any development that, insofar as reasonably can be foreseen, in the future is reasonably likely to have a material adverse effect) on the business, assets, financial or other condition, results of operations or prospects of such Person and its Subsidiaries, taken as a whole. "Person" means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity. "Subsidiary" of any Person means any Affiliate controlled by such Person directly or indirectly through one or more intermediaries. 57 66 SECTION 9.4 Interpretation. When a reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." SECTION 9.5 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. SECTION 9.6 Entire Agreement; No Third-Party Beneficiaries. This Agreement, the Confidentiality Agreements and the other agreements entered into in connection with the transactions contemplated hereby (a) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter of this Agreement and (b) except for the provisions of Article II and Section 6.11, are not intended to confer upon any Person other than the parties hereto any rights or remedies. SECTION 9.7 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflict of laws thereof. SECTION 9.8 Assignment. Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned or delegated, in whole or in part, by operation of law or otherwise by either of the parties without the prior written consent of the other party. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. SECTION 9.9 Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any current or future law, and if the rights or obligations of the parties under this Agreement would not be materially and adversely affected thereby, such provision shall be fully separable, and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part thereof, the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance therefrom. In lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as a part of this Agreement, a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible, and the parties hereto request the court or any arbitrator to whom disputes relating to this Agreement are submitted to reform the otherwise illegal, invalid or unenforceable provision in accordance with this Section 9.9. 58 67 SECTION 9.10 Attorneys' Fees. If any action at law or equity, including an action for declaratory judgement, is brought to enforce or interpret any provision of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and expenses from the other party, which fees and expenses shall be in addition to any other relief that may be rewarded. 59 68 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above. IMPAC COMMERCIAL HOLDINGS, INC. By: /s/ Randal A. Nardone -------------------------------- Name: Randal A. Nardone Title: Chief Operating Officer AMRESCO CAPITAL TRUST By: /s/ Jonathan S.Pettee -------------------------------- Name: Jonathan S. Pettee Title: President 60 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1999 APR-01-1999 JUN-30-1999 3,770 26,099 5,431 0 0 0 68,963 397 234,664 2,103 0 0 0 100 129,264 234,664 0 5,743 0 0 1,529 438 1,069 2,707 0 2,707 0 0 0 2,707 0.27 0.27
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