Exhibit 99 (c)
CONSOLIDATED FINANCIAL STATEMENTS
ARCap Investors, L.L.C. and Subsidiaries
YEAR ENDED DECEMBER 31, 2002
ARCap Investors, L.L.C. and Subsidiaries
Consolidated Financial Statements
Year ended December 31, 2002
CONTENTS
Report of Independent Auditors.................................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheet.................. ..................................2
Consolidated Statement of Operations...........................................3
Consolidated Statement of Members' Equity.... .................................4
Consolidated Statement of Cash Flows.......... ................................5
Notes to Consolidated Financial Statements.....................................6
INDEPENDENT AUDITORS' REPORT
The Board of Managers
ARCap Investors, L.L.C.
We have audited the accompanying consolidated balance sheet of ARCap Investors,
L.L.C. and subsidiaries (the Company) as of December 31, 2002, and the related
consolidated statements of operations, members' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ARCap Investors,
L.L.C. and subsidiaries at December 31, 2002, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Dallas, Texas
February 4, 2003
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31, 2002
-----------------
Investment securities - trading,
net (Note 3) $798,856,791
Accrued interest receivable 9,243,042
Cash and cash equivalents 4,953,388
Deferred borrowing costs, net (Note 5) 4,453,750
Restricted cash - CBO swap (Note 5) 4,325,848
Other assets 722,261
------------
Total assets $822,555,080
============
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Long-term debt (Note 5) $236,000,000
Repurchase agreements (Note 6) 155,423,000
Accrued interest payable 4,853,757
Borrowed investment securities and
interest rate swap, net (Note 4) 4,487,562
CBO swap liability (Note 5) 4,125,000
Accrued expenses 208,455
------------
Total liabilities 405,097,774
------------
Commitments and contingencies
Minority interest in consolidated entities 192,337,631
Members' equity:
Series A preferred members 147,340,254
Common members 77,779,421
Total members' equity 225,119,675
------------
Total liabilities and members' equity $822,555,080
============
See notes to consolidated financial statements
2
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
December 31, 2002
-----------------
Revenues:
Interest income - CMBS $ 76,306,706
Other investment income 2,175,975
------------
Total revenues 78,482,681
------------
Expenses:
Interest - long-term debt and repurchase agreements 20,527,438
Interest - borrowed investment securities and
interest rate swap, net 7,287,485
Financing fee 1,180,000
Salaries and employee benefits 5,508,718
General and administrative 4,442,601
------------
Total expenses 38,946,242
------------
Net margin on CMBS and other investments 39,536,439
Other revenue (expense):
Accretion of purchase discount 17,137,362
Loss on trading securities, net (Note 7) (11,068,375)
------------
6,068,987
Income before minority interest 45,605,426
Minority interest (14,456,330)
------------
Net income $ 31,149,096
============
See notes to consolidated financial statements
3
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
YEAR EMDED DECEMBER 31, 2002
Series A
Common Preferred
Members Members Total
------------------------------------------------
Balance at January 1, 2002 $ 78,156,400 $145,827,125 $223,983,525
Costs to raise capital of
consolidated subsidiaries (386,470) (863,826) (1,250,296)
Distributions (10,890,994) (17,871,656) (28,762,650)
Net income 10,900,485 20,248,611 31,149,096
------------ ------------ ------------
Balance at December 31, 2002 $ 77,779,421 $147,340,254 $225,119,675
============ ============ ============
See notes to consolidated financial statements
4
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
December 31, 2002
-----------------
OPERATING ACTIVITIES
Net income $ 31,149,096
Adjustments to reconcile net income to net cash
used in operating activities:
Loss on trading securities, net 11,068,375
Accretion of purchase discount (17,137,362)
Amortization of deferred borrowing costs 680,930
Minority interest 14,456,330
Changes in operating assets and liabilities:
Investment securities - trading, net (205,485,635)
Accrued interest receivable (3,410,351)
Restricted cash - CBO swap (73,117)
Other assets (93,381)
Accrued interest payable 1,616,725
Borrowed investment securities and interest rate swap, net (14,765,069)
Accrued expenses (190,995)
-------------
Net cash used in operating activities (182,184,454)
-------------
FINANCING ACTIVITIES
Distributions to members (28,762,650)
Contributions from minority interest members 148,576,742
Distributions to minority interest members (14,093,989)
Costs to raise capital (1,350,296)
Proceeds from repurchase agreements 69,321,000
-------------
Net cash provided by financing activities 173,690,807
-------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (8,493,647)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 13,447,035
-------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,953,388
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest on repurchase agreements
and long-term debt $ 20,489,835
=============
See notes to consolidated financial statements
5
s
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
A) Organization - ARCap Investors, L.L.C. (the Company) was incorporated in
January 1999 and commenced its operations on March 17, 1999. The Company was
organized to invest primarily in subordinated commercial mortgage-backed
securities (CMBS).
B) Principles of Consolidation - The consolidated financial statements include
the accounts of:
- The Company.
- ARCap REIT, Inc. (ARCap REIT), a majority-owned subsidiary of the
Company.
- ARCAP Resecuritization Corporation (ARCap Resecuritization), a wholly
owned subsidiary of ARCap REIT. ARCap Resecuritization owns all the
residual interest in Commercial Resecuritization Trust 2001 ABC-2 (the
Trust).
- ARCap High Yield CMBS Fund, L.L.C. (the High Yield Fund), of which
ARCap REIT owned an approximate 23% controlling interest as of
December 31, 2002. The High Yield Fund owns approximately 60% of ARCap
CMBS Fund REIT, Inc. (the Fund REIT).
- ARCap Diversified Risk CMBS Fund, L.L.C. (the Diversified Risk Fund),
of which ARCap REIT owned an approximate 1% controlling interest as of
December 31, 2002. The Diversified Risk Fund owns approximately 40% of
the Fund REIT.
- ARCap Special Servicing, Inc. (Special Servicing), a taxable REIT
subsidiary wholly owned by ARCap REIT.
Minority interests primarily represent outside members' approximate 77%
ownership in the High Yield Fund and outside members' approximate 99% ownership
in the Diversified Risk Fund. The Company has consolidated the High Yield Fund
and Diversified Risk Fund as it exercises control (through ARCap REIT, which
acts as the Managing Member of both Funds in accordance with the terms of the
respective LLC agreements) over the operations of these Funds. The Company
records minority interest expense (income) that reflects the portion of the
earnings (losses) of the operations which is applicable to the minority interest
members.
Separate books of accounts are maintained for ARCap REIT, ARCap
Resecuritization, the Trust, the High Yield Fund, the Fund REIT, the Diversified
Risk Fund, and Special Servicing and are reflected in the accompanying
consolidated financial statements of the Company. All material intercompany
transactions and account balances have been eliminated in consolidation.
C) Investment Securities - The Company's investment security transactions are
recorded on the trade date for existing securities and the settlement date for
to-be-issued securities. CMBS are designated as trading assets since the Company
is holding the securities for possible sales or other dispositions in the near
term. Such securities are carried at their estimated fair value, with unrealized
gains or losses included in earnings.
The fair value of the Company's portfolio of CMBS is generally estimated by
management based on market prices provided by certain dealers who make a market
in these financial instruments. The market for the Company's CMBS may lack
liquidity and have limited market volume. Accordingly, the fair values reported
reflect estimates and may not necessarily be indicative of the amounts that the
Company could realize in a current market exchange.
The yield to maturity on the Company's CMBS depends on, among other things, the
rate and timing of principal payments, the pass-through rate and interest rate
fluctuations. The subordinated CMBS interests owned by the Company provide
credit support to the more senior interests of the related commercial
securitization. Cash flow from the mortgages underlying the CMBS interests
generally is allocated first to the senior interests, with the most senior
interest having a priority entitlement to cash flow. Remaining cash flow is
allocated generally among the other CMBS interests in order of their relative
seniority. To the extent that there are defaults and unrecoverable losses on the
underlying mortgages that result in reduced cash flows, the most subordinated
CMBS interest will bear this loss first. To the extent that there are losses in
excess of the most subordinated interest's stated entitlement to principal and
interest, then the remaining CMBS interests will bear such losses in order of
their relative subordination.
D) Revenue Recognition - Interest income and special servicing fees are
recognized as earned. Accretion of discounts is computed using the
effective-yield method over the life of the underlying assets.
E) Derivative Financial Instruments - Derivative financial instruments are
utilized by the Company to reduce interest rate risk. The Company utilizes
interest rate swaps and cap and floor agreements as a means of hedging the
potential financial statement impact of changes in the fair value of its
portfolio of CMBS and variable rate long-term debt due to changes in interest
rates. Risks in these contracts arise from the movements in interest rates and
from the possible inability of counterparties to meet the terms of their
contracts. The Company carries its derivative financial instruments at fair
6
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
value with any unrealized gain or loss included in earnings, in accordance with
the provisions of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities.
F) Resale and Repurchase Agreements - Transactions involving purchases of
securities under agreements to resell (reverse repurchase agreements or reverse
repos) or sales of securities under agreements to repurchase (repurchase
agreements or repos) are accounted for as collateralized financings, except
where the Company does not have an agreement to sell (or purchase) the same or
substantially the same securities before maturity at a fixed or determinable
price.
G) Cash and Cash Equivalents - Cash and cash equivalents include all highly
liquid investments with original maturities when purchased of three months or
less.
H) Restricted Cash - Restricted cash represents amounts required to be pledged
under interest rate cap and floor agreements (see Note 5).
I) Deferred Borrowing Costs - Deferred borrowing costs represent costs incurred
in connection with the issuance of long-term debt. Such amounts are amortized
using the effective interest method over the term of the related debt (see Note
5).
J) Financing Fee - The Company pays an annual rate of 0.50% of the face of its
existing long-term debt to a financier to provide credit enhancement of such
debt.
K) Income Taxes - The Company has elected to be taxed as a partnership, whereby
all income is taxed at the member level, with the exception of Special Servicing
which is taxed at the entity level. ARCap REIT has elected to be taxed as a real
estate investment trust for federal income tax purposes.
No provision for income taxes has been made for Special Servicing for the period
April 1, 2002 (inception of Special Servicing) through December 31, 2002 as
Special Servicing did not generate any taxable income.
L) Use of Estimates - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect reported
amounts of certain assets, liabilities, revenues, and expenses. Actual results
could differ from those estimates.
M) Fair Value of Financial Instruments - The estimated fair value amounts herein
have been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
material effect on the estimated fair value amounts.
The Company's portfolio of CMBS and securities borrowed is carried at their
estimated fair values. The Company's management believes that the fair values of
its cash and cash equivalents, restricted cash, and repurchase agreements
approximate their carrying values due to the nature of the instruments or the
fact that their terms approximate current market terms.
NOTE 2. MEMBERS' EQUITY
The Limited Liability Company Agreement (LLC Agreement) establishes two classes
of membership: Series A Preferred members and Common members.
Cash Flows are distributed in the following order of priority:
- To the Series A Preferred members in an amount equal to the accrued
and unpaid Preferred Distributions (12% per annum of the $25.00 price
per Unit).
- To the Common members in an amount equal to (a) during the 18-month
period that ended February 4, 2002, the amount determined by the Board
of Managers, but no more than a cumulative return on the Common Units
at the rate of 10% per annum on an established value of $21.74 per
7
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
unit, and (b) subsequent to such 18-month period, the amount
determined by the Board of Managers, provided that if the amount
distributable to the Common members shall exceed a cumulative annual
return on the Common Units of 12% per annum, the Board of Managers
shall notify the Series A Preferred members 30 days in advance of the
record date for distribution of Cash Flow.
- To the extent that any remaining Cash Flow received during such tax
period is not includable in the income of the Company, to members that
have been allocated Net Profits in excess of amounts actually
distributed to such members, in proportion to such amounts.
Net Profits of the Company are allocated as follows:
- To the Series A Preferred members to the extent of amounts distributed
or distributable to them in such taxable year.
- To the Series A Preferred members to the extent Net Losses previously
allocated to such members exceed undistributed Net Profits previously
allocated to them.
- To the Common members to the extent of amounts distributed or
distributable to them in such taxable year.
- To the Common members to the extent Net Losses previously allocated to
such members exceed undistributed Net Profits previously allocated to
them.
- To the members in proportion to their Percentage Interests.
Net Losses of the Company are allocated as follows:
- To the members in an amount equal to undistributed Net Profits
allocated to such member.
- To the Common members pro rata to the extent of their Capital
Accounts.
- To the Series A Preferred members pro rata to the extent of their
Capital Accounts.
Series A Preferred Units
- ------------------------
Series A Preferred Units are convertible into Common Units at the Conversion
Price in effect on the Conversion Date. If the Series A Preferred Units have not
been converted within five years of the effective date of the First Amendment to
the LLC Agreement (August 4, 2000), Series A Preferred Units may, at the
holder's option, be converted to a note equal to $25.00 per Unit, plus accrued
and unpaid Preferred Distributions.
Eighteen months after the First Closing Date (February 4, 2002), but no later
than the fifth anniversary of the First Closing Date (August 4, 2005), the
Company may redeem the Series A Preferred Units for $25.00 per unit, plus
accrued and unpaid Preferred Distributions, plus a premium that will provide the
Series A Preferred members with a total pretax internal rate of return of
17.50%.
In addition, upon either a change in control or sale or transfer of all or
substantially all of the assets of the Company, Series A Preferred Units may, at
the holder's option, be redeemed at $25.00 per unit, plus accrued and unpaid
Preferred Distributions.
At December 31, 2002, there were a total of 6,000,000 Series A Preferred Units
and 4,999,382 Common Units issued and outstanding.
The LLC Agreement contains certain restrictive covenants regarding the amount of
variable rate debt, total debt, and certain financial ratios. Failure to meet
the covenants in successive quarters can result in the Chief Executive Officer
and Chief Operating Officer being removed from the Board of Managers until such
time as the covenants are cured for successive quarters. Management believes
that the Company has not violated the covenants in successive quarters.
8
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
NOTE 3. INVESTMENT SECURITIES
The Company's trading securities are carried at estimated fair value and are
comprised of the following at December 31, 2002:
Face Cost Fair Value Percentage
----------------------------------------------------------
Subordinated CMBS:
Security rating:
BB+ $ 115,923,711 $ 91,176,800 $103,776,027 12.99%
BB 170,077,178 127,903,052 141,264,695 17.68%
BB- 134,295,076 90,149,121 99,793,698 12.49%
B+ 215,067,722 127,005,619 137,774,880 17.25%
B 264,721,814 151,661,428 144,486,471 18.09%
B- 161,254,347 79,612,839 70,601,239 8.84%
NR 420,501,779 110,757,808 101,159,781 12.66%
--------------- ------------- ------------ -------
$ 1,481,841,627 $ 778,266,667 $798,856,791 100.00%
=============== ============= ============ =======
The Company accretes purchase discounts using the effective yield method over
the life of the CMBS. The accumulated accretion of purchase discounts at
December 31, 2002, was approximately $30,627,000.
The gross cumulative unrealized gains and losses on the Company's trading
investment securities at December 31, 2002, were approximately $41,709,000 and
($51,746,000), respectively.
NOTE 4. BORROWED INVESTMENT SECURITIES AND INTEREST RATE SWAP, NET
The Company's borrowed investment securities and interest rate swap are carried
at estimated fair value and are comprised of the following at December 31, 2002:
Security Coupon Cost Fair Unrealized
Description Rate Face Basis Value Gain (Loss)
- ------------------------------------------------------------------------------------------------------
U.S. Treasury (08-15-09) 6.000% $ (11,239,000) $ (10,974,728) $( 13,072,362) $ (2,097,634)
U.S. Treasury (02-15-11) 5.000% (17,818,000) (17,523,195) (19,591,448) (2,068,253)
U.S. Treasury (08-15-11) 5.000% (136,603,000) (138,334,790) (149,900,450) (11,565,660)
U.S. Treasury (02-15-12) 4.875% (85,300,000) (91,513,064) (92,697,111) (1,184,047)
U.S. Treasury (11-15-12) 4.000% (20,468,000) (20,336,877) (20,775,020) (438,143)
-------------- -------------- -------------- ------------
$(271,428,000) $( 278,682,654) (296,036,391) $(17,353,737)
============== =============== =============
Reverse repurchase agreements 295,618,149
-------------
Borrowed investment securities, net (418,242)
Interest rate swap (4,069,320)
-------------
Borrowed investment securities and
interest rate swap, net $ (4,487,562)
==============
The borrowed U.S. Treasury securities were sold in the open market (i.e., a
"short" security sale). The Company is obligated to return the securities in the
future and is therefore exposed to price risk until it repurchases the
securities for delivery to the lender. Short security sales are used by the
Company to modify its interest rate risk. The Company must pay the security
lender the interest earned by the underlying security. Short security sales are
recorded at the estimated fair value of the borrowed securities, and any
unrealized gains (losses) are included in earnings.
Proceeds from short security sales are used to purchase reverse repurchase
agreements of the same security. The transactions are governed by one master
repurchase agreement with rights of offset and, therefore, the values of the
short security sales and reverse repurchase agreements have been offset and
shown as one line item in the accompanying consolidated financial statements. It
has been the Company's practice to settle these transactions on a net basis.
9
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
At December 31, 2002, the Company pledged CMBS valued at approximately
$10,363,000 as additional collateral against the borrowed investment securities
outstanding as of December 31, 2002.
The Company entered into an interest rate swap agreement with Bear Stearns
Capital Markets (Bear Stearns) with a notional amount at December 31, 2002, of
$27,000,000, on which the Company pays a fixed rate of 6.015% and receives a
variable rate based upon a six-month LIBOR for a term of 10 years ending April
27, 2011. The swap agreement calls for interest to be paid semiannually in
arrears. The Company carries the swap agreement at its estimated fair value,
with all periodic changes in estimated fair value recognized in earnings. The
Company was required under the swap agreement to pledge collateral valued at 1%
of the notional amount of the swap to ensure its performance in the event that
the swap declines in value. At December 31, 2002, the Company pledged CMBS
valued at approximately $14,611,000 as additional collateral against the
interest rate swap outstanding as of December 31, 2002.
NOTE 5. LONG-TERM DEBT
During fiscal year 2001, the Company entered into an agreement to sell its
interests in 50 CMBS pass-through certificates (the Pooled Certificates) to its
subsidiary, the Trust.
The Trust resecuritized the Pooled Certificates and offered $98,500,000 Class
A-1 Senior Notes with a fixed coupon rate of 7.17% (Fixed Rate Notes) and
$137,500,000 Class A-2 Senior Notes with a variable coupon rate based on
one-month LIBOR plus 115 basis points (Variable Rate Notes) (together, the
Notes). The Notes are secured by the investment securities of the Company with a
carrying value of approximately $345,512,000 at December 31, 2002. The Company
capitalized $5,667,580 of deferred borrowing costs related to the issuance of
the Notes. The deferred borrowing costs are being amortized, using the
effective-interest method, over the life of the debt, which is seven years
(through February 22, 2008). The Company amortized $680,930 of deferred costs
for the year ended December 31, 2002. Total accumulated amortization of deferred
borrowing costs at December 31, 2002, was $1,213,830.
In conjunction with the issuance of the Variable Rate Notes, the Company entered
into an interest rate cap agreement and an interest rate floor agreement with
Bear Stearns (CBO Swap) to effectively fix the interest rate on its variable
rate debt at 7.435%. The notional amount for the CBO Swap is $137,500,000. The
agreements call for interest to be paid monthly. The Company carries the CBO
Swap at its estimated fair value, with all periodic changes in estimated fair
value recognized in earnings. The Company originally deposited $4,125,000 of
cash to ensure its performance in the event that the CBO Swap declines in value.
If the market value of the CBO Swap falls below defined thresholds, the Company
may be required to deposit additional restricted cash. Amounts in excess of the
minimum requirements may be withdrawn by the Company.
Interest on the Notes is paid monthly. Interest expense on the Notes was
approximately $17,238,000 for the year ended December 31, 2002, and the related
accrued interest payable at December 31, 2002, was approximately $480,000.
NOTE 6. REPURCHASE AGREEMENTS
The Company entered into repurchase agreements to finance a portion of its CMBS
purchases. The weighted-average interest rate as of December 31, 2002, was
2.73%, and the average maturity of the agreements was 30 days. The repurchase
agreements are collateralized by a portion of the Company's portfolio of CMBS
investments with a fair value of approximately $284,943,000 at December 31,
2002. Accrued interest payable at December 31, 2002, was approximately $209,000.
NOTE 7. LOSS ON TRADING SECURITIES, NET
The composition of the Company's gain (loss) on trading securities, net for the
year ended December 31, 2002, is as follows:
Unrealized loss - borrowed investment securities $(17,594,455)
Unrealized loss - interest rate swap (3,395,007)
Unrealized loss - CBO Swap (1,408,400)
Unrealized gain - CMBS 12,443,165
Realized loss - CMBS (1,086,698)
Realized loss - borrowed investment securities (26,980)
-------------
Loss on trading securities, net $(11,068,375)
=============
10
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
NOTE 8. OPERATING LEASES
The Company leases its office space and certain equipment under operating leases
that expire between April 2004 and January 2007. The office lease, as amended,
provides for an annual basic rental of $206,244 during the initial lease term
and contains an option to extend the term of the lease for one extension term of
five years, with the basic rental being reset at the then market rate. Future
minimum lease payments under these leases are as follows:
2003 $313,851
2004 243,455
2005 207,384
2006 206,244
2007 17,187
--------
Total $988,121
========
Lease expense for the year ended December 31, 2002 was approximately $316,000.
NOTE 9. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
At times, the Company purchases investment securities from members of the
Company or their affiliates. These purchases represent transactions that are in
the normal course of business of the Company and the members. During the year
ended December 31, 2002, the Company purchased from such members CMBS with an
approximate face of $387,327,000 at an approximate purchase price of
$210,382,000.
The Company has loaned approximately $231,000 to key executives for funding of
tax liabilities associated with units granted under an incentive compensation
arrangement. As of December 31, 2002, there is approximately $190,000
outstanding.
These loans are classified as other assets in the consolidated balance sheet.
The loans bear interest at a rate of 7% per annum, and payments are due
quarterly on the distribution date for the Common Units. Payments are due only
to the extent that the quarterly distribution is sufficient to pay them. The
loans become due upon termination of the executives' employment with the
Company, and recourse is limited to the Common Units securing the loans.
Under a fee arrangement, ARCap REIT paid C.P. Eaton & Associates, Inc. a monthly
retainer fee and an incentive fee to assist ARCap REIT in raising capital for
fund operations with respect to which ARCap REIT acts as the Managing Member.
The total costs incurred under this fee arrangement are allocated
proportionately (based on total dollars raised) to all funds for which capital
dollars are raised.
NOTE 10. EMPLOYEE BENEFITS
The Company holds a contributory defined contribution 401(k) plan that covers
substantially all full-time employees. The Company matches participant
contributions up to 3% of each participant's total compensation. Matching
contributions totaled approximately $75,000 for the year ended December 31,
2002.
The Company has a deferred compensation plan for key employees. The Board of
Managers approved the availability of approximately 690,000 phantom appreciation
units and 296,000 phantom grant units for future awards to employees. In order
to grant these awards, the Compensation Committee must recommend that they be
granted, and the Compensation Committee's recommendation must be approved by the
Board of Managers. As of December 31, 2002, the Company has granted
approximately 551,000 and 193,000 appreciation units and grant units,
respectively. The Board of Managers approved the Compensation Committee's
recommendations to grant additional appreciation units and grant units of
approximately 138,000 and 95,000, respectively, effective January 1, 2003.
Grant units granted each have a vesting period, which generally is ratable over
a period of three years. Once vested, employees are entitled to receive a bonus
in an amount equal to the per Unit amount distributed on account of the Common
Units times the number of grant units vested in the employee. The employee is
entitled to this compensation regardless of whether the distribution to the
holders of Common Units is an ordinary distribution or an extraordinary
distribution. Thus, if the Company is sold or liquidated, the employee would be
entitled to share in the proceeds of the sale or liquidation on the same basis
as the holders of Common Units with respect to vested grant units.
Appreciation units granted also have a vesting period which is generally spread
ratably over a three year period. Once vested, employees begin to "earn" the
right to receive compensation on account of each vested appreciation unit by
being credited with an amount equal to the per Unit distributions made to
holders of Common Units until the amount credited equals the Initial Value (i.e.
the price at which a vested employee could obtain the appreciation unit)
established by the Compensation Committee. Vested employees are entitled to
compensation on account of each vested appreciation unit in an amount equal to
the per Unit distributions made to holders of Common Units only after they have
"earned" credits equal to the Initial Value. In the event of a liquidation or
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ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
sale, employees with vested appreciation units are entitled to compensation in
an amount equal to the per Unit proceeds in excess of the Initial Value plus the
credits which have been earned.
The amount actually received by employees on account of the vested grant and
appreciation units is compensation. For the year ended December 31, 2002, the
Company expensed approximately $157,000 relating to compensation paid on account
of vested grant units.
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