<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 1900, 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 May 1, 2000.
<PAGE> 2
AMRESCO CAPITAL TRUST
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 ....................................... 3
Consolidated Statements of Income - For the Three Months Ended March 31, 2000 and 1999 ................... 4
Consolidated Statement of Changes in Shareholders' Equity - For the Three Months Ended March 31, 2000 .... 5
Consolidated Statements of Cash Flows - For the Three Months Ended March 31, 2000 and 1999 ............... 6
Notes to Consolidated Financial Statements ............................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk ......................................... 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................................................... 22
SIGNATURE ................................................................................................... 23
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMRESCO CAPITAL TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31,
2000 December 31,
(unaudited) 1999
---------- ----------
<S> <C> <C>
ASSETS
Mortgage loans held for investment, net ............................................. $ 97,135 $ 96,032
Acquisition, development and construction loan arrangements accounted for as real
estate or investments in joint ventures ........................................... 39,788 44,097
---------- ----------
Total loan investments .............................................................. 136,923 140,129
Allowance for loan losses ........................................................... (5,978) (4,190)
---------- ----------
Total loan investments, net of allowance for losses ................................. 130,945 135,939
Commercial mortgage-backed securities - available for sale (at fair value) .......... 21,319 24,569
Real estate, net of accumulated depreciation of $1,171 and $866, respectively ....... 50,412 50,376
Investments in unconsolidated partnerships and subsidiary ........................... 8,078 11,765
Receivables and other assets ........................................................ 3,218 3,991
Cash and cash equivalents ........................................................... 4,569 4,604
---------- ----------
TOTAL ASSETS ................................................................. $ 218,541 $ 231,244
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and other liabilities ............................................... $ 1,427 $ 2,697
Amounts due to affiliates ............................................................ 532 566
Repurchase agreement ................................................................. 9,798 9,856
Line of credit ....................................................................... 51,900 60,641
Non-recourse debt on real estate ..................................................... 34,600 34,600
Dividends payable .................................................................... -- 4,407
---------- ----------
TOTAL LIABILITIES ............................................................ 98,257 112,767
---------- ----------
Minority interests ................................................................... 300 526
---------- ----------
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
shares issued and outstanding ....................................................... 100 100
Additional paid-in capital ........................................................... 140,998 140,998
Unearned stock compensation .......................................................... (205) (282)
Accumulated other comprehensive income (loss) ........................................ (10,093) (10,812)
Distributions in excess of accumulated earnings ...................................... (10,816) (12,053)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY ................................................... 119,984 117,951
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................... $ 218,541 $ 231,244
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
REVENUES:
Interest income on mortgage loans ..................................... $ 3,002 $ 3,057
Income from commercial mortgage-backed securities ..................... 851 914
Operating income from real estate ..................................... 2,309 346
Equity in earnings (losses) of unconsolidated subsidiary, partnerships
and other real estate venture ...................................... (382) 70
Interest income from short-term investments ........................... 60 86
---------- ----------
TOTAL REVENUES .................................................... 5,840 4,473
---------- ----------
EXPENSES:
Interest expense ...................................................... 1,968 589
Management fees ....................................................... 561 588
General and administrative ............................................ 226 523
Depreciation .......................................................... 560 86
Participating interest in mortgage loans .............................. -- 185
Provision for loan losses ............................................. 1,788 742
---------- ----------
TOTAL EXPENSES .................................................... 5,103 2,713
---------- ----------
INCOME BEFORE GAINS (LOSSES) AND MINORITY INTERESTS ....................... 737 1,760
Loss on sale of commercial mortgage-backed security .................. (130) --
Gains associated with repayment of ADC loan arrangements ............. 637 584
---------- ----------
INCOME BEFORE MINORITY INTERESTS .......................................... 1,244 2,344
Minority interests ................................................... 7 --
---------- ----------
NET INCOME ................................................................ $ 1,237 $ 2,344
========== ==========
EARNINGS PER COMMON SHARE:
Basic ............................................................... $ 0.12 $ 0.23
========== ==========
Diluted ............................................................. $ 0.12 $ 0.23
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ............................................................... 10,000 10,000
========== ==========
Diluted ............................................................. 10,025 10,007
========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock
$.01 Par Value Accumulated Distributions in
------------------ Additional Unearned Other Excess of
Number of Paid-in Stock Comprehensive Accumulated
Shares Amount Capital Compensation Income (Loss) Earnings
---------- ------ ---------- ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period ......... 10,015,111 $ 100 $140,998 $ (282) $ (10,812) $ (12,053)
Total nonowner changes in equity:
Net income ....................... 1,237
Unrealized gains on securities
available for sale:
Unrealized holding gains ......... 449
Reclassification adjustment for
losses included in net income ... 270
Comprehensive income .................
Amortization of unearned trust manager
compensation ....................... 23
Amortization of compensatory options.. 54
---------- ------ -------- ----------- ------------- ----------------
Balance, end of period ............... 10,015,111 $ 100 $140,998 $ (205) $ (10,093) $ (10,816)
========== ====== ======== =========== ============= ================
</TABLE>
<TABLE>
<CAPTION>
Total
Nonowner Total
Changes Shareholders'
in Equity Equity
--------- -------------
<S> <C> <C>
Balance, beginning of period ......... $ 117,951
Total nonowner changes in equity:
Net income ....................... $ 1,237 1,237
Unrealized gains on securities
available for sale:
Unrealized holding gains ......... 449 449
Reclassification adjustment for
losses included in net income ... 270 270
----------
Comprehensive income ................. $ 1,956
==========
Amortization of unearned trust manager
compensation ....................... 23
Amortization of compensatory options.. 54
-------------
Balance, end of period ............... $ 119,984
=============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................... $ 1,237 $ 2,344
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ............................................................ 1,788 742
Depreciation ......................................................................... 560 86
Gains associated with repayment of ADC loan arrangements ............................. (637) (584)
Loss on sale of commercial mortgage-backed security .................................. 130 --
Amortization of prepaid assets ....................................................... 59 59
Discount amortization on commercial mortgage-backed securities ....................... (96) (76)
Amortization of compensatory stock options and unearned trust manager compensation.... 77 190
Amortization of loan commitment fees ................................................. (190) (138)
Receipt of loan commitment fees ...................................................... -- 34
Decrease (increase) in receivables and other assets .................................. 714 (374)
Decrease in interest receivable related to commercial mortgage-backed securities ..... 23 82
Increase (decrease) in accounts payable and other liabilities ........................ (1,270) 60
Decrease in minority interests ....................................................... (26) --
Increase (decrease) in amounts due to affiliates ..................................... (34) 234
Equity in losses (earnings) of unconsolidated subsidiary, partnerships and
other real estate venture ...................................................... 382 (70)
Distributions from unconsolidated subsidiary and partnership ......................... 14 79
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................. 2,731 2,668
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in mortgage loans ............................................................ (2,340) (8,276)
Investments in ADC loan arrangements ..................................................... (531) (8,899)
Sale of mortgage loan to affiliate ....................................................... -- 4,585
Principal collected on mortgage loans .................................................... 1,427 1,260
Principal and interest collected on ADC loan arrangements ................................ 5,023 11,513
Proceeds from sale of commercial mortgage-backed security ................................ 3,784 --
Investments in real estate ............................................................... (341) --
Investments in unconsolidated partnerships and subsidiary ................................ (82) (2,104)
Distributions from unconsolidated subsidiary and partnerships ............................ 3,500 --
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ....................... 10,440 (1,921)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings under repurchase agreement ....................................... (58) --
Repayment of borrowings under line of credit ............................................. (8,741) --
Proceeds from financing provided by affiliate ............................................ -- 312
Dividends paid to common shareholders .................................................... (4,407) (4,002)
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES ..................................... (13,206) (3,690)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ..................................................... (35) (2,943)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................................ 4,604 9,789
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................................................... $ 4,569 $ 6,846
========== ==========
SUPPLEMENTAL INFORMATION:
Interest paid, net of amount capitalized ................................................. $ 1,753 $ 588
========== ==========
Income taxes paid ........................................................................ $ -- $ 25
========== ==========
Minority interest distributions associated with ADC loan arrangements .................... $ 200 $ 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
========== ==========
</TABLE>
See notes to consolidated financial statements
6
<PAGE> 7
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(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, as
amended, 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. For its services during the
period from May 12, 1998 (the Company's inception of operations) through March
31, 2000, the Manager has been 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
has been entitled to receive incentive compensation for each fiscal quarter 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. In addition to the fees described above,
the Manager has also been entitled to receive reimbursement for its costs of
providing certain due diligence and professional services to the Company. The
base management fee, reimbursable expenses and incentive fee, if any, are
payable quarterly in arrears. During the three months ended March 31, 2000, base
management fees and reimbursable expenses charged to the Company totaled
$513,000 and $20,000, respectively. During the three months ended March 31,
1999, base management fees and reimbursable expenses charged to the Company
totaled $447,000 and $34,000, respectively. Since its inception, no incentive
fees have been charged to the Company. On March 29, 2000, the Company's Board of
Trust Managers approved certain modifications to the Manager's compensation
effective as of April 1, 2000. In addition to its base management fee, the
Manager will be entitled to receive reimbursements for its quarterly operating
deficits, if any, beginning April 1, 2000. These reimbursements will be equal to
the excess, if any, of the Manager's operating costs (including principally
personnel and general and administrative expenses) over the sum of its base
management fees and any other fees earned by the Manager from sources other than
the Company. Pursuant to the First Amendment to Management Agreement, the
Manager will no longer be entitled to receive incentive compensation and/or a
termination fee in the event that the Management Agreement is terminated.
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 months
ended March 31, 2000 and 1999, management fees included compensatory option
charges totaling $48,000 and $141,000, respectively.
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. As of March 31, 2000, the
Company owned 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
7
<PAGE> 8
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999 (the "10-K").
The notes to the financial statements included herein highlight significant
changes to the notes included in the 10-K.
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.
3. LOAN INVESTMENTS
As of March 31, 2000, the Company's loan investments are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Interest Interest
Date of Initial Scheduled Collateral Commitment Amount Pay Accrual
Investment Maturity Location Property Type Position Amount Outstanding Rate Rate
- --------------- ------------- -------------- ------------- ---------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien $ 14,700 $ 14,058 10.0% 12.0%
June 1, 1998 June 1, 2001 Houston, TX Office First Lien 11,800 11,305 12.0% 12.0%
June 22, 1998 June 19, 2000 Wayland, MA Office First Lien 45,000 39,681 10.5% 10.5%
July 2, 1998 June 30, 2000 Washington, D.C. Office First Lien 7,000 6,571 10.5% 10.5%
July 10, 1998 July 31, 2000 Pasadena, TX Apartment First Lien 3,350 2,993 10.0% 14.0%
September 30, 1998 February 23, 2001 Sunnyvale, TX Residential Lots First Lien 8,400 2,183 10.0% 14.0%
May 18, 1999 May 19, 2001 Irvine, CA Office First Lien 15,260 13,371 10.0% 12.0%
July 29, 1999 July 28, 2001 Lexington, MA R&D/Bio-Tech First Lien 5,213 2,955 10.9% 13.9%
August 19, 1999 August 15, 2001 San Diego, CA Medical Office First Lien 5,745 4,533 10.9% 10.9%
------- --------
Mortgage loans held for investment 116,468 97,650
------- --------
June 12, 1998 June 30, 2000 Pearland, TX Apartment First Lien 12,827 12,291 10.0% 11.5%
June 19, 1998 June 18, 2000 Houston, TX Office First Lien 24,000 22,235 12.0% 12.0%
July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests 10,068 8,504 10.0% 15.0%
------ -------
ADC loan arrangements 46,895 43,030
------- --------
Total loan investments $ 163,363 $140,680
========= ========
</TABLE>
At March 31, 2000, amounts outstanding under acquisition/rehabilitation loans,
construction loans, acquisition loans and land development loans totaled
$50,162,000, $48,584,000, $39,751,000 and $2,183,000, respectively.
Three of the 12 loan investments provide the Company with the opportunity for
profit participation in excess of the contractual interest accrual rates. The
loan investments are classified as follows (in thousands):
<TABLE>
<CAPTION>
Loan Amount Balance Sheet
Outstanding at Amount at
March 31, 2000 March 31, 2000
-------------- --------------
<S> <C> <C>
Mortgage loans held for investment, net ............... $ 97,650 $ 97,135
Real estate, net ...................................... 34,526 32,560
Investment in real estate venture ..................... 8,504 7,228
------------ ------------
Total ADC loan arrangements ...................... 43,030 39,788
------------ ------------
Total loan investments ................................ $ 140,680 136,923
============
Allowance for loan losses .................................................... (5,978)
------------
Total loan investments, net of allowance for losses .......................... $ 130,945
============
</TABLE>
8
<PAGE> 9
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
March 31, 2000 (in thousands):
<TABLE>
<S> <C>
Land ............................ $ 3,743
Buildings and improvements ...... 29,354
--------
Total ...................... 33,097
Less: Accumulated depreciation .. (537)
--------
$ 32,560
========
</TABLE>
A summary of activity for mortgage loans and ADC loan arrangements accounted for
as real estate or investments in joint ventures for the three months ended March
31, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
Mortgage ADC Loan
Loans Arrangements Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of period .. $ 96,737 $ 46,907 $ 143,644
Investments in loans .......... 2,340 881 3,221
Collections of principal ...... (1,427) (4,758) (6,185)
------------ ------------ ------------
Balance, end of period ........ $ 97,650 $ 43,030 $ 140,680
============ ============ ============
</TABLE>
During the three months ended March 31, 2000, the activity in the allowance for
loan losses was as follows (in thousands):
<TABLE>
<S> <C>
Balance, beginning of period ...... $4,190
Provision for losses .............. 1,788
Charge-offs ....................... --
Recoveries ........................ --
------
Balance, end of period ............ $5,978
======
</TABLE>
As of March 31, 2000, the Company had outstanding commitments to fund
approximately $22,683,000 under 12 loans. 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.
4. COMMERCIAL MORTGAGE-BACKED SECURITIES
As of March 31, 2000, the Company held four commercial mortgage-backed
securities which were acquired at an aggregate purchase price of $30,574,000.
The Company's CMBS available for sale are carried at estimated fair value. At
March 31, 2000, the aggregate amortized cost and estimated fair value of CMBS,
by underlying credit rating, were as follows (in thousands):
<TABLE>
<CAPTION>
Aggregate Aggregate Aggregate Aggregate
Security Amortized Unrealized Unrealized Fair
Rating Cost Gains Losses Value
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BB- $ 4,282 $ -- $ (1,026) $ 3,256
B 15,777 -- (4,576) 11,201
B- 11,353 -- (4,491) 6,862
---------- ---------- ---------- ----------
$ 31,412 $ -- $ (10,093) $ 21,319
========== ========== ========== ==========
</TABLE>
9
<PAGE> 10
During the three months ended March 31, 2000, the Company sold one of its CMBS
holdings (the "B-2A" security). Additionally, during this same period, the
Company's unconsolidated taxable subsidiary sold its only CMBS (the "B-3A"
security). The total disposition proceeds and the gross realized loss for each
bond were as follows (in thousands):
<TABLE>
<CAPTION>
Total Gross
Disposition Amortized Realized
Security Proceeds Cost Loss
- ------------ ------------ ------------ ------------
<S> <C> <C> <C>
B-2A $ 3,784 $ 3,914 $ (130)
B-3A $ 3,341 $ 3,481 $ (140)
</TABLE>
In computing the gross realized loss for each security, the amortized cost was
determined using a specific identification method. The Company's share of the
gross realized loss from the sale of the B-3A security is included in equity in
losses from unconsolidated subsidiary, partnerships and other real estate
venture.
5. EARNINGS PER SHARE
A reconciliation of the numerator and denominator used in computing basic
earnings per share and diluted earnings per share for the three months ended
March 31, 2000 and 1999 is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net income available to common shareholders ......... $ 1,237 $ 2,344
======== ========
Weighted average common shares outstanding .......... 10,000 10,000
======== ========
Basic earnings per common share ..................... $ 0.12 $ 0.23
======== ========
Weighted average common shares outstanding .......... 10,000 10,000
Effect of dilutive securities:
Restricted shares ................................ 15 6
Net effect of assumed exercise of warrants ....... 9 --
Net effect of assumed exercise of stock options... 1 1
-------- --------
Adjusted weighted average shares outstanding ........ 10,025 10,007
======== ========
Diluted earnings per common share ................... $ 0.12 $ 0.23
======== ========
</TABLE>
At March 31, 2000 and 1999, options to purchase 1,415,261 and 1,478,011 common
shares, respectively, and warrants to purchase 250,002 and 0 common shares,
respectively, were outstanding. For the three months ended March 31, 2000 and
1999, options related to 1,411,261 and 1,472,011 shares, respectively, were not
included in the computations of diluted earnings per share because the exercise
prices related thereto were greater than the average market price of the
Company's common shares.
10
<PAGE> 11
6. 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 months ended March 31, 2000 and 1999, was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net income ................................................ $ 1,237 $ 2,344
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) ...................... 449 (903)
Reclassification adjustment for
losses included in net income ....................... 270 --
-------- --------
Comprehensive income ...................................... $ 1,956 $ 1,441
======== ========
</TABLE>
7. 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.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 requires that an entity recognize all derivatives as either
assets or liabilities in its balance sheet and that it measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
(that is, gains and losses) is dependent upon the intended use of the derivative
and the resulting designation. SFAS No. 133 generally provides for matching the
timing of gain or loss recognition on the hedging instrument with the
recognition of (1) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (2) the earnings effect of
the hedged forecasted transaction. In June 1999, the FASB issued SFAS 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.
9. SUBSEQUENT EVENTS
On April 3, 2000, the Company sold its 49% limited partner interest in a
suburban office building for $1,800,000. In connection with this sale, the
Company realized a gain of approximately $660,000.
On April 25, 2000, the Company declared a dividend of $0.34 per share; the
dividend is payable on May 15, 2000 to shareholders of record on May 4, 2000.
11
<PAGE> 12
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 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 the size of its investment portfolio, fluctuations in interest rates,
borrowing costs, prepayment rates and favorable and unfavorable credit related
events such as profit participations or credit losses. The operating results of
the Company will depend, in part, upon the ability of the Company to manage its
interest rate, prepayment and credit risks, while maintaining its status as a
REIT. Additionally, the Company's accounting for some real estate loan
arrangements as either real estate or joint venture investments may contribute
to volatility in financial statement net income.
The Company intends to sell its non-core assets, including its CMBS holdings and
its equity investments in real estate. These transactions, should they occur,
are expected to contribute significantly to volatility in the Company's future
financial statement net income and tax basis income. Also, the Board of Trust
Managers has approved a Plan of Liquidation and Dissolution (the "Plan") which
provides for the complete liquidation of the Company. The liquidation and
dissolution of the Company requires the affirmative vote of holders of at least
two-thirds of the Company's outstanding common shares. The Company plans to
submit this matter to its shareholders at its Annual Meeting which is expected
to be held during the third quarter of 2000. If the Plan receives shareholder
approval at the Annual Meeting, the Company will adopt liquidation basis
accounting immediately thereafter. Under liquidation basis accounting, the
Company's assets would be adjusted to their net realizable values and the
Company's liabilities would be adjusted to their expected settlement amounts.
To date, the Company has sold one of its CMBS investments and its 49% limited
partner interest in a suburban office building. These transactions were
completed in January 2000 and April 2000, respectively. Additionally, in March
2000, the Company's unconsolidated taxable subsidiary sold its only CMBS
investment. In mid April, the Company entered into a non-binding letter
agreement for the sale of its majority ownership interest in five
grocery-anchored shopping centers. Finally, the Company has identified a
potential buyer for its minority ownership interest in a partnership that owns
CMBS.
A majority of the Company's loans are expected to be fully repaid at or prior to
their scheduled maturities (including extension options) in accordance with the
terms of the underlying loan agreements. Initially, proceeds from loan
repayments and the asset sales described above will be used to repay the
Company's existing credit facilities. During the three months ended March 31,
2000, the Company reduced the outstanding borrowings under these facilities by
$8.8 million, from $70.5 million to $61.7 million. After these credit facilities
have been fully repaid and assuming that the Plan has received shareholder
approval, liquidating distributions will then be made to the Company's
shareholders as, and when, additional loans are repaid and assets are sold,
provided that the Board of Trust Managers believes that adequate reserves are
available for the payment of the Company's liabilities and expenses. Given the
short duration of the Company's loans and the quality of most of its assets, the
Company believes that the liquidation process will be completed within 18 to 24
months from the date that shareholders approve the liquidation, although there
can be no assurances that this time table will be met or that the anticipated
proceeds from the liquidation will be achieved.
12
<PAGE> 13
RESULTS OF OPERATIONS
The following discussion of results of operations should be read in conjunction
with the consolidated financial statements and notes thereto included in "Item
1. Financial Statements".
Under generally accepted accounting principles, net income for the three months
ended March 31, 2000 was $1,237,000, or $0.12 per common share. The Company's
sources of revenue for the three months ended March 31, 2000, totaling
$5,840,000, are set forth below.
o $4,000,000 from loan investments. As some 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 months ended March 31, 2000
as follows: interest income on mortgage loans of $3,002,000; operating
income from real estate of $998,000; and equity in earnings of other real
estate venture of $0.
o $851,000 from investments in CMBS.
o $1,311,000 of operating income from real estate owned by the Company
(through a majority-owned partnership).
o $382,000 of equity in losses from its unconsolidated subsidiary,
partnerships and other real estate venture, including the Company's share
of the loss realized in connection with the sale of the subsidiary's CMBS
investment.
o $60,000 of interest income from short-term investments.
Additionally, the Company realized a gain of $637,000 during the three months
ended March 31, 2000 in connection with the repayment of an ADC loan
arrangement. The gain was comprised principally of the incremental interest
income earned on the loan investment, the recapture of previously recorded
depreciation and the recognition (in earnings) of the loan commitment fee which
had been received by the Company at the time the loan was originated.
The Company incurred expenses of $5,103,000 during the three months ended March
31, 2000. These expenses are set forth below.
o $561,000 of management fees, including $513,000 of base management fees
payable to the Manager pursuant to the Management Agreement and $48,000 of
expense associated with compensatory options granted to the Manager. No
incentive fees were incurred during the period.
o $226,000 of general and administrative costs, including $75,000 for
professional services, $59,000 for directors and officers' insurance,
$20,000 of reimbursable costs pursuant to the Management Agreement, $6,000
related to compensatory options granted to certain members of the AMRESCO
Group, $4,000 of fees paid to the Company's Independent Trust Managers for
their participation at special meetings of the Board of Trust Managers,
$23,000 related to restricted stock awards to the Company's Independent
Trust Managers and $12,000 of travel costs. These categories do not
represent all general and administrative expenses.
o $1,968,000 of interest expense associated with the Company's credit
facilities and five non-recourse loans secured by real estate.
o $560,000 of depreciation expense, including $305,000 related to five
grocery-anchored shopping centers and $255,000 related to loan investments
accounted for as real estate.
o $1,788,000 of provision for loan losses.
Additionally, the Company realized a loss of $130,000 during the three months
ended March 31, 2000 in connection with the sale of one of its CMBS holdings.
During the three months ended March 31, 2000, minority interest in a subsidiary
partnership's net income totaled $7,000.
13
<PAGE> 14
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
The Company's revenues increased by $1,367,000 (or 31%), from $4,473,000 to
$5,840,000, due primarily to an increase in operating income from real estate.
The increase in operating income from real estate, totaling $1,963,000, was
attributable to the following:
o acquisitions of real estate that occurred on April 30, 1999 and August
25, 1999; and
o the properties underlying two of the Company's ADC loan arrangements
accounted for as real estate were substantially completed on July 1,
1999 and October 1, 1999, respectively, and began producing operating
income thereafter.
The higher revenues described above were offset by declines in interest income
on mortgage loans of $55,000, income from commercial mortgage-backed securities
of $63,000, equity in earnings/losses of unconsolidated subsidiary, partnerships
and other real estate venture of $452,000, and interest income from short-term
investments of $26,000. Interest income on mortgage loans declined as a result
of the fact that the Company had lower average outstanding balances during the
current period as compared to the prior period. The decline in income from
commercial mortgage-backed securities (from the prior period) was attributable
to the sale (in January 2000) of one of the Company's CMBS holdings. Equity in
earnings/losses of unconsolidated subsidiary, partnerships and other real estate
venture declined as a result of the sale of the subsidiary's CMBS investment in
March 2000 (at a loss) and less favorable operating results from the partnership
that the Company assumed control of in February 1999.
The Company's aggregate expenses increased by $2,390,000 (or 88%), from
$2,713,000 to $5,103,000. The changes in the component expenses were as follows
(in thousands):
<TABLE>
<CAPTION>
Increase/
(Decrease)
----------
<S> <C>
Interest expense ....................... $ 1,379
Management fees ........................ (27)
General and administrative ............. (297)
Depreciation ........................... 474
Participating interest in mortgage loans (185)
Provision for loan losses .............. 1,046
----------
Total net increase in expenses ...... $ 2,390
==========
</TABLE>
Interest expense increased primarily as a result of higher average debt balances
under the Company's two credit facilities (the average debt outstanding under
these facilities was approximately $26.8 million higher during the three months
ended March 31, 2000 as compared to the three months ended March 31, 1999),
higher interest rates related to these facilities (at March 31, 2000 and 1999,
the Company's weighted average borrowing rate under these facilities was 7.15%
and 5.98%, respectively), and $27.1 million of additional non-recourse debt on
real estate (these fixed rate borrowings were incurred in connection with the
acquisitions of real estate described above). The Company's base management fees
increased by $66,000, from $447,000 to $513,000 as a result of the Company's
larger average asset base upon which the fee is calculated (during the three
months ended March 31, 2000 and 1999, the average book value of the Company's
assets approximated $225 million and $188 million, respectively), while
compensatory option charges (included in management fees) declined by $93,000,
from $141,000 to $48,000, as a result of a decrease in the value of the options.
14
<PAGE> 15
The reduction in general and administrative expenses was due primarily to the
fact that the Company incurred $200,000 of resolution costs in connection with a
non-performing loan during the three months ended March 31, 1999. No such costs
were incurred by the Company during the three months ended March 31, 2000. The
increase in depreciation expense was attributable to the real estate
acquisitions and ADC loan arrangements described above. The Company incurred no
participating interest in mortgage loans during the three months ended March 31,
2000 as the financing arrangement giving rise to such costs was fully
extinguished on November 1, 1999. The increase in the Company's provision for
loan losses was attributable to one investment, an ADC loan arrangement, that
was initially deemed to be impaired as of December 31, 1999. As discussed below
under the sub-heading "Loan Investments", this loan was deemed to be further
impaired as of March 31, 2000.
For the reasons cited above, income before gains (losses) and minority interests
decreased by $1,023,000 (or 58%), from $1,760,000 to $737,000. Net income
decreased by $1,107,000 (or 47%), from $2,344,000 to $1,237,000. In addition to
the factors cited above, dissimilar gains from repayments of ADC loan
arrangements (in 1999 and 2000) and a loss from the sale of CMBS (in 2000)
contributed to the net income variance from period to period.
Distributions
The Company's policy is to distribute at least 95% of its REIT taxable income to
shareholders each year; to that end, dividends have been 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,
stock-based compensation awards and the Company's investment in its taxable
subsidiary 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 ended December 31, 1999). 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. On April
25, 2000, the Company declared its first quarter dividend; the dividend,
totaling $0.34 per share, is payable on May 15, 2000 to shareholders of record
on May 4, 2000. For federal income tax purposes, this dividend should be treated
as ordinary income to the Company's shareholders.
Loan Investments
During the three months ended March 31, 2000, one of the Company's loans (an
"ADC loan arrangement") was fully repaid. The proceeds from the repayment
totaled $5.1 million, including accrued interest of approximately $350,000.
Principal collections on the Company's other loan investments totaled $1.43
million during the three months ended March 31, 2000. During the three months
ended March 31, 2000, the Company advanced a total of $3.22 million under its
loan commitments. A portion of the commitments may expire without being drawn
upon and therefore the total commitment amounts do not necessarily represent
future cash requirements.
Based upon the amounts outstanding under these facilities, the Company's
portfolio of commercial mortgage loans had a weighted average interest pay rate
of 10.7% and a weighted average interest accrual rate of 11.5% as of March 31,
2000. These weighted average interest rates exclude the loan which was deemed to
be impaired as of December 31, 1999 (see
15
<PAGE> 16
note [c] accompanying the table below). Three of the 12 loans provide the
Company with the opportunity for profit participation above the contractual
accrual rate; one of these three loans was deemed to be impaired as of December
31, 1999 (see note [c] accompanying the table below). As of March 31, 2000, the
Company's loan investments are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Date of Initial Scheduled Collateral Commitment Amount
Investment Maturity Location Property Type Position Amount Outstanding
- ------------------ ----------------- ---------------- ---------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien $ 14,700 $ 14,058
June 1, 1998 June 1, 2001 Houston, TX Office First Lien 11,800 11,305
June 22, 1998 June 19, 2000 Wayland, MA Office First Lien 45,000 39,681
July 2, 1998 June 30, 2000 Washington, D.C. Office First Lien 7,000 6,571
July 10, 1998 July 31, 2000 Pasadena, TX Apartment First Lien 3,350 2,993
September 30, 1998 February 23, 2001 Sunnyvale, TX Residential Lots First Lien 8,400 2,183(a)
May 18, 1999 May 19, 2001 Irvine, CA Office First Lien 15,260 13,371
July 29, 1999 July 28, 2001 Lexington, MA R&D/Bio-Tech First Lien 5,213 2,955
August 19, 1999 August 15, 2001 San Diego, CA Medical Office First Lien 5,745 4,533
---------- -----------
Mortgage loans held for investment 116,468 97,650
---------- -----------
June 12, 1998 June 30, 2000 Pearland, TX Apartment First Lien 12,827 12,291(b)
June 19, 1998 June 18, 2000 Houston, TX Office First Lien 24,000 22,235(b)
July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests 10,068 8,504(c)
---------- -----------
ADC loan arrangements 46,895 43,030
---------- -----------
Total loan investments $ 163,363(d) $ 140,680(d)
========== ===========
</TABLE>
<TABLE>
<CAPTION>
Interest Interest
Date of Initial Pay Accrual
Investment Rate Rate
- ------------------ -------- --------
<S> <C> <C>
May 12, 1998 10.0% 12.0%
June 1, 1998 12.0% 12.0%
June 22, 1998 10.5% 10.5%
July 2, 1998 10.5% 10.5%
July 10, 1998 10.0% 14.0%
September 30, 1998 10.0% 14.0%
May 18, 1999 10.0% 12.0%
July 29, 1999 10.9% 13.9%
August 19, 1999 10.9% 10.9%
Mortgage loans held for investment
June 12, 1998 10.0% 11.5%
June 19, 1998 12.0% 12.0%
July 1, 1998 10.0% 15.0%
ADC loan arrangements
Total loan investments
</TABLE>
(a) Loan was fully repaid on April 20, 2000.
(b) Accounted for as real estate for financial reporting purposes.
(c) Accounted for as investment in joint venture for financial reporting
purposes. Loan was deemed to be impaired as of December 31, 1999.
(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. 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, 1999.
Pursuant to the terms of the underlying loan agreements, extension options are
available to many of the Company's borrowers provided that such borrowers are
not in violation of any of the conditions established in the loan agreements.
Generally, the loans provide for an extension fee to be paid to the Company at
the time the extension option is exercised by the borrower. Typically, extension
fees range from 0.5% to 1% of the loan commitment amount, depending upon the
length of the extension option. The following table summarizes the extension
options currently available to the Company's borrowers under the terms of their
respective loan agreements (dollars in thousands):
<TABLE>
<CAPTION>
Amount Extension
Outstanding at Options
Scheduled Commitment March 31, Available
Maturity Amount 2000 to Borrower
- ------------- -------------- -------------- -------------------
<S> <C> <C> <C>
June 19, 2000 $ 45,000 $ 39,681 One 1-Year Option
June 30, 2000 7,000 6,571 Two 6-Month Options
June 30, 2000 12,827 12,291 Two 6-Month Options
July 31, 2000 3,350 2,993 Two 6-Month Options
March 31, 2001 14,700 14,058 Two 1-Year Options
May 19, 2001 15,260 13,371 One 6-Month Option
July 28, 2001 5,213 2,955 One 6-Month Option
-------------- --------------
$ 103,350 $ 91,920
============== ==============
</TABLE>
16
<PAGE> 17
Additionally, the Company has approved an extension (to September 30, 2000) of
its $24 million Houston office loan. As of March 31, 2000, $22.235 million was
outstanding under this facility. Under the terms of the proposed extension, the
borrower will be entitled to an additional 30-day extension (to October 30,
2000) if the property is under contract to be sold to a third party purchaser
and certain other conditions are met.
A mezzanine loan with an outstanding balance of $8,504,000 and a recorded
investment of $7,228,000 was impaired as of December 31, 1999. The allowance for
loan losses related to this investment, which is secured by partnership
interests in the borrower, totaled $5,978,000 at March 31, 2000. In addition to
the Company's mortgage, the property is encumbered by a $45.5 million first lien
mortgage provided by an unaffiliated third party, of which $44 million is
currently outstanding. The first lien mortgage, which matures on June 30, 2001,
requires interest only payments through June 30, 2000. From July 1, 2000 through
maturity, the first lien mortgage also requires monthly principal reductions of
approximately $42,000. Through March 2000, all interest payments were made in
accordance with the terms of the first lien mortgage and the Company's loan. On
February 15, 2000, the Company entered into a Conditional Agreement with the
borrower. Under the terms of the Conditional Agreement, which is subject to
approval by the first lien lender, the Company agreed to accept $3,000,000 in
complete satisfaction of all amounts owed to it by the borrower provided that
such payment was received by the Company on or before May 15, 2000. On May 10,
2000, the borrower notified the Company that it would be unable to make the
$3,000,000 payment called for under the terms of the Conditional Agreement by
May 15, 2000. At this time, the borrower also informed the Company that it would
not make the April 2000 interest payment to the first lien lender before the
grace period for such payment expired. Concurrently, the Company served a
default notice to the borrower for its failure to pay interest due under the
terms of the mezzanine loan. If these monetary events of default are not cured
in a timely manner, the Company and the first lien lender can pursue their
respective remedies under the terms of the loan agreements. If the mezzanine
loan is not cured or an acceptable discounted payoff is not received, the
Company could assume control of the borrower (a partnership) through foreclosure
of the partnership interests. As a result of these recent events, the Company
recorded an additional loan loss provision of $1,788,000 during the three months
ended March 31, 2000. The allowance for loan losses related to this investment,
totaling $5,978,000, represents management's estimate (at the date of this
report) of the amount of the expected loss which could result upon a disposition
of this loan.
On February 25, 1999, an unconsolidated taxable subsidiary of the Company
assumed control of a borrower (a partnership) through foreclosure of the
partnership interests. In addition to the second lien mortgage, the 909,000
square foot mixed-use property is encumbered by a $17 million first lien
mortgage provided by an unaffiliated third party. The first lien mortgage, which
matures on March 1, 2001, requires interest only payments throughout its term.
On March 11, 1999, the first lien lender notified the Company that it considered
the first lien loan to be in default because of defaults under the Company's
mezzanine loan; however, it did not give notice of an intention to accelerate
the balance of the first lien loan at that time. On September 21, 1999, a
subsidiary of the Company entered into a non-binding letter agreement with a
prospective investor who intends to make a substantial equity commitment to the
project. Under the terms of the agreement, the Company would continue to have an
interest in the project as an equity owner. On March 16, 2000, the first lien
lender gave notice to the partnership of its intention to accelerate the first
lien loan in the event that certain alleged non-monetary events of default were
not cured. In addition to the alleged default described above, the first lien
lender asserted that the borrower permitted a transfer of a beneficial interest
in the partnership in violation of the loan agreement and that it has failed to
perform certain obligations under the Intercreditor Agreement. The notice also
specified that, as a result of the alleged defaults, interest has accrued at the
default rate from the date of the earliest event of default. To date, all
interest payments at the stated rate have been made in accordance with the terms
of the first lien mortgage. Recently, management and the first lien lender
agreed in principle on the terms of a settlement of the claims described above,
although such terms are not binding on either party. Under the terms of the
negotiated settlement, the borrower will pay $250,000 of default interest to the
first lien lender. Additionally, the borrower has agreed to reimburse the first
lien lender for its legal fees and other costs incurred in connection with the
negotiation and closing of the settlement. These fees and other costs are
expected to total approximately $100,000. Following the payment of these
amounts, all of the alleged defaults under the first lien mortgage would be
cured. Furthermore, the first lien lender has now indicated a willingness to
permit the to-be-formed investment partnership to assume the first lien
mortgage, although it is under no obligation to do so as part of the agreed-upon
settlement. To this end, the first lien lender is currently reviewing the credit
worthiness of the prospective investor and its rehabilitation plan for the
project. While management currently expects to finalize the settlement with the
first lien lender in late May 2000, there can be no assurances that such a
settlement will be
17
<PAGE> 18
consummated or that it will be consummated under the terms described above.
Currently, the Company expects to close the proposed transaction with the
prospective investor late in the second quarter or early in the third quarter of
2000, although there can be no assurances that this transaction will be
consummated. The prospective investor is also negotiating with other lenders in
an effort to secure take-out financing for the first lien mortgage; however,
there can be no assurances that such financing will be obtained. During the
first quarter of 1999, the Company charged-off $500,000 against the allowance
for losses related to this investment which amount represented management's
estimate at that time of the amount of the expected loss which could result upon
a disposition of the collateral. If the first lien lender issues can be
satisfactorily resolved and the proposed transaction with the prospective
investor is consummated, the Company currently believes that it will fully
recover its original investment, although there can be no assurances that this
will be the case. Aside from the $500,000 charge-off described above, no
additional impairment losses have been recognized on this investment.
At March 31, 2000, the Company's commercial mortgage loan commitments were
geographically dispersed as follows (dollars in thousands):
<TABLE>
<CAPTION>
Percentage
of Total
Committed Loan Amount Committed
Amount Outstanding Amount
------------ ------------ ------------
<S> <C> <C> <C>
Texas $ 85,145 $ 73,569 52%
Massachusetts 50,213 42,636 31
California 21,005 17,904 13
Washington, D.C 7,000 6,571 4
------------ ------------ ------------
$ 163,363 $ 140,680 100%
============ ============ ============
</TABLE>
At March 31, 2000, the Company's loan investments were collateralized by the
following product types (dollars in thousands):
<TABLE>
<CAPTION>
Percentage
of Total
Committed Loan Amount Committed
Amount Outstanding Amount
------------ ------------ ------------
<S> <C> <C> <C>
Office $ 127,828 $ 115,725 78%
Multifamily 16,177 15,284 10
Residential 8,400 2,183 5
Medical Office 5,745 4,533 4
R&D/Bio-Tech 5,213 2,955 3
------------ ------------ ------------
$ 163,363 $ 140,680 100%
============ ============ ============
</TABLE>
At March 31, 2000, the Company's loan investments were collateralized by the
following loan types (dollars in thousands):
<TABLE>
<CAPTION>
Percentage
of Total
Committed Loan Amount Committed
Amount Outstanding Amount
------------ ------------ ------------
<S> <C> <C> <C>
Acquisition/Rehabilitation $ 59,308 $ 50,162 36%
Construction 51,527 48,584 32
Acquisition 44,128 39,751 27
Single-Family Lot Development 8,400 2,183 5
------------ ------------ ------------
$ 163,363 $ 140,680 100%
============ ============ ============
</TABLE>
18
<PAGE> 19
The three properties underlying the Company's construction loans were
substantially completed during 1999. As of March 31, 2000, these properties were
95%, 86% and 63% leased, 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 exclude the loan that was
reclassified to investment in unconsolidated subsidiary during the first quarter
of 1999.
As the loan investment portfolio is expected to contract as a result of
repayments, geographic and product type concentrations will persist. 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.
Commercial Mortgage-backed Securities
During the three months ended March 31, 2000, the Company sold one of its CMBS
holdings (the "B-2A" security). Additionally, during this same period, the
Company's unconsolidated taxable subsidiary sold its only CMBS (the "B-3A"
security). The total disposition proceeds and the gross realized loss for each
bond were as follows (in thousands):
<TABLE>
<CAPTION>
Total Gross
Disposition Amortized Realized
Security Proceeds Cost Loss
- ---------------------------- ----------------------------- ----------------------------- -------------------------------
<S> <C> <C> <C>
B-2A $3,784 $3,914 $(130)
B-3A $3,341 $3,481 $(140)
</TABLE>
The Company's share of the gross realized loss from the sale of the B-3A
security is included in equity in losses from unconsolidated subsidiary,
partnerships and other real estate venture.
As of March 31, 2000, the Company held four commercial mortgage-backed
securities which were acquired at an aggregate purchase price of $30.6 million.
Due to insignificant changes in comparable-term U.S. Treasury rates and the
spreads over such U.S. Treasury rates during the first quarter, the value of
these holdings increased by $254,000 during the three months ended March 31,
2000; accordingly, the Company recorded an unrealized gain of $254,000 on its
CMBS portfolio at March 31, 2000. As these securities are classified as
available for sale, the unrealized gain was reported as a component of
accumulated other comprehensive income (loss) in shareholders' equity for
financial reporting purposes. During the three months ended March 31, 2000, the
changes in accumulated other comprehensive income (loss) were as follows:
<TABLE>
<S> <C>
Balance, beginning of period ................ $(10,812)
Unrealized gains associated with
securities sold during the period ........ 195
Unrealized gains associated
with retained securities ................. 254
Reclassification adjustment for
realized losses included in net income.... 270
--------
Balance, end of period ...................... $(10,093)
========
</TABLE>
19
<PAGE> 20
As of March 31, 2000, the Company's direct CMBS investments are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Aggregate Aggregate Aggregate Percentage of
Security Amortized Unrealized Fair Total Based on
Rating Cost Losses Value Fair Value
- ---------------- -------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C> <C>
BB- $ 4,282 $ (1,026) $ 3,256 15%
B 15,777 (4,576) 11,201 53%
B- 11,353 (4,491) 6,862 32%
-------------------- ------------------------ --------------------- ----------------------
$ 31,412 $ (10,093) $ 21,319 100%
==================== ======================== ===================== ======================
</TABLE>
While management believes that the fundamental value of the real estate
mortgages underlying its bonds has been largely unaffected to date, the
combination of increasing spreads and comparable-term U.S. Treasury rates during
1998 and 1999 have caused the current fair value of these securities to decline.
In the absence of dramatic declines in spreads and/or comparable-term U.S.
Treasury rates in the near term, management expects to realize losses in
connection with the planned sales of these securities, should they occur. If
realized, these losses would adversely impact the Company's earnings and tax
basis income.
The Company holds a 5% interest in a partnership that owns several classes of
subordinated CMBS. The partnership's majority partner (or an affiliate thereof)
has verbally agreed to acquire the Company's 5% ownership interest at its
current fair value, or approximately $0.3 million. The proposed sales price
approximates the current carrying value of this investment. Currently, the
Company expects to close this sale on or about June 30, 2000, although there can
be no assurances that such sale will be consummated or that it will be
consummated on terms favorable to the Company.
Equity Investments in Real Estate
On April 3, 2000, the Company sold its 49% limited partner interest in a
suburban office building for $1.8 million. The gain associated with this
transaction, totaling approximately $660,000, will be recorded in the second
quarter of 2000.
On April 17, 2000, the Company entered into a non-binding letter agreement
pursuant to which it agreed to sell its 99.5% interest in five grocery-anchored
shopping centers in the Dallas/Fort Worth area for $18.327 million. Currently,
the Company expects to close this sale in June 2000, although there can be no
assurances that such sale will be consummated or that it will be consummated on
terms favorable to the Company. To date, the Company has contributed a total of
$18.2 million of capital to the title-holding partnerships. No additional
capital contributions are expected to be made to the partnerships prior to the
anticipated sale.
The Company's unconsolidated taxable subsidiary holds interests (indirectly) in
a partnership which owns a 909,000 square foot mixed-use property in Columbus,
Ohio. This investment is described above under the sub-heading "Loan
Investments".
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of liquidity and capital resources should be read in
conjunction with the consolidated financial statements and notes thereto
included in "Item 1. Financial Statements".
The Company's principal demands for liquidity are cash for operations, including
funds which are required to satisfy its obligations under existing loan
commitments, interest expense associated with its indebtedness, debt repayments
and distributions to its shareholders. In the near term, the Company's principal
sources of liquidity are the funds available to it under its Line of Credit and
Repurchase Agreement.
At March 31, 2000, amounts outstanding under the Line of Credit and Repurchase
Agreement totaled $51,900,000 and $9,798,000, respectively. During the three
months ended March 31, 2000, the Company reduced the outstanding borrowings
under these facilities by $8,741,000 and $58,000, respectively. At March 31,
2000, the weighted average interest rates under the Line of Credit and
Repurchase Agreement were 7.17% and 7.06%, respectively. During the three months
ended March 31, 2000, there were no amounts due from the counterparty under the
terms of the Company's interest rate cap agreement as one-month LIBOR did not
exceed 6.25% during the period.
20
<PAGE> 21
The Company expects that proceeds generated from loan repayments and sales of
its non-core assets, including CMBS and equity investments in real estate, will
be sufficient to fully repay its two credit facilities on or before their
scheduled maturity dates. The Repurchase Agreement is scheduled to mature on
June 30, 2000 while the Line of Credit matures on November 3, 2000. Beyond the
maturity date of the Line of Credit, the Company believes that its cash flow
from operations and the proceeds from loan repayments and sales of its non-core
assets will be sufficient to meet the Company's liquidity and capital
requirements. In the event that anticipated loan repayments and asset sales are
delayed, the Company believes that its lenders would be willing to consider
extensions of the respective maturity dates. However, there can be no assurances
that the Company would be able to obtain these extensions or that such
extensions would be available to the Company at a reasonable cost. If the
Company's lenders were unwilling to extend the maturity dates of its credit
facilities or they were unwilling to grant extensions on acceptable terms, then
the Company would endeavor, if necessary, to obtain replacement financing from
other sources, including banks and other financial institutions which lend to
entities that have assets similar to those held by the Company. While management
believes that it could obtain replacement financing, there can be no assurances
that such financing would be available or that it would be available at a
reasonable cost.
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 specified 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
All of the Company's information technology infrastructure is provided by the
Manager, and the Manager's systems are supplied by AMRESCO, INC. To date,
AMRESCO, INC. has not experienced any material difficulties with respect to its
internal business-critical systems used in connection with the operations of the
Manager or the Company, nor does it anticipate any material difficulties in the
future. Additionally, the Company has not experienced any adverse effects or had
any material difficulties relating to the Year 2000 issue as a result of any
failures or interruptions in the business or operations of any borrower or other
third party having a material contract with the Company. Under the terms of the
Company's Management Agreement, as amended, all of the costs associated with
addressing the Company's Year 2000 issue are to be borne by the Manager. As a
result, the Company did not incur, nor would it expect to incur, any
expenditures in connection with modifications associated with the Year 2000
issue.
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.
21
<PAGE> 22
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, 1999. The market risk
exposures described therein have not materially changed since December 31, 1999;
accordingly, no additional discussion or analysis is provided in this Form 10-Q.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Exhibit Index
Exhibit No.
10.1 First Amendment to Management Agreement dated as of
April 1, 2000, by and between AMRESCO Capital Trust
and AMREIT Managers, L.P.
27 Financial Data Schedule.
99.1 Termination Agreement, dated January 4, 2000, between
AMRESCO Capital Trust and Impac Commercial Holdings,
Inc. (filed as Exhibit 99.1 to the Registrant's
Current Report on Form 8-K dated January 4, 2000 and
filed with the Commission on January 6, 2000, which
exhibit is incorporated herein by reference).
(b) Reports on Form 8-K. The following reports on Form 8-K were
filed with respect to events occurring during the quarterly
period for which this report is filed:
(i) Form 8-K dated January 4, 2000 and filed with the
Commission on January 6, 2000, reporting the
announcement that AMRESCO Capital Trust and Impac
Commercial Holdings, Inc. had entered into a
Termination Agreement, under Item 5 of such form.
(ii) Form 8-K dated March 29, 2000 and filed with the
Commission on March 30, 2000, reporting the
announcement that the Board of Trust Managers of
AMRESCO Capital Trust had approved a Plan of
Liquidation and Dissolution, under Item 5 of such
form.
22
<PAGE> 23
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: May 15, 2000 By: /s/ Thomas R. Lewis II
-------------------------
Thomas R. Lewis II
Senior Vice President, Chief Financial
and Accounting Officer & Controller
(Principal Financial and Accounting Officer)
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.1 First Amendment to Management Agreement dated as of
April 1, 2000, by and between AMRESCO Capital Trust
and AMREIT Managers, L.P.
27 Financial Data Schedule.
99.1 Termination Agreement, dated January 4, 2000, between
AMRESCO Capital Trust and Impac Commercial Holdings,
Inc. (filed as Exhibit 99.1 to the Registrant's
Current Report on Form 8-K dated January 4, 2000 and
filed with the Commission on January 6, 2000, which
exhibit is incorporated herein by reference).
</TABLE>
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT
TO
MANAGEMENT AGREEMENT
This First Amendment to Management Agreement is executed effective as
of April 1, 2000 by and between AMRESCO Capital Trust, a Texas real estate
investment trust (the "Company"), and AMREIT Managers, L.P., a Delaware limited
partnership (the "Manager").
A. The Company and the Manager are parties to a Management Agreement
dated as of May 12, 1998 and desire to amend the Management Agreement with
respect to the fee to be paid to Manager under the Management Agreement.
B. In consideration of the mutual covenants and agreements and $10.00
and other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged by the parties, it is agreed that the Management Agreement
will be amended as follows:
1. Section 7(b) of the Management Agreement relating to Manager's
incentive compensation is deleted in its entirety and replaced
with the following provision:
(b) In addition to the base management fee, beginning
April 1, 2000, the Manager will be entitled to
receive reimbursement for its quarterly operating
deficits, if any. As used in this Section 7(b),
"operating deficits" means the excess, if any, of the
Manager's expenses as described in Section 8(a) below
(excluding those expenses described in 8(a)(iii)
relating to the year 2000 issues and (iv) relating to
the Manager's errors and omissions insurance policy)
over the sum of its quarterly base management fee and
any other fees received by the Manager from sources
other than the Company.
2. Section 12(b) of the Management Agreement relating to
Manager's termination fee is deleted in its entirety.
3. Section 8(c), 8(d) and 9 of the Management Agreement relating
to the Manager's reimbursement expenses are deleted in their
entirety.
<PAGE> 2
Except as amended hereby, all other terms and provisions of the
Management Agreement shall remain in full force and effect.
AMRESCO CAPITAL TRUST AMREIT MANAGERS, L.P.
By: AMREIT Managers, G.P., Inc.,
its general partner
By: /s/ Jonathan S. Pettee By: /s/ L. Keith Blackwell
----------------------------- -------------------------------
Jonathan S. Pettee L. Keith Blackwell
President Senior Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> $4,569
<SECURITIES> 21,319
<RECEIVABLES> 3,218
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 82,972
<DEPRECIATION> 1,708
<TOTAL-ASSETS> 218,541
<CURRENT-LIABILITIES> 63,657
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 119,884
<TOTAL-LIABILITY-AND-EQUITY> 218,541
<SALES> 0
<TOTAL-REVENUES> 5,840
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,354
<LOSS-PROVISION> 1,788
<INTEREST-EXPENSE> 1,968
<INCOME-PRETAX> 1,237
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,237
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,237
<EPS-BASIC> $0.12
<EPS-DILUTED> $0.12
</TABLE>
