<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 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 - June 30, 2000 and December 31, 1999 ............................... 3
Consolidated Statements of Income - For the Three and Six Months Ended June 30, 2000 and 1999 ... 4
Consolidated Statement of Changes in Shareholders' Equity - For the Six Months Ended
June 30, 2000 ................................................................................. 5
Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 2000 and 1999 ......... 6
Notes to Consolidated Financial Statements ...................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................ 25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .......................................................... 25
SIGNATURE .......................................................................................... 26
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMRESCO CAPITAL TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(unaudited) 1999
------------- -------------
<S> <C> <C>
ASSETS
Mortgage loans held for investment, net ........................................... $ 97,449 $ 96,032
Acquisition, development and construction loan arrangements accounted for as real
estate or investments in joint ventures ........................................ 39,417 44,097
------------- -------------
Total loan investments ............................................................ 136,866 140,129
Allowance for loan losses ......................................................... (5,978) (4,190)
------------- -------------
Total loan investments, net of allowance for losses ............................... 130,888 135,939
Commercial mortgage-backed securities - available for sale (at fair value) ........ 20,500 24,569
Real estate, net of accumulated depreciation of $0 and $866, respectively ......... -- 50,376
Investments in unconsolidated partnerships and subsidiary ......................... 6,342 11,765
Receivables and other assets ...................................................... 2,776 3,991
Cash and cash equivalents ......................................................... 3,892 4,604
------------- -------------
TOTAL ASSETS ................................................................... $ 164,398 $ 231,244
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and other liabilities ............................................. $ 1,062 $ 2,697
Amounts due to manager ............................................................. 485 566
Repurchase agreement ............................................................... -- 9,856
Line of credit ..................................................................... 42,600 60,641
Non-recourse debt on real estate ................................................... -- 34,600
Dividends payable .................................................................. -- 4,407
------------- -------------
TOTAL LIABILITIES .............................................................. 44,147 112,767
------------- -------------
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 ......................................................... 140,481 140,998
Unearned stock compensation ........................................................ (19) (282)
Accumulated other comprehensive income (loss) ...................................... (11,092) (10,812)
Distributions in excess of accumulated earnings .................................... (9,519) (12,053)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY ..................................................... 119,951 117,951
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................................... $ 164,398 $ 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 Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Interest income on mortgage loans ............................. $ 3,005 $ 3,878 $ 6,007 $ 6,935
Income from commercial mortgage-backed securities ............. 848 934 1,699 1,848
Operating income from real estate ............................. 2,049 831 4,358 1,177
Equity in earnings (losses) of unconsolidated subsidiary,
partnerships and other real estate venture................... (481) 64 (863) 134
Interest income from short-term investments ................... 79 36 139 122
------------ ------------ ------------ ------------
TOTAL REVENUES .............................................. 5,500 5,743 11,340 10,216
------------ ------------ ------------ ------------
EXPENSES:
Interest expense .............................................. 1,705 1,069 3,673 1,658
Management fees ............................................... 176 415 737 1,003
General and administrative .................................... 616 259 842 782
Depreciation .................................................. 415 211 975 297
Participating interest in mortgage loans ...................... -- 644 -- 829
Provision for loan losses ..................................... -- 438 1,788 1,180
------------ ------------ ------------ ------------
TOTAL EXPENSES .............................................. 2,912 3,036 8,015 5,749
------------ ------------ ------------ ------------
INCOME BEFORE GAINS (LOSSES) AND MINORITY INTERESTS ............. 2,588 2,707 3,325 4,467
Loss on sale of commercial mortgage-backed security .......... -- -- (130) --
Gain associated with repayment of ADC loan arrangements ...... -- -- 637 584
Gain on sale of real estate .................................. 1,485 -- 1,485 --
Gain on sale of unconsolidated partnership investments ....... 674 -- 674 --
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTERESTS ................................ 4,747 2,707 5,991 5,051
Minority interests ........................................... 45 -- 52 --
------------ ------------ ------------ ------------
NET INCOME ...................................................... $ 4,702 $ 2,707 $ 5,939 $ 5,051
============ ============ ============ ============
EARNINGS PER COMMON SHARE:
Basic ........................................................ $ 0.47 $ 0.27 $ 0.59 $ 0.50
============ ============ ============ ============
Diluted ...................................................... $ 0.47 $ 0.27 $ 0.59 $ 0.50
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ........................................................ 10,000 10,000 10,000 10,000
============ ============ ============ ============
Diluted ...................................................... 10,026 10,012 10,023 10,009
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock
$.01 Par Value
----------------------------- Additional Unearned
Number of Paid-in Stock
Shares Amount Capital Compensation
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, beginning of period ........... 10,015,111 $ 100 $ 140,998 $ (282)
Decrease in fair value of compensatory
options ............................ (517) 517
Total nonowner changes in equity:
Net income ........................
Unrealized losses on securities
available for sale:
Unrealized holding losses ........
Reclassification adjustment for
losses included in net income...
Comprehensive income ...................
Amortization of unearned trust manager
compensation .......................... 34
Amortization of compensatory options ... (288)
Dividends declared ($0.34 per
common share) ........................
------------ ------------ ------------ ------------
Balance, end of period ................. 10,015,111 $ 100 $ 140,481 $ (19)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated Distributions Total
Other in Excess of Nonowner Total
Comprehensive Accumulated Changes Shareholders'
Income (Loss) Earnings in Equity Equity
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, beginning of period ........... $ (10,812) $ (12,053) $ 117,951
Decrease in fair value of compensatory
options ............................
Total nonowner changes in equity:
Net income ........................ 5,939 $ 5,939 5,939
Unrealized losses on securities
available for sale:
Unrealized holding losses ........ (550) (550) (550)
Reclassification adjustment for
losses included in net income... 270 270 270
------------
Comprehensive income ................... $ 5,659
============
Amortization of unearned trust manager
compensation .......................... 34
Amortization of compensatory options ... (288)
Dividends declared ($0.34 per
common share) ........................ (3,405) (3,405)
------------ ------------ ------------
Balance, end of period ................. $ (11,092) $ (9,519) $ 119,951
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................................... $ 5,939 $ 5,051
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ................................................................. 1,788 1,180
Depreciation .............................................................................. 975 297
Gain associated with repayment of ADC loan arrangements ................................... (637) (584)
Loss on sale of commercial mortgage-backed security ....................................... 130 --
Gain on sale of unconsolidated partnership investments .................................... (674) --
Gain on sale of real estate ............................................................... (1,485) --
Amortization of prepaid assets ............................................................ 117 117
Discount amortization on commercial mortgage-backed securities ............................ (196) (170)
Amortization of compensatory stock options and unearned trust manager compensation ........ (254) 70
Amortization of loan commitment and extension fees ........................................ (375) (324)
Receipt of loan commitment and extension fees ............................................. 450 186
Increase in receivables and other assets .................................................. (282) (1,191)
Decrease (increase) in interest receivable related to commercial mortgage-backed securities (57) 4
Increase (decrease) in accounts payable and other liabilities ............................. (1,079) 1,162
Decrease in minority interests ............................................................ (26) --
Increase (decrease) in amounts due to manager and affiliates .............................. (81) 984
Equity in losses (earnings) of unconsolidated subsidiary, partnerships and
other real estate venture ........................................................... 863 (134)
Distributions from unconsolidated subsidiary, partnership and other real estate venture ... 23 201
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................................ 5,139 6,849
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in mortgage loans ................................................................ (5,138) (31,778)
Investments in ADC loan arrangements ......................................................... (638) (15,191)
Sale of mortgage loan to affiliate ........................................................... -- 4,585
Principal collected on mortgage loans ........................................................ 3,646 8,072
Principal and interest collected on ADC loan arrangements .................................... 5,279 11,513
Proceeds from sale of real estate, net of cash on hand ....................................... 17,938 --
Proceeds from sale of unconsolidated partnership investments ................................. 2,126 --
Proceeds from sale of commercial mortgage-backed security .................................... 3,784 --
Investments in real estate ................................................................... (350) (30,191)
Investments in unconsolidated partnerships and subsidiary .................................... (282) (2,334)
Distributions from unconsolidated subsidiary and partnerships ................................ 3,493 --
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES .................................. 29,858 (55,324)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of credit ................................................ -- 20,000
Proceeds from borrowings under repurchase agreement .......................................... -- 11,795
Repayment of borrowings under repurchase agreement ........................................... (9,856) (1,402)
Repayment of borrowings under line of credit ................................................. (18,041) --
Proceeds from financing provided by affiliate ................................................ -- 725
Proceeds from non-recourse debt on real estate ............................................... -- 19,498
Deferred financing costs associated with line of credit ...................................... -- (120)
Deferred financing costs associated with non-recourse debt on real estate .................... -- (436)
Dividends paid to common shareholders ........................................................ (7,812) (7,604)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .................................. (35,709) 42,456
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ....................................................... (712) (6,019)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................................................. 4,604 9,789
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................................ $ 3,892 $ 3,770
=========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid, net of amount capitalized ..................................................... $ 3,520 $ 1,369
=========== ===========
Income taxes paid ............................................................................ $ -- $ 25
=========== ===========
Minority interest distributions associated with ADC loan arrangements ........................ $ 200 $ 2,111
=========== ===========
Debt and other liabilities assumed by buyer in connection with sale of real estate ........... $ 35,156 $ --
=========== ===========
Receivables and other assets transferred to buyer in connection with sale of real estate ..... $ 1,380 $ --
=========== ===========
Receivables transferred in satisfaction of amounts due to affiliate .......................... $ -- $ 280
=========== ===========
Amounts due to affiliate discharged in connection with sale of mortgage loan ................. $ -- $ 1,729
=========== ===========
Issuance of warrants in connection with line of credit ....................................... $ -- $ 400
=========== ===========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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. (together with its
affiliated entities, the "AMRESCO Group"). For its services during the period
from May 12, 1998 (the Company's inception of operations) through March 31,
2000, the Manager was 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 was
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,
exceeded a certain threshold. In addition to the fees described above, the
Manager was also entitled to receive reimbursement for its costs of providing
certain due diligence and professional services 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 is entitled to receive reimbursements for its
quarterly operating deficits, if any, beginning April 1, 2000. These
reimbursements are 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 is no longer entitled to receive incentive
compensation and/or a termination fee in the event that the Management
Agreement is terminated. During the three and six months ended June 30, 2000,
base management fees charged to the Company totaled $485,000 and $998,000,
respectively. Reimbursable expenses charged to the Company during these periods
totaled $0 and $20,000, respectively. No operating deficit reimbursements were
charged to the Company during the three months ended June 30, 2000. During the
three and six months ended June 30, 1999, base management fees charged to the
Company totaled $511,000 and $958,000, respectively; reimbursable expenses
charged to the Company during these periods totaled $70,000 and $104,000,
respectively. During the period from its inception through March 31, 2000, no
incentive fees were charged to the Company. The base management fee and
reimbursements, if any, are payable quarterly in arrears. Immediately after the
closing of the IPO, the Manager was granted options to purchase 1,000,011
common shares; 70% of the options are exercisable at an option price of $15.00
per share and the remaining 30% of the options are exercisable at an option
price of $18.75 per share. During the three and six months ended June 30, 2000,
management fees included compensatory option charges (credits) totaling
$(309,000) and $(261,000), respectively. During the three and six months ended
June 30, 1999, management fees included compensatory option charges (credits)
totaling $(96,000) and $45,000, 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, prior to June 14, 2000, 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
7
<PAGE> 8
benefits of ownership of AMREIT II, Inc. As more fully described in Note 5, the
Company sold its non-controlling interests in two partnerships during the three
months ended June 30, 2000; prior to their disposition, the Company accounted
for these investments using the equity method of accounting and thus reported
its share of income or loss based on its ownership interests. The accompanying
financial statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999, as amended
(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 June 30, 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 $ 14,421 10.0% 12.0%
June 1, 1998 June 1, 2001 Houston, TX Office First Lien 11,800 11,520 12.0% 12.0%
June 22, 1998 June 19, 2001 Wayland, MA Office First Lien 45,000 39,960 10.5% 10.5%
July 2, 1998 July 17, 2000 Washington, D.C. Office First Lien 7,000 6,697 10.5% 10.5%
July 10, 1998 September 30, 2000 Pasadena, TX Apartment First Lien 3,350 2,993 10.0% 14.0%
May 18, 1999 May 19, 2001 Irvine, CA Office First Lien 15,260 13,886 10.0% 12.0%
July 29, 1999 July 28, 2001 Lexington, MA R&D/Bio-Tech First Lien 5,213 3,098 11.7% 14.7%
August 19, 1999 August 15, 2001 San Diego, CA Medical Office First Lien 5,745 5,654 11.7% 11.7%
---------- -----------
Mortgage loans held for investment 108,068 98,229
---------- -----------
June 12, 1998 August 31, 2000 Pearland, TX Apartment First Lien 12,827 12,302 10.0% 11.5%
June 19, 1998 September 30, 2000 Houston, TX Office First Lien 24,000 22,413 12.0% 12.0%
July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests 10,068 8,569 10.0% 15.0%
---------- -----------
ADC loan arrangements 46,895 43,284
---------- -----------
Total loan investments $ 154,963 $ 141,513
========== ===========
</TABLE>
At June 30, 2000, amounts outstanding under acquisition/rehabilitation loans,
construction loans and acquisition loans totaled $51,705,000, $49,136,000 and
$40,672,000, respectively.
8
<PAGE> 9
Three of the 11 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
June 30, 2000 June 30, 2000
------------- -------------
<S> <C> <C>
Mortgage loans held for investment, net .................... $ 98,229 $ 97,449
Real estate, net ........................................... 34,715 32,439
Investment in real estate venture .......................... 8,569 6,978
------------ ------------
Total ADC loan arrangements ............................. 43,284 39,417
------------ ------------
Total loan investments ..................................... $ 141,513 136,866
============
Allowance for loan losses .................................. (5,978)
------------
Total loan investments, net of allowance for losses ........ $ 130,888
============
</TABLE>
The differences between the outstanding loan amounts and the balance sheet
amounts are due primarily to loan commitment fees, interest fundings, minority
interests, capitalized interest and accumulated depreciation.
ADC loan arrangements accounted for as real estate consisted of the following
at June 30, 2000 (in thousands):
<TABLE>
<S> <C>
Land ........................................................... $ 3,743
Buildings and improvements ..................................... 29,454
-------------
Total ....................................................... 33,197
Less: Accumulated depreciation ................................. (758)
-------------
$ 32,439
=============
</TABLE>
A summary of activity for mortgage loans and ADC loan arrangements accounted
for as real estate or investments in joint ventures for the six months ended
June 30, 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 ........................ 5,138 1,141 6,279
Collections of principal .................... (3,646) (4,764) (8,410)
------------- ------------- -------------
Balance, end of period ...................... $ 98,229 $ 43,284 $ 141,513
============= ============= =============
</TABLE>
During the six months ended June 30, 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 June 30, 2000, the Company had outstanding commitments to fund
approximately $13,450,000 under 11 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.
9
<PAGE> 10
4. COMMERCIAL MORTGAGE-BACKED SECURITIES
As of June 30, 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
June 30, 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- $ 4,293 $ -- $ (1,217) $ 3,076
B 15,828 -- (5,093) 10,735
B- 11,471 -- (4,782) 6,689
---------- ---------- ---------- ----------
$ 31,592 $ -- $ (11,092) $ 20,500
========== ========== ========== ==========
</TABLE>
5. ASSET DISPOSITIONS
On January 11, 2000, the Company sold one of its CMBS holdings (the "B-2A"
security). Additionally, on March 21, 2000, 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.
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 $662,000.
On June 14, 2000, the Company sold its 99.5% ownership interest in five
grocery-anchored shopping centers in the Dallas/Fort Worth area for
$18,327,000. The sale generated a gain of $1,485,000. In connection with the
sale, the buyer assumed five non-recourse loans and other partnership
liabilities aggregating $34,600,000 and $556,000, respectively. Additionally,
partnership receivables and other assets totaling $1,380,000 were transferred
to the buyer.
On June 30, 2000, the Company sold its 5% ownership interest in a partnership
that owns several classes of subordinated CMBS for $326,000. The Company
realized a gain of $12,000 in connection with this sale.
10
<PAGE> 11
6. STOCK-BASED COMPENSATION
As of June 30, 2000, the estimated fair value of the options granted to the
Manager and certain employees of the AMRESCO Group approximated $0.07 per
share. The fair value of those options that were remeasured was estimated at
June 30, 2000 using the Cox-Ross-Rubinstein option pricing model with the
following assumptions: risk free interest rate of 6.35%; expected life of three
years; expected volatility of 20%; and dividend yield of 12%. During the three
months ended June 30, 2000, compensation cost associated with those options
that had not previously vested was adjusted to reflect the decline in fair
value (from December 31, 1999) of approximately $0.64 per share. During the
three and six months ended June 30, 2000 and 1999, compensatory option charges
(credits) included in management fees and general and administrative expenses
were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Management fees ............................. $ (309) $ (96) $ (261) $ 45
General and administrative expenses ......... (33) (47) (27) (20)
------------ ------------ ------------ ------------
$ (342) $ (143) $ (288) $ 25
============ ============ ============ ============
</TABLE>
At June 30, 2000, 569,756 shares were available for grant in the form of
restricted common shares or options to purchase common shares.
7. COMMON STOCK
On July 5, 2000, AMRESCO, INC. and AMREIT Holdings, Inc. (a wholly-owned
subsidiary of AMRESCO, INC.) sold 1,500,111 shares of the Company's outstanding
common stock to affiliates of Farallon Capital Management, L.L.C. for
$12,521,000, net of an illiquidity discount of $230,000. As additional
consideration for these shares, the sellers are entitled to receive 90% of
future distributions paid on or with respect to these shares, but only after the
purchasers have received $12,751,000 and a return on this amount, as adjusted,
equal to 16% per annum. As a result of this sale, AMRESCO, INC. and AMREIT
Holdings, Inc. no longer own any of the Company's outstanding common shares.
8. EARNINGS PER SHARE
A reconciliation of the numerator and denominator used in computing basic
earnings per share and diluted earnings per share for the three and six months
ended June 30, 2000 and 1999 is as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income available to common shareholders ........... $ 4,702 $ 2,707 $ 5,939 $ 5,051
============ ============ ============ ============
Weighted average common shares outstanding ............ 10,000 10,000 10,000 10,000
============ ============ ============ ============
Basic earnings per common share ....................... $ 0.47 $ 0.27 $ 0.59 $ 0.50
============ ============ ============ ============
Weighted average common shares outstanding ............ 10,000 10,000 10,000 10,000
Effect of dilutive securities:
Restricted shares .................................. 15 11 15 8
Net effect of assumed exercise of warrants ......... 10 -- 7 --
Net effect of assumed exercise of stock options .... 1 1 1 1
------------ ------------ ------------ ------------
Adjusted weighted average shares outstanding .......... 10,026 10,012 10,023 10,009
============ ============ ============ ============
Diluted earnings per common share ..................... $ 0.47 $ 0.27 $ 0.59 $ 0.50
============ ============ ============ ============
</TABLE>
At June 30, 2000 and 1999, options to purchase 1,415,261 and 1,479,511 common
shares, respectively, and warrants to purchase 250,002 common shares were
outstanding. For the three and six months ended June 30, 2000, options related
to 1,411,261 shares were not included in the computations of diluted earnings
per share because the exercise prices related
11
<PAGE> 12
thereto were greater than the average market price of the Company's common
shares. For the three and six months ended June 30, 1999, options related to
1,473,511 shares and the warrants 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.
9. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
except those resulting from investments by, and distributions to, its owners.
Other comprehensive income includes unrealized gains and losses on marketable
securities classified as available-for-sale. Comprehensive income during the
three and six months ended June 30, 2000 and 1999, was as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
------- --------- ------- -------
<S> <C> <C> <C> <C>
Net income ........................................ $ 4,702 $ 2,707 $ 5,939 $ 5,051
Unrealized losses on securities available for sale:
Unrealized holding losses ...................... (999) (1,918) (550) (2,821)
Reclassification adjustment for
losses included in net income ............... -- -- 270 --
------- ------- ------- -------
Comprehensive income .............................. $ 3,703 $ 789 $ 5,659 $ 2,230
======= ======= ======= =======
</TABLE>
10. SEGMENT INFORMATION
The Company, as an investor in real estate related assets, operates in only one
reportable segment. Within this segment, the Company makes asset allocation
decisions based upon its diversification strategies and changes in market
conditions. The Company does not have, nor does it rely upon, any major
customers. All of the Company's investments are secured directly or indirectly
by real estate properties located in the United States; accordingly, all of its
revenues were derived from U.S. operations.
11. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued 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.
12. SUBSEQUENT EVENTS
On July 17, 2000, one of the Company's loan investments was fully repaid. At
June 30, 2000, the amount outstanding under this loan totaled $6,697,000.
On July 21, 2000, the Company repaid $6,600,000 of outstanding borrowings under
its line of credit facility.
12
<PAGE> 13
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. From inception through July 5, 2000, AMRESCO, INC.
and AMREIT Holdings, Inc. collectively owned 1,500,111 shares, or approximately
15%, of the Company's outstanding common stock. On July 5, 2000, all of these
common shares were sold to affiliates of Farallon Capital Management, L.L.C. 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.
In early 2000, the Board of Trust Managers approved a course of action to
market and sell the Company's non-core assets, including its CMBS holdings and
its equity investments in real estate. To date, the Company has sold one of its
CMBS investments, its 49% limited partner interest in a suburban office
building, its majority ownership interest in five grocery-anchored shopping
centers and its minority ownership interest in a partnership that owns CMBS.
Additionally, in March 2000, the Company's unconsolidated taxable subsidiary
sold its only CMBS investment. Currently, the Company's non-core asset
portfolio is comprised of four commercial mortgage-backed securities which
management is marketing for sale. The sales of these securities, should they
occur, are expected to contribute significantly to volatility in the Company's
future financial statement earnings and tax basis income. As of June 30, 2000,
cumulative unrealized losses associated with the Company's CMBS portfolio
totaled $11.1 million. Also, the Board of Trust Managers has approved a Plan of
Liquidation and Dissolution 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 scheduled to be held on September 26, 2000.
Shareholders of record at the close of business on August 21, 2000 will be
entitled to vote at the meeting. If the liquidation and dissolution 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.
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, the Company intends to
use the proceeds from loan repayments and the asset sales described above to
repay its credit facilities. During the six months ended June 30, 2000, the
Company reduced the outstanding borrowings under its line of credit by $18.0
million, from $60.6 million to $42.6 million, and it fully repaid its
repurchase agreement indebtedness of $9.8 million. After the line of credit has
been fully repaid and assuming that the liquidation and dissolution has
received shareholder approval, the Company intends to make liquidating
distributions to its 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,
13
<PAGE> 14
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.
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 and
six months ended June 30, 2000 was $4,702,000 and $5,939,000, respectively, or
$0.47 and $0.59 per common share, respectively. The Company's primary sources
of revenue for the three and six months ended June 30, 2000, totaling
$5,500,000 and $11,340,000, respectively, were as follows:
o $3,978,000 and $7,978,000, respectively, 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 statements of income for the three and
six months ended June 30, 2000 as follows: interest income on mortgage
loans of $3,005,000 and $6,007,000, respectively; and operating income
from real estate of $973,000 and $1,971,000, respectively.
o $848,000 and $1,699,000, respectively, from investments in CMBS.
o $1,076,000 and $2,387,000, respectively, of operating income from real
estate previously owned by the Company (through a majority-owned
partnership).
o $(481,000) and $(863,000), respectively, 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 $79,000 and $139,000, respectively, of interest income from short-term
investments.
Additionally, the Company realized a gain of $637,000 during the six months
ended June 30, 2000 in connection with the repayment of an ADC loan
arrangement. The repayment occurred in March 2000. 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. During the three and six months ended June
30, 2000, the Company realized gains of $1,485,000 and $674,000 in connection
with the sale of real estate and two unconsolidated partnership investments,
respectively. The real estate disposition was effected by a sale of the
Company's 99.5% interest in a master partnership that, through individual
subsidiary partnerships, owns five grocery-anchored shopping centers.
The Company incurred expenses of $2,912,000 and $8,015,000, respectively,
during the three and six months ended June 30, 2000. These expenses are set
forth below.
o $1,705,000 and $3,673,000, respectively, of interest expense associated
with the Company's credit facilities and five non-recourse loans secured
by real estate.
o $176,000 and $737,000, respectively, of management fees, including
$485,000 and $998,000, respectively, of base management fees payable to
the Manager pursuant to the Management Agreement, as amended, and
$(309,000) and $(261,000), respectively, of credits associated with
compensatory options granted to the Manager. No incentive fees were
incurred during either period.
14
<PAGE> 15
o $616,000 and $842,000, respectively, of general and administrative costs,
including $558,000 and $633,000, respectively, for professional services
(including a financial advisor's fee), $58,000 and $117,000, respectively,
for directors and officers' insurance, $0 and $20,000, respectively, of
reimbursable costs pursuant to the amended Management Agreement, $(33,000)
and $(27,000), respectively, related to compensatory options granted to
certain members of the AMRESCO Group, $3,000 and $7,000, respectively, of
fees paid to the Company's Independent Trust Managers for their
participation at special meetings of the Board of Trust Managers, $15,000
and $15,000, respectively, of fees paid to the Company's Chairman of the
Board of Trust Managers and Chief Executive Officer for his services to the
Company, $11,000 and $34,000, respectively, related to restricted stock
awards to the Company's Independent Trust Managers, and $2,000 and $14,000,
respectively, of travel costs. These categories do not represent all
general and administrative expenses.
o $415,000 and $975,000 of depreciation expense, including $194,000 and
$499,000, respectively, related to five grocery-anchored shopping centers
and $221,000 and $476,000, respectively, related to loan investments
accounted for as real estate.
o $0 and $1,788,000, respectively, of provision for loan losses.
Additionally, the Company realized a loss of $130,000 during the six months
ended June 30, 2000 in connection with the sale of one of its CMBS holdings.
The sale occurred in January 2000.
During the three and six months ended June 30, 2000, minority interest in a
subsidiary partnership's net income totaled $45,000 and $52,000, respectively.
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
The Company's revenues decreased by $243,000 (or 4%), from $5,743,000 to
$5,500,000, due to declines in interest income on mortgage loans of $873,000,
income from commercial mortgage-backed securities of $86,000 and equity in
earnings/losses of unconsolidated subsidiary, partnerships and other real
estate venture of $545,000. 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. Additionally, during
the three and six months ended June 30, 1999, the Company received a profit
participation of approximately $432,000; during the three and six months ended
June 30, 2000, no profit participations were received. 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 and less favorable operating results
from the partnership that the Company assumed control of on February 25, 1999.
During the three and six months ended June 30, 2000, the partnership's
operating results included $346,000 of costs associated with a settlement of
alleged defaults under the partnership's first lien mortgage.
The lower revenues described above were offset by an increase in operating
income from real estate. The increase in operating income from real estate,
totaling $1,218,000, 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.
15
<PAGE> 16
The Company's aggregate expenses decreased by $124,000 (or 4%), from $3,036,000
to $2,912,000. The changes in the component expenses were as follows (in
thousands):
<TABLE>
<CAPTION>
Increase/
(Decrease)
---------
<S> <C>
Interest expense .............................. $ 636
Management fees ............................... (239)
General and administrative .................... 357
Depreciation .................................. 204
Participating interest in mortgage loans ...... (644)
Provision for loan losses ..................... (438)
----
Total net decrease in expenses ............. $ (124)
====
</TABLE>
Interest expense increased primarily as a result of higher average non-recourse
debt balances (these fixed rate borrowings were incurred in connection with the
acquisitions of real estate described above) and higher interest rates related
to the Company's two floating rate credit facilities (at June 30, 2000 and
1999, the Company's weighted average borrowing rate under these facilities was
7.9% [excluding the effect of its interest rate cap agreement] and 6.2%,
respectively). Additionally, during the prior period, a portion of the
Company's interest costs ($235,000) was capitalized; during the current period,
no interest costs were capitalized.
The Company's base management fees decreased by $26,000, from $511,000 to
$485,000, as a result of the fact that the Company's average asset base (upon
which the fee is calculated) was smaller in the current period (as compared to
the prior period) while compensatory option charges (included in management
fees) declined by $213,000, from $(96,000) to $(309,000), as a result of a
decrease in the value of the options.
The increase in general and administrative expenses was due primarily to the
fact that the Company incurred higher professional fees during the current
period as compared to the prior period. These fees were related to financial
advisory and legal services associated with the Company's consideration of
various strategic alternatives and the preparation of materials related to the
Plan of Liquidation and Dissolution. No such costs were incurred by the Company
during the three months ended June 30, 1999. 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 June 30, 2000 as the financing
arrangement giving rise to such costs was fully extinguished on November 1,
1999. The decrease in the Company's provision for loan losses was attributable
to the fact that the Company's current allowance for loan losses was deemed to
be adequate.
For the reasons cited above, income before gains (losses) and minority
interests decreased by $119,000 (or 4%), from $2,707,000 to $2,588,000. Net
income increased by $1,995,000 (or 74%), from $2,707,000 to $4,702,000
primarily as a result of sale-related gains in the current period totaling
$2,159,000.
16
<PAGE> 17
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
The Company's revenues increased by $1,124,000 (or 11%), from $10,216,000 to
$11,340,000, and its expenses increased by $2,266,000 (or 39%), from $5,749,000
to $8,015,000. The changes in the component revenues and expenses were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Increase/
(Decrease)
---------
<S> <C>
Interest income on mortgage loans ....................... $ (928)
Income from commercial mortgage-backed securities ....... (149)
Operating income from real estate ....................... 3,181
Equity in earnings (losses) of unconsolidated subsidiary,
partnerships and other real estate venture .......... (997)
Interest income from short-term investments ............. 17
-------
Total net increase in revenues ...................... $ 1,124
=======
Interest expense ....................................... $ 2,015
Management fees ........................................ (266)
General and administrative ............................. 60
Depreciation ........................................... 678
Participating interest in mortgage loans ............... (829)
Provision for loan losses .............................. 608
-------
Total net increase in expenses ...................... $ 2,266
=======
</TABLE>
For the most part, the changes in the six-month component revenues were
attributable to the same factors cited above under the sub-heading "Three
Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999." The
decrease in equity in earnings/losses of unconsolidated subsidiary,
partnerships and other real estate venture was due, in part, to the fact that
the current period revenues include the Company's share of the loss realized in
connection with the sale of the unconsolidated subsidiary's CMBS investment in
March 2000.
Interest expense increased primarily as a result of higher average debt
balances under the Company's two credit facilities, higher interest rates
related to these facilities and higher average non-recourse debt balances.
Additionally, $386,000 of interest costs were capitalized during the six months
ended June 30, 1999; in contrast, no interest costs were capitalized during the
six months ended June 30, 2000. The Company's base management fees increased by
$40,000, from $958,000 to $998,000, as a result of the fact that the Company's
average asset base (upon which the fee is calculated) was larger during the
current period (as compared to the prior period) while compensatory option
charges (included in management fees) declined by $306,000, from $45,000 to
$(261,000), as a result of a decrease in the value of the options. The increase
in depreciation expense and the decrease in participating interest in mortgage
loans were attributable to the same factors cited above under the sub-heading
"Three Months Ended June 30, 2000 Compared to Three Months Ended June 30,
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 $1,142,000 (or 26%), from $4,467,000 to $3,325,000. Net
income increased by $888,000 (or 18%), from $5,051,000 to $5,939,000. In
addition to the factors cited above, minority interest in a subsidiary
partnership's net income, dissimilar gains from repayments of ADC loan
arrangements (in 1999 and 2000), a loss from the sale of CMBS (in 2000) and
gains from the sales of real estate and two unconsolidated partnership
investments (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 historically 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
17
<PAGE> 18
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 amended). 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, was paid on May 15, 2000 to shareholders of record on
May 4, 2000. For federal income tax purposes, this dividend will likely be
treated as ordinary income to the Company's shareholders. Currently, the Board
of Trust Managers plans to determine the timing and amount of the Company's next
dividend distribution subsequent to the 2000 Annual Meeting of Shareholders.
Loan Investments
During the three months ended June 30, 2000, one of the Company's loans with an
outstanding balance of $2.2 million was fully repaid. During the six months
ended June 30, 2000, two of the Company's loans were fully repaid, one of which
was an ADC loan arrangement. Proceeds from the repayment of the ADC loan
arrangement totaled $5.1 million, including accrued interest of approximately
$350,000. Principal collections on the Company's other loan investments totaled
approximately $43,000 and $1.47 million during the three and six months ended
June 30, 2000, respectively. During the three and six months ended June 30,
2000, the Company advanced a total of $3.06 million and $6.28 million,
respectively, 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 10.8% and a weighted average interest accrual rate of 11.5% as of June 30,
2000. These weighted average interest rates exclude the loan which was deemed to
be impaired as of December 31, 1999 (see note [c] accompanying the table below).
Three of the 11 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 June 30, 2000, the Company's loan investments are summarized
as follows (dollars in thousands):
<TABLE>
<CAPTION>
Date of Initial Scheduled Collateral
Investment Maturity Location Property Type Position
--------------- ------------------ ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien
June 1, 1998 June 1, 2001 Houston, TX Office First Lien
June 22, 1998 June 19, 2001 Wayland, MA Office First Lien
July 2, 1998 July 17, 2000 Washington, D.C. Office First Lien
July 10, 1998 September 30, 2000 Pasadena, TX Apartment First Lien
May 18, 1999 May 19, 2001 Irvine, CA Office First Lien
July 29, 1999 July 28, 2001 Lexington, MA R&D/Bio-Tech First Lien
August 19, 1999 August 15, 2001 San Diego, CA Medical Office First Lien
Mortgage loans held for investment
June 12, 1998 August 31, 2000 Pearland, TX Apartment First Lien
June 19, 1998 September 30, 2000 Houston, TX Office First Lien
July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests
ADC loan arrangements
Total loan investments
</TABLE>
<TABLE>
<CAPTION>
Interest Interest
Date of Initial Scheduled Commitment Amount Pay Accrual
Investment Maturity Amount Outstanding Rate Rate
--------------- ------------------ ----------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
May 12, 1998 March 31, 2001 $14,700 $ 14,421 10.0% 12.0%
June 1, 1998 June 1, 2001 11,800 11,520 12.0% 12.0%
June 22, 1998 June 19, 2001 45,000 39,960 10.5% 10.5%
July 2, 1998 July 17, 2000 7,000 6,697(a) 10.5% 10.5%
July 10, 1998 September 30, 2000 3,350 2,993 10.0% 14.0%
May 18, 1999 May 19, 2001 15,260 13,886 10.0% 12.0%
July 29, 1999 July 28, 2001 5,213 3,098 11.7% 14.7%
August 19, 1999 August 15, 2001 5,745 5,654 11.7% 11.7%
-------- --------
Mortgage loans held for investment 108,068 98,229
-------- --------
June 12, 1998 August 31, 2000 12,827 12,302(b) 10.0% 11.5%
June 19, 1998 September 30, 2000 24,000 22,413(b) 12.0% 12.0%
July 1, 1998 July 1, 2001 10,068 8,569(c) 10.0% 15.0%
-------- --------
ADC loan arrangements 46,895 43,284
-------- --------
Total loan investments $154,963(d) $141,513(d)
======== ========
</TABLE>
(a) Loan was fully repaid on July 17, 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, as amended.
18
<PAGE> 19
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
Outstanding at
Scheduled Commitment June 30, Extension Options
Maturity Amount 2000 Available to Borrower
--------------- ---------- -------------- ---------------------------
<S> <C> <C> <C>
August 31, 2000 $ 12,827 $ 12,302 One 4-Month Option Followed
by One 6-Month Option
March 31, 2001 14,700 14,421 Two 1-Year Options
May 19, 2001 15,260 13,886 One 6-Month Option
July 28, 2001 5,213 3,098 One 6-Month Option
---------- ----------
$ 48,000 $ 43,707
========== ==========
</TABLE>
Additionally, the Company has, by agreement, extended the maturity dates of its
$24 million Houston office loan and its $3.35 million Pasadena apartment loan to
September 30, 2000. As of June 30, 2000, $22.413 million and $2.993 million,
respectively, was outstanding under these facilities. Under the terms of the
extension agreements, each of the borrowers will be entitled to an additional
30-day extension (to October 30, 2000) if their respective property is under
contract to be sold to a third party purchaser and certain other conditions are
met.
During the three months ended June 30, 2000, the maturity date of the Company's
$45 million Wayland office loan was extended to June 19, 2001 under a 1-year
extension option that the borrower elected to exercise. Additionally, the
Company approved an extension (from June 30, 2000 to August 31, 2000) of its
$12.827 million Pearland apartment loan; the first of two 6-month options was
reduced to a 4-month option in connection with this extension (see table above).
At June 30, 2000, $39.960 million and $12.302 million, respectively, was
outstanding under these facilities.
A mezzanine loan with an outstanding balance of $8,569,000 and a recorded
investment of $6,978,000 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 June 30, 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,
required interest only payments through June 30, 2000. In addition to interest,
the first lien mortgage also requires monthly principal reductions of
approximately $42,000 from July 1, 2000 through maturity. 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 was 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. 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. After the grace period
elapsed, the first lien lender served a default notice to the borrower for its
failure to make this interest payment. Concurrently, the Company served a
default notice to the borrower for its failure to pay interest due under the
terms of the mezzanine loan. Effective as of May 15, 2000, the Company entered
into an Agreement for DPO (or discounted payoff) with the borrower (the "DPO
Agreement"). Under the terms of the DPO Agreement, the Company has now agreed to
accept $1,250,000 (the "DPO Amount") in complete satisfaction of all amounts
owed to it by the borrower provided that certain conditions are met. On or
before May 31, 2000, the borrower was required to pay $250,000 of the DPO Amount
to the Company. The recorded investment of this loan was reduced by $250,000
upon receipt of this payment on May 31, 2000. The balance of the DPO Amount (or
$1,000,000) must be received on or before October 31, 2000. On May 16, 2000, the
borrower cured the default on the first lien mortgage by making the April 2000
interest payment. The borrower's ability
19
<PAGE> 20
to fully satisfy the loan pursuant to the DPO Agreement is further conditioned
upon there being no subsequent defaults under the first lien mortgage. Through
July 2000, all debt service payments have been made in accordance with the terms
of the first lien mortgage. If the balance of the DPO Amount is not received on
or before October 31, 2000, the Company could assume control of the borrower (a
partnership) through foreclosure of the partnership interests. As a result of
the events described above, 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 of the amount of the expected loss which could
result upon a final settlement of this loan in accordance with the terms of the
DPO Agreement.
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 had failed to
perform certain obligations under the Intercreditor Agreement. The notice also
specified that, as a result of the alleged defaults, interest had 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. Under the terms of a negotiated settlement, the
borrower paid $250,000 of default interest to the first lien lender.
Additionally, the borrower reimbursed 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 totaled approximately $96,000. Following
the payment of these amounts on May 19, 2000, all of the alleged defaults under
the first lien mortgage were cured. Furthermore, the first lien lender has
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 negotiated settlement. To this end, an assumption agreement is
currently being finalized. Currently, the Company expects to close the proposed
transaction with the prospective investor in August 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
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 June 30, 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 $ 76,745 $ 72,218 50%
Massachusetts 50,213 43,058 32
California 21,005 19,540 14
Washington, D.C 7,000 6,697 4
-------- -------- --------
$154,963 $141,513 100%
======== ======== ========
</TABLE>
20
<PAGE> 21
At June 30, 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 $117,466 83%
Multifamily 16,177 15,295 10
Medical Office 5,745 5,654 4
R&D/Bio-Tech 5,213 3,098 3
-------- -------- --------
$154,963 $141,513 100%
======== ======== ========
</TABLE>
At June 30, 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 $ 51,705 38%
Construction 51,527 49,136 33
Acquisition 44,128 40,672 29
-------- -------- --------
$154,963 $141,513 100%
======== ======== ========
</TABLE>
The three properties underlying the Company's construction loans were
substantially completed during 1999. As of June 30, 2000, these properties were
99%, 94% and 93% leased, respectively.
Eighty-four percent of the portfolio is comprised of first lien loans while the
balance of the portfolio (16%) 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
On January 11, 2000, the Company sold one of its CMBS holdings (the "B-2A"
security). Additionally, on March 21, 2000, 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.
21
<PAGE> 22
As of June 30, 2000, the Company held four commercial mortgage-backed securities
which were acquired at an aggregate purchase price of $30.6 million. During the
six months ended June 30, 2000, the value of these securities declined by
$745,000 due to the widening of spreads in the CMBS market during the latter
half of the period. As these securities are classified as available for sale,
the unrealized loss was reported as a component of accumulated other
comprehensive income (loss) in shareholders' equity for financial reporting
purposes. During the three and six months ended June 30, 2000, the changes in
accumulated other comprehensive income (loss) were as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
2000 2000
------------ ----------
<S> <C> <C>
Balance, beginning of period ..................... $(10,093) $(10,812)
Unrealized gains associated with
securities sold during the period ............. -- 195
Reclassification adjustment for
realized losses included in net income ........ -- 270
Unrealized losses associated
with retained securities ...................... (999) (745)
-------- --------
Balance, end of period ........................... $(11,092) $(11,092)
======== ========
</TABLE>
As of June 30, 2000, the Company's 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- $ 4,293 $ (1,217) $ 3,076 15%
B 15,828 (5,093) 10,735 52%
B- 11,471 (4,782) 6,689 33%
------ ------ ----- --
$ 31,592 $(11,092) $ 20,500 100%
======== ======== ======== ===
</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, 1999 and the six months ended June 30, 2000 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.
On June 30, 2000, the Company sold its 5% ownership interest in a partnership
that owns several classes of subordinated CMBS for $326,000. The gain associated
with this transaction totaled $12,000.
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 totaled $662,000.
On June 14, 2000, the Company sold its 99.5% ownership interest in five
grocery-anchored shopping centers in the Dallas/Fort Worth area for $18.327
million. The gain associated with this transaction totaled $1,485,000.
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".
22
<PAGE> 23
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, management fees,
general and administrative expenses, debt repayments and distributions to its
shareholders. In the near term, the Company's principal source of liquidity is
the funds available to it under its Line of Credit.
At June 30, 2000, amounts outstanding under the Line of Credit totaled $42.6
million. During the three and six months ended June 30, 2000, the Company
reduced the outstanding borrowings under this facility by $9.3 million and $18.0
million, respectively. At June 30, 2000, the weighted average interest rate
under the Line of Credit was 7.90%. In July 2000, the Company repaid an
additional $6.6 million under its Line of Credit, thereby reducing the amounts
outstanding under this facility from $42.6 million to $36.0 million.
In June 2000, the Company fully repaid its Repurchase Agreement indebtedness of
$9.8 million. This borrowing facility matured on June 30, 2000.
During the six months ended June 30, 2000, amounts due from the counterparty
under the terms of the Company's $59 million (notional) interest rate cap
agreement totaled $22,000 as one-month LIBOR exceeded 6.25% during the latter
part of this period. On August 4, 2000, the Company terminated a portion of its
interest rate cap agreement. The proceeds from this transaction totaled $30,000.
The revised agreement, which more closely matches the borrowings currently
outstanding under the Company's Line of Credit, has a notional amount of $30
million. Until its expiration on November 1, 2000, the revised agreement
entitles the Company to receive from the counterparty the amounts, if any, by
which one-month LIBOR exceeds 6.25%.
At the date of this report, the Company expects that proceeds generated from
scheduled loan repayments and sales of its CMBS should be sufficient to fully
repay its Line of Credit on or before its scheduled maturity date (November 3,
2000); at the same time, these sales and anticipated repayments are also
expected to provide the Company with sufficient funds to meet its other
liquidity needs, including those described above. However, there can be no
assurances that this will be the case. The Company's other liquidity needs
include, but are not limited to, the availability of funds which should enable
it to make distributions that will allow it to continue to qualify as a REIT. A
loan with a current maturity date of August 31, 2000 and an outstanding balance
of $12.3 million has an extension option (beyond November 3, 2000) which the
borrower may elect to exercise. While management does not currently believe that
this loan will be repaid on or before August 31, 2000, it does expect that such
loan will be repaid prior to the scheduled maturity of its Line of Credit
although there can be no assurances that this will be the case. Additionally,
two of the Company's borrowers are actively marketing their respective
properties in an effort to have them under contract to be sold by no later than
September 30, 2000 (with closings on or before October 30, 2000). Proceeds from
these sales would be used to repay the Company's loans; at June 30, 2000, the
amounts outstanding under these loans totaled $25.4 million. There can be no
assurances, however, that these borrowers will be successful in completing their
sales on or prior to October 30, 2000. Finally, there can be no assurances that
the Company's CMBS holdings will be sold prior to the maturity date of the Line
of Credit or that they will be sold on terms favorable to the Company. In the
event that the anticipated loan repayments and/or the CMBS sales are delayed
beyond November 3, 2000, the Company believes that its Line of Credit lender
would be willing to consider an extension of the maturity date. However, there
can be no assurances that the Company would be able to obtain this extension or
that such an extension would be available to the Company at a reasonable cost.
If the Company's lender was unwilling to extend the maturity date of its credit
facility or it was unwilling to grant an extension 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.
In the event that the Company has debt outstanding subsequent to November 1,
2000, its cost of borrowing may increase (based on current LIBOR rates) as it
has not entered into any derivative financial instruments which would mitigate
this market risk exposure beyond that date. Beyond the date that the Line of
Credit (or a replacement facility, if necessary) is fully repaid, the Company
believes that its cash flow from operations and the proceeds from loan
repayments and asset sales should be sufficient to meet the Company's currently
expected liquidity and capital requirements.
23
<PAGE> 24
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.
24
<PAGE> 25
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 the Company's borrowing
facility. 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 facility. 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 (indirectly, through its
unconsolidated taxable subsidiary), 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 its manager 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, as amended. 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. (filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2000, which exhibit is incorporated herein by
reference).
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).
99.2 Form of REIT Agreement, dated as of July 5, 2000, among
AMRESCO Capital Trust and Farallon Capital Partners, L.P.,
Farallon Capital Institutional Partners, L.P., Farallon
Capital Institutional Partners II, L.P., Farallon Capital
Institutional Partners III, L.P. and RR Capital Partners,
L.P. (filed as Exhibit 99.1 to the Registrant's Current
Report on Form 8-K dated July 5, 2000 and filed with the
Commission on July 6, 2000, which exhibit is incorporated
herein by reference).
99.3 Form of Amendment No. 1 to Rights Agreement, dated as of
June 29, 2000, between AMRESCO Capital Trust and The Bank of
New York (filed as Exhibit 99.2 to the Registrant's Current
Report on Form 8-K dated July 5, 2000 and filed with the
Commission on July 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:
None.
25
<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMRESCO CAPITAL TRUST
Registrant
Date: August 14, 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)
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
