-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ItBDYWRmbgN7CYQNdztXhqXHgwkfbPGo2h3bd0/01sIp6IIfoMOUBSLB9E1lUq0i KXQe1q1KNlHyTfQGiAmkzw== /in/edgar/work/20000814/0000950134-00-006987/0000950134-00-006987.txt : 20000921 0000950134-00-006987.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950134-00-006987 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMRESCO CAPITAL TRUST CENTRAL INDEX KEY: 0001054337 STANDARD INDUSTRIAL CLASSIFICATION: [6798 ] IRS NUMBER: 752744858 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14029 FILM NUMBER: 697834 BUSINESS ADDRESS: STREET 1: 700 NORTH PEARL STREET STREET 2: SUITE 1900 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2149537700 MAIL ADDRESS: STREET 1: 700 NORTH PEARL STREET STREET 2: SUITE 2400 LB 342 CITY: DALLAS STATE: TX ZIP: 75201 10-Q 1 e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2000 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. 2 AMRESCO CAPITAL TRUST INDEX
Page No. -------- 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
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMRESCO CAPITAL TRUST CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
June 30, 2000 December 31, (unaudited) 1999 ------------- ------------- 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 ============= =============
See notes to consolidated financial statements. 3 4 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ 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 ============ ============ ============ ============
See notes to consolidated financial statements. 4 5 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock $.01 Par Value ----------------------------- Additional Unearned Number of Paid-in Stock Shares Amount Capital Compensation ------------ ------------ ------------ ------------ 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) ============ ============ ============ ============
Accumulated Distributions Total Other in Excess of Nonowner Total Comprehensive Accumulated Changes Shareholders' Income (Loss) Earnings in Equity Equity ------------ ------------ ------------ ------------ 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 ============ ============ ============
See notes to consolidated financial statements. 5 6 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
Six Months Ended June 30, --------------------------- 2000 1999 ----------- ----------- 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 =========== ===========
See notes to consolidated financial statements. 6 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 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):
Interest Interest Date of Initial Scheduled Collateral Commitment Amount Pay Accrual Investment Maturity Location Property Type Position Amount Outstanding Rate Rate - --------------- --------------- ------------- -------------- ---------- ---------- ----------- ----- ------- 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 ========== ===========
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 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):
Loan Amount Balance Sheet Outstanding at Amount at June 30, 2000 June 30, 2000 ------------- ------------- 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 ============
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): Land ........................................................... $ 3,743 Buildings and improvements ..................................... 29,454 ------------- Total ....................................................... 33,197 Less: Accumulated depreciation ................................. (758) ------------- $ 32,439 =============
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):
Mortgage ADC Loan Loans Arrangements Total ------------- ------------- ------------- 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 ============= ============= =============
During the six months ended June 30, 2000, the activity in the allowance for loan losses was as follows (in thousands): Balance, beginning of period ...................................... $4,190 Provision for losses .............................................. 1,788 Charge-offs ....................................................... -- Recoveries ........................................................ -- ------ Balance, end of period ............................................ $5,978 ======
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 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):
Aggregate Aggregate Aggregate Aggregate Security Amortized Unrealized Unrealized Fair Rating Cost Gains Losses Value - -------- ---------- ---------- ---------- ---------- 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 ========== ========== ========== ==========
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):
Total Gross Disposition Amortized Realized Security Proceeds Cost Loss - -------- ---------- ---------- ---------- B-2A $ 3,784 $ 3,914 $ (130) B-3A $ 3,341 $ 3,481 $ (140)
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 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):
Three Months Ended Six Months Ended June 30, June 30, ----------------------------- ----------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Management fees ............................. $ (309) $ (96) $ (261) $ 45 General and administrative expenses ......... (33) (47) (27) (20) ------------ ------------ ------------ ------------ $ (342) $ (143) $ (288) $ 25 ============ ============ ============ ============
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):
Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ 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 ============ ============ ============ ============
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 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):
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2000 1999 2000 1999 ------- --------- ------- ------- 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 ======= ======= ======= =======
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 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 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 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 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):
Increase/ (Decrease) --------- 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) ====
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 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):
Increase/ (Decrease) --------- 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 =======
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 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):
Date of Initial Scheduled Collateral Investment Maturity Location Property Type Position - --------------- ------------------ ---------------- -------------- --------------- 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
Interest Interest Date of Initial Scheduled Commitment Amount Pay Accrual Investment Maturity Amount Outstanding Rate Rate - --------------- ------------------ ----------- ------------ -------- -------- 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) ======== ========
(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 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):
Amount Outstanding at Scheduled Commitment June 30, Extension Options Maturity Amount 2000 Available to Borrower - --------------- ---------- -------------- --------------------------- 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 ========== ==========
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 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):
Percentage of Total Committed Loan Amount Committed Amount Outstanding Amount --------- ----------- ---------- 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% ======== ======== ========
20 21 At June 30, 2000, the Company's loan investments were collateralized by the following product types (dollars in thousands):
Percentage of Total Committed Loan Amount Committed Amount Outstanding Amount --------- ----------- ---------- 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% ======== ======== ========
At June 30, 2000, the Company's loan investments were collateralized by the following loan types (dollars in thousands):
Percentage of Total Committed Loan Amount Committed Amount Outstanding Amount --------- ----------- ---------- Acquisition/Rehabilitation $ 59,308 $ 51,705 38% Construction 51,527 49,136 33 Acquisition 44,128 40,672 29 -------- -------- -------- $154,963 $141,513 100% ======== ======== ========
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):
Total Gross Disposition Amortized Realized Security Proceeds Cost Loss - ---------- ----------- --------- -------------- B-2A $3,784 $3,914 $(130) B-3A $3,341 $3,481 $(140)
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 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:
Three Months Six Months Ended Ended June 30, June 30, 2000 2000 ------------ ---------- 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) ======== ========
As of June 30, 2000, the Company's CMBS investments are summarized as follows (dollars in thousands):
Aggregate Aggregate Aggregate Percentage of Security Amortized Unrealized Fair Total Based on Rating Cost Losses Value Fair Value - -------- --------- ---------- --------- -------------- 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% ======== ======== ======== ===
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 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 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 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 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 27 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 27 Financial Data Schedule
EX-27 2 ex27.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 3,892 20,500 2,776 0 0 0 32,439 758 164,398 44,147 0 0 0 100 119,851 164,398 0 11,340 0 0 2,606 1,788 3,673 5,939 0 5,939 0 0 0 5,939 0.59 0.59 INCLUDES GAINS AND LOSSES ASSOCIATED WITH ASSET DISPOSITIONS.
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