-----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, Evr0hOEaIKlWs+uPza5KgVgANY0dRWLg01p8BrJ9FqPOVMeivzZHs7xpjrkm7rHd RDhRmN5c7WkEz28B1MnhPg== 0000950134-02-002926.txt : 20020415 0000950134-02-002926.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950134-02-002926 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMRESCO CAPITAL TRUST CENTRAL INDEX KEY: 0001054337 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 752744858 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-14029 FILM NUMBER: 02592835 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-K405 1 d95463e10-k405.txt FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 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 Securities registered pursuant to Section 12(b) of the Act: NONE (Title of class) Securities registered pursuant to Section 12(g) of the Act: COMMON SHARES OF BENEFICIAL INTEREST, $0.01 PAR VALUE PER SHARE PREFERRED SHARE PURCHASE RIGHTS (Title of class) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of February 7, 2002, 10,039,974 shares of the registrant's common stock, par value $.01 per share, were outstanding. As of that date, the aggregate market value of the shares of common stock held by non-affiliates of the registrant (based upon the closing price of $1.36 per share on February 7, 2002 as reported on The Nasdaq Stock Market(R)) was approximately $13.5 million. Shares of common stock held by each executive officer and trust manager have been excluded in that such persons may be deemed to be affiliates. From and after February 8, 2002, the registrant's common stock is traded on the OTC Bulletin Board(R). DOCUMENTS INCORPORATED BY REFERENCE None AMRESCO CAPITAL TRUST INDEX
Page No. -------- PART I Item 1. Business .......................................................... 3 Item 2. Properties ........................................................ 8 Item 3. Legal Proceedings ................................................. 8 Item 4. Submission of Matters to a Vote of Security Holders ............... 8 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters ........................................................ 9 Item 6. Selected Financial Data ........................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................... 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........ 24 Item 8. Financial Statements and Supplementary Data ....................... 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................................... 24 PART III Item 10. Trust Managers and Executive Officers of the Company ............... 25 Item 11. Executive Compensation ............................................. 27 Item 12. Security Ownership of Certain Beneficial Owners and Management ..... 30 Item 13. Certain Relationships and Related Transactions ..................... 31 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ... 33 SIGNATURES ................................................................... 34
2 PART I ITEM 1. BUSINESS OVERVIEW AMRESCO Capital Trust (the "Company") was organized on January 6, 1998 as a real estate investment trust ("REIT") 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 through the sale of 100 of its common shares of beneficial interest, par value $.01 per share (the "Common Shares"), to AMRESCO, INC. on February 2, 1998 for $1,000. The Company 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 (the "Private Placement") at $15.00 per share. Immediately after the closing of the IPO, the Company began originating and acquiring investments. Prior to its decision to liquidate (as described below), the Company's principal business objective was to maximize shareholder value by producing cash flow for distribution to its shareholders through investment in mid- to high-yield real estate related assets which earn an attractive spread over the Company's cost of funds. In accordance with this objective, the Company made investments in senior mortgage loans, mezzanine loans, CMBS and commercial real estate (through investments in partnerships) while maintaining what management believed to be a conservative leverage position. Beginning in mid 1998 (shortly after the closing of the Company's IPO), market prices for publicly traded REITs and mortgage REITs in particular began a significant decline. Additionally, during the third and fourth quarters of 1998, the commercial mortgage-backed securitization market deteriorated dramatically. Because of these developments, the Company, like many other REITs, became limited in its ability to raise new capital to achieve its business strategy. REITs are limited in their ability to grow through retained earnings because they are required to distribute a substantial portion of their REIT taxable income annually. In order to continue to grow its asset base as a stand-alone entity, a REIT must raise new capital either in the form of equity or debt. It also became apparent that the market was pricing the Company's equity at severely discounted values relative to its book value. Accordingly, in late 1998, the Company's Board of Trust Managers began discussions of ways to strengthen the Company's balance sheet, gain access to additional sources of capital and provide liquidity to use for future investments and operations. Following an extensive review of the various alternatives available to the Company and after consideration of several proposals from other entities, the Company ultimately entered into an Agreement and Plan of Merger (the "Merger Agreement") with Impac Commercial Holdings, Inc. ("ICH"), another mortgage REIT, in early August 1999. Although the Company believed at that time that the combination would be beneficial to its shareholders, prevailing market conditions and other factors made the merger less attractive as time progressed. Furthermore, it appeared that the benefits to be derived from the combination would take longer than originally anticipated to materialize. Ultimately, the Company and ICH mutually agreed to terminate the Merger Agreement in late December 1999. During the latter part of 1999, the Company's Common Shares continued to trade at a substantial discount to the Company's book value and the CMBS market continued to deteriorate. 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 investments and its equity investments in real estate. During the first quarter of 2000, the Company also continued to analyze strategic alternatives to maximize shareholder value, including continuing to operate as a going concern (either as a REIT or as a C corporation), merging or combining with other entities, selling its shares or its assets, or winding down its operations in a liquidation. On March 29, 2000, the Board of Trust Managers unanimously approved a Plan of Liquidation and Dissolution (the "Plan") for the Company. On September 26, 2000, shareholders approved the liquidation and dissolution of the Company under the terms and conditions of the Plan. At the Company's 2000 Annual Meeting, which was held on September 26, 2000, 78.5% of the Company's outstanding Common Shares were cast in favor of the liquidation and dissolution proposal. Of the votes cast on this proposal, 99.5% were in favor of the liquidation and dissolution. 3 As of December 31, 2001, the Company had disposed of all of its assets other than one mortgage loan. On March 21, 2002, the Company sold its remaining mortgage loan for $10.300 million. During the year ended December 31, 2001, three of the Company's loans were fully repaid; at their respective disposition dates, these three loans had amounts outstanding totaling $31.549 million. Additionally, in June 2001, the Company received $42.382 million in complete satisfaction of another loan; at the time of the settlement, amounts outstanding under this loan totaled $42.882 million. In January 2001, the Company sold its remaining CMBS holdings; at the time the three securities were sold, the Company received net cash proceeds totaling $16.555 million. On March 5, 2001, a partnership controlled by the Company's unconsolidated taxable subsidiary sold a mixed-use property. During the period from March 6, 2001 through December 31, 2001, the Company received distributions totaling $2.155 million from this unconsolidated subsidiary. On March 6, 2002, the Company received a final distribution of $28,000 from the unconsolidated subsidiary. In January 2001, March 2001 and August 2001, the Company made liquidating distributions to its shareholders totaling $3.514 million (or $0.35 per share), $26.104 million (or $2.60 per share) and $70.280 million (or $7.00 per share), respectively. Now that the Company has disposed of its last real estate related asset, the Board of Trust Managers intends to distribute the Company's remaining assets (net of any required reserves) to its shareholders as soon as administratively practical. Currently, the Company expects to make one final liquidating distribution on or about April 30, 2002. The Company currently estimates that its final liquidating distribution will approximate $1.51 to $1.56 per share. Including liquidating distributions paid in 2000 and 2001, a final liquidating distribution within this range would result in total liquidating distributions of $12.11 to $12.16 per share. There can be no assurances, however, that the actual amount of the final liquidating distribution (or the timing of its payment) will not vary materially from the estimates. For additional discussion regarding the status of the Company's liquidation efforts, reference is made to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company believes that it has operated and it intends to continue to operate (through the date of its final dissolution) in a manner so as to continue to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a result, the Company will generally not be subject to federal income tax on that portion of its ordinary income or capital gain that is currently distributed to its shareholders if it distributes at least 90% of its annual REIT taxable income and it complies with a number of other organizational and operational requirements including, among others, those concerning the ownership of its outstanding Common Shares, the nature of its assets and the sources of its income. During the tax years ended December 31, 2000, 1999 and 1998, the Company was required to distribute at least 95% of its annual REIT taxable income. For tax years beginning after December 31, 2000, the minimum distribution requirement was reduced to 90%. 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"), which was formed in March 1998. The terms of the Management Agreement are more fully described below. On July 2, 2001, AMRESCO, INC. ("AMRESCO") filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. The Manager was not included in this bankruptcy filing. Prior to July 5, 2000, AMREIT Holdings, Inc. ("Holdings"), a wholly-owned subsidiary of AMRESCO, owned 1,500,011 shares, or approximately 15% of the Company's outstanding common stock. Holdings acquired 1,000,011 shares at the IPO Price pursuant to the Private Placement; the remaining 500,000 shares were acquired through the IPO. On July 5, 2000, these Common Shares (and the 100 Common Shares held by AMRESCO) were sold to affiliates of Farallon Capital Management, L.L.C. For the terms of such sale, reference is made to Item 8 "Financial Statements and Supplementary Data". As a result of this sale, AMRESCO and Holdings no longer own any of the Company's outstanding Common Shares. As described above, shareholders approved the liquidation and dissolution of the Company on September 26, 2000. As a result, the Company adopted liquidation basis accounting on that date. Prior to September 26, 2000, the Company's operating results were presented in accordance with the historical cost (or going concern) basis of accounting. Under liquidation basis accounting, the Company's revenues and expenses are reported as changes in net assets in liquidation. Additionally, under liquidation basis accounting, the Company's assets are carried at their estimated net realizable values and the Company's liabilities are reported at their expected settlement amounts in a consolidated statement of net assets in liquidation. Among other things, statements of income are not presented under the liquidation basis of accounting. 4 EMPLOYEES The Company has no employees nor does it maintain a separate office. Instead, the Company relies on the facilities and resources of the Manager and its executive officer, who is employed by AMRESCO. Additionally, the Company relies on two other officers, its Chairman of the Board of Trust Managers and Chief Executive Officer and its President and Chief Investment Officer, neither of whom is employed by either the Company or AMRESCO. The Company is not a party to any collective bargaining agreements. Headquartered in Dallas, Texas, AMRESCO is in the process of winding up its affairs. As of December 31, 2001 and 2000, AMRESCO employed approximately 11 people and 200 people, respectively. MANAGEMENT AGREEMENT 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 and 0.5% per annum of the Company's average invested investment grade assets. 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 all of the Company's Funds From Operations (as defined by the National Association of Real Estate Investment Trusts) plus gains (or minus losses) from debt restructurings and sales of property, as adjusted, exceeded the ten-year U.S. Treasury rate plus 3.5%. 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 in response to the changes in the Company's business strategy. In addition to the base management fee described above, the Manager is entitled to receive reimbursement for its quarterly operating deficits, if any, from and after 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. Currently, AMRESCO (through the Manager) employs 2 people who are fully dedicated to the Company. As part of the modification, the Manager is no longer entitled to receive incentive compensation and/or a termination fee in the event that the Management Agreement is terminated. Prior to the modifications, the Manager could have been entitled to a termination fee in the event that the Management Agreement was terminated by the Company without cause, including a termination resulting from the liquidation and dissolution of the Company. The termination fee would have been equal to the sum of the Manager's base management fee and incentive compensation earned during the twelve-month period immediately preceding the termination. The following table summarizes the amounts charged to the Company by the Manager during the years ended December 31, 2001, 2000 and 1999 under the terms of the amended Management Agreement (in thousands):
2001 2000 1999 ------ ------ ------ Base management fees $ 575 $1,762 $2,066 Incentive compensation -- -- -- Reimbursable expenses -- 20 192 Operating deficit reimbursements 1,286 243 -- ------ ------ ------ $1,861 $2,025 $2,258 ====== ====== ======
HISTORICAL INVESTMENT ACTIVITIES General The Company, as an investor in real estate related assets, operated in only one reportable segment. Historically, the Company's asset allocation decisions and investment strategies within this segment were influenced by changing market factors and conditions. The Company had no policy requiring that any specific percentage of its assets be invested in any particular type or form of real estate investment nor did it limit any particular type or form of real estate investment (other than CMBS) to a specific percentage. CMBS investments, by policy, could not exceed 40% of the Company's total consolidated assets. At December 31, 2001, 2000 and 1999, investments in CMBS comprised approximately 0%, 14% and 12%, respectively, of the Company's investment portfolio. 5 The Company's historical investment activities were focused in three primary areas: loan investments, CMBS and equity investments in real estate. For information regarding the revenues that were derived from each of these categories during the year ended December 31, 2001, the period from September 26, 2000 (the date on which the Company adopted liquidation basis accounting) through December 31, 2000, the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999, reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and notes thereto included in Items 7 and 8, respectively, of this report. The Company did not have, nor did it rely upon, any major customers. Additionally, the Company made no investments outside of the United States. Loan Investments Historically, the Company specialized in providing mid- to high-yield senior and mezzanine financing to real estate owners and developers on a participating and non-participating basis. Mezzanine loans, the repayment of which is subordinated to senior mortgage loans, are secured by a second lien mortgage and/or a pledge of the ownership interests of the borrower. Mezzanine loans generally afford a relatively higher yield and entail greater risks than senior mortgage loans. The underwriting process for the Company's loans took into account special risks associated with mid- to high-yield lending, including an in-depth assessment of the character, experience (including operating history) and financial capacity of the borrower or the borrowers' principal(s), a detailed analysis of the property or project being financed and an analysis of the market in which the borrower operates, including competition, market share data, comparable properties, absorption rates and market rental rates as well as general information such as population, employment trends, median income and demographic data. Prior to closing, the Manager either obtained a Phase I environmental assessment or reviewed a recently obtained Phase I environmental assessment and at least one of the Manager's representatives performed a site inspection. Sources of information which were examined (if available) during the due diligence process included: (a) current and historical operating statements; (b) existing or new appraisals; (c) sales comparables; (d) industry statistics and reports regarding operating expenses; (e) existing leases and market rates for comparable leases; and (f) deferred maintenance observed during site inspections and described in structural and engineering reports. Using all of the information obtained during the due diligence process, the Manager then developed projections of net operating income and cash flows to determine current and expected exit values, as well as appropriate lending limits and pricing given the risks inherent in each transaction. As of December 31, 2001, the Company held one mortgage loan investment. The loan (a mezzanine investment) had a commitment amount and an outstanding principal balance of $14,700,000. Prior to its sale on March 21, 2002, the loan provided for interest at a pay rate of 10% per annum and an accrual rate of 12% per annum. The incremental interest earned at the accrual rate was due (from the borrower) at maturity. The loan, which was scheduled to mature on March 31, 2003, also provided the Company with the opportunity for profit participation above the contractual accrual rate. The repayment of the Company's second lien loan was subordinated to a $26.2 million non-recourse first lien mortgage provided by an unaffiliated third party. The first lien loan and the Company's second lien loan were secured by a 301,000 square foot office building in Richardson, Texas. Inet Technologies, Inc. (Nasdaq: INTI) and Macromedia, Inc. (Nasdaq: MACR) lease approximately 80% and 19%, respectively, of the building's net rentable area. During the year ended December 31, 2001, the Company reduced the carrying value of its second lien loan by $4,400,000, from $14,700,000 to $10,300,000 (the amount at which the loan was liquidated); additionally, the Company reduced the carrying value of the related accrual rate interest receivable by $673,000, from $673,000 to $0. Commercial Mortgage-backed Securities Prior to September 26, 2000, the Company's investments in non-investment grade CMBS were classified as available for sale and were carried at estimated fair value as determined by quoted market rates. Any unrealized gains or losses were excluded from earnings and reported as a component of accumulated other comprehensive income (loss) in shareholders' equity. From and after September 26, 2000, the Company's CMBS available for sale were carried at estimated net realizable value; any unrealized gains or losses (changes in estimated net realizable value) were reported in the consolidated statement of changes in net assets in liquidation. 6 In most commercial mortgage securitizations, including those from which the Company had acquired its bonds, a series of CMBS is issued in multiple classes in order to obtain investment-grade credit ratings for the senior classes (i.e., those with credit ratings of "BBB", "A", "AA" or "AAA") in order to increase their marketability. The non-investment grade, or subordinated classes, typically include classes with ratings below investment grade "BBB". These subordinated classes also typically include an unrated higher-yield, credit-support class which generally is required to absorb the first losses on the underlying mortgage loans. Each class of CMBS may be issued with a specific fixed rate or variable coupon rate and has a stated maturity or final scheduled distribution date. As the subordinated classes provide credit protection to the senior classes by absorbing losses from underlying mortgage loan defaults or foreclosures, they carry more credit risk than the senior classes. Subordinated classes are generally issued at a discount to their outstanding face value and therefore generally afford a higher yield than the senior classes. Because there were numerous characteristics to consider when evaluating CMBS for purchase, each CMBS was analyzed individually, taking into consideration both objective data as well as subjective analysis. The Manager's due diligence included an analysis of (i) the underlying collateral pool, (ii) the prepayment and default history of the mortgage loans previously originated by the originator, (iii) cash flow analyses under various prepayment and interest rate scenarios (including sensitivity analyses) and (iv) an analysis of various default scenarios. However, which of these characteristics (if any) were important and how important each characteristic may have been to the evaluation of a particular CMBS depended on the individual circumstances. The Manager used sampling and other analytical techniques to determine on a loan-by-loan basis which mortgage loans would undergo a full-scope review and which mortgage loans would undergo a more streamlined review process. Although the choice was a subjective one, considerations that influenced the choice for scope of review included mortgage loan size, debt service coverage ratio, loan-to-value ratio, mortgage loan maturity, lease rollover, property type and geographic location. A full-scope review may have included, among other factors, a site inspection, tenant-by-tenant rent roll analysis, review of historical income and expenses for each property securing the mortgage loan, a review of major leases for each property (if available); recent appraisals (if available), engineering and environmental reports (if available), and the price paid for similar CMBS by unrelated third parties in arm's length purchases and sales (if available) or a review of broker price opinions (if the price paid by a bona fide third party for similar CMBS was not available and such price opinions were available). For those mortgage loans that were selected for the more streamlined review process, the Manager's evaluation may have included a review of the property operating statements, summary loan level data, third party reports, and a review of prices paid for similar CMBS by bona fide third parties or broker price opinions, each as available. If the Manager's review of such information did not reveal any unusual or unexpected characteristics or factors, no further due diligence was performed. Equity Investments in Real Estate The Company made equity investments in real estate through two partnerships. Both of these investments were liquidated in 2000. In considering potential equity investments in real estate, the Company's Manager performed due diligence substantially similar to that described above in connection with the acquisition or origination of loan investments. The Company's unconsolidated taxable subsidiary held interests (indirectly) in a partnership which had owned a 909,000 square foot mixed-use property in Columbus, Ohio. The partnership interests were acquired through foreclosure on February 25, 1999. On March 5, 2001, the partnership sold the mixed-use property to an unaffiliated third party. The Company did not operate the real estate owned by the partnerships, but rather it relied upon qualified and experienced real estate operators unaffiliated with the Company. COMPETITION Historically, the Company competed in the acquisition and origination of investments with a significant number of other REITs, investment banking firms, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, credit companies and other entities, some of which had greater financial resources than the Company. As the Company is now liquidating, it no longer competes with any of these entities for new investments. The owners of the real properties which had secured the Company's mortgage loans competed with numerous other owners and operators of similar properties, including commercial developers, real estate companies and REITs. Many of these entities may have had greater financial and other resources and more operating experience than the owners of the real properties which had secured the Company's mortgage loans. The real properties owned and operated by the borrowers under the Company's mortgage loans were located in markets or submarkets in which significant construction 7 or rehabilitation of properties could occur. This could have resulted in overbuilding in these markets or submarkets. Any such overbuilding could have adversely impacted the ability of the borrowers under the Company's mortgage loans to lease, refinance and/or sell their respective properties and repay their mortgage loans. This could, in turn, have adversely impacted the Company's income and the timing and amount of its liquidating distributions. As the Company's mortgage loan portfolio has now been completely liquidated, the Company no longer competes in these areas. ENVIRONMENTAL MATTERS Under existing and future environmental legislation, a current or previous owner or operator of real estate may be liable for the remediation of hazardous or toxic substances on, under or in such real estate. As a part of the Manager's due diligence activities, Phase I environmental assessments were obtained on all real estate acquired by the Company and on the real estate collateralizing its loan investments. The purpose of Phase I environmental assessments was to identify potential environmental contamination that is made apparent from historical reviews of the real estate, reviews of certain public records, preliminary (non-invasive) investigations of the sites and surrounding real estate, and screening of relevant records for the presence of hazardous substances, toxic substances and underground storage tanks. There can be no assurance that such assessments revealed all existing or potential environmental risks and liabilities, nor that there will be no unknown or material environmental obligations or liabilities. Based on these assessments, the Company believes that its real estate investments and the real estate underlying its loan investments were (during its term of ownership) in compliance, in all material respects, with all federal, state and local ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which could have a material adverse effect on the Company or the borrowers, as applicable. The Company has not been notified by any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of its previously owned properties (including the property which had been owned by its taxable subsidiary) nor is it aware of any such noncompliance with respect to the real estate collateralizing its previous loan investments. SHAREHOLDER RIGHTS PLAN On February 25, 1999, the Company's Board of Trust Managers adopted a shareholder rights plan (the "Rights Plan"). The Rights Plan was adopted in response to the consolidation trend in the REIT industry rather than in response to any specific proposals or communications. The Rights Plan is designed to provide the Company's Board of Trust Managers with negotiating leverage in dealing with a potential acquirer, to protect the Company from unfair and abusive takeover tactics and to prevent an acquirer from gaining control of the Company without offering a full and fair price to all shareholders. The Rights Plan is not intended to prevent an acquisition beneficial to all of the Company's shareholders. In connection with the adoption of the Rights Plan, the Board of Trust Managers declared a dividend of one preferred share purchase right (a "Right") for each outstanding Common Share of the Company. The dividend was paid on March 11, 1999 to shareholders of record on March 11, 1999. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a Series A Junior Participating Preferred Share ("Preferred Share") for $37.50 per one one-hundredth of a Preferred Share. On June 29, 2000, the Rights Plan was amended to permit affiliates of Farallon Capital Management, L.L.C. to acquire up to 18.2% of the Company's outstanding Common Shares. The Rights trade with the Company's Common Shares and are not exercisable until a triggering event, as defined, occurs. ITEM 2. PROPERTIES The Company does not maintain a separate office. It relies exclusively on the facilities of its manager, AMREIT Managers, L.P. (the "Manager"), an affiliate of AMRESCO, INC. The executive offices of the Company, the Manager and AMRESCO, INC. are located at 700 North Pearl Street, Suite 1900, Dallas, Texas 75201. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of 2001, through the solicitation of proxies or otherwise. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS MARKET INFORMATION Prior to February 8, 2002, the Company's common shares of beneficial interest, par value $.01 per share (the "Common Shares"), were traded on The Nasdaq Stock Market(R) ("Nasdaq") under the symbol "AMCT". From and after February 8, 2002, the Company's Common Shares are traded on the OTC Bulletin Board(R) under the symbol "AMCT". The following table sets forth for the indicated periods the high and low sale prices for the Common Shares, as reported by Nasdaq.
High Low ----------- ----------- 2000 First Quarter ................................... 10.250 8.313 Second Quarter .................................. 10.750 9.688 Third Quarter ................................... 11.250 10.063 Fourth Quarter .................................. 10.938 9.688 2001 First Quarter ................................... 10.563 9.625 Second Quarter .................................. 8.380 7.625 Third Quarter ................................... 8.440 0.650 Fourth Quarter .................................. 1.430 1.060 2002 First Quarter (through February 7, 2002) ........ 1.400 1.280
SHAREHOLDER INFORMATION At February 28, 2002, the Company had approximately 35 holders of record of its Common Shares. It is estimated that there were approximately 1,400 beneficial owners of the Common Shares at that date. Because the Board of Trust Managers believes it is essential for the Company to continue to qualify as a REIT, the Company's Amended and Restated Declaration of Trust, subject to certain exceptions, limits the number of Common Shares that may be owned by any single person or affiliated group to 9.8% (the "Aggregate Share Ownership Limit") of the total outstanding Common Shares. The Trust Managers may waive the Aggregate Share Ownership Limit and have waived such Aggregate Share Ownership Limit with respect to Farallon Capital Management, L.L.C. and its affiliates (for whom the Aggregate Share Ownership Limit is 18.2%) and FMR Corp. (for whom the Aggregate Share Ownership Limit is 15%). 9 DISTRIBUTION INFORMATION Historically, the Company's policy was to distribute at least 95% of its REIT taxable income to shareholders each year. To that end, dividends were paid quarterly through the first quarter of 2000. On September 26, 2000, shareholders approved the liquidation and dissolution of the Company. As a result, the Company's dividend policy was modified to provide for the distribution of the Company's assets to its shareholders. Through December 31, 2001, the Company had declared five liquidating distributions. The following table sets forth information regarding the declaration, payment and federal income tax status of the Company's distributions for the years ended December 31, 2001 and 2000 (in thousands, except per share amounts).
FEDERAL INCOME TAX STATUS DISTRIBUTION ---------------------------------- DECLARATION RECORD PAYMENT DISTRIBUTION PER COMMON ORDINARY RETURN OF LIQUIDATING DATE DATE DATE PAID SHARE INCOME CAPITAL DISTRIBUTIONS ----------- ------ ------- ------------ ------------ -------- --------- ------------- 2000 First Quarter April 25, 2000 May 4, 2000 May 15, 2000 $ 3,405 $0.34 $0.34 $ -- $ -- Liquidating Distributions: First September 27, 2000 October 6, 2000 October 19, 2000 3,012 0.30 -- -- 0.30 Second October 31, 2000 November 9, 2000 November 21, 2000 3,514 0.35 -- -- 0.35 Third December 21, 2000 December 31, 2000 January 17, 2001 3,514 0.35 -- -- 0.35 ------- ----- ------- ------- ----- $13,445 $1.34 $0.34 $ -- $1.00 ======= ===== ======= ======= ===== 2001 Liquidating Distributions: Fourth March 8, 2001 March 19, 2001 March 30, 2001 $26,104 $2.60 $ -- $ -- $2.60 Fifth July 19, 2001 July 30, 2001 August 9, 2001 70,280 7.00 -- -- 7.00 ------- ----- ------- ------- ----- $96,384 $9.60 $ -- $ -- $9.60 ======= ===== ======= ======= =====
Currently, the Company expects to make one final liquidating distribution. The timing and amount of this liquidating distribution will be at the discretion of the Board of Trust Managers and will be dependent upon the Company's anticipated wrap-up expenses, reserve requirements, if any, and such other factors as the Board of Trust Managers deems relevant. The Company believes that its final liquidating distribution will be sufficient to allow it to continue to qualify as a REIT under the Internal Revenue Code of 1986, as amended, through the date of its dissolution. In order to maintain its qualification as a REIT, the Company was required to make annual distributions to its shareholders of at least 95% of its REIT taxable income for the tax year ended December 31, 2000. For tax years beginning after December 31, 2000, the minimum distribution requirement was reduced from 95% to 90%. For the tax years ended December 31, 2001 and 2000, the Company declared distributions totaling $96,384,000 and $13,445,000, respectively, which satisfied the 90% and 95% distribution requirements for such years. 10 ITEM 6. SELECTED FINANCIAL DATA On September 26, 2000, shareholders approved the liquidation and dissolution of the Company. As a result, the Company adopted liquidation basis accounting on that date. Among other things, statements of income and earnings per share data are not presented under the liquidation basis of accounting. Instead, the Company's revenues and expenses are reported as changes in net assets in liquidation. Additionally, under liquidation basis accounting, the Company's assets are carried at their estimated net realizable values and the Company's liabilities are reported at their expected settlement amounts in a consolidated statement of net assets in liquidation. The selected financial data set forth below for the year ended December 31, 2001 and the period from September 26, 2000 through December 31, 2000 has been derived from the Company's audited consolidated financial statements prepared under the liquidation basis of accounting for such periods. This information should be read in conjunction with "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as the audited consolidated financial statements and notes thereto included in "Item 8. Financial Statements and Supplementary Data".
Period from September 26, 2000 Year Ended through (In thousands, except per share data) December 31, 2001 December 31, 2000 ----------------- ------------------ Revenues ................................................................... $ 5,999 $ 3,758 Decrease in net assets in liquidation from operating activities ............ $ (1,491) $ (1,531) Liquidating distributions declared per common share ........................ $ 9.60 $ 1.00 Total assets ............................................................... $ 17,027 $ 119,159 Total debt ................................................................. $ -- $ -- Net assets in liquidation .................................................. $ 15,617 $ 117,006
The selected financial data set forth below for the period from January 1, 2000 through September 25, 2000 (the date immediately prior to the adoption of liquidation basis accounting), the year ended December 31, 1999 and the period from February 2, 1998 (date of initial capitalization) through December 31, 1998 has been derived from the Company's audited consolidated financial statements prepared under the historical cost (or going concern) basis of accounting. This information should also be read in conjunction with "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as the audited consolidated financial statements and notes thereto included in "Item 8. Financial Statements and Supplementary Data".
Period from Period from January 1, 2000 February 2, 1998 through Year Ended through (In thousands, except per share and ratio data) September 25, 2000 December 31, 1999 December 31, 1998 ------------------ ----------------- ----------------- Revenues .......................................................... $ 15,708 $ 23,393 $ 8,745 Net income ........................................................ $ 5,948 $ 7,320 $ 3,952 Earnings per common share: Basic .......................................................... $ 0.59 $ 0.73 $ 0.56 Diluted ........................................................ $ 0.59 $ 0.73 $ 0.56 Dividends declared per common share ............................... $ 0.34 $ 1.59 $ 0.74 Total assets ...................................................... $ 147,269 $ 231,244 $ 190,926 Total debt ........................................................ $ 22,000 $ 105,097 $ 46,838 Long-term debt .................................................... $ -- $ 34,600 $ 46,838 Total shareholders' equity ........................................ $ 124,004 $ 117,951 $ 130,266 Debt to equity ratio .............................................. 0.2 to 1 0.9 to 1 0.4 to 1 Debt to equity ratio (excluding non-recourse debt on real estate)........................................................ 0.2 to 1 0.6 to 1 0.3 to 1
11 Although the Company was initially capitalized on February 2, 1998 (with $1,000), it did not commence operations until its initial public offering was completed on May 12, 1998. As a result, the Company had no earnings prior to the commencement of its operations. Accordingly, the 1998 data set forth below reflects operations and earnings per common share for the period from May 12, 1998 (inception of operations) through December 31, 1998.
(In thousands, except per share data) Revenues ...................................... $ 8,745 Net income .................................... $ 3,952 Earnings per common share: Basic ..................................... $ 0.39 Diluted ................................... $ 0.39
12 ITEM 7. 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 the Company's inception of operations through July 5, 2000, AMRESCO, INC. and AMREIT Holdings, Inc. collectively owned 1,500,111 shares, or approximately 15%, of its outstanding common stock. On July 5, 2000, all of these common shares were sold to affiliates of Farallon Capital Management, L.L.C. Historically, the Company's investment activities were focused in three primary areas: loan investments, CMBS and equity investments in real estate. 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. On September 26, 2000, shareholders approved the liquidation and dissolution of the Company under the terms and conditions of a Plan of Liquidation and Dissolution which was approved by the Company's Board of Trust Managers on March 29, 2000. As of December 31, 2001, the Company had disposed of all of its real estate related assets other than one mortgage loan. The remaining loan, a $14.7 million mezzanine investment, was sold on March 21, 2002 for $10.3 million. Now that the Company has disposed of its last real estate related asset, the Board of Trust Managers intends to distribute the Company's remaining assets (net of any required reserves) to its shareholders as soon as administratively practical. Currently, the Company expects to make one final liquidating distribution on or about April 30, 2002. The Company currently estimates that its final liquidating distribution will approximate $1.51 to $1.56 per share. Including liquidating distributions paid in 2000 and 2001, a final liquidating distribution within this range would result in total liquidating distributions of $12.11 to $12.16 per share. There can be no assurances, however, that the actual amount of the final liquidating distribution (or the timing of its payment) will not vary materially from the estimates. Shortly after the final distribution is made, the Company expects to file articles of dissolution. As described above, shareholders approved the liquidation and dissolution of the Company on September 26, 2000. As a result, the Company adopted liquidation basis accounting on that date. Prior to September 26, 2000, the Company's operating results were presented in accordance with the historical cost (or going concern) basis of accounting. Under liquidation basis accounting, the Company's assets are carried at their estimated net realizable values and the Company's liabilities are reported at their expected settlement amounts in a consolidated statement of net assets in liquidation. Additionally, under liquidation basis accounting, the Company's revenues and expenses are reported as changes in net assets in liquidation. Statements of income, earnings per share data and an amount representing total comprehensive income are not presented. For a discussion of the liquidation basis of accounting and a summary of the adjustments to the Company's assets and liabilities resulting from the adoption thereof, reference is made to the Company's audited consolidated financial statements and notes thereto included in Item 8 of this report. 13 RESULTS OF OPERATIONS The following discussion of the Company's operating results should be read in conjunction with the audited consolidated financial statements and notes thereto included in "Item 8. Financial Statements and Supplementary Data". Under the liquidation basis of accounting, net assets in liquidation decreased by $101,389,000 during the year ended December 31, 2001, of which $99,898,000 was attributable to liquidating distributions that were paid to the Company's shareholders in January, March and August 2001. During 2001, revenues and expenses totaled $5,999,000 and $2,100,000, respectively. The Company's expenses were comprised of management fees and general and administrative expenses of $987,000 and $1,113,000, respectively. The management fees are fully described in the notes to the audited consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data." During the year ended December 31, 2001, general and administrative expenses were comprised of the following: $174,000 for professional services; $689,000 for directors and officers' insurance; $120,000 of fees paid to the Company's Trust Managers (excluding the Chairman of the Board) for their services to the Company; $60,000 of fees paid to the Company's Chairman of the Board of Trust Managers and Chief Executive Officer for his services to the Company; $30,000 of fees paid to the Company's President and Chief Investment Officer for his services to the Company; and $40,000 of other miscellaneous expenditures. Additionally, during the year, the Company reduced the carrying value of its last remaining mortgage loan and the accrual rate interest receivable associated therewith by $4,400,000 and $673,000, respectively; furthermore, the Company increased the carrying value of its investment in its unconsolidated subsidiary by $183,000. These adjustments (changes in estimated net realizable value), and a $500,000 loss on the disposition of another mortgage loan, are discussed further in this section of Management's Discussion and Analysis of Financial Condition and Results of Operations under the sub-heading "Loan Investments". During the period from September 26, 2000 through December 31, 2000, net assets in liquidation decreased by $8,025,000, of which $6,526,000 was attributable to liquidating distributions that were paid to the Company's shareholders in October and November 2000. During this period, revenues and expenses totaled $3,758,000 and $2,482,000, respectively. The Company's expenses were comprised largely of management fees totaling $2,094,000. Included in this amount was a charge equal to the aggregate amount of termination benefits expected to be payable to certain employees of the Manager. These costs, totaling $1,490,000, were expected (as of December 31, 2000) to be borne by the Company through future operating deficit reimbursements under the terms of the amended Management Agreement. Ultimately, amounts paid to the employees aggregated $1,506,000 ($884,000 in June 2001 and $622,000 in January 2002). During the period from September 26, 2000 through December 31, 2000, base management fees totaled $361,000. During this same period, operating deficit reimbursements totaled $243,000, of which $192,000 was related to termination benefits which were paid to departing employees of the Manager on December 31, 2000. Additionally, during the period, the Company reduced the carrying value of its investment in its unconsolidated taxable subsidiary by $3,114,000 and it increased the carrying value of its CMBS by $307,000. These adjustments (changes in estimated net realizable value) are discussed further in this section of Management's Discussion and Analysis of Financial Condition and Results of Operations under the sub-headings "Loan Investments" and "Commercial Mortgage-backed Securities", respectively. During the period, the Company also received $32,000 from the exercise of 4,000 stock options. Under the historical cost (or going concern) basis of accounting, net income for the period from January 1, 2000 through September 25, 2000 (the date immediately prior to the adoption of liquidation basis accounting) and the year ended December 31, 1999 was $5,948,000 and $7,320,000, respectively, or $0.59 and $0.73 per common share, respectively. The Company's sources of revenue for the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999, totaling $15,708,000 and $23,393,000, respectively, are set forth below. o $11,790,000 and $16,099,000, respectively, from loan investments. As some of the Company's loan investments were accounted for as either real estate or joint venture investments for financial reporting purposes, these revenues were included in the consolidated statements of income for the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999 as follows: interest income on mortgage loans of $8,937,000 and $14,568,000, respectively, and operating income from real estate of $2,853,000 and $1,531,000, respectively. o $2,405,000 and $3,699,000, respectively, from investments in CMBS. o $2,387,000 and $3,327,000, respectively, of operating income from real estate previously owned by the Company (through a majority-owned partnership). 14 o $(1,091,000) and $17,000, respectively, of equity in earnings (losses) from its unconsolidated subsidiary, partnerships and other real estate ventures. o $217,000 and $251,000, respectively, of interest income from short-term investments. Additionally, the Company realized gains of $1,930,000 and $584,000 during the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999, respectively, in connection with the repayments of ADC loan arrangements. The gains realized in 2000 were comprised principally of the incremental interest income earned on the loan investments, the recapture of previously recorded depreciation and the recognition (in earnings) of the loan commitment fees which had been received by the Company at the time the loans were originated; additionally, the gain associated with one of the repayments in 2000 included a profit participation of $261,000. The 1999 gain was comprised principally of interest income earned at the accrual rate over the life of the loan investment. During the period from January 1, 2000 through September 25, 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; these sales were completed during the second quarter of 2000. 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, owned five grocery-anchored shopping centers. The Company incurred expenses of $9,530,000 and $16,631,000 during the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999, respectively. These expenses are set forth below. o $4,396,000 and $5,593,000, respectively, of interest expense (net of capitalized interest totaling $0 and $593,000, respectively) associated with the Company's credit facilities and five non-recourse loans secured by real estate. o $1,140,000 and $2,206,000, respectively, of management fees, including $1,401,000 and $2,066,000, respectively, of base management fees payable to the Manager pursuant to the amended Management Agreement and $(261,000) and $140,000, respectively, of expense (credits) associated with compensatory options granted to the Manager. Costs associated with the compensatory options decreased during the period from January 1, 2000 through September 25, 2000 primarily as a result of a decrease in the expected volatility of the Company's stock. No incentive fees or operating deficit reimbursements were incurred during either of these periods. o $1,018,000 and $1,437,000, respectively, of general and administrative costs, including $0 and $200,000, respectively, of resolution costs associated with a non-performing loan, $705,000 and $304,000, respectively, for professional services (including a financial advisor's fee during the period from January 1, 2000 through September 25, 2000), $172,000 and $234,000, respectively, for directors and officers' insurance, $20,000 and $192,000, respectively, of reimbursable costs pursuant to the amended Management Agreement, $(27,000) and $(8,000), respectively, related to compensatory options granted to certain members of the AMRESCO Group, $0 and $114,000, respectively, of dividend equivalent costs, $37,000 and $23,000, respectively, of fees paid to the Company's Independent Trust Managers for their services to the Company, $29,000 and $0, 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, $34,000 and $91,000, respectively, related to restricted stock awards to the Company's Independent Trust Managers and $17,000 and $111,000, respectively, of travel costs. Costs associated with the compensatory options decreased during the period from January 1, 2000 through September 25, 2000 primarily as a result of a decrease in the expected volatility of the Company's stock. These categories do not represent all general and administrative expenses. o $0 and $1,737,000, respectively, of costs associated with an abandoned merger. o $1,188,000 and $1,252,000, respectively, of depreciation expense, including $499,000 and $810,000, respectively, related to five grocery-anchored shopping centers and $689,000 and $442,000, respectively, related to loan investments that were accounted for as real estate. o $0 and $1,084,000, respectively, of participating interest associated with amounts due to an affiliate. o $1,788,000 and $3,322,000, respectively, of provision for loan losses. During the year ended December 31, 1999, the Company charged-off $500,000 against an existing allowance for losses related to the non-performing loan referred to above. This loan is discussed further in this section of Management's Discussion and Analysis of Financial Condition and Results of Operations under the sub-heading "Loan Investments". No charge-offs were recorded during the period from January 1, 2000 through September 25, 2000. 15 Additionally, the Company realized losses of $4,267,000 during the period from January 1, 2000 through September 25, 2000 in connection with the sales of two of its CMBS holdings. The sales occurred in January 2000 and August 2000 resulting in losses totaling $130,000 and $4,137,000, respectively. No losses were realized during 1999. During the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999, minority interest in a subsidiary partnership's net income totaled $52,000 and $26,000, respectively. Period from January 1, 2000 through September 25, 2000 Compared to Year Ended December 31, 1999 The Company's revenues decreased by $7,685,000, or 33%, from $23,393,000 to $15,708,000, due primarily to declines in interest income on mortgage loans of $5,631,000, income from commercial mortgage-backed securities of $1,294,000 and equity in earnings/losses of unconsolidated subsidiary, partnerships and other real estate ventures of $1,108,000. The declines in interest income on mortgage loans and income from commercial mortgage-backed securities were due, in part, to the shorter reporting period in 2000. Additionally, interest income on mortgage loans declined as a result of the fact that the Company had lower average outstanding balances during 2000 as compared to 1999; the decline in income from commercial mortgage-backed securities was also attributable to the sales (in January 2000 and August 2000) of two of the Company's CMBS holdings. The decrease in equity in earnings/losses of unconsolidated subsidiary, partnerships and other real estate ventures was due, in part, to the loss of revenue resulting from the sale of the unconsolidated subsidiary's CMBS investment in March 2000 and the Company's share of the loss realized in connection with such sale; furthermore, in addition to less favorable operating results from the partnership that the Company assumed control of on February 25, 1999, the 2000 results included $346,000 of costs associated with a settlement of alleged defaults under the partnership's first lien mortgage. Operating income from real estate increased by $382,000 as a result of the fact that the properties underlying two of the Company's ADC loan arrangements that had been accounted for as real estate were substantially completed on July 1, 1999 and October 1, 1999, respectively, and began producing operating income thereafter (one of these loans was repaid on September 14, 2000 while the other was not repaid until November 10, 2000). The increase in operating income from real estate which was attributable to ADC loan arrangements was partially offset by lower revenues from the real estate that had been owned by the Company (through a majority-owned partnership); revenues derived from the owned real estate were lower as a result of the sale of such real estate on June 14, 2000. The Company's expenses decreased by $7,101,000, or 43%, from $16,631,000 to $9,530,000 as all expense categories were lower in the 2000 period as compared to 1999. The declines in interest expense and management fees were due, in part, to the shorter reporting period in 2000. Interest expense decreased by $1,197,000, a portion of which was attributable to lower average debt balances under the Company's two credit facilities and its non-recourse debt on real estate. The non-recourse debt was assumed by the buyer of the Company's real estate on June 14, 2000. The Company's base management fees decreased by $665,000, from $2,066,000 to $1,401,000, as a result of the shorter reporting period and the fact that the Company's average asset base (upon which the fee is calculated) was smaller during 2000 (as compared to 1999) while compensatory option charges (included in management fees) declined by $401,000, from $140,000 to $(261,000), as a result of a decrease in the value of the options. The decline in general and administrative expenses was due largely to the shorter reporting period in 2000. Additionally, during 1999, the Company incurred reimbursable costs under the Management Agreement of $192,000 and dividend equivalent costs of $114,000. During 2000, the Company did not incur any dividend equivalent costs as the dividend equivalents program was terminated in early 2000; furthermore, reimbursable costs were limited to $20,000 in 2000 as the provision of the Management Agreement which gave rise to such Manager cost reimbursements was terminated effective April 1, 2000. The Company's 1999 expenses included $1,737,000 of abandoned merger costs and $1,084,000 of participating interest in mortgage loans; no such costs were incurred during 2000. The Company incurred no participating interest in mortgage loans during 2000 as the financing arrangement giving rise to such costs was fully extinguished on November 1, 1999. The decrease in provision for loan losses of $1,534,000, from $3,322,000 to $1,788,000, was attributable to the fact that the Company's allowance for loan losses at September 25, 2000 was deemed to be adequate at that time. For the reasons cited above, income before gains (losses) and minority interests declined by $584,000 (or 9%), from $6,762,000 to $6,178,000. Net income decreased by $1,372,000 (or 19%), from $7,320,000 to $5,948,000. 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), losses associated with sales 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. 16 Distributions Historically, the Company's policy was to distribute at least 95% of its REIT taxable income to shareholders each year; to that end, dividends were paid quarterly through the first quarter of 2000. Under its original policy, dividends declared, as well as their federal income tax status, were as follows (in thousands, except per share amounts):
FEDERAL INCOME DIVIDEND TAX STATUS PER -------------------- DECLARATION RECORD PAYMENT DIVIDEND COMMON ORDINARY RETURN OF DATE DATE DATE PAID SHARE INCOME CAPITAL ----------- ------ ------- -------- -------- --------- --------- 1998 Period from May 12, 1998 through June 30, 1998 July 23, 1998 July 31, 1998 August 17, 1998 $ 1,001 $0.10 $0.1000 $ -- Third Quarter October 22, 1998 October 31, 1998 November 16, 1998 2,401 0.24 0.2400 -- Fourth Quarter December 15, 1998 December 31, 1998 January 27, 1999 4,002 0.40 0.4000 -- ------- ----- ------- ------- $ 7,404 $0.74 $0.7400 $ -- ======= ===== ======= ======= 1999 First Quarter April 22, 1999 April 30, 1999 May 17, 1999 $ 3,602 $0.36 $0.3268 $0.0332 Second Quarter July 22, 1999 July 31, 1999 August 16, 1999 3,906 0.39 0.3466 0.0434 Third Quarter October 21, 1999 October 31, 1999 November 15, 1999 4,006 0.40 0.3555 0.0445 Fourth Quarter December 15, 1999 December 31, 1999 January 27, 2000 4,407 0.44 0.3911 0.0489 ------- ----- ------- ------- $15,921 $1.59 $1.4200 $0.1700 ======= ===== ======= ======= 2000 First Quarter April 25, 2000 May 4, 2000 May 15, 2000 $ 3,405 $0.34 $0.3400 $ -- ======= ===== ======= =======
A portion of each of the distributions declared in 1999 was classified as a non-taxable return of capital as a result of the merger related charges described above. On September 26, 2000, shareholders approved the liquidation and dissolution of the Company. As a result, the Company's dividend policy was modified to provide for the distribution of the Company's assets to its shareholders. To date, the Company has declared five liquidating distributions pursuant to the Plan of Liquidation and Dissolution. The following table sets forth information regarding the declaration, record and payment dates for these liquidating distributions (in thousands, except per share amounts).
DISTRIBUTION PER DECLARATION RECORD PAYMENT TOTAL COMMON DATE DATE DATE DISTRIBUTION SHARE ----------- ------ ------- ------------ ------------ First Liquidating Distribution September 27, 2000 October 6, 2000 October 19, 2000 $ 3,012 $ 0.30 Second Liquidating Distribution October 31, 2000 November 9, 2000 November 21, 2000 3,514 0.35 Third Liquidating Distribution December 21, 2000 December 31, 2000 January 17, 2001 3,514 0.35 -------- ------ Total Liquidating Distributions Declared in 2000 10,040 1.00 -------- ------ Fourth Liquidating Distribution March 8, 2001 March 19, 2001 March 30, 2001 26,104 2.60 Fifth Liquidating Distribution July 19, 2001 July 30, 2001 August 9, 2001 70,280 7.00 -------- ------ Total Liquidating Distributions Declared in 2001 96,384 9.60 -------- ------ Total Liquidating Distributions Declared to Date $106,424 $10.60 ======== ======
As described above, the Company currently expects to make one final liquidating distribution on or about April 30, 2002. The timing and amount of this liquidating distribution will be at the discretion of the Board of Trust Managers and will be dependent upon the Company's anticipated wrap-up expenses, reserve requirements, if any, and such other factors as the Board of Trust Managers deems relevant. The Company believes that its final liquidating distribution will be sufficient to allow it to continue to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), through the date of its dissolution. Tax basis income differs from the operating results reported for financial reporting purposes under the historical cost (or going concern) basis of accounting and the liquidation basis of accounting due to 17 differences in methods of accounting for revenues, expenses, gains and losses. As a result of these accounting differences, net income (under the historical cost [or going concern] basis of accounting) and the increase/decrease in net assets from operating activities (under the liquidation basis of accounting) are not necessarily indicative of the distributions which must be made by the Company in order for it to continue to qualify as a REIT under the Code. For the years ended December 31, 2001 and 2000, $9.60 per share and $1.00 per share, respectively, were reported to the Company's shareholders (for federal income tax purposes) as liquidating distributions. The Company believes that distributions made to shareholders pursuant to its Plan of Liquidation and Dissolution will be treated for federal income tax purposes as distributions in a complete liquidation. In this case, in general, shareholders will realize, for federal income tax purposes, gain or loss equal to the difference between the cash distributed to them from the liquidating distributions and their adjusted tax basis in their shares. Tax consequences to shareholders may differ depending upon their circumstances. Shareholders are encouraged to consult with their own tax advisors. Loan Investments During the period from May 12, 1998 (inception of operations) through December 31, 1998, the Company assembled a portfolio of 21 loans. During the year ended December 31, 1999, three loan originations were closed (the last of which occurred in August 1999), six of the Company's loans were fully repaid and four loans were sold to AMRESCO Commercial Finance, Inc., a member of the AMRESCO Group. Finally, one loan was reclassified, net of a $500,000 charge-off, to investment in unconsolidated subsidiary following the subsidiary's acquisition (through foreclosure on February 25, 1999) of the partnership interests of one of the Company's borrowers. During the year ended December 31, 2000, six of the Company's loans were fully repaid. As further described below, $1,250,000 was received in complete satisfaction of another loan. One additional loan was repaid at an amount which was $576,000 less than its par (or face) value. Prior to September 26, 2000, this loan had been accounted for as real estate for financial reporting purposes; upon adoption of liquidation basis accounting, the carrying value of this ADC loan arrangement was increased to the amount that was ultimately realized when the loan was repaid on November 10, 2000. At December 31, 2000, the Company had commitments to fund $92.270 million (under five loans), of which $88.401 million was outstanding. During the year ended December 31, 2001, three of the Company's loans were fully repaid; at their respective disposition dates, these three loans had amounts outstanding totaling $31.549 million. Additionally, in June 2001, the Company received $42.382 million in complete satisfaction of another loan; at the time of the settlement, amounts outstanding under this loan totaled $42.882 million (at December 31, 2000, $42.152 million was outstanding under this loan). On March 21, 2002, the Company sold its remaining mortgage loan, a mezzanine investment, to an unaffiliated third party for $10,300,000. During the year ended December 31, 2001, the Company reduced the carrying value of this loan by $4,400,000, from $14,700,000 (the amount outstanding) to $10,300,000. Additionally, during the year ended December 31, 2001, the Company reduced the carrying value of the related accrual rate interest receivable by $673,000, from $673,000 to $0. The Company provided financing through certain real estate loan arrangements that, because of their nature, qualified (under the historical cost [or going concern] basis of accounting) either as real estate or joint venture investments for financial reporting purposes. For a discussion of these loan arrangements and the changes thereto resulting from the adoption of liquidation basis accounting, see the notes to the audited consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data". In cases where the Company originated loans, the borrowers paid a commitment fee to the Company that was in addition to interest payments due under the terms of the loan agreements. Prior to September 26, 2000, commitment fees were deferred and recognized over the life of the loan as an adjustment of yield or, in those cases where loan investments were classified as either real estate or joint ventures for financial reporting purposes, such fees were deferred and recognized upon the disposition of the investment. A mezzanine loan with an outstanding balance of $8,262,000 and a recorded investment of $7,191,000 was deemed to be impaired as of December 31, 1999. The allowance for loan losses related to this investment, which was secured by partnership interests in the borrower, totaled $4,190,000 at December 31, 1999. In addition to the Company's mortgage, the property was encumbered by a $45.5 million first lien mortgage provided by an unaffiliated third party, of which $44 million was outstanding. In early 2000, the Company made an additional investment in this loan totaling $37,000. Through March 2000, all interest payments were made in accordance with the terms of the first lien mortgage and the Company's loan. On February 15, 2000, the Company entered into a Conditional Agreement with the borrower. Under the terms of the Conditional Agreement, which 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 18 the terms of the DPO Agreement, the Company 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 were 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. 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 to fully satisfy the loan pursuant to the DPO Agreement was further conditioned upon there being no subsequent defaults under the first lien mortgage. Through October 2000, all debt service payments were made in accordance with the terms of the first lien mortgage. As a result of the events described above, the Company recorded an additional loan loss provision of $1,788,000 during the first quarter of 2000. On October 31, 2000, the Company received the balance of the DPO Amount ($1,000,000). A mezzanine (second lien) loan with an outstanding balance of $6,839,000 and a recorded investment of $6,659,000 was over 30 days past due as of December 31, 1998. The allowance for loan losses related to this investment totaled $500,000 at December 31, 1998. On February 25, 1999, an unconsolidated taxable subsidiary of the Company assumed control of the borrower (a partnership) through foreclosure of the partnership interests. In addition to the mezzanine mortgage, the 909,000 square foot mixed-use property was encumbered by a $17 million non-recourse first lien mortgage provided by an unaffiliated third party. The first lien mortgage, which was fully repaid on March 5, 2001, required 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 intended to make a substantial equity commitment to the project. Under the terms of the agreement, the Company would have continued 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. Through March 2000, all interest payments at the stated rate had 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. Initially, the first lien lender indicated a willingness to permit the to-be-formed investment partnership to assume the first lien mortgage; however, the parties ultimately could not agree on the terms of an assumption agreement. At that time, the Company was informed by the prospective investor that it was negotiating with two lenders in an effort to secure take-out financing for the first lien mortgage and that such financing was expected to be in place by December 2000. In early December 2000, the prospective investor informed the Company that it was abandoning the proposed transaction. Immediately thereafter, the Company retained a broker and proceeded to market the property for sale. On January 24, 2001, the partnership entered into an agreement to sell the property at a gross sales price of $18,250,000. Through February 28, 2001, the partnership received non-refundable deposits totaling $1,150,000 from the purchaser. The closing was originally scheduled to occur on March 1, 2001 (the maturity date of the first lien mortgage); however, the purchaser was entitled to extend the closing date to April 2, 2001 upon payment of an extension fee of $100,000. The non-refundable extension fee was received by the partnership on February 28, 2001. Under the terms of the extension, the purchaser was obligated to reimburse the partnership (up to $100,000) for costs that it might be charged by the first lien lender as a result of the partnership's failure to repay the first lien mortgage on or before its scheduled maturity date. These costs, totaling $9,000, were reimbursed by the purchaser on March 5, 2001 (the date on which the sale was consummated). At closing, $17 million was received from the purchaser; such proceeds were used to fully extinguish the first lien mortgage. The balance of the sales price (or $100,000) was evidenced by a promissory note which was collected (by the partnership) on July 24, 2001. Concurrent with its adoption 19 of liquidation basis accounting, the Company reduced the carrying value of its investment in the unconsolidated taxable subsidiary by $1,000,000. As a result of the events which occurred in December 2000 and January 2001, the Company reduced the carrying value of this investment by an additional $3,114,000 as of December 31, 2000; this adjustment was reported as a change in estimated net realizable value in the audited consolidated statement of changes in net assets in liquidation. 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. At December 31, 2000, the carrying value of the Company's investment in its taxable subsidiary totaled $2,000,000, which amount represented management's estimate at that time of the value that it expected to derive from such investment as a result of the transaction described above. During the period from March 6, 2001 through December 31, 2001, the Company received distributions totaling $2,155,000 from the taxable subsidiary. During the year ended December 31, 2001, the Company increased the carrying value of its investment in the unconsolidated taxable subsidiary by $183,000. On March 6, 2002, the Company received a final distribution of $28,000 from the taxable subsidiary. Commercial Mortgage-backed Securities During 1998, the Company acquired five non-investment grade commercial mortgage-backed securities ("CMBS") at an aggregate purchase price of $34.5 million. All of these securities were acquired on or before September 1, 1998. Due to the significant widening of spreads in the CMBS market during the latter half of 1998, the value of the Company's CMBS holdings had declined by $6.245 million at December 31, 1998. During the year ended December 31, 1999, the value of the Company's CMBS holdings declined by an additional $4.440 million due to an increase in comparable-term U.S. Treasury rates and continued (albeit less dramatic) spread widening in the CMBS market. During the period from January 1, 2000 through September 25, 2000 (the date immediately prior to the adoption of liquidation basis accounting), the value of the Company's CMBS holdings declined by $630,000 due primarily to continued widening of spreads in the CMBS market. As a result, during the period from January 1, 2000 through September 25, 2000, the year ended December 31, 1999 and the period from May 12, 1998 (inception of operations) through December 31, 1998, the Company recorded unrealized losses of $630,000, $4.440 million and $6.245 million, respectively, on its CMBS portfolio. Additionally, during the period from January 1, 2000 through September 25, 2000 and the period from May 12, 1998 through December 31, 1998, the Company recorded unrealized losses (net of tax effects) of $13,000 and $230,000, respectively, related to one commercial mortgage-backed security which had been owned by its unconsolidated taxable subsidiary; this security was purchased by the subsidiary in May 1998. During the year ended December 31, 1999, the Company recorded an unrealized gain of $103,000, net of tax effects, related to the security which had been held by the taxable subsidiary. Unlike spreads for the majority of the Company's direct CMBS investments, the spread for this particular bond declined during the year ended December 31, 1999. As these securities were classified as available for sale under the historical cost (or going concern) basis of accounting, the unrealized losses were reported as a component of accumulated other comprehensive income (loss) in shareholders' equity for financial reporting purposes. On January 11, 2000 and August 23, 2000, the Company sold two of its CMBS holdings (the "B-2A" security and the "G-2" security, respectively). 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 Security Disposition Amortized Realized Security Rating Proceeds Cost Loss -------- -------- ----------- --------- -------- B-2A B $3,784 $3,914 $ (130) B-3A B- $3,341 $3,481 $ (140) G-2 B- $4,030 $8,167 $(4,137)
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 ventures in the audited consolidated statement of income for the period from January 1, 2000 through September 25, 2000. 20 As of December 31, 2000, the Company's CMBS investments were summarized as follows (in thousands):
Estimated Net Security Amortized Unrealized Realizable Security Rating Cost Losses Value -------- -------- --------- ---------- ---------- G BB- $ 4,305 $ (1,131) $ 3,174 H B 15,880 (4,812) 11,068 J B- 3,167 (798) 2,369 -------- -------- -------- $ 23,352 $ (6,741) $ 16,611 ======== ======== ========
On January 18, 2001, the Company sold its remaining CMBS holdings to an unaffiliated third party (the "Buyer"). At the time of the sale, the Company received net cash proceeds totaling $16.555 million plus accrued interest of $266,000, of which $170,000 was accrued as of December 31, 2000. Concurrently, AMRESCO Investments, Inc. ("AMRESCO Investments"), a member of the AMRESCO Group, sold (to the Buyer) its unrated bonds which had been issued from the same securitization. As the former owner of the unrated class, AMRESCO Investments had had the right to grant special servicing rights with respect to all of the subject securities. Under the terms of an earlier agreement, AMRESCO Investments is obligated to pay the designated special servicer a termination fee in the event that such servicer's rights are terminated on or before March 17, 2003. The simultaneous sale of the Company's securities and AMRESCO Investments' securities was a condition precedent to the Buyer's acquisition of either party's securities. In order to induce AMRESCO Investments to sell its unrated securities, the Company agreed to reimburse the affiliate in an amount equal to the termination fee if the Buyer elects to terminate AMRESCO Investments' appointee on or before March 17, 2003. Alternatively, if a termination has not occurred prior to the time that the Company intends to declare its final liquidating distribution, then the Company can satisfy this obligation by paying to AMRESCO Investments an amount equal to one-half of the termination fee that would have been payable had an actual termination occurred at that time. Under the terms of the agreement between AMRESCO Investments and the special servicer, the termination fee is based, in part, on the number of months remaining until March 17, 2003 and therefore the amount of such fee declines each month. If a termination had occurred at the time the bonds were sold, the Company would have been obligated to reimburse AMRESCO Investments approximately $300,000 (the estimated maximum reimbursement obligation). At the time of closing, the Buyer informed the Company that it had no present intention to terminate AMRESCO Investments' appointee and that its future decisions with regard to the special servicer would be based upon the servicer's performance. When recording the sale, the Company accrued the amount at which it expects to settle this obligation. These additional selling expenses, totaling $114,000, are included in accounts payable and other liabilities at December 31, 2001; such expenses were considered when estimating the net realizable value of the Company's CMBS at December 31, 2000. Based on the terms of the sale (as described above), the Company increased the carrying value of its CMBS by $307,000 on December 31, 2000. This adjustment was reported as a change in estimated net realizable value in the audited consolidated statement of changes in net assets in liquidation. While management believed that the fundamental value of the real estate mortgages underlying the Company's bonds had been largely unaffected during its term of ownership, the combination of increasing spreads and comparable-term U.S. Treasury rates caused the current fair value of these securities to decline. In February 1999, the Company contributed $0.7 million to a newly formed investment partnership with Olympus Real Estate Corporation. The partnership, which was 5% owned by the Company, acquired several classes of subordinated CMBS at an aggregate purchase price of $12.7 million. In connection with the partnership's procurement of financing, the Company's investment in this partnership was reduced to $0.3 million in February 2000. On June 30, 2000, the Company sold its 5% ownership interest for $326,000. The gain associated with this transaction totaled $12,000. Equity Investments in Real Estate On October 23, 1998, the Company (through a majority-owned partnership) acquired an interest in the first of five newly constructed, grocery-anchored shopping centers in the Dallas/Fort Worth, Texas area, an 82,730 square foot facility in Arlington, Texas, for $10.3 million. In connection with this acquisition, the title-holding partnership obtained non-recourse financing of $7.5 million. Immediately prior to the closing, the Company contributed $3.4 million of capital to the partnership which was used to fund the balance of the purchase price, to pay costs associated with the financing and to provide initial working capital to the title-holding partnership. On April 30, 1999, the Company (through the 21 majority-owned partnership) acquired interests in three additional grocery-anchored shopping centers. These newly constructed properties, which were acquired by three subsidiary partnerships at an aggregate purchase price of $30.2 million, included an 86,516 square foot facility in Flower Mound, Texas, a 61,440 square foot facility in Fort Worth, Texas and an 85,611 square foot facility in Grapevine, Texas. In connection with these acquisitions, the three title-holding partnerships obtained non-recourse financing totaling $19.5 million. Immediately prior to the closings, the Company contributed $11.4 million of capital to the partnership. The proceeds from this contribution were used to fund the balance of the purchase price, to pay costs associated with the financing and to provide initial working capital to the title-holding partnerships. On August 25, 1999, the Company (through the majority-owned partnership) acquired an interest in the fifth grocery-anchored shopping center. The newly constructed property, an 87,540 square foot facility in Richardson, Texas, was acquired by a subsidiary partnership at a purchase price of $10.7 million. In connection with this acquisition, the title-holding partnership obtained non-recourse financing of $7.6 million. Immediately prior to the closing, the Company contributed $3.4 million of capital to the partnership which was used to fund the balance of the purchase price, to pay costs associated with the financing and to provide initial working capital to the title-holding partnership. Prior to June 14, 2000, the Company held a 99.5% interest in the majority-owned (or master) partnership. The master partnership owned, directly or indirectly, 100% of the equity interests in each of the five title-holding partnerships. On June 14, 2000, the Company sold its 99.5% ownership interest for $18.327 million. The sale generated a gain of $1,485,000. The five consolidated title-holding partnerships were indebted under the terms of five non-recourse loan agreements with Jackson National Life Insurance Company, an unaffiliated third party. All five loans, aggregating $34.6 million, bore interest at 6.83% per annum. The interest rates on the first four loans were adjusted in connection with the placement of the fifth loan on August 25, 1999. Prior to that time, a $7.5 million loan bore interest at 7.28% per annum and three loans aggregating $19.5 million bore interest at 6.68% per annum. The five non-recourse loans were assumed by the buyer in connection with the sale described above. On March 2, 1999, the Company acquired a 49% limited partner interest in a partnership which owned a 116,000 square foot office building in Richardson, Texas. The property was encumbered by a first lien mortgage approximating $13.7 million. In connection with this acquisition, the Company contributed $1.4 million of capital to the partnership. On April 3, 2000, the Company sold its 49% limited partner interest for $1.8 million. The gain associated with this transaction totaled $662,000. Previously, the Company's unconsolidated taxable subsidiary held interests (indirectly) in a partnership which, until March 5, 2001, had owned a 909,000 square foot mixed-use property in Columbus, Ohio. This investment is described above under the sub-heading "Loan Investments". LIQUIDITY AND CAPITAL RESOURCES The following discussion of liquidity and capital resources should be read in conjunction with the audited consolidated financial statements and notes thereto included in "Item 8. Financial Statements and Supplementary Data". At the date of this report, the Company's principal demand for liquidity is cash for operations, including funds which will be required to pay its management fees and its general and administrative expenses, including those that will be incurred in connection with the wrap-up of the Company's affairs. As its real estate investment portfolio has been completely liquidated, the Company no longer has any capital requirements. The Company's principal source of liquidity is its cash reserves. The Company believes that its cash reserves will be sufficient to meet the Company's currently expected liquidity requirements through the date of its dissolution. Previously, the Company was a party to a line of credit agreement and a repurchase agreement. Borrowings under the line of credit, which was provided by Prudential Securities Credit Corporation, LLC (PSCC), could be used to finance a portion of the Company's structured loan and equity real estate investments. The repurchase agreement was provided by Prudential-Bache International, Ltd., an affiliate of PSCC; borrowings under this facility could be used to finance a portion of the Company's portfolio of mortgage-backed securities. Both of the Company's credit facilities bore interest at variable rates based on a spread over LIBOR. The repurchase agreement and the line of credit agreement matured on June 30, 2000 and April 30, 2001, respectively. All amounts then outstanding under these facilities were fully repaid on June 16, 2000 and November 14, 2000, respectively. To reduce the impact that rising interest rates would have on its floating rate indebtedness, the Company periodically entered into interest rate cap 22 agreements with a major international financial institution. These interest rate cap agreements entitled the Company to receive from the counterparty the amounts, if any, by which one-month LIBOR exceeded certain thresholds. During 2000 and 1999, amounts due from the counterparty totaled $70,000 and $13,000, respectively. There were no margin requirements associated with the interest rate caps and therefore there was no liquidity risk associated with this particular hedging instrument. In connection with a previous amendment and extension of its line of credit, the Company granted warrants to Prudential Securities Incorporated ("PSI"), an affiliate of PSCC, to purchase 250,002 common shares of beneficial interest at $9.83 per share. The exercise price represented the average closing market price of the Company's common shares for the ten-day period ending on May 3, 1999. The warrants were issued in lieu of a commitment fee or other cash compensation. On September 25, 2000, PSI purchased 20,863 of the Company's common shares by tendering all 250,002 warrants. No cash was received by the Company in connection with this issuance of common shares. REIT STATUS Management expects the Company to continue to qualify as a REIT for federal income tax purposes through the date of its final dissolution. As a REIT, the Company will not pay income taxes at the trust level on any taxable income which is distributed to its shareholders. 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. Given the changes in the nature of the Company's assets and in the Company's sources of income during the liquidation process and the need to retain assets to meet liabilities, there can be no assurance that the Company will continue to meet the REIT qualification tests. If the Company ceases to qualify as a REIT for any taxable year, it would not be entitled to deduct dividends paid to shareholders from its taxable income. In this case, the Company would be liable for federal income taxes with respect to its gains from sales of assets and the Company's income from operations for that year and for subsequent taxable years, if any. Prior to its liquidation in March 2002, AMREIT II, Inc., the Company's "taxable REIT subsidiary", was subject to tax at the corporate level. FORWARD-LOOKING STATEMENTS Certain statements contained in this Form 10-K 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 prevailing short-term interest rates, credit risks, conditions which may affect public securities markets generally, 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. 23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At the date of this report, the Company is a party to certain financial instruments (trade receivables and payables and amounts due to manager) which, due to their short-term nature, are not subject to market risk; accordingly, no discussion of these instruments is provided herein. Previously, the Company was a party to two credit facilities, each of which bore interest at floating rates. One of the facilities was used to finance a portion of the Company's commercial mortgage-backed securities (the "Repurchase Agreement") while the other facility was used to finance some of the Company's structured loan and equity real estate investments (the "Line of Credit"). The Repurchase Agreement and the Line of Credit were fully repaid on June 16, 2000 and November 14, 2000, respectively. During the period from January 1, 1999 through November 1, 2000, the Company was also a party to several interest rate cap agreements which it entered into in order to mitigate the market risk exposure associated with its floating rate credit facilities. As of December 31, 2001, the Company held one mezzanine (second lien) loan which was subject to market risk. As this loan was sold on March 21, 2002, no discussion of market risk exposures related to mortgage loans is provided herein. Similarly, no discussion of market risk exposures related to commercial mortgage-backed securities ("CMBS") is provided in this report as the Company sold its remaining CMBS holdings on January 18, 2001. All of the Company's financial instruments, including its derivative financial instruments, were entered into for purposes other than trading. The Company has not entered into, nor does it intend to enter into, any financial instruments for trading or speculative purposes. As the Company has no investments outside of the United States, it is not (nor was it) subject to foreign currency exchange rate risk. As a real estate investment trust, the Company is subject to certain limitations imposed by the Internal Revenue Code of 1986, as amended, as it relates to the use of derivative instruments, particularly with regard to hedging fair value exposures. As a result, the Company generally did not attempt to hedge its exposure to changes in the fair value of its investments through the use of derivative instruments. Instead, these exposures were managed by the Company through its diversification efforts and strict underwriting of its investments. Furthermore, the Company generally intended to hold its mortgage loan investments to maturity. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Included herein at pages F-1 through F-26. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 24 PART III ITEM 10. TRUST MANAGERS AND EXECUTIVE OFFICERS OF THE COMPANY TRUST MANAGERS Currently, the Company's Board of Trust Managers is comprised of six members, one of which was affiliated with AMREIT Managers, L.P. ("AMREIT Managers"), the Company's Manager, through March 31, 2000, one of which was so affiliated through November 15, 2000, and four of whom are independent trust managers. As required by the Company's Declaration of Trust, the Board of Trust Managers is divided into three classes. Each class consists of two trust managers, at least one of whom is an independent trust manager. As defined in the Company's Bylaws, an independent trust manager is a natural person who is not an officer or employee of the Company or any of its affiliates, or an affiliate of any advisor or manager to the Company under any advisory or management agreement with the Company. In addition, except for acting as a trust manager or as a director of any entity controlled by the Company, an independent trust manager cannot have performed more than a "de minimus" amount of service for the Company or had a material business relationship with AMREIT Managers or any other advisor or manager of the Company. The term of office of one class of trust managers expires each year at the annual meeting of shareholders. The initial term of office of the Class III trust managers was scheduled to expire at the 2001 annual meeting of shareholders; as a result of the fact that the Company elected not to hold a 2001 annual meeting, the term of office of the Class III trust managers will continue until the Company files its articles of dissolution, which currently is expected to occur in May 2002. The terms of office of the Class I and Class II trust managers were scheduled to expire at the 2002 and 2003 annual meetings of shareholders, respectively, but such terms are now expected to expire on the date that the Company files its articles of dissolution. The Company's Bylaws require the Board of Trust Managers to have not less than two nor more than nine members, as determined from time to time by the existing Board of Trust Managers. The Bylaws further require that the majority of the members of the Board of Trust Managers and of any committee of the Board of Trust Managers be independent trust managers, except in the case of a vacancy. Vacancies occurring on the Board of Trust Managers among the independent trust managers may be filled by the vote of a majority of the trust managers, including the independent trust managers, or the holders of a majority of the outstanding common shares at an annual or special meeting of shareholders. The following table sets forth certain information with respect to the Company's current trust managers:
Trust Manager Board Name Age Position Since Class Committees - ------------------------- --- --------------------------------------- ------- ----- ---------- Robert L. Adair III 58 Chairman of the Board of Trust Managers 1998 I (a)(b) and Chief Executive Officer John C. Deterding 70 Independent Trust Manager 1998 I (a)(b)(d) Bruce W. Duncan 50 Independent Trust Manager 1998 II (a)(b)(c) Robert H. Lutz, Jr. 52 Trust Manager 1998 II (a) Christopher B. Leinberger 51 Independent Trust Manager 1998 III (a)(c)(d) James C. Leslie 46 Independent Trust Manager 1998 III (b)(c)(d)
(a) Member of the Executive Committee (b) Member of the Investment Committee (c) Member of the Audit Committee (d) Member of the Compensation Committee Robert L. Adair III is Chairman of the Board of Trust Managers and Chief Executive Officer of the Company. Mr. Adair has served as Chief Executive Officer of the Company since November 1998 and has served as Chairman of the Board of Trust Managers of the Company since its inception in 1998. From 1994 through March 31, 2000, Mr. Adair also served as a director, President and Chief Operating Officer of AMRESCO, INC. Mr. Adair served AMRESCO, INC. and its predecessors in various capacities since 1987. Since December 2000, Mr. Adair has served as President of Real Estate Value Managers, a real estate advisory company. From July 1998 to February 2002, Mr. Adair also served as a director of Stratus Properties, Inc. He holds a B.B.A. degree from The University of Texas and an M.B.A. degree from the Wharton School at the University of Pennsylvania. 25 John C. Deterding is a member of the Board of Trust Managers and has served in such capacity since May 1998. Mr. Deterding served as Senior Vice President and General Manager of the Commercial Real Estate Division of General Electric Capital Corporation ("GECC") from 1975 to June 1993. From November 1989 to June 1993, Mr. Deterding also served as Chairman of the General Electric Real Estate Investment Company, a privately-held REIT. From 1986 to 1993, Mr. Deterding served as a Director of GECC Financial Corporation. Since retiring from GECC in June 1993, Mr. Deterding has worked as a private real estate consultant. He served as a director of Patriot American Hospitality Inc. / Wyndham International, a publicly-held REIT (or its predecessors) from September 1995 to June 1999. He currently serves as a board member of U.S. Restaurant Properties, Inc., a publicly-traded REIT, and as a trustee of Fortress Investment Fund. He holds a B.S. degree from the University of Illinois. Bruce W. Duncan is a member of the Board of Trust Managers and has served in such capacity since May 1998. Since March 2002, Mr. Duncan has served as a board member and President of Equity Residential Properties Trust, a publicly-traded REIT. From 1995 until its sale in March 2000, Mr. Duncan was the Chairman, President and Chief Executive Officer of Cadillac Fairview Corporation Limited ("Cadillac Fairview"). Prior to joining Cadillac Fairview, Mr. Duncan worked for JMB Realty Corporation from 1978 to 1992, where he served as Executive Vice President and a member of the Board of Directors. From 1992 to 1994, he was President and Co-Chief Executive Officer of JMB Institutional Realty Corporation. From 1994 to 1995, he was with Blakely Capital, Inc. From March 2000 to March 2002, Mr. Duncan focused on his personal investments. Mr. Duncan is a member of the Board of Trustees of Starwood Hotels and Resorts Worldwide, Inc. and is a member of the Partnership Committee of The Rubenstein Company, L.P., a privately owned real estate operating company focusing on office properties in the mid-Atlantic region. Mr. Duncan holds an M.B.A. degree from the University of Chicago and an undergraduate degree from Kenyon College. He is also a Certified Public Accountant. Robert H. Lutz, Jr. is a member of the Board of Trust Managers and has served in such capacity since the Company's inception in 1998. From May 1994 through November 15, 2000, Mr. Lutz served as Chief Executive Officer of AMRESCO, INC. From May 1994 through March 31, 2000, Mr. Lutz also served as Chairman of the Board of AMRESCO, INC. Since November 2000, Mr. Lutz has focused on his personal investments. From November 1991 to May 1994, Mr. Lutz was President of Allegiance Realty, a real estate management company. Mr. Lutz is also a director of Felcor Lodging Trust, a publicly-traded REIT. He holds a B.A. degree from Furman University and an M.B.A. degree from Georgia State University. Christopher B. Leinberger is a member of the Board of Trust Managers and has served in such capacity since May 1998. Mr. Leinberger has been Managing Director and co-owner of Robert Charles Lesser & Co. since 1982. Mr. Leinberger is also a partner in Arcadia Land Company. Mr. Leinberger is Chair of the Board of The College of Santa Fe. He is a graduate of Swarthmore College and the Harvard Business School. James C. Leslie is a member of the Board of Trust Managers and has served in such capacity since May 1998. From 1996 through March 2001, Mr. Leslie served as President and Chief Operating Officer of The Staubach Company. From 1988 through March 2001, Mr. Leslie also served as a director of the Staubach Company. Mr Leslie was President of Staubach Financial Services from January 1992 until February 1996. From 1982 until January 1992, Mr. Leslie served as Chief Financial Officer of The Staubach Company. Since March 2001, Mr. Leslie has focused on his personal investments. Mr. Leslie is President and a board member of Wolverine Holding Company, and serves on the boards of Stratus Properties, Inc. and the North Texas Chapter of the Arthritis Foundation. Mr. Leslie holds a B.S. degree from The University of Nebraska and an M.B.A. degree from The University of Michigan Graduate School of Business. EXECUTIVE OFFICERS Set forth below are the names and ages of all executive officers of the Company. The executive officers of the Company serve at the discretion of, and are elected annually by, the Board of Trust Managers. Each officer holds office until his successor is duly elected and qualified or until death, resignation or removal, if earlier.
Name Age Position - ----------------------- --- ------------------------------------------------------------------------- Robert L. Adair III (1) 58 Chairman of the Board of Trust Managers and Chief Executive Officer David M. Striph 43 President and Chief Investment Officer Thomas R. Lewis II 39 Senior Vice President, Chief Financial and Accounting Officer, Controller and Secretary
(1) See section entitled "Trust Managers" above for biographical information regarding Mr. Adair. 26 David M. Striph is President and Chief Investment Officer of both the Company and AMREIT Managers and has served in such capacity since January 1, 2001. As President and Chief Investment Officer, Mr. Striph has had primary responsibility for the day-to-day management and liquidation of the Company's investments. From February 2000 until December 31, 2000, Mr. Striph served as Executive Vice President and Chief Investment Officer of the Company. Mr. Striph has served as one of the Company's executive officers since November 1998. Initially, his primary responsibilities included nationwide business development and management of the staff responsible for the origination, underwriting and portfolio management of the Company's high-yield commercial real estate mortgages and equity investments. Mr. Striph was the Western Division Manager for AMRESCO, INC.'s Real Estate Structured Finance Group from December 1996 until August 1998. Mr. Striph was employed by AMRESCO, INC. from 1994 until June 30, 2001. From 1994 through August 1998, Mr. Striph served in various positions within AMRESCO, INC.'s former Asset Management/Loan Workout division. Since July 2001, Mr. Striph has served as Vice President and Regional Manager of the Commercial Real Estate Division of Fremont Investment and Loan. Mr. Striph has over 15 years of real estate lending/banking experience including owning a commercial mortgage brokerage company for five years. Mr. Striph has a B.S. Degree from Southern Illinois University and is a licensed real estate broker. Thomas R. Lewis II is Senior Vice President, Chief Financial and Accounting Officer and Controller of both the Company and AMREIT Managers and has served in such capacity since February 2000. Additionally, since January 1, 2001, Mr. Lewis has also served as Secretary of the Company. From the Company's inception until February 2000, Mr. Lewis served as Vice President and Controller of both the Company and AMREIT Managers. Mr. Lewis has been employed by AMRESCO, INC. since November 1995 and until April 1998 had responsibility for accounting, cash management and reporting for its 40 institutional advisory clients. From 1993 to 1995, Mr. Lewis served in a similar capacity as Vice President-Finance for Acacia Realty Advisors, Inc. ("Acacia"). From 1989 to 1993, Mr. Lewis served as Senior Controller for Prentiss Properties Limited, Inc., an affiliate of Acacia. Mr. Lewis was employed by Price Waterhouse from 1985 to 1989. Mr. Lewis holds a B.B.A. degree in Accounting from Texas A&M University and is a Certified Public Accountant. RELATIONSHIPS There are no family relationships among any of the trust managers or executive officers of the Company. Except as described above, none of the Company's trust managers hold directorships in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") or pursuant to Section 15(d) of the Exchange Act or any company registered as an investment company under the Investment Company Act of 1940. There are no arrangements or understandings between any trust manager or executive officer and any other person pursuant to which that trust manager or executive officer was selected. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's officers and trust managers, and persons who beneficially own more than 10% of the Company's common shares, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission ("SEC"). Officers, trust managers and greater than 10% beneficial owners are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such reports furnished to the Company and representations from the officers and trust managers, the Company believes that all Section 16(a) filing requirements with respect to fiscal 2001 applicable to its officers, trust managers and greater than 10% beneficial owners were satisfied by such persons. ITEM 11. EXECUTIVE COMPENSATION The Company does not pay a salary or bonus to its executive officers, nor does it currently provide any other compensation or incentive programs to its executive officers other than its Chief Executive Officer and its President and Chief Investment Officer. Effective April 1, 2000, the Company's Chairman of the Board of Trust Managers and Chief Executive Officer is paid a quarterly fee of $15,000 for his services to the Company. Prior to April 1, 2000, this executive officer was affiliated with AMRESCO, INC. and the Manager and was not compensated by the Company other than as described below. Effective July 1, 2001, the Company's President and Chief Investment Officer is paid a monthly fee of 27 $5,000 for his services to the Company; prior to July 1, 2001, this executive officer was employed by AMRESCO, INC. (through the Manager) and was not compensated by the Company other than as described below. During 1998, the Company granted share option awards to its executive officers, the Manager and certain other members of the AMRESCO Group. Additionally, during the period from February 1999 through February 2000, the Company paid dividend equivalents on all vested and unexercised share options, excluding those held by the Manager. These dividend equivalents were equal to the dividends paid on the Company's common shares, excluding those distributions that were characterized as a non-taxable return of capital for tax purposes, and therefore were not preferential. On February 24, 2000, the Board of Trust Managers terminated the dividend equivalents program. As a result, the Company has not made any dividend equivalent payments since January 27, 2000, the date on which it made the dividend equivalent payment relating to the Company's 1999 fourth quarter dividend. Other than the Company's Chief Executive Officer and its President and Chief Investment Officer, AMREIT Managers, at its expense, provides all personnel necessary to conduct the business of the Company. Under the terms of a Management Agreement, as amended, AMREIT Managers receives a base management fee and operating deficit reimbursements for its services to the Company. For a description of the amended Management Agreement, see caption entitled "The Manager" in Item 13 "Certain Relationships and Related Transactions". Excluding the compensation associated with past share option awards and dividend equivalents and the fees which are currently being paid to the Company's Chief Executive Officer and its President and Chief Investment Officer, AMREIT Managers pays all salaries, bonuses and other compensation to the Company's executive officers. In February 2000, Messrs. Striph and Lewis entered into retention and severance arrangements with AMREIT Managers; as described in Item 13 of this report, the Company accrued (in 2000) an amount equal to the amount of termination benefits expected to be payable to these officers and certain other employees of the Manager. Some of these costs have already been borne by the Company through operating deficit reimbursements to AMREIT Managers in 2001; the remainder of these costs is expected to be borne by the Company in 2002 (through operating deficit reimbursements to AMREIT Managers). The following tables summarize the compensation provided by the Company to its named executive officers during the years ended December 31, 2001, 2000 and 1999. No stock appreciation rights ("SARs") were granted during any of these years. SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation --------------------------- ----------------------------------- Number of Long-Term Other Restricted Securities Incentive Name Annual Stock Underlying Plan All Other and Salary Bonus Compensation Awards Options/SARs Payouts Compensation Principal Position Year ($) ($) ($) ($) Granted ($) ($)(1) - ------------------------------------------- ----- ------ ----- ------------ ---------- ------------ --------- ------------ Robert L. Adair III, Chairman of the 2001 -- -- -- -- -- -- 60,000 Board of Trust Managers and Chief 2000 -- -- -- -- -- -- 45,000 Executive Officer 1999 -- -- -- -- -- -- 11,925 David M. Striph, President and 2001 -- -- -- -- -- -- 30,000 Chief Investment Officer 2000 -- -- -- -- -- -- -- 1999 -- -- -- -- -- -- 1,860 Thomas R. Lewis II, Senior Vice 2001 -- -- -- -- -- -- -- President, Chief Financial and 2000 -- -- -- -- -- -- -- Accounting Officer, Controller and 1999 -- -- -- -- -- -- 1,590 Secretary
(1) For the years ended December 31, 2001 and 2000, all other compensation is comprised solely of fees paid to Messrs. Adair and Striph for their services to the Company. The amounts paid to Mr. Adair include fees for his services as both Chairman of the Board of Trust Managers and Chief Executive Officer. For the year December 31, 1999, all other compensation is comprised solely of non-preferential dividend equivalents earned by the executive officers. Dividend equivalents were paid to the executive officers on August 16, 1999, November 15, 1999 and January 27, 2000. The payments made on these dates totaled the amounts shown above. 28 SHARE OPTION/SAR GRANTS IN FISCAL 2001 During fiscal 2001, no share options or SARs were granted to the Company's executive officers. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Shares Options at December 31, 2001 at December 31, 2001 ($) Acquired on Value ----------------------------- ----------------------------- Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable --------------------- ------------ ------------ ----------- ------------- ----------- ------------- Robert L. Adair III -- -- 33,750 11,250 -- -- David M. Striph -- -- 4,500 1,500 -- -- Thomas R. Lewis II -- -- 4,500 1,500 -- --
COMPENSATION OF TRUST MANAGERS In lieu of the cash payment of fees to independent trust managers for attendance at the regularly scheduled board meetings, the Company granted 2,250 and 1,500 restricted common shares to each independent trust manager in May 1999 and May 1998, respectively. In addition, in 1999, the Company paid each independent trust manager a fee of $1,000 for each special board meeting that he attended; these fees totaled $23,000 for all independent trust managers in 1999. During the period from February 1999 through February 2000, the Company granted dividend equivalent rights to all of its trust managers. During this period, each trust manager received cash payments equal to the Company's per share dividend (excluding those distributions that were characterized as a non-taxable return of capital for tax purposes) multiplied by the number of common shares such trust manager was eligible to purchase under options that were vested at the time the dividend was declared. Dividend equivalents totaling $60,950 were paid to trust managers under this program. On February 24, 2000, the Board of Trust Managers terminated the dividend equivalents program. The final dividend equivalent payment relating to the Company's 1999 fourth quarter dividend was made on January 27, 2000. On March 29, 2000, the Board of Trust Managers determined to instead pay each independent trust manager an annual fee of $20,000, payable quarterly in advance, plus $1,000 for each special meeting that he attends. These fee provisions were extended to include Mr. Lutz following his resignation from AMRESCO, INC. on November 15, 2000. During the years ended December 31, 2001 and 2000, fees paid to the independent trust managers and Mr. Lutz totaled $120,000 and $58,000, respectively. Effective April 1, 2000, the Company pays Mr. Adair an annual fee of $60,000, payable quarterly in advance, for his services as both Chairman of the Board of Trust Managers and Chief Executive Officer; such compensation was approved by the Board of Trust Managers on March 29, 2000. During the years ended December 31, 2001 and 2000, Mr. Adair was paid fees totaling $60,000 and $45,000, respectively. The Company did not separately compensate Messrs. Adair and Lutz prior to April 1, 2000 and November 15, 2000, respectively, other than through its Share Option and Award Plan and dividend equivalents program. All trust managers are reimbursed for their costs and expenses in attending meetings of the Board of Trust Managers (or any committee thereof). Immediately after the closing of the Company's initial public offering, each independent trust manager received options to purchase 20,000 common shares at $15.00 per share (the initial public offering price). Messrs. Adair and Lutz were each awarded options to purchase 45,000 common shares at $15.00 per share. All of the trust managers' options vest ratably over a four-year period commencing on the first anniversary of the date of grant. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 2001, the Company's Compensation Committee consisted of Christopher B. Leinberger, John C. Deterding and James C. Leslie, none of whom was, prior to or during 2001, an officer or employee of the Company or any of its affiliates. None of the Company's officers nor its affiliates' officers served as a member of the compensation committee or similar committee or board of directors of any entity whose members served on the Company's Compensation Committee. None of such persons had any relationships requiring disclosure under applicable rules and regulations. 29 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 15, 2002, there were 10,039,974 shares of the Company's common stock outstanding. The following table sets forth certain information regarding the beneficial ownership of the Company's common stock as of March 15, 2002 by: (1) each person known to the Company to be the beneficial owner of more than 5% of the Company's common stock; (2) the Company's Trust Managers; (3) the Company's named executive officers; and (4) all Trust Managers and executive officers as a group. Unless otherwise indicated in the footnotes, all such shares of common stock are owned directly and the indicated person has sole voting and investment power with respect thereto.
Percentage of Amount and Nature of Common Shares Name of Beneficial Owner (1) Beneficial Ownership Beneficially Owned ----------------------------------------------------------- -------------------- ------------------ Farallon Capital Management, L.L.C. ....................... 1,722,011(2) 17.15% Taunus Corporation/Deutsche Banc Alex. Brown Inc .......... 1,290,900(3) 12.86% AMREIT Managers, L.P. ..................................... 1,000,011(4) 9.06% FMR Corp. ................................................. 578,694(5) 5.76% John C. Deterding ......................................... 23,750(6) * Bruce W. Duncan ........................................... 37,450(6) * Christopher B. Leinberger ................................. 29,000(6) * James C. Leslie ........................................... 28,750(6) * Robert H. Lutz, Jr. ....................................... 55,000(7) * Robert L. Adair III ....................................... 125,000(8) 1.24% David M. Striph ........................................... 10,250(9) * Thomas R. Lewis II ........................................ 7,000(9) * All Trust Managers and executive officers as a group (8 persons) ................................... 316,200(10) 3.09%
* Less than 1%. (1) A Person is deemed to be the beneficial owner of securities that can be acquired by such Person within 60 days upon the exercise of options. Each beneficial owner's percentage ownership was determined by assuming that options that are held by such Person (but not those held by any other Person) and which are exercisable within 60 days have been exercised. (2) The information set forth above is based solely on the Schedule 13D filed with the SEC on July 13, 2000 by 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., Tinicum Partners, L.P., Farallon Capital Management, L.L.C., Farallon Partners, L.L.C., Enrique H. Boilini, David I. Cohen, Joseph F. Downes, William F. Duhamel, Andrew B. Fremder, Richard B. Fried, William F. Mellin, Stephen L. Millham, Meridee A. Moore, Thomas F. Steyer and Mark C. Wehrly. In such Schedule 13D, Farallon Capital Partners, L.P. reported that it had shared voting and shared dispositive power over 627,211 shares, Farallon Capital Institutional Partners, L.P., reported that it had sole voting power and shared dispositive power over 616,800 shares, Farallon Capital Institutional Partners II, L.P. reported that it had shared voting power and shared dispositive power over 214,700 shares, Farallon Capital Institutional Partners III, L.P. reported that it had shared voting power and shared dispositive power over 128,000 shares, Tinicum Partners, L.P. reported that it had shared voting power and shared dispositive power over 3,400 shares, RR Capital Partners, L.P. reported that it had shared voting power and shared dispositive power over 60,000 shares, Farallon Capital Management, L.L.C. reported that it had shared voting power and shared dispositive power over 71,900 shares, Farallon Partners, L.L.C. reported that it had shared voting power and shared dispositive power over 1,650,111 shares, Enrique H. Boilini, David I. Cohen, Joseph F. Downes, William F. Duhamel, Andrew B. Fremder, Richard B. Fried, William F. Mellin, Stephen L. Millham, Meridee A. Moore, Thomas F. Steyer and Mark C. Wehrly each reported that he or she had shared voting power and shared dispositive power over 1,722,011 shares. The address of all such persons is One Maritime Plaza, Suite 1325, San Francisco, California 94111, except the address of Enrique H. Boilini is c/o Farallon Capital Management, L.L.C., 75 Holly Hill Lane, Greenwich, Connecticut 06830. (3) The information set forth above is based solely on the Schedule 13G filed by Taunus Corporation and Deutsche Banc Alex. Brown Inc. with the SEC on March 5, 2002. In such Schedule 13G, Deutsche Banc Alex. Brown Inc. reported that it had sole voting power and sole dispositive power with respect to 1,290,900 shares. Taunus Corporation reported that it had sole voting power and sole dispositive power over 1,290,900 shares, which included the shares reported by Deutsche Banc Alex. Brown Inc. and with respect to which Taunus Corporation declared, pursuant to Rule 13d-4 under the Securities Exchange Act of 1934 (the "Act"), that the filing of such Schedule 13G was not an admission that it is the beneficial owner of such shares for purposes of Section 13(d) or 13(g) of the Act. The address of Taunus Corporation and Deutsche Banc Alex. Brown Inc. is 31 West 52nd Street, New York, New York 10019. The Company has notified Taunus Corporation and Deutsche Banc Alex. Brown Inc. that their beneficial ownership of the Company's common shares exceeds the ownership limits set forth in the Company's Amended and Restated Declaration of Trust (the "Declaration of Trust") and that they must therefore dispose of sufficient shares in order to become compliant with the Declaration of Trust. (4) Represents options which are exercisable by AMREIT Managers, L.P. within 60 days to purchase 1,000,011 common shares. AMREIT Managers' address is 700 North Pearl Street, Suite 1900, Dallas, Texas 75201. 30 (5) The information set forth above is based solely on the Schedule 13G filed by FMR Corp. with the SEC on February 13, 2002. FMR Corp. reported that, through its subsidiaries, it had sole dispositive power with respect to all such shares and sole voting power with respect to 225,094 of such shares. FMR Corp. is the parent holding company of an investment management company registered under Section 203 of the Investment Advisers Act of 1940 that provides investment advisory and management services to its clients. FMR Corp. disclaims investment power or voting power over any of the securities referenced above; however, it may be deemed to "beneficially own" such securities by virtue of Rule 13d-3 under the Securities Exchange Act of 1934. FMR Corp.'s address is 82 Devonshire Street, Boston, Massachusetts 02109. (6) Includes options which are exercisable within 60 days to purchase 20,000 common shares. (7) Includes options which are exercisable within 60 days to purchase 45,000 common shares. Excludes 5,000 shares of the Company's common stock that are owned by Mr. Lutz's spouse as to which Mr. Lutz disclaims ownership. (8) Includes options which are exercisable within 60 days to purchase 45,000 common shares. (9) Includes options which are exercisable within 60 days to purchase 6,000 common shares. (10) Includes options which are exercisable within 60 days to purchase 182,000 common shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS THE MANAGER 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. ("AMRESCO") (together with its affiliated entities, the "AMRESCO Group"). Under the terms of the Management Agreement, the Manager performs such services and activities relating to the assets and operations of the Company as may be required or appropriate in accordance with the Company's policies and guidelines that are approved from time to time and monitored by the Board of Trust Managers. Such responsibilities include but are not necessarily limited to: (i) servicing and managing the invested portfolio; (ii) asset/liability and risk management, hedging of floating rate liabilities, and financing, management and disposition of the invested portfolio, (iii) capital management and investor relations activities; and (iv) the provision of certain administrative and managerial services such as accounting and information technology services. 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 and 0.5% per annum of the Company's average invested investment grade assets. 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 all of the Company's Funds From Operations (as defined by the National Association of Real Estate Investment Trusts) plus gains (or minus losses) from debt restructurings and sales of property, as adjusted, exceeded the ten-year U.S. Treasury rate plus 3.5%. 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 in response to the changes in the Company's business strategy. In addition to the base management fee described above, the Manager is entitled to receive reimbursement for its quarterly operating deficits, if any, from and after 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. Currently, AMRESCO (through the Manager) employs 2 people who are fully dedicated to the Company. As part of the modification, the Manager is no longer entitled to receive incentive compensation and/or a termination fee in the event that the Management Agreement is terminated. Prior to the modifications, the Manager could have been entitled to a termination fee in the event that the Management Agreement was terminated by the Company without cause, including a termination resulting from the liquidation and dissolution of the Company. The termination fee would have been equal to the sum of the Manager's base management fee and incentive compensation earned during the twelve-month period immediately preceding the termination. 31 During the year ended December 31, 2001, the following amounts were charged to the Company by the Manager under the terms of the amended Management Agreement (in thousands): Base management fees $ 575 Incentive compensation -- Reimbursable expenses -- Operating deficit reimbursements 1,286 ------ $1,861 ======
As set forth above, operating deficit reimbursements totaled $1,286,000, of which $884,000 was attributable to termination benefits which were paid to departing employees of the Manager during the year ended December 31, 2001 (one of which was the Company's President and Chief Investment Officer). Amounts approximating these termination benefits ($874,000), and amounts approximating those paid to the remaining employees of the Manager in January 2002 ($616,000), were charged to management fee expense during the period from September 26, 2000 (the date on which the Company adopted liquidation basis accounting) through December 31, 2000. The Company relies primarily on the facilities, personnel and resources of the Manager to conduct its operations; accordingly, it does not maintain separate office space. The executive offices of the Company, the Manager and AMRESCO are located at 700 North Pearl Street, Suite 1900, Dallas, Texas 75201. The Manager has options to purchase 1,000,011 common shares; 70% of the options are exercisable at an option price of $15.00 per share (the "IPO Price") and the remaining 30% of the options are exercisable at an option price of $18.75 per share. The options vest in four equal installments on May 12, 1999, May 12, 2000, May 12, 2001 and May 12, 2002. The current term of the Management Agreement expires on May 12, 2002 or, if earlier, on the date that the Company files its articles of dissolution. The Management Agreement may be renewed at the end of each term for a period of one year, upon review and approval by a majority of the independent trust managers. If the independent trust managers do not vote to terminate or renew the Management Agreement at least 90 days prior to the end of the then current period, the Management Agreement will automatically renew for a one-year period. The Manager has the right to terminate the Management Agreement upon 180 days prior written notice to the Company. Under the terms of a letter agreement dated November 16, 2001, the Company has the right to terminate the Management Agreement upon 15 days prior written notice to the Manager. TRANSACTIONS INVOLVING MEMBERS OF THE AMRESCO GROUP On January 18, 2001, the Company sold three non-investment grade commercial mortgage-backed securities ("CMBS") to an unaffiliated third party (the "Buyer"). Concurrently, AMRESCO Investments, Inc. ("AMRESCO Investments"), a member of the AMRESCO Group, sold (to the Buyer) its unrated bonds which had been issued from the same securitization. As the former owner of the unrated class, AMRESCO Investments had had the right to grant special servicing rights with respect to all of the subject securities. Under the terms of an earlier agreement, AMRESCO Investments is obligated to pay the designated special servicer a termination fee in the event that such servicer's rights are terminated on or before March 17, 2003. The simultaneous sale of the Company's securities and AMRESCO Investments' securities was a condition precedent to the Buyer's acquisition of either party's securities. In order to induce AMRESCO Investments to sell its unrated securities, the Company agreed to reimburse the affiliate in an amount equal to the termination fee if the Buyer elects to terminate AMRESCO Investments' appointee on or before March 17, 2003. Alternatively, if a termination has not occurred prior to the time that the Company intends to declare its final liquidating distribution, then the Company can satisfy this obligation by paying to AMRESCO Investments an amount equal to one-half of the termination fee that would have been payable had an actual termination occurred at that time. Under the terms of the agreement between AMRESCO Investments and the special servicer, the termination fee is based, in part, on the number of months remaining until March 17, 2003 and therefore the amount of such fee declines each month. If a termination had occurred at the time the bonds were sold, the Company would have been obligated to reimburse AMRESCO Investments approximately $300,000 (the estimated maximum reimbursement obligation). At the time of closing, the Buyer informed the Company that it had no present intention to terminate AMRESCO Investments' appointee and that its future decisions with regard to the special servicer would be based upon the servicer's performance. When recording the sale, the Company accrued the amount at which it expects to settle this obligation. The estimate of these additional selling expenses was $114,000. 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements Included herein at pages F-1 through F-26. 2. Financial Statement Schedules As of December 31, 2001, the Company had one loan which exceeded 20% of its total consolidated assets. As this loan was sold on March 21, 2002, audited financial statements for the underlying operating property are not included herein. All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the related instructions or are inapplicable or the related information is included in the audited financial statements or notes thereto. 3. Exhibits The following exhibits are filed as part of this Annual Report on Form 10-K: Exhibit No: 11 Computation of Per Share Earnings. 21 Subsidiaries of the Registrant. (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 33 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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 By: /s/ Thomas R. Lewis II ------------------------------------------ Thomas R. Lewis II Senior Vice President, Chief Financial and Accounting Officer, Controller & Secretary Date: March 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date Signature ---- --------- March 28, 2002 /s/ Robert L. Adair III ---------------------------------------------- Robert L. Adair III Chairman of the Board of Trust Managers and Chief Executive Officer (Principal Executive Officer) March 28, 2002 /s/ Thomas R. Lewis II ---------------------------------------------- Thomas R. Lewis II Senior Vice President, Chief Financial and Accounting Officer, Controller & Secretary (Principal Financial and Accounting Officer) March 28, 2002 /s/ John C. Deterding ---------------------------------------------- John C. Deterding Independent Trust Manager March 28, 2002 /s/ Bruce W. Duncan ---------------------------------------------- Bruce W. Duncan Independent Trust Manager March 28, 2002 /s/ Christopher B. Leinberger ---------------------------------------------- Christopher B. Leinberger Independent Trust Manager March 28, 2002 /s/ James C. Leslie ---------------------------------------------- James C. Leslie Independent Trust Manager March 28, 2002 /s/ Robert H. Lutz, Jr. ---------------------------------------------- Robert H. Lutz, Jr. Trust Manager
34 AMRESCO CAPITAL TRUST INDEX TO FINANCIAL STATEMENTS
Page No. REGISTRANT'S FINANCIAL STATEMENTS Independent Auditors' Report ....................................................................... F-2 Consolidated Statements of Net Assets in Liquidation -- December 31, 2001 and 2000.................. F-3 Consolidated Statements of Changes in Net Assets in Liquidation -- For the Year Ended December 31, 2001 and the Period from September 26, 2000 through December 31, 2000.............. F-4 Consolidated Statements of Income (Going Concern Basis) -- For the Period from January 1, 2000 through September 25, 2000 and the Year Ended December 31, 1999................................... F-5 Consolidated Statements of Changes in Shareholders' Equity (Going Concern Basis) -- For the Period from January 1, 2000 through September 25, 2000 and the Year Ended December 31, 1999... F-6 Consolidated Statements of Cash Flows in Liquidation -- For the Year Ended December 31, 2001 and the Period from September 26, 2000 through December 31, 2000...................................... F-7 Consolidated Statements of Cash Flows (Going Concern Basis) -- For the Period from January 1, 2000 through September 25, 2000 and the Year Ended December 31, 1999.............................. F-8 Notes to Consolidated Financial Statements.......................................................... F-9
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Trust Managers and Shareholders of AMRESCO Capital Trust We have audited the accompanying consolidated statements of net assets in liquidation of AMRESCO Capital Trust and its subsidiaries (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of changes in net assets in liquidation and cash flows in liquidation for the year ended December 31, 2001 and the period from September 26, 2000 through December 31, 2000. In addition, we have audited the accompanying consolidated statements of income, changes in shareholders' equity and cash flows for AMRESCO Capital Trust and its subsidiaries for the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 2 to the financial statements, the shareholders of AMRESCO Capital Trust approved the liquidation and dissolution of the Company on September 26, 2000, and the Company commenced liquidation shortly thereafter. As a result, the Company changed its basis of accounting from the going concern basis to the liquidation basis effective as of September 26, 2000. In our opinion, such consolidated financial statements present fairly, in all material respects: (1) the net assets in liquidation of AMRESCO Capital Trust and its subsidiaries as of December 31, 2001 and 2000, (2) the changes in their net assets in liquidation and their cash flows in liquidation for the year ended December 31, 2001 and the period from September 26, 2000 through December 31, 2000, and (3) the results of their operations and their cash flows for the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Dallas, Texas March 22, 2002 F-2 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION (IN THOUSANDS, EXCEPT SHARE DATA)
December 31, December 31, 2001 2000 ------------ ------------ ASSETS Mortgage loans ................................................................... $ 10,300 $ 88,401 Commercial mortgage-backed securities - available for sale ....................... -- 16,611 Investment in unconsolidated subsidiary .......................................... 28 2,000 Receivables and other assets ..................................................... 175 2,346 Cash and cash equivalents ........................................................ 6,524 9,801 --------- --------- TOTAL ASSETS .................................................................. 17,027 119,159 --------- --------- LIABILITIES Accounts payable and other liabilities ............................................ 597 82 Amounts due to manager ............................................................ 813 2,071 --------- --------- TOTAL LIABILITIES ............................................................. 1,410 2,153 --------- --------- COMMITMENTS AND CONTINGENCIES (NOTE 5) NET ASSETS IN LIQUIDATION (10,039,974 common shares issued and outstanding) ......... $ 15,617 $ 117,006 ========= =========
See notes to consolidated financial statements. F-3 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION (IN THOUSANDS)
Period from September 26, 2000 Year Ended through December 31, December 31, 2001 2000 ------------ ------------- REVENUES: Interest income on mortgage loans ....................................... $ 5,025 $ 3,050 Income from commercial mortgage-backed securities ....................... 96 538 Interest income from short-term investments ............................. 878 170 --------- --------- TOTAL REVENUES ........................................................ 5,999 3,758 --------- --------- EXPENSES: Interest expense ........................................................ -- 226 Management fees ......................................................... 987 2,094 General and administrative .............................................. 1,113 162 --------- --------- TOTAL EXPENSES ........................................................ 2,100 2,482 --------- --------- Loss on disposition of mortgage loan ...................................... (500) -- Changes in estimated net realizable value of certain assets ............... (4,890) (2,807) --------- --------- DECREASE IN NET ASSETS IN LIQUIDATION FROM OPERATING ACTIVITIES ........... (1,491) (1,531) Cash received from exercise of stock options .............................. -- 32 Liquidating distributions to shareholders ................................. (99,898) (6,526) --------- --------- DECREASE IN NET ASSETS IN LIQUIDATION DURING THE PERIOD ................... (101,389) (8,025) NET ASSETS IN LIQUIDATION, BEGINNING OF PERIOD ............................ 117,006 125,031 --------- --------- NET ASSETS IN LIQUIDATION, END OF PERIOD .................................. $ 15,617 $ 117,006 ========= ========= SHAREHOLDERS' EQUITY, END OF GOING CONCERN PERIOD ......................... $ 124,004 Net increase in carrying value of certain assets upon adoption of liquidation basis accounting ........................................ 817 Net decrease in carrying value of certain liabilities and minority interests upon adoption of liquidation basis accounting ................ 210 --------- NET ASSETS IN LIQUIDATION, BEGINNING OF LIQUIDATION PERIOD ................ $ 125,031 =========
See notes to consolidated financial statements. F-4 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF INCOME (GOING CONCERN BASIS) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Period from January 1, 2000 through Year Ended September 25, December 31, 2000 1999 --------------- ------------ REVENUES: Interest income on mortgage loans ....................................... $ 8,937 $ 14,568 Income from commercial mortgage-backed securities ....................... 2,405 3,699 Operating income from real estate ....................................... 5,240 4,858 Equity in earnings (losses) of unconsolidated subsidiary, partnerships and other real estate ventures ............... (1,091) 17 Interest income from short-term investments ............................. 217 251 -------- -------- TOTAL REVENUES ........................................................ 15,708 23,393 -------- -------- EXPENSES: Interest expense ........................................................ 4,396 5,593 Management fees ......................................................... 1,140 2,206 General and administrative .............................................. 1,018 1,437 Abandoned merger costs .................................................. -- 1,737 Depreciation ............................................................ 1,188 1,252 Participating interest in mortgage loans ................................ -- 1,084 Provision for loan losses ............................................... 1,788 3,322 -------- -------- TOTAL EXPENSES ........................................................ 9,530 16,631 -------- -------- INCOME BEFORE GAINS (LOSSES) AND MINORITY INTERESTS ....................... 6,178 6,762 Loss on sale of commercial mortgage-backed securities ................... (4,267) -- Gain associated with repayment of ADC loan arrangements ................. 1,930 584 Gain on sale of real estate ............................................. 1,485 -- Gain on sale of unconsolidated partnership investments .................. 674 -- -------- -------- INCOME BEFORE MINORITY INTERESTS .......................................... 6,000 7,346 Minority interests ...................................................... 52 26 -------- -------- NET INCOME ................................................................ $ 5,948 $ 7,320 ======== ======== EARNINGS PER COMMON SHARE: Basic .................................................................. $ 0.59 $ 0.73 ======== ======== Diluted ................................................................ $ 0.59 $ 0.73 ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic .................................................................. 10,000 10,000 ======== ======== Diluted ................................................................ 10,029 10,012 ======== ========
See notes to consolidated financial statements. F-5 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (GOING CONCERN BASIS) FOR THE PERIOD FROM JANUARY 1, 2000 THROUGH SEPTEMBER 25, 2000 AND THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock $.01 Par Value -------------------------- Additional Unearned Number of Paid-in Stock Shares Amount Capital Compensation ------------ ----------- ---------- ------------ Balance at December 31, 1998 ............... 10,006,111 $ 100 $ 140,941 $ (848) Issuance of trust managers' restricted shares ........................ 9,000 -- 91 (91) Issuance of warrants ....................... 400 Decrease in fair value of compensatory options ..................... (434) 434 Total nonowner changes in equity: Net income ................................ Unrealized losses on securities available for sale ...................... Comprehensive income ....................... Amortization of unearned trust manager compensation ..................... 91 Amortization of compensatory options .................................. 132 Dividends declared ($1.59 per common share) ............................ ------------ ---------- ---------- ---------- Balance at December 31, 1999 ............... 10,015,111 100 140,998 (282) Issuance of common shares upon exercise of warrants ...................... 20,863 -- -- 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 at September 25, 2000 .............. 10,035,974 $ 100 $ 140,481 $ (19) ============ ========== ========== ========== Accumulated Distributions Total Other in Excess of Nonowner Total Comprehensive Accumulated Changes Shareholders' Income(Loss) Earnings in Equity Equity ------------- ------------- --------- ------------- Balance at December 31, 1998 ............... $ (6,475) $ (3,452) $ 130,266 Issuance of trust managers' restricted shares ........................ -- Issuance of warrants ....................... 400 Decrease in fair value of compensatory options ..................... -- Total nonowner changes in equity: Net income ................................ 7,320 $ 7,320 7,320 Unrealized losses on securities available for sale ...................... (4,337) (4,337) (4,337) ---------- Comprehensive income ....................... $ 2,983 ========== Amortization of unearned trust manager compensation ..................... 91 Amortization of compensatory options .................................. 132 Dividends declared ($1.59 per common share) ............................ (15,921) (15,921) ------------- ------------- ------------ Balance at December 31, 1999 ............... (10,812) (12,053) 117,951 Issuance of common shares upon exercise of warrants ...................... Decrease in fair value of compensatory options ..................... -- Total nonowner changes in equity: Net income ................................ 5,948 $ 5,948 5,948 Unrealized losses on securities available for sale: Unrealized holding losses ............... (643) (643) (643) Reclassification adjustment for losses included in net income ......... 4,407 4,407 4,407 ---------- Comprehensive income ....................... $ 9,712 ========== Amortization of unearned trust manager compensation ..................... 34 Amortization of compensatory options .................................. (288) Dividends declared ($0.34 per common share) ............................ (3,405) (3,405) ------------- ------------- ------------ Balance at September 25, 2000 .............. $ (7,048) $ (9,510) $ 124,004 ============= ============= ============
See notes to consolidated financial statements. F-6 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS IN LIQUIDATION (IN THOUSANDS)
Period from September 26, 2000 Year Ended through December 31, December 31, 2001 2000 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Decrease in net assets in liquidation from operating activities ............................ $ (1,491) $ (1,531) Adjustments to reconcile to net cash provided by operating activities: Loss on disposition of mortgage loan .................................................... 500 -- Changes in estimated net realizable value of certain assets ............................. 4,890 2,807 Decrease in receivables and other assets ................................................ 1,264 225 Decrease in interest receivable related to commercial mortgage-backed securities ........ 170 142 Increase (decrease) in accounts payable and other liabilities ........................... 515 (570) Increase (decrease) in amounts due to manager ........................................... (1,258) 1,668 Amortization of prepaid insurance ....................................................... 234 62 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES .......................................... 4,824 2,803 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in mortgage loans .............................................................. (730) (2,187) Principal collected on mortgage loans ...................................................... 73,931 31,953 Proceeds from sale of commercial mortgage-backed securities ................................ 16,441 -- Distributions from unconsolidated subsidiary ............................................... 2,155 -- -------- -------- NET CASH PROVIDED BY INVESTING ACTIVITIES .......................................... 91,797 29,766 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of borrowings under line of credit ............................................... -- (22,000) Liquidating distributions paid to common shareholders ...................................... (99,898) (6,526) Net proceeds from issuance of common stock ................................................. -- 32 -------- -------- NET CASH USED IN FINANCING ACTIVITIES .............................................. (99,898) (28,494) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................................... (3,277) 4,075 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................................ 9,801 5,726 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD ...................................................... $ 6,524 $ 9,801 ======== ========
See notes to consolidated financial statements. F-7 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (GOING CONCERN BASIS) (IN THOUSANDS)
Period from January 1, 2000 through Year Ended September 25, December 31, 2000 1999 --------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................................................................. $ 5,948 $ 7,320 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ................................................................ 1,788 3,322 Depreciation ............................................................................. 1,188 1,252 Gain associated with repayment of ADC loan arrangements .................................. (1,930) (584) Loss on sale of commercial mortgage-backed securities .................................... 4,267 -- Gain on sale of unconsolidated partnership investments ................................... (674) -- Gain on sale of real estate .............................................................. (1,485) -- Loss (gain) on sale of interest rate cap ................................................. (19) 5 Amortization of prepaid insurance ........................................................ 172 234 Discount amortization on commercial mortgage-backed securities ........................... (282) (329) Amortization of compensatory stock options and unearned trust manager compensation ....... (254) 223 Amortization of loan commitment and extension fees ....................................... (592) (1,050) Receipt of loan commitment and extension fees ............................................ 460 427 Increase in receivables and other assets ................................................. (219) (592) Decrease (increase) in interest receivable related to commercial mortgage-backed securities.............................................................................. (40) 74 Increase (decrease) in accounts payable and other liabilities ............................ (1,428) 1,756 Increase (decrease) in minority interests ................................................ (26) 26 Increase (decrease) in amounts due to manager and affiliates ............................. (163) 1,226 Equity in losses (earnings) of unconsolidated subsidiary, partnerships and other real estate ventures ... ........................................................ 1,091 (17) Distributions from unconsolidated subsidiary, partnership and other real estate venture .. 23 124 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES ........................................... 7,825 13,417 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in mortgage loans ............................................................... (8,480) (44,622) Investments in ADC loan arrangements ........................................................ (1,034) (24,688) Sale of mortgage loans to affiliate ......................................................... -- 13,340 Principal collected on mortgage loans ....................................................... 10,398 26,252 Principal and interest collected on ADC loan arrangements ................................... 17,953 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 securities ................................. 7,814 -- Investments in real estate .................................................................. (350) (40,913) Investments in unconsolidated partnerships and subsidiary ................................... (282) (2,684) Distributions from unconsolidated subsidiary and partnerships ............................... 3,493 344 -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ................................. 49,576 (61,458) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings under line of credit ............................................... -- 39,162 Repayment of borrowings under line of credit ................................................ (38,641) (17,859) Proceeds from borrowings under repurchase agreement ......................................... -- 12,103 Repayment of borrowings under repurchase agreement .......................................... (9,856) (2,247) Proceeds from financing provided by affiliate ............................................... -- 907 Proceeds from non-recourse debt on real estate .............................................. -- 27,100 Purchase of interest rate caps .............................................................. -- (110) Proceeds from sale of interest rate caps .................................................... 30 30 Deferred financing costs associated with line of credit ..................................... -- (120) Deferred financing costs associated with non-recourse debt on real estate ................... -- (594) Distributions paid to common shareholders ................................................... (7,812) (15,516) -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................................. (56,279) 42,856 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................................... 1,122 (5,185) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................................. 4,604 9,789 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................................... $ 5,726 $ 4,604 ======== ========
See notes to consolidated financial statements. F-8 AMRESCO CAPITAL TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 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, 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"). On September 26, 2000, shareholders approved the liquidation and dissolution of the Company under the terms and conditions of a Plan of Liquidation and Dissolution which was approved by the Company's Board of Trust Managers on March 29, 2000. 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. ("AMRESCO") (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, from and after 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, including a termination resulting from the Company's liquidation and dissolution. The base management fee and reimbursements, if any, are payable quarterly in arrears. F-9 2. BASIS OF PRESENTATION As described in Note 1, shareholders approved the liquidation and dissolution of the Company on September 26, 2000. As a result, the Company adopted liquidation basis accounting on that date. Prior to September 26, 2000, the Company's operating results were presented in accordance with the historical cost (or going concern) basis of accounting. Under liquidation basis accounting, the Company's revenues and expenses are reported as changes in net assets in liquidation. Additionally, under liquidation basis accounting, the Company's assets are carried at their estimated net realizable values and the Company's liabilities are reported at their expected settlement amounts in a consolidated statement of net assets in liquidation. The adjustments to the Company's assets and liabilities resulting from the adoption of liquidation basis accounting are summarized as follows (in thousands):
Increase (Decrease) in Carrying Value ----------- Mortgage loans .................................................. $ 574 ADC loan arrangements ........................................... 1,257 Investments in unconsolidated partnerships and subsidiary ....... (1,000) Receivables and other assets .................................... (14) -------- Net increase in carrying value of assets upon adoption of liquidation basis accounting ....................... $ 817 ========
Decrease in Carrying Value ----------- Accounts payable and other liabilities............................. $ 60 Minority interests................................................. 150 --------- Net decrease in carrying value of liabilities and minority interests upon adoption of liquidation basis accounting........... $ 210 =========
Under the liquidation basis of accounting, statements of income, earnings per share data and an amount representing total comprehensive income are not presented. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and, prior to June 14, 2000, a majority-owned partnership. Prior to September 26, 2000, the Company accounted for its investment in AMREIT II, Inc., a taxable subsidiary, using the equity method of accounting, and thus reported its share of income or loss based on its ownership interest. The Company used the equity method of accounting due to the non-voting nature of its ownership interest and because the Company was entitled to substantially all of the economic benefits of ownership of AMREIT II, Inc. Under liquidation basis accounting, the Company's investment in AMREIT II, Inc. was carried at its estimated net realizable value. From and after September 26, 2000, the Company accounted for its investment in AMREIT II, Inc. using the cost method of accounting and thus reported income only when cash was received. Changes in the estimated net realizable value of this investment, if any, were reported in the consolidated statement of changes in net assets in liquidation. On December 31, 2000, the Company reduced the carrying value of its investment in AMREIT II, Inc. by $3,114,000, from $5,114,000 to $2,000,000. During the year ended December 31, 2001, the Company increased the carrying value of its investment in AMREIT II, Inc. by $183,000. As described in Note 16, the Company received its final distribution from AMREIT II, Inc. on March 6, 2002. During the period from January 1, 2000 through September 25, 2000, the Company sold its non-controlling interests in two partnerships; prior to their disposition, the Company F-10 accounted for these investments using the equity method of accounting and thus reported its share of income or loss based on its ownership interests. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES 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. Actual results may differ from those estimates. MORTGAGE LOANS From and after September 26, 2000, mortgage loans are stated at estimated net realizable value as determined by management. Loan extension fees, if any, are recognized when they are received. Consistent with the historical cost (or going concern) basis of accounting, interest income on mortgage loans is recognized on an accrual basis at the contractual accrual rate. Interest income on impaired loans is recognized using a cash-basis method. Loans are deemed to be impaired when it is probable that a borrower will not be able to fulfill the contractual terms of its loan agreement. Changes in the estimated net realizable values of mortgage loans, if any, are reported in the consolidated statement of changes in net assets in liquidation. Prior to September 26, 2000, mortgage loans were stated at cost, net of deferred origination and commitment fees and associated direct costs, if any. Loan origination and commitment fees and incremental direct costs, if any, were deferred and recognized over the life of the loan as an adjustment of yield using the interest method. ACQUISITION, DEVELOPMENT AND CONSTRUCTION (ADC) LOAN ARRANGEMENTS The Company provided financing through certain real estate loan arrangements that, because of their nature, qualified (prior to September 26, 2000) as either real estate or joint venture investments for financial reporting purposes. Using the guidance set forth in the Third Notice to Practitioners issued by the AICPA in February 1986 entitled "ADC Arrangements" (the "Third Notice"), the Company evaluated each investment to determine whether loan, joint venture or real estate accounting was appropriate; such determination affected the Company's balance sheet classification of these investments and the recognition of revenues derived therefrom. The Third Notice was issued to address those real estate acquisition, development and construction arrangements where a lender has virtually the same risks and potential rewards as those of real estate owners or joint venturers. EITF 86-21, "Application of the AICPA Notice to Practitioners regarding Acquisition, Development, and Construction Arrangements to Acquisition of an Operating Property" expanded the applicability of the Third Notice to loans on operating real estate. The Company accounted for its loan investments classified as real estate in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects" and SFAS No. 66, "Accounting for Sales of Real Estate", consistent with its accounting for direct real estate investments. Depreciation on buildings and improvements was provided under the straight-line method over an estimated useful life of 39 years for office buildings and 27.5 years for multi-family projects. The Company accounted for its loan investments classified as joint ventures in accordance with the provisions of Statement of Position 78-9, "Accounting for Investments in Real Estate Ventures" and thus reported its share of income or loss under the equity method of accounting based on its preferential ownership interest. On September 26, 2000, the carrying values of these ADC loan arrangements were adjusted to their estimated net realizable values as determined by management; concurrently, such investments were reclassified to mortgage loans. Under the liquidation basis of accounting, the Company accounted for these investments in the same manner as it accounts for its other mortgage loans. As these loan arrangements were carried at their estimated net realizable values prior to their disposition during the period from September 26, 2000 through December 31, 2000, the Company no longer provided for systematic depreciation of these investments during such period. F-11 PROVISION FOR LOAN LOSSES Prior to September 26, 2000, the Company provided for estimated loan losses by establishing an allowance for losses through a charge to earnings. Management performed a periodic evaluation of the allowance with consideration given to economic conditions and trends, collateral values and other relevant factors. ADC loan arrangements were considered in the allowance for loan losses. Impairment on a loan-by-loan basis was determined by assessing the probability that a borrower would not be able to fulfill the contractual terms of its loan agreement. If a loan was determined to be impaired, the amount of the impairment was measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or by the fair value of the collateral less estimated costs to sell if those costs were expected to reduce the cash flows available to repay or otherwise satisfy the loan. The allowance for loan losses was adjusted accordingly. The recognition of income on impaired loans was dependent upon their classification as either mortgage loans, real estate or joint venture investments. Interest income on impaired mortgage loans was recognized using a cash-basis method while income recognition related to ADC loan arrangements was dependent upon the facts and circumstances specific to each investment. Under liquidation basis accounting, an allowance for loan losses is no longer separately reported as the Company's loans are carried at their estimated net realizable values. REAL ESTATE Prior to its sale on June 14, 2000, real estate was stated at cost, net of accumulated depreciation. Costs associated with the acquisition, development and construction of a real estate project were capitalized as a cost of that project during its construction period. In accordance with SFAS No. 34, "Capitalization of Interest Cost", interest on the Company's borrowings was capitalized to the extent such asset qualified for capitalization. When a real estate project was substantially completed and held available for occupancy, rental revenues and operating costs were recognized as they accrued. Depreciation on buildings and improvements was provided under the straight-line method over an estimated useful life of 39 years. Depreciation on land improvements was provided using the 150% declining-balance method over an estimated useful life of 15 years. Maintenance and repair costs were charged to operations as incurred, while significant capital improvements and replacements were capitalized. Leasing commissions and leasehold improvements were deferred and amortized on a straight-line basis over the terms of the related leases. Other deferred charges were amortized over terms applicable to the expenditure. LEASES The Company, having retained substantially all of the risks and benefits of ownership, accounted for its leases as operating leases. Rental income was recognized over the terms of the leases as it was earned. COMMERCIAL MORTGAGE-BACKED SECURITIES At December 31, 2000, the Company's investments in commercial mortgage-backed securities ("CMBS") were carried at estimated net realizable value, which approximated the amount that was realized by the Company in connection with the sale of these securities in January 2001. From and after September 26, 2000, income from CMBS was recognized at the fixed coupon rate; any unrealized gains or losses (changes in estimated net realizable value) were reported in the consolidated statement of changes in net assets in liquidation. On December 31, 2000, the Company increased the carrying value of its CMBS by $307,000. Prior to September 26, 2000, the Company's CMBS investments were classified as available for sale and were carried at estimated fair value as determined by quoted market rates. Any unrealized gains or losses were excluded from earnings and reported as a component of accumulated other comprehensive income (loss) in shareholders' equity. Income from CMBS was recognized based on the effective interest method using the anticipated yield over the expected life of the investments. F-12 CASH AND CASH EQUIVALENTS Cash and cash equivalents consists of cash on hand and highly liquid investments with maturities of three months or less at the date of purchase. STOCK-BASED COMPENSATION Prior to the adoption of liquidation basis accounting on September 26, 2000, the Company applied APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for stock option awards granted to its officers and trust managers (the "APB 25 Options"). Pro forma disclosures of net income and earnings per common share as if the fair value based method of accounting had been applied are included in Note 8. Stock options awarded to the Manager and certain other members of the AMRESCO Group and warrants granted to an affiliate of one of the Company's lenders were accounted for under the fair value method prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation" and related Interpretations. Under liquidation basis accounting, the Company no longer records compensation expense associated with the options that are held by the Manager and certain other members of the AMRESCO Group. In liquidation, the assumptions underlying the fair value based method of accounting for stock options are no longer appropriate. Accordingly, pro forma disclosures related to the APB 25 Options are provided only for the periods ending prior to September 26, 2000. EARNINGS PER COMMON SHARE Basic earnings per common share ("EPS") excludes dilution and was computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS gives effect to all dilutive potential common shares that were outstanding during the period. INCOME TAXES AND DISTRIBUTIONS The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a result, the Company will generally not be subject to federal income tax on that portion of its ordinary income or capital gain that is currently distributed to its shareholders if it distributes at least 90% of its annual REIT taxable income and it complies with a number of other organizational and operational requirements. The minimum distribution requirement was reduced from 95% to 90% for tax years beginning after December 31, 2000. Prior to its liquidation in March 2002, AMREIT II, Inc. was subject to federal income tax on its taxable income at regular corporate rates. Historically, the Company's policy was to distribute at least 95% of its REIT taxable income to shareholders each year. To that end, dividends were paid quarterly through the first quarter of 2000. Earnings and profits, which (prior to September 26, 2000) determined the taxability of distributions to shareholders, differs from the operating results reported for financial reporting purposes under the historical cost (or going concern) basis of accounting and the liquidation basis of accounting due to differences in methods of accounting for revenues, expenses, gains and losses. As a result of these accounting differences, net income (under the historical cost [or going concern] basis of accounting) and the increase/decrease in net assets from operating activities (under the liquidation basis of accounting) are not necessarily indicative of the distributions which must be made by the Company in order for it to continue to qualify as a REIT under the Code. As described in Note 1, shareholders approved the liquidation and dissolution of the Company on September 26, 2000. As a result, the Company's dividend policy was modified to provide for the distribution of the Company's assets to its shareholders through liquidating distributions. The timing and amount of liquidating distributions will be at the discretion of the Board of Trust Managers and will be dependent upon the Company's financial condition, tax basis income, capital requirements, the timing of asset dispositions, reserve requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Trust Managers deems relevant. At a minimum, the Company intends to make distributions which will allow it to continue to qualify as a REIT under the Code. The Company believes that distributions made to shareholders pursuant to the Plan of Liquidation and Dissolution will be treated for federal income tax purposes as distributions in a complete liquidation. F-13 4. MORTGAGE LOANS At December 31, 2001 and 2000, the Company's mortgage loans are summarized as follows (dollars in thousands):
Estimated Net Date of Commitment Amount Amount Outstanding Realizable Value Interest Interest Initial Disposition ------------------------- ----------------------- -------------------- Pay Accrual Investment Date Location 2001 2000 2001 2000 2001 2000 Rate Rate - ---------- ----------- --------------- ------------ ------------ ------------ ---------- ---------- --------- --------- -------- 05/12/98 03/21/02 Richardson, TX $ 14,700 $ 14,700 $ 14,700 $ 14,700 $ 10,300 $ 14,700 10.0% 12.0% 06/01/98 06/01/01 Houston, TX -- 11,800 -- 11,800 -- 11,800 12.0% 12.0% 06/22/98 06/26/01 Wayland, MA -- 45,000 -- 42,152 -- 42,152 10.5% 10.5% 05/18/99 06/22/01 Irvine, CA -- 15,557 -- 15,306 -- 15,306 10.0% 12.0% 07/29/99 02/01/01 Lexington, MA -- 5,213 -- 4,443 -- 4,443 11.7% 14.7% -------- -------- -------- -------- -------- --------- Total mortgage loans $ 14,700 $ 92,270 $ 14,700 $ 88,401 $ 10,300 $ 88,401 ======== ======== ======== ======== ======== =========
During the year ended December 31, 2001, three of the Company's loans were fully repaid. Additionally, on June 26, 2001, the Company received $42.382 million in complete satisfaction of its Wayland (Massachusetts) loan. At the time of the settlement, amounts outstanding under the Wayland loan totaled $42.882 million. A summary of mortgage loan activity for the year ended December 31, 2001 is as follows (in thousands): Balance, beginning of year ..................... $ 88,401 Investments in loans ........................... 730 Collections of principal ....................... (73,931) Loss on disposition of loan .................... (500) Change in estimated net realizable value of remaining loan .............................. (4,400) ---------- Balance, end of year ........................... $ 10,300 ==========
As of December 31, 2001, the Company held one mortgage loan investment. As described in Note 17, this second lien loan was sold on March 21, 2002 for $10,300,000. Prior to its sale, payments of interest only were due monthly at the interest pay rate. All principal and all remaining accrued and unpaid interest were due (from the borrower) on March 31, 2003, the scheduled maturity of the loan. The loan had also provided the Company with the opportunity for profit participation in excess of the contractual interest accrual rate. During the year ended December 31, 2001, the Company reduced the carrying value of this loan and the related accrual rate interest receivable by $4,400,000 and $673,000, respectively. At December 31, 2001, the carrying value of the accrual rate interest receivable was $0. F-14 At September 25, 2000 (the date immediately prior to the adoption of liquidation basis accounting), the Company's loan investments were classified as follows (in thousands):
Loan Balance Amount Sheet Outstanding Amount ------------ ------------ Mortgage loans held for investment, net ................ $ 94,819 $ 94,246 Real estate, net ....................................... 22,924 21,090 Investment in real estate ventures ..................... 8,569 6,978 ------------ ------------ Total ADC loan arrangements ......................... 31,493 28,068 ------------ ------------ Total loan investments ................................. $ 126,312 122,314 ============ Allowance for loan losses .............................. (5,978) ------------ Total loan investments, net of allowance for losses .... $ 116,336 ============
The differences between the outstanding loan amounts and the balance sheet amounts were 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 September 25, 2000 (in thousands): Land ............................................ $ 2,490 Buildings and improvements ....................... 19,093 ---------- Total .......................................... 21,583 Less: Accumulated depreciation ................... (493) ---------- $ 21,090 ==========
A summary of activity for mortgage loans and ADC loan arrangements accounted for as real estate or investments in joint ventures for the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999 is as follows (in thousands):
2000 1999 ---------------------------------------------- --------------------------------------------- ADC ADC Mortgage Loan Mortgage Loan Loans Arrangements Total Loans Arrangements Total -------------- -------------- -------------- -------------- -------------- ------------- Balance, beginning of period ...... $ 96,737 $ 46,907 $ 143,644 $ 98,303 $ 38,488 $ 136,791 Investments in loans .............. 8,480 1,662 10,142 44,622 26,617 71,239 Collections of principal .......... (10,398) (17,076) (27,474) (26,252) (11,359) (37,611) Cost of mortgages sold ............ -- -- -- (19,936) -- (19,936) Foreclosure (partnership interests) ..................... -- -- -- -- (6,839) (6,839) --------- --------- --------- --------- --------- --------- Balance, end of period ............ $ 94,819 $ 31,493 $ 126,312 $ 96,737 $ 46,907 $ 143,644 ========= ========= ========= ========= ========= =========
F-15 During the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999, the activity in the allowance for loan losses was as follows (in thousands):
2000 1999 ------- ------- Balance, beginning of period ......... $ 4,190 $ 1,368 Provision for losses ................. 1,788 3,322 Charge-offs .......................... -- (500) Recoveries ........................... -- -- ------- ------- Balance, end of period ............... $ 5,978 $ 4,190 ======= =======
A summary of the adjustments to the Company's loan investments (and the reclassifications thereof) resulting from the adoption of liquidation basis accounting is as follows (in thousands):
Activity During the Period from September 26, 2000 through Estimated Adjustments December 31, 2000 Net Realizable Balance Sheet to -------------------------- Value at Amount at Net Realizable Collections December 31, Sept 25, 2000 Value Reclassifications Investments of Principal 2000 ------------- -------------- ----------------- ----------- ------------ ------------- Mortgage loans ......................... $ 94,246 $ 574 $ 23,347 $ 2,187 $ (31,953) $ 88,401 Real estate, net ....................... 21,090 1,257 (22,347) -- -- -- Investment in real estate venture ...... 6,978 (5,978) (1,000) -- -- -- --------- --------- --------- --------- --------- --------- Total ADC loan arrangements ........... 28,068 (4,721) (23,347) -- -- -- --------- --------- --------- --------- --------- --------- Total loan investments ................. 122,314 (4,147) -- 2,187 (31,953) 88,401 Allowance for loan losses .............. (5,978) 5,978 -- -- -- -- --------- --------- --------- --------- --------- --------- Total loan investments, net of allowance for loan losses ........... $ 116,336 $ 1,831 $ -- $ 2,187 $ (31,953) $ 88,401 ========= ========= ========= ========= ========= =========
An ADC loan arrangement with a recorded investment of $7,191,000 was deemed to be impaired on December 31, 1999. The allowance for loan losses related to this investment totaled $4,190,000 at December 31, 1999. At December 31, 1999, the amount outstanding under this loan totaled $8,262,000. During the period from January 1, 2000 through September 25, 2000, investments in this loan totaled $37,000 and the allowance for loan losses related to this investment was increased by $1,788,000 to $5,978,000. The average recorded investment in this loan was $7,100,000 during the period from January 1, 2000 through October 31, 2000 (the disposition date). On May 31, 2000 and October 31, 2000, the Company received $250,000 and $1,000,000, respectively, in complete satisfaction of all amounts owed to it by the borrower. No income was recognized on this loan investment after it was deemed to be impaired. 5. COMMERCIAL MORTGAGE-BACKED SECURITIES On January 18, 2001, the Company sold three commercial mortgage-backed securities (its "Remaining Securities") to an unaffiliated third party (the "Buyer"). At the time of the sale, the Company received net cash proceeds totaling $16,555,000 plus accrued interest of $266,000, of which $170,000 was accrued as of December 31, 2000. Concurrently, AMRESCO Investments, Inc. ("AMRESCO Investments"), a member of the AMRESCO Group, sold (to the Buyer) its unrated bonds which had been issued from the same securitization. As the former owner of the unrated class, AMRESCO Investments had had the right to grant special servicing rights with respect to all of the subject securities. Under the terms of an earlier agreement, AMRESCO Investments is obligated to pay the designated special servicer a termination fee in the event that such servicer's rights are terminated on or before March 17, 2003. The simultaneous sale of the Company's Remaining Securities and AMRESCO Investments' securities was a condition precedent to the Buyer's acquisition of either party's securities. In order to induce AMRESCO Investments to sell its unrated securities, the Company agreed to reimburse the affiliate in an amount equal to the termination fee if the Buyer elects to terminate AMRESCO Investments' appointee on or before March 17, 2003. Alternatively, if a termination has not occurred prior to the time that the Company intends to declare its final liquidating distribution, then the Company can satisfy this obligation by paying to AMRESCO Investments an amount equal to one-half of the termination fee that would have been payable had an actual F-16 termination occurred at that time. Under the terms of the agreement between AMRESCO Investments and the special servicer, the termination fee is based, in part, on the number of months remaining until March 17, 2003 and therefore the amount of such fee declines each month. If a termination had occurred at the time the bonds were sold, the Company would have been obligated to reimburse AMRESCO Investments approximately $300,000 (the estimated maximum reimbursement obligation). When recording the sale, the Company accrued the amount at which it expects to settle this obligation. These additional selling expenses, totaling $114,000, are included in accounts payable and other liabilities at December 31, 2001. As of December 31, 2000, the Company's CMBS available for sale were carried at estimated net realizable value which approximated estimated fair value. At December 31, 2000, the amortized cost and carrying value of CMBS, by underlying credit rating, were as follows (in thousands):
Estimated Net Security Acquisition Amortized Unrealized Unrealized Realizable Rating Price Cost Gains Losses Value --------------- ------------ ------------ ------------ ------------ ------------ BB- $ 4,186 $ 4,305 $ -- $ (1,131) $ 3,174 B 15,367 15,880 -- (4,812) 11,068 B- 3,045 3,167 -- (798) 2,369 ------------ ------------ ------------ ------------ ------------ $ 22,598 $ 23,352 $ -- $ (6,741) $ 16,611 ============ ============ ============ ============ ============
During the year ended December 31, 2000, the Company sold two of its CMBS holdings (the "B-2A" and "G-2" securities). 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 Sale Date Proceeds Cost Loss ----------------- ------------------ ------------------- ---------------- ---------------- B-2A January 11, 2000 $3,784 $3,914 $ (130) B-3A March 21, 2000 $3,341 $3,481 $ (140) G-2 August 23, 2000 $4,030 $8,167 $(4,137)
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 ventures during the period from January 1, 2000 through September 25, 2000. 6. DEBT AND FINANCING FACILITIES Previously, the Company was a party to a line of credit agreement and a repurchase agreement. Borrowings under the line of credit, which was provided by Prudential Securities Credit Corporation, LLC (PSCC), could be used to finance a portion of the Company's structured loan and equity real estate investments. The repurchase agreement was provided by Prudential-Bache International, Ltd., an affiliate of PSCC; borrowings under this facility could be used to finance a portion of the Company's portfolio of mortgage-backed securities. Both of the Company's credit facilities bore interest at variable rates based on a spread over LIBOR. The repurchase agreement and the line of credit agreement matured on June 30, 2000 and April 30, 2001, respectively. All amounts then outstanding under these facilities were fully repaid on June 16, 2000 and November 14, 2000, respectively. To reduce the impact that rising interest rates would have on its floating rate indebtedness, the Company periodically entered into interest rate cap agreements with a major international financial institution. These interest rate cap F-17 agreements entitled the Company to receive from the counterparty the amounts, if any, by which one-month LIBOR exceeded certain thresholds. The premiums paid for these caps were amortized on a straight-line basis as an adjustment of interest incurred. Five consolidated title-holding partnerships were indebted under the terms of five non-recourse loan agreements with Jackson National Life Insurance Company. All five loans, which were secured by grocery-anchored shopping centers in the Dallas/Fort Worth (Texas) area, bore interest at 6.83% per annum. The interest rates on the first four loans were adjusted in connection with the placement of the fifth loan on August 25, 1999. Prior to that time, a $7.5 million loan bore interest at 7.28% per annum while three loans aggregating $19.5 million bore interest at 6.68% per annum. On June 14, 2000, the Company sold its ownership interests in the consolidated partnerships; in connection therewith, the five non-recourse loans aggregating $34,600,000 were assumed by the buyer. In connection with a previous amendment and extension of its line of credit, the Company granted warrants to Prudential Securities Incorporated, an affiliate of PSCC, to purchase 250,002 common shares of beneficial interest at $9.83 per share. The exercise price represented the average closing market price of the Company's common shares for the ten-day period ending on May 3, 1999. The warrants were issued in lieu of a commitment fee or other cash compensation. The estimated fair value of the warrants, totaling $400,000, was measured at the grant date and was amortized to interest expense through September 25, 2000 using the straight-line method. Amortization was calculated based upon the 18-month term of the facility. The unamortized balance of the warrants at September 25, 2000, approximating $22,000, was discharged on September 26, 2000 in connection with the Company's adoption of liquidation basis accounting. Total interest incurred during the period from September 26, 2000 through December 31, 2000, the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999 was $226,000, $4,396,000 and $6,186,000, of which $0, $0 and $593,000, respectively, was capitalized. Interest paid (net of amounts capitalized) during these periods totaled $395,000, $4,438,000 and $4,980,000, respectively. 7. RELATED PARTY TRANSACTIONS The Company's day-to-day operations are managed by the Manager, a member of the AMRESCO Group. During the years ended December 31, 2001, 2000 and 1999, fees and reimbursements charged to the Company were as follows (in thousands):
2000 ------------------------------------------- Period from Period from Total January 1, September 26, for the Year Year Ended 2000 through 2000 through Ended Year Ended December 31, September 25, December 31, December 31, December 31, 2001 2000 2000 2000 1999 ------------ ------------- ------------- ------------- ------------ Base management fees ........................ $ 575 $ 1,401 $ 361 $ 1,762 $ 2,066 Incentive compensation ...................... -- -- -- -- -- Reimbursable expenses ....................... -- 20 -- 20 192 Operating deficit reimbursements ............ 1,286 -- 243 243 -- ------- ------- ------- ------- ------- $ 1,861 $ 1,421 $ 604 $ 2,025 $ 2,258 ======= ======= ======= ======= =======
During the year ended December 31, 2001, operating deficit reimbursements totaled $1,286,000, of which $884,000 was attributable to termination benefits which were paid to departing employees of the Manager during the year. Amounts approximating these termination benefits ($874,000), and amounts approximating those paid to the remaining employees of the Manager in January 2002 ($616,000), were charged to management fee expense during the period from September 26, 2000 through December 31, 2000. During the period from September 26, 2000 through December 31, 2000, operating deficit reimbursements totaled $243,000, of which $192,000 was related to termination benefits which were paid to departing employees of the Manager on December 31, 2000. Reimbursable expenses are included in general and administrative expenses while operating deficit reimbursements are included in management fees for the periods indicated. As of December 31, 2001 and 2000, base management fees due to the Manager totaled $47,000 and $338,000, F-18 respectively. Operating deficit reimbursements due to the Manager totaled $150,000 and $243,000 at December 31, 2001 and 2000, respectively. At December 31, 2001 and 2000, amounts due to manager included $616,000 and $1,490,000, respectively, relating to termination benefit costs expected to be borne by the Company (as of each of these financial reporting dates) through future operating deficit reimbursements. 8. STOCK-BASED COMPENSATION On May 12, 1998, the Company granted to its trust managers and officers non-qualified options to purchase 352,000 common shares at an exercise price of $15.00 per share (the IPO price). The options vest ratably over a four-year period beginning one year after the date of grant. Through September 25, 2000 (the date immediately prior to the adoption of liquidation basis accounting), the Company applied APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for these awards. As the awards had no intrinsic value at the grant date, no compensation cost was ever recognized. Had the Company determined compensation cost associated with these options consistent with the fair value methodology of SFAS No. 123, the Company's net income and earnings per common share for the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999 would have been reduced to the following pro forma amounts (in thousands, except per share data):
Period from January 1, 2000 through Year Ended September 25, 2000 December 31, 1999 ------------------ ----------------- Net income: As reported ........................ $5,948 $7,320 Pro forma .......................... $5,827 $7,138 Basic earnings per common share: As reported ....................... $ 0.59 $ 0.73 Pro forma ......................... $ 0.58 $ 0.71 Diluted earnings per common share: As reported ....................... $ 0.59 $ 0.73 Pro forma ......................... $ 0.58 $ 0.71
The estimated fair value of the options granted to the Company's officers and trust managers, approximating $2.20 per share, was measured at the grant date using the Cox-Ross-Rubinstein option pricing model with the following assumptions: risk free interest rate of 5.64%; expected life of four years; expected volatility of 25%; and dividend yield of 8%. Subsequent to the grant date, the fair value of the options was not adjusted for changes in these assumptions nor for changes in the price of the Company's stock. On May 12, 1998, the Company granted to the Manager and certain employees of the AMRESCO Group non-qualified options to purchase 1,000,011 and 141,500 common shares, respectively. Seventy percent of the Manager's options and those options awarded to the other members of the AMRESCO Group are exercisable at $15.00 per share (the IPO price); the remaining thirty percent of the Manager's options are exercisable at an option price of $18.75 per share. The options vest in four equal installments on May 12, 1999, May 12, 2000, May 12, 2001 and May 12, 2002. On November 3, 1998 and February 25, 1999, the Company granted to certain employees of the AMRESCO Group non-qualified options to purchase 4,000 and 2,000 common shares, respectively; the options vest ratably over a four-year period beginning one year after the date of grant. Prior to September 26, 2000, the Company accounted for these options under SFAS No. 123 and the interpretation thereof provided by EITF 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services"; accordingly, compensation cost was being recognized over the four-year vesting period. For purposes of recognizing compensation costs during the financial reporting periods prior to the measurement (or vesting) date, the share option awards were measured as of each financial reporting date at their then-current fair value. Changes in those fair values between reporting dates were attributed in accordance with the provisions of FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans". As of June 30, 2000 (the last financial reporting date for which the historical cost [or going concern] basis of accounting was appropriate), December 31, 1999 and December 31, 1998, the estimated F-19 fair value of the options granted to the Manager and certain employees of the AMRESCO Group approximated $0.07 per share, $0.71 per share and $1.10 per share, respectively. The fair value of the options was estimated using the Cox-Ross-Rubinstein option pricing model with the following assumptions:
2000 1999 1998 -------------- -------------- -------------- Risk free interest rate ................ 6.35% 5.97% to 6.17% 4.54% to 4.59% Expected life .......................... 3 years 4 to 7 years 4 to 7 years Expected volatility .................... 20% 35% 40% Dividend yield ......................... 12% 12% 10%
During the six 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 year ended December 31, 1999, compensation cost associated with all of the options was adjusted to reflect the decline in estimated fair value (from December 31, 1998) of approximately $0.39 per share. During the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999, compensatory option charges (credits) included in management fees and general and administrative expenses were as follows (in thousands):
Period from January 1, 2000 through Year Ended September 25, December 31, 2000 1999 --------------- ------------ Management fees .......................... $ (261) $ 140 General and administrative expenses ...... (27) (8) ------------ ------------ $ (288) $ 132 ============ ============
A summary of the status of the Company's stock options as of December 31, 2001, 2000 and 1999 and the changes during the years then ended is as follows:
Compensatory Non-compensatory Options Options -------------------------------- --------------------------------- Weighted Weighted Number of Average Number of Average Shares Exercise Price Shares Exercise Price ------------- -------------- ------------- -------------- Options outstanding at January 1, 1999 1,124,011 $ 15.98 352,000 $ 15.00 Granted on February 25, 1999 2,000 8.75 -- -- Exercised -- -- -- -- Forfeited (4,250) (12.06) (13,500) (15.00) Expired -- -- -- -- ------------- ------------- ------------- ------------- Options outstanding at December 31, 1999 1,121,761 15.98 338,500 15.00 Exercised on September 26, 2000 (4,000) (7.88) -- -- Forfeited -- -- (45,000) (15.00) Expired -- -- -- -- ------------- ------------- ------------- ------------- Options outstanding at December 31, 2000 1,117,761 16.01 293,500 15.00 Exercised -- -- -- -- Forfeited -- -- -- -- Expired -- -- -- -- ------------- ------------- ------------- ------------- Options outstanding at December 31, 2001 1,117,761 $ 16.01 293,500 $ 15.00 ============= ============= ============= =============
F-20 As of December 31, 2001, the 1,411,261 options outstanding have a weighted average exercise price of $15.80 and a weighted average remaining contractual life of 6.38 years; 1,111,258 options have an exercise price of $15.00 per share while 300,003 options have an exercise price of $18.75 per share. At December 31, 2001, 1,115,758 options were exercisable at a weighted average exercise price of $15.17 per share. At December 31, 2000, 807,256 options were exercisable at a weighted average exercise price of $15.00 per share. At December 31, 1999, 405,378 options were exercisable at a weighted average exercise price of $14.98 per share. In lieu of cash compensation for their services and participation at regularly scheduled meetings of the Board of Trust Managers, the Company granted 2,250 and 1,500 restricted common shares to each of its four independent trust managers on May 11, 1999 and May 12, 1998, respectively. The grant-date fair value of these restricted common shares was $10.13 and $15.00 per share, respectively. The associated compensation cost was recognized over the one-year service period. At December 31, 2001, 573,485 shares were available for grant in the form of restricted common shares or options to purchase common shares under the Company's 1998 Share Option and Award Plan, as amended. On February 25, 1999, the Board of Trust Managers approved the payment of dividend equivalents on all vested and unexercised share options excluding those held by the Manager. Dividend equivalents were equal to the dividends paid on the Company's common shares from time to time, excluding those distributions that were characterized as a non-taxable return of capital for tax purposes. During the year ended December 31, 1999, dividend equivalent costs totaled $114,000 and were included in general and administrative expenses in the consolidated statement of income. The dividend equivalents program was terminated by the Board of Trust Managers on February 24, 2000; as a result, no dividend equivalent costs were incurred during the years ended December 31, 2001 and 2000. As described in Note 6, the Company granted warrants to Prudential Securities Incorporated to purchase 250,002 common shares of beneficial interest at $9.83 per share. The estimated fair value of the warrants, totaling $400,000, was measured at the grant date (May 4, 1999) using the Cox-Ross-Rubinstein option pricing model with the following assumptions: risk free interest rate of 5.23%; expected life of three years (the warrants had a 7-year term); expected volatility of 35%; and dividend yield of 12%. During the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999, $200,000 and $178,000, respectively, of warrant costs were amortized to interest expense. 9. 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. AMRESCO, INC. and AMREIT Holdings, Inc. had owned such shares since the Company's inception. On September 25, 2000, Prudential Securities Incorporated, an affiliate of PSCC, purchased 20,863 of the Company's common shares by tendering 250,002 warrants with an exercise price of $9.83 per share. No cash was received by the Company in connection with this issuance of common shares. The Company has no other warrants outstanding. On September 26, 2000, an executive officer of the Company exercised options to purchase 4,000 shares of common stock at $7.88 per share. F-21 10. EARNINGS PER SHARE A reconciliation of the numerator and denominator used in computing basic earnings per share and diluted earnings per share for the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999 is as follows (in thousands, except per share data):
Period from January 1, 2000 through Year Ended September 25, December 31, 2000 1999 ------------- ------------- Net income available to common shareholders $ 5,948 $ 7,320 ============= ============= Weighted average common shares outstanding 10,000 10,000 ============= ============= Basic earnings per common share $ 0.59 $ 0.73 ============= ============= Weighted average common shares outstanding 10,000 10,000 Effect of dilutive securities: Restricted shares 15 12 Net effect of assumed exercise of warrants 13 -- Net effect of assumed exercise of stock options 1 -- ------------- ------------- Adjusted weighted average shares outstanding 10,029 10,012 ============= ============= Diluted earnings per common share $ 0.59 $ 0.73 ============= =============
At September 25, 2000, options to purchase 1,415,261 common shares were outstanding. During the period from January 1, 2000 through September 24, 2000, warrants to purchase 250,002 common shares were outstanding; these warrants were exercised on September 25, 2000 (Note 9). For the period from January 1, 2000 through September 25, 2000, options related to 1,411,261 shares were not included in the computation of diluted earnings per share because the exercise prices related thereto were greater than the average market price of the Company's common shares. During the year ended December 31, 1999, options to purchase 1,460,261 common shares and warrants to purchase 250,002 common shares were outstanding. The options related to 1,456,261 shares and the warrants were not included in the computation of diluted earnings per share because the exercise prices related thereto were greater than the average market price of the Company's common shares. 11. DISTRIBUTIONS During the years ended December 31, 2001, 2000 and 1999, the Company declared distributions totaling $96,384,000 (or $9.60 per share), $13,445,000 (or $1.34 per share) and $15,921,000 (or $1.59 per share), respectively. All 2001 distributions were reported as liquidating distributions (for federal income tax purposes) to the Company's shareholders. For the year ended December 31, 2000, $0.34 per share was reported to the Company's shareholders (for federal income tax purposes) as ordinary income; $1.00 per share was reported for federal income tax purposes as liquidating distributions. For federal income tax purposes, $1.42 per share and $0.17 per share were reported to the Company's shareholders as ordinary income and non-taxable return of capital, respectively, for the year ended December 31, 1999. Information regarding the declaration of distributions by the Company during the years ended December 31, 2001, 2000 and 1999 is as follows (in thousands, except per share data): F-22
Distribution Declaration Record Payment Distribution per Common Date Date Date Paid Share ------------------ ------------------ ------------------ ------------ ------------ 1999 First Quarter April 22, 1999 April 30, 1999 May 17, 1999 $ 3,602 $ 0.36 Second Quarter July 22, 1999 July 31, 1999 August 16, 1999 3,906 0.39 Third Quarter October 21, 1999 October 31, 1999 November 15, 1999 4,006 0.40 Fourth Quarter December 15, 1999 December 31, 1999 January 27, 2000 4,407 0.44 ----------- ----------- $ 15,921 $ 1.59 =========== =========== 2000 First Quarter April 25, 2000 May 4, 2000 May 15, 2000 $ 3,405 $ 0.34 Liquidating Distributions: First September 27, 2000 October 6, 2000 October 19, 2000 3,012 0.30 Second October 31, 2000 November 9, 2000 November 21, 2000 3,514 0.35 Third December 21, 2000 December 31, 2000 January 17, 2001 3,514 0.35 ----------- ----------- $ 13,445 $ 1.34 =========== =========== 2001 Liquidating Distributions: Fourth March 8, 2001 March 19, 2001 March 30, 2001 $ 26,104 $ 2.60 Fifth July 19, 2001 July 30, 2001 August 9, 2001 70,280 7.00 ----------- ----------- $ 96,384 $ 9.60 =========== ===========
12. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES No non-cash investing and/or financing activities were recorded during the year ended December 31, 2001 or the period from September 26, 2000 through December 31, 2000. A summary of the non-cash investing and financing activities which occurred during the period from January 1, 2000 through September 25, 2000 and the year ended December 31, 1999 is as follows (in thousands):
Period from January 1, 2000 through Year Ended September 25, December 31, 2000 1999 ------------- ------------ Minority interest distributions associated with ADC loan arrangements $ 350 $ 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 $ -- $ 1,238 ============ ============ Amounts due to affiliate discharged in connection with sales of mortgage loans $ -- $ 6,597 ============ ============ Issuance of warrants in connection with line of credit $ -- $ 400 ============ ============
While not resulting in cash receipts or cash payments, these activities affected recognized assets and liabilities during the periods indicated. F-23 13. RECONCILIATION OF FINANCIAL STATEMENT OPERATING RESULTS TO TAX BASIS INCOME A reconciliation of the Company's financial statement operating results to its tax basis income for the years ended December 31, 2001, 2000 and 1999 is as follows (in thousands):
2001 2000 1999 ------------ ------------ ------------ Consolidated financial statement net income ....................... $ -- $ 5,948 $ 7,320 Decrease in net assets in liquidation from operating activities ... (1,491) (1,531) -- ------------ ------------ ------------ (1,491) 4,417 7,320 Difference attributable to differences in methods of accounting for ADC loan arrangements ........................... -- (268) 3,598 Equity in losses from unconsolidated subsidiary ................... -- 1,149 223 Dividends received from unconsolidated subsidiary ................. -- -- 45 Interest capitalized under SFAS No. 34 ............................ -- -- (593) Adjustments for restricted stock and compensatory options ......... -- (254) 223 Adjustment for management fees .................................... (874) 1,490 -- Adjustment for insurance costs .................................... 455 -- -- Adjustment for differences in methods of accounting for loan fees and line of credit costs ............................ 268 195 -- Provision for loan losses ......................................... -- 1,788 3,322 Net capital loss carryforward ..................................... 500 2,108 -- Changes in estimated net realizable value of certain assets ....... 4,890 2,807 -- Other ............................................................. 154 (289) 21 ------------ ------------ ------------ Tax basis income .................................................. $ 3,902 $ 13,143 $ 14,159 ============ ============ ============
14. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS No. 107"), requires disclosure of the estimated fair values of financial instruments whether or not such financial instruments are recognizable in a balance sheet prepared under the historical cost (or going concern) basis of accounting. For purposes of the statement, fair value is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. With the exception of the Company's investment in its unconsolidated subsidiary, substantially all of the Company's assets and liabilities are considered financial instruments for purposes of SFAS No. 107. At December 31, 2001 and 2000, all of the Company's financial instruments were carried at either their estimated net realizable values or their expected settlement amounts, which approximated their estimated fair values as of those dates. 15. SEGMENT INFORMATION SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"), requires enterprises to report certain financial and descriptive information about their reportable operating segments. SFAS No. 131 also requires certain enterprise-wide disclosures regarding products and services, geographic areas and major customers. The Company, as an investor in real estate related assets, operated in only one reportable segment. Historically, the Company made asset allocation decisions within this segment based upon its diversification strategies and changes in market conditions. The Company has not had, nor does it rely upon, any major customers. All of the Company's investments were secured directly or indirectly by real estate properties located in the United States; accordingly, all of its revenues were derived from U.S. operations. F-24 16. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY At December 31, 2001 and 2000, investment in unconsolidated subsidiary was comprised of the Company's investment in AMREIT II, Inc., its taxable subsidiary. Prior to September 26, 2000, the Company accounted for its investment in AMREIT II, Inc. using the equity method of accounting, and thus reported its share of income or loss based on its ownership interest. From and after September 26, 2000, the Company accounted for its investment in AMREIT II, Inc. using the cost method of accounting, and thus reported income only when cash was received. During the period from January 1, 2000 through September 25, 2000, the Company recognized losses of $1,080,000 from its investment in AMREIT II, Inc. During the year ended December 31, 2001 and the period from September 26, 2000 through December 31, 2000, the Company recognized no income from this investment. On December 31, 2000, the Company reduced the carrying value of its investment in AMREIT II, Inc. by $3,114,000, from $5,114,000 to $2,000,000. During the year ended December 31, 2001, the Company increased the carrying value of its investment in AMREIT II, Inc. by $183,000; additionally, the Company received distributions totaling $2,155,000 from this unconsolidated subsidiary. On March 6, 2002, the Company received a final distribution of $28,000 from AMREIT II, Inc. During the period from January 1, 2002 through March 6, 2002, the Company recognized no income from its investment in AMREIT II, Inc. Summarized financial information for AMREIT II, Inc. as of December 31, 2000 and for the year then ended is set forth below. The consolidated financial information is presented under the historical cost (or going concern) basis of accounting and includes the accounts of AMREIT II, Inc., its wholly-owned subsidiaries and a partnership which was owned by AMREIT II, Inc. (through its wholly-owned subsidiaries). All significant intercompany balances and transactions have been eliminated from the summarized financial information, including the Company's mezzanine (second lien) loan to the partnership. CONSOLIDATED BALANCE SHEET: Real estate held for sale, at estimated net realizable value ....... $ 17,882 Cash and other assets .............................................. $ 2,528 Non-recourse debt on real estate ................................... $ 17,000 Accounts payable and other liabilities ............................. $ 1,327 CONSOLIDATED STATEMENT OF OPERATIONS: Net operating income ............................................... $ 1,499 Income from CMBS ................................................... $ 99 Interest expense ................................................... $ 1,898 Depreciation ....................................................... $ 631 Loss on sale of CMBS ............................................... $ 140 Impairment of real estate .......................................... $ 4,557 Net loss ........................................................... $ (5,788)
On March 5, 2001, the partnership controlled by AMREIT II, Inc. sold a mixed-use property at a gross sales price of $18,250,000; in connection therewith, the non-recourse debt on real estate, which had been provided by an unaffiliated third party, was fully extinguished. 17. SUBSEQUENT EVENT On March 21, 2002, the Company sold its remaining mortgage loan to an unaffiliated third party for $10,300,000. F-25 18. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of unaudited quarterly operating results (under the liquidation basis of accounting) for the year ended December 31, 2001 and the period from September 26, 2000 through December 31, 2000 (in thousands):
Year Ended December 31, 2001 ---------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------------ ------------ ------------ ------------ Revenues ........................................... $ 2,877 $ 1,982 $ 721 $ 419 Expenses ........................................... $ 494 $ 489 $ 284 $ 833 Loss on disposition of mortgage loan ............... $ -- $ (500) $ -- $ -- Changes in estimated net realizable value of certain assets ............................... $ -- $ (3,710) $ -- $ (1,180) Increase (decrease) in net assets in liquidation from operating activities ....................... $ 2,383 $ (2,717) $ 437 $ (1,594)
Period from September 26, 2000 through December 31, 2000 ------------------------------------------- Period from September 26, 2000 through Fourth September 30, 2000 Quarter ------------------ ------------ Revenues ...................................................... $ 184 $ 3,574 Expenses ...................................................... $ 1,734 $ 748 Changes in estimated net realizable value of certain assets .................................... $ -- $ (2,807) Increase (decrease) in net assets in liquidation from operating activities....................... $ (1,550) $ 19
The following is a summary of unaudited quarterly results (under the historical cost [or going concern] basis of accounting) for the period from January 1, 2000 through September 25, 2000 (in thousands, except per share data):
Period from July 1, 2000 First Second through Quarter Quarter September 25, 2000 ------------ ------------ ------------------ Revenues ..................................... $ 5,840 $ 5,500 $ 4,368 Gain (loss) on sale of assets ................ $ (130) $ 2,159 $ (4,137) Gain associated with repayment of ADC loan arrangements .............................. $ 637 $ -- $ 1,293 Net income ................................... $ 1,237 $ 4,702 $ 9 Earnings per common share: Basic ..................................... $ 0.12 $ 0.47 $ -- Diluted ................................... $ 0.12 $ 0.47 $ --
F-26 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 11 Computation of Per Share Earnings. 21 Subsidiaries of the Registrant.
EX-11 3 d95463ex11.txt COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 AMRESCO CAPITAL TRUST COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
Period from January 1, 2000 through Year Ended September 25, December 31, 2000 1999 ------------ ------------ Basic: Net income available to common shareholders $ 5,948 $ 7,320 ============ ============ Weighted average common shares outstanding 10,000 10,000 ============ ============ Basic earnings per common share $ 0.59 $ 0.73 ============ ============ Diluted: Net income available to common shareholders $ 5,948 $ 7,320 ============ ============ Weighted average common shares outstanding 10,000 10,000 Effect of dilutive securities: Restricted shares 15 12 Net effect of assumed exercise of warrants 13 -- Net effect of assumed exercise of stock options 1 -- ------------ ------------ Adjusted weighted average common shares outstanding 10,029 10,012 ============ ============ Diluted earnings per common share $ 0.59 $ 0.73 ============ ============
EX-21 4 d95463ex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 AMRESCO CAPITAL TRUST SUBSIDIARIES OF THE REGISTRANT AMREIT I, Inc. (a Delaware corporation) AMREIT II, Inc. (a Nevada corporation) -----END PRIVACY-ENHANCED MESSAGE-----