1
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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-14029
AMRESCO CAPITAL TRUST
(Exact name of Registrant as specified in its charter)
TEXAS 75-2744858
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 N. PEARL STREET, SUITE 1900, LB 342, DALLAS, TEXAS 75201-7424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 953-7700
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 23, 2001, 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 $10.25 per share on February 23, 2001 as
reported on The Nasdaq Stock Market(R)) was approximately $101.5 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.
DOCUMENTS INCORPORATED BY REFERENCE
None
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AMRESCO CAPITAL TRUST
INDEX
Page No.
--------
PART I
Item 1. Business .................................................................. 3
Item 2. Properties ................................................................ 12
Item 3. Legal Proceedings ......................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders ....................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters ................................................................ 13
Item 6. Selected Financial Data ................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................ 32
Item 8. Financial Statements and Supplementary Data ............................... 33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................... 33
PART III
Item 10. Trust Managers and Executive Officers of the Company ....................... 34
Item 11. Executive Compensation ..................................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and Management ............. 39
Item 13. Certain Relationships and Related Transactions ............................. 40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........... 43
SIGNATURES ........................................................................... 45
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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. ("AMRESCO") 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.
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4
To date, all of the Company's CMBS investments have been sold. Additionally, all
of the Company's equity investments in real estate have been liquidated. A
majority of the Company's loans are expected to be fully repaid at or prior to
their scheduled maturities (including extension options) in accordance with the
terms of the underlying loan agreements. During the year ended December 31,
2000, six of the Company's loans were fully repaid; additionally, the Company
disposed of two additional loans at amounts which were less than their par (or
face) value. On February 1, 2001, another loan was fully repaid. Given the short
duration and quality of its four remaining loans, the Company believes that the
liquidation process will be completed within 18 to 24 months from the date that
shareholders approved the liquidation, although there can be no assurances that
this time table will be met or that the anticipated proceeds from the
liquidation will be achieved. 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 it has operated and it intends to continue to operate 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 has been 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 (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. Immediately after the
closing of the IPO, the Manager was granted options to purchase 1,000,011 Common
Shares; 70% of the options are exercisable at an option price of $15.00 per
share (the "IPO Price") and the remaining 30% of the options are exercisable at
an option price of $18.75 per share. The options vest ratably over a four-year
period commencing on the first anniversary of the date of grant.
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.
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 two
executive officers, each of whom is employed by AMRESCO. Additionally, the
Company relies on a third officer, its Chairman of the Board of Trust Managers
and Chief Executive Officer, who is not employed by either the Company or
AMRESCO. The Company is not a party to any collective bargaining agreements.
AMRESCO is a publicly-traded small and middle market business lending company
headquartered in Dallas, Texas. AMRESCO, which began operating in 1987, employed
approximately 200 people as of December 31, 2000. As of December 31, 1999,
AMRESCO employed approximately 2,600 people.
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5
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, beginning April 1, 2000. These reimbursements are
equal to the excess, if any, of the Manager's operating costs (including
principally personnel and general and administrative expenses) over the sum of
its base management fees and any other fees earned by the Manager from sources
other than the Company. Currently, AMRESCO (through the Manager) employs 4
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
since May 12, 1998 under the terms of the amended Management Agreement (in
thousands):
Period from
May 12, 1998
Year Ended Year Ended through
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ ------------
Base management fees $ 1,762 $ 2,066 $ 835
Incentive compensation -- -- --
Reimbursable expenses 20 192 140
Operating deficit reimbursements 243 -- --
------------ ------------ ------------
$ 2,025 $ 2,258 $ 975
============ ============ ============
HISTORICAL INVESTMENT ACTIVITIES
General
The Manager is authorized in accordance with the terms of the amended Management
Agreement to make the day-to-day investment decisions of the Company based on
guidelines in effect and approved from time to time by the Company's Board of
Trust Managers. The Trust Managers have reviewed all transactions of the Company
on a quarterly basis to determine compliance with the guidelines. Currently, any
proposed sale of assets involving a member of the AMRESCO Group requires the
prior approval of a majority of the Independent Trust Managers of the Investment
Committee of the Board of Trust Managers.
The Company operates exclusively as an investor in real estate related assets.
Historically, its asset allocation decisions and investment strategies were
influenced by changing market factors and conditions. The Company has no policy
requiring that any specific percentage of its assets be invested in any
particular type or form of real estate investment nor does 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, 2000, 1999 and 1998,
investments in CMBS comprised approximately 14%, 12% and 17%, respectively, of
the Company's investment portfolio.
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6
The Company's historical investment activities were focused in three primary
areas: loan investments, CMBS and equity investments in real estate. Each of
these investment categories is more fully described below. During 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 May 12, 1998 (inception of operations) through December 31,
1998, revenues derived from each of these categories were as follows (dollars in
thousands):
Period from January 1, 2000 Year Ended Period from May 12, 1998
through September 25, 2000 December 31, 1999 through December 31, 1998
--------------------------- -------------------------- --------------------------
Amount % of Total Amount % of Total Amount % of Total
---------- ---------- ---------- ---------- ---------- ----------
Loan investments $ 11,790 75% $ 16,099 69% $ 4,834 55%
Investments in CMBS 2,405 15 3,699 16 1,563 18
Equity investments in real
estate 2,353 15 3,199 13 181 2
Other (840) (5) 396 2 2,167 25
---------- ---------- ---------- ---------- ---------- ----------
$ 15,708 100% $ 23,393 100% $ 8,745 100%
========== ========== ========== ========== ========== ==========
Revenues derived from loan investments are included in the Company's
consolidated statements of income for 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, as follows (in
thousands):
Period from Period from
January 1, May 12, 1998
2000 through Year Ended through
September 25, December 31, December 31,
2000 1999 1998
------------- ------------ ------------
Interest income on mortgage loans $ 8,937 $ 14,568 $ 4,278
Operating income from real estate 2,853 1,531 211
Equity in earnings of other real estate ventures -- -- 345
------------ ------------ ------------
$ 11,790 $ 16,099 $ 4,834
============ ============ ============
The Company provided financing through some real estate loan arrangements that,
because of their nature, qualified (under the historical cost [or going concern]
basis of accounting) as either real estate or joint venture investments for
financial reporting purposes. Such determination by the Company affected the
balance sheet classification of these investments and the recognition of
revenues derived therefrom. These investments are referred to in this report as
"ADC loan arrangements". For a discussion of ADC loan arrangements as well as
operating profit and information regarding the Company's assets, reference is
made to the audited consolidated financial statements and notes thereto included
in Item 8 of this report. Revenues derived from equity investments in real
estate includes both consolidated and unconsolidated investments which were held
directly by the Company. During the period from January 1, 2000 through
September 25, 2000, other was comprised principally of losses from the Company's
unconsolidated taxable subsidiary and, to a lesser extent, of interest income
which was derived from the temporary investment of the Company's excess cash and
income from a minority-owned partnership which had owned CMBS. During the two
previous periods, other was comprised principally of interest income which was
derived from the temporary investment of the Company's excess cash and, to a
lesser extent, of income from its unconsolidated taxable subsidiary and the
minority-owned partnership that had owned CMBS. At December 31, 2000, the
Company's unconsolidated taxable subsidiary held interests in a partnership that
owned a mixed-use property. At December 31, 1999, the Company's unconsolidated
taxable subsidiary owned one CMBS and it held the interests in the mixed-use
property. At December 31, 1998, the taxable subsidiary held only the commercial
mortgage-backed security. During the period from May 12, 1998 through December
31, 1998, other represented a more significant component of the Company's
revenues due to the income which was derived from the temporary investment of
the Company's IPO and Private Placement proceeds prior to their deployment in
real estate related investments.
For information regarding the revenues which were earned by the Company during
the period from September 26, 2000 (the date on which the Company adopted
liquidation basis accounting) through December 31, 2000, 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.
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The Company does not have, nor does it rely upon, any major customers.
Additionally, the Company has 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.
Based on committed amounts, senior mortgage loans and mezzanine loans comprised
84% and 16%, respectively, of the Company's loan investment portfolio at
December 31, 2000. As of December 31, 2000, the Company's loan investments were
as follows (dollars in thousands):
Scheduled Estimated
Date of Maturity/ Net Interest Interest
Initial Disposition Collateral Commitment Amount Realizable Pay Accrual
Investment Date Location Property Type Position Amount Outstanding Value Rate Rate
---------- ----------- --------------- ------------- ----------- ---------- ----------- ---------- -------- --------
05/12/98 03/31/02 Richardson, TX Office Second Lien $ 14,700 $ 14,700 $ 14,700 10.0% 12.0%
06/01/98 06/01/01 Houston, TX Office First Lien 11,800 11,800 11,800 12.0% 12.0%
06/22/98 06/19/01 Wayland, MA Office First Lien 45,000 42,152 42,152 10.5% 10.5%
05/18/99 05/19/01 Irvine, CA Office First Lien 15,557 15,306 15,306 10.0% 12.0%
07/29/99 02/01/01 Lexington, MA R&D/Bio-Tech First Lien 5,213 4,443 4,443 11.7% 14.7%
---------- ----------- ----------
$ 92,270 $ 88,401 $ 88,401
========== =========== ==========
On February 1, 2001, one of the five loan investments was fully repaid; at
December 31, 2000, the amount outstanding under this loan totaled $4.443
million. Two of the Company's four remaining loans provide for additional
advances as costs are incurred by the borrowers. For all four loan investments,
payments of interest only are due monthly at the fixed interest pay rate.
Following the repayment described above, the Company has four loan investments
which accrue interest at fixed accrual rates ranging from 10.5% to 12%. The
incremental interest earned at the accrual rate is due (from the borrowers) at
the scheduled maturities of the loans (including extension options). Extension
options are available to two of the Company's remaining borrowers provided that
such borrowers are not in violation of any of the conditions established in the
loan agreements. One of the four loan investments provides the Company with the
opportunity for profit participation in excess of the contractual accrual rate.
The following table sets forth information regarding the location of the
properties securing the Company's loan investments at December 31, 2000 (dollars
in thousands):
Estimated
Net % of Total
Committed Loan Amount Realizable Committed
Amount Outstanding Value Amount
------------ ------------ ------------ ------------
Massachusetts $ 50,213 $ 46,595 $ 46,595 54%
Texas 26,500 26,500 26,500 29
California 15,557 15,306 15,306 17
------------ ------------ ------------ ------------
$ 92,270 $ 88,401 $ 88,401 100%
============ ============ ============ ============
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8
At December 31, 2000, the Company's loan investments were collateralized by the
following product types (dollars in thousands):
Estimated
Net % of Total
Committed Loan Amount Realizable Committed
Amount Outstanding Value Amount
--------- ----------- ---------- ----------
Office $ 87,057 $ 83,958 $ 83,958 94%
R&D/Bio-Tech 5,213 4,443 4,443 6
--------- ----------- ---------- ----------
$ 92,270 $ 88,401 $ 88,401 100%
========= =========== ========== ==========
The Company is obligated to fund its loan commitments to the extent that the
borrowers are not in violation of any of the conditions established in the loan
agreements. A portion of the commitments could expire without being drawn upon
and therefore the total commitment amounts do not necessarily represent future
cash requirements. As the Company's loan portfolio is expected to contract as a
result of repayments and/or sales, geographic and product type concentrations
will persist.
The underwriting process for 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.
Commercial Mortgage-backed Securities
During the period from May 12, 1998 (inception of operations) through September
1, 1998, the Company acquired five non-investment grade commercial
mortgage-backed securities from several sources. 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.
Prior to September 26, 2000, the Company's investments in 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 are carried at estimated net realizable value; any unrealized
gains or losses (changes in estimated net realizable value) are reported in the
consolidated statement of changes in net assets in liquidation.
8
9
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); this non-investment grade security had been acquired by the
subsidiary in May 1998. 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 Sale Date Proceeds Cost Loss
-------- -------- --------- ----------- --------- --------
B-2A B January 11, 2000 $3,784 $3,914 $ (130)
B-3A B- March 21, 2000 $3,341 $3,481 $ (140)
G-2 B- August 23, 2000 $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 during the period from January 1,
2000 through September 25, 2000.
At December 31, 2000, the amortized cost and estimated net realizable value of
the Company's three CMBS were 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 (three
securities) at an amount which approximated their estimated net realizable value
as of December 31, 2000.
In February 1999, the Company contributed $0.7 million to a newly formed
investment partnership with Olympus Real Estate Corporation. Concurrently, the
partnership, which was 5% owned by the Company, acquired several classes of
subordinated CMBS, including some unrated and interest only securities, at an
aggregate purchase price of $12.7 million. On June 30, 2000, the Company sold
its 5% ownership interest at a gain of $12,000.
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
9
10
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. The
Company acquired these interests on a leveraged basis with the expectation that
the investments would provide sufficient cash flow to provide a return on its
investment after debt service within the Company's target parameters. The tax
depreciation associated with these investments was used to offset the non-cash
accrual of interest on some of its loan investments and original issue discount
generally associated with CMBS.
In 1998, the Company entered into a master partnership that, through individual
subsidiary partnerships, eventually acquired interests in five newly
constructed, grocery-anchored shopping centers in the Dallas/Fort Worth, Texas
area. Prior to June 14, 2000, the Company held a 99.5% interest in the master
partnership. The master partnership directly or indirectly owned 100% of the
equity investment in each of these centers. Information about these centers is
summarized below.
Acquisition Date Location Square Feet
---------------- -------- -----------
October 23, 1998 Arlington, Texas 82,730
April 30, 1999 Flower Mound, Texas 86,516
April 30, 1999 Grapevine, Texas 85,611
April 30, 1999 Fort Worth, Texas 61,440
August 25, 1999 Richardson, Texas 87,540
In connection with these acquisitions, the subsidiary partnerships which held
title to these properties obtained non-recourse financing aggregating $34.6
million from an unaffiliated third party. Additionally, the Company contributed
$18.161 million of capital to the master partnership which, in turn, was then
contributed to the subsidiary partnerships. On June 14, 2000, the Company sold
its 99.5% ownership interest in the five grocery-anchored shopping centers for
$18.327 million. The sale generated a gain of $1,485,000.
On March 2, 1999, the Company acquired a 49% limited partnership interest in a
partnership that owns a 116,000 square foot office building in Richardson,
Texas. In connection with this acquisition, the Company contributed $1.4 million
of capital to this partnership. On April 3, 2000, the Company sold its 49%
limited partner interest for $1.8 million. In connection with this sale, the
Company realized a gain of $662,000.
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 holds 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.
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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 real properties securing the Company's mortgage loans compete with
numerous other owners and operators of similar properties, including commercial
developers, real estate companies and REITs. Many of these entities may have
greater financial and other resources and more operating experience than the
owners of real properties securing the Company's mortgage loans. The real
properties owned and operated by borrowers under the Company's mortgage loans
are located in markets or submarkets in which significant construction or
rehabilitation of properties may occur. This could result in overbuilding in
these markets or submarkets. Any such overbuilding could adversely impact 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, adversely impact the Company's income and the timing and amount
of its anticipated liquidating distributions. After completing the liquidation
of its assets, the Company will no longer compete 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. Accordingly, the value and
operating costs of real estate acquired by the Company may be affected by the
obligation to pay for the cost of complying with this legislation. 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 are (or 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 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.
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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 material 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 2000, through the solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The Company's common shares of beneficial interest, par value $.01 per share
(the "Common Shares"), are traded on The Nasdaq Stock Market(R) ("Nasdaq") 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
--------- --------
1999
First Quarter.......................................... 10.500 8.250
Second Quarter......................................... 10.750 8.250
Third Quarter ......................................... 11.063 8.563
Fourth Quarter ........................................ 9.563 8.000
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 (through February 23, 2001).............. 10.438 9.625
SHAREHOLDER INFORMATION
At February 23, 2001, the Company had approximately 36 holders of record of its
Common Shares. It is estimated that there were approximately 1,825 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%).
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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, 2000, the Company had
declared three 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, 2000 and 1999 (in
thousands, except per share amounts).
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
========== ==========
Federal Income Tax Status
----------------------------------------
Ordinary Return Liquidating
Income Of Capital Distributions
---------- ---------- -------------
1999
First Quarter $ 0.3268 $ 0.0332 $ --
Second Quarter 0.3466 0.0434 --
Third Quarter 0.3555 0.0445 --
Fourth Quarter 0.3911 0.0489 --
---------- ---------- ----------
$ 1.4200 $ 0.1700 $ --
========== ========== ==========
2000
First Quarter $ 0.3400 $ -- $ --
Liquidating
Distributions:
First -- -- 0.3000
Second -- -- 0.3500
Third -- -- 0.3500
---------- ---------- ----------
$ 0.3400 $ -- $ 1.0000
========== ========== ==========
On March 8, 2001, the Company declared its fourth liquidating distribution; the
distribution, totaling $26,104,000 (or $2.60 per share), is payable on March 30,
2001 to shareholders of record on March 19, 2001. The timing and amount of
future 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 Internal Revenue Code of 1986, as amended (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.
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 years ended December 31, 2000, 1999 and 1998. For tax
years beginning after December 31, 2000, the minimum distribution requirement
has been reduced from 95% to 90%. For the tax years ended December 31, 2000,
1999 and 1998, the Company declared dividends totaling $1.34, $1.59 and $0.74
per share, respectively, which satisfied the 95% distribution requirement for
such years.
SALES OF UNREGISTERED SECURITIES
The Company was initially capitalized through the sale of 100 of its Common
Shares to AMRESCO, INC. ("AMRESCO") on February 2, 1998 for $1,000. On February
11, 1998, AMRESCO contributed additional capital of $25,000 to the Company; no
additional shares were issued to AMRESCO in connection with this contribution.
On May 12, 1998, concurrent with the completion of its initial public offering
of 9,000,000 Common Shares, the Company sold 1,000,011 Common Shares to AMREIT
Holdings, Inc. ("Holdings"), a wholly-owned subsidiary of AMRESCO, at the
initial public offering price of $15.00 per share, or $15,000,165 in aggregate
cash consideration, pursuant to a private placement (the "Private Placement").
The Common Shares sold in the Private Placement and those sold in connection
with the Company's initial capitalization were sold without registration under
the Securities Act of 1933 in reliance on the exemption provided by Section 4(2)
thereof.
In addition to the 1,000,011 shares acquired pursuant to the Private Placement,
Holdings purchased 500,000 registered shares through the IPO. On July 5, 2000,
AMRESCO and Holdings sold 1,500,111 shares of the Company's outstanding common
stock to affiliates of Farallon Capital Management, L.L.C. As a result of this
sale, AMRESCO and Holdings no longer own any of the Company's outstanding Common
Shares.
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ITEM 6. SELECTED FINANCIAL DATA
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 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
The Company believes that the following additional financial data is also
meaningful to users of its financial reports. 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
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 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 period. 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".
(In thousands, except per share data)
Revenues .............................................. $ 3,758
Decrease in net assets in liquidation from
operating activities ................................ $ (1,531)
Liquidating distributions declared per common share ... $ 1.00
Total assets .......................................... $ 119,159
Total debt ............................................ $ --
Net assets in liquidation ............................. $ 117,006
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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 it's 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. To date, all of the Company's non-core assets
have been sold. During the year ended December 31, 2000, the Company sold two of
its CMBS investments, its 49% limited partner interest in a suburban office
building, its majority ownership interest in five grocery-anchored shopping
centers and its minority ownership interest in a partnership that owns CMBS.
Additionally, in March 2000, the Company's unconsolidated taxable subsidiary
sold its only CMBS investment. On January 18, 2001, the Company sold its
remaining CMBS holdings; at the time of the sale, the Company received net cash
proceeds totaling $16.5 million. On March 5, 2001, the Company's taxable
subsidiary sold its last asset, a mixed-use property in Columbus, Ohio. Prior to
its sale, the property had been owned by a partnership which is controlled by
the subsidiary. Based upon the terms of the sale, the Company expects to receive
approximately $2.0 million from its unconsolidated taxable subsidiary.
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 a result, the Company adopted liquidation basis accounting on
September 26, 2000. Prior to that date, 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.
A majority of the Company's loans are expected to be fully repaid at or prior to
their scheduled maturities (including extension options) in accordance with the
terms of the underlying loan agreements. During the year ended December 31,
2000, the Company used the proceeds from eight loan repayments and the asset
sales described above to fully repay $70.5 million in outstanding borrowings
under its two credit facilities. Now that the credit facilities have been fully
repaid, the Board of Trust Managers intends to distribute the Company's
remaining assets to its shareholders as, and when, additional loans are repaid
and/or sold, provided that the Trust Managers believe that adequate reserves are
available for the payment of the Company's liabilities, expenses and unfunded
loan commitments. Given the short duration and quality of the Company's
remaining loans, the Company believes that the liquidation process will be
completed within 18 to 24 months from the date that shareholders approved the
liquidation, although there can be no assurances that this time table will be
met or that the anticipated proceeds from the liquidation will be achieved.
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17
RESULTS OF OPERATIONS
The following discussion of results of operations 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 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), the year ended December
31, 1999 and the period from May 12, 1998 (inception of operations) through
December 31, 1998 was $5,948,000, $7,320,000 and $3,952,000, respectively, or
$0.59, $0.73 and $0.39 per common share, respectively. The Company had no income
or expenses during the period from February 2, 1998 (date of initial
capitalization) through May 11, 1998. The Company's sources of revenue for the
period from January 1, 2000 through September 25, 2000, the year ended December
31, 1999 and the period from May 12, 1998 through December 31, 1998, totaling
$15,708,000, $23,393,000 and $8,745,000, respectively, are set forth below.
o $11,790,000, $16,099,000 and $4,834,000, 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, the
year ended December 31, 1999 and the period from February 2, 1998 through
December 31, 1998 as follows: interest income on mortgage loans of
$8,937,000, $14,568,000 and $4,278,000, respectively; operating income from
real estate of $2,853,000, $1,531,000 and $211,000, respectively; and
equity in earnings of other real estate ventures of $0, $0 and $345,000,
respectively.
o $2,405,000, $3,699,000 and $1,563,000, respectively, from investments in
CMBS.
o $2,387,000, $3,327,000 and $181,000, respectively, of operating income from
real estate previously owned by the Company (through a majority-owned
partnership).
o $(1,091,000), $17,000 and $243,000, respectively, of equity in earnings
(losses) from its unconsolidated subsidiary, partnerships and other real
estate ventures, including the Company's share of the loss realized in
connection with the sale of the subsidiary's CMBS investment in March 2000.
o $217,000, $251,000 and $1,924,000, 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. No gains were realized during 1998.
The Company incurred expenses of $9,530,000, $16,631,000 and $4,793,000 during
the period from January 1, 2000 through September 25, 2000, the year ended
December 31, 1999 and the period from May 12, 1998 through December 31, 1998,
respectively. These expenses are set forth below.
o $4,396,000, $5,593,000 and $567,000, respectively, of interest expense (net
of capitalized interest totaling $0, $593,000 and $57,000, respectively)
associated with the Company's credit facilities and five non-recourse loans
secured by real estate.
o $1,140,000, $2,206,000 and $1,187,000, respectively, of management fees,
including $1,401,000, $2,066,000 and $835,000, respectively, of base
management fees payable to the Manager pursuant to the amended Management
Agreement and $(261,000), $140,000 and $352,000, 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 and the year ended December
31, 1999 primarily as a result of a decrease
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in the expected volatility of the Company's stock. No incentive fees or
operating deficit reimbursements were incurred during any of the three
periods.
o $1,018,000, $1,437,000 and $1,294,000, respectively, of general and
administrative costs, including $0, $200,000 and $0, respectively, of
resolution costs associated with a non-performing loan, $0, $0 and
$330,000, respectively, of due diligence costs associated with an abandoned
transaction, $705,000, $304,000 and $396,000, respectively, for
professional services (including a financial advisor's fee during the
period from January 1, 2000 through September 25, 2000), $172,000, $234,000
and $162,000, respectively, for directors and officers' insurance, $20,000,
$192,000 and $140,000, respectively, of reimbursable costs pursuant to the
amended Management Agreement, $(27,000), $(8,000) and $68,000,
respectively, related to compensatory options granted to certain members of
the AMRESCO Group, $0, $114,000 and $0, respectively, of dividend
equivalent costs, $37,000, $23,000 and $0, respectively, of fees paid to
the Company's Independent Trust Managers for their services to the Company,
$29,000, $0 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, $91,000 and $56,000, respectively, related to
restricted stock awards to the Company's Independent Trust Managers and
$17,000, $111,000 and $57,000, respectively, of travel costs. Costs
associated with the compensatory options decreased during the period from
January 1, 2000 through September 25, 2000 and the year ended December 31,
1999 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, $1,737,000 and $0, respectively, of costs associated with an abandoned
merger.
o $1,188,000, $1,252,000 and $100,000, respectively, of depreciation expense,
including $499,000, $810,000 and $56,000, respectively, related to five
grocery-anchored shopping centers and $689,000, $442,000 and $44,000,
respectively, related to loan investments that were accounted for as real
estate.
o $0, $1,084,000 and $277,000, respectively, of participating interest
associated with amounts due to an affiliate.
o $1,788,000, $3,322,000 and $1,368,000, 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 or the period from May 12, 1998 through December 31,
1998.
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 or 1998.
During the period from January 1, 2000 through September 25, 2000, the year
ended December 31, 1999 and the period from May 12, 1998 through December 31,
1998, minority interest in a subsidiary partnership's net income totaled
$52,000, $26,000 and $0, 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 the current period as compared to the prior
period; 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 current period 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
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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 current period as
compared to the prior period. 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 the current period (as
compared to the prior period) 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 the prior period, the Company incurred reimbursable costs
under the Management Agreement of $192,000 and dividend equivalent costs of
$114,000. During the current period, 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 the current
period 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.
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.
Changes in Net Assets in Liquidation
Under the liquidation basis of accounting, net assets in liquidation decreased
by $8,025,000 during the period from September 26, 2000 through December 31,
2000, 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, are expected to be borne by the
Company through future operating deficit reimbursements under the terms of the
amended Management Agreement. 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.
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20
Year Ended December 31, 1999 Compared to Period from February 2, 1998 (Date of
Initial Capitalization) through December 31, 1998
The Company was initially capitalized through the sale of 100 common shares to
AMRESCO, INC. on February 2, 1998 and it 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. The following
comparisons reflect the fact that during the entire year ended December 31,
1999, the Company's net proceeds from the issuance of its common shares were
fully invested and it (and its consolidated partnerships) had outstanding
borrowings under several credit facilities. By contrast, during the period from
February 2, 1998 (date of initial capitalization) through December 31, 1998, the
Company was actively investing the $139.7 million of net proceeds received from
the issuance of its common shares. These proceeds were not fully invested until
September 30, 1998. Additionally, the Company did not begin to borrow under its
credit facilities until September 30, 1998. During the period from February 2,
1998 (date of initial capitalization) through December 31, 1998, the Company had
operations for only 234 days (from May 12, 1998 through December 31, 1998). The
Company had no income or expenses during the period from February 2, 1998
through May 11, 1998.
The Company's revenues increased by $14,648,000, or 168%, from $8,745,000 to
$23,393,000, due primarily to increases in interest income derived from mortgage
loan investments, income from commercial mortgage-backed securities, and
operating income from real estate. More specifically, the higher revenues were
attributable to the following (amounts in parentheses represent incremental
revenues earned in 1999 as compared to 1998):
o mortgage loans that were originated during 1998 and those that were
acquired immediately after the closing of the IPO (other than loans
accounted for as real estate or joint venture investments for financial
reporting purposes) were outstanding for a longer period of time during the
year ended December 31, 1999 and at higher average balances due to
additional fundings under these commitments ($7,197,000);
o some of the loans that contributed to 1999 revenues were acquired on
September 30, 1998 and therefore they generated only three months of
revenues in the earlier period ($1,746,000);
o three new loan originations that occurred in mid 1999 ($1,347,000);
o acquisitions of CMBS that occurred on May 27, 1998, June 30, 1998 and
September 1, 1998 ($2,136,000);
o acquisitions of real estate that occurred on October 23, 1998, April 30,
1999 and August 25, 1999 ($3,146,000);
o the properties underlying two of the Company's ADC loan arrangements
accounted for as real estate were substantially completed in 1999 and began
producing operating income ($1,112,000); and
o a property underlying one of the Company's ADC loan arrangements accounted
for as real estate was operating during the entire year ended December 31,
1999 as compared to a period of just over six months during 1998
($208,000).
The higher revenues described above were offset by declines in interest income
from short-term investments and equity in earnings from the Company's
unconsolidated subsidiary, partnerships and other real estate ventures. Interest
income declined by $1,673,000, from $1,924,000 to $251,000, as the uninvested
portion of the net proceeds received from the issuance of the Company's common
shares were temporarily invested in short-term investments during the period
from May 12, 1998 through September 30, 1998. Equity in earnings from
unconsolidated subsidiary, partnerships and other real estate ventures declined
by $571,000, from $588,000 to $17,000. For the most part, this decline was
attributable to a non-performing loan. This loan was performing until late in
the fourth quarter of 1998. Prior to its reclassification in February 1999,
which is described below, this loan was accounted for as a joint venture
investment for financial reporting purposes.
During the year ended December 31, 1999, the average book value of the Company's
assets, excluding cash and cash equivalents, approximated $204 million. During
the period from February 2, 1998 through December 31, 1998, the average book
value of the Company's assets, excluding cash and cash equivalents, approximated
$91 million.
The Company's expenses increased by $11,838,000, or 247%, from $4,793,000 to
$16,631,000, due primarily to increases in borrowing costs (including
participating interest in mortgage loans), base management fees, depreciation
expense and the Company's provision for loan losses. Additionally, the Company's
1999 expenses included $1,737,000 of costs associated with an abandoned merger.
These costs included financial advisors' fees, legal and accounting fees, filing
fees and
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expenses associated with printing preliminary proxy materials. The Company and
the prospective merger partner each bore one-half of the related filing fees and
printing costs. The Company was not required to pay or reimburse any of the
expenses incurred by the prospective merger partner nor was it required to pay
any type of break-up or termination fee to such party.
During the year ended December 31, 1999, the Company incurred borrowing costs,
including participating interest in mortgage loans, of $6,677,000 (net of
amounts capitalized of $593,000). During the period from May 12, 1998 (inception
of operations) through December 31, 1998, the Company incurred borrowing costs,
including participating interest in mortgage loans, of only $844,000 (net of
amounts capitalized of $57,000) as it did not begin to leverage its assets until
September 30, 1998. As of December 31, 1999 and 1998, obligations under the
Company's various financing arrangements totaled $105,097,000 and $52,647,000,
including amounts due to an affiliate of $0 and $5,809,000, respectively.
Amounts due to the affiliate were fully extinguished on November 1, 1999. Base
management fees increased by $1,231,000, from $835,000 to $2,066,000, as a
result of the Company's larger average asset base upon which the fee is
calculated. Depreciation expense increased by $1,152,000, from $100,000 to
$1,252,000, as a result of the real estate acquisitions described above and the
fact that the projects securing two of the Company's ADC loan arrangements
accounted for as real estate were substantially completed and held available for
occupancy during 1999. Finally, the Company's provision for loan losses
increased by $1,954,000, from $1,368,000 to $3,322,000. The increase was
attributable to one investment, an ADC loan arrangement, that was deemed to be
impaired as of December 31, 1999. 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". The higher expenses
enumerated above were offset, in part, by a decline in compensatory option
charges. The aggregate costs associated with compensatory options declined by
$288,000, from $420,000 to $132,000, primarily as a result of a decrease in the
expected volatility of the Company's stock.
For the reasons cited above, income before gains and minority interests
increased by $2,810,000, or 71%, from $3,952,000 to $6,762,000.
Net income increased by $3,368,000, or 85%, from $3,952,000 to $7,320,000. In
addition to the factors cited above, net income increased partially as a result
of a $584,000 gain realized in connection with the repayment of an ADC loan
arrangement. During 1999, the Company's net income was reduced by a minority
interest in a subsidiary partnership's net income totaling $26,000.
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
Date Date Date Paid Share Income Of 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.
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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 four 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 10,040 1.00
Declared in 2000
Fourth Liquidating Distribution March 8, 2001 March 19, 2001 March 30, 2001 26,104 2.60
---------- ----------
Total Liquidating Distributions
Declared to Date $ 36,144 $ 3.60
========== ==========
The timing and amount of future 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 Internal Revenue Code of 1986, as
amended (the "Code"), and such other factors as the Board of Trust Managers
deems relevant. At a minimum, the Company intends to make distributions in a
manner which will allow it to continue to qualify as a REIT under the Code
throughout the liquidation period. 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 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 year ended December 31, 2000, $1.00 per share was 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 through December 31, 1998, the Company
assembled a portfolio of 21 loans, representing $209.6 million in aggregate
commitments; as of December 31, 1998, $136.8 million had been advanced under
these facilities. Eleven of the 21 loans were originated by the Company while
two of the loans were acquired from AMRESCO Funding Corporation ("AFC") and
eight of the loans were acquired from AMRESCO Commercial Finance, Inc. ("ACFI"),
both of whom are members of the AMRESCO Group. The two loans were acquired from
AFC immediately after the closing of the IPO at an aggregate cash purchase price
of $5,433,000, including accrued interest and as adjusted for unamortized loan
commitment fees. The eight loans were acquired from ACFI on September 30, 1998
pursuant to two separate agreements. The first agreement provided for the
purchase of three loans at an aggregate cash purchase price of $11,314,000,
including accrued interest of $137,000. The second agreement provided for the
purchase of five loans at an aggregate cash purchase price of $22,978,000,
including accrued interest of $675,000. Immediately following the purchase of
the five loans, the Company sold to ACFI a contractual right to collect from the
Company an amount equal to the economic equivalent of all amounts collected from
the five loans in excess of (i) $17,958,000 and (ii) a return on this amount, or
so much of it as was outstanding from time to time, equal to 12% per annum. The
aggregate cash sales price of $5,020,000 had the effect of reducing the
Company's credit exposure with respect to such loans. The sales price was
comprised of $4,345,000 which had the effect of reducing the Company's net
investment in such loans; the balance of the
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sales price, or $675,000, equated to the amount of interest which was accrued
under the five loan agreements as of September 30, 1998. As additional
consideration, ACFI agreed to immediately reimburse the Company for any
additional advances which were required to be made under the five loan
agreements. The proceeds received from ACFI were accounted for as a financing.
During the year ended December 31, 1999, six of the Company's loans were fully
repaid, three loan originations were closed (the last of which occurred in
August 1999) and four loans were sold to ACFI in two separate transactions.
Prior to their sale, these four investments had been subject to the ACFI
economic interest described above. The fifth loan was fully repaid by the
borrower in May 1999. The proceeds from the sales, which produced no gain or
loss for the Company, totaled $13,340,000. In connection with the last sale,
amounts due to ACFI were fully extinguished; additionally, ACFI's contingent
reimbursement obligations were discharged. 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. Excluding
the loan classified as an investment in unconsolidated subsidiary, the Company
had 13 loans representing $168.9 million in aggregate commitments as of December
31, 1999; $143.6 million was outstanding under these facilities at that date.
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 $92.3 million (under five loans), of which
$88.4 million was outstanding. Based upon the amounts outstanding under these
facilities, the Company's portfolio of commercial mortgage loans had a weighted
average interest pay rate of 10.6% and a weighted average interest accrual rate
of 11.4% as of December 31, 2000. As of December 31, 2000, the Company's loan
investments are summarized as follows (dollars in thousands):
Scheduled Estimated
Date of Maturity/ Net Interest Interest
Initial Disposition Collateral Commitment Amount Realizable Pay Accrual
Investment Date Location Property Type Position Amount Outstanding Value Rate Rate
- ---------- ----------- -------------- --------------- ------------- ---------- ----------- ---------- ------- --------
05/12/98 03/31/02 Richardson, TX Office Second Lien $ 14,700 $ 14,700 $ 14,700 10.0% 12.0%
06/01/98 06/01/01 Houston, TX Office First Lien 11,800 11,800 11,800 12.0% 12.0%
06/22/98 06/19/01 Wayland, MA Office First Lien 45,000 42,152 42,152 10.5% 10.5%
05/18/99 05/19/01 Irvine, CA Office First Lien 15,557 15,306 15,306 10.0% 12.0%
07/29/99 02/01/01 Lexington, MA R&D/Bio-Tech First Lien 5,213 4,443 4,443 11.7% 14.7%
---------- ----------- ----------
$ 92,270 $ 88,401 $ 88,401
========== =========== ==========
On February 1, 2001, one of the Company's loan investments was fully repaid; at
December 31, 2000, the amount outstanding under this loan totaled $4.443
million. After giving effect to this disposition, the Company has commitments to
fund $87.057 million, of which $83.958 million is outstanding. The Company is
obligated to fund the outstanding commitments of $3.099 million to the extent
the borrowers are not in violation of any of the conditions established in the
loan agreements. Conversely, a portion of the commitments may expire without
being drawn upon and therefore the unfunded commitments do not necessarily
represent future cash requirements. One investment, the Company's $14.7 million
Richardson office loan, provides the Company with the opportunity for profit
participation above the contractual accrual rate.
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Pursuant to the terms of the underlying loan agreements, extension options are
available to two of the Company's remaining borrowers provided that such
borrowers are not in violation of any of the conditions established in the loan
agreements. The loans provide for an extension fee to be paid to the Company at
the time the extension option is exercised by the borrower. The extension fees
range from 0.5% to 1% of the loan commitment amount, depending upon the length
of the extension option. The following table summarizes the extension options
currently available to the Company's borrowers under the terms of their
respective loan agreements (dollars in thousands):
Amount
Outstanding at
Scheduled Commitment December 31, Extension Options
Maturity Amount 2000 Available to Borrower
-------------- ---------- -------------- ---------------------
May 19, 2001 $ 15,557 $ 15,306 One 6-Month Option
March 31, 2002 14,700 14,700 One 1-Year Option
---------- ----------
$ 30,257 $ 30,006
========== ==========
During the second quarter of 2000, the maturity date of the Company's $45
million Wayland office loan was extended to June 19, 2001 under a 1-year
extension option that the borrower elected to exercise. At December 31, 2000,
$42.152 million was outstanding under this facility. In February 2001, the
maturity date of the Company's $14.7 million Richardson office loan was extended
from March 31, 2001 to March 31, 2002 under the first of two 1-year extension
options.
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 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).
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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) is due on July 31, 2001 and is evidenced by a
promissory note which was executed at closing. Concurrent with its adoption 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 recent events described above, 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 represents management's estimate of the value that is
expected to be derived from such investment as a result of the transaction
described above.
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At December 31, 2000, the Company's commercial mortgage loan commitments were
geographically dispersed as follows:
Location Percent
------------- ---------
Massachusetts 54%
Texas 29%
California 17%
The underlying collateral for these loans at December 31, 2000 was comprised of
the following property types:
Property Type Percent
------------- ---------
Office 94%
R&D/Bio-Tech 6%
The percentages reflected above are based upon committed loan amounts and
exclude the loan that was reclassified to investment in unconsolidated
subsidiary in February 1999.
As the loan investment portfolio is expected to contract as a result of
repayments and/or sales, geographic and product type concentrations will
persist. Geographic and product type concentrations present additional risks,
particularly if there is a deterioration in the general condition of the real
estate market or in the sub-market in which the loan collateral is located, or
if demand for a particular product type does not meet expectations due to
adverse market conditions that are different from those projected by the
Company.
Commercial Mortgage-backed Securities
During 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.
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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.
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. 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, 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.
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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 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.
The Company's unconsolidated taxable subsidiary holds 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".
Having fully repaid its credit facilities, the Company's principal demands for
liquidity are cash for operations, including funds which are required to satisfy
its obligations under existing loan commitments, management fees, general and
administrative expenses and distributions to its shareholders (in amounts that
are sufficient to allow it to continue to qualify as a REIT). Distributions in
excess of the amounts required to maintain the Company's REIT qualification will
be funded with the proceeds from loan repayments and/or sales. The Company's
principal sources of liquidity are its cash reserves, pay rate interest income
from its mortgage loans, proceeds from loan repayments and/or sales and, through
April 30, 2001,
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the funds available to it under its line of credit. The Company believes that
its cash flow from operations and the proceeds from loan repayments and/or sales
will be sufficient to meet the Company's currently expected liquidity and
capital requirements.
Effective as of July 1, 1998, the Company and some of its subsidiaries entered
into a $400 million credit facility (the "Line of Credit") with Prudential
Securities Credit Corporation ("PSCC"). Subject to PSCC's approval on an asset
by asset basis, borrowings under the facility could be used to finance the
Company's structured loan and equity real estate investments. As a result of the
dislocation in the capital markets in mid to late 1998, PSCC became more
restrictive in the application of its approval rights with respect to financing
for new investments sought by the Company. Accordingly, very few investments
were consummated in late 1998 and early 1999. Prior to the modifications
discussed below, borrowings under the Line of Credit bore interest at rates
ranging from LIBOR plus 1% per annum to LIBOR plus 2% per annum. At December 31,
1998, $39,338,000 had been borrowed under the Line of Credit. The weighted
average interest rate at December 31, 1998 was 6.65%.
Effective as of May 4, 1999, the Company and some of its subsidiaries entered
into an Amended and Restated Interim Warehouse and Security Agreement (the
"Amended Line of Credit") with PSCC. The agreement amended the Company's
existing line of credit. The Amended Line of Credit included the following
modifications:
o a reduction in the size of the committed facility from $400 million to
$300 million;
o the elimination of the requirement that assets financed with proceeds from
the facility had to be securitizable;
o a reduction in the amount of capital the Company had to fund with respect
to construction and rehabilitation loans before PSCC was required to begin
advancing funds;
o an extension of the maturity date from July 1, 2000 to November 3, 2000;
and
o the modification to, and addition of, sublimits on specified categories of
loans and assets, including:
o a new $40 million sublimit on mezzanine loans and equity investments;
and
o a reduction in the sublimit on construction loans from $150 million to
$115 million, with the addition of a new $50 million sublimit within
this category for construction loans that were less than 70% pre-leased
at the time the initial advance was to be made under the Amended Line
of Credit with respect to a construction loan fitting this category.
Under the Amended Line of Credit, borrowings bore interest at LIBOR plus 1.25%
per annum as such borrowings did not exceed the Company's Tangible Net Worth, as
defined. At December 31, 1999, $60,641,000 was outstanding under the Amended
Line of Credit. The weighted average interest rate at December 31, 1999 was
7.73%.
As compensation for amending the existing line of credit and extending the
maturity date, 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.
Following the completion of the modifications to its line of credit facility,
the Company's investment activities increased, albeit at a slower rate than was
achieved in 1998 before the capital markets deteriorated. During the latter part
of 1999 and early 2000, the Company's investment activities were discontinued
pending a review of various strategic alternatives.
Effective as of November 3, 2000, the Company (and certain of its subsidiaries)
entered into a First Amendment to Amended and Restated Interim Warehouse and
Security Agreement (the "First Amendment Line of Credit") with Prudential
Securities Credit Corporation, LLC, successor in interest to PSCC. Under the
terms of the First Amendment Line of Credit, the committed amount of the credit
facility was reduced from $300 million to $35 million (subject to certain
limitations) and the maturity date was extended from November 3, 2000 to April
30, 2001. On and after November 3, 2000, the Company may request advances under
the line of credit only for purposes of funding its unfunded loan commitments
and its
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dividend payments to shareholders to the extent such dividends are necessary in
order for the Company to maintain its qualification as a REIT. As compensation
for entering into the First Amendment Line of Credit, the Company paid
Prudential Securities Credit Corporation, LLC an extension fee equal to 0.5% of
the committed amount. Borrowings under the credit facility bear interest at
LIBOR plus 1.25% per annum. On November 14, 2000, the Company fully repaid all
amounts then outstanding under the First Amendment Line of Credit. This debt
repayment, totaling $22,000,000, was made possible by the repayment of one of
the Company's loans on November 10, 2000. Currently, there are no amounts
outstanding under the facility. Borrowings under the First Amendment Line of
Credit, if any, are secured by a first lien security interest in all assets
funded with proceeds from the facility.
Effective as of July 1, 1998, the Company and some of its subsidiaries entered
into a $100 million Master Repurchase Agreement (the "Repurchase Agreement")
with PSCC; subsequently, PSCC was replaced by Prudential-Bache International,
Ltd. ("PBI"), an affiliate of PSCC, as lender. Borrowings under the Repurchase
Agreement could be used to finance a portion of the Company's portfolio of
commercial mortgage-backed securities. Under the Repurchase Agreement, the
Company could borrow a varying percentage of the market value of its CMBS,
depending on the credit quality of such securities. Borrowings under the
Repurchase Agreement bore interest at rates ranging from LIBOR plus 0.20% per
annum to LIBOR plus 1.5% per annum depending upon the advance rate and the
credit quality of the securities which were financed. Borrowings under the
facility were secured by an assignment to PBI of all commercial mortgage-backed
securities funded with proceeds from the Repurchase Agreement. On June 16, 2000,
the Company fully repaid the outstanding borrowings under this facility. The
Repurchase Agreement matured on June 30, 2000. At December 31, 1999, $9,856,000
was outstanding under the Repurchase Agreement. At December 31, 1998, there were
no outstanding borrowings under this facility. The weighted average interest
rate at December 31, 1999 was 7.62%.
To reduce the impact that rising interest rates would have on its floating rate
indebtedness, the Company entered into an interest rate cap agreement which
became effective on January 1, 1999. This agreement had a notional amount of
$33.6 million and was scheduled to expire on July 1, 2000. The agreement
entitled the Company to receive from a counterparty the amounts, if any, by
which one-month LIBOR exceeded 6.0%. Prior to its termination (as described
below), no payments were due from the counterparty as one-month LIBOR had not
exceeded 6.0%. On July 2, 1999, the agreement was terminated and replaced with
an interest rate cap agreement which became effective on August 1, 1999. The new
agreement, which was entered into to more closely match the then outstanding
borrowings, had a notional amount of $59 million. On August 4, 2000, the Company
terminated a portion of the $59 million (notional) interest rate cap. The
revised agreement, which was entered into to more closely match the then
outstanding borrowings, had a notional amount of $30 million. The cap agreements
($59 million and $30 million) entitled the Company to receive from a
counterparty the amounts, if any, by which one-month LIBOR exceeded 6.25%. The
$30 million (notional) interest rate cap agreement expired on November 1, 2000.
During 2000 and 1999, amounts due from the counterparty totaled $70,000 and
$13,000, respectively. There are no margin requirements associated with interest
rate caps and therefore there was no liquidity risk associated with this
particular hedging instrument.
REIT STATUS
Management expects the Company to continue to qualify as a REIT for federal
income tax purposes throughout the period during which the Company's assets are
being liquidated. As a REIT, the Company will not pay income taxes at the trust
level on any taxable income which is distributed to its shareholders, although
AMREIT II, Inc., its "non-qualified REIT subsidiary", may be subject to tax at
the corporate level. Qualification for treatment as a REIT requires the Company
to meet specified criteria, including certain requirements regarding the nature
of its ownership, assets, income and distributions of taxable income. The
Company may, however, be subject to tax at normal corporate rates on any
ordinary income or capital gains not distributed. Given the changes in the
nature of the Company's assets and in the Company's sources of income that could
result from dispositions of assets in 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.
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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 international, national, regional or
local economic environments, changes in prevailing interest rates, credit risks,
basis and asset/liability risks, event risk, conditions which may affect public
securities and debt markets generally or the markets in which the Company
operates, geographic or product type concentrations of assets, other factors
generally understood to affect the real estate acquisition, mortgage and leasing
markets, 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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At the date of this report, the Company is a party to four financial instruments
which are subject to market risk. These instruments include three senior loans
and one mezzanine investment. The mezzanine loan, the repayment of which is
subordinated to a senior mortgage loan, is secured by a second lien. 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, 2000, the Company
held three commercial mortgage-backed securities ("CMBS") which were subject to
both interest rate risk and spread risk. As these securities were sold on
January 18, 2001, no discussion of market risk exposures related to CMBS is
provided herein.
The Company's four mortgage loans involve, to varying degrees, elements of
interest rate risk. Additionally, these financial instruments are subject to
real estate market risk. The Company is a party to certain other financial
instruments, including trade receivables and payables and amounts due to manager
which, due to their short-term nature, are not subject to market risk;
accordingly, no discussion of these instruments is provided herein.
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 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 does not attempt to hedge its
exposure to changes in the fair value of its investments through the use of
derivative instruments. Instead, these exposures have been managed by the
Company through its diversification efforts and strict underwriting of its
investments. Furthermore, the Company generally intends to hold its mortgage
loan investments to maturity. Excluding extension options which are available to
two of the Company's four borrowers, these mortgage loan investments had
remaining terms ranging from 4.5 months to 15 months as of December 31, 2000.
All of the Company's loans provide for a fixed pay rate and fixed accrual rate
of interest. One of the Company's loans provides for profit participation above
the contractual accrual rate. The incremental interest earned at the accrual
rate is not payable by the borrowers until the maturities of their respective
loans. Generally, the Company's loans have higher loan-to-value ratios than most
conventional loans.
The fair values of the Company's mortgage loans are less sensitive (than are the
values of more conventional loans) to changes in interest rates due to their
comparatively shorter duration and higher yield, equity-like characteristics.
For example, the Company does not believe that a 10% increase or decrease in
general interest rates (from those prevailing at December 31, 2000) would have a
significant impact on the fair value of its fixed rate mortgage loan portfolio.
A significant increase in interest rates could, however, make it more difficult
for the Company's borrowers to sell or refinance their respective properties.
This could have a material adverse effect on the Company, either through loan
defaults or the need to grant extensions of the maturity dates, thereby delaying
repayment. Additionally, a general real estate market decline could have a
material adverse impact on the Company. If rental rates were to decline and/or
vacant space was not able to be leased as a result of declining demand, cash
flows from the properties securing the Company's loans might be inadequate to
service the loans. In the event of shortfalls, borrowers may or may not be
willing to supplement property cash flows to pay the Company all amounts due
under the terms of its mortgage loans. If real estate values were to decline,
borrowers may find it difficult, if not impossible, to repay some or all of the
principal and accrued interest in connection with a sale or refinancing of the
underlying properties. With the exception of certain limited guarantees, most of
the Company's loans are without recourse and therefore borrowers may have little
or no incentive to retain ownership of their properties if real estate values
decline sharply. A number of factors could lead to a real estate market decline
including, but not limited to, a slowdown in the growth of the economy,
increasing commercial mortgage interest rates and supply and demand factors. In
the event of a decline, some real estate markets may be adversely impacted more
than others. Despite generally high loan-to-value ratios, the Company's
borrowers have varying amounts of equity at risk; this equity, which is
subordinate to the Company's investment, serves to protect the Company in the
event of a declining real estate market. As
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a result of these factors and the unique characteristics of the Company's
mortgage loan investments, it is not possible for the Company to quantify the
potential loss in income or cash flows that might result from a real estate
market decline.
The Company has attempted to mitigate these risk exposures by carefully
underwriting its investments and by diversifying its mortgage loan portfolio.
The underwriting process for its loans included, among other things, an in-depth
assessment of the character, experience (including operating history) and
financial capacity of the borrower. In the event of a real estate market
decline, the borrower's motivations and financial capacity could, to some
extent, limit the potential loss to the Company. While the Company has attempted
to mitigate these risk exposures, there can be no assurance that these efforts
will be successful.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included herein at pages F-1 through F-29.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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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 will expire at the 2001 annual meeting of
shareholders. The term of office of the Class I trust managers will expire at
the 2002 annual meeting of shareholders. The term of office of the Class II
trust managers expires at the 2003 annual meeting of shareholders. Each trust
manager of the class elected at each annual meeting of shareholders will hold
office for a term of three years or until the Company files 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 Term Board
Name Age Position Since Class Expires Committees
- ----------------------------- ----- ------------------------------------------ -------- ----- ------- ----------
Robert L. Adair III 57 Chairman of the Board of Trust Managers 1998 I 2002 (a)(b)
and Chief Executive Officer
John C. Deterding 68 Independent Trust Manager 1998 I 2002 (a)(b)(d)
Bruce W. Duncan 49 Independent Trust Manager 1998 II 2003 (a)(b)(c)
Robert H. Lutz, Jr. 51 Trust Manager 1998 II 2003 (a)
Christopher B. Leinberger 50 Independent Trust Manager 1998 III 2001 (a)(c)(d)
James C. Leslie 45 Independent Trust Manager 1998 III 2001 (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. Mr. Adair also serves 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.
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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 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. Mr. Duncan was the Chairman, President and Chief
Executive Officer of Cadillac Fairview Corporation Limited ("Cadillac Fairview")
from 1995 until its sale in March 2000. 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. Since
March 2000, Mr. Duncan has 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. 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. Mr. Leslie has served as President and Chief
Operating Officer of The Staubach Company since 1996, and as a director of The
Staubach Company since 1988. 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. Mr. Leslie
is also 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 the Board of
Trust Managers and are elected annually by the Board of Trust Managers at a
meeting held following each annual meeting of shareholders, or as soon
thereafter as necessary and convenient in order to fill vacancies or newly
created offices. 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) 57 Chairman of the Board of Trust Managers and Chief
Executive Officer
David M. Striph 42 President and Chief Investment Officer
Thomas R. Lewis II 38 Senior Vice President, Chief Financial Officer, Chief
Accounting Officer, Controller and Secretary
(1) See section entitled "Trust Managers" above for biographical information
regarding Mr. Adair.
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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 primary responsibility
for the day-to-day management and liquidation of the Company's remaining
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 has been employed by AMRESCO, INC. since 1994
serving in various positions within its former Asset Management/Loan Workout
division. 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 2000
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. 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. 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,
AMREIT Managers, at its expense, provides all
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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, 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. These costs are
expected to be borne by the Company through future operating deficit
reimbursements to AMREIT Managers.
In the following tables, the named executive officers were determined based upon
the number of share options granted as these awards and the related dividend
equivalents were the only forms of compensation provided by the Company to its
executive officers (other than its Chief Executive Officer) during the year
ended December 31, 2000, the year ended December 31, 1999 and the period from
May 12, 1998 (the Company's inception of operations) through December 31, 1998.
No stock appreciation rights ("SARs") were granted during any of these periods.
Messrs. Pettee and McCoy resigned their positions with the Company effective as
of December 31, 2000.
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 ($) ($) ($) ($) Granted ($) ($)(1)
------------------ ---- ------ ----- ------------ ---------- ------------ ---------- -----------
Robert L. Adair III, Chairman of the 2000 -- -- -- -- -- -- 45,000
Board of Trust Managers and Chief 1999 -- -- -- -- -- -- 11,925
Executive Officer 1998 -- -- -- -- 45,000 -- --
Jonathan S. Pettee, President and 2000 -- -- -- -- -- -- --
Chief Operating Officer 1999 -- -- -- -- -- -- 7,950
1998 -- -- -- -- 30,000 -- --
Michael L. McCoy, Senior Vice President, 2000 -- -- -- -- -- -- --
General Counsel and Secretary 1999 -- -- -- -- -- -- 3,975
1998 -- -- -- -- 15,000 -- --
David M. Striph, Executive Vice President 2000 -- -- -- -- -- -- --
and Chief Investment Officer 1999 -- -- -- -- -- -- 1,860
1998 -- -- -- -- 10,000 -- --
Thomas R. Lewis II, Senior Vice 2000 -- -- -- -- -- -- --
President, Chief Financial and 1999 -- -- -- -- -- -- 1,590
Accounting Officer and Controller 1998 -- -- -- -- 6,000 -- --
(1) For the year ended December 31, 2000, all other compensation is comprised
solely of fees paid to Mr. Adair for his services to the Company as both
Chairman of the Board of Trust Managers and Chief Executive Officer. For
the year December 31, 1999, all other compensation is comprised solely of
non-preferential dividend equivalents earned by the executive officers.
Dividend equivalents were paid to the executive officers on August 16,
1999, November 15, 1999 and January 27, 2000. The payments made on these
dates totaled the amounts shown above.
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SHARE OPTION/SAR GRANTS IN FISCAL 2000
During fiscal 2000, no share options or SARs were granted to the Company's
executive officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at December 31, 2000 at December 31, 2000 ($)
Acquired on Value ---------------------------- ---------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
Robert L. Adair III -- -- 22,500 22,500 -- --
Jonathan S. Pettee -- -- 30,000 -- -- --
Michael L. McCoy -- -- 15,000 -- -- --
David M. Striph 4,000 11,500 3,000 3,000 -- --
Thomas R. Lewis II -- -- 3,000 3,000 -- --
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 year ended December 31, 2000,
fees paid to the independent trust managers and Mr. Lutz totaled $58,000.
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 year ended December
31, 2000, Mr. Adair was paid fees totaling $45,000. 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 2000, 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 2000, 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.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 15, 2001, 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, 2001 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%
FMR Corp. ........................................... 765,094 (3) 7.62%
AMREIT Managers, L.P. ............................... 750,009 (4) 6.95%
Taunus Corporation/Deutsche Bank Securities Inc. .... 671,942 (5) 6.69%
John C. Deterding ................................... 18,750 (6) *
Bruce W. Duncan ..................................... 32,450 (6) *
Christopher B. Leinberger ........................... 24,000 (6) *
James C. Leslie ..................................... 23,750 (6) *
Robert H. Lutz, Jr .................................. 43,750 (7) *
Robert L. Adair III ................................. 113,750 (8) 1.13%
David M. Striph ..................................... 8,750 (9) *
Thomas R. Lewis II .................................. 5,500 (9) *
Jonathan S. Pettee .................................. 37,000 (10) *
Michael L. McCoy .................................... 18,000 (11) *
All Trust Managers and executive officers as
a group (10 persons) ............................ 325,700 (12) 3.19%
* 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 FMR Corp. with the SEC on December 11, 2000. 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 195,894 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.
(4) Represents options which are exercisable by AMREIT Managers, L.P. within 60
days to purchase 750,009 common shares. AMREIT Managers' address is 700
North Pearl Street, Suite 1900, Dallas, Texas 75201.
(5) The information set forth above is based solely on the Schedule 13G filed
by Taunus Corporation and Deutsche Bank Securities Inc. with the SEC on
February 14, 2001. In such Schedule 13G, Deutsche Bank Securities Inc.
reported that it had sole voting power and sole dispositive power with
respect to 671,900 shares. Taunus Corporation reported that it had sole
voting power and sole dispositive power over 671,942 shares, which included
the shares reported by Deutsche Bank Securities Inc. and with respect to
which Taunus Corporation declared, pursuant to Rule 13d-4
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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 Bank Securities Inc. is 31 West 52nd
Street, New York, New York 10019.
(6) Includes options which are exercisable within 60 days to purchase 15,000
common shares.
(7) Includes options which are exercisable within 60 days to purchase 33,750
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 33,750
common shares.
(9) Includes options which are exercisable within 60 days to purchase 4,500
common shares.
(10) Includes options which are exercisable within 60 days to purchase 30,000
common shares.
(11) Includes options which are exercisable within 60 days to purchase 15,000
common shares.
(12) Includes options which are exercisable within 60 days to purchase 181,500
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, beginning April 1, 2000. These reimbursements are
equal to the excess, if any, of the Manager's operating costs (including
principally personnel and general and administrative expenses) over the sum of
its base management fees and any other fees earned by the Manager from sources
other than the Company. Currently, AMRESCO (through the Manager) employs 4
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.
40
41
During the year ended December 31, 2000, the following amounts were charged to
the Company by the Manager under the terms of the amended Management Agreement
(in thousands):
Base management fees $ 1,762
Incentive compensation --
Reimbursable expenses 20
Operating deficit reimbursements 243
-------
$ 2,025
=======
During the period from September 26, 2000 (the date on which the Company adopted
liquidation basis accounting) through December 31, 2000, management fees (as
presented in the Company's audited consolidated statement of changes in net
assets in liquidation) included 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, are expected to be borne by the Company
through future operating deficit reimbursements. During the quarter ended
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. No operating deficit
reimbursements were incurred by the Company during the quarter ended June 30,
2000 or the quarter ended September 30, 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, 2001. 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. The Company has the right to terminate the
Management Agreement upon 90 days prior written notice to the Manager.
TRANSACTIONS INVOLVING MEMBERS OF THE AMRESCO GROUP
On July 5, 2000, AMRESCO, INC. and AMREIT Holdings, Inc. (a wholly-owned
subsidiary of AMRESCO, INC.) sold 1,500,111 shares (or approximately 15%) 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 of operations in 1998.
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
41
42
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, were considered when estimating the net realizable
value of the Company's CMBS at December 31, 2000.
42
43
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-29.
2. Financial Statement Schedules
As of December 31, 2000, the Company had one loan which
exceeded 20% of its total consolidated assets. The audited
financial statements for the operating property underlying
such loan are included herein at pages F-30 through F-38.
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:
2.1 Plan of Liquidation and Dissolution of the Registrant
dated as of March 29, 2000 and effective as of
September 26, 2000 (filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated March
29, 2000 and filed with the Commission on March 30,
2000, which exhibit is incorporated herein by
reference).
10.1 First Amendment to Management Agreement dated as of
April 1, 2000, by and between AMRESCO Capital Trust
and AMREIT Managers, L.P. (filed as Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2000, which
exhibit is incorporated herein by reference).
10.2 First Amendment to Amended and Restated Interim
Warehouse and Security Agreement dated as of November
3, 2000 by and among Prudential Securities Credit
Corporation, LLC and AMRESCO Capital Trust, AMREIT I,
Inc., AMREIT II, Inc., ACT Equities, Inc. and ACT
Holdings, Inc. (filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2000, which
exhibit is incorporated herein by reference).
11 Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
99.1 Termination Agreement, dated January 4, 2000, between
AMRESCO Capital Trust and Impac Commercial Holdings,
Inc. (filed as Exhibit 99.1 to the Registrant's
Current Report on Form 8-K dated January 4, 2000 and
filed with the Commission on January 6, 2000, which
exhibit is incorporated herein by reference).
99.2 Form of REIT Agreement, dated as of July 5, 2000,
among AMRESCO Capital Trust and Farallon Capital
Partners, L.P., Farallon Capital Institutional
Partners, L.P., Farallon Capital Institutional
Partners II, L.P., Farallon Capital Institutional
Partners III, L.P. and RR Capital Partners, L.P.
(filed as Exhibit 99.1 to the Registrant's Current
Report on Form 8-K dated July 5, 2000 and filed with
the Commission on July 6, 2000, which exhibit is
incorporated herein by reference).
43
44
99.3 Form of Amendment No. 1 to Rights Agreement, dated as
of June 29, 2000, between AMRESCO Capital Trust and
The Bank of New York (filed as Exhibit 99.2 to the
Registrant's Current Report on Form 8-K dated July 5,
2000 and filed with the Commission on July 6, 2000,
which exhibit is incorporated herein by reference).
99.4 Charter for the Audit Committee of the Board of Trust
Managers of AMRESCO Capital Trust which was adopted
by the Board of Trust Managers on May 20, 2000.
(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
44
45
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 15, 2001
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 15, 2001 /s/ Robert L. Adair III
-----------------------------------
Robert L. Adair III
Chairman of the Board of Trust Managers
and Chief Executive Officer
(Principal Executive Officer)
March 15, 2001 /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 15, 2001 /s/ John C. Deterding
-----------------------------------
John C. Deterding
Independent Trust Manager
March 15, 2001 /s/ Bruce W. Duncan
-----------------------------------
Bruce W. Duncan
Independent Trust Manager
March 15, 2001 /s/ Christopher B. Leinberger
-----------------------------------
Christopher B. Leinberger
Independent Trust Manager
March 15, 2001 /s/ James C. Leslie
-----------------------------------
James C. Leslie
Independent Trust Manager
March 15, 2001 /s/ Robert H. Lutz, Jr.
-----------------------------------
Robert H. Lutz, Jr.
Trust Manager
45
46
AMRESCO CAPITAL TRUST
INDEX TO FINANCIAL STATEMENTS
Page No.
REGISTRANT'S FINANCIAL STATEMENTS
Independent Auditors' Report ................................................................... F-2
Consolidated Statement of Net Assets in Liquidation as of December 31, 2000 and
Consolidated Balance Sheet as of December 31, 1999 (Going Concern Basis) ................... F-3
Consolidated Statement of Changes in Net Assets in Liquidation -
For 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, the Year Ended December 31, 1999 and the Period from February 2,
1998 (Date of Initial Capitalization) through December 31, 1998 .............................. F-5
Consolidated Statements of Changes in Shareholders' Equity (Going Concern
Basis) - For the Period from January 1, 2000 through September 25, 2000, the
Year Ended December 31, 1999 and the Period from February 2, 1998 (Date of
Initial Capitalization) through December 31, 1998 ............................................ F-6
Consolidated Statement of Cash Flows in Liquidation - For 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, the Year Ended December 31,
1999 and the Period from February 2, 1998 (Date of Initial Capitalization)
through December 31, 1998 .................................................................... F-8
Notes to Consolidated Financial Statements ..................................................... F-9
FINANCIAL STATEMENTS FOR WAYLAND BUSINESS CENTER LLC,
ONE OF THE REGISTRANT'S BORROWERS
Report of Independent Auditors ................................................................. F-30
Balance Sheets as of December 31, 2000 and 1999 ................................................ F-31
Statements of Operations for the Years Ended December 31, 2000 and 1999 ........................ F-32
Statements of Members' Capital for the Years Ended December 31, 2000 and 1999................... F-33
Statements of Cash Flows for the Years Ended December 31, 2000 and 1999......................... F-34
Notes to Financial Statements .................................................................. F-35
F-1
47
INDEPENDENT AUDITORS' REPORT
To the Board of Trust Managers and Shareholders
of AMRESCO Capital Trust
We have audited the accompanying consolidated statement of net assets in
liquidation of AMRESCO Capital Trust and its subsidiaries (the Company) as of
December 31, 2000, and the related consolidated statements of changes in net
assets in liquidation and cash flows in liquidation for the period from
September 26, 2000 through December 31, 2000. In addition, we have audited the
accompanying consolidated balance sheet of AMRESCO Capital Trust and its
subsidiaries as of December 31, 1999, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for the period from
January 1, 2000 through September 25, 2000, the year ended December 31, 1999 and
the period from February 2, 1998 (date of initial capitalization) through
December 31, 1998. 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 1 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, 2000, (2) the changes in their net
assets in liquidation and their cash flows in liquidation for the period from
September 26, 2000 through December 31, 2000, (3) their financial position as of
December 31, 1999, and (4) the results of their operations and their cash flows
for the period from January 1, 2000 through September 25, 2000, the year ended
December 31, 1999 and the period from February 2, 1998 (date of initial
capitalization) through December 31, 1998, in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
February 2, 2001 (March 8, 2001 as to Note 18)
F-2
48
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION AS OF DECEMBER 31, 2000 AND
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 (GOING CONCERN BASIS)
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31, December 31,
2000 1999
------------ ------------
ASSETS
Mortgage loans ............................................................... $ 88,401 $ 96,032
Acquisition, development and construction loan arrangements accounted for
as real estate or investments in joint ventures .......................... -- 44,097
------------ ------------
Total loan investments ....................................................... 88,401 140,129
Allowance for loan losses .................................................... -- (4,190)
------------ ------------
Total loan investments, net of allowance for losses .......................... 88,401 135,939
Commercial mortgage-backed securities - available for sale ................... 16,611 24,569
Real estate, net of accumulated depreciation of $0 and $866, respectively .... -- 50,376
Investments in unconsolidated partnerships and subsidiary .................... 2,000 11,765
Receivables and other assets ................................................. 2,346 3,991
Cash and cash equivalents .................................................... 9,801 4,604
------------ ------------
TOTAL ASSETS .............................................................. 119,159 $ 231,244
------------ ============
LIABILITIES:
Accounts payable and other liabilities ........................................ 82 $ 2,697
Amounts due to manager ........................................................ 2,071 566
Repurchase agreement .......................................................... -- 9,856
Line of credit ................................................................ -- 60,641
Non-recourse debt on real estate .............................................. -- 34,600
Distributions payable ......................................................... -- 4,407
------------ ------------
TOTAL LIABILITIES ......................................................... 2,153 112,767
------------ ------------
Minority interests ............................................................ -- 526
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 18)
NET ASSETS IN LIQUIDATION (10,039,974 common shares issued and outstanding) ..... $ 117,006
============
SHAREHOLDERS' EQUITY (AS OF DECEMBER 31, 1999):
Preferred stock, $.01 par value, 49,650,000 shares authorized, no shares
issued .................................................................... --
Series A junior participating preferred stock, $.01 par value, 350,000
shares authorized, no shares issued ....................................... --
Common stock, $.01 par value, 200,000,000 shares authorized, 10,015,111
shares issued and outstanding ............................................. 100
Additional paid-in capital .................................................... 140,998
Unearned stock compensation ................................................... (282)
Accumulated other comprehensive income (loss) ................................. (10,812)
Distributions in excess of accumulated earnings ............................... (12,053)
------------
TOTAL SHAREHOLDERS' EQUITY ................................................ 117,951
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................ $ 231,244
============
See notes to consolidated financial statements.
F-3
49
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
FOR THE PERIOD FROM SEPTEMBER 26, 2000 THROUGH DECEMBER 31, 2000
(IN THOUSANDS)
REVENUES:
Interest income on mortgage loans................................. $ 3,050
Income from commercial mortgage-backed securities................. 538
Interest income from short-term investments....................... 170
-----------
TOTAL REVENUES.................................................. 3,758
-----------
EXPENSES:
Interest expense.................................................. 226
Management fees................................................... 2,094
General and administrative........................................ 162
-----------
TOTAL EXPENSES.................................................. 2,482
-----------
Gain (loss) on disposition of assets................................ --
Changes in estimated net realizable value of certain assets......... (2,807)
-----------
DECREASE IN NET ASSETS IN LIQUIDATION FROM OPERATING ACTIVITIES..... (1,531)
Cash received from exercise of stock options........................ 32
Liquidating distributions to shareholders........................... (6,526)
-----------
DECREASE IN NET ASSETS IN LIQUIDATION DURING THE PERIOD............. (8,025)
NET ASSETS IN LIQUIDATION, BEGINNING OF PERIOD...................... 125,031
-----------
NET ASSETS IN LIQUIDATION, END OF PERIOD............................ $ 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
50
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF INCOME (GOING CONCERN BASIS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Period from Period from
January 1, February 2,
2000 1998
through Year Ended through
September 25, December 31, December 31,
2000 1999 1998
------------- ------------ ------------
REVENUES:
Interest income on mortgage loans .......................... $ 8,937 $ 14,568 $ 4,278
Income from commercial mortgage-backed securities .......... 2,405 3,699 1,563
Operating income from real estate .......................... 5,240 4,858 392
Equity in earnings (losses) of unconsolidated subsidiary,
partnerships and other real estate ventures .............. (1,091) 17 588
Interest income from short-term investments ................ 217 251 1,924
------------- ------------ ------------
TOTAL REVENUES ........................................... 15,708 23,393 8,745
------------- ------------ ------------
EXPENSES:
Interest expense ........................................... 4,396 5,593 567
Management fees ............................................ 1,140 2,206 1,187
General and administrative ................................. 1,018 1,437 1,294
Abandoned merger costs ..................................... -- 1,737 --
Depreciation ............................................... 1,188 1,252 100
Participating interest in mortgage loans ................... -- 1,084 277
Provision for loan losses .................................. 1,788 3,322 1,368
------------- ------------ ------------
TOTAL EXPENSES ........................................... 9,530 16,631 4,793
------------- ------------ ------------
INCOME BEFORE GAINS (LOSSES) AND MINORITY INTERESTS .......... 6,178 6,762 3,952
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 3,952
Minority interests ........................................ 52 26 --
------------- ------------ ------------
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
============= ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ..................................................... 10,000 10,000 7,027
============= ============ ============
Diluted ................................................... 10,029 10,012 7,031
============= ============ ============
See notes to consolidated financial statements.
F-5
51
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (GOING CONCERN BASIS)
FOR THE PERIOD FROM JANUARY 1, 2000 THROUGH SEPTEMBER 25, 2000, THE YEAR ENDED
DECEMBER 31, 1999 AND THE PERIOD FROM
FEBRUARY 2, 1998 (DATE OF INITIAL CAPITALIZATION) THROUGH DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock
$.01 Par Value Accumulated Distributions Total
------------------- Additional Unearned Other in Excess of Nonowner Total
Number of Paid-in Stock Comprehensive Accumulated Changes Shareholders'
Shares Amount Capital Compensation Income (Loss) Earnings in Equity Equity
---------- -------- ---------- ------------ ------------- ------------- --------- -------------
Initial capitalization,
February 2, 1998............ 100 -- $ 1 $ 1
Additional paid-in capital,
February 11, 1998........... -- -- 25 25
Issuance of common shares
through IPO, net of
offering expenses,
May 12, 1998................ 9,000,000 $ 90 124,601 124,691
Issuance of common shares
through Private
Placement, May 12, 1998... 1,000,011 10 14,990 15,000
Issuance of trust managers'
restricted shares........... 6,000 -- 90 $ (90) --
Total nonowner changes in
equity:
Net income................. $ 3,952 $ 3,952 3,952
Unrealized losses on
securities available for
sale...................... $ (6,475) (6,475) (6,475)
---------
Comprehensive loss............ $ (2,523)
=========
Compensatory options
granted..................... 1,234 (1,234) --
Amortization of unearned
trust manager compensation.. 56 56
Amortization of compensatory
options..................... 420 420
Dividends declared ($0.74
per common share)........... (7,404) (7,404)
---------- -------- ---------- ------------ ------------- ------------- -------------
Balance at December 31, 1998.. 10,006,111 100 140,941 (848) (6,475) (3,452) 130,266
Issuance of trust managers'
restricted shares........... 9,000 -- 91 (91) --
Issuance of warrants.......... 400 400
Decrease in fair value of
compensatory options........ (434) 434 --
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 91
Amortization of compensatory
options..................... 132 132
Dividends declared ($1.59 per
common share)............... (15,921) (15,921)
---------- -------- ---------- ------------ ------------- ------------- -------------
Balance at December 31, 1999.. 10,015,111 100 140,998 (282) (10,812) (12,053) 117,951
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.................. 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 34
Amortization of compensatory
options..................... (288) (288)
Dividends declared ($0.34
per common share)........... (3,405) (3,405)
---------- -------- ---------- ------------ ------------- ------------- -------------
Balance at September 25,
2000........................ 10,035,974 $ 100 $ 140,481 $ (19) $ (7,048) $ (9,510) $ 124,004
========== ======== ========== ============ ============= ============= =============
See notes to consolidated financial statements.
F-6
52
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS IN LIQUIDATION
FOR THE PERIOD FROM SEPTEMBER 26, 2000 THROUGH DECEMBER 31, 2000
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Decrease in net assets in liquidation from operating activities ..................... $ (1,531)
Adjustments to reconcile to net cash provided by operating activities:
Changes in estimated net realizable value of certain assets ...................... 2,807
Decrease in receivables and other assets ......................................... 225
Decrease in interest receivable related to commercial mortgage-backed
securities .................................................................... 142
Decrease in accounts payable and other liabilities ............................... (570)
Increase in amounts due to manager ............................................... 1,668
Amortization of prepaid insurance ................................................ 62
--------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................... 2,803
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in mortgage loans ....................................................... (2,187)
Principal collected on mortgage loans ............................................... 31,953
--------
NET CASH PROVIDED BY INVESTING ACTIVITIES ................................... 29,766
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings under line of credit ........................................ (22,000)
Liquidating distributions paid to common shareholders ............................... (6,526)
Net proceeds from issuance of common stock .......................................... 32
--------
NET CASH USED IN FINANCING ACTIVITIES ....................................... (28,494)
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS .............................................. 4,075
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......................................... 5,726
--------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................................... $ 9,801
========
See notes to consolidated financial statements.
F-7
53
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (GOING CONCERN BASIS)
(IN THOUSANDS)
Period from
Period from February 2,
January 1, 2000 1998
through Year Ended through
September 25, December 31, December 31,
2000 1999 1998
------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................................... $ 5,948 $ 7,320 $ 3,952
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ....................................................... 1,788 3,322 1,368
Depreciation .................................................................... 1,188 1,252 100
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 ............................................... 172 234 162
Discount amortization on commercial mortgage-backed securities .................. (282) (329) (173)
Amortization of compensatory stock options and unearned trust manager
compensation ................................................................. (254) 223 476
Amortization of loan commitment and extension fees .............................. (592) (1,050) (180)
Receipt of loan commitment and extension fees ................................... 460 427 1,507
Increase in receivables and other assets ........................................ (219) (592) (3,659)
Decrease (increase) in interest receivable related to commercial
mortgage-backed securities ................................................... (40) 74 (345)
Increase (decrease) in accounts payable and other liabilities ................... (1,428) 1,756 941
Increase (decrease) in minority interests ....................................... (26) 26 --
Increase (decrease) in amounts due to manager and affiliates .................... (163) 1,226 736
Equity in losses (earnings) of unconsolidated subsidiary, partnerships and
other real estate ventures ................................................... 1,091 (17) (588)
Distributions from unconsolidated subsidiary, partnership and other real
estate venture ............................................................... 23 124 588
------------- ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................................. 7,825 13,417 4,885
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of mortgage loans ...................................................... -- -- (25,807)
Investments in mortgage loans ...................................................... (8,480) (44,622) (73,059)
Investments in ADC loan arrangements ............................................... (1,034) (24,688) (37,269)
Sale of mortgage loans to affiliate ................................................ -- 13,340 --
Principal collected on mortgage loans .............................................. 10,398 26,252 563
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) (10,329)
Investments in unconsolidated partnerships and subsidiary .......................... (282) (2,684) (3,501)
Distributions from unconsolidated subsidiary and partnerships ...................... 3,493 344 --
Distributions from ADC joint ventures .............................................. -- -- 285
Purchase of commercial mortgage-backed securities .................................. -- -- (34,480)
------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ........................ 49,576 (61,458) (183,597)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of credit ...................................... -- 39,162 39,338
Repayment of borrowings under line of credit ....................................... (38,641) (17,859) --
Proceeds from borrowings under repurchase agreement ................................ -- 12,103 5,123
Repayment of borrowings under repurchase agreement ................................. (9,856) (2,247) (5,123)
Proceeds from financing provided by affiliate ...................................... -- 907 5,532
Proceeds from non-recourse debt on real estate ..................................... -- 27,100 7,500
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) (184)
Net proceeds from issuance of common stock ......................................... -- -- 139,717
Distributions paid to common shareholders .......................................... (7,812) (15,516) (3,402)
------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........................ (56,279) 42,856 188,501
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................................. 1,122 (5,185) 9,789
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................................ 4,604 9,789 --
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD .............................................. $ 5,726 $ 4,604 $ 9,789
============= ============ ============
See notes to consolidated financial statements.
F-8
54
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
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") of 9,000,000 common shares and private placement
of 1,000,011 common shares. 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, beginning April 1,
2000. These reimbursements are equal to the excess, if any, of the Manager's
operating costs (including principally personnel and general and administrative
expenses) over the sum of its base management fees and any other fees earned by
the Manager from sources other than the Company. Pursuant to the First Amendment
to Management Agreement, the Manager is no longer entitled to receive incentive
compensation and/or a termination fee in the event that the Management Agreement
is terminated, including a termination resulting from the Company's liquidation
and dissolution. The base management fee and reimbursements, if any, are payable
quarterly in arrears.
Immediately after the closing of the IPO, the Manager was granted options to
purchase 1,000,011 common shares; 70% of the options are exercisable at an
option price of $15.00 per share and the remaining 30% of the options are
exercisable at an option price of $18.75 per share.
F-9
55
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 is 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. is
carried at its estimated net realizable value. From and after September 26,
2000, the Company accounts for its investment in AMREIT II, Inc. using the cost
method of accounting and thus reports income only when cash is received. Changes
in the estimated net realizable value of this investment, if any, are 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 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 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.
F-10
56
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.
Significant estimates include the valuations of the Company's loan investments
and its investment in AMREIT II, Inc. 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 face value, 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.
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
F-11
57
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 is recognized at the fixed coupon rate; any unrealized gains or
losses (changes in estimated net realizable value) are 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.
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 9.
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.
F-12
58
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 95% of its annual REIT taxable income
and it complies with a number of other organizational and operational
requirements. For tax years beginning after December 31, 2000, the minimum
distribution requirement has been reduced to 90%. AMREIT II, Inc. is 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
59
4. LOAN INVESTMENTS
At December 31, 2000 and 1999, the Company had commitments to fund $92,270,000
(under 5 loans) and $168,923,000 (under 13 loans), of which $88,401,000 and
$143,644,000, respectively, was outstanding. As of December 31, 2000 and 1999,
the Company's loan investments are summarized as follows (dollars in thousands):
Scheduled
Date of Maturity/ Commitment Amount Amount Outstanding
Initial Disposition ------------------- --------------------
Investment Date Location Property Type 2000 1999 2000 1999
- ------------ ----------- ---------------- ---------------- -------- ---------- --------- ---------
05/12/98 03/31/02 Richardson, TX Office $ 14,700 $ 14,700 $ 14,700 $ 13,709
06/01/98 06/01/01 Houston, TX Office 11,800 11,800 11,800 11,079
06/22/98 06/19/01 Wayland, MA Office 45,000 45,000 42,152 39,134
07/02/98 07/17/00 Washington, D.C. Office -- 7,000 -- 6,409
07/10/98 11/01/00 Pasadena, TX Apartment -- 3,350 -- 2,993
09/30/98 04/20/00 San Antonio, TX/ Residential Lots -- 8,400 -- 3,555
Sunnyvale, TX
05/18/99 05/19/01 Irvine, CA Office 15,557 15,260 15,306 13,057
07/29/99 02/01/01 Lexington, MA R&D/Bio-Tech 5,213 5,213 4,443 2,753
08/19/99 10/26/01 San Diego, CA Medical Office -- 5,745 -- 4,048
-------- ---------- --------- ---------
Mortgage loans 92,270 116,468 88,401 96,737
-------- ---------- --------- ---------
06/12/98 09/14/00 Pearland, TX Apartment -- 12,827 -- 12,291
06/17/98 03/24/00 San Diego, CA R&D/Bio-Tech -- 5,560 -- 4,732
06/19/98 11/10/00 Houston, TX Office -- 24,000 -- 21,622
07/01/98 10/31/00 Dallas, TX Office -- 10,068 -- 8,262
-------- ---------- --------- ---------
ADC loan arrangements -- 52,455 -- 46,907
-------- ---------- --------- ---------
Total loan investments $ 92,270 $ 168,923 $ 88,401 $ 143,644
======== ========== ========= =========
Estimated
Net
Scheduled Realizable
Date of Maturity/ Value at Interest Interest
Initial Disposition December 31, Pay Accrual
Investment Date 2000 Rate Rate
- ------------ ----------- ------------ -------- --------
05/12/98 03/31/02 $ 14,700 10.0% 12.0%
06/01/98 06/01/01 11,800 12.0% 12.0%
06/22/98 06/19/01 42,152 10.5% 10.5%
07/02/98 07/17/00 -- 10.5% 10.5%
07/10/98 11/01/00 -- 10.0% 14.0%
09/30/98 04/20/00 -- 10.0% 14.0%
05/18/99 05/19/01 15,306 10.0% 12.0%
07/29/99 02/01/01 4,443 11.7% 14.7%
08/19/99 10/26/01 -- 11.6% 11.6%
------------
Mortgage loans 88,401
------------
06/12/98 09/14/00 -- 10.0% 11.5%
06/17/98 03/24/00 -- 10.0% 13.5%
06/19/98 11/10/00 -- 12.0% 12.0%
07/01/98 10/31/00 -- 10.0% 15.0%
------------
ADC loan arrangements --
------------
Total loan investments $ 88,401
============
During the year ended December 31, 2000, six of the Company's loans were fully
repaid, two of which were classified as ADC loan arrangements. Additionally,
during the period from September 26, 2000 through December 31, 2000, the Company
disposed of two additional loans which had been reclassified from ADC loan
arrangements to mortgage loans at the time the Company adopted liquidation basis
accounting.
For all loan investments, payments of interest only are due monthly at the
interest pay rate. All principal and all remaining accrued and unpaid interest
are due at the scheduled maturities of the loans. At December 31, 2000, one of
the five loan investments provides the Company with the opportunity for profit
participation in excess of the contractual interest accrual rate. Four of the
five loans are secured by first liens; the other investment, the Company's $14.7
million Richardson office loan, is secured by a second lien. Extension options
are available to two of the Company's remaining borrowers provided that such
borrowers are not in violation of any of the conditions established in the loan
agreements.
F-14
60
At September 25, 2000 (the date immediately prior to the adoption of liquidation
basis accounting) and December 31, 1999, the loan investments were classified as
follows (in thousands):
As of September 25, 2000 As of December 31, 1999
--------------------------- --------------------------
Loan Balance Loan Balance
Amount Sheet Amount Sheet
Outstanding Amount Outstanding Amount
----------- ---------- ----------- ----------
Mortgage loans held for investment, net .................... $ 94,819 $ 94,246 $ 96,737 $ 96,032
Real estate, net ........................................... 22,924 21,090 38,645 36,906
Investment in real estate ventures ......................... 8,569 6,978 8,262 7,191
---------- ---------- ---------- ----------
Total ADC loan arrangements ............................. 31,493 28,068 46,907 44,097
---------- ---------- ---------- ----------
Total loan investments ..................................... $ 126,312 122,314 $ 143,644 140,129
========== ==========
Allowance for loan losses .................................. (5,978) (4,190)
---------- ----------
Total loan investments, net of allowance for losses ........ $ 116,336 $ 135,939
========== ==========
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 and December 31, 1999 (in thousands):
As of As of
September 25, December 31,
2000 1999
------------- ------------
Land .......................................... $ 2,490 $ 4,648
Buildings and improvements .................... 19,093 32,744
------------- ------------
Total ...................................... 21,583 37,392
Less: Accumulated depreciation ................ (493) (486)
------------- ------------
$ 21,090 $ 36,906
============= ============
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, the year ended December 31, 1999 and the period
from February 2, 1998 through December 31, 1998 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
========== ========== ========== ========== ========== ==========
1998
---------------------------------------
ADC
Mortgage Loan
Loans Arrangements Total
---------- ------------ ----------
Balance, beginning of
period .................. $ -- $ -- $ --
Investments in loans ....... 98,866 38,488 137,354
Collections of principal ... (563) -- (563)
Cost of mortgages sold ..... -- -- --
Foreclosure (partnership
interests) .............. -- -- --
---------- ---------- ----------
Balance, end of period ..... $ 98,303 $ 38,488 $ 136,791
========== ========== ==========
During the period from January 1, 2000 through September 25, 2000, the year
ended December 31, 1999 and the period from February 2, 1998 through December
31, 1998, the activity in the allowance for loan losses was as follows (in
thousands):
2000 1999 1998
-------- -------- --------
Balance, beginning of period ......... $ 4,190 $ 1,368 $ --
Provision for losses ................. 1,788 3,322 1,368
Charge-offs .......................... -- (500) --
Recoveries ........................... -- -- --
-------- -------- --------
Balance, end of period ............... $ 5,978 $ 4,190 $ 1,368
======== ======== ========
F-15
61
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 Estimated
from September 26, 2000 Net
Adjustments through December 31, 2000 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.
An ADC loan arrangement with a recorded investment of $6,659,000 was
non-performing as of December 31, 1998. The allowance for loan losses related to
this investment totaled $500,000 at December 31, 1998. The average recorded
investment in this ADC loan arrangement was $5,970,000 during the period from
May 12, 1998 (inception of operations) through December 31, 1998. At December
31, 1998, the amount outstanding under this loan totaled $6,839,000. No income
was recognized after the loan investment became non-performing. On February 25,
1999, an unconsolidated taxable subsidiary of the Company assumed control of the
borrower (a partnership) through foreclosure of the partnership interests;
concurrently, the loan was reclassified, net of a $500,000 charge-off, to
investment in unconsolidated subsidiary.
As of December 31, 2000, the Company had outstanding commitments to fund
approximately $3,869,000 under five loans. The Company is obligated to fund
these commitments to the extent that the borrowers are not in violation of any
of the conditions established in the loan agreements. Conversely, a portion of
the commitments may expire without being drawn upon and therefore the total
commitment amounts do not necessarily represent future cash requirements. At
December 31, 2000, approximately 54%, 29% and 17% of the Company's committed
loan investments were collateralized by properties located in Massachusetts,
Texas and California, respectively. Additionally, approximately 94% of the
Company's loan commitments were secured by office properties.
5. COMMERCIAL MORTGAGE-BACKED SECURITIES
As of December 31, 2000, the Company held three commercial mortgage-backed
securities which were acquired at an aggregate purchase price of $22,598,000. At
December 31, 2000, the Company's CMBS available for sale are carried at
estimated net realizable value which approximates estimated fair value. As of
December 31, 1999, the Company held five CMBS which were acquired at an
aggregate purchase price of $34,480,000. At December 31, 1999, the Company's
CMBS available for sale were carried at estimated fair value. At December 31,
2000 and 1999, the amortized cost and carrying value of CMBS, by underlying
credit rating, were as follows (in thousands):
F-16
62
2000
-------------------------------------------------------------------------
Estimated
Net
Security Amortized Unrealized Unrealized Realizable
Rating Cost Gains Losses Value
----------- ---------- ---------- ---------- ----------
BB- $ 4,305 $ -- $ (1,131) $ 3,174
B 15,880 -- (4,812) 11,068
B- 3,167 -- (798) 2,369
---------- ---------- ---------- ----------
$ 23,352 $ -- $ (6,741) $ 16,611
========== ========== ========== ==========
1999
-------------------------------------------------------------------------
Aggregate Aggregate Aggregate Aggregate
Security Amortized Unrealized Unrealized Fair
Rating Cost Gains Losses Value
----------- ---------- ---------- ---------- ----------
BB- $ 4,271 $ -- $ (1,140) $ 3,131
B 19,664 -- (4,854) 14,810
B- 11,319 -- (4,691) 6,628
---------- ---------- ---------- ----------
$ 35,254 $ -- $ (10,685) $ 24,569
========== ========== ========== ==========
Additionally, at December 31, 1999, the Company had recorded unrealized losses
(net of tax effects) of $127,000 related to CMBS owned by AMREIT II, Inc., its
unconsolidated taxable subsidiary. 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
venture during the period from January 1, 2000 through September 25, 2000.
The mortgage loans underlying the Company's CMBS are diverse in nature; no
particular concentrations exist by property type or location. At December 31,
2000, the weighted average maturity of the Company's CMBS was 12.4 years. As
described in Note 18, the Company's remaining CMBS holdings were sold on January
18, 2001.
6. REAL ESTATE
During 1999 and 1998, the Company (through a majority-owned partnership)
acquired interests in five newly constructed, grocery-anchored shopping centers
in the Dallas/Fort Worth (Texas) area. In connection with these acquisitions,
the subsidiary partnerships which held title to these assets obtained
non-recourse financing aggregating $34,600,000 from an unaffiliated third party
(Note 7). Additionally, the Company contributed $18,161,000 of capital to the
master partnership which, in turn, was contributed to the subsidiary
partnerships. The majority-owned partnership owned, directly or indirectly, all
of the equity interests in the title-holding subsidiary partnerships. On June
14, 2000, the Company sold its 99.5% ownership interest in the five
grocery-anchored shopping centers for $18,327,000. The sale generated a gain of
$1,485,000. In connection with the sale, the buyer assumed the five non-recourse
loans and other partnership liabilities
F-17
63
aggregating $34,600,000 and $556,000, respectively. Additionally, partnership
receivables and other assets totaling $1,380,000 were transferred to the buyer.
Real estate, which was comprised entirely of amounts derived from the Company's
partnership investment, consisted of the following at December 31, 2000 and 1999
(in thousands):
2000 1999
---------- ----------
Land ............................... $ -- $ 14,386
Buildings and improvements ......... -- 36,856
---------- ----------
Total ........................... -- 51,242
Less: Accumulated depreciation ..... -- (866)
---------- ----------
$ -- $ 50,376
========== ==========
7. DEBT AND FINANCING FACILITIES
Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $400 million Interim Warehouse and Security Agreement (the "Line
of Credit") with Prudential Securities Credit Corporation ("PSCC"). Subject to
certain limitations, borrowings under the facility could be used to finance the
Company's structured loan and equity real estate investments. Prior to the
modifications discussed below, borrowings under the Line of Credit bore interest
at rates ranging from LIBOR plus 1% per annum to LIBOR plus 2% per annum
depending upon the type of asset, its loan-to-value ratio and the advance rate
selected by the Company.
Effective as of May 4, 1999, the Company (and certain of its subsidiaries)
entered into an Amended and Restated Interim Warehouse and Security Agreement
(the "Amended Line of Credit") with PSCC; the agreement amended the Company's
existing Line of Credit. The Amended Line of Credit included the following
modifications: (1) a reduction in the size of the committed facility from $400
million to $300 million; (2) the elimination of the requirement that assets
financed with proceeds from the facility had to be securitizable; (3) a
reduction in the amount of capital the Company had to fund with respect to
construction and rehabilitation loans before PSCC was required to begin
advancing funds; (4) an extension of the maturity date from July 1, 2000 to
November 3, 2000; and (5) the modification to, and addition of, certain
sublimits on specified types of loans and assets. Under the Amended Line of
Credit, borrowings bore interest at LIBOR plus 1.25% per annum as such
borrowings did not exceed the Company's Tangible Net Worth, as defined. At
December 31, 1999, the weighted average interest rate under this facility was
7.73% per annum.
As compensation for entering into the Amended Line of Credit and extending the
maturity date, 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.
Effective as of November 3, 2000, the Company (and certain of its subsidiaries)
entered into a First Amendment to Amended and Restated Interim Warehouse and
Security Agreement (the "First Amendment Line of Credit") with Prudential
Securities Credit Corporation, LLC, successor in interest to PSCC. Under the
terms of the First Amendment Line of Credit, the committed amount of the credit
facility was reduced from $300 million to $35 million (subject to certain
limitations) and the maturity date was extended from November 3, 2000 to April
30, 2001. On and after November 3, 2000, the Company may request advances under
the line of credit only for purposes of funding its unfunded loan commitments
and its dividend payments to shareholders to the extent such dividends are
necessary in order for the Company to maintain its qualification as a REIT. As
compensation for entering into the First Amendment Line of Credit, the Company
paid Prudential Securities Credit Corporation, LLC an extension fee equal to
0.5% of the committed amount. Under the First Amendment Line of Credit,
borrowings bear interest at LIBOR plus 1.25% per annum. On November 14, 2000,
all amounts then outstanding under the First Amendment Line of Credit
($22,000,000) were fully repaid. At December 31, 2000, there were no amounts
outstanding under the facility.
F-18
64
Borrowings under the facility are secured by a first lien security interest on
all assets funded with proceeds from the First Amendment Line of Credit. The
First Amendment Line of Credit contains several covenants; among others, the
more significant covenants include the maintenance of a $100 million
consolidated Tangible Net Worth; maintenance of a Coverage Ratio, as defined, of
not less than 1.4 to 1; and limitation of Total Indebtedness, as defined, to no
more than 400% of shareholders' equity.
Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $100 million Master Repurchase Agreement (the "Repurchase
Agreement") with PSCC; subsequently, PSCC was replaced by Prudential-Bache
International, Ltd. ("PBI"), an affiliate of PSCC, as lender. Borrowings under
the Repurchase Agreement could be used to finance a portion of the Company's
portfolio of mortgage-backed securities. Under the Repurchase Agreement, the
Company could borrow a varying percentage of the market value of its
mortgage-backed securities, depending on the credit quality of such securities.
Borrowings under the Repurchase Agreement bore interest at rates ranging from
LIBOR plus 0.20% per annum to LIBOR plus 1.5% per annum depending upon the
advance rate and the credit quality of the securities which were financed.
Borrowings under the facility were secured by an assignment to PBI of all
mortgage-backed securities funded with proceeds from the Repurchase Agreement.
The Repurchase Agreement matured on June 30, 2000. At December 31, 1999, the
weighted average interest rate under this facility was 7.62% per annum.
To reduce the impact that rising interest rates would have on its floating rate
indebtedness, the Company entered into an interest rate cap agreement with a
major international financial institution. The cap agreement, which became
effective on January 1, 1999, had a notional amount of $33.6 million. Prior to
its termination, the agreement entitled the Company to receive from the
counterparty the amounts, if any, by which one month LIBOR exceeded 6.0%. No
amounts were ever due from the counterparty under the terms of this agreement.
The premium paid for this cap, totaling $52,000, was amortized on a
straight-line basis as an adjustment of interest incurred until the agreement
was terminated.
On July 2, 1999, the Company terminated the $33.6 million (notional) interest
rate cap agreement at a loss of $5,000. Concurrently, the Company entered into a
new cap agreement to reduce the impact that rising interest rates would have on
its floating rate indebtedness. The new agreement, which became effective on
August 1, 1999, had a notional amount of $59.0 million. On August 4, 2000, the
Company terminated a portion of the $59 million (notional) interest rate cap
agreement at a gain of $19,000. The revised agreement, which more closely
matched the borrowings then outstanding under the Company's line of credit, had
a notional amount of $30 million. The interest rate cap agreements entitled the
Company to receive from the counterparty the amounts, if any, by which one-month
LIBOR exceeded 6.25%. The revised agreement expired on November 1, 2000. The
premium paid for this cap, totaling $110,000, was amortized on a straight-line
basis as an adjustment of interest incurred. During the period from January 1,
2000 through November 1, 2000 and the period from August 1, 1999 through
December 31, 1999, amounts due from the counterparty under these agreements
totaled $70,000 and $13,000, respectively. As of December 31, 1999, the
unamortized premium was included in receivables and other assets in the
consolidated balance sheet.
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 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
were assumed by the buyer.
Total interest incurred during the period from September 26, 2000 through
December 31, 2000, 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 was $226,000, $4,396,000, $6,186,000 and
$624,000, of which $0, $0, $593,000 and $57,000, respectively, was capitalized.
Interest paid (net of amounts capitalized) during these periods totaled
$395,000, $4,438,000, $4,980,000 and $365,000, respectively.
8. RELATED PARTY TRANSACTIONS
The Company's day-to-day operations are managed by the Manager, a member of the
AMRESCO Group. Since its inception, fees and reimbursements charged to the
Company were as follows (in thousands):
F-19
65
Period from Period from Total Period from
January 1, September 26, for the Year May 12, 1998
2000 through 2000 through Ended Year Ended through
September 25, December 31, December 31, December 31, December 31,
2000 2000 2000 1999 1998
-------------- -------------- -------------- -------------- --------------
Base management fees ............... $ 1,401 $ 361 $ 1,762 $ 2,066 $ 835
Incentive compensation ............. -- -- -- -- --
Reimbursable expenses .............. 20 -- 20 192 140
Operating deficit reimbursements ... -- 243 243 -- --
-------------- -------------- -------------- -------------- --------------
$ 1,421 $ 604 $ 2,025 $ 2,258 $ 975
============== ============== ============== ============== ==============
During the period from September 26, 2000 through December 31, 2000, management
fees included 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, are expected to be borne by the Company through future
operating deficit reimbursements. 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, 2000 and 1999, base management fees due to the Manager totaled
$338,000 and $544,000, respectively. Operating deficit reimbursements due to the
Manager totaled $243,000 and $0 at December 31, 2000 and 1999, respectively.
Reimbursable expenses due to the Manager totaled $0 and $22,000 at December 31,
2000 and 1999, respectively.
On September 30, 1998, the Company acquired eight loans from AMRESCO Commercial
Finance, Inc. ("ACFI"), a member of the AMRESCO Group, at an aggregate cash
purchase price of $34,292,000. Immediately following the purchase, the Company
sold to ACFI a contractual right to collect from the Company an amount equal to
the economic equivalent of all amounts collected from five of the loans in
excess of (i) $17,958,000 and (ii) a return on this amount, or so much of it as
was outstanding from time to time, equal to 12% per annum. The aggregate cash
sales price of $5,020,000 had the effect of reducing the Company's credit
exposure with respect to such loans. As additional consideration, ACFI agreed to
immediately reimburse the Company for any additional advances that were required
to be made under the five loan agreements. The proceeds received from ACFI were
accounted for as a financing.
During the year ended December 31, 1999, the Company sold four loans to ACFI in
two separate transactions. Prior to their sale, these investments had been
subject to the ACFI economic interest described above. The fifth loan was fully
repaid by the borrower in May 1999. The proceeds from the sales totaled
$13,340,000. In connection with the last sale, amounts due to ACFI were fully
extinguished; additionally, ACFI's reimbursement obligations were discharged. In
aggregate, these sales were recorded as follows (in thousands):
Cash ........................... $ 13,340
Mortgage loans ................. (19,936)
Receivables and other assets ... (1,238)
Amounts due to affiliates ...... 7,834
----------
Gain (loss) .................... $ --
==========
9. 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
F-20
66
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, the year
ended December 31, 1999 and the period from February 2, 1998 (date of initial
capitalization) through December 31, 1998 would have been reduced to the
following pro forma amounts (in thousands, except per share data):
Period from Period from
January 1, 2000 February 2, 1998
through Year Ended through
September 25, 2000 December 31, 1999 December 31, 1998
------------------ ----------------- -----------------
Net income:
As reported ...................... $ 5,948 $ 7,320 $ 3,952
Pro forma ........................ $ 5,827 $ 7,138 $ 3,831
Basic earnings per common share:
As reported ...................... $ 0.59 $ 0.73 $ 0.56
Pro forma ........................ $ 0.58 $ 0.71 $ 0.54
Diluted earnings per common share:
As reported ...................... $ 0.59 $ 0.73 $ 0.56
Pro forma ........................ $ 0.58 $ 0.71 $ 0.54
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 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
F-21
67
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, the year ended December 31, 1999 and the period from May 12,
1998 (inception of operations) through December 31, 1998, compensatory option
charges (credits) included in management fees and general and administrative
expenses were as follows (in thousands):
Period from Period from
January 1, 2000 May 12, 1998
through Year Ended through
September 25, December 31, December 31,
2000 1999 1998
--------------- ------------ ------------
Management fees ........................ $ (261) $ 140 $ 352
General and administrative expenses .... (27) (8) 68
---------- ---------- ----------
$ (288) $ 132 $ 420
========== ========== ==========
A summary of the status of the Company's stock options as of December 31, 2000,
1999 and 1998 and the changes during the year ended December 31, 2000, the year
ended December 31, 1999 and the period from May 12, 1998 (inception of
operations) through December 31, 1998 is as follows:
Compensatory Non-compensatory
Options Options
-------------------------------- --------------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
-------------- -------------- -------------- --------------
Granted on May 12, 1998 1,141,511 $ 15.99 352,000 $ 15.00
Granted on November 3, 1998 4,000 7.88 -- --
Exercised -- -- -- --
Forfeited (21,500) (15.00) -- --
Expired -- -- -- --
-------------- -------------- -------------- --------------
Options outstanding at December 31, 1998 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
============== ============== ============== ==============
As of December 31, 2000, the 1,411,261 options outstanding have a weighted
average exercise price of $15.80 and a weighted average remaining contractual
life of 7.38 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, 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. No options were exercisable
as of December 31, 1998.
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, 2000, 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.
F-22
68
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 year ended December 31, 2000.
As described in Note 7, 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.
10. 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.
11. 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, the year ended December 31, 1999 and the period
from February 2, 1998 (date of initial capitalization) through December 31,
1998, is as follows (in thousands, except per share data):
Period from Period from
January 1, February 2,
2000 1998
through Year Ended through
September 25, December 31, December 31,
2000 1999 1998
------------- ------------ ------------
Net income available to common shareholders $ 5,948 $ 7,320 $ 3,952
============ ============ ============
Weighted average common shares outstanding 10,000 10,000 7,027
============ ============ ============
Basic earnings per common share $ 0.59 $ 0.73 $ 0.56
============ ============ ============
Weighted average common shares outstanding 10,000 10,000 7,027
Effect of dilutive securities:
Restricted shares 15 12 4
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 7,031
============ ============ ============
Diluted earnings per common share $ 0.59 $ 0.73 $ 0.56
============ ============ ============
F-23
69
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 10). 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 and the period from May 12, 1998
(inception of operations) through December 31, 1998, options to purchase
1,460,261 and 1,476,011 common shares, respectively, and warrants to purchase
250,002 and 0 common shares, respectively, were outstanding. The options related
to 1,456,261 shares and the warrants for the year ended December 31, 1999 and
options related to 1,472,011 shares for the period from May 12, 1998 (inception
of operations) through December 31, 1998 were not included in the computations
of diluted earnings per share because the exercise prices related thereto were
greater than the average market price of the Company's common shares.
The Company had no earnings prior to the commencement of its operations on May
12, 1998. When calculated for the period from May 12, 1998 (inception of
operations) through December 31, 1998, the Company's basic and diluted earnings
were $0.39 per common share.
12. DISTRIBUTIONS
During the year ended December 31, 2000, the year ended December 31, 1999 and
the period from May 12, 1998 (inception of operations) through December 31,
1998, the Company declared distributions totaling $13,445,000 (or $1.34 per
share), $15,921,000 (or $1.59 per share) and $7,404,000 (or $0.74 per share),
respectively. 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. All 1998 dividends were reported as ordinary income (for federal income
tax purposes) to the Company's shareholders. Information regarding the
declaration and payment of distributions by the Company since its inception of
operations is as follows (in thousands, except per share data):
Distribution
Declaration Record Payment Distribution per Common
Date Date Date Paid Share
------------------- ------------------ ------------------ ------------ ------------
1998
Period from May 12, 1998
through June 30, 1998 July 23, 1998 July 31, 1998 August 17, 1998 $ 1,001 $ 0.10
Third Quarter October 22, 1998 October 31, 1998 November 16, 1998 2,401 0.24
Fourth Quarter December 15, 1998 December 31, 1998 January 27, 1999 4,002 0.40
------------ ------------
$ 7,404 $ 0.74
============ ============
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
============ ============
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70
13. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
A summary of the non-cash investing and financing activities which occurred
during the period from January 1, 2000 through September 25, 2000, the year
ended December 31, 1999 and the period from February 2, 1998 (date of initial
capitalization) through December 31, 1998, is as follows (in thousands):
Period from Period from
January 1, February 2,
2000 1998
through Year Ended through
September 25, December 31, December 31,
2000 1999 1998
------------- ------------ ------------
Minority interest contributions associated with ADC loan arrangements..................... $ -- $ -- $ 2,611
============= ============ ===========
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. No non-cash
investing and/or financing activities were recorded during the period from
September 26, 2000 through December 31, 2000.
14. 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 year ended December 31, 2000, the year ended December
31, 1999 and the period from February 2, 1998 (date of initial capitalization)
through December 31, 1998 is as follows (in thousands):
Period from
February 2,
1998
Year Ended Year Ended through
December 31, December 31, December 31,
2000 1999 1998
-------------- -------------- --------------
Consolidated financial statement net income ....................... $ 5,948 $ 7,320 $ 3,952
Decrease in net assets in liquidation from operating activities ... (1,531) -- --
-------------- -------------- --------------
4,417 7,320 3,952
Difference attributable to differences in methods of
accounting for ADC loan arrangements ........................... (268) 3,598 1,713
Equity in losses (earnings) from unconsolidated subsidiary ........ 1,149 223 (58)
Dividends received from unconsolidated subsidiary ................. -- 45 58
Interest capitalized under SFAS No. 34 ............................ -- (593) (57)
Adjustments for restricted stock and compensatory options ......... (254) 223 476
Adjustment for accrued management fees ............................ 1,490 -- --
Provision for loan losses ......................................... 1,788 3,322 1,368
Net capital loss carryforward ..................................... 2,108 -- --
Changes in estimated net realizable value of certain assets ....... 2,807 -- --
Other ............................................................. (94) 21 43
-------------- -------------- --------------
Tax basis income .................................................. $ 13,143 $ 14,159 $ 7,495
============== ============== ==============
F-25
71
For the period from May 12, 1998 (inception of operations) through December 31,
1998, the Company retained a portion of its REIT taxable income in excess of the
95% requirement; as a result, such income was subject to tax at regular
corporate rates. These taxes, totaling approximately $20,000, were included in
general and administrative expenses in the consolidated statement of income for
the period from February 2, 1998 (date of initial capitalization) through
December 31, 1998; such taxes were paid during the year ended December 31, 1999.
15. 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 real estate,
the Company's unconsolidated investments and minority interests, substantially
all of the Company's assets and liabilities are considered financial instruments
for purposes of SFAS No. 107. At December 31, 2000, all of the Company's
financial instruments were carried at either their estimated net realizable
values or their expected settlement amounts, which approximate their estimated
fair values.
As of December 31, 1999, the estimated fair value amounts were determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment was necessarily required to
interpret market data to develop the estimates of fair value. The use of
different market assumptions and/or estimation methodologies may have had a
material effect on the estimated fair value amounts. The fair value estimates
were derived based upon pertinent information available to management as of
December 31, 1999. Although management is not aware of any factors that would
have significantly affected the estimated fair value amounts, such amounts have
not been comprehensively revalued for purposes of these financial statements
since December 31, 1999.
With the exception of two floating rate mortgage loans originated during the
year ended December 31, 1999, mortgage loans and ADC loan arrangements accounted
for as real estate or investments in joint ventures had fixed rates which
approximated rates that the Company would have quoted at that time for
investments with similar terms and risk characteristics; accordingly, their
estimated fair values approximated their net carrying values as of December 31,
1999. However, there was not (and is not) an active secondary trading market for
these types of investments; as a result, the estimates of fair value are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. Furthermore, the Company generally intends to hold
these financial instruments to maturity and realize their recorded values.
As of December 31, 1999, commercial mortgage-backed securities were carried at
estimated fair value based on quoted market prices.
The estimated fair values of cash and cash equivalents, receivables and other
assets (including the Company's interest rate cap), accounts payable and other
liabilities, amounts due to manager and distributions payable approximated their
carrying values at December 31, 1999 due to the short-term nature of these
financial instruments.
At December 31, 1999, the estimated fair values of the line of credit and
repurchase agreement indebtedness approximated their carrying values due to the
variable rate nature of these facilities. The estimated fair value of the fixed
rate non-recourse debt on real estate approximated $30.8 million at December 31,
1999.
F-26
72
16. 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, operates 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 are secured directly or indirectly
by real estate properties located in the United States; accordingly, all of its
revenues were derived from U.S. operations.
17. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS AND SUBSIDIARY
At December 31, 2000, investments in unconsolidated partnerships and subsidiary
was comprised solely 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 accounts for its investment in AMREIT II,
Inc. using the cost method of accounting and thus reports income only when cash
is 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 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.
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 is 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.
F-27
73
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)
As described in Note 18, AMREIT II, Inc. sold its real estate holdings on March
5, 2001; in connection therewith, the non-recourse debt on real estate was fully
extinguished.
18. SUBSEQUENT EVENTS
On January 17, 2001, the Company made its third liquidating distribution
pursuant to the Plan of Liquidation and Dissolution. This distribution, totaling
$3,514,000 (or $0.35 per share), was declared on December 21, 2000 and was
payable to shareholders of record on December 31, 2000. Under liquidation basis
accounting, this distribution was not recorded as a liability in the
consolidated statement of net assets in liquidation as of December 31, 2000. Net
assets in liquidation was reduced by $3,514,000 on January 17, 2001 upon payment
of this liquidating distribution.
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 $16,555,000. 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). When recording the sale, the
Company accrued the amount at which it expects to settle this obligation. These
additional selling expenses, totaling $114,000, were considered by management
when estimating the net realizable value of the Company's CMBS at December 31,
2000.
On February 1, 2001, one of the Company's loan investments was fully repaid. At
December 31, 2000, the amount outstanding under this loan totaled $4,443,000.
On March 5, 2001, a partnership controlled by the Company's unconsolidated
taxable subsidiary sold a mixed-use property at a gross sales price of
$18,250,000. Prior to its sale, the property was encumbered by a $17,000,000
first lien mortgage which had been provided by an unaffiliated third party. The
terms of this sale were considered by management when estimating the net
realizable value of the Company's investment in its taxable subsidiary at
December 31, 2000.
F-28
74
On March 8, 2001, the Company declared its fourth liquidating distribution
pursuant to the Plan of Liquidation and Dissolution; the distribution, totaling
$26,104,000 (or $2.60 per share), is payable on March 30, 2001 to shareholders
of record on March 19, 2001.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations (under
the historical cost [or going concern] basis of accounting) for the period from
January 1, 2000 through September 25, 2000 and the year ended December 31, 1999
(in thousands, except per share data):
Period from January 1, 2000 through
September 25, 2000
----------------------------------------
Period from
July 1, 2000
through
First Second September 25,
Quarter Quarter 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 $ --
Year Ended December 31, 1999
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Revenues ..................................... $ 4,473 $ 5,743 $ 6,301 $ 6,876
Gain associated with repayment of ADC loan
arrangement ............................... $ 584 $ -- $ -- $ --
Net income (loss) ............................ $ 2,344 $ 2,707 $ 2,344 $ (75)
Earnings (loss) per common share:
Basic ..................................... $ 0.23 $ 0.27 $ 0.24 $ (0.01)
Diluted ................................... $ 0.23 $ 0.27 $ 0.24 $ (0.01)
The Company's operating results for the period from September 26, 2000 through
December 31, 2000 (under the liquidation basis of accounting) are presented in
the accompanying consolidated statement of changes in net assets in liquidation.
F-29
75
REPORT OF INDEPENDENT AUDITORS
To the Members of
Wayland Business Center LLC:
We have audited the accompanying balance sheets of Wayland Business Center LLC
as of December 31, 2000 and 1999, and the related statements of operations,
members' capital, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wayland Business Center LLC at
December 31, 2000 and 1999, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for organizational costs.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 2, 2001
F-30
76
WAYLAND BUSINESS CENTER LLC
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
ASSETS
Real estate investments:
Land ................................................................. $ 6,425,080 $ 6,425,090
Buildings and tenant improvements .................................... 40,992,659 36,850,735
Furniture and fixtures ............................................... 2,111 --
------------ ------------
47,419,850 43,275,825
Less accumulated depreciation ........................................ (2,505,792) (1,095,191)
------------ ------------
44,914,058 42,180,634
Cash and cash equivalents ............................................... 1,491,055 1,083,099
Accounts receivable, tenants ............................................ 61,117 4,000
Advances to affiliates .................................................. 35,522 54,830
Deferred rent receivable ................................................ 1,855,315 1,371,745
Prepaid expenses ........................................................ 59,628 29,782
Mortgage escrows ........................................................ 168,031 198,149
Deferred costs:
Financing fees, net of accumulated amortization for 2000 and 1999
of $1,203,882 and $760,314, respectively ......................... 221,149 204,926
Legal fees, net of accumulated amortization for 2000 and 1999
of $893 and $536, respectively ................................... 893 1,249
Leasing fees, net of accumulated amortization for 2000 and 1999
of $248,755 and $98,889, respectively ............................ 2,350,101 1,220,052
------------ ------------
$ 51,156,869 $ 46,348,466
============ ============
LIABILITIES AND MEMBERS' CAPITAL
Accounts payable:
Trade ................................................................ $ 1,582,566 $ 316,805
Affiliate ............................................................ 725,589 97,011
Prepaid rent ............................................................. 395,833 395,833
Mortgage and accrued interest payable .................................... 42,533,776 39,446,913
Contract retainage ....................................................... 16,058 10,091
------------ ------------
Total liabilities .................................................... 45,253,822 40,266,653
------------ ------------
Members' capital ......................................................... 5,903,047 6,081,813
------------ ------------
$ 51,156,869 $ 46,348,466
============ ============
See accompanying notes to the financial statements.
F-31
77
WAYLAND BUSINESS CENTER LLC
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
----------- -----------
REVENUES:
Rental income ................................................... $ 5,733,374 $ 4,751,575
Operating expense recoveries .................................... 40,296 --
Interest income ................................................. 36,269 29,531
Other income .................................................... 4,039 453
Loss on sale of treatment plant ................................. -- (1,314,855)
----------- -----------
Total revenues ................................................ 5,813,978 3,466,704
----------- -----------
EXPENSES:
Interest ........................................................ 4,542,509 3,222,634
Utilities ....................................................... 675,754 627,912
Real estate taxes ............................................... 284,572 251,695
Repairs and maintenance ......................................... 469,533 236,945
Salaries ........................................................ 207,628 149,061
Administrative .................................................. 166,220 133,487
Management fees ................................................. 159,302 101,347
Professional fees ............................................... 439,792 53,809
Cafeteria costs ................................................. 68,315 48,588
Property insurance .............................................. 88,252 46,394
Security ........................................................ 121,966 33,000
Depreciation and amortization ................................... 1,764,393 1,686,736
----------- -----------
Total expenses ................................................ 8,988,236 6,591,608
----------- -----------
Loss before cumulative effect of change in accounting principle ... (3,174,258) (3,124,904)
Cumulative effect of change in accounting principle ............... -- (98,603)
----------- -----------
Net loss .......................................................... $(3,174,258) $(3,223,507)
=========== ===========
See accompanying notes to the financial statements.
F-32
78
WAYLAND BUSINESS CENTER LLC
STATEMENTS OF MEMBERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
CGV
WAYLAND FREAM
LLC NO. 5 LLC TOTAL
------------- ------------- -------------
Members' capital at December 31, 1998 ...... $ 1,419,456 $ 7,885,864 $ 9,305,320
Net loss for year .......................... (491,585) (2,731,922) (3,223,507)
------------- ------------- -------------
Members' capital at December 31, 1999 ...... 927,871 5,153,942 6,081,813
Member contributions ....................... 456,938 2,538,554 2,995,492
Net loss for year .......................... (484,209) (2,690,049) (3,174,258)
------------- ------------- -------------
Members' capital at December 31, 2000 ..... $ 900,600 $ 5,002,447 $ 5,903,047
============= ============= =============
See accompanying notes to the financial statements.
F-33
79
WAYLAND BUSINESS CENTER LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $ (3,174,258) $ (3,223,507)
Adjustments to reconcile excess of expenses over revenues
to net cash used in operating activities:
Depreciation and amortization .......................... 1,764,393 1,785,339
Amortization of fees paid to lender .................... 240,000 --
Straight-line rent ..................................... (483,570) (1,371,745)
Loss from sale of treatment plant ...................... -- 1,314,855
Changes in assets and liabilities:
Accounts receivable .................................. (57,117) (4,000)
Advances to affiliates ............................... 19,308 (4,830)
Prepaid expenses ..................................... (29,846) (29,782)
Mortgage escrows ..................................... 30,118 (198,149)
Accounts payable ..................................... 494,431 297,388
Accounts payable to affiliates ....................... (82,462) 14,145
Prepaid rent ......................................... -- 395,833
Accrued interest ..................................... 28,213 --
Contract retainage ................................... (5,665) --
------------ ------------
Total adjustments ...................................... 1,917,803 2,199,054
------------ ------------
Net cash used in operating activities .................. (1,256,455) (1,024,453)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate investments ................... (2,772,172) (12,074,181)
Additions to furniture and fixtures .................... (2,111) --
Redemption of treatment plant bond ..................... -- 90,000
Proceeds from sale of treatment plant .................. -- 250,000
Payment of leasing fees ................................ (1,166,368) --
------------ ------------
Net cash used in investing activities .................. (3,940,651) (11,734,181)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Mortgage loan advances ................................. 3,058,650 15,106,783
Mortgage loan payments ................................. -- (1,288,500)
Member contributions ................................... 2,995,492 --
Cost of financing ...................................... (449,080) (6,219)
------------ ------------
Net cash provided by financing activities .............. 5,605,062 13,812,064
------------ ------------
Net increase in cash and cash equivalents ............ 407,956 1,053,430
Cash and cash equivalents, beginning of year ........... 1,083,099 29,669
------------ ------------
Cash and cash equivalents, end of year ................. $ 1,491,055 $ 1,083,099
============ ============
Cash paid for interest ................................. $ 3,919,410 $ 351,863
============ ============
NON-CASH INVESTING ACTIVITIES:
Real estate investments:
Amortization of organizational and financing costs ... $ -- $ 89,156
Construction payables and retainage .................. 11,632 4,426
Accrued mortgage interest ............................ -- 445,776
------------ ------------
$ 11,632 $ 539,358
============ ============
Accrued mortgage interest .............................. $ 381,334 $ 351,356
============ ============
See accompanying notes to the financial statements.
F-34
80
WAYLAND BUSINESS CENTER LLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 1 - BUSINESS FORMATION AND OPERATIONS
Wayland Business Center LLC ("Company"), a Delaware limited liability company,
was formed on December 12, 1997 for the purpose of acquiring a 48.6 acre parcel
of land and related structures at 430 Boston Post Road, Wayland, Massachusetts.
The Company redeveloped the property and operates an office complex thereon,
which is known as "Wayland Business Center" (the "Project"). The Project
consists of six interconnected two-story buildings containing approximately
400,000 square feet in the aggregate. Redevelopment began in the spring of 1998,
and the Project opened in March 1999.
The Project developer is Congress Group Ventures, Inc. ("Developer" or "CGV"),
an affiliate of CGV Wayland LLC, one of the members of the Company. The
Developer provides all services reasonably required by the Company in connection
with the redevelopment, construction, marketing, management, leasing, and other
activities of the Project. The Developer received a fee for its services,
payable in monthly installments over the construction period.
On October 19, 1999, the Town of Wayland acquired, by eminent domain, a
wastewater treatment plant and appurtenant easements located on the Project for
$250,000. The Company recognized a loss of $1,314,855 in connection with this
transaction.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The financial statements are prepared in conformity with generally accepted
accounting principles.
Leasing costs
Costs incurred in obtaining tenant leases have been capitalized and are being
amortized using the straight-line method over the life of the leases.
Financing fees
Fees incurred in obtaining financing have been capitalized and are being
amortized using the straight-line method over the term of the related financing.
Amortization of these costs was capitalized during the development phase.
Income Taxes
The Company has elected to be taxed as a partnership for income tax reporting
purposes and, as such, no income tax expense or liability is presented as such
amounts are the responsibility of the members and not the Company.
Real Estate Investments
Real estate investments are stated at cost. Depreciation of buildings and tenant
improvements is computed on a straight-line basis over 39 years. Tenant
improvements are depreciated using the straight-line method over the related
non-cancelable lease terms.
Valuation of Real Estate
The Company measures impairment in accordance with FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", which requires impairment losses to be recorded on specific
long-lived assets used in operations where indicators of impairment are present
and the undiscounted cash flows (net realizable value) estimated to be generated
by those assets are less than the assets' carrying amount. Since inception, no
impairment losses have been recorded.
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81
WAYLAND BUSINESS CENTER LLC
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capitalization of Development Costs
The Company capitalized costs associated with acquiring and developing the
Project, including direct construction costs, real estate taxes, interest
expense related to the development, and overhead.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
Rental Income and Deferred Rent Receivable
Rental income is reported on a straight-line basis over the non-cancelable lease
term. Deferred rent receivable represents the difference between the rent earned
using the straight-line method and rental payments due under the lease
agreements.
Organizational Costs
Effective January 1, 1999, the Company adopted the provisions of Statement of
Position 98-5, "Reporting Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5
requires that costs related to start-up activities be expensed as incurred.
Prior to 1999, the Company capitalized start-up costs incurred in connection
with the formation of the Company. As permitted, prior year financial statements
have not been restated. The cumulative effect of adopting SOP 98-5 was to
increase the net loss by $98,603 in 1999.
Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that may affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
NOTE 3 - MEMBERS, ALLOCATIONS OF PROFITS AND LOSSES, AND DISTRIBUTIONS
The members of the Company are CGV Wayland LLC and FREAM No. 5 LLC. CGV is the
Manager of the Company. Allocations of profits and losses are made in accordance
with the provisions of Section 704(b) of the Internal Revenue Code. Profits and
losses are generally allocated 15.2542% to CGV Wayland LLC and 84.7458% to FREAM
No. 5 LLC. The Company terminates under varying circumstances.
Distributions of cash are governed by the operating agreement.
Under provisions of the operating agreement, no member shall be obligated
individually for any debt, obligation, or liability of the Company or any other
member. Additionally, no member shall have any responsibility to restore
negative capital account balances or to contribute to or in respect of the
liabilities or obligations of the Company.
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82
WAYLAND BUSINESS CENTER LLC
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 4 - MORTGAGE DEBT
On June 19, 1998, the Company entered into a loan agreement with AMREIT I, Inc.,
a wholly-owned subsidiary of AMRESCO Capital Trust, for a $45,000,000 loan to
pay indebtedness on the property and construction costs. In February 2000, the
Company restructured certain terms of the first mortgage loan. The lender agreed
to fund amounts up to the maximum loan amount during the remaining loan term,
and the members agreed to fund any resulting cash flow shortfalls. Other terms
and conditions of the loan remain unchanged. On May 19, 2000, the lender agreed
to extend the maturity date of the loan to June 19, 2001.
The loan bears interest at 10.5% per annum and is non-recourse. The outstanding
loan balance, including accrued interest, was $42,533,776 and $39,446,913 at
December 31, 2000 and 1999, respectively.
Interest incurred for the years ended December 31, 2000 and 1999 under all debt
agreements amounted to $4,302,509 and $3,677,361, respectively, of which
$445,776 was capitalized to buildings in 1999.
The loan is secured by a first mortgage on the property.
The Company is currently in negotiations with several unaffiliated lenders to
refinance the mortgage debt. The Company intends to execute a new loan agreement
prior to maturity of the existing loan.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Developer was paid development fees of $350,000 and $48,000 during 2000 and
1999, respectively. The amounts were capitalized to buildings in 2000 and 1999.
On September 1, 1998, Congress Group Construction Corp. (CGCC), an affiliate of
the Developer, became a partner of Beacon Skanska / Congress Group Construction
Corp. II, a Joint Venture ("BS/CGCC II"). Effective September 8, 1998, BS/CGCC
II became the general contractor on the Project. During 2000 and 1999, BS/CGCC
II was paid $1,185,115 and $6,023,325 for construction costs incurred, including
contract fees of $23,900 and $191,700, respectively. CGCC served as the general
contractor during the construction of certain building and tenant improvements.
Amounts paid to CGCC under this arrangement totaled $499,465 during 2000.
On October 23, 1998, the Company made a non-interest bearing advance of $50,000
to BS/CGCC II for working capital. The amount was refunded in total to the
Company on November 3, 2000.
Management fees represent fees paid to CGV to manage the operations of the
building.
Total amount of salaries expense for 2000 and 1999 represents reimbursements to
CGV for maintenance personnel salaries and benefits. For the years ended
December 31, 2000 and 1999, administrative expenses include $97,822 and $80,682,
respectively, representing reimbursements to CGV for administrative personnel
salaries and benefits.
The Company leases 6,440 square feet to Wayland Cafeteria LLC, an affiliate of
the Developer. Rental income amounted to $18,515 and $4,830 for the years ended
December 31, 2000 and 1999, respectively.
F-37
83
WAYLAND BUSINESS CENTER LLC
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 6 - OPERATING LEASES
The Company leases space to tenants under operating leases that expire at
various dates through 2014. In addition to the minimum rentals, certain leases
provide for the reimbursement of operating expenses and real estate taxes in
excess of base amounts specified in the leases.
Minimum future base rents under the terms of the existing lease arrangements are
as follows:
YEAR AMOUNT
------------- --------------
2001 $ 8,792,937
2002 9,227,662
2003 9,258,595
2004 10,107,792
2005 10,139,985
Thereafter 83,864,726
--------------
$ 131,391,697
==============
The Company derives a substantial portion of its revenues from Polaroid
Corporation. In 1998, the Company entered into an operating lease agreement with
Polaroid Corporation. On October 24, 2000, the original lease was amended to
extend the lease term to March 31, 2014 and add 88,353 square feet to the
original premises. Rental and operating expense recovery income from Polaroid
Corporation totaled 91% and 100% of the aggregate totals for 2000 and 1999,
respectively. Future minimum rents from Polaroid are 93% of the total at
December 31, 2000.
NOTE 7 - CONTINGENCIES
On October 19, 2000, a former owner of the property brought two court
declaratory judgment actions against the Company. The former owner sought an
injunction from establishing a day care center on the property. On November 22,
2000, the Company answered, denying all liability, and asserted counterclaims
for money damage. While the relief sought by the former owner is declaratory, it
is also seeking recovery of its legal fees in connection with this suit.
Coincident with this dispute, the operator of the day care center, a former
tenant, filed a claim against the Company to recover costs incurred related to
improvements it made to the property. Given the early stage of the case and the
lack of meaningful discovery, the Company is not now in a position to assess the
outcome of these cases.
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84
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
2.1 Plan of Liquidation and Dissolution of the Registrant
dated as of March 29, 2000 and effective as of
September 26, 2000 (filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated March
29, 2000 and filed with the Commission on March 30,
2000, which exhibit is incorporated herein by
reference).
10.1 First Amendment to Management Agreement dated as of
April 1, 2000, by and between AMRESCO Capital Trust
and AMREIT Managers, L.P. (filed as Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2000, which
exhibit is incorporated herein by reference).
10.2 First Amendment to Amended and Restated Interim
Warehouse and Security Agreement dated as of November
3, 2000 by and among Prudential Securities Credit
Corporation, LLC and AMRESCO Capital Trust, AMREIT I,
Inc., AMREIT II, Inc., ACT Equities, Inc. and ACT
Holdings, Inc. (filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2000, which
exhibit is incorporated herein by reference).
11 Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
99.1 Termination Agreement, dated January 4, 2000, between
AMRESCO Capital Trust and Impac Commercial Holdings,
Inc. (filed as Exhibit 99.1 to the Registrant's
Current Report on Form 8-K dated January 4, 2000 and
filed with the Commission on January 6, 2000, which
exhibit is incorporated herein by reference).
99.2 Form of REIT Agreement, dated as of July 5, 2000,
among AMRESCO Capital Trust and Farallon Capital
Partners, L.P., Farallon Capital Institutional
Partners, L.P., Farallon Capital Institutional
Partners II, L.P., Farallon Capital Institutional
Partners III, L.P. and RR Capital Partners, L.P.
(filed as Exhibit 99.1 to the Registrant's Current
Report on Form 8-K dated July 5, 2000 and filed with
the Commission on July 6, 2000, which exhibit is
incorporated herein by reference).
99.3 Form of Amendment No. 1 to Rights Agreement, dated as
of June 29, 2000, between AMRESCO Capital Trust and
The Bank of New York (filed as Exhibit 99.2 to the
Registrant's Current Report on Form 8-K dated July 5,
2000 and filed with the Commission on July 6, 2000,
which exhibit is incorporated herein by reference).
99.4 Charter for the Audit Committee of the Board of Trust
Managers of AMRESCO Capital Trust which was adopted
by the Board of Trust Managers on May 20, 2000.