UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-14029
AMRESCO CAPITAL TRUST
(Exact name of Registrant as specified in its charter)
<Table>
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)
</Table>
Registrant's telephone number, including area code: (214) 953-7700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
10,039,974 shares of common stock, $.01 par value per share, as
of October 26, 2001.
AMRESCO CAPITAL TRUST
INDEX
<Table>
<Caption>
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Net Assets in Liquidation - September 30, 2001 and
December 31, 2000.................................................................................... 3
Consolidated Statements of Changes in Net Assets in Liquidation -
For the Three and Nine Months Ended September 30, 2001............................................... 4
Consolidated Statement of Changes in Net Assets in Liquidation -
For the Period from September 26, 2000 through September 30, 2000.................................... 5
Consolidated Statements of Income (Going Concern Basis) - For the Period from July 1, 2000
through September 25, 2000 and the Period from January 1, 2000 through September 25, 2000............ 6
Consolidated Statement of Cash Flows in Liquidation -
For the Nine Months Ended September 30, 2001.......................................................... 7
Consolidated Statement of Cash Flows in Liquidation - For the Period from
September 26, 2000 through September 30, 2000........................................................ 8
Consolidated Statement of Cash Flows (Going Concern Basis) -
For the Period from January 1, 2000 through September 25, 2000....................................... 9
Notes to Consolidated Financial Statements.............................................................. 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................................. 18
SIGNATURE ................................................................................................. 19
</Table>
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
September 30,
2001 December 31,
(unaudited) 2000
----------- -----------
ASSETS
Mortgage loans ......................................................... $ 11,563 $ 88,401
Commercial mortgage-backed securities - available for sale ............. -- 16,611
Investment in unconsolidated subsidiary ................................ 150 2,000
Receivables and other assets ........................................... 217 2,346
Cash and cash equivalents .............................................. 6,150 9,801
-------- --------
TOTAL ASSETS ........................................................ 18,080 119,159
-------- --------
LIABILITIES
Accounts payable and other liabilities .................................. 123 82
Amounts due to manager .................................................. 746 2,071
-------- --------
TOTAL LIABILITIES ................................................... 869 2,153
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
NET ASSETS IN LIQUIDATION (10,039,974 common shares issued and outstanding) $ 17,211 $117,006
======== ========
</Table>
See notes to consolidated financial statements.
3
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(UNAUDITED, IN THOUSANDS)
<Table>
<Caption>
Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2001
------------- ------------
REVENUES:
Interest income on mortgage loans ..................................... $ 376 $ 4,647
Income from commercial mortgage-backed securities ..................... -- 96
Interest income from short-term investments ........................... 345 837
--------- ---------
TOTAL REVENUES ...................................................... 721 5,580
--------- ---------
EXPENSES:
Management fees ....................................................... 130 790
General and administrative ............................................ 154 477
--------- ---------
TOTAL EXPENSES ...................................................... 284 1,267
--------- ---------
Loss on disposition of mortgage loan .................................... -- (500)
Changes in estimated net realizable value of certain assets ............. -- (3,710)
--------- ---------
INCREASE IN NET ASSETS IN LIQUIDATION FROM OPERATING ACTIVITIES ......... 437 103
Liquidating distributions to shareholders ............................... (70,280) (99,898)
--------- ---------
DECREASE IN NET ASSETS IN LIQUIDATION DURING THE PERIOD ................. (69,843) (99,795)
NET ASSETS IN LIQUIDATION, BEGINNING OF PERIOD .......................... 87,054 117,006
--------- ---------
NET ASSETS IN LIQUIDATION, END OF PERIOD ................................ $ 17,211 $ 17,211
========= =========
</Table>
See notes to consolidated financial statements.
4
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
FOR THE PERIOD FROM SEPTEMBER 26, 2000 THROUGH SEPTEMBER 30, 2000
(UNAUDITED; IN THOUSANDS)
<Table>
REVENUES:
Interest income on mortgage loans ......................................... $ 153
Income from commercial mortgage-backed securities ......................... 28
Interest income from short-term investments ............................... 3
---------
TOTAL REVENUES .......................................................... 184
---------
EXPENSES:
Interest expense .......................................................... 24
Management fees ........................................................... 1,705
General and administrative ................................................ 5
---------
TOTAL EXPENSES .......................................................... 1,734
---------
Gain (loss) on disposition of assets ........................................ --
Changes in estimated net realizable value of certain assets ................. --
---------
DECREASE IN NET ASSETS IN LIQUIDATION FROM OPERATING ACTIVITIES ............. (1,550)
Cash received from exercise of stock options ................................ 32
Liquidating distributions to shareholders ................................... --
---------
DECREASE IN NET ASSETS IN LIQUIDATION DURING THE PERIOD ..................... (1,518)
NET ASSETS IN LIQUIDATION, BEGINNING OF PERIOD .............................. 125,031
---------
NET ASSETS IN LIQUIDATION, END OF PERIOD .................................... $ 123,513
=========
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
=========
</Table>
See notes to consolidated financial statements.
5
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF INCOME (GOING CONCERN BASIS)
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
Period from Period from
July 1, January 1,
2000 2000
through through
September 25, September 25,
2000 2000
------------- ------------
REVENUES:
Interest income on mortgage loans ......................................................... $ 2,930 $ 8,937
Income from commercial mortgage-backed securities ......................................... 706 2,405
Operating income from real estate ......................................................... 882 5,240
Equity in losses of unconsolidated subsidiary, partnerships
and other real estate venture .......................................................... (228) (1,091)
Interest income from short-term investments ............................................... 78 217
-------- --------
TOTAL REVENUES .......................................................................... 4,368 15,708
-------- --------
EXPENSES:
Interest expense .......................................................................... 723 4,396
Management fees ........................................................................... 403 1,140
General and administrative ................................................................ 176 1,018
Depreciation .............................................................................. 213 1,188
Provision for loan losses ................................................................. -- 1,788
-------- --------
TOTAL EXPENSES .......................................................................... 1,515 9,530
-------- --------
INCOME BEFORE GAINS (LOSSES) AND MINORITY INTERESTS ......................................... 2,853 6,178
Loss on sale of commercial mortgage-backed securities .................................... (4,137) (4,267)
Gain associated with repayment of ADC loan arrangements .................................. 1,293 1,930
Gain on sale of real estate .............................................................. -- 1,485
Gain on sale of unconsolidated partnership investments ................................... -- 674
-------- --------
INCOME BEFORE MINORITY INTERESTS ............................................................ 9 6,000
Minority interests ....................................................................... -- 52
-------- --------
NET INCOME................................................................................... $ 9 $ 5,948
======== ========
EARNINGS PER COMMON SHARE:
Basic .................................................................................... $ -- $ 0.59
======== ========
Diluted .................................................................................. $ -- $ 0.59
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic .................................................................................... 10,000 10,000
======== ========
Diluted .................................................................................. 10,038 10,029
======== ========
</Table>
See notes to consolidated financial statements.
6
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS IN LIQUIDATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED, IN THOUSANDS)
<Table>
CASH FLOWS FROM OPERATING ACTIVITIES:
Increase in net assets in liquidation from operating activities ............................. $ 103
Adjustments to reconcile to net cash provided by operating activities:
Loss on disposition of mortgage loan ..................................................... 500
Changes in estimated net realizable value of certain assets .............................. 3,710
Decrease in receivables and other assets ................................................. 1,280
Decrease in interest receivable related to commercial mortgage-backed securities ......... 170
Increase in accounts payable and other liabilities ....................................... 41
Decrease in amounts due to manager ....................................................... (1,325)
Amortization of prepaid insurance ........................................................ 176
--------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................................... 4,655
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in mortgage loans ............................................................... (730)
Principal collected on mortgage loans ....................................................... 73,931
Proceeds from sale of commercial mortgage-backed securities ................................. 16,441
Distributions from unconsolidated subsidiary ................................................ 1,950
--------
NET CASH PROVIDED BY INVESTING ACTIVITIES ........................................... 91,592
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Liquidating distributions paid to common shareholders ....................................... (99,898)
--------
NET CASH USED IN FINANCING ACTIVITIES ............................................... (99,898)
--------
NET DECREASE IN CASH AND CASH EQUIVALENTS ...................................................... (3,651)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................................. 9,801
--------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................................... $ 6,150
========
</Table>
See notes to consolidated financial statements.
7
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS IN LIQUIDATION
FOR THE PERIOD FROM SEPTEMBER 26, 2000 THROUGH SEPTEMBER 30, 2000
(UNAUDITED, IN THOUSANDS)
<Table>
CASH FLOWS FROM OPERATING ACTIVITIES:
Decrease in net assets in liquidation from operating activities.......................... $(1,550)
Adjustments to reconcile to net cash provided by operating activities:
Increase in receivables and other assets............................................... (156)
Decrease in interest receivable related to commercial mortgage-backed securities....... 142
Decrease in accounts payable and other liabilities..................................... (33)
Increase in amounts due to manager..................................................... 1,705
Amortization of prepaid insurance...................................................... 4
-------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................................ 112
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in mortgage loans........................................................... (531)
-------
NET CASH USED IN INVESTING ACTIVITIES............................................ (531)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock.............................................. 32
-------
NET CASH PROVIDED BY FINANCING ACTIVITIES ....................................... 32
-------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................................. (387)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................................ 5,726
-------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................... $ 5,339
=======
SUPPLEMENTAL INFORMATION:
Interest paid............................................................................. $ -
=======
</Table>
See notes to consolidated financial statements.
8
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS (GOING CONCERN BASIS)
FOR THE PERIOD FROM JANUARY 1, 2000 THROUGH SEPTEMBER 25, 2000
(UNAUDITED, IN THOUSANDS)
<Table>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................................... $ 5,948
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses .................................................................... 1,788
Depreciation ................................................................................. 1,188
Gain associated with repayment of ADC loan arrangements ...................................... (1,930)
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)
Gain on sale of interest rate cap ............................................................ (19)
Amortization of prepaid insurance ............................................................ 172
Discount amortization on commercial mortgage-backed securities ............................... (282)
Amortization of compensatory stock options and unearned trust manager compensation ........... (254)
Amortization of loan commitment and extension fees ........................................... (592)
Receipt of loan extension fees ............................................................... 460
Increase in receivables and other assets ..................................................... (219)
Increase in interest receivable related to commercial mortgage-backed securities ............. (40)
Decrease in accounts payable and other liabilities ........................................... (1,428)
Decrease in minority interests ............................................................... (26)
Decrease in amounts due to manager ........................................................... (163)
Equity in losses of unconsolidated subsidiary, partnerships and
other real estate venture .............................................................. 1,091
Distributions from unconsolidated partnership ................................................ 23
--------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................................... 7,825
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in mortgage loans ................................................................... (8,480)
Investments in ADC loan arrangements ............................................................ (1,034)
Principal collected on mortgage loans ........................................................... 10,398
Principal and interest collected on ADC loan arrangements ....................................... 17,953
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)
Investments in unconsolidated subsidiary ........................................................ (282)
Distributions from unconsolidated subsidiary and partnerships ................................... 3,493
--------
NET CASH PROVIDED BY INVESTING ACTIVITIES ............................................... 49,576
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings under repurchase agreement .............................................. (9,856)
Repayment of borrowings under line of credit .................................................... (38,641)
Proceeds from sale of interest rate cap ......................................................... 30
Dividends paid to common shareholders ........................................................... (7,812)
--------
NET CASH USED IN FINANCING ACTIVITIES ................................................... (56,279)
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................................................... 1,122
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................................................... 4,604
--------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................................... $ 5,726
========
SUPPLEMENTAL INFORMATION:
Interest paid ................................................................................... $ 4,438
========
Minority interest distributions associated with ADC loan arrangements ........................... $ 350
========
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
========
</Table>
See notes to consolidated financial statements.
9
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
1. ORGANIZATION AND RELATIONSHIPS
AMRESCO Capital Trust (the "Company"), a real estate investment trust ("REIT"),
was organized under the laws of the State of Texas. The Company was formed to
take advantage of certain mid- to high-yield lending and investment
opportunities in real estate related assets, including various types of
commercial mortgage loans (including, among others, participating loans,
mezzanine loans, acquisition loans, construction loans, rehabilitation loans and
bridge loans), commercial mortgage-backed securities ("CMBS"), commercial real
estate, equity investments in joint ventures and/or partnerships, and certain
other real estate related assets. The Company was initially capitalized on
February 2, 1998 and commenced operations on May 12, 1998, concurrent with the
completion of its initial public offering ("IPO") of 9,000,000 common shares and
private placement of 1,000,011 common shares. 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, the Manager is
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 is entitled to receive reimbursements
for its quarterly operating deficits, if any. 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. The base management fee and operating deficit reimbursements, if
any, are payable quarterly in arrears.
During the three and nine months ended September 30, 2001, base management fees
charged to the Company totaled $76,000 and $528,000, respectively. During these
same periods, operating deficit reimbursements totaled $54,000 and $1,136,000,
respectively, of which $0 and $884,000 were attributable to termination benefits
which were paid to departing employees of the Manager during the three and nine
months ended September 30, 2001. Amounts approximating these termination
benefits ($874,000), and those expected to be payable to the remaining employees
of the Manager, were included in amounts due to manager at December 31, 2000. At
September 30, 2001, base management fees and operating deficit reimbursements
due to the Manager totaled $130,000. Termination benefits expected to be borne
by the Company through future operating deficit reimbursements totaled $616,000
at September 30, 2001.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10,
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting principles
for complete financial statements.
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. 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. Under the liquidation basis of accounting, statements
of income, earnings per share data and an amount representing total
comprehensive income are not presented.
10
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Under liquidation basis accounting, the Company's
investment in AMREIT II, Inc., a taxable subsidiary, is carried at its estimated
net realizable value. 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. All significant intercompany balances and transactions have been
eliminated in consolidation.
The accompanying financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000 (the
"10-K"). The notes to the financial statements included herein highlight
significant changes to the notes included in the 10-K.
In the opinion of management, the accompanying consolidated financial statements
include all adjustments (consisting of normal and recurring accruals) necessary
for a fair presentation of the interim financial statements. Operating results
for the periods presented are not necessarily indicative of the results that may
be expected for the entire fiscal year or any other interim period.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities at the date of the
financial statements and revenues and expenses for the reporting period. The
valuation of the Company's remaining mortgage loan is a significant estimate.
Actual results may differ from this estimate.
3. MORTGAGE LOANS
As of September 30, 2001, the Company held one mortgage loan investment. The
loan, which is fully funded, has an outstanding principal balance of $14,700,000
and an estimated net realizable value of $11,563,000. The loan provides for
interest at a pay rate of 10% per annum and an accrual rate of 12% per annum.
The loan is scheduled to mature on March 31, 2002; however, the borrower has an
option to extend the maturity date to March 31, 2003 provided that it is not in
violation of any of the conditions established in the loan agreement. On June
30, 2001, the Company reduced the carrying value of this loan and the related
accrual rate interest receivable by $3,137,000 and $673,000, respectively. At
September 30, 2001, the carrying value of the accrual rate interest receivable
was $0.
A summary of mortgage loan activity for the nine months ended September 30, 2001
is as follows (in thousands):
<Table>
Balance, beginning of period........................ $ 88,401
Investments in loans................................ 730
Collections of principal............................ (73,931)
Loss on disposition of loan......................... (500)
Change in estimated net realizable value of
remaining loan................................ (3,137)
--------
Balance, end of period.............................. $ 11,563
========
</Table>
11
4. ASSET DISPOSITIONS
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, are included in accounts payable
and other liabilities at September 30, 2001.
During the nine months ended September 30, 2001, the following loans were
liquidated (dollars in thousands):
<Table>
<Caption>
At Disposition Date
---------------------------
Disposition Amount Amount
Date Location Outstanding Repaid
----------- ------------ ------------- ---------
02/01/01 Lexington, MA $ 4,443 $ 4,443
06/01/01 Houston, TX 11,800 11,800
06/22/01 Irvine, CA 15,306 15,306
06/26/01 Wayland, MA 42,882 42,382
-------- --------
$ 74,431 $ 73,931
======== ========
</Table>
On March 5, 2001, a partnership controlled by AMREIT II, Inc. (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. In connection with the sale, the non-recourse mortgage was fully
extinguished. On March 6, 2001, the Company received $1,800,000 from the
partnership. On June 6, 2001, the Company received an additional $150,000 from
the partnership. On June 30, 2001, the Company increased the carrying value of
its investment in AMREIT II, Inc. by $100,000. At September 30, 2001, the
estimated net realizable value of the Company's remaining investment in its
taxable subsidiary totaled $150,000.
5. LIQUIDATING DISTRIBUTIONS
During the nine months ended September 30, 2001, the Company made three
liquidating distributions totaling $99,898,000 (or $9.95 per share).
On January 17, 2001, the Company made its third liquidating distribution
pursuant to the Plan of Liquidation and Dissolution. The 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. For tax purposes, this
distribution was deemed to have been paid by the Company on December 31, 2000.
Similarly, this distribution was deemed (for tax purposes) to have been received
by the Company's shareholders on December 31, 2000.
12
On March 30, 2001, the Company made its fourth liquidating distribution pursuant
to the Plan of Liquidation and Dissolution. This distribution, totaling
$26,104,000 (or $2.60 per share), was declared on March 8, 2001 and was payable
to shareholders of record on March 19, 2001.
On August 9, 2001, the Company made its fifth liquidating distribution pursuant
to the Plan of Liquidation and Dissolution. The distribution, totaling
$70,280,000 (or $7.00 per share), was declared on July 19, 2001 and was payable
to shareholders of record on July 30, 2001.
6. SEGMENT INFORMATION
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 does not have, nor does it rely upon, any major
customers. All of the Company's revenues were derived from U.S. operations.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
AMRESCO Capital Trust (the "Company") is a real estate investment trust ("REIT")
which was formed in early 1998 to take advantage of certain mid- to high-yield
lending and investment opportunities in real estate related assets, including
various types of commercial mortgage loans (including, among others,
participating loans, mezzanine loans, acquisition loans, construction loans,
rehabilitation loans and bridge loans), commercial mortgage-backed securities
("CMBS"), commercial real estate, equity investments in joint ventures and/or
partnerships, and certain other real estate related assets. Subject to the
direction and oversight of the Board of Trust Managers, the Company's day-to-day
operations are managed by AMREIT Managers, L.P. (the "Manager"), an affiliate of
AMRESCO, INC. On July 2, 2001, AMRESCO, INC. filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code. The Manager was
not included in this bankruptcy filing.
The Company commenced operations on May 12, 1998 concurrent with the completion
of its initial public offering of 9,000,000 common shares and private placement
of 1,000,011 common shares with AMREIT Holdings, Inc., a wholly-owned subsidiary
of AMRESCO, INC. From the Company's inception of operations through July 5,
2000, AMRESCO, INC. and AMREIT Holdings, Inc. collectively owned 1,500,111
shares, or approximately 15%, of its outstanding common stock. On July 5, 2000,
all of these common shares were sold to affiliates of Farallon Capital
Management, L.L.C. Historically, the Company's investment activities were
focused in three primary areas: loan investments, CMBS and equity investments in
real estate.
In early 2000, the Board of Trust Managers approved a course of action to market
and sell the Company's non-core assets, including its CMBS holdings and its
equity investments in real estate. As of March 5, 2001, all of the Company's
non-core assets had been sold.
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. 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. Furthermore, no
discussion of the changes in operating results between the current fiscal
quarter and year-to-date period and the corresponding periods of the preceding
fiscal year is provided in this Form 10-Q. As noted above, the Company's
operating results for the three and nine months ended September 30, 2001 are
presented under the liquidation basis of accounting. During the period from July
1, 2000 through September 25, 2000 and the period from January 1, 2000 through
September 25, 2000, the Company's operating results were presented in accordance
with the historical cost (or going concern) basis of accounting.
CHANGES IN NET ASSETS IN LIQUIDATION
The following discussion of changes in net assets in liquidation should be read
in conjunction with the consolidated financial statements and notes thereto
included in "Item 1. Financial Statements".
Under the liquidation basis of accounting, net assets in liquidation decreased
by $69,843,000 and $99,795,000 during the three and nine months ended September
30, 2001, respectively.
The Company's sources of revenue for the three and nine months ended September
30, 2001, totaling $721,000 and $5,580,000, respectively, were as follows:
o $376,000 and $4,647,000, respectively, from five mortgage loan investments,
four of which were liquidated. As of September 30, 2001, the Company held
one mortgage loan investment.
o $0 and $96,000, respectively, from investments in CMBS (the Company's
remaining CMBS holdings were sold on January 18, 2001 at their then current
carrying value).
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o $345,000 and $837,000, respectively, of interest income from short-term
investments.
During the three and nine months ended September 30, 2001, the Company's
expenses were comprised of the following:
o $130,000 and $790,000, respectively, of management fees incurred pursuant
to the terms of the amended Management Agreement. During the three and nine
months ended September 30, 2001, base management fees charged to the
Company totaled $76,000 and $528,000, respectively. During these same
periods, operating deficit reimbursements totaled $54,000 and $1,136,000,
respectively, of which $0 and $884,000 were attributable to termination
benefits which were paid to departing employees of the Manager during the
three and nine months ended September 30, 2001. Amounts approximating these
termination benefits ($874,000), and those expected to be payable to the
remaining employees of the Manager, were included in amounts due to manager
at December 31, 2000.
o $154,000 and $477,000, respectively, of general and administrative costs,
including $24,000 and $104,000 for professional services, $59,000 and
$176,000, respectively, for directors and officers' insurance, $15,000 and
$45,000, respectively, of fees paid to the Company's Chairman of the Board
of Trust Managers and Chief Executive Officer for his services to the
Company, $30,000 and $95,000, respectively, of fees paid to the Company's
other trust managers for their services to the Company, and $26,000 and
$57,000, respectively, of other miscellaneous expenses.
In June 2001, the Company realized a loss of $500,000 in connection with the
discounted payoff of its Wayland (Massachusetts) office loan. No gain or loss
was realized in connection with three other loan dispositions (repayments) which
occurred during the nine months ended September 30, 2001. On June 30, 2001, the
Company reduced the carrying value of its remaining mortgage loan investment
(including the accrual rate interest receivable related thereto) by $3,810,000
and it increased the carrying value of its investment in AMREIT II, Inc. (its
unconsolidated taxable subsidiary) by $100,000. During the three and nine months
ended September 30, 2001, liquidating distributions paid to common shareholders
totaled $70,280,000 and $99,898,000, respectively.
LIQUIDATING DISTRIBUTIONS
As described above, 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. During the nine months ended September 30, 2001, the Company made
three liquidating distributions totaling $99,898,000 (or $9.95 per share).
Liquidating distributions of $3,514,000 (or $0.35 per share), $26,104,000 (or
$2.60 per share) and $70,280,000 (or $7.00 per share) were paid to the Company's
shareholders on January 17, 2001 (the "third liquidating distribution"), March
30, 2001 (the "fourth liquidating distribution") and August 9, 2001 (the "fifth
liquidating distribution"), respectively. To date, the Company has made
liquidating distributions totaling $106,424,000 (or $10.60 per share).
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 its loan disposition, 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. 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
timetable will be met or that the anticipated proceeds from the liquidation will
be achieved. Tax basis income differs from the operating results reported for
financial reporting purposes under 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, the increase/decrease in net assets
in liquidation from operating activities is 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.
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REMAINING ASSETS
At the date of this report, the Company's investment portfolio is comprised of
one mortgage loan and a residual interest in its unconsolidated taxable
subsidiary.
The mortgage loan (a mezzanine investment) has a commitment amount and an
outstanding principal balance of $14,700,000. The loan provides for interest at
a pay rate of 10% per annum and an accrual rate of 12% per annum. The
incremental interest earned at the accrual rate is due (from the borrower) at
maturity. To the extent that the underlying property generates excess cash flow
prior to maturity, such cash flow must be used by the borrower to service the
accrual rate interest. The loan also provides the Company with the opportunity
for profit participation above the contractual accrual rate. The loan is
scheduled to mature on March 31, 2002; however, the borrower has an option to
extend the maturity date to March 31, 2003 provided that it is not in violation
of any of the conditions established in the loan agreement. The loan provides
for an extension fee of $147,000 (or 1% of the loan commitment amount) to be
paid to the Company at the time the extension option is exercised by the
borrower. The repayment of the Company's second lien loan is subordinated to a
$26.2 million non-recourse first lien mortgage provided by an unaffiliated third
party. The first lien mortgage, which matures on March 30, 2002, requires
floating rate interest payments throughout its term. From March 31, 2001 through
March 30, 2002, the first lien mortgage also requires monthly principal
reductions of approximately $16,500. The borrower has an option to extend the
maturity date of the first lien loan to March 30, 2003; in the event that this
option is exercised, the borrower will be required to make monthly principal
reductions under the first lien mortgage of approximately $18,000 during the
period from March 31, 2002 through March 30, 2003. The first lien loan and the
Company's second lien loan are secured by a 301,000 square foot office building
in Richardson, Texas. Inet Technologies, Inc. (Nasdaq: INTI) and Macromedia,
Inc. (Nasdaq: MACR) lease approximately 80% and 19%, respectively, of the
building's net rentable area. On June 30, 2001, the Company reduced the carrying
value of its remaining loan by $3,137,000, from $14,700,000 to $11,563,000;
additionally, the Company reduced the carrying value of the related accrual rate
interest receivable by $673,000, from $673,000 to $0. At September 30, 2001, the
carrying values of the remaining loan and the associated accrual rate interest
receivable were $11,563,000 and $0, respectively.
At September 30, 2001, the estimated net realizable value of the Company's
remaining investment in its unconsolidated taxable subsidiary totaled $150,000.
In March 2001, a partnership controlled by the subsidiary sold a mixed-use
property to an unaffiliated buyer; in connection with this sale, the partnership
received a $100,000 promissory note. The amount of the note, which was collected
(by the partnership) on July 24, 2001, is included in management's estimate of
the value that is expected to be derived from the subsidiary in connection with
the wrap-up of its activities (including the wind-up of the partnership's
affairs). Although there can be no assurances, the residual interest in the
subsidiary is expected to be fully realized by the Company during the fourth
quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of liquidity and capital resources should be read in
conjunction with the consolidated financial statements and notes thereto
included in "Item 1. Financial Statements."
The Company's principal demands for liquidity are cash for operations, including
funds which are needed to pay its management fees and 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 proceeds from the final loan disposition. The Company's principal sources
of liquidity are its cash reserves and the pay rate interest income from its
remaining mortgage loan. The Company believes that its cash flow from
operations, its cash reserves and the proceeds from its final loan disposition
will be sufficient to meet the Company's currently expected liquidity and
capital requirements.
The Company's $35 million line of credit matured on April 30, 2001. No amounts
were borrowed under the credit facility during the four months ended April 30,
2001.
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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 "taxable 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 distributions 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.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q are not based on historical facts
and are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company intends that
forward-looking statements be subject to such Act and any similar state or
federal laws. Forward-looking statements, which are based on various
assumptions, include statements regarding the intent, belief or current
expectations of the Company, its Manager, and their respective Trustees or
directors and officers, and may be identified by reference to a future period or
periods or by use of forward-looking terminology such as "intends," "may,"
"could," "will," "believe," "expect," "anticipate," "plan," or similar terms or
variations of those terms or the negative of those terms. Actual results could
differ materially from those set forth in forward-looking statements due to
risks, uncertainties and changes with respect to a variety of factors,
including, but not limited to, changes in international, national, regional or
local economic environments, changes in prevailing interest rates, credit 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 and 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a party to one financial instrument, a mezzanine investment,
which is subject to market risk. The mezzanine loan, the repayment of which is
subordinated to a senior mortgage loan, is secured by a second lien. The
Company's mortgage loan involves, to some degree, an element of interest rate
risk. Additionally, this financial instrument is subject to real estate market
risk. The Company is a party to certain other financial instruments, including
trade receivables and payables and amounts due to its manager which, due to
their short-term nature, are not subject to market risk. For a discussion of
market risk exposures, reference is made to Item 7A. "Quantitative and
Qualitative Disclosures About Market Risk" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000. The market risk exposures
described therein have not materially changed since December 31, 2000;
accordingly, no additional discussion or analysis is provided in this Form 10-Q.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Exhibit Index
None
(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
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMRESCO CAPITAL TRUST
Registrant
Date: October 26, 2001 By: /s/Thomas R. Lewis II
---------------------
Thomas R. Lewis II
Senior Vice President, Chief Financial
and Accounting Officer, Controller &
Secretary (Principal Financial and
Accounting Officer)
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