1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 2400, LB
342, Dallas, Texas 75201-7424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 953-7700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
10,006,111 shares of common stock, $.01 par value per share, as of
November 9, 1998.
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AMRESCO CAPITAL TRUST
INDEX
Page No.
----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 1998 and February 2, 1998 3
Consolidated Statements of Income - For the Three Months Ended September 30,
1998 and the Period from February 2, 1998 (Date of Initial Capitalization) 4
through September 30, 1998
Consolidated Statement of Changes in Shareholders' Equity - For the Period
from February 2, 1998 (Date of Initial Capitalization) through September 5
30, 1998
Consolidated Statement of Cash Flows - For the Period from February 2, 1998
(Date of Initial Capitalization) through September 30, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 27
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
AMRESCO CAPITAL TRUST
CONSOLIDATED BALANCE SHEETS
(UNAUDITED; DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
September 30, February 2,
1998 1998
------------- -------------
ASSETS
Mortgage loans, net ........................................................ $ 79,657 $ --
Commercial mortgage-backed securities - available for sale (at fair value) . 30,685 --
Real estate, net of accumulated depreciation of $24 ........................ 19,806 --
Investments in unconsolidated subsidiary and other real estate ventures .... 15,184 --
Receivables and other assets ............................................... 1,662 --
Cash and cash equivalents .................................................. 3,885 1
------------- -------------
TOTAL ASSETS .......................................................... $ 150,879 $ 1
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and other liabilities ................................... $ 6,416 $ --
Repurchase agreement ..................................................... 5,123 --
------------- -------------
TOTAL LIABILITIES ...................................................... 11,539 --
------------- -------------
Minority interests ....................................................... 2,611 --
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 50,000,000 shares authorized, no shares
issued ................................................................. -- --
Common stock, $.01 par value, 200,000,000 shares authorized, 10,006,111
and 100 shares issued and outstanding ................................. 100 --
Additional paid-in capital ............................................... 142,191 1
Unearned stock compensation .............................................. (2,289) --
Accumulated unrealized losses on securities available for sale ........... (4,301) --
Retained earnings ........................................................ 1,028 --
------------- -------------
TOTAL SHAREHOLDERS' EQUITY ............................................. 136,729 1
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................. $ 150,879 $ 1
============= =============
See notes to consolidated financial statements.
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AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND THE
PERIOD FROM FEBRUARY 2, 1998 (DATE OF INITIAL CAPITALIZATION)
THROUGH SEPTEMBER 30, 1998
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
Period from
February 2,
Three Months 1998
Ended through
September 30, September 30,
1998 1998
-------------- --------------
REVENUES:
Interest income on mortgage loans ................................... $ 1,188 $ 1,328
Income from commercial mortgage-backed securities ................... 560 597
Operating income from real estate ................................... 91 108
Equity in unconsolidated subsidiary and other real estate ventures .. 326 486
Interest income from short-term investments ......................... 827 1,734
-------------- --------------
TOTAL REVENUES .................................................... 2,992 4,253
-------------- --------------
EXPENSES:
Interest expense .................................................... 1 1
Management fees ..................................................... 439 632
General and administrative .......................................... 755 953
Depreciation ........................................................ 21 24
Participating interest in mortgage loans ............................ 3 3
Provision for loan losses ........................................... 501 611
-------------- --------------
TOTAL EXPENSES .................................................... 1,720 2,224
-------------- --------------
NET INCOME ............................................................ $ 1,272 $ 2,029
============== ==============
EARNINGS PER COMMON SHARE:
Basic .............................................................. $ 0.12 $ 0.34
============== ==============
Diluted ............................................................ $ 0.12 $ 0.34
============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic .............................................................. 10,000 5,892
============== ==============
Diluted ............................................................ 10,006 5,896
============== ==============
See notes to consolidated financial statements.
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AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 2, 1998 (DATE OF INITIAL
CAPITALIZATION) THROUGH SEPTEMBER 30, 1998
(UNAUDITED; DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock Accumulated
$.01 Par Value Unrealized
------------------------ Losses on
Additional Unearned Securities Total
Number of Paid-in Stock Available Retained Shareholders'
Shares Amount Capital Compensation For Sale Earnings 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) -
Compensatory options granted..... 2,484 (2,484) -
Amortization of unearned trust
manager compensation .......... 33 33
Amortization of compensatory
options ....................... 252 252
Unrealized loss on securities
available for sale............. $(4,301) (4,301)
Distributions paid to common
shareholders................... $(1,001) (1,001)
Net income....................... 2,029 2,029
---------- ---- -------- ------- ------- ------ --------
Balance at September 30, 1998.... 10,006,111 $100 $142,191 $(2,289) $(4,301) $1,028 $136,729
========== ==== ======== ======= ======= ====== ========
See notes to consolidated financial statements.
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AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 2, 1998
(DATE OF INITIAL CAPITALIZATION)
THROUGH SEPTEMBER 30, 1998
(UNAUDITED; DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 2,029
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses .................................................... 611
Depreciation ................................................................. 24
Amortization of prepaid assets ............................................... 104
Discount amortization on CMBS ................................................ (54)
Compensatory stock options ................................................... 252
Amortization of unearned trust manager compensation .......................... 33
Amortization of loan commitment fees ......................................... (74)
Receipt of loan commitment fees .............................................. 1,220
Increase in receivables and other assets ..................................... (1,766)
Increase in CMBS interest receivable ......................................... (377)
Increase in accounts payable and other liabilities ........................... 1,396
Equity in undistributed earnings of unconsolidated subsidiary and other real
estate ventures ........................................................... (486)
Distributions from unconsolidated subsidiary and other real estate ventures .. 513
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................... 3,425
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of mortgage loans ................................................... (25,807)
Investments in mortgage loans ................................................... (55,607)
Purchase of commercial mortgage-backed securities ............................... (34,480)
Investments in real estate ...................................................... (17,219)
Investments in unconsolidated subsidiary and other real estate ventures ......... (15,286)
---------
NET CASH USED IN INVESTING ACTIVITIES ................................... (148,399)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ...................................... 139,717
Proceeds from borrowings under repurchase agreement ............................. 5,123
Proceeds from other financing ................................................... 5,020
Distributions paid to common shareholders ....................................... (1,001)
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............................... 148,859
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................................... 3,885
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................................... --
---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................... $ 3,885
=========
SUPPLEMENTAL INFORMATION:
Minority interest contributions associated with ADC arrangements ................ $ 2,611
=========
See notes to consolidated financial statements.
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AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
SEPTEMBER 30, 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, construction loans, rehabilitation loans and bridge loans),
mortgage-backed securities ("MBS"), commercial real estate, equity investments
in joint ventures and/or partnerships, and certain other real estate related
assets. 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").
Pursuant to the terms of a Management Agreement dated as of May 12, 1998 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 incentive
compensation 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, exceeds a certain threshold. The base management fee and
the incentive fee, if any, are payable quarterly in arrears. During the three
months ended September 30, 1998 and the period from May 12, 1998 (inception of
operations) through September 30, 1998, base management fees charged to the
Company totaled $298,000 and $421,000, respectively. No incentive fees were
charged to the Company during either period. 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 and the remaining 30% of the options are exercisable at an
option price of $18.75 per share.
AMREIT Holdings, Inc. ("Holdings"), a member of the AMRESCO Group, currently
owns 1,500,011 shares, or approximately 15% of the Company's outstanding common
stock. Holdings acquired 1,000,011 shares at the IPO price of $15.00 per share
pursuant to the Private Placement; the remaining 500,000 shares were acquired
through the IPO. AMRESCO owns 100 shares of the Company's outstanding common
shares; these shares were acquired on February 2, 1998 in connection with the
initial capitalization of the Company.
Subject to certain limited exceptions, AMRESCO has granted to the Company a
right of first refusal with respect to the first $100 million of targeted
mortgage loan investments which are identified by or to any member of the
AMRESCO Group during any calendar quarter and all MBS (other than MBS issued in
securitizations sponsored in whole or in part by any member of the AMRESCO
Group). Additionally, the Company has entered into a Correspondent Agreement
with Holliday Fenoglio Fowler ("HFF"), a member of the AMRESCO Group, pursuant
to which HFF presents to the Company (on a non-exclusive basis) investment
opportunities identified by HFF which meet the investment criteria and
objectives of the Company.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10,
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting principles
for complete financial statements. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. The Company
accounts for its investment in AMREIT II, Inc., a taxable subsidiary, using the
equity method of accounting, and thus reports its share of income or loss based
on its ownership interest. The Company uses the equity method of accounting
because a majority of the voting common stock of AMREIT II, Inc. is owned by the
Manager and because the Company is entitled to substantially all of the economic
benefits of ownership of AMREIT II, Inc. The accompanying financial statements
should be read in conjunction with the Company's February 2, 1998 audited
balance sheet and notes thereto included in the Company's prospectus dated May
6, 1998 (the
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"Prospectus"). The notes to the financial statements included herein highlight
significant changes to the notes included in the Prospectus.
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 ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the entire fiscal year or any other interim
period.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities at the date of the
financial statements and revenues and expenses for the reporting period.
Significant estimates include the valuation of commercial mortgage-backed
securities, the provision for loan losses and the determination of the fair
value of certain share option awards. Actual results may differ from those
estimates and assumptions.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ADC ARRANGEMENTS
The Company provides financing through certain real estate loan arrangements
that, because of their nature, qualify 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 evaluates each investment
to determine whether loan, joint venture or real estate accounting is
appropriate; such determination affects 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 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 accounts 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", SFAS No. 66, "Accounting for Sales of Real Estate" and SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". Accordingly, costs associated with the acquisition,
development and construction of a real estate project are capitalized as a cost
of that project during its construction period. When a real estate project is
substantially completed and held available for occupancy, rental revenues and
operating costs are recognized as they accrue. Depreciation on buildings and
improvements is provided under the straight-line method over an estimated useful
life of 39 years for office and industrial buildings and 27.5 years for
multi-family projects. Maintenance and repair costs are charged to operations as
incurred, while significant capital improvements and replacements are
capitalized. Leasing commissions and leasehold improvements are deferred and
amortized over the terms of the related leases. Other deferred charges are
amortized over terms applicable to the expenditure.
The Company accounts 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 reports its share of income or
loss under the equity method of accounting based on its preferential ownership
interest.
MORTGAGE LOANS
Mortgage loans are stated at face value, net of deferred commitment fees and
associated direct costs, if any, and net of an allowance for loan losses. In
accordance with the provisions of SFAS No. 91, "Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases", loan commitment fees and incremental direct costs, if any, are
deferred and recognized over the life of the loan as an adjustment of yield
using the interest method.
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PROVISION FOR LOAN LOSSES
The Company provides for estimated loan losses by establishing an allowance for
losses through a charge to earnings. Management performs a periodic evaluation
of the allowance with consideration given to economic conditions and trends,
collateral values and other relevant factors.
COMMERCIAL MORTGAGE-BACKED SECURITIES
The Company's investments in commercial mortgage-backed securities ("CMBS") are
classified as available for sale and are carried at estimated fair value as
determined by quoted market rates when available, otherwise by discounting
estimated cash flows at current market rates. Any unrealized gains or losses are
excluded from earnings and reported as a separate component of shareholders'
equity in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". If a decline in fair value is deemed to be other
than temporary, it is charged to earnings during the period such determination
is made. Income from CMBS is 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. At September
30, 1998, cash and cash equivalents includes restricted cash of $542,000. The
restricted cash serves as collateral for an irrevocable standby letter of credit
in a like amount which was issued on behalf of a partnership in which the
Company, through certain of its subsidiaries, has a controlling interest. The
letter of credit, which expires on July 15, 1999, was issued in connection with
the partnership's procurement of permanent financing.
STOCK-BASED COMPENSATION
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for its stock option awards
to the extent an election is available. Accordingly, the Company will, in its
annual Form 10-K, make pro forma disclosures of net income and earnings per
common share as if the fair value based method of accounting defined in SFAS No.
123, "Accounting for Stock-Based Compensation" had been applied.
EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") is computed using the guidance in SFAS No.
128, "Earnings Per Share". Under SFAS No. 128, the Company is required to
present both basic and diluted EPS on the face of its consolidated statement of
income. Basic EPS excludes dilution and is 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
The Company intends to qualify and will elect to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the
"Code"), commencing with its initial taxable year ended December 31, 1998. 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. Accordingly, no provision for income taxes has been made in the
consolidated financial statements.
DISTRIBUTIONS
The Company intends to make quarterly distributions to its shareholders which
will be designed to allow the Company to qualify as a REIT under the Code.
Earnings and profits, which will determine the taxability of distributions to
shareholders, differs from income reported for financial reporting purposes due
primarily to differences in methods of accounting for ADC arrangements and
stock-based compensation awards and the nondeductibility, for tax purposes, of
the Company's loan loss reserve. As a result, net income under generally
accepted accounting principles is not necessarily an indicator of distributions
to be made by the Company.
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4. INVESTMENT ACTIVITY
Concurrent with the commencement of its operations on May 12, 1998, the Company
acquired two loans from AMRESCO Funding Corporation, a member of the AMRESCO
Group. Additionally, the Company originated nine loans during the period from
May 12, 1998 through September 30, 1998. 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, including
accrued interest of $812,000. 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
is 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 which are required
to be made under the five loan agreements. At September 30, 1998, ACFI's
contingent obligation for these additional advances approximated $2,116,000. The
proceeds received from ACFI are accounted for as a financing and are included in
other liabilities as of September 30, 1998. The Company's loan investments are
summarized as follows (dollars in thousands):
Amount
Outstanding at Interest
Date of Initial Collateral Commitment September 30, Interest Accrual
Investment Location Position Amount 1998 Pay Rate Rate
- ------------------------- -------------------- --------------- ------------------ ----------------- ------------ ------------
May 12, 1998 Columbus, OH Second Lien $ 7,000 $ 5,839 15.0% 15.0%
May 12, 1998 Richardson, TX Second Lien 14,700 3,816 10.0% 12.0%
June 1, 1998 Houston, TX First Lien 11,800 9,857 12.0% 12.0%
June 12, 1998 Pearland, TX First Lien 12,827 2,185 10.0% 11.5%
June 17, 1998 San Diego, CA First Lien 5,560 3,991 10.0% 13.5%
June 19, 1998 Houston, TX First Lien 24,000 3,725 12.0% 12.0%
June 22, 1998 Wayland, MA First Lien 45,000 17,132 10.5% 10.5%
July 1, 1998 Dallas, TX Ptrshp Interests 10,068 6,283 10.0% 15.0%
July 2, 1998 Washington, D.C. First Lien 7,000 5,351 10.5% 10.5%
July 10, 1998 Pasadena, TX First Lien 3,350 2,038 10.0% 14.0%
September 1, 1998 Los Angeles, CA First Lien 18,419 17,413 10.0% 12.0%
September 30, 1998 Richardson, TX First Lien 13,001 7,674 10.0% 14.0%
September 30, 1998 San Antonio, TX First Lien 3,266 1,554 22.0% 22.0%
September 30, 1998 San Antonio, TX First Lien 8,400 1,949 10.0% 14.0%
September 30, 1998 Galveston, TX First Lien 3,664 3,664 10.0% 15.0%
September 30, 1998 Ft. Worth, TX Ptrshp Interests 2,650 2,587 10.5% 16.0%
September 30, 1998 Austin, TX First Lien 6,325 6,247 10.0% 16.0%
September 30, 1998 Dallas, TX First Lien 3,015 2,364 10.0% 13.0%
September 30, 1998 Norwood, MA First Lien 8,765 7,441 10.0% 12.5%
-------- --------
$208,810 $111,110
======== ========
Eight of the nineteen loans provide for profit participation above the
contractual accrual rate; four of these eight facilities are included in the
pool of loans in which ACFI has a contractual right to collect certain excess
proceeds, as described above. The loan investments are classified as follows
(dollars in thousands):
Loan Amount Balance Sheet
Outstanding at Amount at
September 30, 1998 September 30, 1998
------------------ ------------------
Mortgage loans, net $ 81,413 $ 79,657
Real estate, net 17,575 19,806
Investment in real
estate ventures 12,122 11,726
-------- --------
$111,110 $111,189
======== ========
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The differences between the outstanding loan amounts and the balance sheet
amounts are due primarily to loan commitment fees, the allowance for loan
losses, minority interests and accumulated depreciation. At September 30, 1998,
mortgage loans are presented net of an allowance for loan losses of $611,000.
Real estate, which is comprised entirely of amounts arising under ADC
arrangements, consisted of the following at September 30, 1998 (dollars in
thousands):
Land $6,118
Buildings and improvements 3,194
Construction in progress 10,518
-------
Total 19,830
Less: Accumulated depreciation (24)
-------
$19,806
=======
As of September 30, 1998, the Company has outstanding commitments to fund
approximately $97.7 million under 19 loan agreements, of which $2.1 million is
reimbursable by ACFI. The Company is obligated to fund these commitments to the
extent that the borrowers are not in violation of any of the conditions
established in the loan agreements. Commitments generally have fixed expiration
dates or other termination clauses and may require the payment of a fee if
amounts are repaid to the Company during certain prepayment lock-out periods. A
portion of the commitments could expire without being drawn upon and therefore
the total commitment amounts do not necessarily represent future cash
requirements.
During the period from May 12, 1998 (inception of operations) through September
30, 1998, the Company, either directly or through its unconsolidated subsidiary,
acquired six commercial mortgage-backed securities at an aggregate purchase
price of $37.9 million.
5. 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
"Warehouse Line") with Prudential Securities Credit Corporation ("PSCC").
Borrowings under the facility can be used to finance the Company's structured
loan and equity real estate investments. Borrowings under the Warehouse Line
bear 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. Advance rates on eligible assets range from 50% to
95% depending upon the asset's characteristics. Borrowings under the facility
are secured by a first lien security interest on all assets funded with proceeds
from the Warehouse Line. The Warehouse Line contains several covenants; among
others, the more significant covenants include the maintenance of a minimum
consolidated tangible net worth, maintenance of a minimum coverage ratio, and a
limitation on total indebtedness. The Warehouse Line matures on July 1, 2000. At
September 30, 1998, there had been no borrowings under the Warehouse Line.
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 can be used to finance a portion of the Company's
portfolio of mortgage-backed securities. The Repurchase Agreement provides that
the Company may borrow a varying percentage of the market value of the purchased
mortgage-backed securities, depending on the credit quality of such securities.
Borrowings under the Repurchase Agreement bear 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 being financed. Borrowings
under the facility are secured by a first lien security interest on all
mortgage-backed securities funded with proceeds from the Repurchase Agreement.
The Repurchase Agreement matures on June 30, 2000. At September 30, 1998,
$5,123,000 had been borrowed under the Repurchase Agreement; these borrowings
were fully repaid on October 23, 1998 with proceeds from the Warehouse Line. The
weighted average interest rate at September 30, 1998 was 6.47%.
Under the terms of the Warehouse Line and the Repurchase Agreement, PSCC and
PBI, respectively, retain the right to mark the underlying collateral to market
value. A reduction in the value of its pledged assets may require the Company to
provide additional collateral or fund margin calls. From time to time, the
Company may be required to provide such additional collateral or fund margin
calls.
Page 11
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6. SHARE OPTION AWARDS
Under the Company's 1998 Share Option and Award Plan, the Company may grant
restricted common shares and options to purchase common shares in amounts up to
an aggregate of 15% of the Company's outstanding common shares (or 1,500,017
common shares).
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. The Company applies 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 has been recognized.
On May 12, 1998, the Company granted to the Manager and certain other members 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.
The Company accounts for these options under SFAS No. 123, "Accounting for
Stock-Based Compensation"; accordingly, compensation cost, which was measured at
the grant date based upon the estimated fair value of the share options granted,
is being recognized over the four-year vesting period. The fair value of the
options granted was estimated using the Cox-Ross-Rubinstein option pricing model
with the following assumptions: risk free interest rates ranging from 5.43% to
5.71%; expected lives ranging from one to ten years; expected volatility of 25%;
and dividend yield of 8%. As of September 30, 1998, 17,000 options had been
forfeited by other members of the AMRESCO Group. During the three months ended
September 30, 1998, management fees and general and administrative expenses
included compensatory option charges totaling $141,000 and $27,000,
respectively. During the period from May 12, 1998 (inception of operations)
through September 30, 1998, management fees and general and administrative
expenses included compensatory option charges totaling $211,000 and $41,000,
respectively.
In lieu of cash compensation, the Company granted 6,000 restricted common shares
to its four independent trust managers on May 12, 1998. The associated
compensation cost is being recognized over the one-year service period.
7. COMMON STOCK
The Company was initially capitalized through the sale of 100 common shares to
AMRESCO on February 2, 1998. On May 12, 1998, the Company completed its IPO of
9,000,000 shares of common stock. Concurrently, the Private Placement of
1,000,011 common shares was completed with Holdings. The net proceeds from the
IPO and the Private Placement, after the underwriters' discount and offering
expenses, aggregated approximately $139.7 million. The price to the public and
to Holdings was $15.00 per share and the proceeds to the Company from the IPO
and the Private Placement were $14.00 per share (after the underwriter's
discount and advisory fee) and $15.00 per share, respectively.
Page 12
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8. EARNINGS PER SHARE
A reconciliation of the numerator and denominator used in computing basic
earnings per share and diluted earnings per share for the three months ended
September 30, 1998 and the period from February 2, 1998 (date of initial
capitalization) through September 30, 1998, is as follows (in thousands, except
per share data):
Period from
Three Months February 2, 1998
Ended through
September 30, 1998 September 30, 1998
--------------- ---------------
Net income available to common shareholders $ 1,272 $ 2,029
=============== ===============
Weighted average common shares outstanding 10,000 5,892
=============== ===============
Basic earnings per common share $ 0.12 $ 0.34
=============== ===============
Weighted average common shares outstanding 10,000 5,892
Effect of dilutive securities:
Restricted shares 6 4
Net effect of assumed exercise of stock options -- --
=============== ===============
Adjusted weighted average shares outstanding 10,006 5,896
=============== ===============
Diluted earnings per common share $ 0.12 $ 0.34
=============== ===============
Options to purchase 1,176,508 shares of common stock at $15.00 per share and
300,003 shares of common stock at $18.75 per share were outstanding during the
period from May 12, 1998 (inception of operations) through September 30, 1998
but were not included in the computation of diluted earnings per share because
the options' exercise price was greater than the average market price of the
Company's common shares. The options, which expire on May 12, 2008, were still
outstanding as of September 30, 1998.
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 September 30, 1998, the Company's basic and diluted earnings
were $0.20 per common share.
9. COMPREHENSIVE INCOME
At its inception, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances except those resulting from investments by, and
distributions to, its owners. SFAS No. 130 requires that all items recognized
under accounting standards as components of comprehensive income be reported in
an annual financial statement that is displayed with the same prominence as
other annual financial statements. SFAS No. 130 also requires that an entity
classify items of other comprehensive income by their nature in a financial
statement. Other comprehensive income includes unrealized gains and losses on
marketable securities classified as available-for-sale. During the three months
ended September 30, 1998, total nonowner changes in equity aggregated
$(3,029,000) and were comprised of net income of $1,272,000 and an unrealized
loss on securities available for sale of $4,301,000. For the period from
February 2, 1998 (date of initial capitalization) through September 30, 1998,
total nonowner changes in equity aggregated $(2,272,000) and were comprised of
net income and an unrealized loss on securities available for sale of $2,029,000
and $4,301,000, respectively. The unrealized loss on securities available for
sale had no impact on the Company's taxable income or cash flow.
Page 13
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10. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 requires that an entity recognize all derivatives as either assets
or liabilities in its balance sheet and that it measure those instruments at
fair value. The accounting for changes in the fair value of a derivative (that
is, gains and losses) is dependent upon the intended use of the derivative and
the resulting designation. SFAS No. 133 generally provides for matching the
timing of gain or loss recognition on the hedging instrument with the
recognition of (1) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (2) the earnings effect of
the hedged forecasted transaction. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999, although earlier
application is encouraged. The Company expects to adopt the provisions of SFAS
No. 133 upon its initial use of derivative instruments. As of September 30,
1998, no such instruments were being utilized by the Company.
11. SUBSEQUENT EVENTS
On October 1, 1998, the Company originated a $566,000 first lien loan secured
by a certain tract of land in Richardson, Texas; the initial advance under this
loan totaled approximately $300,000. The Company also committed to provide
additional first lien financing of $14,363,000 to the borrower. If the borrower
exercises its option to utilize this financing, the proceeds therefrom will be
used for the construction of an office building on such land. The existing loan
is due and payable on January 1, 1999; however, if the borrower elects to
exercise its option on the additional financing, it may also elect to extend
the term of the land loan.
On October 22, 1998, the Company declared a dividend of $0.24 per share; the
dividend is payable on November 16, 1998 to shareholders of record on October
31, 1998.
During the three months ended September 30, 1998, the Company entered into a
partnership that will ultimately acquire interests in five newly constructed,
grocery-anchored shopping centers in the Dallas/Fort Worth (Texas) area. On
October 23, 1998, the partnership acquired an interest in the first of these
five centers, an 82,730 square foot facility in Arlington, Texas. In connection
with this acquisition, the Company contributed $3.4 million of capital to the
partnership. The acquisitions of the remaining four centers, which are subject
to certain closing conditions, will require an additional equity investment of
approximately $13.5 million. The Company anticipates that the remaining four
centers will be acquired during the second quarter of 1999.
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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 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, construction loans, rehabilitation loans and bridge loans),
mortgage-backed securities, 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 ("IPO") of 9,000,000 common shares and private
placement of 1,000,011 common shares with AMREIT Holdings, Inc., a member of the
AMRESCO Group (the "Private Placement"). At September 30, 1998, the $139.7
million of net proceeds received from the issuance of its common shares had been
fully invested in structured finance arrangements and commercial mortgage-backed
securities. The Company is currently evaluating a variety of potential
investments. Given the recent dislocation in the capital markets, as discussed
further in the Liquidity and Capital Resources section below, the Company is
also evaluating a number of alternative financing sources.
The Company will elect to be taxed as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), and as such, is required to distribute at least
95% of its REIT taxable income annually, subject to certain adjustments. It is
expected that the cash for such distributions will be generated from the
Company's day-to-day operations, although the Company may also borrow funds to
make distributions.
The Company may experience high volatility in net income from quarter to quarter
and year to year, primarily as a result of fluctuations in interest rates,
borrowing costs, reinvestment opportunities and prepayment rates. Because
changes in interest rates may significantly affect the Company's activities, the
operating results of the Company will depend, in large part, upon the ability of
the Company to manage its interest rate, prepayment and credit risks, while
maintaining its status as a REIT.
RESULTS OF OPERATIONS
The Company commenced operations on May 12, 1998. Net income for the three
months ended September 30, 1998 and the period from May 12, 1998 through
September 30, 1998 was $1,272,000 and $2,029,000, respectively, or $0.12 and
$0.20 per common share, respectively. The Company had no income during the
period from February 2, 1998 (date of initial capitalization) through May 11,
1998. The Company's primary sources of revenue for the three months ended
September 30, 1998 and the period from May 12, 1998 through September 30, 1998,
totaling $2,992,000 and $4,253,000, respectively, were as follows:
o $1,188,000 and $1,328,000 of interest income, respectively, on mortgage
loans; the loans earn interest at accrual rates ranging from 10.5% to
22% per annum
o $827,000 and $1,734,000 of other interest income, respectively,
generated primarily from the temporary investment of proceeds from the
IPO and Private Placement
o $560,000 and $597,000, respectively, from investments in commercial
mortgage-backed securities
o $326,000 and $486,000, respectively, from equity in the earnings of its
unconsolidated subsidiary and mortgage loans accounted for as joint
venture investments (for a discussion of loans accounted for as joint
venture investments, see the notes to the consolidated financial
statements included in Item 1 above).
Revenue increased as funds from the IPO were more fully invested in real estate
related assets.
Page 15
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The Company incurred expenses of $1,720,000 and $2,224,000 for the three months
ended September 30, 1998 and the period from May 12, 1998 through September 30,
1998, respectively, consisting primarily of the following:
o $439,000 and $632,000, respectively, of management fees, including
$298,000 and $421,000, respectively, of base management fees payable to
the Manager pursuant to the Management Agreement and $141,000 and
$211,000, respectively, of expense associated with compensatory options
granted to the Manager. No incentive fees were incurred during either
of these periods.
o $755,000 and $953,000, respectively, of general and administrative
costs, including approximately $400,000 and $400,000, respectively, of
due diligence costs associated with an abandoned transaction, $126,000
and $201,000, respectively, for professional services, $58,000 and
$104,000, respectively, for directors and officers' insurance, $80,000
and $96,000, respectively, of reimbursable costs pursuant to the
Management Agreement, $27,000 and $41,000, respectively, related to
compensatory options granted to certain members of the AMRESCO Group
and $0 and $13,000, respectively, of organizational expenses.
o $501,000 and $611,000, respectively, of loan loss reserves. No loan
losses were incurred by the Company during the period.
The Company's policy is to distribute at least 95% of its REIT taxable income to
shareholders each year. Tax basis income differs from income reported for
financial reporting purposes due primarily to differences in methods of
accounting for ADC arrangements and stock-based compensation awards and the
nondeductibility, for tax purposes, of the Company's loan loss reserve (for a
discussion of ADC arrangements, see the notes to the consolidated financial
statements included in Item 1 above). As a result, net income under generally
accepted accounting principles is not necessarily an indicator of distributions
to be made by the Company. To date, the following dividends have been declared:
Dividend per
Declaration Record Payable Common
Date Date Date Share
------------------ ------------------ -------------------- ----------------
Period from May 12, 1998
through June 30, 1998 July 23, 1998 July 31, 1998 August 17, 1998 $0.10
Third Quarter October 22, 1998 October 31, 1998 November 16, 1998 $0.24
For federal income tax purposes, all dividends declared to date should be
treated as ordinary income to the Company's shareholders. The Company expects to
declare its fourth quarter dividend on December 15, 1998; it is anticipated that
this dividend will be payable on January 27, 1999 to shareholders of record on
December 31, 1998.
During the three months ended September 30, 1998, the Company added 12 loans,
representing $87.9 million in aggregate commitments, to its portfolio; four of
these loans were originated by the Company while eight of the loans were
acquired from AMRESCO Commercial Finance, Inc. ("ACFI"), a member of the AMRESCO
Group. As of September 30, 1998, the Company's structured finance portfolio was
comprised of 19 commercial mortgage loans aggregating $208.8 million in
commitments; $111.1 million had been advanced under these facilities at
September 30, 1998. After giving effect to ACFI's economic interest (as further
described below), commitments and amounts outstanding totaled $202.3 million and
$106.8 million, respectively, at September 30, 1998.
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
is 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 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 are required to be made under the five
loan agreements. At September 30, 1998, ACFI's contingent obligation for these
additional advances approximated $2,116,000.
Page 16
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Based upon the amounts committed under these facilities and after giving effect
to the contractual right sold to ACFI, the Company's portfolio of commercial
mortgage loans had a weighted average interest pay rate of 11.0% and a weighted
average interest accrual rate of 12.3% as of September 30, 1998. Except for the
loans purchased from ACFI on September 30, 1998, the borrowers paid a commitment
fee to the Company that is in addition to interest payments due under the terms
of the loan agreements. Commitment fees are deferred and recognized over the
life of the loan as an adjustment of yield or, in those cases where loan
investments are classified as either real estate or joint ventures, such fees
are deferred and recognized upon the disposition of the investment. Eight of the
nineteen loans provide for profit participation above the contractual accrual
rate; four of these eight facilities are included in the pool of loans in which
ACFI has a contractual right to collect certain excess proceeds, as described
above. The Company's loan investments are summarized as follows (dollars in
thousands):
Amount
Outstanding at Interest
Date of Initial Collateral Commitment September 30, Interest Accrual
Investment Location Position Amount 1998 Pay Rate Rate
- ------------------------- -------------------- --------------- ------------------ ----------------- ------------ ------------
May 12, 1998 Columbus, OH Second Lien $7,000 $5,839 15.0% 15.0%
May 12, 1998 Richardson, TX Second Lien 14,700 3,816 10.0% 12.0%
June 1, 1998 Houston, TX First Lien 11,800 9,857 12.0% 12.0%
June 12, 1998 Pearland, TX First Lien 12,827 2,185 10.0% 11.5%
June 17, 1998 San Diego, CA First Lien 5,560 3,991 10.0% 13.5%
June 19, 1998 Houston, TX First Lien 24,000 3,725 12.0% 12.0%
June 22, 1998 Wayland, MA First Lien 45,000 17,132 10.5% 10.5%
July 1, 1998 Dallas, TX Ptrshp Interests 10,068 6,283 10.0% 15.0%
July 2, 1998 Washington, D.C. First Lien 7,000 5,351 10.5% 10.5%
July 10, 1998 Pasadena, TX First Lien 3,350 2,038 10.0% 14.0%
September 1, 1998 Los Angeles, CA First Lien 18,419 17,413 10.0% 12.0%
September 30, 1998 Richardson, TX First Lien 13,001 7,674 10.0% 14.0%
September 30, 1998 San Antonio, TX First Lien 3,266 1,554 22.0% 22.0%
September 30, 1998 San Antonio, TX First Lien 8,400 1,949 10.0% 14.0%
September 30, 1998 Galveston, TX First Lien 3,664 3,664 10.0% 15.0%
September 30, 1998 Ft. Worth, TX Ptrshp Interests 2,650 2,587 10.5% 16.0%
September 30, 1998 Austin, TX First Lien 6,325 6,247 10.0% 16.0%
September 30, 1998 Dallas, TX First Lien 3,015 2,364 10.0% 13.0%
September 30, 1998 Norwood, MA First Lien 8,765 7,441 10.0% 12.5%
-------- --------
208,810 111,110
ACFI's Economic Interest (6,461) (4,345)
-------- --------
$202,349 $106,765
======== ========
The Company provides financing through certain real estate loan arrangements
that, because of their nature, qualify either as real estate or joint venture
investments for financial reporting purposes. As of September 30, 1998, loan
investments representing approximately $72,456,000 in aggregate commitments are
accounted for as either real estate or joint venture interests; approximately
$29,697,000 had been advanced to borrowers under the related agreements. For a
discussion of these loan arrangements, see the notes to the consolidated
financial statements in Item 1 above.
At September 30, 1998, the Company's commercial mortgage loan commitments were
concentrated in four states and the District of Columbia: Texas (56%);
Massachusetts (26%); California (12%); Ohio (3%); and Washington, D.C. (3%). The
underlying collateral for these loans was comprised of the following property
types: office (63%); mixed use (13%); multifamily (11%); residential (6%);
industrial (3%); R&D/Bio-Tech (3%); and medical office (1%). Construction loans,
acquisition/rehabilitation loans, acquisition loans, single-family lot
development loans and bridge loans comprised 33%, 31%, 27%, 6% and 3% of the
portfolio, respectively. Eighty-three percent of the portfolio is comprised of
first lien loans while the balance of the portfolio (17%) is secured by second
liens and/or partnership interests. The percentages reflected above are based
upon committed loan amounts and give effect to ACFI's economic interest.
Until the investment portfolio becomes larger, geographic and product type
concentrations are expected. The Company expects to see more diversification
both geographically and by product type as the loan portfolio grows. Geographic
and product type concentrations present additional risks, particularly if there
is a deterioration in the general condition of the
Page 17
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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. In an effort to reduce concentration risks, the Company is targeting
transactions which will more broadly diversify its investment portfolio.
During the three months ended September 30, 1998, the Company acquired three
commercial mortgage-backed securities at an aggregate purchase price of $22.6
million. As of September 30, 1998, the Company, either directly or through its
unconsolidated subsidiary, holds six commercial mortgage-backed securities
("CMBS") which were acquired at an aggregate purchase price of $37.9 million.
Due to the significant widening of spreads in the CMBS market, the Company
recorded an unrealized loss of $4.3 million on its CMBS portfolio as of
September 30, 1998. As these securities are classified as available for sale,
the unrealized loss was reported as a separate component of shareholders' equity
for financial reporting purposes. The unrealized loss had no impact on the
Company's taxable income or cash flow. Management intends to retain these
investments for the foreseeable future. As of September 30, 1998, CMBS
investments comprised 15% of the Company's aggregate commitments. Excluding the
potential tax effects associated with one of the securities held by the
Company's unconsolidated subsidiary, the weighted average unleveraged yield over
the expected life of these investments is expected to approximate 11.6%.
Including the security held by its unconsolidated subsidiary, the Company's CMBS
investments are summarized as follows (dollars in thousands):
Percentage of
Aggregate Aggregate Total Based
Rating Amortized Cost Fair Value on Fair Value
------------------ ----------------- ------------------ ----------------
Double BB- $4,219 $4,002 12%
Single B 19,454 17,253 50%
Single B- 14,716 12,833 38%
------- ------- ---
$38,389 $34,088 100%
======= ======= ===
The Company's estimated returns on its CMBS investments are based upon a number
of assumptions that are subject to certain business and economic risks and
uncertainties including, but not limited to, the timing and magnitude of
prepayments and credit losses on the underlying mortgage loans that may result
from general and/or localized real estate market factors. These risks and
uncertainties are in many ways similar to those affecting the Company's
commercial mortgage loans. These risks and uncertainties may cause the actual
yields to differ materially from expected yields.
During the three months ended September 30, 1998, the Company entered into a
partnership that will ultimately acquire interests in five newly constructed,
grocery-anchored shopping centers in the Dallas/Fort Worth (Texas) area. On
October 23, 1998, the partnership acquired an interest in the first of these
five centers, an 82,730 square foot facility in Arlington, Texas. In connection
with this acquisition, the Company contributed $3.4 million of capital to the
partnership. The acquisitions of the remaining four centers, which are subject
to certain closing conditions, will require an additional equity investment of
approximately $13.5 million. The Company anticipates that the remaining four
centers will be acquired during the second quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to execute its business strategy, particularly the growth
of its investment and loan portfolio, depends to a significant degree on its
ability to obtain additional capital. The Company's principal demands for
liquidity are cash for operations, including funds for its lending activities
and other investments, interest expense associated with its indebtedness, debt
repayments and distributions to its shareholders. In the near term, the
Company's principal sources of liquidity are the funds available under the
Warehouse Line and Repurchase Agreement described below.
Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $400 million warehouse facility (the "Warehouse Line") with
Prudential Securities Credit Corporation ("PSCC"). Subject to PSCC's approval on
an asset by asset basis, borrowings under the facility can be used to finance
the Company's structured loan and equity real estate investments. Borrowings
under the Warehouse Line bear interest at rates ranging from LIBOR plus 1% per
annum to LIBOR plus 2% per annum and are secured by a first lien security
interest in all assets funded with proceeds from the Warehouse Line. The
Warehouse Line matures on July 1, 2000. At September 30, 1998, there had been no
borrowings under the Warehouse Line.
Page 18
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The Company (and certain of its subsidiaries) also entered into a $100 million
repurchase agreement (the "Repurchase Agreement") with PSCC effective as of July
1, 1998; subsequently, PSCC was replaced by Prudential-Bache International,
Ltd., an affiliate of PSCC, as lender. Borrowings under the Repurchase Agreement
can be used to finance a portion of the Company's portfolio of mortgage-backed
securities. The Repurchase Agreement provides that the Company may borrow a
varying percentage of the market value of the purchased mortgage-backed
securities, depending on the credit quality of such securities. Borrowings under
the Repurchase Agreement bear 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 being financed. The Repurchase Agreement
matures on June 30, 2000. At September 30, 1998, approximately $5.1 million had
been borrowed under the Repurchase Agreement; these borrowings were fully repaid
on October 23, 1998 with proceeds from the Warehouse Line, thereby eliminating
the potential for collateral margin calls. The weighted average interest rate at
September 30, 1998 was 6.47%.
The Company believes that the funds available under its Warehouse Line and
Repurchase Agreement will be sufficient to meet the Company's liquidity and
committed capital requirements into 1999. To fund future growth, the Company
will need to raise additional funds for operations through future public or
private equity and debt offerings and/or by leveraging its investments,
primarily through additional secured and unsecured financings, and other
borrowing arrangements.
The capital market fluctuations that occurred during the third quarter of 1998
have, at least in the near term, potentially diminished the Company's access to
additional capital and have restricted its ability to expand its asset base.
These capital market fluctuations began in Russia and Asia and grew to include a
global investor flight to low risk investments. During the quarter, spreads on
high yield and mortgage-backed bonds widened significantly resulting in a marked
decline in the market value of CMBS and a general lessening of liquidity for the
lower rated classes of CMBS. Substantial margin calls related to certain hedge
positions were brought on by steep declines in U.S. Treasury rates. The
combination of spread widening and hedge losses created severe liquidity
problems for some companies, including many companies within the mortgage REIT
sector. As of September 30, 1998, no hedging instruments were being utilized by
the Company.
Management currently believes that the dislocation in the capital markets will
not extend long-term; however, its duration is impossible to predict at this
time. In the near term, the Company will be constrained from accessing the
public equity markets. In addition, new issues of long-term public unsecured
debt will be difficult to obtain and, in any event, will likely not be available
to the Company at a reasonable cost. Additional secured debt beyond the
Company's existing Warehouse Line will also be difficult to obtain and may not
be offered at a reasonable cost. Aside from limiting the Company's access to
additional capital in the near term, the Company has been relatively insulated
from the effects of the dislocation in the capital markets. While the Company's
portfolio of CMBS has declined in value, the Company invested in these bonds for
the long term yields that they are expected to produce. Management believes that
the current market dislocation presents significant investment opportunities for
selective acquisitions of CMBS and that the fundamental value of the real estate
mortgages underlying these bonds has been largely unaffected at this time,
although general economic conditions could adversely impact real estate values
in the future.
As a result of these trends, PSCC has indicated to the Company that it will be
much more restrictive in the application of its approval rights under the
Warehouse Line with respect to financing for new investments sought by the
Company. While the Company believes that sufficient availability under the
Warehouse Line and Repurchase Agreement exist to meet all of the Company's
existing commitments, potential restrictions on financing for new investments
will limit future growth.
As a result of these uncertainties, the Company's assets will grow more slowly
than was originally forecast for 1999. However, in view of the uncertainties in
the capital markets, management believes that it is more prudent to maintain low
leverage and greater liquidity. Therefore, it is unlikely that the Company will
add additional assets if such addition were to result in a debt to equity ratio
exceeding 2 to 1. As of September 30, 1998, the Company's debt to equity ratio
was 0.04 to 1. The Company also intends to closely monitor any financing that
may be placed on the Company's existing CMBS portfolio in an effort to minimize
the risk of margin calls.
Despite the uncertainties in the public debt and equity markets, management
believes that there are other potential sources of capital available to entities
like the Company. Management is actively exploring the availability of capital
from these other sources and the costs associated therewith. However, there can
be no assurances that such capital will become available at a reasonable cost.
Page 19
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REIT STATUS
Management believes that the Company is operated in a manner that will enable it
to qualify as a REIT for federal income tax purposes. As a REIT, the Company
will not pay income taxes at the trust level on any taxable income which is
distributed to its shareholders, although AMREIT II, Inc., its "Non-Qualified
REIT Subsidiary", may be subject to tax at the corporate level. Qualification
for treatment as a REIT requires the Company to meet certain criteria, including
certain requirements regarding the nature of its ownership, assets, income and
distributions of taxable income. The Company may, however, be subject to tax at
normal corporate rates on any ordinary income or capital gains not distributed.
YEAR 2000 ISSUE
General
Many of the world's computers, software programs and other equipment using
microprocessors or embedded chips currently have date fields that use two digits
rather than four digits to define the applicable year. These computers, programs
and chips may be unable to properly interpret dates beyond the year 1999; for
example, computer software that has date sensitive programming using a two-digit
format may recognize a date using "00" as the year 1900 rather than the year
2000. This inability to properly process dates is commonly referred to as the
"Year 2000 issue," the "Year 2000 problem" or "Millennium Bug." Such errors
could potentially result in a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar normal business activities, which,
in turn, could lead to disruptions in the Company's operations or performance.
All of the Company's information technology infrastructure is provided by the
Manager, and the Manager's systems are supplied by AMRESCO, INC. The Company's
assessments of the cost and timeliness of completion of Year 2000 modifications
set forth below are based on representations made to the Company and the best
estimates of the individuals within or engaged by AMRESCO, INC. charged with
handling the Year 2000 issue, which estimates were derived using numerous
assumptions relating to future events, including, without limitation, the
continued availability of certain internal and external resources and third
party readiness plans. Furthermore, as the AMRESCO, INC. Year 2000 initiative
(described below) progresses, AMRESCO, INC., the Manager and the Company
continue to revise estimates of the likely problems and costs associated with
the Year 2000 issue and to adapt contingency plans. However, there can be no
assurance that any estimate or assumption will prove to be accurate.
The AMRESCO, INC. Year 2000 Initiative
AMRESCO, INC. is conducting a comprehensive Year 2000 initiative with respect to
its internal business-critical systems, including those upon which the Company
depends. This initiative encompasses information technology ("IT") systems and
applications, as well as non-IT systems and equipment with embedded technology,
such as fax machines and telephone systems, which may be impacted by the Year
2000 issue. Business-critical systems encompass internal accounting systems,
including general ledger, accounts payable and financial reporting applications;
cash management systems; loan servicing systems; and decision support systems;
as well as the underlying technology required to support the software. The
initiative includes assessing, remediating or replacing, testing and upgrading
the business-critical IT systems of AMRESCO, INC. with the assistance of a
consulting firm that specializes in Year 2000 readiness. Based upon a review of
the completed and planned stages of the initiative, and the testing done to
date, AMRESCO, INC. does not anticipate any material difficulties in achieving
Year 2000 readiness with respect to its internal business-critical systems, and
the Company has received a written representation from AMRESCO, INC. that
AMRESCO, INC. expects that Year 2000 readiness will be achieved by December 1998
with respect to virtually all its internal business-critical systems used in
connection with the operations of the Manager or the Company.
In addition to the internal IT systems and non-IT systems of AMRESCO, INC., the
Company may be at risk from Year 2000 failures caused by or occurring to third
parties. These third parties can be classified into two groups. The first group
includes borrowers, significant business partners, lenders, vendors and other
service providers with whom the Company, the Manager or AMRESCO, INC. has a
direct contractual relationship. The second group, while encompassing certain
members of the first group, is comprised of third parties providing services or
functions to large segments of society, both domestically and internationally,
such as airlines, utilities and national stock exchanges.
Page 20
21
As is the case with most other companies, the actions the Company, the Manager
and AMRESCO, INC. can take to avoid any adverse effects from the failure of
companies, particularly those in the second group, to become Year 2000 ready is
extremely limited. However, AMRESCO, INC. is in the process of communicating
with those companies that have significant business relationships with AMRESCO,
INC., the Manager or the Company, particularly those in the first group, to
determine their Year 2000 readiness status and the extent to which AMRESCO,
INC., the Manager or the Company could be affected by any of their Year 2000
readiness issues. In connection with this process, AMRESCO, INC. is seeking to
obtain written representations and other independent confirmations of Year 2000
readiness from the third parties with whom AMRESCO, INC., the Manager or the
Company has material contracts. Responses from all third parties having material
contracts with AMRESCO, INC., the Manager or the Company have not been received.
In addition to contacting these third parties, where there are direct interfaces
between the systems of AMRESCO, INC. and the systems of these third parties in
the first group, AMRESCO, INC. plans to conduct testing in the second quarter of
1999 in conformance with the guidelines of the Federal Financial Institutions
Examination Council. Based on responses received and testing to date, it is not
currently anticipated that AMRESCO, INC., the Manager or the Company will be
materially affected by any third party Year 2000 readiness issues.
For all business-critical systems interfaces, readiness is scheduled to be
achieved by December 31, 1998. Significant third party service providers that
have not completed their Year 2000 initiative by March 31, 1999 are scheduled to
be replaced with comparable firms that are believed to be compliant. AMRESCO,
INC. anticipates that this portion of its Year 2000 initiative will be completed
within the scheduled time periods.
There can be no assurance that the systems of AMRESCO, INC. or those of third
parties will be timely converted. Furthermore, there can be no assurance that a
failure to convert by another company, or a conversion that is not compatible
with the systems of AMRESCO, INC. or those of other companies on which the
systems of AMRESCO, INC. rely, would not have a material adverse effect on the
Company.
Under the terms of the Company's Management Agreement with the Manager, all of
the costs associated with addressing the Company's Year 2000 issue are to be
borne by the Manager. Therefore, the Company does not anticipate that it will
incur material expenditures in connection with any modifications necessary to
achieve Year 2000 readiness.
Potential Risks
In addition to the internal systems of AMRESCO, INC. and the systems and
embedded technology of third parties with whom AMRESCO, INC., the Manager and
the Company do business, there is a general uncertainty regarding the overall
success of global remediation efforts relating to the Year 2000 issue,
including those efforts of providers of services to large segments of society,
as described above in the second group. Due to the interrelationships on a
global scale that may be impacted by the Year 2000 issue, there could be
short-term disruptions in the capital or real estate markets or longer-term
disruptions that would affect the overall economy.
Due to the general uncertainty with respect to how this issue will affect
businesses and governments, it is not possible to list all potential problems or
risks associated with the Year 2000 issue. However, some examples of problems
or risks to the Company that could result from the failure by third parties to
adequately deal with the Year 2000 issue include:
o in the case of lenders, the potential for liquidity stress due to
disruptions in funding flows;
o in the case of exchanges and clearing agents, the potential for funding
disruptions and settlement failures;
o in the case of counter parties, accounting and financial difficulties
to those parties that may expose the Company to increased credit risk;
and
o in the case of vendors or providers, service failures or interruptions,
such as failures of power, telecommunications and the embedded
technology in building systems (such as HVAC, sprinkler and fire
suppression, elevators, alarm monitoring and security, and building and
parking garage access).
Page 21
22
With respect to the Company's loan portfolios, risks due to the potential
failure of third parties to be ready to deal with the Year 2000 issue include:
o potential borrower defaults resulting from increased expenses or legal
claims related to failures of embedded technology in building systems,
such as HVAC, sprinkler and fire suppression, elevators, alarm
monitoring and security, and building and parking garage access;
o potential reductions in collateral value due to failure of one or more
of the building systems;
o interruptions in cash flow due to borrowers being unable to obtain
timely lease payments from tenants or incomplete or inaccurate
accounting of rents;
o potential borrower defaults resulting from computer failures of retail
systems of major tenants in retail commercial real estate properties
such as shopping malls and strip shopping centers;
o construction delays resulting from contractors' failure to be Year 2000
ready and increased costs of construction associated with upgrading
building systems to be Year 2000 compliant; and
o delays in reaching projected occupancy levels due to construction
delays, interruptions in service or other market factors.
These risks are also applicable to the Company's portfolio of CMBS as these
securities are dependent upon the pool of mortgage loans underlying them. If the
investors in these types of securities demand higher returns in recognition of
these potential risks, the market value of any CMBS portfolio of the Company
also could be adversely affected.
Additionally, the Company has made an equity investment in a partnership that
will ultimately own interests in five to-be-built grocery-anchored shopping
centers. These operations will be subject to many of the risks set forth above.
As construction plans are developed and construction progresses, the Company
will review the measures taken by the developer and general contractor to make
all of the building systems Year 2000 ready. However, there can be no guarantee
that all building systems will be Year 2000 ready upon completion of
construction.
The Company believes that the risks most likely to affect the Company adversely
relate to the failure of third parties, including its borrowers and sources of
capital, to achieve Year 2000 readiness. If its borrowers' systems fail, the
result could be a delay in making payments to the Company or the complete
business failure of such borrowers. The failure, although believed to be
unlikely, of the Company's sources of capital to achieve Year 2000 readiness
could result in the Company being unable to obtain the funds necessary to
continue its normal business operations.
Some of the risks associated with the Year 2000 issue may be mitigated through
insurance maintained or purchased by the Company, its affiliates, its business
partners, borrowers and vendors. However, the scope of insurance coverage in
addressing these potential issues under existing policies has yet to be tested,
and the economic impact on the solvency of the insurers has not been explored.
Therefore, no assurance can be given that insurance coverage will be available
or, if it is available, that it will be available on a cost-effective basis or
that it will cover all or a significant portion of any potential loss.
Business Continuity/Disaster Recovery Plan
AMRESCO, INC. currently has a business continuity/disaster recovery plan that
includes business resumption processes that do not rely on computer systems and
the maintenance of hard copy files, where appropriate. The business
continuity/disaster recovery plan is monitored and updated as potential Year
2000 readiness issues of AMRESCO, INC. and third parties are specifically
identified. Due to the inability to predict all of the potential problems that
may arise in connection with the Year 2000 issue, there can be no assurance
that all contingencies will be adequately addressed by such plan.
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23
FORWARD-LOOKING STATEMENTS
Certain statements contained herein 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, international, national, regional or local economic
environments, changes in prevailing interest rates, credit and prepayment risks,
basis and asset/liability risks, spread risk, event risk, conditions which may
affect public securities and debt markets generally or the markets in which the
Company operates, the Year 2000 issue, the availability of and costs associated
with obtaining adequate and timely sources of liquidity, dependence on existing
sources of funding, the size and liquidity of the secondary market for
commercial mortgage-backed securities, geographic or product type concentrations
of assets (temporary or otherwise), other factors generally understood to affect
the real estate acquisition, mortgage and leasing markets and securities
investments, changes in federal income tax laws and regulations, and other risks
described from time to time in the Company's SEC reports and filings, including
its registration statement on Form S-11 and periodic reports on Form 10-Q, Form
8-K and Form 10-K.
Page 23
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
SALE OF SECURITIES
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 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 IPO of 9,000,000 Common Shares, the
Company sold 1,000,011 Common Shares to Holdings, a member of the AMRESCO Group,
at the IPO price of $15.00 per share, or $15,000,165 in aggregate cash
consideration, pursuant to 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 in
reliance on the exemption provided by Section 4 (2) thereof.
USE OF PROCEEDS
The Company's Registration Statement (File No. 333-45543) registering the
9,000,000 Common Shares sold in the IPO was declared effective by the Securities
and Exchange Commission on May 6, 1998. The IPO commenced on May 6, 1998 and
closed on May 12, 1998, with the sale of all of the Company's registered shares
at the offering price of $15.00 per share, or $135,000,000 in aggregate gross
proceeds. Prudential Securities Incorporated, Credit Suisse First Boston, ABN
AMRO Incorporated, J.C. Bradford & Co., NationsBanc Montgomery Securities LLC
and Piper Jaffray Inc. served as the principal underwriters for the public
offering. When combined with the aggregate proceeds received from the
unregistered sale of securities to AMRESCO and Holdings totaling $26,000 and
$15,000,165, respectively, the Company's aggregate gross proceeds from the sales
of its Common Shares totaled $150,026,165. From the effective date of the
Registration Statement through September 30, 1998, the Company incurred the
following expenses in connection with the IPO and other sales of securities:
Underwriting discounts and commissions $ 7,969,000
Finders' fees --
Expenses paid to or for underwriters (advisory fee) 1,012,000
Other expenses 1,328,000
-----------
Total expenses $10,309,000
===========
After deducting these expenses, net proceeds to the Company totaled
approximately $139,717,000 (inclusive of the 100 shares sold to AMRESCO and the
1,000,011 shares sold to Holdings for aggregate consideration of $15,026,165).
As of September 30, 1998, the Company had fully invested these proceeds. From
the effective date of the Registration Statement through September 30, 1998, the
Company made investments as follows:
Acquisition of mortgage loans $ 25,807,000
Investments in mortgage loans 55,607,000
Purchase of CMBS 34,480,000
Investments in real estate 17,219,000
Investments in unconsolidated subsidiary and other
real estate ventures 15,286,000
------------
$148,399,000
============
All such payments relating to these investments were direct or indirect payments
to others, except for $6,290,000 which was paid to AMRESCO Funding Corporation
("AFC") and $34,292,000 which was paid to AMRESCO Commercial Finance, Inc.
("ACFI") for the acquisition of two and eight loans, respectively. The two loans
acquired from AFC on May 12, 1998 are more fully described in the Company's
Registration Statement (such loans being referred to therein as "Loan One" and
"Loan Four", respectively). The eight loans acquired from ACFI on September 30,
1998 are more fully described in the Company's Current Report on Form 8-K dated
September 30, 1998 (such loans being referred to therein as "Package 1" and
"Package 2", respectively).
Page 24
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits and Exhibit Index
Exhibit No.
2.1 Sale and Assignment Agreement by and between AMRESCO Commercial
Finance, Inc. and AMREIT I, Inc. dated effective as of
September 30, 1998 relating to three loans (filed as Exhibit
2.1 to the Registrant's Current Report on Form 8-K dated
September 30, 1998, which exhibit is incorporated herein by
reference).
2.2 Sale and Assignment Agreement by and between AMRESCO Commercial
Finance, Inc. and AMREIT I, Inc. dated effective as of
September 30, 1998 relating to five loans (filed as Exhibit 2.2
to the Registrant's Current Report on Form 8-K dated September
30, 1998, which exhibit is incorporated herein by reference).
2.3 Economics Equivalents and Funding Agreement by and between
AMRESCO Commercial Finance, Inc. and AMREIT I, Inc. dated
effective as of September 30, 1998 (filed as Exhibit 2.3 to the
Registrant's Current Report on Form 8-K dated September 30,
1998, which exhibit is incorporated herein by reference).
3.1 Amended and Restated Declaration of Trust of the Registrant
(filed as Exhibit 3.1 to the Registrant's Registration
Statement on Form S-11 (Registration No. 333-45543), which
exhibit is incorporated herein by reference).
3.2 First Amendment to Amended and Restated Declaration of Trust of
the Registrant (filed as Exhibit 3.1 to the Registrant's
Current Report on Form 8-K dated May 12, 1998, which exhibit is
incorporated herein by reference).
3.3 Second Amendment to Amended and Restated Declaration of Trust
of the Registrant (filed as Exhibit 3.2 to the Registrant's
Current Report on Form 8-K dated May 12, 1998, which exhibit is
incorporated herein by reference).
3.4 Form of Bylaws of the Registrant (filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-11 (Registration
No. 333-45543), which exhibit is incorporated herein by
reference).
10.1 Interim Warehouse and Security Agreement dated as of July 1,
1998 by and among Prudential Securities Credit Corporation and
AMRESCO Capital Trust, AMREIT I, Inc. and AMREIT II, Inc.
10.2 Master Repurchase Agreement dated as of July 1, 1998 between
Prudential-Bache International, Ltd. and AMRESCO Capital
Trust, AMREIT CMBS I, Inc., AMREIT RMBS I, Inc. and AMREIT II,
Inc.
11 Computation of Per Share Earnings.
27 Financial Data Schedule.
(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:
(i) Form 8-K dated June 19, 1998 and filed with the Commission on
July 6, 1998, reporting (a) the origination of a $24,000,000
nonrecourse construction loan and the origination of a
$45,000,000 nonrecourse acquisition and construction loan under
Item 2 of such form and (b) the origination of three other
loans under Item 5 of such form.
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26
(ii) Form 8-K/A filed with the Commission on August 3, 1998,
amending Form 8-K dated May 12, 1998, reporting the acquisition
of a $7,000,000 nonrecourse loan and a $14,700,000 nonrecourse
loan under Item 2 of such form.
(iii) Form 8-K dated September 30, 1998 and filed with the Commission
on October 15, 1998, reporting (a) under Item 2 of such form,
the acquisition from an affiliate of the Registrant of (i) a
package of loans for a purchase price of approximately
$11,313,916 and (ii) another package of loans for a purchase
price of approximately $ 22,978,251 and (b) under Item 5 of
such form, the origination of four other loans.
Page 26
27
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: November 13, 1998 By: /s/Thomas J. Andrus
------------------------------
Thomas J. Andrus
Executive Vice President
and Chief Financial Officer
Page 27
28
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1 Sale and Assignment Agreement by and between AMRESCO Commercial
Finance, Inc. and AMREIT I, Inc. dated effective as of
September 30, 1998 relating to three loans (filed as Exhibit
2.1 to the Registrant's Current Report on Form 8-K dated
September 30, 1998, which exhibit is incorporated herein by
reference).
2.2 Sale and Assignment Agreement by and between AMRESCO Commercial
Finance, Inc. and AMREIT I, Inc. dated effective as of
September 30, 1998 relating to five loans (filed as Exhibit 2.2
to the Registrant's Current Report on Form 8-K dated September
30, 1998, which exhibit is incorporated herein by reference).
2.3 Economics Equivalents and Funding Agreement by and between
AMRESCO Commercial Finance, Inc. and AMREIT I, Inc. dated
effective as of September 30, 1998 (filed as Exhibit 2.3 to the
Registrant's Current Report on Form 8-K dated September 30,
1998, which exhibit is incorporated herein by reference).
3.1 Amended and Restated Declaration of Trust of the Registrant
(filed as Exhibit 3.1 to the Registrant's Registration
Statement on Form S-11 (Registration No. 333-45543), which
exhibit is incorporated herein by reference).
3.2 First Amendment to Amended and Restated Declaration of Trust of
the Registrant (filed as Exhibit 3.1 to the Registrant's
Current Report on Form 8-K dated May 12, 1998, which exhibit is
incorporated herein by reference).
3.3 Second Amendment to Amended and Restated Declaration of Trust
of the Registrant (filed as Exhibit 3.2 to the Registrant's
Current Report on Form 8-K dated May 12, 1998, which exhibit is
incorporated herein by reference).
3.4 Form of Bylaws of the Registrant (filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-11 (Registration
No. 333-45543), which exhibit is incorporated herein by
reference).
10.1 Interim Warehouse and Security Agreement dated as of July 1,
1998 by and among Prudential Securities Credit Corporation and
AMRESCO Capital Trust, AMREIT I, Inc. and AMREIT II, Inc.
10.2 Master Repurchase Agreement dated as of July 1, 1998 between
Prudential-Bache International, Ltd. and AMRESCO Capital
Trust, AMREIT CMBS I, Inc., AMREIT RMBS I, Inc. and AMREIT II,
Inc.
11 Computation of Per Share Earnings.
27 Financial Data Schedule.