1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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:
10,015,111 shares of common stock, $.01 par value per share,
as of August 1, 1999.
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AMRESCO CAPITAL TRUST
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 ...................................... 3
Consolidated Statements of Income - For the Three and Six Months Ended June 30, 1999, the Three Months
Ended June 30, 1998 and the Period from February 2, 1998 (Date of Initial Capitalization) through
June 30, 1998......................................................................................... 4
Consolidated Statement of Changes in Shareholders' Equity - For the Six Months Ended June
30, 1999.............................................................................................. 5
Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 1999 and the Period from
February 2, 1998 (Date of Initial Capitalization) through June 30, 1998............................... 6
Notes to Consolidated Financial Statements.............................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 26
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 27
Item 5. Other Information................................................................................ 27
Item 6. Exhibits and Reports on Form 8-K................................................................. 28
SIGNATURE ................................................................................................ 29
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMRESCO CAPITAL TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, 1999 December 31,
(unaudited) 1998
------------- ------------
ASSETS
Mortgage loans, net ................................................................ $ 114,506 $ 96,976
Acquisition, development and construction loan arrangements accounted for as real
estate or investments in joint ventures ......................................... 34,987 39,550
---------- ----------
Total loan investments ............................................................. 149,493 136,526
Allowance for loan losses .......................................................... (2,048) (1,368)
---------- ----------
Total loan investments, net of allowance for losses ................................ 147,445 135,158
Commercial mortgage-backed securities - available for sale (at fair value) ......... 26,099 28,754
Real estate, net of accumulated depreciation of $297 and $56, respectively ......... 40,223 10,273
Investments in unconsolidated partnerships and subsidiary .......................... 11,696 3,271
Receivables and other assets ....................................................... 5,431 3,681
Cash and cash equivalents .......................................................... 3,770 9,789
---------- ----------
TOTAL ASSETS .................................................................... $ 234,664 $ 190,926
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and other liabilities .............................................. $ 2,103 $ 941
Amounts due to affiliates ........................................................... 5,968 6,268
Repurchase agreement ................................................................ 10,393 --
Line of credit ...................................................................... 59,338 39,338
Non-recourse debt on real estate .................................................... 26,998 7,500
Dividends payable ................................................................... -- 4,002
---------- ----------
TOTAL LIABILITIES ............................................................... 104,800 58,049
---------- ----------
Minority interests .................................................................. 500 2,611
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 49,650,000 shares authorized, no shares issued ..... -- --
Series A junior participating preferred stock, $.01 par value, 350,000 shares
authorized, no shares issued .................................................... -- --
Common stock, $.01 par value, 200,000,000 shares authorized, 10,015,111 and
10,006,111 shares issued and outstanding, respectively .......................... 100 100
Additional paid-in capital .......................................................... 140,998 140,941
Unearned stock compensation ......................................................... (435) (848)
Accumulated other comprehensive income (loss) ....................................... (9,296) (6,475)
Distributions in excess of accumulated earnings ..................................... (2,003) (3,452)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY ...................................................... 129,364 130,266
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................................... $ 234,664 $ 190,926
========== ==========
See notes to consolidated financial statements.
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AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
Period from
February 2,
Three Months Ended Six Months 1998
June 30, Ended through
------------------------- June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- -----------
REVENUES:
Interest income on mortgage loans .......................... $ 3,878 $ 140 $ 6,935 $ 140
Income from commercial mortgage-backed securities .......... 934 37 1,848 37
Operating income from real estate .......................... 831 17 1,177 17
Equity in earnings of unconsolidated subsidiary,
partnerships and other real estate ventures .............. 64 160 134 160
Interest income from short-term investments ................ 36 907 122 907
---------- ---------- ---------- ----------
TOTAL REVENUES ........................................... 5,743 1,261 10,216 1,261
---------- ---------- ---------- ----------
EXPENSES:
Interest expense ........................................... 1,069 -- 1,658 --
Management fees ............................................ 415 193 1,003 193
General and administrative ................................. 259 198 782 198
Depreciation ............................................... 211 3 297 3
Participating interest in mortgage loans ................... 644 -- 829 --
Provision for loan losses .................................. 438 110 1,180 110
---------- ---------- ---------- ----------
TOTAL EXPENSES ........................................... 3,036 504 5,749 504
---------- ---------- ---------- ----------
INCOME BEFORE GAINS .......................................... 2,707 757 4,467 757
Gain associated with repayment of ADC loan arrangement .... -- -- 584 --
---------- ---------- ---------- ----------
NET INCOME ................................................... $ 2,707 $ 757 $ 5,051 $ 757
========== ========== ========== ==========
EARNINGS PER COMMON SHARE:
Basic ..................................................... $ 0.27 $ 0.14 $ 0.50 $ 0.23
========== ========== ========== ==========
Diluted ................................................... $ 0.27 $ 0.14 $ 0.50 $ 0.23
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ..................................................... 10,000 5,495 10,000 3,356
========== ========== ========== ==========
Diluted ................................................... 10,012 5,498 10,009 3,358
========== ========== ========== ==========
See notes to consolidated financial statements.
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AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock
$.01 Par Value Accumulated Distributions
--------------------- Additional Unearned Other in Excess of Total
Number of Paid-in Stock Comprehensive Accumulated Shareholders'
Shares Amount Capital Compensation Income (Loss) Earnings Equity
------------ ------ ---------- ------------ ------------- -------------- -------------
Balance at January 1, 1999...... 10,006,111 $100 $140,941 $(848) $(6,475) $ (3,452) $ 130,266
Issuance of trust managers'
restricted shares............. 9,000 -- 91 (91) --
Issuance of warrants............ 400 400
Decrease in fair value of
compensatory options ......... (434) 434 --
Amortization of unearned trust
manager compensation.......... 45 45
Amortization of compensatory
options ...................... 25 25
Dividends declared
($0.36 per common share)...... (3,602) (3,602)
Unrealized loss on securities
available for sale............ (2,821) (2,821)
Net income...................... 5,051 5,051
---------- ---- -------- ----- ------- -------- ---------
Balance at June 30, 1999...... 10,015,111 $100 $140,998 $(435) $(9,296) $ (2,003) $ 129,364
========== ==== ======== ===== ======= ======== =========
See notes to consolidated financial statements.
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AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
Period from
Six Months February 2,
Ended 1998
June 30, through
1999 June 30, 1998
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................ $ 5,051 $ 757
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses .......................................................... 1,180 110
Depreciation ....................................................................... 297 3
Gain associated with repayment of ADC loan arrangement ............................. (584) --
Amortization of prepaid assets ..................................................... 117 46
Discount amortization on commercial mortgage-backed securities ..................... (170) --
Amortization of compensatory stock options and unearned trust manager
compensation ..................................................................... 70 95
Amortization of loan commitment fees ............................................... (324) (10)
Receipt of loan commitment fees .................................................... 186 568
Increase in receivables and other assets ........................................... (1,191) (615)
Decrease (increase) in interest receivable related to commercial
mortgage-backed securities ....................................................... 4 (96)
Increase in accounts payable and other liabilities ................................. 1,162 924
Increase in amounts due to affiliates .............................................. 984 139
Increase in deferred income ........................................................ -- 294
Equity in undistributed earnings of unconsolidated subsidiary, partnerships
and other real estate ventures ................................................... (134) (160)
Distributions from unconsolidated subsidiary and other real estate venture ......... 201 69
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..................................... 6,849 2,124
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in mortgage loans ......................................................... (31,778) (22,113)
Investments in ADC loan arrangements .................................................. (15,191) (14,100)
Sale of mortgage loan to affiliate .................................................... 4,585 --
Principal collected on mortgage loans ................................................. 8,072 --
Principal and interest collected on ADC loan arrangement .............................. 11,513 --
Investments in real estate ............................................................ (30,191) --
Investments in unconsolidated partnerships and subsidiary ............................. (2,334) (3,501)
Purchase of commercial mortgage-backed securities ..................................... -- (11,882)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ......................................... (55,324) (51,596)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of credit ......................................... 20,000 --
Proceeds from borrowings under repurchase agreement ................................... 11,795 --
Repayment of borrowings under repurchase agreement .................................... (1,402) --
Proceeds from financing provided by affiliate ......................................... 725 --
Proceeds from non-recourse debt on real estate ........................................ 19,498 --
Deferred financing costs associated with line of credit ............................... (120) --
Deferred financing costs associated with non-recourse debt on real estate ............. (436) --
Net proceeds from issuance of common stock ............................................ -- 139,717
Dividends paid to common shareholders ................................................. (7,604) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ..................................... 42,456 139,717
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................................... (6,019) 90,245
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................................... 9,789 --
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................. $ 3,770 $ 90,245
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid, net of amount capitalized .............................................. $ 1,369 $ --
============ ============
Income taxes paid ..................................................................... $ 25 $ --
============ ============
Minority interest contributions associated with ADC loan arrangements ................. $ -- $ 500
============ ============
Minority interest distribution associated with ADC loan arrangement ................... $ 2,111 $ --
============ ============
Receivables transferred in satisfaction of amounts due to affiliate ................... $ 280 $ --
============ ============
Amounts due to affiliate discharged in connection with sale of mortgage loan .......... $ 1,729 $ --
============ ============
Issuance of warrants in connection with line of credit ................................ $ 400 $ --
============ ============
See notes to consolidated financial statements.
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AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. ORGANIZATION AND RELATIONSHIPS
AMRESCO Capital Trust (the "Company"), a real estate investment trust ("REIT"),
was organized under the laws of the State of Texas. The Company was formed to
take advantage of certain mid- to high-yield lending and investment
opportunities in real estate related assets, including various types of
commercial mortgage loans (including, among others, participating loans,
mezzanine loans, acquisition loans, construction loans, rehabilitation loans
and bridge loans), commercial mortgage-backed securities ("CMBS"), commercial
real estate, equity investments in joint ventures and/or partnerships, and
certain other real estate related assets. The Company was initially capitalized
on February 2, 1998 and commenced operations on May 12, 1998, concurrent with
the completion of its initial public offering ("IPO") of 9,000,000 common
shares and private placement of 1,000,011 common shares.
Pursuant to the terms of a Management Agreement dated as of May 12, 1998 and
subject to the direction and oversight of the Board of Trust Managers, the
Company's day-to-day operations are managed by AMREIT Managers, L.P. (the
"Manager"), an affiliate of AMRESCO, INC. (together with its affiliated
entities, the "AMRESCO Group"). For its services, 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 Manager is also entitled
to receive reimbursement for its costs of providing certain services to the
Company. The base management fee, reimbursable expenses and incentive fee, if
any, are payable quarterly in arrears. During the three and six months ended
June 30, 1999, base management fees charged to the Company totaled $511,000 and
$958,000, respectively. Reimbursable expenses charged to the Company during
these periods totaled $70,000 and $104,000, respectively. During the three
months ended June 30, 1998 and the period from February 2, 1998 (date of
initial capitalization) through June 30, 1998, base management fees charged to
the Company totaled $123,000; reimbursable expenses charged to the Company
during these periods totaled $16,000. Since its inception, no incentive fees
have been charged to the Company. Immediately after the closing of the IPO, the
Manager was granted options to purchase 1,000,011 common shares; 70% of the
options are exercisable at an option price of $15.00 per share and the
remaining 30% of the options are exercisable at an option price of $18.75 per
share. During the three and six months ended June 30, 1999, management fees
included compensatory option charges totaling $(96,000) and $45,000,
respectively. During the three months ended June 30, 1998 and the period from
February 2, 1998 (date of initial capitalization) through June 30, 1998,
management fees included compensatory option charges totaling $70,000.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10,
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting
principles for complete financial statements. The consolidated financial
statements include the accounts of the Company, its wholly-owned subsidiaries
and a majority-owned partnership. The Company accounts for its investment in
AMREIT II, Inc., a taxable subsidiary, using the equity method of accounting,
and thus reports its share of income or loss based on its ownership interest.
The Company uses the equity method of accounting due to the non-voting nature
of its ownership interest and because the Company is entitled to substantially
all of the economic benefits of ownership of AMREIT II, Inc. The Company owns
non-controlling interests in two partnerships; the Company accounts for these
investments using the equity method of accounting and thus reports its share of
income or loss based on its ownership interests. The accompanying financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 (the "10-K"). The notes to
the financial statements included herein highlight significant changes to the
notes included in the 10-K.
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In the opinion of management, the accompanying consolidated financial
statements include all adjustments (consisting of normal and recurring
accruals) necessary for a fair presentation of the interim financial
statements. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for the entire fiscal year or
any other interim period.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities at the date of the
financial statements and revenues and expenses for the reporting period.
Significant estimates include the valuation of commercial mortgage-backed
securities, the allowance for loan losses and the determination of the fair
value of certain share option awards and warrants. Actual results may differ
from those estimates.
Certain prior period amounts have been reclassified to conform with the current
period's presentation.
3. LOAN INVESTMENTS
During the three months ended June 30, 1999, the Company originated one loan
and two of the Company's loans were fully repaid. During the six months ended
June 30, 1999, four of the Company's loans were fully repaid, one loan
origination was closed and one loan was sold to AMRESCO Commercial Finance,
Inc. ("ACFI"), a member of the AMRESCO Group; additionally, one loan was
reclassified, net of a $500,000 charge-off, to investment in unconsolidated
subsidiary following the subsidiary's acquisition (through foreclosure on
February 25, 1999) of the partnership interests of one of the Company's
borrowers. As of June 30, 1999, the Company's loan investments are summarized
as follows (dollars in thousands):
Amount
Outstanding at
Date of Initial Scheduled Collateral Commitment June 30,
Investment Maturity Location Property Type Position Amount 1999
- ------------------ ----------------- -------------- -------------- ------------- ----------- -------------
May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien $14,700 $13,032
June 1, 1998 June 1, 2001 Houston, TX Office First Lien 11,800 10,353
June 12, 1998 June 30, 2000 Pearland, TX Apartment First Lien 12,827 10,987
June 17, 1998 June 30, 2000 San Diego, CA R&D/Bio-Tech First Lien 5,560 4,570
June 19, 1998 June 18, 2000 Houston, TX Office First Lien 24,000 14,016
June 22, 1998 June 19, 2000 Wayland, MA Office First Lien 45,000 36,951
July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests 10,068 7,017
July 2, 1998 June 30, 2000 Washington, D.C. Office First Lien 7,000 5,882
July 10, 1998 July 31, 2000 Pasadena, TX Apartment First Lien 3,350 2,900
September 1, 1998 February 28, 2001 Los Angeles, CA Mixed Use First Lien 18,419 17,418
September 30,1998 Various San Antonio, TX/ Residential First Lien 8,400 2,536
Sunnyvale, TX Lots
September 30, 1998 October 7, 1999 Ft. Worth, TX Apartment Ptrshp Interests 2,650 2,649
September 30, 1998 December 31, 1999 Dallas, TX Medical Office First Lien 3,015 2,596
September 30, 1998 September 22, 1999 Norwood, MA Industrial/Office First Lien 8,765 8,195
October 1, 1998 December 31, 1999 Richardson, TX Office First Lien 567 300
May 18, 1999 May 19, 2001 Irvine, CA Office First Lien 15,260 12,883
-------- --------
$191,381 $152,285
======== ========
Interest Interest
Pay Accrual
Rate Rate
- --------- --------
10.0% 12.0%
12.0% 12.0%
10.0% 11.5%
10.0% 13.5%
12.0% 12.0%
10.5% 10.5%
10.0% 15.0%
10.5% 10.5%
10.0% 14.0%
10.0% 12.0%
10.0% 14.0%
10.5% 16.0%
10.0% 13.0%
10.0% 12.5%
9.3% 15.0%
10.0% 12.0%
At June 30, 1999, amounts outstanding under construction loans,
acquisition/rehabilitation loans, acquisition loans, land development loans and
bridge loans totaled $40,684,000, $47,017,000, $53,553,000, $2,836,000 and
$8,195,000, respectively.
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Three of the 16 loan investments provide the Company with the opportunity for
profit participation in excess of the contractual interest accrual rates. The
loan investments are classified as follows (in thousands):
Loan Amount Balance Sheet Amount
Outstanding at at
June 30, 1999 June 30, 1999
-------------- --------------------
Mortgage loans, net ................................... $ 115,695 $ 114,506
Real estate, net ...................................... 29,573 28,740
Investment in real estate venture ................... 7,017 6,247
--------- ---------
Total ADC loan arrangements ........................ 36,590 34,987
--------- ---------
Total loan investments ................................ $ 152,285 149,493
=========
Allowance for loan losses ............................. (2,048)
---------
Total loan investments, net of allowance for losses ... $ 147,445
=========
The differences between the outstanding loan amounts and the balance sheet
amounts are due primarily to loan commitment fees, interest fundings, minority
interests, capitalized interest and accumulated depreciation.
ADC loan arrangements accounted for as real estate consisted of the following
at June 30, 1999 (in thousands):
Land ............................. $ 4,648
Buildings and improvements ....... 4,377
Construction in progress ......... 19,815
--------
Total ......................... 28,840
Less: Accumulated depreciation ... (100)
--------
$ 28,740
========
A summary of activity for mortgage loans and ADC loan arrangements accounted
for as real estate or investments in joint ventures is as follows (in
thousands):
Balance at December 31, 1998 .......... $136,791
Investments in loans................... 48,052
Collections of principal .............. (19,405)
Cost of mortgage sold ................. (6,314)
Foreclosure (partnership interests) ... (6,839)
--------
Balance at June 30, 1999 .............. $152,285
========
The activity in the allowance for loan losses was as follows (in thousands):
Balance at December 31, 1998 .......... $ 1,368
Provision for losses .................. 1,180
Charge-offs ........................... (500)
Recoveries ............................ -
---------
Balance at June 30, 1999............... $ 2,048
========
As of June 30, 1999, the Company had outstanding commitments to fund
approximately $39,096,000 under 16 loans, of which $990,000 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.
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4. REAL ESTATE
On April 30, 1999, the Company (through a majority-owned partnership) acquired
interests in three newly constructed, grocery-anchored shopping centers in the
Dallas/Fort Worth (Texas) area. These properties, which were acquired by
subsidiary partnerships at an aggregate purchase price of $30.2 million,
include an 86,516 square foot facility in Flower Mound, Texas, a 61,440 square
foot facility in Fort Worth, Texas and an 85,611 square foot facility in
Grapevine, Texas. In connection with these acquisitions, the subsidiary
partnerships which hold title to these assets obtained non-recourse financing
aggregating $19.5 million from an unaffiliated third party (Note 5).
Immediately prior to the closing, the Company contributed $11.4 million of
capital to the partnership. The proceeds from this contribution were used to
fund the balance of the purchase price, to pay costs associated with the
financing and to provide initial working capital to the title-holding
partnerships.
Real estate, which is comprised entirely of amounts derived from the Company's
partnership investment, consisted of the following at June 30, 1999 and
December 31, 1998 (in thousands):
June 30, 1999 December 31, 1998
------------- -----------------
Land ............................. $ 11,285 $ 2,353
Buildings and improvements ....... 29,235 7,976
-------- --------
Total ......................... 40,520 10,329
Less: Accumulated depreciation ... (297) (56)
-------- --------
$ 40,223 $ 10,273
======== ========
In connection with the partnership's procurement of third party financing, the
Company was required to post two irrevocable standby letters of credit totaling
$1,084,000. The letters of credit, which were cancelled on May 4, 1999, were
collateralized by certificates of deposit in a like amount; the certificates of
deposit mature on August 31, 1999. Concurrent with the cancellation and as a
replacement for a portion thereof related to the financing for an additional
acquisition, the Company posted an irrevocable standby letter of credit in the
amount of $304,000. This letter of credit, which expires on September 15, 1999,
is collateralized by a $304,000 certificate of deposit which matures on
September 30, 1999. The certificates of deposit aggregating $1,388,000 at June
30, 1999 are included in receivables and other assets in the consolidated
balance sheet.
5. DEBT AND FINANCING FACILITIES
Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $400 million Interim Warehouse and Security Agreement (the "Line
of Credit") with Prudential Securities Credit Corporation ("PSCC"). Subject to
certain limitations, borrowings under the facility can be used to finance the
Company's structured loan and equity real estate investments. Prior to the
modifications discussed below, borrowings under the Line of Credit bore
interest at rates ranging from LIBOR plus 1% per annum to LIBOR plus 2% per
annum depending upon the type of asset, its loan-to-value ratio and the advance
rate selected by the Company. Advance rates on eligible assets ranged from 50%
to 95% depending upon the asset's characteristics.
Effective as of May 4, 1999, the Company (and certain of its subsidiaries)
entered into an Amended and Restated Interim Warehouse and Security Agreement
(the "Amended Line of Credit") with PSCC; the agreement amended the Company's
existing Line of Credit. The Amended Line of Credit includes the following
modifications: (1) a reduction in the size of the committed facility from $400
million to $300 million; (2) the elimination of the requirement that assets
financed with proceeds from the facility must be securitizable; (3) a reduction
in the amount of capital the Company must fund with respect to construction and
rehabilitation loans before PSCC is required to begin advancing funds; (4) an
extension of the maturity date from July 1, 2000 to November 3, 2000; and (5)
the modification to, and addition of, certain sublimits on certain types of
loans and assets. Under the Amended Line of Credit, borrowings bear interest at
LIBOR plus 1.25% per annum to the extent such borrowings do not exceed the
Company's Tangible Net Worth, as defined; borrowings in excess of the Company's
Tangible Net Worth bear interest at LIBOR plus 3%. At June 30, 1999, the
weighted average interest rate under this facility was 6.19%.
As compensation for entering into the Amended Line of Credit and extending the
maturity date, the Company granted warrants to Prudential Securities
Incorporated, an affiliate of PSCC, to purchase 250,002 common shares of
beneficial
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interest at $9.83 per share. The exercise price represents the average closing
market price of the Company's common shares for the ten-day period ending on
May 3, 1999. The warrants were issued in lieu of a commitment fee or other cash
compensation. The estimated fair value of the warrants, totaling $400,000, was
measured at the grant date and is being amortized to interest expense over the
18-month term of the facility using the straight-line method.
Borrowings under the facility are secured by a first lien security interest on
all assets funded with proceeds from the Amended Line of Credit. The Amended
Line of Credit contains several covenants; among others, the more significant
covenants include the maintenance of a $100 million consolidated Tangible Net
Worth, subject to adjustment in connection with any future equity offerings;
maintenance of a Coverage Ratio, as defined, of not less than 1.4 to 1; and
limitation of Total Indebtedness, as defined, to no more than 400% of
shareholders' equity.
On July 2, 1999, the Company terminated its existing $33.6 million (notional)
interest rate cap agreement at a loss of $4,000. Concurrently, the Company
entered into a new cap agreement to reduce the impact that rising interest
rates would have on its floating rate indebtedness. The new agreement, which
became effective on August 1, 1999, has a notional amount of $59.0 million.
Until its expiration on November 1, 2000, the agreement entitles the Company to
receive from the counterparty the amounts, if any, by which one month LIBOR
exceeds 6.25%. The premium paid for this cap, totaling $110,000, will be
amortized on a straight-line basis over the life of the agreement as an
adjustment of interest incurred.
Three consolidated title-holding partnerships are indebted under the terms of
three non-recourse loan agreements with Jackson National Life Insurance
Company. The loans, aggregating $19,498,000, bear interest at 6.68% per annum.
The loans require interest only payments through January 1, 2002; thereafter,
interest and principal payments are due based upon 25-year amortization
schedules. The loans, which mature on January 1, 2014, prohibit any prepayment
of the outstanding principal prior to January 1, 2006. Thereafter, prepayment
is permitted at any time, in whole or in part, upon payment of a yield
maintenance premium of at least 1% of the then outstanding principal balance.
Obligations under various financing arrangements were as follows at June 30,
1999 and December 31, 1998 (in thousands):
June 30, 1999 December 31, 1998
------------- -----------------
Repurchase agreement......................... $10,393 $ --
Line of credit............................... 59,338 39,338
Non-recourse debt on real estate............. 26,998 7,500
------- -------
$96,729 $46,838
======= =======
6. STOCK-BASED COMPENSATION
As of June 30, 1999, the estimated fair value of the options granted to the
Manager and certain employees of the AMRESCO Group approximated $0.71 per
share. The fair value of the options granted was estimated at June 30, 1999
using the Cox-Ross-Rubinstein option pricing model with the following
assumptions: risk free interest rates ranging from 5.97% to 6.17%; expected
lives ranging from four to seven years; expected volatility of 35%; and
dividend yield of 12%. During the three months ended June 30, 1999,
compensation cost associated with these options was adjusted to reflect the
decline in fair value approximating $0.39 per share. During the three and six
months ended June 30, 1999, the three months ended June 30, 1998 and the period
from February 2, 1998 (date of initial capitalization) through June 30, 1998,
management fees and general and administrative expenses included the following
compensatory option charges (in thousands):
Period from
February 2,
Three Months Ended Six Months 1998
June 30, Ended through
------------------- June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Management fees ....................... $ (96) $ 70 $ 45 $ 70
General and administrative expenses ... (47) 14 (20) 14
----- ----- ----- -----
$(143) $ 84 $ 25 $ 84
===== ===== ===== =====
11
12
In lieu of cash compensation for their services and participation at regularly
scheduled meetings of the Board of Trust Managers, the Company granted 2,250
restricted common shares to each of its four independent trust managers on May
11, 1999. The associated compensation cost is being recognized over the
one-year service period.
At June 30, 1999, 505,506 shares were available for grant in the form of
restricted common shares or options to purchase common shares.
7. EARNINGS PER SHARE
A reconciliation of the numerator and denominator used in computing basic
earnings per share and diluted earnings per share for the three and six months
ended June 30, 1999, the three months ended June 30, 1998 and the period from
February 2, 1998 (date of initial capitalization) through June 30, 1998, is as
follows (in thousands, except per share data):
Period from
February 2,
Three Months Ended Six Months 1998
June 30, Ended through
------------------- June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Net income available to common shareholders ......... $ 2,707 $ 757 $ 5,051 $ 757
======= ======= ======= =======
Weighted average common shares outstanding .......... 10,000 5,495 10,000 3,356
======= ======= ======= =======
Basic earnings per common share ..................... $ 0.27 $ 0.14 $ 0.50 $ 0.23
======= ======= ======= =======
Weighted average common shares outstanding .......... 10,000 5,495 10,000 3,356
Effect of dilutive securities
Restricted shares .................................. 11 3 8 2
Net effect of assumed exercise of stock options .... 1 -- 1 --
------- ------- ------- -------
Adjusted weighted average shares outstanding ........ 10,012 5,498 10,009 3,358
======= ======= ======= =======
Diluted earnings per common share ................... $ 0.27 $ 0.14 $ 0.50 $ 0.23
======= ======= ======= =======
Options and warrants to purchase 1,479,511 and 250,002 shares, respectively, of
common stock were outstanding at June 30, 1999. Options related to 1,473,511
shares and the warrants were not included in the computation of diluted
earnings per share because the exercise prices related thereto were greater
than the average market price of the Company's common shares. The Company was
initially capitalized on February 2, 1998 with the sale of 100 shares to
AMRESCO, INC. The Company had no earnings prior to the commencement of its
operations on May 12, 1998. No options or warrants were outstanding during the
period from February 2, 1998 through May 11, 1998. When calculated for the
period from May 12, 1998 (inception of operations) through June 30, 1998, the
Company's basic and diluted earnings were $0.08 per common share.
8. LEASING ACTIVITIES
As of June 30, 1999, the future minimum lease payments to be received by the
Company (through a majority-owned partnership) under noncancellable operating
leases, which expire on various dates through 2024, are as follows (in
thousands):
1999 .......................... $ 1,849
2000 .......................... 3,736
2001 .......................... 3,753
2002 .......................... 3,779
2003 .......................... 3,752
2004 and thereafter ........... 56,548
--------
$ 73,417
========
Approximately 85% of the future minimum lease payments disclosed above are due
from a regional grocer.
12
13
9. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
except those resulting from investments by, and distributions to, its owners.
Other comprehensive income includes unrealized gains and losses on marketable
securities classified as available-for-sale. Comprehensive income during the
three and six months ended June 30, 1999, the three months ended June 30, 1998
and the period from February 2, 1998 (date of initial capitalization) through
June 30, 1998, is as follows (in thousands):
Period from
February 2,
Three Months Ended Six Months 1998
June 30, Ended through
------------------- June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- -----------
Net income ........................................... $ 2,707 $ 757 $ 5,051 $ 757
Unrealized losses on securities available for sale ... (1,918) -- (2,821) --
------- ------- ------- -------
Comprehensive income ................................. $ 789 $ 757 $ 2,230 $ 757
======= ======= ======= =======
The unrealized losses on securities available for sale had no impact on the
Company's taxable income or cash flow.
10. SEGMENT INFORMATION
The Company, as an investor in real estate related assets, operates in only one
reportable segment. Within this segment, the Company makes asset allocation
decisions based upon its diversification strategies and changes in market
conditions. The Company does not have, nor does it rely upon, any major
customers. All of the Company's investments are secured directly or indirectly
by real estate properties located in the United States; accordingly, all of its
revenues were derived from U.S. operations.
11. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires
that an entity recognize all derivatives as either assets or liabilities in its
balance sheet and that it measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) is dependent upon the intended use of the derivative and the resulting
designation. SFAS No. 133 generally provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of (1) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (2) the earnings effect of the hedged
forecasted transaction. In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
("SFAS No. 137"). SFAS No. 137 deferred the effective date of SFAS No. 133 such
that it is now effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000, although earlier application is encouraged. The Company
has not yet assessed the impact that SFAS No. 133 will have on its financial
condition or results of operations.
13
14
12. SUBSEQUENT EVENTS
On July 22, 1999, the Company declared a dividend of $0.39 per share; the
dividend is payable on August 16, 1999 to shareholders of record on July 31,
1999.
On July 29, 1999, the Company originated a $5,213,000 first lien loan for the
acquisition and conversion of a research and development facility in Lexington,
Massachusetts; the initial advance under this loan totaled approximately
$2,541,000.
Effective as of August 4, 1999, the Company entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Impac Commercial Holdings, Inc. ("ICH").
Pursuant to the Merger Agreement, ICH will be merged with and into the Company,
with the Company as the surviving entity (the "Merger"), and each outstanding
share of common stock of ICH will be converted into 0.66094 of a common share of
the Company. Also pursuant to this agreement, the holder of the outstanding
shares of Series B 8.5% Cumulative Convertible Preferred Stock of ICH ("ICH
Preferred Stock") will convert all of such shares into 1,683,635 shares of
common stock of ICH or, if such conversion does not occur prior to the effective
time of the Merger, all of the shares of ICH Preferred Stock will be converted
into 1,112,782 common shares of the Company. The Merger will be accounted for
under the purchase method of accounting. After the Merger, the Company will have
approximately 16.7 million common shares outstanding. The parties anticipate
that the Merger will be completed in the fourth quarter of 1999. The
transactions contemplated by the Merger Agreement are subject to approval by the
shareholders of the Company and ICH.
14
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
AMRESCO Capital Trust (the "Company") is a real estate investment trust ("REIT")
which was formed in early 1998 to take advantage of certain mid- to high-yield
lending and investment opportunities in real estate related assets, including
various types of commercial mortgage loans (including, among others,
participating loans, mezzanine loans, acquisition loans, construction loans,
rehabilitation loans and bridge loans), commercial mortgage-backed securities
("CMBS"), commercial real estate, equity investments in joint ventures and/or
partnerships, and certain other real estate related assets. Subject to the
direction and oversight of the Board of Trust Managers, the Company's day-to-day
operations are managed by AMREIT Managers, L.P. (the "Manager"), an affiliate of
AMRESCO, INC. (together with its affiliated entities, the "AMRESCO Group").
The Company commenced operations on May 12, 1998 concurrent with the completion
of its initial public offering of 9,000,000 common shares and private placement
of 1,000,011 common shares with AMREIT Holdings, Inc., a wholly-owned subsidiary
of AMRESCO, INC. To date, the Company's investment activities have been focused
in three primary areas: loan investments, CMBS and equity investments in real
estate. The Company expects that its mid- to high-yield loan investments and, to
a lesser extent, equity investments in real estate, will continue to comprise a
substantial portion of its investment portfolio. Similarly, the Company expects
to continue to have 15% to 20% of its invested capital (comprising equity and
proceeds from its two credit facilities) allocated to CMBS.
The Company's investment activities increased during the second quarter of 1999
following the completion (in early May) of modifications to the Company's line
of credit facility. During the quarter, the Company closed one new loan
investment (a $15.3 million commitment, of which $12.9 million was funded
initially) and it approved two additional loan commitments; one of the two
approved loans closed in late July and the other, to be secured by a Canadian
property, is expected to close during the third quarter. Additionally, the
Company advanced $17.4 million under structured loan commitments it had closed
on or prior to December 31, 1998. Loan repayments during the three months ended
June 30, 1999 totaled $6.8 million. During the six months ended June 30, 1999,
advances under structured loan investments totaled $48.1 million while
repayments totaled $19.4 million. Finally, the Company's aggregate capital
contributions to partnerships which hold title to real estate increased from
$4.8 million at March 31, 1999 to $16.2 million at June 30, 1999 as a result of
the Company's acquisition (through a majority-owned partnership) of interests in
three newly constructed, grocery-anchored shopping centers in the Dallas/Fort
Worth (Texas) area. No commercial mortgage-backed securities were acquired
during the recently ended quarter.
The Company believes it has operated and it intends to continue to operate in a
manner so as to continue to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"). As such, the Company has distributed and it
intends to continue to distribute at least 95% of its REIT taxable income
annually.
The Company may experience high volatility in financial statement net income and
tax basis income from quarter to quarter and year to year, primarily as a result
of fluctuations in interest rates, borrowing costs, reinvestment opportunities,
prepayment rates and favorable and unfavorable credit related events (e.g.,
profit participations or credit losses). Additionally, the Company's accounting
for certain real estate loan arrangements as either real estate or joint venture
investments may contribute to volatility in financial statement net income.
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.
The following discussion of results of operations and liquidity and capital
resources should be read in conjunction with the consolidated financial
statements and notes thereto included in "Item 1. Financial Statements".
15
16
RESULTS OF OPERATIONS
Under generally accepted accounting principles, net income for the three and six
months ended June 30, 1999 was $2,707,000 and $5,051,000, respectively, or $0.27
and $0.50 per common share, respectively. The Company's primary sources of
revenue for the three and six months ended June 30, 1999, totaling $5,743,000
and $10,216,000, respectively, were as follows:
o $3,996,000 and $7,160,000, respectively, from loan investments. As certain
of the Company's loan investments are accounted for as either real estate
or joint venture investments for financial reporting purposes, these
revenues are included in the consolidated statement of income for the three
and six months ended June 30, 1999 as follows: interest income on mortgage
loans - $3,878,000 and $6,935,000, respectively; and operating income from
real estate - $118,000 and $225,000, respectively. The loan investments
earn interest at accrual rates ranging from 10.5% to 16% per annum as of
June 30, 1999.
o $934,000 and $1,848,000, respectively, from investments in CMBS.
o $713,000 and $952,000, respectively, of operating income from real estate
owned by the Company (through a majority-owned partnership).
Additionally, the Company realized a gain of $584,000 during the three months
ended March 31, 1999 in connection with the repayment of an ADC loan
arrangement. The gain was comprised principally of interest income earned at the
accrual rate over the life of the loan investment. No gains were realized
during the three months ended June 30, 1999.
The Company incurred expenses of $3,036,000 and $5,749,000, respectively, during
the three and six months ended June 30, 1999, consisting primarily of the
following:
o $415,000 and $1,003,000, respectively, of management fees, including
$511,000 and $958,000, respectively, of base management fees payable to the
Manager pursuant to the Management Agreement and $(96,000) and $45,000,
respectively, of expense associated with compensatory options granted to
the Manager. No incentive fees were incurred during either period.
o $259,000 and $782,000, respectively, of general and administrative costs,
including $0 and $200,000, respectively, of resolution costs associated
with a non-performing loan, $103,000 and $199,000, respectively, for
professional services, $58,000 and $117,000, respectively, for directors
and officers' insurance, $70,000 and $104,000, respectively, of
reimbursable costs pursuant to the Management Agreement, $(47,000) and
$(20,000), respectively, related to compensatory options granted to certain
members of the AMRESCO Group and $23,000 and $45,000, respectively, related
to restricted stock awards to the Company's Independent Trust Managers.
o $1,069,000 and $1,658,000, respectively, of interest expense (net of
capitalized interest totaling $235,000 and $386,000, respectively)
associated with the Company's credit facilities and four non-recourse loans
secured by real estate.
o $438,000 and $1,180,000, respectively, of provision for loan losses. During
the three months ended March 31, 1999, the Company charged-off $500,000
against an existing allowance for losses related to the non-performing loan
referred to above. This loan is discussed further in this section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the sub-heading "Loan Investments".
The Company's policy is to distribute at least 95% of its REIT taxable income to
shareholders each year; to that end, dividends are paid quarterly. Tax basis
income differs from income reported for financial reporting purposes due
primarily to differences in methods of accounting for ADC loan arrangements and
stock-based compensation awards and the nondeductibility, for tax purposes, of
the Company's loan loss reserve (for a discussion of ADC loan arrangements, see
the notes to the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year
16
17
ended December 31, 1998). As a result of these accounting differences, net
income under generally accepted accounting principles is not necessarily an
indicator of distributions to be made by the Company. The following dividends
have been declared in 1999:
Dividend
Declaration Record Payment per
Date Date Date Common Share
------------------ ------------------ -------------------- ----------------
First Quarter April 22, 1999 April 30, 1999 May 17, 1999 $ 0.36
Second Quarter July 22, 1999 July 31, 1999 August 16, 1999 0.39
------
$ 0.75
======
For federal income tax purposes, all dividends declared to date should be
treated as ordinary income to the Company's shareholders.
The Company was initially capitalized through the sale of 100 common shares to
AMRESCO, INC. on February 2, 1998 and it commenced operations on May 12, 1998
concurrent with the completion of its initial public offering of 9,000,000
common shares and private placement of 1,000,011 common shares with AMREIT
Holdings, Inc., a wholly-owned subsidiary of AMRESCO, INC. At June 30, 1998,
$52.0 million of the $139.7 million of net proceeds received from the issuance
of its common shares had been invested in structured finance arrangements and
commercial mortgage-backed securities; the remaining net proceeds were fully
invested during the third quarter of 1998. As of June 30, 1998, the Company had
advanced $36.7 million under seven commercial mortgage loan commitments. During
its initial 50-day period of operations, the Company, either directly or through
its unconsolidated taxable subsidiary, acquired three commercial mortgage-backed
securities at an aggregate purchase price of $15.3 million. The following
comparisons are reflective of the fact that during the entire three and six
months ended June 30, 1999, the Company's net proceeds from the issuance of its
common shares were fully invested and it (and its consolidated partnerships) had
outstanding borrowings under several credit facilities. By contrast, during the
three months ended June 30, 1998 and the period from February 2, 1998 (date of
initial capitalization) through June 30, 1998, the Company had operations for
only 50 days (from May 12, 1998 through June 30, 1998) and it had not fully
invested its net proceeds from the issuance of its common shares nor had it
begun to borrow under its credit facilities.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
The Company's revenues increased 355%, from $1,261,000 to $5,743,000, due
primarily to increases in interest income derived from mortgage loan
investments, income from commercial mortgage-backed securities, and operating
income from real estate; as of June 30, 1998, the Company had not made any
equity investments in real estate. The higher revenues were attributable to new
loan originations and acquisitions, acquisitions of CMBS and real estate, and
additional fundings under commitments which were closed during the Company's
initial 50-day period of operations. During the three months ended June 30,
1999, the average book value of the Company's assets, excluding cash and cash
equivalents, approximated $205 million. Excluding cash and cash equivalents, the
Company had no assets on May 11, 1998. By June 30, 1998, the Company had
accumulated assets with a book value of approximately $52.0 million, excluding
cash and cash equivalents of $90.2 million. Interest income on short-term
investments declined from the comparable period in 1998 as the uninvested
portion of the net proceeds received from the issuance of the Company's common
shares were temporarily invested during such period in short-term investments.
The Company's expenses increased 502%, from $504,000 to $3,036,000, due
primarily to the fact that the Company incurred borrowing costs (including
participating interest in mortgage loans) during the three months ended June 30,
1999; during the comparable period in 1998, no such costs were incurred.
Additionally, base management fees were higher as a result of the Company's
larger asset base upon which the fee is calculated. The Company's loan loss
provision was higher as a result of significantly higher loan balances. Finally,
depreciation expense increased as a result of several real estate acquisitions
which were closed in October 1998 and April 1999.
For the reasons cited above, income before gains and net income increased 258%,
from $757,000 to $2,707,000.
17
18
Six Months Ended June 30, 1999 Compared to Period from February 2, 1998 (Date of
Initial Capitalization) through June 30, 1998
For the reasons described above, the Company's revenues increased 710%, from
$1,261,000 to $10,216,000, and its expenses increased 1040%, from $504,000 to
$5,749,000. Income before gains increased 490%, from $757,000 to $4,467,000, and
net income increased 567%, from $757,000 to $5,051,000. In addition to the
factors cited above, net income increased partially as a result of a gain
realized in connection with the repayment of an ADC loan arrangement.
Loan Investments
During the three months ended June 30, 1999, the Company originated one new loan
(a $15.3 million first lien commitment) and two of the Company's loans
aggregating $5.1 million in then outstanding balances were fully repaid; the
initial advance under the new loan totaled approximately $12.9 million. During
the six months ended June 30, 1999, four of the Company's loans were fully
repaid, one loan origination was closed and one loan was sold to AMRESCO
Commercial Finance, Inc. ("ACFI"), a member of the AMRESCO Group; additionally,
one loan was reclassified, net of a $500,000 charge-off, to investment in
unconsolidated subsidiary following the subsidiary's acquisition (through
foreclosure on February 25, 1999) of the partnership interests of one of the
Company's borrowers. In connection with the loan sale, amounts due to ACFI were
reduced by $2.0 million; as of June 30, 1999, amounts due to ACFI totaled $5.4
million. The proceeds from the four loan repayments and the loan sale totaled
$22.3 million, including accrued interest, a profit participation and a
prepayment fee aggregating $1.0 million. Principal collections on certain of the
Company's other loan investments totaled $1.7 million and $2.7 million during
the three and six months ended June 30, 1999, respectively. During the three and
six months ended June 30, 1999, the Company advanced $17.4 million and $35.2
million, respectively, under loan commitments it had closed on or prior to
December 31, 1998.
Excluding the loan classified as an investment in unconsolidated subsidiary, the
Company has 16 loans representing $191.4 million in aggregate commitments; as of
June 30, 1999, $152.3 million had been advanced under these facilities. A
portion of the commitments may expire without being drawn upon and therefore the
total commitment amounts do not necessarily represent future cash requirements.
After giving effect to ACFI's economic interest (as described in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998), commitments
and amounts outstanding totaled approximately $185.7 million and $147.6 million,
respectively, at June 30, 1999. At June 30, 1999, ACFI's contingent obligation
for additional advances which may be required to be made under certain of the
Company's loans approximated $990,000.
Based upon the amounts outstanding 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 10.6% and
a weighted average interest accrual rate of 11.8% as of June 30, 1999. Five of
the 16 loans provide for profit participation above the contractual accrual
rate; two of these five facilities are included in the pool of loans in which
ACFI has a contractual right to collect certain excess proceeds. The Company's
loan investments are summarized as follows (dollars in thousands):
Amount
Outstanding at
Date of Initial Scheduled Collateral Commitment June 30,
Investment Maturity Location Property Type Position Amount 1999 (c)
- -------------------- ------------------- ---------------- ------------------ ---------------- ---------- ----------------
May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien $ 14,700 $ 13,032
June 1, 1998 June 1, 2001 Houston, TX Office First Lien 11,800 10,353
June 12, 1998 June 30, 2000 Pearland, TX Apartment First Lien 12,827 10,987 (b)
June 17, 1998 June 30, 2000 San Diego, CA R&D/Bio-Tech First Lien 5,560 4,570 (b)
June 19, 1998 June 18, 2000 Houston, TX Office First Lien 24,000 14,016 (b)
June 22, 1998 June 19, 2000 Wayland, MA Office First Lien 45,000 36,951
July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests 10,068 7,017 (a)
July 2, 1998 June 30, 2000 Washington, D.C. Office First Lien 7,000 5,882
July 10, 1998 July 31, 2000 Pasadena, TX Apartment First Lien 3,350 2,900
September 1, 1998 February 28, 2001 Los Angeles, CA Mixed Use First Lien 18,419 17,418
September 30, 1998 Various San Antonio, TX/ Residential Lots First Lien 8,400 2,536
Sunnyvale, TX
September 30, 1998 October 7, 1999 Ft. Worth, TX Apartment Ptrshp Interests 2,650 2,649
September 30, 1998 December 31, 1999 Dallas, TX Medical Office First Lien 3,015 2,596
September 30, 1998 September 22, 1999 Norwood, MA Industrial/Office First Lien 8,765 8,195
October 1, 1998 December 31, 1999 Richardson, TX Office First Lien 567 300
May 18, 1999 May 19, 2001 Irvine, CA Office First Lien 15,260 12,883
--------- ---------
191,381 152,285
ACFI's Economic Interest (5,698) (4,708)
--------- ---------
$ 185,683 (d) $ 147,577 (d)
========= =========
Interest Interest
Date of Initial Pay Accrual
Investment Rate Rate
- ------------------------ --------- -----------
May 12, 1998 10.0% 12.0%
June 1, 1998 12.0% 12.0%
June 12, 1998 10.0% 11.5%
June 17, 1998 10.0% 13.5%
June 19, 1998 12.0% 12.0%
June 22, 1998 10.5% 10.5%
July 1, 1998 10.0% 15.0%
July 2, 1998 10.5% 10.5%
July 10, 1998 10.0% 14.0%
September 1, 1998 10.0% 12.0%
September 30, 1998 10.0% 14.0%
September 30, 1998 10.5% 16.0%
September 30, 1998 10.0% 13.0%
September 30, 1998 10.0% 12.5%
October 1, 1998 9.3% 15.0%
May 18, 1999 10.0% 12.0%
18
19
(a) Accounted for as investment in joint venture for financial reporting
purposes.
(b) Accounted for as real estate for financial reporting purposes.
(c) For all loan investments, payments of interest only are due monthly at the
interest pay rate. All principal and all remaining accrued and unpaid
interest are due at the scheduled maturities of the loans.
(d) Amounts exclude the loan which was reclassified to investment in
unconsolidated subsidiary during the three months ended March 31, 1999.
The Company provides financing through certain real estate loan arrangements
that, because of their nature, qualify either as real estate or joint venture
investments for financial reporting purposes (see notes [a] and [b] accompanying
the table above). As of June 30, 1999, loan investments representing
approximately $52,455,000 in aggregate commitments were accounted for as either
real estate or joint venture interests; approximately $36,590,000 had been
advanced to borrowers under the related agreements. For a discussion of these
loan arrangements, see the Company's consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
A mezzanine (second lien) loan with an outstanding balance of $6,839,000 and a
recorded investment of $6,659,000 was over 30 days past due as of December 31,
1998. The allowance for loan losses related to this investment totaled $500,000
at December 31, 1998. On February 25, 1999, an unconsolidated taxable subsidiary
of the Company assumed control of the borrower (a partnership) through
foreclosure of the partnership interests. In addition to the second lien
mortgage, the property is encumbered by a $17 million first lien mortgage
provided by an unaffiliated third party. During the first quarter, the Company
charged-off $500,000 against the allowance for losses related to this
investment. Should the Company incur an actual loss on this investment, tax
basis income would be adversely affected.
At June 30, 1999, the Company's commercial mortgage loan commitments were
geographically dispersed in three states and the District of Columbia: Texas
(48%); Massachusetts (27%); California (21%); and Washington, D.C. (4%). The
underlying collateral for these loans was comprised of the following property
types: office (69%); multifamily (10%); mixed use (10%); residential (4%);
industrial (3%); R&D/Bio-Tech (3%); and medical office (1%). Acquisition loans,
acquisition/rehabilitation loans, construction loans, single-family lot
development loans and bridge loans comprised 34%, 30%, 29%, 5% and 2% of the
portfolio, respectively. Eighty-five percent of the portfolio is comprised of
first lien loans while the balance of the portfolio (15%) 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.
Additionally, the percentages exclude the loan which was reclassified to
investment in unconsolidated subsidiary during the first quarter of 1999.
Until the loan 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 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 loan investment portfolio.
Commercial Mortgage-backed Securities
As of June 30, 1999, the Company holds five commercial mortgage-backed
securities ("CMBS") which were acquired at an aggregate purchase price of $34.5
million. All of these securities were acquired on or before September 1, 1998.
Due an increase in comparable-term U.S. Treasury rates and increasing spreads in
the CMBS market during the three and six months ended June 30, 1999, the value
of the Company's CMBS holdings declined by $1,915,000 and $2,822,000,
respectively; accordingly, the Company recorded an unrealized loss of $1,915,000
and $2,822,000, respectively, on its CMBS portfolio during the three and six
months ended June 30, 1999. Additionally, during the three and six months ended
June 30, 1999 the Company recorded an unrealized loss of $3,000 and an
unrealized gain of $1,000, respectively, net of tax effects, related to one
commercial mortgage-backed security owned by its unconsolidated taxable
subsidiary; the security held by this subsidiary has an investment rating of
"B-". As these securities are classified as available for sale, the aggregate
unrealized loss was reported as a component of accumulated other comprehensive
income (loss) in shareholders' equity for financial reporting purposes. The
cumulative unrealized losses (totaling $9.3 million) have had no impact on the
Company's taxable income or cash flow. Management intends to retain these
investments for the foreseeable future. Excluding the potential tax effects
associated with the security held by the Company's unconsolidated taxable
subsidiary, the weighted average unleveraged yield over the
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expected life of these investments is expected to approximate 11.4%. The
Company's direct CMBS investments are summarized as follows (dollars in
thousands):
Percentage of
Security Aggregate Aggregate Total Based
Rating Amortized Cost Fair Value on Fair Value
------------- ------------------ ----------------- ----------------
BB- $ 4,248 $ 3,429 13%
B 19,590 15,736 60%
B- 11,328 6,934 27%
-------- -------- ----
$ 35,166 $ 26,099 100%
======== ======== ====
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.
In February 1999, the Company contributed $0.7 million to a newly formed
investment partnership with Olympus Real Estate Corporation. The partnership,
which is 5% owned by the Company, acquired several classes of subordinated CMBS
at an aggregate purchase price of $12.7 million. Currently, the Company does not
expect to make any additional investments in the partnership.
Equity Investments in Real Estate
On March 2, 1999, the Company acquired a 49% limited partner interest in a
partnership which owns a 116,000 square foot office building in Richardson,
Texas. The property is encumbered by a first lien mortgage with an outstanding
balance of $13.8 million at June 30, 1999. The Company contributed $1.4 million
of capital to the partnership.
On April 30, 1999, the Company (through a majority-owned partnership) acquired
interests in three newly constructed, grocery-anchored shopping centers in the
Dallas/Fort Worth (Texas) area. These properties, which were acquired by three
subsidiary partnerships at an aggregate purchase price of $30.2 million, include
an 86,516 square foot facility in Flower Mound, Texas, a 61,440 square foot
facility in Fort Worth, Texas and an 85,611 square foot facility in Grapevine,
Texas. In connection with these acquisitions, the three title-holding
partnerships obtained non-recourse financing aggregating $19.5 million from an
unaffiliated third party. Immediately prior to the closing, the Company
contributed $11.4 million of capital to the partnership. The proceeds from this
contribution were used to fund the balance of the purchase price, to pay costs
associated with the financing and to provide initial working capital to the
title-holding partnerships. With this transaction, the Company has now
contributed a total of $16.2 million of capital to partnerships that hold title
to real estate. The non-recourse loans bear interest at 6.68% per annum and
require interest only payments through January 1, 2002; thereafter, interest and
principal payments are due based upon 25-year amortization schedules.
The loans mature on January 1, 2014.
The Company, (through the majority-owned partnership), expects to acquire a
fifth center, an 87,540 square foot facility in Richardson, Texas, during the
third quarter of 1999 following the completion of construction and satisfaction
of certain other closing conditions. The fifth center is expected to be acquired
at a purchase price of approximately $10.8 million; it is anticipated that this
acquisition will be financed with a $3.2 million equity contribution from the
Company and $7.6 million of third party non-recourse financing.
Ultimately, the Company expects to construct an additional 62,000 square feet of
side-store space; this development is expected to occur at the three recently
acquired properties and at the fifth center (following the acquisition thereof).
It is currently anticipated that the development costs will be financed with an
additional $1 million equity contribution from the Company and $3.8 million of
third party financing proceeds.
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
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its indebtedness, debt repayments and distributions to its shareholders. In the
near term, the Company's principal sources of liquidity are the funds available
to it under its financing facilities described below.
Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $400 million credit facility (the "Line of Credit") with
Prudential Securities Credit Corporation ("PSCC"). Subject to PSCC's approval on
an asset by asset basis, borrowings under the facility can be used to finance
the Company's structured loan and equity real estate investments. As a result of
the dislocation in the capital markets in mid to late 1998, PSCC became more
restrictive in the application of its approval rights with respect to financing
for new investments sought by the Company; accordingly, very few new investments
were consummated during the fourth quarter of 1998 and the first quarter of
1999. Prior to the modifications discussed below, borrowings under the Line of
Credit bore interest at rates ranging from LIBOR plus 1% per annum to LIBOR plus
2% per annum. At December 31, 1998, $39,338,000 had been borrowed under the Line
of Credit. To reduce the impact that rising interest rates would have on this
floating rate indebtedness, the Company entered into an interest rate cap
agreement which became effective on January 1, 1999; the agreement had a
notional amount of $33,600,000 and was scheduled to expire on July 1, 2000. The
agreement entitled the Company to receive from a counterparty the amounts, if
any, by which one month LIBOR exceeded 6.0%. Prior to its termination (as
described below), no payments were due from the counterparty as one month LIBOR
had not exceeded 6.0%. On July 2, 1999, the agreement was terminated and
replaced with an interest rate cap agreement which became effective on August 1,
1999. The new agreement, which was entered into to more closely match the then
outstanding borrowings, has a notional amount of $59,000,000. Until its
expiration on November 1, 2000, the agreement entitles the Company to receive
from a counterparty the amounts, if any, by which one month LIBOR exceeds 6.25%.
There are no margin requirements associated with interest rate caps and
therefore there is no liquidity risk associated with this particular hedging
instrument.
Effective as of May 4, 1999, the Company (and certain of its subsidiaries)
entered into an Amended and Restated Interim Warehouse and Security Agreement
(the "Amended Line of Credit") with PSCC; the agreement amended the Company's
existing line of credit. The Amended Line of Credit includes the following
modifications: (1) a reduction in the size of the committed facility from $400
million to $300 million; (2) the elimination of the requirement that assets
financed with proceeds from the facility must be securitizable; (3) a reduction
in the amount of capital the Company must fund with respect to construction and
rehabilitation loans before PSCC is required to begin advancing funds; (4) an
extension of the maturity date from July 1, 2000 to November 3, 2000; and (5)
the modification to, and addition of, certain sublimits on certain types of
loans and assets. Under the Amended Line of Credit, borrowings bear interest at
LIBOR plus 1.25% per annum to the extent such borrowings do not exceed the
Company's Tangible Net Worth, as defined; borrowings in excess of the Company's
Tangible Net Worth bear interest at LIBOR plus 3%. Borrowings are secured by a
first lien security interest in all assets funded with proceeds from the Amended
Line of Credit. At June 30, 1999, $59,338,000 had been borrowed under the
Amended Line of Credit. The weighted average interest rate at June 30, 1999 was
6.19%.
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 an assignment to PBI of all mortgage-backed
securities funded with proceeds from the Repurchase Agreement. The Repurchase
Agreement matures on June 30, 2000. At June 30, 1999, $10,393,000 was
outstanding under the Repurchase Agreement. At December 31, 1998, there were no
outstanding borrowings under this facility. The weighted average interest rate
at June 30, 1999 was 6.36%.
Under the terms of the Amended Line of Credit 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.
The Company believes that the funds available under its two credit facilities
will be sufficient to meet the Company's liquidity and capital requirements
through the maturity date of the Amended Line of Credit. The Company believes
that the Amended Line of Credit will provide it with more flexibility, which in
turn will allow it to utilize favorable financing terms in connection with the
origination of investments and enable it to resume the growth of its assets,
albeit at a slower
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rate than was achieved in the second and third quarters of 1998. The Company,
however, remains subject to capital constraints. In particular, the Company's
ability to raise additional capital through the public equity and debt markets
continues to be severely limited. The Company is continuing its efforts to
obtain additional secured loan facilities that would better match the duration
of its assets. Additionally, these efforts are designed to provide alternatives
to the Amended Line of Credit and, ultimately, to replace it. However, there can
be no assurances that the Company will be able to obtain renewal or additional
financing on acceptable terms.
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 believes it 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 Amended Line of Credit 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 to fund growth, the Company has been
relatively insulated from the effects of the dislocation in the capital markets.
While the market value of the Company's CMBS holdings has declined, 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 to date, although general economic conditions could
adversely impact real estate values in the future.
REIT STATUS
Management believes that the Company is operated in a manner that will enable it
to continue to qualify as a REIT for federal income tax purposes. As a REIT, the
Company will not pay income taxes at the trust level on any taxable income which
is distributed to its shareholders, although AMREIT II, Inc., its "Non-Qualified
REIT Subsidiary", may be subject to tax at the corporate level. Qualification
for treatment as a REIT requires the Company to meet 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
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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 used
in connection with the operations of the Manager or the Company, and the Company
has received a written representation from AMRESCO, INC. that Year 2000
readiness was achieved by December 1998 with respect to 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.
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. has communicated 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. has sought 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, nor is it
likely that responses will be received from all such third parties. 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. conducted 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 in connection
with the operations of the Manager or the Company.
For all business-critical systems interfaces used in connection with the
operations of the Manager and the Company, AMRESCO, INC. advised the Company
that readiness was achieved by December 31, 1998. Replacement providers believed
to be compliant have been identified for significant third party providers that
did not complete their Year 2000 initiatives.
There can be no assurance that the systems of AMRESCO, INC. or those of third
parties will not experience adverse effects after December 31, 1999.
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.
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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).
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 equity investments in a partnership that will
ultimately own interests in five grocery-anchored shopping centers and in a
partnership which owns a suburban office building. These operations will be
subject to many of the risks set forth above. Although the Company intends to
monitor Year 2000 readiness, there can be no guarantee that all building systems
will be Year 2000 compliant.
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
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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.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q are not based on historical facts
and are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company intends that
forward-looking statements be subject to such Act and any similar state or
federal laws. Forward-looking statements, which are based on various
assumptions, include statements regarding the intent, belief or current
expectations of the Company, its Manager, and their respective Trustees or
directors and officers, and may be identified by reference to a future period or
periods or by use of forward-looking terminology such as "intends," "may,"
"could," "will," "believe," "expect," "anticipate," "plan," or similar terms or
variations of those terms or the negative of those terms. Actual results could
differ materially from those set forth in forward-looking statements due to
risks, uncertainties and changes with respect to a variety of factors,
including, but not limited to, changes in international, national, regional or
local economic environments, changes in prevailing interest rates, credit and
prepayment risks, basis and asset/liability risks, spread risk, event risk,
conditions which may affect public securities and debt markets generally or the
markets in which the Company operates, the Year 2000 issue, the availability of
and costs associated with obtaining adequate and timely sources of liquidity,
dependence on existing sources of funding, the size and liquidity of the
secondary market for commercial mortgage-backed securities, geographic or
product type concentrations of assets (temporary or otherwise), hedge mismatches
with liabilities, other factors generally understood to affect the real estate
acquisition, mortgage and leasing markets and securities investments, changes in
federal income tax laws and regulations, and other risks described from time to
time in the Company's SEC reports and filings, including its registration
statement on Form S-11 and periodic reports on Form 10-Q, Form 8-K and Form
10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a party to various financial instruments which are subject to
market risk. These instruments include mortgage loan investments, investments in
commercial mortgage-backed securities ("CMBS") and certain of the Company's
borrowing facilities. The Company is also a party to an interest rate cap
agreement which it entered into in order to mitigate the market risk exposure
associated with its credit facilities. The Company's financial instruments
involve, to varying degrees, elements of interest rate risk. Additionally, the
Company's investment portfolio, which is comprised of both financial instruments
(mortgage loans and CMBS) and equity investments in real estate, is subject to
real estate market risk. The Company is a party to certain other financial
instruments, including trade receivables and payables and amounts due to
affiliates which, due to their short-term nature, are not subject to market
risk. For a discussion of market risk exposures, reference is made to Item 7A.
"Quantitative and Qualitative Disclosures About Market Risk" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998. The market risk
exposures described therein have not materially changed since December 31, 1998;
accordingly, no additional discussion or analysis is provided in this Form 10-Q.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of Shareholders was held on May 11, 1999. There were
8,461,410 shares present in person or by proxy, which constituted 84.5% of the
shares entitled to vote at the meeting. The matters voted upon and the results
of such votes were as follows:
(i) Election of Robert L. Adair III (7,172,986 shares voted in
favor and 1,288,424 shares withheld) and John C. Deterding
(7,172,716 shares voted in favor and 1,288,694 shares
withheld) as Trust Managers for a three year term.
(ii) Approval and ratification of the appointment by the Board
of Trust Managers of Deloitte & Touche LLP as the Company's
independent public accountants for the 1999 fiscal year
with 8,430,385 shares voted in favor, 7,875 shares voted
against and 23,150 shares abstained.
(iii) Approval of an amendment to Article 2 of the AMRESCO
Capital Trust 1998 Share Option and Award Plan to increase
the aggregate number of common shares of beneficial
interest reserved for issuance thereunder by 500,000 with
5,715,897 shares voted in favor, 2,324,963 shares voted
against and 420,550 shares abstained.
ITEM 5. OTHER INFORMATION
Effective as of August 4, 1999, the Company entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Impac Commercial Holdings, Inc. ("ICH").
Pursuant to the Merger Agreement, ICH will be merged with and into the Company,
with the Company as the surviving entity (the "Merger"), and each outstanding
share of common stock of ICH will be converted into 0.66094 of a common share of
the Company. Also pursuant to the Merger Agreement, the holder of the
outstanding shares of Series B 8.5% Cumulative Convertible Preferred Stock of
ICH ("ICH Preferred Stock") will convert all of such shares into 1,683,635
shares of common stock of ICH or, if such conversion does not occur prior to the
effective time of the Merger, all of the shares of ICH Preferred Stock will be
converted into 1,112,782 common shares of the Company. The transactions
contemplated by the Merger Agreement are subject to approval by the shareholders
of the Company and ICH.
A copy of the Merger Agreement is attached as an exhibit to this report.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Exhibit Index
Exhibit No.
2.1 Agreement and Plan of Merger, dated as of August
4, 1999, by and between the Company and Impac
Commercial Holdings, Inc.
4.1 Rights Agreement, dated as of February 25, 1999,
between the Company and The Bank of New York, as
Rights Agent, which includes: as Exhibit A
thereto, the Form of Statement of Designation of
Series A Junior Participating Preferred Shares,
par value $.01 per share, of the Company; as
Exhibit B thereto, the Form of Right Certificate;
and as Exhibit C thereto, the Summary of Rights to
Purchase Preferred Shares (filed as Exhibit 1 to
the Registrant's Current Report on Form 8-K dated
February 25, 1999, which exhibit is incorporated
herein by reference).
10.1 Amended and Restated Interim Warehouse and
Security Agreement dated as of May 4, 1999, by and
among Prudential Securities Credit Corporation and
AMRESCO Capital Trust, AMREIT I, Inc., AMREIT II,
Inc., ACT Equities, Inc. and ACT Holdings, Inc.
(filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1999, which exhibit is
incorporated herein by reference).
10.2 Warrant Agreement dated as of May 4, 1999 between
AMRESCO Capital Trust and Prudential Securities
Incorporated (filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999, which
exhibit is incorporated herein by reference).
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:
None.
28
29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMRESCO CAPITAL TRUST
Registrant
Date: August 16, 1999 By: /s/Thomas J. Andrus
---------------------------
Thomas J. Andrus
Executive Vice President
and Chief Financial Officer
29
30
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Agreement and Plan of Merger, dated as of August 4, 1999, by
and between the Company and Impac Commercial Holdings, Inc.
4.1 Rights Agreement, dated as of February 25, 1999, between the
Company and The Bank of New York, as Rights Agent, which
includes: as Exhibit A thereto, the Form of Statement of
Designation of Series A Junior Participating Preferred Shares,
par value $.01 per share, of the Company; as Exhibit B thereto,
the Form of Right Certificate; and as Exhibit C thereto, the
Summary of Rights to Purchase Preferred Shares (filed as
Exhibit 1 to the Registrant's Current Report on Form 8-K dated
February 25, 1999, which exhibit is incorporated herein by
reference).
10.1 Amended and Restated Interim Warehouse and Security Agreement
dated as of May 4, 1999, by and among Prudential Securities
Credit Corporation and AMRESCO Capital Trust, AMREIT I, Inc.,
AMREIT II, Inc., ACT Equities, Inc. and ACT Holdings, Inc.
(filed as Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1999, which
exhibit is incorporated herein by reference).
10.2 Warrant Agreement dated as of May 4, 1999 between AMRESCO
Capital Trust and Prudential Securities Incorporated (filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1999, which exhibit is
incorporated herein by reference).
27 Financial Data Schedule.