1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(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
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _____________________ to _____________________
Commission file number 0-23917
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Chastain Capital Corporation
(Exact name of registrant as specified in its governing instrument)
Georgia 58-2354416
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
3424 Peachtree Road N.E., Suite 800, Atlanta, Georgia 30326
(Address of principal executive office) (Zip Code)
(404) 848-8850
(Registrant's telephone number, including area code)
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: 7,346,778 shares of common
stock outstanding as of August 13, 1999
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CHASTAIN CAPITAL CORPORATION
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 (Unaudited)
Consolidated Statements of Operations for the three and six
months ended June 30, 1999 and 1998 (Unaudited)
Consolidated Statement of Changes in Shareholders' Equity
for the six months ended June 30, 1999 (Unaudited)
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosure about Market Risk
PART II - OTHER INFORMATION
Items 1 through 6
Signatures
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHASTAIN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998 (Unaudited)
June 30, December 31,
1999 1998
-------- ------------
ASSETS
Commercial mortgage-backed securities (CMBS) available-for-sale,
at fair value $ 18,946,951 $ 71,567,475
Mezzanine loan investments 44,990,786 44,374,346
Mortgage loan investments -- 15,150,400
Real estate investment held for sale, net 3,496,460 7,294,583
Cash and short-term investments 5,991,187 11,957,616
Escrow cash -- 2,138,011
Accrued interest receivable 279,079 1,153,989
Other assets 294,481 876,006
------------- -------------
Total assets $ 73,998,944 $ 154,512,426
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Short-term borrowings $ -- $ 61,918,156
Subordinated debt to related party -- 9,000,000
Borrowings under repurchase agreement 10,069,000 7,926,375
Treasury locks payable 5,034,951 10,887,660
Accrued management fees 436,911 438,842
Accrued interest expense -- 374,759
Accrued expenses and other liabilities 761,792 4,127,931
------------- -------------
Total liabilities 16,302,654 94,673,723
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SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value. Authorized 25,000,000 shares, no
shares issued
Common stock, $.01 par value. Authorized 200,000,000 shares,
7,346,778 issued and outstanding at June 30, 1999 and
December 31, 1998 73,468 73,468
Additional paid-in capital 108,692,169 108,692,169
Distributions in excess of earnings:
Accumulated losses from operations (37,583,806) (38,105,018)
Accumulated losses from sale of assets (10,230,302) (7,566,677)
Dividends paid (3,255,239) (3,255,239)
------------- -------------
Total distributions in excess of earnings (51,069,347) (48,926,934)
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Total shareholders' equity 57,696,290 59,838,703
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Total liabilities and shareholders' equity $ 73,998,944 $ 154,512,426
============= =============
See accompanying Notes to Consolidated Financial Statements.
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CHASTAIN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
REVENUE:
Interest income on CMBS $ 530,617 $ 317,095 $ 2,363,809 $ 317,095
Interest income on mezzanine loan investments 1,201,265 11,602 2,409,268 11,602
Interest income on mortgage loan investments -- -- 9,739 --
Rental income 163,711 7,979 460,716 7,979
Other income 10,815 -- 22,312 --
Other interest income 92,279 1,009,314 183,185 1,009,314
----------- ----------- ----------- ----------
Total revenue 1,998,687 1,345,990 5,449,029 1,345,990
----------- ----------- ----------- ----------
OPERATING EXPENSES:
Stock compensation to Manager -- 877,917 -- 877,917
Impairment loss on CMBS 2,079,322 -- 2,549,850 --
Asset selling costs 750,000 -- 750,000 --
Decrease in impairment on mezzanine loans (1,136,107) -- (1,136,107) --
Interest expense 408,535 -- 1,644,889 --
Management fees 157,442 220,986 436,911 220,986
General and administrative expense 245,968 179,198 345,294 179,198
Real estate operating expenses 41,140 2,366 152,054 2,366
Depreciation and amortization -- 5,313 135,926 5,313
Loss on termination of interest rate collar -- -- 49,000 --
----------- ----------- ----------- ----------
Total operating expenses 2,546,300 1,285,780 4,927,817 1,285,780
----------- ----------- ----------- ----------
OPERATING INCOME (LOSS) BEFORE ASSET SALES (547,613) 60,210 521,212 60,210
REALIZED GAINS (LOSSES) ON SALE OF ASSETS:
Gain (Loss) on sale of CMBS -- 42,426 (2,561,102) 42,426
Loss on sale and settlement of mortgage loans -- -- (97,929) --
Loss on sale of real estate -- -- (4,594) --
----------- =========== =========== ==========
NET INCOME (LOSS) $ (547,613) $ 102,636 $(2,142,413) $ 102,636
=========== =========== =========== ==========
NET INCOME (LOSS) PER COMMON SHARE:
Basic and Diluted $ (0.07) $ 0.01 $ (0.29) $ 0.01
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 7,346,728 8,980,778 7,346,728 8,980,778
See accompanying Notes to Consolidated Financial Statements.
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CHASTAIN CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Distributions in Excess of Earnings
-----------------------------------
Number of Additional Total
Shares Common Paid-in Accumulated Losses from Shareholders'
Outstanding Stock Capital Operations Sale of Assets Dividends Paid Equity
----------- ------ ---------- ----------- -------------- -------------- -------------
Balance at
December 31,
1998 7,346,778 $73,468 $108,692,169 $(38,105,018) $ (7,566,677) $(3,255,239) 59,838,703
Net loss -- -- -- 521,212 (2,663,625) -- (2,142,413)
------------------------------------------------------------------------------------------------------------
Balance at
June 30, 1999 7,346,778 $73,468 $108,692,169 $(37,583,806) $(10,230,302) $(3,255,239) $ 57,696,290
============================================================================================================
See accompanying Notes to Consolidated Financial Statements.
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CHASTAIN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
For the Six Months Ended June 30,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,142,413) $ 102,636
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Impairment loss on investments 1,413,743 --
Loss (Gain) on sale of CMBS 2,561,102 (42,426)
Losses on termination of interest rate collar 49,000 --
Non-cash interest expense on rate lock agreements 284,047 --
Loss on sale and settlement of mortgage loan 97,929 --
investments
Loss on sale of real estate 4,594 --
Depreciation and amortization 135,926 5,313
Amortization of discount/premium on CMBS
available-for-sale (263,220) (11,849)
Amortization of premium on mezzanine loan investment 149,890 1,462
Stock options issued -- 888,773
Shares issued for directors fees 45,000
Net (increase) decrease in assets:
Accrued interest receivable 874,910 (655,057)
Other assets 2,583,610 (457,805)
Net increase (decrease) in liabilities:
Accrued interest expense (374,759) --
Accrued management fees (1,931) 220,986
Accrued expenses and other liabilities (2,475,344) 598,277
------------ -------------
Net cash provided by operating activities 2,897,084 695,310
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of CMBS available-for-sale -- (77,084,208)
Proceeds from sale of CMBS available-for-sale 47,772,792 3,477,500
Purchase of mezzanine loan investments -- (25,780,000)
Proceeds from sale of mortgage loan investment 15,052,470 --
Purchase of real estate investment -- (3,678,346)
Proceeds from sale of real estate investment 2,904,612 --
Repayments on investment borrowings 369,778 --
Capital additions to real estate (1,877) --
------------ -------------
Net cash provided by (used in) investing activities 66,097,775 (103,065,054)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering -- 124,937,334
Deferred financing costs incurred -- (52,650)
Repayments of loan facilities (87,275,531) --
Proceeds from loan facilities 18,500,000 --
Repayments of treasury lock liability (5,920,757)
Repayments of interest rate collar (265,000) --
------------ -------------
Net cash provided by (used in) financing activities (74,961,288) 124,884,684
------------ -------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS (5,966,429) 22,514,940
Cash and cash equivalents at beginning of period 11,957,616 1,000
------------ -------------
Cash and cash equivalents at end of period $ 5,991,187 $ 22,515,940
============ =============
Cash paid for interest $ 1,630,601 $ --
============ =============
See accompanying Notes to Consolidated Financial Statements.
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CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Chastain Capital Corporation (the "Company") was incorporated in Georgia on
December 16, 1997 and was initially capitalized on such date through the sale of
100 shares of common stock, par value $0.01 per share ("Common Stock"), for an
aggregate purchase price of $1,000. On April 23, 1998, the Company commenced
operations through the consummation of an initial public offering ("IPO") of
7,380,000 shares of its Common Stock, with gross proceeds of $110,700,000 and
net proceeds to the Company of $102,951,000. Additional public offering costs of
$1,215,750 were incurred in connection with the IPO.
The Company also issued, pursuant to two separate private placements, an
aggregate of 897,678 shares of Common Stock to Lend Lease Investments Holdings,
Inc. ("LLIH", formerly ERE Yarmouth Holdings, Inc.), an indirect wholly-owned
subsidiary of Lend Lease Corporation Limited ("Lend Lease"), and 700,000 shares
of Common Stock to FBR Asset Investment Corporation, an affiliate of Friedman,
Billings, Ramsey & Co., Inc. (lead underwriter of the Company's IPO). The two
private placements closed concurrently with the closing of the IPO, at $13.95
per share, with total proceeds to the Company of $22,287,608.
Pursuant to the Company's Directors Stock Plan, each of the Company's three
independent directors received, as of the consummation of the IPO, $15,000 worth
of Common Stock equal to 1,000 shares as part of their annual director's fee.
The Company was organized to originate first lien commercial and multifamily
mortgage loans for the purpose of issuing collateralized mortgage obligations
("CMOs") collateralized by its mortgage loans and retaining the mortgage loans
subject to the CMO debt. The Company also was organized to acquire subordinated
interests in commercial mortgage-backed securities ("CMBS"), originate and
acquire loans on real property that are subordinated to first lien mortgage
loans and acquire real property and other real estate related assets.
On October 23, 1998, the Company announced that due to turmoil in the credit
markets, it was necessary to obtain temporary waivers from Morgan Guaranty Trust
Company of New York ("Morgan Guaranty Trust") and Merrill Lynch Mortgage
Capital, Inc. ("Merrill Lynch") to avoid being in default of tangible net worth
covenants under the Company's credit facilities. The Board of Directors decided
to discontinue new investment activity and concluded that the Company needed to
be restructured. On November 13, 1998, the Company reached an agreement with
Morgan Guaranty Trust and Merrill Lynch to restructure its credit facilities and
to dispose of certain assets to reduce the size and stabilize the volatility of
the overall portfolio. Proceeds from the asset sales were used to reduce
outstanding indebtedness on both credit facilities. Through the asset sales and
indebtedness reduction, the Company was able to satisfy its immediate liquidity
needs. The remaining portfolio consists primarily of CMBS, mezzanine loan
investments and real estate.
In connection with the credit facility amendments, LLIH agreed to provide the
Company with up to $40 million of unsecured subordinated debt. An initial
advance of $17 million was drawn on November 13, 1998 and the remaining funds
were available to be drawn from time to time by the Company through maturity on
March 31, 1999. The advances incurred interest at the rate of 14% per annum
through January 31, 1999 and 16% thereafter. The terms of the subordinated debt
were reviewed and approved by a special committee of the Board of Directors
consisting of independent directors not affiliated with Lend Lease. The special
committee obtained the advice of independent financial advisors and legal
counsel in negotiating the terms of the loan.
The amended credit facilities and new subordinated debt agreement provided the
Company with the necessary liquidity in the short term to fund its mortgage loan
commitments, meet margin calls and hold investments. The Merrill Lynch amendment
required the $19 million in outstanding borrowings be repaid on or before
January 31, 1999. On January 27, 1999, the Merrill Lynch Agreement was further
amended, requiring the borrowings to be repaid on or before February 26, 1999.
On February 25, 1999, the Merrill Lynch agreement was again amended, extending
the maturity date to March 25, 1999. All outstanding indebtedness under the
Merrill Lynch agreement was repaid on March 25, 1999, and the facility was
terminated. All indebtedness under the Morgan Guaranty Trust agreement was
repaid on March 31, 1999. The LLIH subordinated debt agreement was repaid and
terminated on April 5, 1999.
On January 25, 1999, the Board of Directors approved a plan of action to sell
off existing assets to meet the debt maturities. From January 25, 1999 to March
31, 1999, the Company sold certain CMBS for total proceeds of $47.8 million,
resulting in a realized loss of $14.2 million, of which $11.7 million was
recognized in 1998. On March 25, 1999, the Company sold a real estate asset for
$3.8 million, resulting in a realized loss of $262,392, of which $257,797 was
recognized in 1998.
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On April 5, 1999, the Company consummated an agreement (the "GMAC Repo") to
sell an office mezzanine loan with a face value of $21 million to General Motors
Acceptance Corporation ("GMAC"). The agreement allows the Company to repurchase
the investment no later than April 1, 2000. The GMAC Repo generated proceeds of
$10.5 million. The repurchase price of the GMAC Repo will be adjusted such that
GMAC will receive an 8% annualized yield on its investment prior to October 1,
1999. After October 1, 1999, the repurchase price is fixed at $9.6 million. The
Company used $8.5 million of the proceeds of the GMAC Repo to repay borrowings
from LLIH and used the remaining proceeds to meet its remaining corporate
obligations, which primarily consist of hedging liabilities. The Company is
accounting for the GMAC Repo as a financing transaction.
On May 14, 1999, the Company announced that its Board of Directors had voted to
sell all of the Company's assets, either through a plan of liquidation or
through a sale of the Company, with proceeds to be distributed to shareholders.
On August 2, 1999, the Company entered into an agreement to sell all of its
remaining CMBS investments and three of its mezzanine loan investments to
Insignia Opportunity Partners. The aggregate purchase price for the transaction
is $24.4 million. The purchase price is fixed subject to a closing prior to
December 15, 1999, thus movements in interest rates and credit spreads should
not impact the Company's net proceeds. In addition, the Company's Board of
Directors has adopted a Plan of Liquidation and Dissolution (the "Plan"), which
provides for the complete liquidation of the Company's remaining assets and the
dissolution of the Company in accordance with the Georgia Business Corporation
Code. Both the asset sales and the Plan are subject to the approval of holders
of a majority of the outstanding shares of common stock of the Company. The
Company expects to submit these matters to its shareholders at its Annual
Meeting of Shareholders during the fourth quarter of 1999. Prior to the meeting,
the Company may enter into additional agreements for the sale of its assets,
which would also be submitted to shareholders at the meeting. Assuming the Plan
is approved by the shareholders, the Company intends to sell the remaining
assets of the Company in the fourth quarter of 1999 or the first quarter of
2000. The Company expects to distribute the proceeds of such asset sales to
shareholders as the properties are sold, with appropriate reserves for the
Company's liabilities and expenses.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Short-term Investments
All highly liquid investments with maturities of three months or less when
purchased are considered to be short-term investments.
Comprehensive Income (Loss).
Comprehensive income is defined as the change in equity of a business during a
period from transactions and other events and circumstances, excluding those
resulting from investments by and distributions to owners. For the period ended
June 30, 1999 there is no difference between net income (loss) and comprehensive
net income (loss). For the period ending June 30, 1998 comprehensive net income
was 763,712.
CMBS
The Company classifies its CMBS as available-for-sale. Available-for-sale
securities are reported at fair value with net unrealized gains and losses
reported in comprehensive income (loss) as a separate component of shareholders'
equity. The Company recognizes income from CMBS under the effective interest
method, using the anticipated yield over the projected life of the investment.
The Company recognizes impairment on its CMBS when it determines that the
decline in the estimated fair value of its CMBS below cost is other than
temporary. Impairment losses are determined by comparing the estimated fair
value of a CMBS to its current carrying amount, the difference being recognized
as a loss. The Company uses specific identification in determining realized
gains/losses on its CMBS.
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CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mezzanine Loan Investments
The Company purchased and originated certain mezzanine loans to be held as
long-term investments. Loans held for investment are recorded at cost at the
date of purchase. Premiums and discounts related to these loans are amortized
over their estimated lives using the effective interest method. Any origination
fee income, application fee income and direct costs associated with originating
or purchasing mezzanine investments have been deferred and the net amount is
added to the basis of the loans on the balance sheet. The Company recognizes
impairment on the loans when it is probable that the Company will not be able to
collect all amounts due according to the contractual terms of the loan
agreement, or when the fair value of the loans is below amortized cost and the
Company determines that it may not be able to hold the loans until amortized
cost is recovered. As a result of the Company's November 1998 restructuring and
the Board's decision to sell the remaining assets, it is unlikely that the
Company will hold its mezzanine loan investments until maturity. The Company
measures impairment based on the present value of expected future cash flows
discounted at the loan's effective interest rate or Management's estimate of the
fair value of the loan.
Mortgage Loan Investments
The Company originated mortgage loans to be held as long-term investments.
Interest income was recognized using the effective interest rate method. Due to
the turmoil in the credit markets in October 1998, and the Company's revised
credit facility terms, the Company changed its strategy to hold its mortgage
loans for resale. Loans held for resale are accounted for at the lower of cost
or fair value. Fair value is determined based upon the Company's estimate of
market value. Subsequent to December 31, 1998, the Company sold its remaining
mortgage loan investment.
Real Estate Investments
Real estate assets are stated at cost when purchased and are subsequently
reduced by depreciation charges using the straight-line method over the
estimated useful lives of the assets. At June 30, 1999, the Company's investment
in real estate is classified as held for sale and is carried at the lower of
cost or fair value less estimated selling costs.
Income Taxes
The Company elected to be taxed as a REIT under the Internal Revenue Code of
1986 (the "Code"), as amended, commencing with its first REIT taxable year ended
on December 31, 1998. As a REIT, the Company generally is not subject to federal
corporate income taxes on net income that it distributes to shareholders,
provided that the Company meets certain other requirements for qualification as
a REIT under the Code. Because the Company believes that it qualifies as a REIT
and because the Company is reporting net losses year to date for 1999, no
provision has been made for federal income taxes for the Company in the
accompanying consolidated financial statements.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed on the basis of the weighted
average number of shares outstanding for the period. Diluted net income (loss)
per share is computed on the basis of the weighted average number of shares and
dilutive common equivalent shares outstanding for the period. For all periods
presented, all outstanding options to purchase 1,246,253 shares of Common Stock
were anti-dilutive. Accordingly, there is no difference between basic and
diluted net income (loss) per common share.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
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CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 133 "Accounting for Derivative Instruments and for
Hedging Activities" ("FAS 133"). FAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. FAS 133 is
effective for the Company beginning January 1, 2001. The Company is evaluating
the eventual impact of FAS 133 on its financial statements.
NOTE 3 - SEGMENT DISCLOSURE
The Company has one reportable segment, real estate investments. At June 30,
1999, the Company's real estate investments included CMBS, mezzanine real estate
loans, and a commercial real estate property. The Company uses net income (loss)
to measure profit or loss. The Company separately discloses assets, revenue and
capital expenditures by type of real estate investment in the consolidated
financial statements.
Except for interest income earned on the Company's investment in a British
pounds Sterling mezzanine loan, discussed in Note 6, all of the Company's
revenue for the three and six month periods ending June 30, 1999 is attributed
to investments located in the United States. For the period ending June 30, 1998
the company had no revenue attributed to investments located outside the U.S.
Revenue information by country is summarized below:
Six Months Three Months
Ended June 30, Ended June 30,
1999 1999
---- ----
United States ...................... $4,515,934 $1,514,561
United Kingdom ..................... $ 933,095 $ 484,146
Total ...................... $5,449,029 $1,998,707
At June 30, 1999, the carrying amount of the Company's British pounds Sterling
loan was $17,500,000.
During the six months ended June 30, 1999, the following Company investments
accounted for more than 10% of revenue:
Mezzanine loan on an office building in New York 23%
Mezzanine loan on multiple hotels in London, England 17%
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CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - MANAGEMENT FEES
The Company is party to a Management Agreement (the "Management Agreement") with
ERE Yarmouth, Inc., an indirect wholly-owned subsidiary of Lend Lease
Corporation Limited, under which ERE Yarmouth, Inc. advises the Company on
various facets of its business and manages its day-to-day operations, subject to
the supervision of the Company's Board of Directors. On July 13, 1998, the name
of ERE Yarmouth, Inc. was changed to Lend Lease Real Estate Investments, Inc.
("Lend Lease" or the "Manager" or "Management"). Lend Lease continues as the
advisor to the Company.
Pursuant to the Management Agreement, the Company will pay the Manager a
quarterly base management fee equal to the following:
For the first four fiscal quarters
Commencing with the fiscal
Quarter ended June 30, 1998 ........... 1.00% per annum of the Average Invested Assets (1) of the Company
During each fiscal quarter
Thereafter ............................ 0.85% per annum of the Average Invested Assets up to $1 billion
0.75% per annum of the Average Invested Assets from $1 billion to $1.25 billion
0.50% per annum of the Average Invested Assets in excess of $1.25 billion
The Management Agreement also provides for a quarterly incentive management fee
equal to the product of (A) 25% of the dollar amount by which (1) (a) Funds From
Operations (2) (before the incentive fee) of the Company for the applicable
quarter per weighted average number of shares of Common Stock outstanding plus
(b) gains (or minus losses) from debt restructuring or sales of assets not
included in Funds From Operations of the Company for such quarter per weighted
average number of shares of Common Stock outstanding, exceed (2) an amount equal
to (a) the weighted average of the price per share at initial offering and the
prices per share at any secondary offerings by the Company multiplied by (b) 25%
of the sum of the Ten-Year U.S. Treasury Rate plus four percent, and (B) the
weighted average number of shares of Common Stock outstanding. No incentive
management fees have been earned since inception.
The Manager is reimbursed for (or charges the Company directly for) the
Manager's out-of-pocket costs incurred in performing its duties under the
management agreement. There is no cap of the reimbursement of out-of-pocket
expenses.
The Management Agreement is for an initial term of two years, and can be
successively extended for two year periods subject to an affirmative vote of a
majority of the directors who are not employees of Lend Lease. In addition, the
Management Agreement provides for a termination fee equal to the sum of the base
management fee and incentive management fee, if any, earned during the
immediately preceding four fiscal quarters.
- --------------------
(1) The term "Average Invested Assets" for any period means the average of the
aggregate book value of the assets of the Company, including a
proportionate amount of the assets of all of its direct and indirect
subsidiaries, before reserves for depreciation or bad debts or other
similar non-cash reserves less (i) uninvested cash balances and (ii) the
book value of the Company's CMO liabilities, computed by dividing (a) the
sum of such values for each of the three months during such quarter (based
on the book value of such assets as of the last day of each month) by (b)
three.
(2) The term "Funds From Operations" as defined by the National Association of
Real Estate Investment Trusts, Inc. means net income (computed in
accordance with GAAP) excluding gains (or losses) from debt restructuring,
sales of property and any unusual or non-recurring transactions, plus
depreciation and amortization on real estate assets, and after deduction of
preferred stock dividends, if any, and similar adjustments for
unconsolidated partnerships and joint ventures. Funds From Operations does
not represent cash generated from operating activities in accordance with
GAAP and should not be considered as an alternative to net income as an
indication of the Company's performance or to cash flows as a measure of
liquidity or ability to make distributions.
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CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT IN CMBS
The amortized cost and estimated fair value of commercial mortgage-backed
securities classified as available-for-sale securities at June 30, 1999 are
summarized below. The face value of CMBS was $31,015,870 at June 30, 1999.
Weighted Estimated
Average Life Amortized Impairment Amortized Cost Fair
Security Rating (in years) Cost Losses Adjusted Value
--------------- ------------ --------- ----------- -------------- ---------
CMBS:
BB+ 13.668 $15,915,530 $ 5,304,209 $10,611,321 $10,611,321
BB 13.900 10,539,920 2,204,290 8,335,630 8,335,630
----------- ----------- ----------- -----------
Total $26,455,450 $ 7,508,499 $18,946,951 $18,946,951
=========== =========== =========== ===========
The estimated fair value of the CMBS for this quarter is based on the purchase
price in the agreement with Insignia Opportunity Partners. In prior periods, the
values have been determined by either i) the price obtained from the investment
banking institutions, which sold the CMBS to the Company, or ii) an average of
at least three quotes received on similarly structured and rated CMBS. The use
of different market assumptions, valuation methodologies, changing interest
rates, interest rate spreads for CMBS over the U.S. Treasury yields and the
timing and magnitude of credit losses may have a material effect on the
estimates of fair value. The fair value estimates presented herein are based on
pertinent information available as of June 30, 1999.
The CMBS tranches owned by the Company provide credit support to the more senior
tranches of the related commercial securitization. Cash flow from the underlying
mortgages is generally allocated first to the senior tranches, with the most
senior tranches having a priority right to cash flow. Any remaining cash flow is
generally allocated among the other tranches based on their seniority. To the
extent there are defaults and unrecoverable losses on the underlying mortgages,
resulting in reduced cash flows, the subordinate tranches will bear those losses
first. To the extent there are losses in excess of the most subordinate tranches
stated right to principal and interest, the remaining tranches will bear such
losses in order of their relative subordination.
At June 30, 1999, the amortized cost of the Company's investments in CMBS
exceeded estimated fair value by $7,508,499. Impairment losses of $4,958,649 on
these investments were recognized in 1998. Due to the Company's inability to
hold its CMBS investments until the cost of the CMBS is recovered, the Company
determined that the decline in the fair value of its CMBS below amortized cost
at June 30, 1999 was other than temporary. Accordingly, the Company carries its
investment in CMBS at estimated fair value at June 30, 1999. During the first
quarter of 1999, the Company sold seven of its investments in CMBS securities
for $47.8 million, resulting in a realized loss of $14.2 million, of which $11.7
million was recognized in 1998. The proceeds from the sale of CMBS were used to
repay the Company's obligations under its debt agreements. (See Note 8)
12
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CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - MEZZANINE LOAN INVESTMENTS
As of June 30, 1999, the Company's investment in mezzanine loans consisted of
the following:
Estimated
Underlying Interest Maturity Face Amortized Impairment Carrying Fair
Security Rate Date Value Cost Loss Value Value
---------- -------- -------- ----- --------- ---------- -------- ---------
Commercial
real estate:
Office 12.00% 05/01/2007 $21,000,000 $24,485,585 $ 2,651,050 $21,834,535 $21,834,535
Hotel 11.77% 06/30/2003 19,647,200 19,722,940 2,222,940 17,500,000 17,500,000
Multi-family 10.63% 08/01/2008 2,800,000 2,662,793 1,046,515 1,616,278 1,616,278
Retail 9.69% 05/01/2005 4,570,896 4,233,172 941,272 3,291,900 3,291,900
Other 10.57% 07/01/2008 1,000,000 945,680 197,607 748,073 748,073
----------- ----------- ----------- ----------- -----------
Total $49,018,096 $52,050,170 $ 7,059,384 $44,990,786 $44,990,786
=========== =========== =========== =========== ===========
At June 30, 1999, the amortized cost of the Company's investments in mezzanine
loans exceeds their aggregate carrying value. The Company carries its
investments in mezzanine loans at the lower of amortized cost after impairment
losses or fair value. The fair value of mezzanine loan investments is based on
the contract with Insignia Opportunity Partners for the loans being sold and
Management's best estimate of market conditions at June 30, 1999. The use of
different market assumptions, valuation methodologies, changing interest rates,
interest rate spreads and the timing and magnitude of credit losses may have a
material effect on the estimates of fair value. The Company's ability to hold
its mezzanine loans to maturity was negatively affected by the 1998 turmoil in
the financial markets and its effect on the value of the loans. An $8,195,491
impairment loss on mezzanine loan investments was recognized in 1998. Based on
information obtained during recent sales negotiations that is perceived to more
accurately reflect the estimated fair value, actual impairment loss on mezzanine
loan investments is $7,059,384 at June 30, 1999, which results in a reduction in
impairment charges of $1,136,107 for the six months ended June 30, 1999.
The Company's $19,647,200 face value mezzanine loan investment is a British
pounds Sterling loan. The Company purchased the investment for 11.98 million in
British pounds Sterling. Interest on the loan is based on Sterling Libor ("Base
Rate") plus 4.00%. The exchange rate at the date of investment was $1.64 per
pound. In order to reduce the risk of foreign currency exchange rate
fluctuations, the Company entered into a foreign currency swap arrangement with
Merrill Lynch Capital Services, Inc. The swap arrangement provides the Company
with an exchange rate of $1.64 per pound on the return of its principal
regardless of exchange rate fluctuation. The swap arrangement also converts the
Base Rate to US$ Libor minus 0.06% regardless of movements in the Sterling
Libor. The Company is subject to foreign currency risk on the spread portion
(4.00%) of the quarterly interest payments. The market value of the currency
swap at June 30, 1999 was an asset of $666,029. The foreign currency swap
arrangement expires on the maturity date of the related loan. The Company is
exposed to credit loss in the event of nonperformance by the counterparty to the
currency swap agreement. However, the Company does not anticipate nonperformance
by the counterparty.
On April 5, 1999, the Company consummated a sale and repurchase agreement with
respect to a mezzanine loan at a face value of $21 million to GMAC. The
agreement allows the Company to repurchase the investment no later than April 1,
2000. The GMAC Repo generated proceeds of $10.5 million. The repurchase price of
the GMAC Repo will be adjusted such that GMAC will receive an 8% annualized
yield on its investment if the Company repurchases the investment prior to
October 1, 1999. On and after October 1, 1999, the repurchase price is fixed at
$9.6 million. The Company used $8.5 million of the proceeds of the GMAC Repo to
repay borrowings from LLIH and used the remaining proceeds to meet its remaining
corporate obligations, which primarily consist of hedging liabilities. The
Company is accounting for the GMAC Repo as a financing transaction.
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CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - REAL ESTATE INVESTMENT HELD FOR SALE
As of June 30, 1999, the Company's investment in real estate consisted of the
following:
Date Acquired Property Location Property Type
- ------------- -------- -------- -------------
6/26/98 Lakeside Plaza Stockton, CA Retail
The carrying value of real estate investment held for sale at June 30, 1999 is
summarized below:
Real estate investment held for sale - at cost
Land $ 1,470,000
Buildings 2,225,869
Tenant Improvements 1,909
Capitalized Costs 20,670
Less accumulated depreciation and amortization ( 32,280)
Less impairment charge ( 189,708)
------------
Real estate investment held for sale - net $ 3,496,460
============
In connection with the Company's decision to discontinue its initial investment
strategies, the Company also decided to sell its real estate investments and
accordingly, at June 30, 1999, the Company's real estate investment is
classified as held for sale. The real estate investment was written down to
market value less estimated selling costs in 1998.
On March 25, 1999, the Company sold its Bryarwood 85 real estate investment for
$3.8 million. Primarily due to credits given for tenant improvement liabilities,
sales proceeds were $2,881,543, resulting in a realized loss of $262,391 of
which $257,797 was recognized in 1998.
NOTE 8 - BORROWING ARRANGEMENTS
During 1998, the Company entered into certain borrowing arrangements to provide
financing for the Company's investments. The facility with Morgan Guaranty Trust
Company of New York ("Morgan Guaranty Trust") became due and was repaid and
terminated on March 31, 1999. The agreement with Merrill Lynch Mortgage Capital,
Inc. and Merrill Lynch Capital Services, Inc. ("Merrill Lynch") became due and
was repaid and terminated on March 25, 1999. Total interest paid to Morgan
Guaranty Trust and Merrill Lynch for the six months ended June 30, 1999 was
$868,360.
The Company also entered into an agreement with Lend Lease Investment Holdings,
Inc. ("LLIH") in 1998, to provide unsecured, subordinated financing to the
Company. This facility was terminated on April 5, 1999, and borrowings under the
agreement were completely repaid on that date with proceeds from the GMAC Repo.
(See Note 9) Interest paid to LLIH for the six months ended June 30, 1999 was
$147,562.
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15
CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INTEREST RATE PROTECTION AGREEMENTS
In order to hedge the risk of a material change in interest rates that would
affect the Company's borrowing rate on its lines of credit and on anticipated
future long-term borrowings secured by the Company's investments, the Company
entered into forward treasury lock agreements, an interest rate collar and an
interest rate cap. None of these agreements were held for trading purposes.
As a result of the financial turmoil in the credit markets in October 1998, and
the Company's failure to comply with its debt agreements, the Company determined
that its ability to obtain long-term, fixed-rate financing was not probable. The
turmoil also created uncertainty as to the Company's ability to hold the
investments, and thus the treasury locks no longer qualified for hedge
accounting. On October 23, 1998 the Company terminated all of its treasury locks
and incurred a realized loss of $13.3 million, which was recognized as a
component of income. The interest rate cap was terminated in July 1998.
On January 23, 1999 the Company terminated its interest rate collar contract at
a loss of $265,000, of which $216,000 was recognized in 1998.
On April 30, 1999 and May 3, 1999, the Company paid $4,771,187 and $1,149,570,
respectively toward its Treasury locks liability.
NOTE 10 - SUBSEQUENT EVENTS
On July 2, 1999, the Company repaid its remaining Treasury lock liability of
$5,034,951.
On August 2, 1999 the Company announced the sale of a portion of the Company's
mezzanine loan investments and all of its remaining CMBS investments for $24.4
million. The Board of Directors also voted to adopt a Plan of Liquidation and
Dissolution (the "Plan"). Both the asset sale and the Plan are subject to
shareholder approval. The Company expects to submit the Plan to shareholders at
the Company's annual meeting in the fourth quarter of 1999.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of the Company's consolidated financial
condition, results from operations, and capital resources and liquidity should
be read in conjunction with the Consolidated Financial Statements and related
Notes included in Item 1.
Capital Resources and Liquidity
Liquidity is the ability for the Company to meet its cash requirements
including any ongoing commitments, borrowings, shareholder distributions,
lending and general business activities. The Company's source of liquidity
during the period ended December 31, 1998 consisted of net proceeds from the
IPO, borrowings under the Master Loan and Security Agreement with Morgan
Guaranty Trust (the "Morgan Guaranty Trust Agreement"), borrowings under the
Merrill Lynch Agreement, borrowings under the LLIH Agreement and repurchase
financing from the Deutsche Bank Agreement and the GMAC Repo.
In order to meet the Company's liquidity needs in early 1999, the Board
of Directors, on January 25, 1999, approved a plan of action to sell a portion
of the Company's assets in order to meet the Company's outstanding obligations.
On February 19, 1999, the Company sold a CMBS investment for total proceeds of
$8.8 million. The proceeds were used to repay the Company's indebtedness under
the Deutsche Bank Agreement. On March 31, 1999, the Company completed the sale
of a package of CMBS. The total proceeds from the sale were $39.0 million. The
Company used the proceeds to repay its borrowings from Morgan Guaranty Trust. In
connection with its sale of investments on March 31, 1999, the Company entered
into the GMAC Repo. The agreement allows the Company to repurchase the pledged
investment no later than April 1, 2000. The GMAC Repo was closed on April 5,
1999 and generated proceeds of $10.5 million. The repurchase price of the GMAC
Repo will be adjusted such that GMAC will receive an 8% annualized yield on its
investment if the Company repurchases the investment prior to October 1, 1999.
On and after October 1, 1999, the repurchase price is fixed at $9.6 million. The
Company used $8.5 million of the proceeds of the GMAC Repo to repay borrowings
from LLIH and the remaining monies were used to meet its remaining corporate
obligations, which primarily consisted of hedging liabilities.
The Company paid off and terminated all of its existing credit
facilities other than the GMAC Repo as of April 5, 1999. The Company's remaining
material liability is $10.1 million for the GMAC Repo. As of July 2, 1999, the
Company had paid all of the forward Treasury lock liabilities that were due. The
Company believes its net working capital and net operating cash flow will be
sufficient to meet the Company's remaining liabilities and that it will pay off
the GMAC repo with proceeds from asset sales.
As discussed in Note 1 to the Consolidated Financial Statements
included in Item 1, the Company has entered into an agreement to sell all of its
remaining CMBS investments and three of its mezzanine loan investments to
Insignia Opportunity Partners. The aggregate purchase price for the transaction
is $24.4 million. In addition, the Company's Board of Directors has adopted a
Plan of Liquidation and Dissolution (the "Plan"), which provides for the
complete liquidation of the Company's remaining assets and the dissolution of
the Company in accordance with the Georgia Business Corporation Code. Both the
asset sales and the Plan are subject to the approval of holders of a majority of
the outstanding shares of common stock of the Company. The Company expects to
submit these matters to its shareholders at its Annual Meeting of Shareholders
during the fourth quarter of 1999. Prior to the meeting, the Company may enter
into additional agreements for the sale of its assets, which would also be
submitted to shareholders at the meeting. Assuming the Plan is approved by the
shareholders, the Company intends to sell the remaining assets of the Company in
the fourth quarter of 1999 or the first quarter of 2000. The Company expects to
distribute the proceeds of such asset sales to shareholders as the properties
are sold, with appropriate reserves for the Company's liabilities and expenses.
The discussion above contains forward-looking statements regarding the
Company's plans, goals and expectations, including statements regarding the
Company's estimate of the timing of the sale of the Company's remaining assets,
the distribution of proceeds and the dissolution of the Company. Forward-looking
statements are necessarily speculative, there being certain risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in the forward-looking statements. The Company's current
plans are subject to change, including in the event of changes in general
business and economic conditions as well as changes in interest rates and credit
markets. There can be no assurance that shareholder approval of the asset sales
and the Plan will be obtained, if and when proxy solicitation materials will be
mailed to the Company's shareholders, or if and when the Company's assets will
be sold, the proceeds distributed and the Company dissolved. The timing of any
sale of the Company's assets, the distribution of proceeds, and the dissolution
of the Company are subject to various and significant uncertainties, many of
which are beyond the Company's control and which could delay any sale of the
Company's remaining assets, distribution of proceeds and dissolution of the
Company significantly beyond the time periods estimated above. Among such
uncertainties are the date when any proxy solicitation materials are mailed to
the Company's shareholders, the date when approval of the shareholders of the
assets sales and the Plan is obtained (assuming it is obtained), the demand for
the Company's assets by potential purchasers, the availability of capital for
potential purchasers, the actual dates when assets are sold, and the duration of
any installment sales of any of the assets and the amount of any contingent
liabilities or expenses against which the Company must reserve sales proceeds.
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Working Capital Reserves
At June 30, 1999 the Company had $5,991,187 in cash and short-term
investments. The funds were held to pay the Company's final Treasury lock
liability of $5.0 million dollars on July 2, 1999. The remaining funds will be
used to meet the Company's operating needs.
Financial Condition
Securities Available-For-Sale. Due to the Company's pending agreement
with Insignia Opportunity Partners for the sale of its remaining CMBS, the
Company wrote down its investment in CMBS to fair value and recognized an
impairment loss of $2,549,850 for the six months period ended June 30, 1999. The
Company sold a CMBS on February 19, 1999 for $8,827,344 resulting in a realized
loss of $627,488, of which $541,562 was recognized at December 31, 1998. On
March 31, 1999, the Company sold $38,962,296 of CMBS in order to repay its
obligations under its borrowing agreements, resulting in a realized loss of
$13,592,790, of which $11,176,359 was recognized at December 31, 1999.
Mezzanine Investment Portfolio. In connection with its sale of CMBS on
March 31, 1999, the Company entered into a sale and repurchase agreement for an
office mezzanine loan with a face value of $21 million to GMAC. The agreement
allows the Company to repurchase the investment no later than April 1, 2000. The
GMAC Repo closed on April 5, 1999, and generated proceeds of $10.5 million. The
Company's liability at June 30,1999 was $10.1 million. The repurchase price of
the GMAC Repo will be adjusted such that GMAC will receive an 8% annualized
yield on its investment if the Company repurchases the investment prior to
October 1, 1999. On and after October 1, 1999, the repurchase price is fixed at
$9.6 million. The Company used $8.5 million of the proceeds of the GMAC Repo to
repay borrowings from LLIH and used the remaining monies to pay its hedging
liabilities. Based on pending negotiations with third parties with respect to
the mezzanine loans, the Company determined that the carrying value of the
mezzanine loans were below market value and reduced the impairment allowance by
$1,136,107 for the six months ended June 30, 1999. This reduction was a result
of the Company's belief that the increased value more fairly reflected the
estimated value of the assets to be sold.
Mortgage Loan Portfolio. The Company accepted a discounted pay off of
its remaining mortgage loan on January 4, 1999 at a loss of $797,810. This loss
was recognized by the Company as an operating loss for the year ended December
31, 1998. The loss on sale and settlement of mortgage loans in the amount of
$97,929 resulted from changes in estimates that were used to accrue for third
party costs relating to the sale and settlement of previously committed loans.
Real Estate Investments. At June 30, 1999, the Company's real estate
investment was classified as held for sale. Preliminary offers determined that
the value of the property was less than book value. Impairment losses of
$447,505 were recognized in 1998. On March 25, 1999 the Company sold one real
estate investment for $3.8 million in order to meet its debt obligations.
Short-Term Borrowings. During the second quarter of 1999, the Company
repaid its borrowings with LLIH, as further discussed in "Capital Resources and
Liquidity" and in the notes to the Company's consolidated financial statements
as of and for the period ended June 30, 1999 included herein.
Treasury Locks Payable. As a result of the turmoil in the credit market
during the fourth quarter of 1998 and the Company's failure to comply with its
debt agreements, the Company determined that its ability to obtain long-term
fixed rate financing was not probable. The turmoil also created uncertainty as
to the Company's ability to hold its investments. Accordingly, the Company
discontinued hedge accounting for its Treasury locks and incurred a loss of
$13,070,685 on these agreements. As part of its debt restructuring on November
13, 1998, the Company paid $2,390,000 to settle its Treasury locks payable with
Merrill Lynch. On April 30, 1999 and May 3, 1999, the Company paid $4,771,187
and $1,149,570, respectively, to settle outstanding Treasury lock liabilities.
The remaining hedging liability of $5,034,951 to Morgan Guaranty Trust was paid
on July 2, 1999.
Shareholders' Equity. Shareholders' equity decreased by $2,142,413 from
December 31, 1998 due to net losses from the sale of its investments. The losses
were offset by $521,212 from operating income before asset sales.
Results from Operations
Revenue. Revenue totaled $1,998,687 and $5,449,029 for the three and
six months ended June 30, 1999 and $1,345,990 for the period ending June 30,
1998. Revenue is comprised primarily of interest income on CMBS investments and
Mezzanine Investments and rental income from real estate. The decrease in
revenue during the second quarter was the result of the asset sales that
occurred earlier in the year.
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Operating Expenses. Operating expenses consist of expenses incurred in
operating the Company, property and investment operations, and totaled
$2,546,300 and $4,927,817 for the three and six months ended June 30, 1999 and
$1,285,780 for the three and six months ended June 30, 1998. Included in the
1999 amounts were impairment losses on CMBS totaling $2,079,322 and $2,549,850
for the three and six month periods; and reduction in impairment on mezzanine
loans of $1,136,107 for the three and six month periods. Management fees were
calculated at 1% per annum of the Average Invested Assets for the quarter ended
March 31, 1999 and 0.85% per annum of the Average Invested Assets for the
quarter ended June 30, 1999, and totaled $157,442 and $436,911 for the three and
six months ended June 30, 1999, respectively and $220,986 for the period ending
June 30, 1998. The Company also recorded general and administrative expenses of
$245,968 and $345,294 for the three and six months ended June 30, 1999 and
179,198 for the period ending June 30, 1998.
Loss on Sale of CMBS. The loss on sale of CMBS was a result of the
disposal of CMBS during first quarter for $47,789,640. The losses totaled
$14,279,022 of which $11,717,920 was recognized in 1998.
REIT Status
The Company made an election to be taxed as a REIT under the Code,
commencing with its first REIT taxable year ending on December 31, 1998. The
Company believes that it qualifies for taxation as a REIT and therefore will not
be subject to federal corporate income tax on its net income that is distributed
currently to its shareholders.
To qualify as a REIT under the Code, the Company must meet several
requirements regarding, among other things, the ownership of its outstanding
stock, the sources of its gross income, the nature of its assets, and the levels
of distributions to its shareholders. These requirements are highly technical
and complex, and the Company's determination that it qualifies as a REIT
requires an analysis of various factual matters and circumstances that may not
be entirely within the Company's control. Accordingly, there can be no assurance
that the Company will remain qualified as a REIT.
If the Company fails to qualify for taxation as a REIT in any taxable
year, and certain relief provisions of the Code do not apply, the Company will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to the Company's
shareholders in any year in which the Company fails to qualify will not be
deductible by the Company nor will they be required to be made. In such event,
to the extent of the Company's current and accumulated earnings and profits, all
distributions to shareholders will be taxable as ordinary income and, subject to
certain limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company also will be disqualified from taxation as a REIT for
the four taxable years following the year during which the Company ceased to
qualify as a REIT. It is impossible to predict whether the Company would be
entitled to such statutory relief.
YEAR 2000 DISCLOSURES
The inability of computers, software and other equipment to recognize and
properly process data fields containing a two-digit year is commonly referred to
as the Year 2000 compliance issue ("Y2K"). As the year 2000 approaches, such
systems may be unable to accurately process certain date-based information.
Y2K exposures of the Company are currently being assessed. Potential critical
exposures include reliance on third party vendors and building systems that are
not Y2K compliant. The Company continues to communicate with its third party
service vendors to assess Y2K compliance status and the adequacy of their Y2K
efforts
The Manager has made Year 2000 compliance a high priority for replacement
applications and is in the process of updating and replacing other applications
that are not Year 2000 compliant. The Manager materially completed all
mission critical system projects by the modified date of July 31, 1999, which
will allow for systems testing to resolve any remaining Year 2000 compliance
issues. However, if any of the vendors of the Manager's Y2K compliant software
fail to perform pursuant to their contracts with the Manager, the Manager's Y2K
compliance could be jeopardized, and could materially adversely affect the
Company. The Manager does not believe that the costs to remediate any Y2K issues
will materially affect its business, operations or financial condition, or will
have an adverse affect on its clients, including the Company.
Lakeside Plaza is being assessed in an effort to identify critical Y2K issues.
Required remediation strategies will depend on the outcome of the assessment and
therefore, will not be developed until the property assessment is complete. The
inventory survey for the property was halted due to the pending sale of the
property.
The Company has not incurred any material costs to date relating to Y2K. Total
property assessment costs to the Company were expected to total approximately
$4,300 and the total cost for quality assurance for third party engineers and
consultants is expected to be approximately $1,000. Remediation costs can not be
reasonably estimated, until the assessment is
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complete and remediation strategies are determined.
The failure to adequately address the Year 2000 issue may result in the closure
of the building owned by the Company. In order to reduce the potential impact on
the operations of the Company, contingency plans are anticipated to be completed
by September 30, 1999.
With respect to the Company's loan portfolios, the primary Year 2000 issue
relates to potential borrower defaults caused by:
- - increased expenses or legal claims related to failures of embedded
technology in building systems,
- - reductions in collateral value due to failure of one or more building
systems,
- - interruptions in building cash flows due to tenants inability to make
timely lease payments inaccurate or incomplete accounting of rents, or
decreases in building occupancy levels,
- - the borrower's inability to address all material Y2K issues that may
potentially impact the borrowers operations.
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
could also be adversely affected.
FORWARD LOOKING STATEMENTS
Certain statements contained herein are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Act of
1934, as amended. These forward-looking statements may be identified by
reference to a future period(s) or by the use of forward-looking terminology,
such as "may", "will", "intend", "should", "expect", "anticipate", "estimate",
or "continue" or the negatives thereof or other comparable terminology. The
Company's actual results could differ materially from those anticipated in such
forward-looking statements due to a variety of factors, including, but not
limited to, changes in national, regional or local economic environments,
competitive products and pricing, government fiscal and monetary policies,
changes in prevailing interest rates, the course of negotiations, the
fulfillment of contractual conditions, factors inherent to the valuation and
pricing of interests in commercial mortgage-backed securities, credit risk
management, asset/liability management, the financial and securities markets,
the availability of and costs associated with the sources of liquidity, other
factors generally understood to affect the real estate acquisition, mortgage and
leasing markets and security investments, and other risks detailed in the
Company's registration statement on Form S-11, as amended, filed with the SEC,
the Company's annual report on Form 10-K and quarterly reports on Form 10-Q
filed with the SEC, and other filings made by the Company with the SEC. The
Company does not undertake, and specifically disclaims any obligation, to
publicly release the results of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. The Company
is primarily exposed to interest rate and spread risk. Interest rates and
spreads are sensitive to many external forces including, but not limited to,
governmental monetary and tax policies and domestic and international economic
and political factors. These forces are beyond the control of the Manager and
the Company. Changes in the general level of interest rates can affect the
Company's net interest income, which is the difference between the interest
income earned on interest-earning assets and the interest expense incurred in
connection with its interest-bearing liabilities, by affecting the spread
between the Company's interest-earning assets and interest-bearing liabilities.
Changes in the level of interest rates also can affect, among other things, the
ability of the Company to originate and acquire loans, the value of the
Company's mortgage-related securities and other interest-earning assets, and its
ability to realize gains from the sale of such assets.
The Company may utilize a variety of financial instruments, including interest
rate swaps, caps, floors, and other interest rate contracts, in order to limit
the effects of interest rates on its operations. The use of these types of
derivatives to hedge interest-earning assets and/or interest-bearing liabilities
carries certain risks, including the risk that losses on a hedge position will
reduce the funds available for payments to holders of securities and, indeed,
that such losses may exceed the amount invested in such instruments. A hedge may
not perform its intended purpose of offsetting losses or increased costs.
Moreover, with respect to certain of the instruments used as hedges, the Company
is exposed to the risk that the
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counterparties with which the Company trades may cease making markets and
quoting prices in such instruments, which may render the Company unable to enter
into an offsetting transaction with respect to an open position.
The following table quantifies the potential changes in net interest income and
net asset value should interest rates rise or fall. The table below calculates
the changes in the assets owned by the Company as of June 30, 1999 and assumes
none of the assets are sold. The table represents the effect over the next four
quarters. The results assume that yield curves of the rate changes will be
parallel to each other. Net asset value is calculated as the sum of the present
value of cash in flows generated from interest-earning assets net of cash
outflows in respect of interest-bearing liabilities. The base interest rate
scenario assumes interest rates at June 30, 1999. All changes in the net asset
value are a result of valuing assets based on changes in interest rates. These
changes do not include the effects of income or dividends. The net interest
income is interest income (excluding interest income on cash) netted with
interest expense. All changes are measured by percentage changes from the base
interest rate. Actual results could differ significantly from these estimates.
NET
CHANGE IN INTEREST RATE NET INTEREST INCOME ASSET VALUE
----------------------- ------------------- -----------
+400........................................... 15.7 (15.2)
+300........................................... 11.8 (11.9)
+200........................................... 7.8 (8.2)
+100........................................... 3.9 (4.3)
Base............................................. 0.0 0.0
-100........................................... (3.9) 4.7
-200........................................... (7.8) 9.8
-300........................................... (11.8) 15.5
-400........................................... (15.7) 21.7
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27.1 Financial Data Schedule (for SEC filing purposes only)
b) Reports
None
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SIGNATURES
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.
Chastain Capital Corporation
By: /s/Steve Grubenhoff
-------------------
Steve Grubenhoff
Chief Financial Officer
Date: August 13, 1999
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