10-Q 1 d91567e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-14029 AMRESCO CAPITAL TRUST (Exact name of Registrant as specified in its charter) TEXAS 75-2744858 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 N. PEARL STREET, SUITE 1900, LB 342, DALLAS, TEXAS 75201-7424 (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (214) 953-7700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 10,039,974 shares of common stock, $.01 par value per share, as of October 26, 2001. AMRESCO CAPITAL TRUST INDEX

2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION (IN THOUSANDS, EXCEPT SHARE DATA)

See notes to consolidated financial statements. 3 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION (UNAUDITED, IN THOUSANDS)

See notes to consolidated financial statements. 4 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION FOR THE PERIOD FROM SEPTEMBER 26, 2000 THROUGH SEPTEMBER 30, 2000 (UNAUDITED; IN THOUSANDS) REVENUES: Interest income on mortgage loans ......................................... $ 153 Income from commercial mortgage-backed securities ......................... 28 Interest income from short-term investments ............................... 3 --------- TOTAL REVENUES .......................................................... 184 --------- EXPENSES: Interest expense .......................................................... 24 Management fees ........................................................... 1,705 General and administrative ................................................ 5 --------- TOTAL EXPENSES .......................................................... 1,734 --------- Gain (loss) on disposition of assets ........................................ -- Changes in estimated net realizable value of certain assets ................. -- --------- DECREASE IN NET ASSETS IN LIQUIDATION FROM OPERATING ACTIVITIES ............. (1,550) Cash received from exercise of stock options ................................ 32 Liquidating distributions to shareholders ................................... -- --------- DECREASE IN NET ASSETS IN LIQUIDATION DURING THE PERIOD ..................... (1,518) NET ASSETS IN LIQUIDATION, BEGINNING OF PERIOD .............................. 125,031 --------- NET ASSETS IN LIQUIDATION, END OF PERIOD .................................... $ 123,513 ========= SHAREHOLDERS' EQUITY, END OF GOING CONCERN PERIOD ........................... $ 124,004 Net increase in carrying value of certain assets upon adoption of liquidation basis accounting .......................................... 817 Net decrease in carrying value of certain liabilities and minority interests upon adoption of liquidation basis accounting ......... 210 --------- NET ASSETS IN LIQUIDATION, BEGINNING OF LIQUIDATION PERIOD .................. $ 125,031 =========

See notes to consolidated financial statements. 5 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF INCOME (GOING CONCERN BASIS) (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)

See notes to consolidated financial statements. 6 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENT OF CASH FLOWS IN LIQUIDATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED, IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Increase in net assets in liquidation from operating activities ............................. $ 103 Adjustments to reconcile to net cash provided by operating activities: Loss on disposition of mortgage loan ..................................................... 500 Changes in estimated net realizable value of certain assets .............................. 3,710 Decrease in receivables and other assets ................................................. 1,280 Decrease in interest receivable related to commercial mortgage-backed securities ......... 170 Increase in accounts payable and other liabilities ....................................... 41 Decrease in amounts due to manager ....................................................... (1,325) Amortization of prepaid insurance ........................................................ 176 -------- NET CASH PROVIDED BY OPERATING ACTIVITIES ........................................... 4,655 -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in mortgage loans ............................................................... (730) Principal collected on mortgage loans ....................................................... 73,931 Proceeds from sale of commercial mortgage-backed securities ................................. 16,441 Distributions from unconsolidated subsidiary ................................................ 1,950 -------- NET CASH PROVIDED BY INVESTING ACTIVITIES ........................................... 91,592 -------- CASH FLOWS FROM FINANCING ACTIVITIES: Liquidating distributions paid to common shareholders ....................................... (99,898) -------- NET CASH USED IN FINANCING ACTIVITIES ............................................... (99,898) -------- NET DECREASE IN CASH AND CASH EQUIVALENTS ...................................................... (3,651) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................................. 9,801 -------- CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................................... $ 6,150 ========

See notes to consolidated financial statements. 7 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENT OF CASH FLOWS IN LIQUIDATION FOR THE PERIOD FROM SEPTEMBER 26, 2000 THROUGH SEPTEMBER 30, 2000 (UNAUDITED, IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Decrease in net assets in liquidation from operating activities.......................... $(1,550) Adjustments to reconcile to net cash provided by operating activities: Increase in receivables and other assets............................................... (156) Decrease in interest receivable related to commercial mortgage-backed securities....... 142 Decrease in accounts payable and other liabilities..................................... (33) Increase in amounts due to manager..................................................... 1,705 Amortization of prepaid insurance...................................................... 4 ------- NET CASH PROVIDED BY OPERATING ACTIVITIES........................................ 112 ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in mortgage loans........................................................... (531) ------- NET CASH USED IN INVESTING ACTIVITIES............................................ (531) ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock.............................................. 32 ------- NET CASH PROVIDED BY FINANCING ACTIVITIES ....................................... 32 ------- NET DECREASE IN CASH AND CASH EQUIVALENTS.................................................. (387) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................................ 5,726 ------- CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................... $ 5,339 ======= SUPPLEMENTAL INFORMATION: Interest paid............................................................................. $ - =======

See notes to consolidated financial statements. 8 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENT OF CASH FLOWS (GOING CONCERN BASIS) FOR THE PERIOD FROM JANUARY 1, 2000 THROUGH SEPTEMBER 25, 2000 (UNAUDITED, IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ...................................................................................... $ 5,948 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .................................................................... 1,788 Depreciation ................................................................................. 1,188 Gain associated with repayment of ADC loan arrangements ...................................... (1,930) Loss on sale of commercial mortgage-backed securities ........................................ 4,267 Gain on sale of unconsolidated partnership investments ....................................... (674) Gain on sale of real estate .................................................................. (1,485) Gain on sale of interest rate cap ............................................................ (19) Amortization of prepaid insurance ............................................................ 172 Discount amortization on commercial mortgage-backed securities ............................... (282) Amortization of compensatory stock options and unearned trust manager compensation ........... (254) Amortization of loan commitment and extension fees ........................................... (592) Receipt of loan extension fees ............................................................... 460 Increase in receivables and other assets ..................................................... (219) Increase in interest receivable related to commercial mortgage-backed securities ............. (40) Decrease in accounts payable and other liabilities ........................................... (1,428) Decrease in minority interests ............................................................... (26) Decrease in amounts due to manager ........................................................... (163) Equity in losses of unconsolidated subsidiary, partnerships and other real estate venture .............................................................. 1,091 Distributions from unconsolidated partnership ................................................ 23 -------- NET CASH PROVIDED BY OPERATING ACTIVITIES ............................................... 7,825 -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in mortgage loans ................................................................... (8,480) Investments in ADC loan arrangements ............................................................ (1,034) Principal collected on mortgage loans ........................................................... 10,398 Principal and interest collected on ADC loan arrangements ....................................... 17,953 Proceeds from sale of real estate, net of cash on hand .......................................... 17,938 Proceeds from sale of unconsolidated partnership investments .................................... 2,126 Proceeds from sale of commercial mortgage-backed securities ..................................... 7,814 Investments in real estate ...................................................................... (350) Investments in unconsolidated subsidiary ........................................................ (282) Distributions from unconsolidated subsidiary and partnerships ................................... 3,493 -------- NET CASH PROVIDED BY INVESTING ACTIVITIES ............................................... 49,576 -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of borrowings under repurchase agreement .............................................. (9,856) Repayment of borrowings under line of credit .................................................... (38,641) Proceeds from sale of interest rate cap ......................................................... 30 Dividends paid to common shareholders ........................................................... (7,812) -------- NET CASH USED IN FINANCING ACTIVITIES ................................................... (56,279) -------- NET INCREASE IN CASH AND CASH EQUIVALENTS .......................................................... 1,122 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................................................... 4,604 -------- CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................................... $ 5,726 ======== SUPPLEMENTAL INFORMATION: Interest paid ................................................................................... $ 4,438 ======== Minority interest distributions associated with ADC loan arrangements ........................... $ 350 ======== Debt and other liabilities assumed by buyer in connection with sale of real estate .............. $ 35,156 ======== Receivables and other assets transferred to buyer in connection with sale of real estate ........ $ 1,380 ========

See notes to consolidated financial statements. 9 AMRESCO CAPITAL TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) 1. ORGANIZATION AND RELATIONSHIPS AMRESCO Capital Trust (the "Company"), a real estate investment trust ("REIT"), was organized under the laws of the State of Texas. The Company was formed to take advantage of certain mid- to high-yield lending and investment opportunities in real estate related assets, including various types of commercial mortgage loans (including, among others, participating loans, mezzanine loans, acquisition loans, construction loans, rehabilitation loans and bridge loans), commercial mortgage-backed securities ("CMBS"), commercial real estate, equity investments in joint ventures and/or partnerships, and certain other real estate related assets. The Company was initially capitalized on February 2, 1998 and commenced operations on May 12, 1998, concurrent with the completion of its initial public offering ("IPO") of 9,000,000 common shares and private placement of 1,000,011 common shares. On September 26, 2000, shareholders approved the liquidation and dissolution of the Company under the terms and conditions of a Plan of Liquidation and Dissolution which was approved by the Company's Board of Trust Managers on March 29, 2000. Pursuant to the terms of a Management Agreement dated as of May 12, 1998, as amended, and subject to the direction and oversight of the Board of Trust Managers, the Company's day-to-day operations are managed by AMREIT Managers, L.P. (the "Manager"), an affiliate of AMRESCO, INC. ("AMRESCO") (together with its affiliated entities, the "AMRESCO Group"). For its services, the Manager is entitled to receive a base management fee equal to 1% per annum of the Company's Average Invested Non-Investment Grade Assets, as defined, and 0.5% per annum of the Company's Average Invested Investment Grade Assets, as defined. In addition to the base management fee, the Manager is entitled to receive reimbursements for its quarterly operating deficits, if any. These reimbursements are equal to the excess, if any, of the Manager's operating costs (including principally personnel and general and administrative expenses) over the sum of its base management fees and any other fees earned by the Manager from sources other than the Company. The base management fee and operating deficit reimbursements, if any, are payable quarterly in arrears. During the three and nine months ended September 30, 2001, base management fees charged to the Company totaled $76,000 and $528,000, respectively. During these same periods, operating deficit reimbursements totaled $54,000 and $1,136,000, respectively, of which $0 and $884,000 were attributable to termination benefits which were paid to departing employees of the Manager during the three and nine months ended September 30, 2001. Amounts approximating these termination benefits ($874,000), and those expected to be payable to the remaining employees of the Manager, were included in amounts due to manager at December 31, 2000. At September 30, 2001, base management fees and operating deficit reimbursements due to the Manager totaled $130,000. Termination benefits expected to be borne by the Company through future operating deficit reimbursements totaled $616,000 at September 30, 2001. 2. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. As described in Note 1, shareholders approved the liquidation and dissolution of the Company on September 26, 2000. As a result, the Company adopted liquidation basis accounting on that date. Under liquidation basis accounting, the Company's revenues and expenses are reported as changes in net assets in liquidation. Additionally, under liquidation basis accounting, the Company's assets are carried at their estimated net realizable values and the Company's liabilities are reported at their expected settlement amounts in a consolidated statement of net assets in liquidation. Under the liquidation basis of accounting, statements of income, earnings per share data and an amount representing total comprehensive income are not presented. 10 The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Under liquidation basis accounting, the Company's investment in AMREIT II, Inc., a taxable subsidiary, is carried at its estimated net realizable value. The Company accounts for its investment in AMREIT II, Inc. using the cost method of accounting and thus reports income only when cash is received. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (the "10-K"). The notes to the financial statements included herein highlight significant changes to the notes included in the 10-K. In the opinion of management, the accompanying consolidated financial statements include all adjustments (consisting of normal and recurring accruals) necessary for a fair presentation of the interim financial statements. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities at the date of the financial statements and revenues and expenses for the reporting period. The valuation of the Company's remaining mortgage loan is a significant estimate. Actual results may differ from this estimate. 3. MORTGAGE LOANS As of September 30, 2001, the Company held one mortgage loan investment. The loan, which is fully funded, has an outstanding principal balance of $14,700,000 and an estimated net realizable value of $11,563,000. The loan provides for interest at a pay rate of 10% per annum and an accrual rate of 12% per annum. The loan is scheduled to mature on March 31, 2002; however, the borrower has an option to extend the maturity date to March 31, 2003 provided that it is not in violation of any of the conditions established in the loan agreement. On June 30, 2001, the Company reduced the carrying value of this loan and the related accrual rate interest receivable by $3,137,000 and $673,000, respectively. At September 30, 2001, the carrying value of the accrual rate interest receivable was $0. A summary of mortgage loan activity for the nine months ended September 30, 2001 is as follows (in thousands): Balance, beginning of period........................ $ 88,401 Investments in loans................................ 730 Collections of principal............................ (73,931) Loss on disposition of loan......................... (500) Change in estimated net realizable value of remaining loan................................ (3,137) -------- Balance, end of period.............................. $ 11,563 ========

11 4. ASSET DISPOSITIONS On January 18, 2001, the Company sold its remaining CMBS holdings to an unaffiliated third party (the "Buyer"). At the time of the sale, the Company received net cash proceeds totaling $16,555,000. Concurrently, AMRESCO Investments, Inc. ("AMRESCO Investments"), a member of the AMRESCO Group, sold (to the Buyer) its unrated bonds which had been issued from the same securitization. As the former owner of the unrated class, AMRESCO Investments had had the right to grant special servicing rights with respect to all of the subject securities. Under the terms of an earlier agreement, AMRESCO Investments is obligated to pay the designated special servicer a termination fee in the event that such servicer's rights are terminated on or before March 17, 2003. The simultaneous sale of the Company's securities and AMRESCO Investments' securities was a condition precedent to the Buyer's acquisition of either party's securities. In order to induce AMRESCO Investments to sell its unrated securities, the Company agreed to reimburse the affiliate in an amount equal to the termination fee if the Buyer elects to terminate AMRESCO Investments' appointee on or before March 17, 2003. Alternatively, if a termination has not occurred prior to the time that the Company intends to declare its final liquidating distribution, then the Company can satisfy this obligation by paying to AMRESCO Investments an amount equal to one-half of the termination fee that would have been payable had an actual termination occurred at that time. Under the terms of the agreement between AMRESCO Investments and the special servicer, the termination fee is based, in part, on the number of months remaining until March 17, 2003 and therefore the amount of such fee declines each month. If a termination had occurred at the time the bonds were sold, the Company would have been obligated to reimburse AMRESCO Investments approximately $300,000 (the estimated maximum reimbursement obligation). When recording the sale, the Company accrued the amount at which it expects to settle this obligation. These additional selling expenses, totaling $114,000, are included in accounts payable and other liabilities at September 30, 2001. During the nine months ended September 30, 2001, the following loans were liquidated (dollars in thousands):

On March 5, 2001, a partnership controlled by AMREIT II, Inc. (the Company's unconsolidated taxable subsidiary) sold a mixed-use property at a gross sales price of $18,250,000. Prior to its sale, the property was encumbered by a $17,000,000 first lien mortgage which had been provided by an unaffiliated third party. In connection with the sale, the non-recourse mortgage was fully extinguished. On March 6, 2001, the Company received $1,800,000 from the partnership. On June 6, 2001, the Company received an additional $150,000 from the partnership. On June 30, 2001, the Company increased the carrying value of its investment in AMREIT II, Inc. by $100,000. At September 30, 2001, the estimated net realizable value of the Company's remaining investment in its taxable subsidiary totaled $150,000. 5. LIQUIDATING DISTRIBUTIONS During the nine months ended September 30, 2001, the Company made three liquidating distributions totaling $99,898,000 (or $9.95 per share). On January 17, 2001, the Company made its third liquidating distribution pursuant to the Plan of Liquidation and Dissolution. The distribution, totaling $3,514,000 (or $0.35 per share), was declared on December 21, 2000 and was payable to shareholders of record on December 31, 2000. For tax purposes, this distribution was deemed to have been paid by the Company on December 31, 2000. Similarly, this distribution was deemed (for tax purposes) to have been received by the Company's shareholders on December 31, 2000. 12 On March 30, 2001, the Company made its fourth liquidating distribution pursuant to the Plan of Liquidation and Dissolution. This distribution, totaling $26,104,000 (or $2.60 per share), was declared on March 8, 2001 and was payable to shareholders of record on March 19, 2001. On August 9, 2001, the Company made its fifth liquidating distribution pursuant to the Plan of Liquidation and Dissolution. The distribution, totaling $70,280,000 (or $7.00 per share), was declared on July 19, 2001 and was payable to shareholders of record on July 30, 2001. 6. SEGMENT INFORMATION The Company, as an investor in real estate related assets, operates in only one reportable segment. Historically, the Company made asset allocation decisions within this segment based upon its diversification strategies and changes in market conditions. The Company does not have, nor does it rely upon, any major customers. All of the Company's revenues were derived from U.S. operations. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW AMRESCO Capital Trust (the "Company") is a real estate investment trust ("REIT") which was formed in early 1998 to take advantage of certain mid- to high-yield lending and investment opportunities in real estate related assets, including various types of commercial mortgage loans (including, among others, participating loans, mezzanine loans, acquisition loans, construction loans, rehabilitation loans and bridge loans), commercial mortgage-backed securities ("CMBS"), commercial real estate, equity investments in joint ventures and/or partnerships, and certain other real estate related assets. Subject to the direction and oversight of the Board of Trust Managers, the Company's day-to-day operations are managed by AMREIT Managers, L.P. (the "Manager"), an affiliate of AMRESCO, INC. On July 2, 2001, AMRESCO, INC. filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. The Manager was not included in this bankruptcy filing. The Company commenced operations on May 12, 1998 concurrent with the completion of its initial public offering of 9,000,000 common shares and private placement of 1,000,011 common shares with AMREIT Holdings, Inc., a wholly-owned subsidiary of AMRESCO, INC. From the Company's inception of operations through July 5, 2000, AMRESCO, INC. and AMREIT Holdings, Inc. collectively owned 1,500,111 shares, or approximately 15%, of its outstanding common stock. On July 5, 2000, all of these common shares were sold to affiliates of Farallon Capital Management, L.L.C. Historically, the Company's investment activities were focused in three primary areas: loan investments, CMBS and equity investments in real estate. In early 2000, the Board of Trust Managers approved a course of action to market and sell the Company's non-core assets, including its CMBS holdings and its equity investments in real estate. As of March 5, 2001, all of the Company's non-core assets had been sold. On September 26, 2000, shareholders approved the liquidation and dissolution of the Company under the terms and conditions of a Plan of Liquidation and Dissolution which was approved by the Company's Board of Trust Managers on March 29, 2000. As a result, the Company adopted liquidation basis accounting on September 26, 2000. Under liquidation basis accounting, the Company's assets are carried at their estimated net realizable values and the Company's liabilities are reported at their expected settlement amounts in a consolidated statement of net assets in liquidation. Additionally, under liquidation basis accounting, the Company's revenues and expenses are reported as changes in net assets in liquidation. Statements of income, earnings per share data and an amount representing total comprehensive income are not presented. Furthermore, no discussion of the changes in operating results between the current fiscal quarter and year-to-date period and the corresponding periods of the preceding fiscal year is provided in this Form 10-Q. As noted above, the Company's operating results for the three and nine months ended September 30, 2001 are presented under the liquidation basis of accounting. During the period from July 1, 2000 through September 25, 2000 and the period from January 1, 2000 through September 25, 2000, the Company's operating results were presented in accordance with the historical cost (or going concern) basis of accounting. CHANGES IN NET ASSETS IN LIQUIDATION The following discussion of changes in net assets in liquidation should be read in conjunction with the consolidated financial statements and notes thereto included in "Item 1. Financial Statements". Under the liquidation basis of accounting, net assets in liquidation decreased by $69,843,000 and $99,795,000 during the three and nine months ended September 30, 2001, respectively. The Company's sources of revenue for the three and nine months ended September 30, 2001, totaling $721,000 and $5,580,000, respectively, were as follows: o $376,000 and $4,647,000, respectively, from five mortgage loan investments, four of which were liquidated. As of September 30, 2001, the Company held one mortgage loan investment. o $0 and $96,000, respectively, from investments in CMBS (the Company's remaining CMBS holdings were sold on January 18, 2001 at their then current carrying value). 14 o $345,000 and $837,000, respectively, of interest income from short-term investments. During the three and nine months ended September 30, 2001, the Company's expenses were comprised of the following: o $130,000 and $790,000, respectively, of management fees incurred pursuant to the terms of the amended Management Agreement. During the three and nine months ended September 30, 2001, base management fees charged to the Company totaled $76,000 and $528,000, respectively. During these same periods, operating deficit reimbursements totaled $54,000 and $1,136,000, respectively, of which $0 and $884,000 were attributable to termination benefits which were paid to departing employees of the Manager during the three and nine months ended September 30, 2001. Amounts approximating these termination benefits ($874,000), and those expected to be payable to the remaining employees of the Manager, were included in amounts due to manager at December 31, 2000. o $154,000 and $477,000, respectively, of general and administrative costs, including $24,000 and $104,000 for professional services, $59,000 and $176,000, respectively, for directors and officers' insurance, $15,000 and $45,000, respectively, of fees paid to the Company's Chairman of the Board of Trust Managers and Chief Executive Officer for his services to the Company, $30,000 and $95,000, respectively, of fees paid to the Company's other trust managers for their services to the Company, and $26,000 and $57,000, respectively, of other miscellaneous expenses. In June 2001, the Company realized a loss of $500,000 in connection with the discounted payoff of its Wayland (Massachusetts) office loan. No gain or loss was realized in connection with three other loan dispositions (repayments) which occurred during the nine months ended September 30, 2001. On June 30, 2001, the Company reduced the carrying value of its remaining mortgage loan investment (including the accrual rate interest receivable related thereto) by $3,810,000 and it increased the carrying value of its investment in AMREIT II, Inc. (its unconsolidated taxable subsidiary) by $100,000. During the three and nine months ended September 30, 2001, liquidating distributions paid to common shareholders totaled $70,280,000 and $99,898,000, respectively. LIQUIDATING DISTRIBUTIONS As described above, shareholders approved the liquidation and dissolution of the Company on September 26, 2000. As a result, the Company's dividend policy was modified to provide for the distribution of the Company's assets to its shareholders. During the nine months ended September 30, 2001, the Company made three liquidating distributions totaling $99,898,000 (or $9.95 per share). Liquidating distributions of $3,514,000 (or $0.35 per share), $26,104,000 (or $2.60 per share) and $70,280,000 (or $7.00 per share) were paid to the Company's shareholders on January 17, 2001 (the "third liquidating distribution"), March 30, 2001 (the "fourth liquidating distribution") and August 9, 2001 (the "fifth liquidating distribution"), respectively. To date, the Company has made liquidating distributions totaling $106,424,000 (or $10.60 per share). The timing and amount of future liquidating distributions will be at the discretion of the Board of Trust Managers and will be dependent upon the Company's financial condition, tax basis income, capital requirements, the timing of its loan disposition, reserve requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and such other factors as the Board of Trust Managers deems relevant. At a minimum, the Company intends to make distributions in a manner which will allow it to continue to qualify as a REIT under the Code throughout the liquidation period. The Company believes that the liquidation process will be completed within 18 to 24 months from the date that shareholders approved the liquidation, although there can be no assurances that this timetable will be met or that the anticipated proceeds from the liquidation will be achieved. Tax basis income differs from the operating results reported for financial reporting purposes under the liquidation basis of accounting due to differences in methods of accounting for revenues, expenses, gains and losses. As a result of these accounting differences, the increase/decrease in net assets in liquidation from operating activities is not necessarily indicative of the distributions which must be made by the Company in order for it to continue to qualify as a REIT under the Code. 15 REMAINING ASSETS At the date of this report, the Company's investment portfolio is comprised of one mortgage loan and a residual interest in its unconsolidated taxable subsidiary. The mortgage loan (a mezzanine investment) has a commitment amount and an outstanding principal balance of $14,700,000. The loan provides for interest at a pay rate of 10% per annum and an accrual rate of 12% per annum. The incremental interest earned at the accrual rate is due (from the borrower) at maturity. To the extent that the underlying property generates excess cash flow prior to maturity, such cash flow must be used by the borrower to service the accrual rate interest. The loan also provides the Company with the opportunity for profit participation above the contractual accrual rate. The loan is scheduled to mature on March 31, 2002; however, the borrower has an option to extend the maturity date to March 31, 2003 provided that it is not in violation of any of the conditions established in the loan agreement. The loan provides for an extension fee of $147,000 (or 1% of the loan commitment amount) to be paid to the Company at the time the extension option is exercised by the borrower. The repayment of the Company's second lien loan is subordinated to a $26.2 million non-recourse first lien mortgage provided by an unaffiliated third party. The first lien mortgage, which matures on March 30, 2002, requires floating rate interest payments throughout its term. From March 31, 2001 through March 30, 2002, the first lien mortgage also requires monthly principal reductions of approximately $16,500. The borrower has an option to extend the maturity date of the first lien loan to March 30, 2003; in the event that this option is exercised, the borrower will be required to make monthly principal reductions under the first lien mortgage of approximately $18,000 during the period from March 31, 2002 through March 30, 2003. The first lien loan and the Company's second lien loan are secured by a 301,000 square foot office building in Richardson, Texas. Inet Technologies, Inc. (Nasdaq: INTI) and Macromedia, Inc. (Nasdaq: MACR) lease approximately 80% and 19%, respectively, of the building's net rentable area. On June 30, 2001, the Company reduced the carrying value of its remaining loan by $3,137,000, from $14,700,000 to $11,563,000; additionally, the Company reduced the carrying value of the related accrual rate interest receivable by $673,000, from $673,000 to $0. At September 30, 2001, the carrying values of the remaining loan and the associated accrual rate interest receivable were $11,563,000 and $0, respectively. At September 30, 2001, the estimated net realizable value of the Company's remaining investment in its unconsolidated taxable subsidiary totaled $150,000. In March 2001, a partnership controlled by the subsidiary sold a mixed-use property to an unaffiliated buyer; in connection with this sale, the partnership received a $100,000 promissory note. The amount of the note, which was collected (by the partnership) on July 24, 2001, is included in management's estimate of the value that is expected to be derived from the subsidiary in connection with the wrap-up of its activities (including the wind-up of the partnership's affairs). Although there can be no assurances, the residual interest in the subsidiary is expected to be fully realized by the Company during the fourth quarter of 2001. LIQUIDITY AND CAPITAL RESOURCES The following discussion of liquidity and capital resources should be read in conjunction with the consolidated financial statements and notes thereto included in "Item 1. Financial Statements." The Company's principal demands for liquidity are cash for operations, including funds which are needed to pay its management fees and general and administrative expenses, and distributions to its shareholders (in amounts that are sufficient to allow it to continue to qualify as a REIT). Distributions in excess of the amounts required to maintain the Company's REIT qualification will be funded with proceeds from the final loan disposition. The Company's principal sources of liquidity are its cash reserves and the pay rate interest income from its remaining mortgage loan. The Company believes that its cash flow from operations, its cash reserves and the proceeds from its final loan disposition will be sufficient to meet the Company's currently expected liquidity and capital requirements. The Company's $35 million line of credit matured on April 30, 2001. No amounts were borrowed under the credit facility during the four months ended April 30, 2001. 16 REIT STATUS Management expects the Company to continue to qualify as a REIT for federal income tax purposes throughout the period during which the Company's assets are being liquidated. As a REIT, the Company will not pay income taxes at the trust level on any taxable income which is distributed to its shareholders, although AMREIT II, Inc., its "taxable REIT subsidiary", may be subject to tax at the corporate level. Qualification for treatment as a REIT requires the Company to meet specified criteria, including certain requirements regarding the nature of its ownership, assets, income and distributions of taxable income. The Company may, however, be subject to tax at normal corporate rates on any ordinary income or capital gains not distributed. Given the changes in the nature of the Company's assets and in the Company's sources of income that could result from dispositions of assets in the liquidation process and the need to retain assets to meet liabilities, there can be no assurance that the Company will continue to meet the REIT qualification tests. If the Company ceases to qualify as a REIT for any taxable year, it would not be entitled to deduct distributions paid to shareholders from its taxable income. In this case, the Company would be liable for federal income taxes with respect to its gains from sales of assets and the Company's income from operations for that year and for subsequent taxable years. FORWARD-LOOKING STATEMENTS Certain statements contained in this Form 10-Q are not based on historical facts and are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company intends that forward-looking statements be subject to such Act and any similar state or federal laws. Forward-looking statements, which are based on various assumptions, include statements regarding the intent, belief or current expectations of the Company, its Manager, and their respective Trustees or directors and officers, and may be identified by reference to a future period or periods or by use of forward-looking terminology such as "intends," "may," "could," "will," "believe," "expect," "anticipate," "plan," or similar terms or variations of those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to risks, uncertainties and changes with respect to a variety of factors, including, but not limited to, changes in international, national, regional or local economic environments, changes in prevailing interest rates, credit risks, basis and asset/liability risks, event risk, conditions which may affect public securities and debt markets generally or the markets in which the Company operates, geographic and product type concentrations of assets, other factors generally understood to affect the real estate acquisition, mortgage and leasing markets, changes in federal income tax laws and regulations, and other risks described from time to time in the Company's SEC reports and filings, including its registration statement on Form S-11 and periodic reports on Form 10-Q, Form 8-K and Form 10-K. 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is a party to one financial instrument, a mezzanine investment, which is subject to market risk. The mezzanine loan, the repayment of which is subordinated to a senior mortgage loan, is secured by a second lien. The Company's mortgage loan involves, to some degree, an element of interest rate risk. Additionally, this financial instrument is subject to real estate market risk. The Company is a party to certain other financial instruments, including trade receivables and payables and amounts due to its manager which, due to their short-term nature, are not subject to market risk. For a discussion of market risk exposures, reference is made to Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The market risk exposures described therein have not materially changed since December 31, 2000; accordingly, no additional discussion or analysis is provided in this Form 10-Q. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits and Exhibit Index None (b) Reports on Form 8-K. The following reports on Form 8-K were filed with respect to events occurring during the quarterly period for which this report is filed: None 18 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMRESCO CAPITAL TRUST Registrant Date: October 26, 2001 By: /s/Thomas R. Lewis II --------------------- Thomas R. Lewis II Senior Vice President, Chief Financial and Accounting Officer, Controller & Secretary (Principal Financial and Accounting Officer) 19

AMRESCO CAPITAL TRUST 10-Q