SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] 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 000-27081
AMERICAN HOME MORTGAGE HOLDINGS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-4066303
------------------------------------- --------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
12 EAST 49TH STREET, NEW YORK, NY 10017
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 755-8600
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
Common Stock, $0.01 par value NASDAQ National Market
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
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] or No [ ].
As of September 30, 2000, 8,784,551 shares of the Registrant's
Common Stock, $.01 par value, were outstanding.
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
QUARTER ENDED SEPTEMBER 30, 2000
INDEX
PART I-FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II-OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
ITEM 1.
FINANCIAL STATEMENTS
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,374,539 $ 3,414,017
Accounts receivable 13,996,490 7,102,546
Mortgage loans held for sale, net 118,297,926 65,115,356
Mortgage loans held for investment, net 164,457 153,534
Real estate owned 344,032 112,865
Mortgage servicing rights, net 33,356 34,470
Premises and equipment, net 6,253,301 3,419,693
Prepaid expenses and security deposits 2,305,340 2,034,234
Goodwill 12,849,783 4,497,537
------------ ------------
TOTAL ASSETS $157,612,224 $ 85,884,252
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Warehouse lines of credit $113,412,232 $ 56,804,901
Drafts payable 1,972,626 3,313,686
Accrued expenses and other 13,943,431 5,262,997
Notes payable 2,331,930 1,947,578
Mortgage payable - building 1,298,640 --
Deferred income tax liability 531,950 532,025
------------ ------------
Total liabilities 133,490,809 67,861,187
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST 262,431 23,372
STOCKHOLDERS' EQUITY:
Preferred stock $1.00 per share, 1,000,000 shares
authorized, none issued and outstanding -- --
Common stock, $.01 per share par value, 19,000,000
shares authorized, 8,784,551 issued and outstanding 87,845 82,534
Additional paid-in capital 19,517,810 17,249,390
Retained earnings 4,260,329 667,769
------------ ------------
Total stockholders' equity 23,858,984 17,999,693
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $157,612,224 $ 85,884,252
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Gain on sale of mortgage loans, net $ 15,411,656 $ 5,015,536 $ 33,281,451 $ 15,837,750
Interest income, net 691,800 482,583 2,611,873 1,190,951
Other 890,377 330,838 2,034,763 967,553
------------ ------------ ------------ ------------
Total revenues 16,993,833 5,828,957 37,928,087 17,996,254
------------ ------------ ------------ ------------
EXPENSES:
Salaries, commissions and benefits, net 7,959,155 2,831,315 17,555,906 8,654,829
Marketing and promotion 1,788,316 336,141 2,723,543 1,205,089
Occupancy and equipment 1,598,414 552,826 3,977,745 1,575,884
Data processing and communications 713,080 267,910 1,831,038 884,572
Provision for loss 50,000 -- 98,500 27,967
Other 2,104,350 567,928 5,334,737 1,670,729
------------ ------------ ------------ ------------
Total expenses 14,213,315 4,556,120 31,521,469 14,019,070
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 2,780,518 1,272,837 6,406,618 3,977,184
INCOME TAXES 1,195,067 79,859 2,822,727 211,125
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 1,585,451 1,192,978 3,583,891 3,766,059
MINORITY INTEREST IN INCOME OF
CONSOLIDATED JOINT VENTURE 64,562 (17,159) (8,670) 27,332
INCOME TAX EXPENSE DUE TO
CONVERSION OF "S" CORP. -- 625,000 -- 625,000
------------ ------------ ------------ ------------
NET INCOME $ 1,520,889 $ 585,137 $ 3,592,561 $ 3,113,727
============ ============ ============ ============
Earnings per share - basic $ 0.17 $ 0.12 $ 0.43 $ 0.62
Earnings per share - diluted $ 0.17 $ 0.12 $ 0.43 $ 0.62
Weighted average number of shares - basic 8,779,247 5,000,000 8,453,899 5,000,000
============ ============ ============ ============
Weighted average number of shares - diluted 8,779,247 5,000,000 8,453,899 5,000,000
============ ============ ============ ============
Unaudited pro forma information:
Provision for proforma income taxes 548,669 1,737,935
------------ ------------
Pro forma earnings $ 741,327 $ 2,211,917
============ ============
Pro forma basic and diluted earnings per share $ 0.10 $ 0.29
============ ============
Pro forma weighted average number of shares - basic 7,500,000 7,500,000
============ ============
Pro forma weighted average number of shares - diluted 7,533,334 7,533,334
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,592,561 $ 3,113,727
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,086,188 258,783
Provision for loss 98,500 27,967
Origination of mortgage loans held for sale (1,882,964,166) (894,744,878)
Proceeds on sale of mortgage loans 1,831,438,008 896,215,678
Increase in accrued expenses and other liabilities 7,029,203 497,123
Deferred income taxes (75) 640,000
(Increase) / decrease in:
Accounts receivable (7,112,245) (463,961)
Mortgage servicing rights 1,114 (1,000)
Prepaid expenses and security deposits 399,318 (669,097)
--------------- ---------------
Net cash (used in) provided by operating activities (46,431,594) 4,874,342
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate owned, net (231,167) --
Net purchases of loans held for investment (10,923) (80,055)
Acquisition of First Home Mortgage Corp., net (7,339,605) --
Purchases of premises and equipment, net (1,112,880) (877,509)
Increase (decrease) in minority interest 82,219 (85,168)
--------------- ---------------
Net cash used in investing activities (8,612,356) (1,042,732)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in warehouse lines of credit 56,498,940 (11,189,014)
Increase (decrease) in drafts payable (1,341,060) 7,932,897
Decrease in notes payable (153,408) --
Distributions -- (994,012)
Proceeds from issuance of capital stock -- 1,000
--------------- ---------------
Net cash provided by (used in) financing activities 55,004,472 (4,249,129)
--------------- ---------------
NET DECREASE IN CASH (39,478) (417,519)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,414,017 2,891,513
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,374,539 $ 2,473,994
=============== ===============
SUPPLEMENTAL DISCLOSURE--CASH PAID FOR:
Interest $ 4,388,818 $ 1,332,523
Taxes 919,836 396,134
</TABLE>
NON CASH ACTIVITIES
On June 30, 2000, the Company issued 489,804 shares of common stock in
exchange for 100% of the outstanding shares of First Home Mortgage Corp. See
Notes to Consolidated Financial Statements.
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1-BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of American
Home Mortgage Holdings, Inc. and its subsidiaries, American Home Mortgage Corp.
("American Home Mortgage") and Marina Mortgage Company, Inc. ("Marina")
(collectively, the "Company") reflect all adjustments which, in the opinion of
management, are necessary for a fair presentation of the results of the interim
periods presented. All such adjustments are of a normal recurring nature. All
intercompany accounts and transactions have been eliminated. Operating results
for the nine months ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the full year ended December 31, 2000.
The unaudited interim consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended December 31, 1999, included in the Company's
annual report on Form 10-K for the year then ended.
NOTE 2-INCOME TAXES
Prior to September 29, 1999, the Company was treated as an S corporation for
income tax purposes. Effective September 29, 1999, the Company changed its
income tax treatment to a C corporation. Income tax expense of approximately
$80,000 and $211,000 has been recorded for the third quarter and nine months
ending September 30, 1999, respectively. On a pro forma basis income tax expense
would have been approximately $741,000 and $2.2 million for the third quarter
and nine months ending September 30, 1999, respectively. Pro forma income tax
provisions have been presented as if the Company was taxable as a C corporation
for Federal and state income tax purposes for all periods presented.
The pro forma financial information has been presented to show the effect on the
historical results of operations of the Company had it been treated as a C
corporation for Federal and state income tax purposes as of the beginning of the
earliest period presented. The pro forma earnings per share has been presented
as if the shares issued at the time of the Offering were outstanding as of the
beginning of each period.
NOTE 3-EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of shares
outstanding and excludes the dilutive effect of common stock equivalents.
Diluted earnings per share is based on the weighted average number of shares
outstanding and includes the dilutive effect of common stock equivalents. There
was a de minimus dilutive effect as of September 30, 2000.
NOTE 4-INCORPORATION TRANSACTION
On June 15, 1999, the Company was formed to serve as a holding company for
American Home Mortgage. In conjunction with the closing of its Offering, all of
the issued and outstanding shares of stock of American Home Mortgage were
exchanged for 4,999,900 shares of the Company's Common Stock.
The Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") in June 1998 and No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities an Amendment of FASB
Statement No. 133" ("SFAS 138") in June 2000.
<PAGE>
NOTE 5-DERIVATIVES
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) 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:
o a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment;
o a hedge of the exposure to variable cash flows of a forecasted transaction;
or
o a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available for sale security,
or a foreign-currency-denominated forecasted transaction.
Under SFAS 133, an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk.
SFAS 138 addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS 133 and amends the accounting
and reporting standards of SFAS 133 for certain derivative instruments and
certain hedging activities.
As part of the Company's secondary marketing activities, mortgage-backed
securities are purchased and sold forward and options are acquired on mortgage
and treasury securities. At September 30, 2000, forward delivery commitments
amounted to approximately $138 million and options to buy securities amounted to
approximately $48 million. These contracts have a high correlation to the price
movement of the loans being hedged. There is currently no recognition of
unrealized gains or losses on these contracts in the balance sheet or statement
of income. When the related loans are sold, the deferred gains or losses from
these contracts are recognized in the statement of income as a component of net
gains or losses on sales of mortgage loans.
These statements are effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. When the Company adopts these statements in January 2001,
management believes there will be a positive fair value impact of $2 million to
$3 million.
NOTE 6-ACQUISITION
On June 30, 2000, the Company completed its acquisition of First Home Mortgage
Corporation ("First Home"), an Illinois corporation, which was merged with and
into American Home Mortgage Corp. The shareholders of First Home received an
aggregate of 489,804 shares of the Company's common stock and $3.6 million, to
be paid over a period of two years. In addition, the shareholders of First Home
may receive additional consideration consisting of cash and shares of the
company's common stock based on the future results of the financial performance
of the First Home division of the Company (please see the Company's current
report on Form 8-K filed with the Securities and Exchange Commission on February
1, 2000 for further information). First Home is an independent mortgage lender
based in metropolitan Chicago. Formed in 1987, First Home originates primarily
residential mortgage loans. It operates 21 branch offices in 4 states and
employs approximately 255 full time employees, including sales personnel. At
June 30, 2000, First Home had assets of $9.7 million. This transaction generated
goodwill of approximately $8.2 million to be amortized over 20 years.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading independent retail mortgage banking company primarily
engaged in the business of originating and selling residential mortgage loans.
The Company offers a broad array of residential mortgage products targeted
primarily to high-credit-quality borrowers over the Internet, as well as through
its 313 primarily commission-compensated loan originators. The Company operates
from 55 loan offices in the New York metropolitan area and five other eastern
states, and in California, Illinois, New Mexico and Arizona. The Company
operates primarily as a mortgage banker, underwriting, funding and selling its
loan products to more than 45 different buyers. In January of 1999, the Company
began marketing its mortgage products over the Internet through its Internet
site, MORTGAGESELECT.COM. Mortgage products are originated online through
arrangements with a number of popular Web sites and through the Company's own
Web site, established in 1999.
Net income for the third quarter of 2000 totaled $1.5 million, or $0.17 per
share on a diluted basis, compared to $0.7 million, or $0.10 per share on a pro
forma basis, in the 1999 third quarter. For the first nine months of 2000, net
income was $3.6 million, or $0.43 per share on a diluted basis, up from $2.2
million, or $0.29 per share on a pro forma basis, in the same period a year ago.
Loan originations increased 193.1% in the third quarter of 2000, totaling $862.8
million compared to $294.4 in the 1999 third quarter. Originations from our
MORTGAGESELECT.COM Internet Web site totaled $139.5 million in the third quarter
of 2000.
On June 30, 2000, the Company completed its acquisition of First Home Mortgage
Corporation ("First Home"), an Illinois corporation, which was merged with and
into American Home Mortgage Corp. First Home is a full service retail lender.
First Home originates and purchases mortgage loans for sale in the secondary
mortgage market. It operates 24 branch offices in three states.
During the third quarter the Company entered into an agreement with Roslyn
National Mortgage Corporation, a New York corporation ("RNMC"), to purchase
certain branch offices of RNMC. These branch offices are located in New York,
Virginia, Maryland and Connecticut. The transaction closed on October 23, 2000.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth information derived from the Company's
Consolidated Statements of Income expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues
Gain on sale of mortgage loans ......................................... 90.7% 86.0% 87.7% 88.0%
Interest income, net ................................................... 4.1 8.3 6.9 6.6
Other .................................................................. 5.2 5.7 5.4 5.4
----- ----- ----- -----
Total revenues ......................................................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Expenses
Salaries, commissions and benefits, net ................................ 46.9 48.6 46.3 48.1
Marketing and promotion ................................................ 10.6 5.8 7.2 6.7
Occupancy and equipment ................................................ 9.4 9.5 10.5 8.7
Data processing and communications ..................................... 4.2 4.6 4.8 4.9
Provision for loss ..................................................... 0.1 -- 0.2 0.2
Other .................................................................. 12.4 9.7 14.1 9.3
----- ----- ----- -----
Total expenses ......................................................... 83.6 78.2 83.1 77.9
----- ----- ----- -----
Income before income taxes and minority interest ....................... 16.4 21.8 16.9 22.1
Income taxes ........................................................... 7.0 1.4 7.4 1.2
Minority interest ...................................................... 0.4 (0.3) -- 0.1
Income tax expense due to conversion of "S" Corp. ...................... -- 10.7 -- 3.5
----- ----- ----- -----
Net income ............................................................. 9.0% 10.0% 9.5% 17.3%
===== ===== ===== =====
Provision for pro forma income taxes ................................... 9.4 9.7
===== =====
Pro forma net income ................................................... 12.7% 12.3%
===== =====
</TABLE>
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
Revenues for the third quarter of 2000 were $17.0 million compared to $5.8
million in 1999, an increase of 191.5%. The increase was a result of increased
gains on sale of mortgage loans, net interest income and volume incentive
bonuses.
Gain on sale increased by 207.3% to $15.4 million from $5.0 million a year
earlier, generally a result of an increase in loan volume, due in large part to
the Marina and First Home acquisitions and Internet-generated loan closings.
Loans sold in the third quarter of 2000 were $842.5 million compared to $337.1
million in the like quarter in 1999 (which amounts include $111.9 million and
$33.8 million of originations in which we acted as broker, respectively).
Net interest income increased to $692,000 from $483,000 a year ago, an increase
of 43.4%. The improvement resulted from increased loan originations and from
more efficient cash management, including the implementation of sweep accounts,
which use existing cash balances overnight to reduce outstanding borrowings.
Other income was $890,000 for the current quarter, an increase of 169.1%
compared to $331,000 for the third quarter of 1999. Other income primarily
consists of volume incentive bonuses received from loan purchasers. These bonus
payments are earned and recognized when the Company achieves volume targets
specified in agreements with these purchasers.
EXPENSES
Salaries, commissions and benefits increased by 181.1% to $8.0 million from $2.8
million from the 1999 third quarter. The increase was largely due to the
inclusion of Marina and First Home expenses following the acquisitions and
increased staffing levels related to our MORTGAGESELECT.COM Internet Web site.
Marketing and promotion expenses totaled $1.8 million in the current quarter, up
432.0% from $336,000 in the third quarter of 1999. Increased advertising expense
in support of retail operations and our MORTGAGESELECT.COM Internet Web site
accounted for the increase.
Occupancy and equipment costs increased by 189.1% to $1.6 million for the
current quarter, from $553,000 in the like period in 1999. The increase in costs
is reflective of the acquisitions of Marina and First Home, the opening of new
community loan offices and Internet call centers and greater depreciation
charges as a result of the Company's increased investments in computer
networking.
Data processing and communications increased by 166.2% to $713,000 from $268,000
in the third quarter of 1999. The increase was a result of the Marina and First
Home acquisitions, the growth in our MORTGAGESELECT.COM Internet Web site and
the opening of new office locations.
Other expenses increased by 270.5% to $2.1 million, from $568,000 in 1999. These
expenses, which consist generally of office supplies, travel, professional fees
and insurance, have increased as a result of the growth in our
MORTGAGESELECT.COM Internet Web site, the acquisitions of Marina and First Home,
new office openings and higher employment levels.
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
Revenues increased to $37.9 million from $18.0 million in 1999 a year earlier,
an increase of 110.8%. The increase was a result of increased gains on sale of
mortgage loans, net interest income and volume incentive bonuses.
For the nine months ended September 30, 2000, gain on sale totaled $33.3 million
compared to $15.8 million in 1999, an increase of 110.1%. The increase primarily
resulted from an increased loan volume, due in large part to the Marina and
First Home acquisitions and Internet-generated loan closings. The Company sold
$2.0 billion of loans on a year-to-date basis compared to $945.1 million for the
same period in 1999 (which amounts include $197.9 million and $48.9 million of
originations in which we acted as broker, respectively).
Net interest income increased by 119.3% to $2.6 million from $1.2 million a year
ago. Increased loan origination volume and more efficient cash management
accounted for the improvement.
Other income was $2.0 million for the nine month period compared to $968,000, an
increase of 110.3% in the like period of 1999. Other income primarily consists
of volume incentive bonuses received from loan purchasers.
EXPENSES
Salaries, commissions and benefits amounted to $17.6 million in the current nine
month period, compared to $8.7 million in 1999, an increase of 102.8%. The
increase was largely due to the inclusion of Marina and First Home expenses
following the acquisitions and increased staffing levels related to our
MORTGAGESELECT.COM Internet Web site.
Marketing and promotion expenses totaled $2.7 million in the current period, up
126.0% from $1.2 million in the first nine months of 1999. Increased advertising
expense in support of retail operations and our MortgageSelect.com Internet Web
site accounted for the increase.
Occupancy and equipment costs increased by 152.4% to $4.0 million for the first
nine months of 2000, from $1.6 million in like period in 1999. The increase in
costs is reflective of the acquisition of Marina and First Home, the opening of
new community loan offices and Internet call centers and greater depreciation
charges as a result of the Company's increased investments in computer
networking.
Data processing and communications increased by 107.0% to $1.8 million from
$885,000 in the nine month period of 1999. The increase was a result of the
Marina acquisition, the growth in our MORTGAGESELECT.COM Internet Web site and
the opening of new office locations.
Other expenses increased by 219.3% to $5.3 million, from $1.6 million in 1999.
These expenses, which consist generally of office supplies, travel, professional
fees and insurance, have increased as a result of the growth in our
MORTGAGESELECT.COM Internet Web site, the acquisitions of Marina and First Home,
new office openings and higher employment levels.
LIQUIDITY AND CAPITAL RESOURCES
To originate a mortgage loan, the Company draws against a syndicated warehouse
facility that its subsidiaries, American Home Mortgage Corp. and Marina Mortgage
Company, Inc., have entered into, agented by First Union National Bank ("First
Union") and a committed facility with Morgan Stanley Dean Witter Mortgage
Capital, Inc. ("Morgan Stanley"). The First Union warehouse facility is for $125
million. The Morgan Stanley facility is for $75 million. The Company's warehouse
facilities are secured by the mortgages it originates and certain of its other
assets. Loans under its warehouse facilities bear interest at rates that vary
depending on the type of underlying loan, and these loans are subject to
sublimits, advance rates and terms that vary depending on the type of underlying
loan and the ratio of the Company's liabilities to its tangible net worth.
<PAGE>
In addition to the First Union and Morgan Stanley warehouse facilities, the
Company has purchase and sale agreements with Fannie Mae and Paine Webber Real
Estate Securities, Inc. Pursuant to these arrangements, the Company obtains
commitments from the ultimate buyer to purchase its loans. These loans are then
sold together with the commitment from the end investor to one of the two
institutions above, who subsequently take responsibility for consummating the
final transaction. These agreements allow the Company to accelerate the sale of
its mortgage loan inventory resulting in a more effective use of the warehouse
facility. The combined capacity available under the Company's purchase and sale
agreements is $267 million.
For the nine months ended September 30, 2000, net cash (used in) provided by
operating, investing and financing activities was $(46.4) million, $(8.6)
million and $55.0 million respectively. Net cash used in operating activities
was primarily due to loan originations exceeding loan sales and an increase in
accounts receivable, offset by an increase in accrued expenses and other
liabilities and net income. Net cash used in investing activities was primarily
due to the acquisition of First Home and the purchase of furniture and
equipment. Net cash provided by financing activities was primarily a result of
an increase in warehouse lines of credit which are collateral for mortgage loans
held for sale.
For the comparable period a year ago, net cash provided by (used in) operating,
investing and financing activities was $4.9 million, $(1.0) million and $(4.2)
million, respectively. Net cash provided by operating activities was primarily
due to loan sales exceeding loan originations, an increase in accrued expenses
and other liabilities, an increase in deferred income taxes and net income,
offset by an increase in prepaid expenses and security deposits and accounts
receivable. Net cash used in investing activities was primarily due to the
purchase of furniture and equipment. Net cash used in financing activities was a
result of a decrease in warehouse lines of credit and capital distributions,
offset by an increase in drafts payable.
The Company's existing cash balances and funds available under its working
capital credit facilities, together with cash flows from operations, are
expected to be sufficient to meet its liquidity requirements for at least the
next 12 months.
On June 30, 2000, the Company acquired First Home Mortgage Corp. ("First Home"),
an Illinois corporation, which was immediately merged into American Home
Mortgage Corp. The shareholders of First Home received an aggregate of 489,804
shares of the company's common stock and $3.6 million over a period of two
years. This transaction generated goodwill of approximately $8.2 million to be
amortized over 20 years. For further information, see Notes to Consolidated
Financial Statements, Note 6.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") in June 1998 and No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities an Amendment of FASB
Statement No. 133" ("SFAS 138") in June 2000.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) 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:
o a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment;
o a hedge of the exposure to variable cash flows of a forecasted
transaction; or
<PAGE>
o a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available for sale
security, or a foreign-currency-denominated forecasted transaction.
Under SFAS 133, an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk.
SFAS 138 addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS 133 and amends the accounting
and reporting standards of SFAS 133 for certain derivative instruments and
certain hedging activities.
As part of the Company's secondary marketing activities, mortgage-backed
securities are purchased and sold forward and options are acquired on mortgage
and treasury securities. At September 30, 2000, forward delivery commitments
amounted to approximately $138 million and options to buy securities amounted to
approximately $48 million. These contracts have a high correlation to the price
movement of the loans being hedged. There is currently no recognition of
unrealized gains or losses on these contracts in the balance sheet or statement
of income. When the related loans are sold, the deferred gains or losses from
these contracts are recognized in the statement of income as a component of net
gains or losses on sales of mortgage loans.
These statements are effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. When the Company adopts these statements in January 2001,
management believes there will be a positive fair value impact of $2 million to
$3 million.
SEC Staff Accounting Bulletin, No. 101 - "Revenue Recognition in Financial
Statements" (SAB 101) outlines the accounting literature on revenue recognition
as including both broad conceptual discussions as well as certain
industry-specific guidance. Based on these guidelines, it states that revenue
should not be recognized until it is realized or realizable and earned. The
Company will implement SAB 101 on October 1, 2000. The Company believes that the
implementation will not have a material impact on the results of operations.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. The words "plan," "believe," "anticipate,"
"estimate," "expect," "objective," "projection," "forecast," "goal" or similar
words are intended to identify forward-looking statements. Such statements
involve risks and uncertainties that exist in the Company's operations and
business environment that could render actual outcomes and results materially
different than predicted. The Company's forward-looking statements are based on
assumptions about many factors, including, but not limited to, general
volatility of the capital markets; changes in the real estate market, interest
rates or the general economy of the markets in which the Company operates;
economic, technological or regulatory changes affecting the use of the Internet;
and changes in government regulations that are applicable to the Company's
regulated brokerage and property management businesses. These and other factors
are more fully discussed in the Company's prospectus filed with the Securities
and Exchange Commission during the past 12 months. While the Company believes
that its assumptions are reasonable at the time forward-looking statements were
made, it cautions that it is impossible to predict the actual outcome of
numerous factors and, therefore, readers should not place undue reliance on such
statements. Forward-looking statements speak only as of the date they are made,
and the Company undertakes no obligation to update such statements in light of
new information or future events.
<PAGE>
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Movements in interest rates can pose a major risk to the Company in either a
rising or declining interest rate environment. When interest rates rise, loans
held for sale and any applications in process with locked-in rates decrease in
value. To preserve the value of such loans or applications in process with
locked-in rates, agreements are executed for mandatory loan sales to be settled
at future dates with fixed prices. These sales take the form of forward sales of
mortgage-backed securities.
When interest rates decline, fallout may occur as a result of customers
withdrawing their applications. In those instances, the Company may be required
to purchase loans at current market prices to fulfill existing mandatory loan
sale agreements, thereby incurring losses upon sale. The Company uses an
interest rate hedging program to manage these risks. Through this program,
mortgage-backed securities are purchased and sold forward and options are
acquired on mortgage and treasury securities.
The board of directors establishes thresholds which limit exposure to such risk.
An analysis is performed daily to determine the risk exposure under various
interest rate scenarios and such risk is managed by executing the program
discussed above. All derivatives are obtained for hedging (or other than
trading) purposes, and management evaluates the effectiveness of the hedges on
an on-going basis.
The following table summarizes the Company's interest rate sensitive
instruments:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Instruments:
Commitments to fund mortgages at agreed-upon rates ...... $181,378,356 $ 3,816,526 $147,482,380 $ 1,391,777
Forward delivery commitments ....................... 137,558,000 (550,231) 33,634,595 (379,248)
Option contracts to buy securities ................. 48,000,000 211,843 35,000,000 439,856
</TABLE>
In the event that the Company does not deliver into the forward delivery
commitments or exercise its option contracts, the instruments can be settled on
a net basis. Net settlement entails paying or receiving cash based upon the
change in market value of the existing instrument. All forward delivery
commitments and option contracts to buy securities are to be contractually
settled within nine months of the balance sheet date.
The following methods and assumptions are used in estimating fair values of the
aforementioned financial instruments:
Fair value estimates are made as of a specific point in time based
on estimates using present value or other valuation techniques.
These techniques involve uncertainties and are significantly
affected by the assumptions used and the judgments made regarding
risk characteristics of various financial instruments, discount
rates, estimates of future cash flows, future expected loss
experience, and other factors.
Changes in assumptions can significantly affect the Company's
estimates and the resulting fair values. Derived fair value
estimates cannot be substantiated by comparison to independent
markets and, in many cases, cannot be realized in an immediate sale
of the instrument. Also, as a result of differences in methodologies
and assumptions used to estimate fair values, the Company's fair
values should not be compared to those of other companies.
<PAGE>
The fair value of commitments to fund with locked-in rates are
estimated using the fees and rates currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties.
For fixed rate loan commitments, fair value also considers the
difference between current market interest rates and the existing
committed rates.
The fair value of these instruments is estimated using current
market prices for dealer or investor commitments relative to
existing positions.
The Company's hedging program contains an element of risk since the
counterparties to its mortgage and treasury securities transactions may be
unable to meet their obligations. While the Company does not anticipate
nonperformance by any counterparty, it is exposed to potential credit losses in
the event that the counterparty fails to perform. The exposure to credit risk in
the event of default by a counterparty is the difference between the contract
and the current market price. This credit risk is minimized by limiting the
counterparties to well-capitalized banks and securities dealers who meet
established credit and capital guidelines.
<PAGE>
PART II-OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibit is filed as part of this Quarterly Report on
Form 10-Q:
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None
<PAGE>
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.
AMERICAN HOME MORTGAGE HOLDINGS, INC.
-------------------------------------
(Registrant)
Date: November 14, 2000 By: /s/ ROBERT E. BURKE
-------------------------------
Robert E. Burke
Chief Financial Officer
Date: November 14, 2000 By: /s/ RICHARD D. SILVER
-------------------------------
Richard D. Silver
Controller
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
FORM 10-Q
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
27.1 Financial Data Schedule
