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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-8630
AMRESCO, INC.
(Exact name of Registrant as specified in its charter)
Delaware 59-1781257
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 N. Pearl Street, Suite 2400, LB 342, Dallas, Texas 75201-7424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 953-7700
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
36,517,771 shares of common stock, $.05 par value per share, as
of October 31, 1997.
AMRESCO, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1997 3
and December 31, 1996
Consolidated Statements of Income - Three and
Nine Months Ended September 30, 1997 and 1996 4
Consolidated Statement of Shareholders' Equity -
Nine Months Ended September 30, 1997 5
Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 16
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
AMRESCO, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts)
September 30, December 31,
1997 1996
(Unaudited)
ASSETS
Cash and equivalents $31,346 $29,046
Temporary investments 34,190
Accounts receivable, net of reserves of $3,191 18,323 12,243
and $1,611, respectively
Loans held for sale, net 586,816 376,029
Loans, net 178,121 42,188
Investments in purchased loan and other asset 329,553 251,060
portfolios, net
Asset backed and other securities - available 87,737 55,678
for sale
Retained interests in securitizations - trading 214,225 130,328
Deferred income taxes 30,815 13,285
Premises and equipment, net of accumulated
depreciation of $9,397 and $5,285, respectively 15,430 18,228
Intangible assets, net of accumulated
amortization of $17,806 and $11,110, respectively 115,365 87,219
Other assets 39,770 26,447
TOTAL ASSETS $1,647,501 $1,075,941
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued compensation and $44,742 $30,509
benefits
Notes payable 323,492 260,092
Warehouse loans payable 562,284 354,562
Senior notes 57,500 57,500
Senior subordinated notes 250,000 57,500
Income taxes payable 10,566 3,742
Other liabilities 19,228 10,521
Total liabilities 1,267,812 774,426
SHAREHOLDERS' EQUITY:
Common stock, $0.05 par value, authorized
150,000,000 shares; 36,504,450 and 33,796,145 1,825 1,690
shares issued, respectively
Capital in excess of par 257,251 213,843
Reductions for employee stock (3,113) (1,129)
Treasury stock, $0.05 par value, 24,339 shares
in 1997 and 1996, respectively (160) (160)
Net unrealized gains 481 249
Retained earnings 123,405 87,022
Total shareholders' equity 379,689 301,515
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,647,501 $1,075,941
See notes to consolidated financial statements.
AMRESCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1997 1996 1997 1996
REVENUES:
<S> <C> <C> <C> <C>
Interest and other investment income $ 58,977 $22,481 $140,311 $65,728
Gain on sale of loans and investments, net 23,075 3,177 67,701 8,966
Mortgage banking and servicing fees 19,031 10,095 48,384 25,032
Asset management and resolution fees 6,741 9,177 18,632 27,214
Income from equity affiliate 3,736 14,193
Other revenues 1,226 556 2,286 2,255
Total revenues 112,786 45,486 291,507 129,195
EXPENSES:
Personnel 37,324 17,031 102,300 52,662
Interest 29,807 7,983 71,219 21,478
Other general and administrative 11,764 4,832 35,812 15,489
Provision for loan and investment losses 4,338 11,556
Depreciation and amortization 4,001 1,919 10,776 5,899
Total expenses 87,234 31,765 231,663 95,528
Income before income taxes 25,552 13,721 59,844 33,667
Income tax expense 10,216 5,165 23,461 12,968
NET INCOME $ 15,336 $ 8,556 $ 36,383 $ 20,699
Earnings per share:
Primary $0.41 $0.31 $1.00 $0.75
Fully-diluted 0.41 0.29 1.00 0.71
Weighted average number of common shares
outstanding and common share equivalents 37,487 28,005 36,301 27,648
</TABLE>
See notes to consolidated financial statements.
AMRESCO, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Nine Months Ended September 30, 1997
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Reductions Net
$0.05 Par Value Capital in For Unrealized Total
Number of Excess of Employee Treasury Gains Retained Shareholders'
Shares Amount Par Stock Stock (Losses) Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1997 33,796,145 $1,690 $213,843 $(1,129) $(160) $ 249 $87,022 $301,515
Purchase of subsidiary 2,094,944 105 34,203 34,308
Issuance of common
stock for acquisition earnout 43,622 2 775 777
Exercise of stock options 405,655 19 2,550 2,569
Grant of restricted stock 166,584 9 3,246 (3,255)
Cancellation of restricted stock (2,500) (42) 42
Tax benefits from employee
stock compensation 2,776 2,776
Amortization of unearned stock
compensation 1,229 1,229
Additional costs from conversion
of convertible debt (100) (100)
Unrealized gain on securities
available for sale, net 470 470
Foreign currency translation
adjustments (238) (238)
Net income 36,383 36,383
September 30, 1997 36,504,450 $1,825 $257,251 $(3,113) $(160) $481 $123,405 $379,689
</TABLE>
See notes to consolidated financial statements.
AMRESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
1997 1996
OPERATING ACTIVITIES:
Net Income $ 36,383 $ 20,699
Adjustments to reconcile net income to net cash used
in operating activities:
Gain on sale of loans and investments (67,701) (8,966)
Undistributed earnings of equity affiliate (2,530)
Depreciation and amortization 10,776 5,899
Accretion of interest income (27,372) (7,578)
Deferred tax benefit (13,565) (68)
Provision for loan and investment losses 11,556 350
Other 1,229 750
Increase (decrease) in cash for changes in exclusive
of assets and liabilities acquired in business
combinations):
Accounts receivable (5,973) 6,356
Loans held for sale, net (223,426) (302,602)
Warehouse loans payable, net 120,431 228,402
Retained interests in securitizations 106,434 34,899
Other assets (3,311) (5,178)
Accounts payable and accrued compensation and benefits 9,969 (4,163)
Income taxes payable 6,824 (153)
Other liabilities 13,994 (4,231)
Net cash used in operating activities (26,282) (35,584)
INVESTING ACTIVITIES:
Sale (purchase) of temporary investments, net 34,190 (14,450)
Originations of loans, net (138,641) (22,207)
Acquisition of purchased loan and other asset
portfolios (155,381) (95,847)
Collections on purchased loan and other asset
portfolios 80,581 75,056
Purchase of asset backed securities (59,054) (7,981)
Collections on asset backed securities 28,067 611
Cash used for purchases of subsidiaries, net (2,176) (2,379)
Investment in joint venture (15,450)
Collections on investment in joint venture 17,789
Purchase of premises and equipment (1,086) (2,214)
Net cash used in investing activities (211,161) (69,411)
FINANCING ACTIVITIES:
Net proceeds from notes payable and other debt 724,779 446,768
Repayment of notes payable and other debt (677,012) (401,843)
Net proceeds from issuance of senior
subordinated notes 186,631
Net proceeds from issuance of senior notes 54,694
Stock options exercised and tax benefit of
employee stock compensation 5,345 3,394
Net cash provided by financing activities 239,743 103,013
Net decrease in cash and cash equivalents 2,300 (1,982)
Cash and cash equivalents, beginning period 29,046 16,139
Cash and cash equivalents, end of period $ 31,346 $ 14,157
SUPPLEMENTAL DISCLOSURE:
Exchange of loans held for sale for retained
interests in securitizations $93,474 $60,707
Interest paid 69,585 21,227
Common stock issued for the purchase of subsidiaries 35,085 777
Income taxes paid 26,249 13,121
See notes to consolidated financial statements
AMRESCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
1. Basis of Presentation and Summary of Significant Accounting
Policies
The accompanying unaudited consolidated financial statements
of AMRESCO, INC. and subsidiaries (the "Company") have been
prepared by the Company in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three
and nine month periods ended September 30, 1997 are not
necessarily indicative of the results that may be expected for
the entire fiscal year or any other interim period. It is
recommended that these statements 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, 1996. Certain reclassifications of prior
period amounts have been made to conform to the current period
presentation.
New Accounting Standards - On January 1, 1997, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities," which requires an entity to
recognize the financial and servicing assets it controls and the
liabilities it has incurred and to derecognize financial assets
when control has been surrendered. Retained interests in assets
sold are measured by allocating the previous carrying amount
between the assets sold and retained interests based on their
relative fair values at the date of transfer.
The gain on sale of loans and other investments for the
three and nine months ended September 30, 1997 includes
approximately $0.5 million and $2.8 million, respectively,
related to unrealized gains on valuation of retained interests in
the Company's March, June and September 1997 securitizations as
the Company reports its retained interests in securitizations as
trading securities which must be measured at fair value.
The provision for loan and investment losses has been made
as a reserve for management's estimate of losses on existing
loans and investments which may be uncollectible. Such estimate
was based on evaluation of the collectability of loans and
investments.
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings Per Share," which establishes new
standards for computing and presenting earnings per share ("EPS")
and is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods;
earlier application is not permitted. Under the requirements of
SFAS No. 128, basic and diluted EPS for the three and nine months
ended September 30, 1997 and 1996 would have been as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Basic $0.42 $0.31 $1.03 $0.77
Diluted 0.41 0.29 1.00 0.71
2. Acquisition
On March 31, 1997, the Company purchased the stock of
Commercial Lending Corporation and the operations and specific
assets of certain of its affiliates ("CLC"). CLC's primary line
of business is originating, securitizing, selling and servicing
franchise loans. The purchase price consisted of (i)
approximately 2.1 million shares of the Company's common stock
valued at $34.3 million (including 0.2 million additional shares
issued in July 1997 valued at $3.3 million pursuant to the
original acquisition terms), (ii) the assumption of certain
liabilities estimated at $14,000,000 and (iii) contingent earnout
payments of additional shares of the Company's common stock based
upon the operating performance of the acquired entities through
March 31, 2000. The acquisition of CLC was recorded as a
purchase acquisition.
3. Notes Payable and Other Debt
Revolving Loan Agreement - During 1997, the Company amended
its revolving loan agreement (the "Revolving Loan Agreement")
with a syndicate of lenders, led by NationsBank of Texas, N.A.
The Revolving Loan Agreement was amended to provide for a maximum
credit facility of $350.0 million of which $60.0 million could be
available on a term basis. As of September 30, 1997, $225.2
million was outstanding under the Revolving Loan Agreement.
Senior Subordinated Notes - On March 12, 1997, the Company
issued $192,500,000 aggregate principal amount of senior
subordinated notes. The notes bear interest at 10% per annum and
mature on March 15, 2004. The notes are unsecured obligations of
the Company and are subordinated to prior payment of all existing
and future senior debt and to indebtedness and other liabilities
of the Company's subsidiaries. The notes are not redeemable
prior to maturity.
Warehouse Debt - On April 1, 1997, a wholly-owned subsidiary
of the Company entered into an Interim Warehouse and Security
Agreement, which replaced an existing warehouse agreement, with
Prudential Securities Credit Corporation for an amount not to
exceed $150.0 million (the "Repurchase Facility") to finance the
origination of certain franchise loans and construction loans to
franchisees of certain approved franchise concepts. Indebtedness
under the Repurchase Facility is secured by the loans originated
with funds advanced under the Repurchase Facility. As of
September 30, 1997, $77.8 million was outstanding under the
Repurchase Facility.
On June 12, 1997, a wholly-owned subsidiary of the Company
entered into an Interim Warehouse and Security Agreement,
replacing an existing warehouse agreement, with Prudential
Securities Credit Corporation for an amount not to exceed $500.0
million (the "Second Repurchase Facility") to finance the
purchase of fixed and floating rate "B and C credit," first and
second lien and one-to-four family residential mortgage loans.
Indebtedness under the Second Repurchase Facility is secured by
the loans purchased with funds advanced under the Second
Repurchase Facility. The available debt limit will increase by
the amount of participation's sold by Prudential Securities
Credit Corporation to other participants. At September 30, 1997,
$136.6 million was outstanding under the Second Repurchase
Facility. As of October 29, 1997, the available debt limit was
$548.0 million.
On August 20, 1997, a wholly-owned subsidiary of the Company
entered into a Second Amended and Restated Master Loan and
Security Agreement, replacing an existing warehouse agreement,
with Morgan Stanley Mortgage Capital Inc., for an amount not to
exceed $400.0 million (the "Second Amended Agreement") to finance
the origination or acquisition of certain residential mortgage
loans. This facility is secured by the mortgages originated or
acquired under the Second Amended Agreement. At September 30,
1997, $181.3 million was outstanding under the Second Amended
Agreement.
On September 16, 1997, a wholly-owned subsidiary of the
Company entered into a $55.0 million warehouse credit facility
with Bank United to finance the origination and funding of
residential construction and residential acquisition and
development loans. This facility is secured by the loans made
under this facility and bears interest at the monthly average
LIBOR rate plus an applicable margin, which ranges from 1.85% to
2.75%. The stated maturity date for this facility is September
15, 1999. At September 30, 1997, $36.5 million was outstanding
under this facility.
4. Stockholders Rights Plan
On May 28, 1997, the Company adopted a Stockholders Rights
Plan pursuant to which rights were distributed to stockholders of
record as of June 9, 1997. The Stockholders Rights Plan
provides, among other things, that if a person (or group of
affiliated or associated persons) acquires (or ten days after the
commencement of a tender offer to acquire) "beneficial ownership"
of 15% or more of the outstanding shares of Common Stock, the
rights previously distributed to stockholders, other than those
owned by such acquiring person or group, will become exercisable.
Under the Stockholders Rights Plan, the acquisition of 15% or
more of the outstanding Common Stock or the completion of the
tender offer will entitle the holder to purchase shares of Common
Stock having a market value equal to twice the purchase price of
the right.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
AMRESCO, INC. (the "Company") is a leading specialty
financial services company engaged in residential mortgage
banking, commercial mortgage banking, asset management and
commercial finance. The residential mortgage banking business
involves originating, acquiring, warehousing and securitizing non-
conforming (sub-prime) loans. The commercial mortgage banking
business involves the origination, underwriting, placement,
securitization and servicing of commercial real estate mortgages.
The asset management business involves acquiring asset portfolios
at a substantial discount to face value and managing and
resolving such asset portfolios to maximize cash recoveries and
providing real estate investment advice to various institutional
investors (primarily pension funds). The commercial finance
business involves providing short and mid-term special situation
and franchise financing, securitization and servicing. The
Company's business may be affected by many factors, including
fluctuations in real estate and other asset values, the
availability and price of assets and residential mortgages to be
purchased, the level of and fluctuations in interest rates,
changes in the securitization market and competition. In
addition, the Company's operations require continued access to
short and long term sources of financing.
On March 31, 1997, the Company purchased the stock of
Commercial Lending Corporation and the operations and specific
assets of certain of its affiliates ("CLC"). CLC's primary line
of business is originating, securitizing, selling and servicing
franchise loans. The purchase price consisted of (i)
approximately 2.1 million shares of the Company's common stock
valued at $34.3 million (including 0.2 million additional shares
issued in July 1997 valued at $3.3 million pursuant to the
original acquisition terms), (ii) the assumption of certain
liabilities estimated at $14,000,000 and (iii) contingent earnout
payments of additional shares of the Company's common stock based
upon the operating performance of the acquired entities through
March 31, 2000.
Throughout 1996 and continuing into 1997, the Company has
extended its business lines to offer a full range of mortgage
banking services including the origination, acquisition and
securitization of sub-prime residential mortgages and commercial
loan origination, securitization and servicing. The Company has
also increased its investment in asset portfolios and developed
and expanded its commercial finance operations. These
significant changes in the composition of the Company's business
are reflected in the Company's results of operations and may
limit the comparability of the Company's results from period to
period.
Results of Operations
The following discussion and analysis presents the
significant changes in results of operations of the Company for
the three and nine months ended September 30, 1997 and 1996 by
primary business lines. The results of operations of acquired
businesses are included in the consolidated financial statements
from the date of acquisition. This discussion should be read in
conjunction with the consolidated financial statements and notes
thereto.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(in thousands, except per share data) September 30, September 30,
1997 1996 1997 1996
Revenues:
<S> <C> <C> <C> <C>
Residential mortgage banking $ 50,835 $11,475 $122,050 $28,339
Commercial mortgage banking 25,461 13,579 69,772 33,974
Asset management 24,199 21,231 72,367 67,154
Commercial finance 12,021 816 27,856 1,632
Corporate, other and 270 (1,615) (538) (1,904)
intercompany eliminations
Total revenues 112,786 45,486 291,507 129,195
Operating expenses:
Residential mortgage banking 33,569 4,866 85,378 11,488
Commercial mortgage banking 16,727 9,364 45,865 26,566
Asset management 14,636 10,594 44,161 35,296
Commercial finance 8,763 527 17,785 1,099
Corporate, other and 13,539 6,414 38,474 21,079
intercompany eliminations
Total operating expenses 87,234 31,765 231,663 95,528
Operating profit:
Residential mortgage banking 17,266 6,609 36,672 16,851
Commercial mortgage banking 8,734 4,215 23,907 7,408
Asset management 9,563 10,637 28,206 31,858
Commercial finance 3,258 289 10,071 533
Corporate, other and (13,269) (8,029) (39,012) (22,983)
intercompany eliminations
Total operating profit 25,552 13,721 59,844 33,667
Income tax expense 10,216 5,165 23,461 12,968
Net income $ 15,336 $ 8,556 $ 36,383 $ 20,699
Earnings per share:
Primary $0.41 $0.31 $1.00 $0.75
Fully-diluted $0.41 $0.29 $1.00 $0.71
Weighted average shares 37,487 28,005 36,301 27,648
outstanding and equivalents
</TABLE>
Three Months Ended September 30, 1997 Compared to Three Months
Ended September 30, 1996
The Company reported a 148% increase in revenues, an 86%
increase in operating profit and a 79% increase in net income
compared to the prior year period. The increases were due
primarily to additional contributions by the residential and
commercial mortgage banking businesses and the commercial finance
business. Weighted average shares outstanding and equivalents
increased 34% due primarily to the late 1996 conversion of the
Company's convertible subordinated debentures, the late 1996
public offering of the Company's common stock and the March 1997
purchase of CLC with the Company's common stock. Fully-diluted
earnings per share increased 41% from $0.29 to $0.41.
Residential Mortgage Banking. Revenues for the three months
ended September 30, 1997 primarily consisted of $28.5 million in
interest and other investment income and $20.4 million of gain on
the securitization and sale of residential mortgage loans. The
$39.4 million increase in revenues relates to increased volumes
and the acquisition of the assets of Quality Mortgage USA, Inc.,
("Quality") in October 1996. The increase in revenues primarily
consisted of a $19.5 million increase in interest and other
investment income and a $17.8 million increase in gain on the
securitization and sale of residential mortgage loans.
Interest and other investment income primarily consisted of
interest earned on loans held for sale, which have increased
significantly since 1996, and accrued earnings on retained
interests in securitizations. The increased gain on the
securitization and sale of residential mortgage loans was due
primarily to the securitization and sale of approximately $991.0
million of residential mortgage loans, including gains recognized
from the transfer to the securitization trustee of approximately
$64.0 million of loans securitized in June 1997 which were not
transferred to the trust until the third quarter of 1997,
compared to gains on approximately $311.0 million of loans
securitized in the third quarter of 1996. Additionally, loans
originated by AMRESCO Residential Mortgage Corporation ("ARMC")
(the subsidiary which acquired substantially all of the assets of
Quality), which had a lower basis than loans purchased from third
parties and thus resulted in larger gains, were included in the
third quarter 1997 securitization. A gain related to
approximately $23.0 million of residential loans sold on a pre-
fund basis in the third quarter of 1997 securitization was
recognized when the loans were transferred to the trustee in
October 1997.
Operating expenses for the three months ended September 30,
1997, which increased $28.7 million from the prior year period,
primarily consisted of $17.0 million in interest expense, $9.5
million in personnel expense, $4.3 million in other general and
administrative expense and a $2.3 million provision for loan
losses. The $17.0 million in interest expense primarily related
to borrowings under warehouse loans payable which funded the
origination, acquisition and warehousing of mortgage loans held
for sale and the addition of retained interests in
securitizations. Personnel and other general and administrative
costs increased significantly due primarily to the increased
operations of the residential business through ARMC. The
provision for loan losses was established primarily for
delinquent loans.
Commercial Mortgage Banking. Revenues for the three months
ended September 30, 1997 consisted of $16.7 million in
origination, underwriting and servicing revenues, $5.1 million in
interest and other investment income and $3.7 million in income
from equity affiliate. Origination, underwriting and servicing
revenues increased $6.6 million due primarily to originations of
$1.8 billion in the current period compared to $0.8 billion in
the same period of 1996. Interest and other investment income
increased $1.6 million due primarily to interest earned on loans
held for sale and escrow deposits, both of which have increased
significantly since early 1996. Income from equity affiliate was
$3.7 million for the third quarter of 1997 due primarily to
AMRESCO Capital L.P. ("AMRESCO Capital") realizing its 50% share
of the gain from its joint venture's $460.0 million
securitization of commercial loans ($16.0 million of income
related to the loans securitized was recorded in the joint
venture's second quarter 1997 mark-to-market adjustment).
Operating expenses for the three months ended September 30,
1997 primarily consisted of $12.6 million in personnel expense
and $3.3 million in other general and administrative expense.
The $7.4 million increase in expenses was due primarily to an
increase of $5.7 million in personnel expenses primarily related
to commissions on increased originations and an increase of $1.3
million in other general and administrative expense due to
expanded operations.
Asset Management. Revenues for the third quarter of 1997
primarily consisted of $16.3 million in interest and other
investment income and $6.7 million in asset management and
resolution fees. The $2.9 million increase in revenues primarily
consisted of a $5.4 million increase in interest and other
investment income related to a significant increase in aggregate
investments for the Company's own account since early 1996. The
increase was offset, in part, by a $2.4 million decrease in
management and resolution fees as a result of a shift in business
away from primarily managing and investing in partnerships and
joint ventures to investing in wholly-owned portfolios.
Operating expenses for the quarter ended September 30, 1997
primarily consisted of $6.3 million in interest expense, $4.2
million in personnel cost and $3.8 million in other general and
administrative expenses. The $4.0 million increase in operating
expenses was due primarily to a $3.0 million increase in interest
expense related to the financing for increased levels of
investments from early 1996 and a $1.4 million increase in other
general and administrative expenses offset, in part, by a $0.5
million decrease in personnel expenses resulting from a lower
level of assets being managed.
Commercial Finance. The Company acquired CLC on March 31,
1997 and hired an experienced team formerly with a financial
institution to form its home construction finance unit in the
first quarter of 1997. Revenues for the third quarter of 1997
consisted primarily of $9.0 million of interest and other
investment income and $2.0 million of gain on sale of loans and
investments. Interest and other investment income primarily
consisted of interest earned on loans and retained interests in
securitizations. The $2.0 million gain relates primarily to the
transfer to the securitization trustee of approximately $23.6
million of franchise loans securitized on a pre-fund basis in the
second quarter of 1997 by AMRESCO Commercial Lending Corporation
("ACLC") (formerly CLC).
Operating expenses of $8.8 million primarily consisted of
$3.3 million in interest expense related to the financing of
franchise and commercial loans, $2.3 million in personnel
expenses, $1.8 million in provision for loan losses and $1.2
million in other general and administrative expenses.
Corporate, Other and Intercompany Eliminations. Operating
losses in this area for the three months ended September 30, 1997
increased $5.2 million primarily due to increases in personnel
costs and other overhead related to expanded operations from the
third quarter of 1996.
Nine Months Ended September 30, 1997 Compared to Nine Months
Ended September 30, 1996
The Company reported a 126% increase in revenues, a 78%
increase in operating profit and a 76% increase in net income
compared to the prior year period. The increases were due
primarily to additional contributions by the residential mortgage
banking, commercial mortgage banking and commercial finance
businesses. Weighted average shares outstanding and equivalents
increased 31% due primarily to the late 1996 conversion of the
Company's convertible subordinated debentures, the late 1996
public offering of the Company's common stock and the March 1997
purchase of CLC with the Company's common stock. Fully-diluted
earnings per share increased 41% from $0.71 to $1.00.
Residential Mortgage Banking. Revenues for the first nine
months of 1997 primarily consisted of $63.4 million in interest
and other investment income and $53.5 million of gain on the
securitization and sale of residential mortgage loans. The $93.7
million increase in revenues related to increased securitization,
loan and investment volumes, and the acquisition of the assets of
Quality. The increase in revenues was primarily comprised of a
$45.3 million increase in gain on the securitization and sale of
residential mortgage loans and a $43.2 million increase in
interest and other investment income.
The increased gain on the securitization and sale of
residential mortgage loans was due primarily to the
securitization and sale of approximately $2.4 billion of
residential mortgage loans, including gains recognized from the
first quarter of 1997 transfer to the securitization trustee of
approximately $142.0 million of loans securitized on a pre-fund
basis in December 1996, compared to gains on approximately $1.1
billion of loans securitized in the first nine months of 1996.
Additionally, loans originated by ARMC, which had a lower basis
than loans purchased from third parties and thus resulted in
larger gains, were included in the 1997 securitizations. Gains
were reduced by losses from futures contracts used for hedging
activities. A gain related to approximately $23.0 million of
residential loans sold on a pre-fund basis in the third quarter
of 1997 securitization was recognized when the loans were
transferred to the trustee in October 1997.
Interest and other investment income primarily consisted of
interest earned on loans held for sale, which have increased
significantly since early 1996, and retained interests in
securitizations (including related hedging and mark-to-market
activities). During the first nine months of 1997, the Company
recognized a loss of $4.9 million from futures contracts used for
hedging activities associated with its retained interests in
securitizations offset, in part, by mark-to-market gains of $2.9
million on its retained interests in securitizations.
Operating expenses for the nine months ended September 30,
1997, which increased $73.9 million from the prior year period,
primarily consisted of $39.6 million in interest expense, $28.0
million in personnel expense, $12.4 million in other general and
administrative and a $4.3 million provision for investment and
loan losses. Interest expense primarily related to borrowings
under warehouse loans payable which funded the origination,
acquisition and warehousing of mortgage loans held for sale and
acquisition of retained interests in securitizations. Personnel
and other general and administrative costs increased
significantly from the prior year period due primarily to the
increased operations of the residential business through ARMC.
Commercial Mortgage Banking. Revenues for the nine months
ended September 30, 1997 consisted of $42.1 million in
origination, underwriting and servicing revenues, $14.2 million
in income from equity affiliate and $13.5 million in interest and
other investment income. Origination, underwriting and servicing
revenues increased $17.2 million due primarily to originations of
$4.5 billion in the current period compared to $1.9 billion in
the same period of 1996. Income from equity affiliate of $14.2
million for the first nine months of 1997 was due primarily to
income from the AMRESCO Capital joint venture which included
AMRESCO Capital's 50% share of approximately $28.5 million of
earnings. Interest and other investment income increased $4.5
million due primarily to interest earned on loans held for sale
and escrow deposits, both of which have increased significantly
since early 1996.
Operating expenses for the nine months ended September 30,
1997 primarily consisted of $32.4 million in personnel expense,
$9.0 million in other general and administrative expense, $2.7
million in interest expense and a $1.0 million provision for
investment and loan losses. The $19.3 million increase in
expenses was due primarily to an increase of $13.0 million in
personnel expenses primarily related to commissions on increased
originations, an increase of $3.5 million in other general and
administrative expense due to expanded operations, an increase of
$1.5 million in interest expense related to warehousing a higher
volume of loans and a $1.0 million provision for investment and
loan losses.
Asset Management. Revenues for the nine months ended
September 30, 1997 primarily consisted of $46.5 million in
interest and other investment income, $18.6 million in asset
management and resolution fees and a $5.9 million gain on sale of
loans and investments. The $5.2 million increase in revenues was
primarily comprised of a $9.0 million increase in interest and
other investment income and a $5.2 million increase in gain on
sale of loans and investments, primarily resulting from the sale
of an asset backed security, offset, in part, by a $8.6 million
decrease in management and resolution fees. Interest and other
investment income increased due to a significant increase in
aggregate investments for the Company's own account since early
1996. Asset management and resolution fees decreased as a result
of a shift in business away from primarily managing and investing
in partnerships and joint ventures to investing in wholly-owned
portfolios.
Operating expenses for the nine months ended September 30,
1997 primarily consisted of $16.0 million in interest expense,
$13.2 million in personnel cost, $11.7 million in other general
and administrative expenses and a $2.7 million provision for
investment and loan losses. The $8.9 million increase in
expenses was due primarily to a $5.1 million increase in interest
expense related to the financing for increased levels of
investments from early 1996, a $4.5 million increase in other
general and administrative expenses and a $2.7 million provision
on owned portfolios and special servicing receivables, offset, in
part, by a $3.4 million decrease in personnel expenses resulting
from a lower level of assets being managed.
Commercial Finance. Revenues for the first nine months of
1997 primarily consisted of $17.6 million of interest and other
investment income and $8.4 million of gain on sale of loans and
investments. Interest and other investment income primarily
consisted of interest earned on loans and retained interests in
securitizations. The $8.4 million gain primarily relates to a
gain on securitization of approximately $132.5 million of
franchise loans in the second quarter of 1997 by ACLC.
Operating expenses of $17.8 million primarily consisted of
$7.0 million in interest expense related to the financing of
franchise and commercial loans, $4.8 million in personnel
expenses, $3.6 million in provision for loan losses and $2.3
million in other general and administrative expenses.
Corporate, Other and Intercompany Eliminations. Operating
losses for the nine months ended September 30, 1997 increased
$16.0 million due primarily to increases in personnel costs and
other overhead related to expanded operations.
Liquidity and Capital Resources
Cash and equivalents totaled $31.3 million at September 30,
1997. Cash flows provided by operating activities plus principal
collections on investments totaled $100.2 million for the first
nine months of 1997 compared to $40.1 million for the same period
in 1996. The variance from the prior period was due primarily to
returns of principal on retained interests in securitizations,
asset backed securities and the AMRESCO Capital joint venture.
The Company received $102.2 million in cash from the sale of
retained interests in securitizations in the third quarter of
1997 compared to $39.8 million in the second quarter of 1996.
The following table is a summary of selected cash flow activity
and debt ratios during the first nine months of 1997 and 1996
(dollars in millions):
For the Nine Months
Ended September 30,
1997 1996
Cash provided by operations and collections $100.2 $40.1
on investments, net
Cash flows used by operations (26.3) (35.6)
Cash provided by borrowings, net (excluding 234.4 99.6
warehouse loans payable)
Cash used for purchase of investments and (368.5) (126.0)
originations of commercial loans
Ratio of core debt (excluding warehouse 1.7:1 1.3:1
debt and investment line) to capital
Ratio of total debt (excluding investment 3.1:1 3.4:1
line) to capital
Interest coverage ratio * 2.0x 2.8x
* Interest coverage ratio is defined as the ratio of
earnings before interest, taxes, depreciation and
amortization to interest expense.
The following table shows the components of the Company's
capital structure at September 30, 1997 and December 31, 1996
(dollars in millions):
September 30, December 31,
1997 % of Total 1996 % of Total
Stockholders' equity $379.7 24% $301.5 30%
Warehouse loans payable 562.3 36% 354.6 36%
Notes payable (excluding 323.5 20% 225.9 22%
investment line)
Senior notes 57.5 4% 57.5 6%
Senior subordinated notes 250.0 16% 57.5 6%
Total assets increased $571.6 million to $1,647.5 million at
September 30, 1997 from $1,075.9 million at December 31, 1996.
This increase was due primarily to (i) an increase in mortgage
loans held for sale resulting from the origination and
acquisition of residential loans for securitization and sale and
the related increase in retained interests in securitizations due
to the securitization of approximately $2.4 billion of
residential mortgage loans and approximately $132.5 million of
franchise loans, (ii) an increase in commercial loans and (iii)
an increase in purchased loan and other asset portfolios.
On March 12, 1997, the Company issued $192,500,000 aggregate
principal amount of senior subordinated notes. The notes bear
interest at 10% per annum and mature on March 15, 2004. The
notes are unsecured obligations of the Company and are
subordinated to prior payment of all existing and future senior
debt and to indebtedness and other liabilities of the Company's
subsidiaries. The notes are not redeemable prior to maturity.
On May 30, 1997, the Revolving Loan Agreement was amended to
provide a $350.0 million commitment under the revolving credit
facility with a maturity date of May 31, 1999 and a $60.0 million
commitment under the term facility which matures May 31, 2001.
As of September 30, 1997, $225.2 million was outstanding under
the credit facility.
During the next twelve months, the Company intends to pursue
(i) additional investment opportunities by acquiring assets both
for its own account and as an investor with various capital
partners who acquire such investments, (ii) additional loans by
the commercial finance business and (iii) expansion of other
businesses. The funds for such growth are anticipated to be
provided by cash flows, borrowings under the Company's Revolving
Loan Agreement or other debt facilities and/or the issuance of
additional debt or equity. As a result, interest expense for the
remainder of 1997 is expected to be higher than interest expense
for the corresponding period in 1996.
The Company believes its funds on hand of $31.3 million at
September 30, 1997, its cash flow from operations, and its unused
borrowing capacity under its credit lines should be sufficient to
meet its anticipated operating needs and capital expenditures, as
well as planned new investments, through mid-1998. The Company
anticipates obtaining additional debt or equity financing to meet
its long-term liquidity requirements.
Other Matters
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," which establishes new
standards for computing and presenting earnings per share and is
effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier
application is not permitted. The Company does not expect the
adoption of SFAS No. 128 to have a significant impact upon the
Company's reported earnings per share.
The FASB issued, in February 1997, SFAS No. 129, "Disclosure
of Information about Capital Structure," which establishes
standards for disclosing information about an entity's capital
structure and is effective for financial statements for periods
ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting
and display of comprehensive income and its components in the
financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997.
The FASB also issued, in June 1997, SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the way public
companies disclose information about operating segments, products
and services, geographic areas and major customers. SFAS No. 131
is effective for financial statements for periods beginning after
December 15, 1997.
Private Litigation Securities Reform Act of 1995
This report contains forward-looking statements based on
current expectations that involve a number of risks and
uncertainties. The forward-looking statements are made pursuant
to safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The factors that could cause actual results
to differ materially include the following: industry conditions
and competition, interest rates, business mix, availability of
additional financing, and the risks described from time to time
in the Company's reports to the Securities and Exchange
Commission.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits and Exhibit Index
Exhibit No.
11 Computation of Per Share
Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
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, INC.
Registrant
Date: November 13, 1997 By: /s/Barry L. Edwards
Barry L. Edwards
Executive Vice President
and Chief Financial Officer
AMRESCO, INC.
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Primary:
<S> <C> <C> <C> <C>
Net income $15,336,000 $8,556,000 $36,383,000 $ 20,699,000
Weighted average common shares 36,318,936 26,964,529 35,417,398 26,843,989
outstanding
Net effect of dilutive stock options
based on the Treasury stock method
using average market price 1,168,540 1,039,986 883,350 803,640
Total 37,487,476 28,004,515 36,300,748 27,647,629
Earnings per share $0.41 $0.31 $1.00 $0.75
Fully diluted:
Net income $15,336,000 $8,556,000 $36,383,000 $20,699,000
Interest expense related to
convertible debentures, net
of income tax expense 549,000 1,647,000
Adjusted net income $15,336,000 $9,105,000 $36,383,000 $22,346,000
Weighted average common
shares outstanding, assuming
conversion of convertible
debentures to 3,600,000 shares 36,318,936 30,564,529 35,417,398 30,443,989
of common stock in November 1995
Net effect of dilutive stock options
based on the Treasury stock method
using the higher of average or 1,441,843 1,096,673 1,003,701 1,014,820
or ending market price
Total 37,760,779 31,661,202 36,421,099 31,458,809
Earnings per share $0.41 $0.29 $1.00 $0.71
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 31,346
<SECURITIES> 0
<RECEIVABLES> 21,514
<ALLOWANCES> 3,191
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 24,827
<DEPRECIATION> 9,397
<TOTAL-ASSETS> 1,647,501
<CURRENT-LIABILITIES> 0
<BONDS> 630,992
0
0
<COMMON> 1,825
<OTHER-SE> 377,864
<TOTAL-LIABILITY-AND-EQUITY> 1,647,501
<SALES> 0
<TOTAL-REVENUES> 291,507
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 148,888
<LOSS-PROVISION> 11,556
<INTEREST-EXPENSE> 71,219
<INCOME-PRETAX> 59,844
<INCOME-TAX> 23,461
<INCOME-CONTINUING> 36,383
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,383
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
</TABLE>
