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 March 31, 1998
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:
42,826,585 shares of common stock, $.05 par value per share, as
of April 30, 1998.
AMRESCO, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1998 and December 3
31, 1997
Consolidated Statements of Income - Three Months Ended
March 31, 1998 and 1997 4
Consolidated Statement of Shareholders' Equity - Three
Months Ended March 31, 1998 5
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1998 and 1997 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)
March 31 December 31
1998 1997
(Unaudited)
ASSETS
Cash and equivalents $ 35,160 $ 25,866
Loans held for sale, net 2,052,152 1,330,337
Loans and asset portfolios, net 738,872 648,694
Retained interests in securitizations - trading 306,942 294,062
(at fair value)
Asset backed and other securities - available for 189,271 107,677
sale (at fair value)
Accounts receivable, net of reserves of $745 and 34,174 19,183
$455, respectively
Deferred income taxes 35,141 28,324
Premises and equipment, net of accumulated
depreciation of $11,623 and $10,641, respectively 11,553 10,147
Intangible assets, net of accumulated amortization
of $21,699 and $20,038, respectively 138,879 113,841
Other assets 91,006 55,717
TOTAL ASSETS $3,633,150 $2,633,848
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 13,689 $ 22,821
Accrued employee compensation and benefits 13,734 33,609
Notes payable 457,403 531,573
Warehouse loans payable 1,845,471 1,268,665
Senior notes 57,500 57,500
Senior subordinated notes 580,200 250,000
Income taxes payable 19,076 19,185
Other liabilities 55,033 41,995
Total liabilities 3,042,106 2,225,348
SHAREHOLDERS' EQUITY:
Common stock, $0.05 par value, authorized
150,000,000 shares; 42,807,129 and 36,543,210
shares issued, respectively 2,141 1,827
Capital in excess of par 433,046 257,941
Reductions for employee stock (6,877) (2,713)
Treasury stock, $0.05 par value, 24,339 shares in
1998 and 1997, respectively (160) (160)
Accumulated other comprehensive income 5,599 8,359
Retained earnings 157,295 143,246
Total shareholders' equity 591,044 408,500
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,633,150 $2,633,848
See notes to consolidated financial statements.
AMRESCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
REVENUES:
<S> <C> <C>
Interest income $ 88,569 $36,015
Gain on sale of loans and investments, net 24,766 18,111
Mortgage banking and servicing fees 21,406 13,328
Asset management and resolution fees 2,657 5,727
Income from equity affiliate 4,765 1,056
Other revenues 900 603
Total revenues 143,063 74,840
EXPENSES:
Personnel 41,348 29,795
Interest 49,843 16,159
Other general and administrative 17,842 10,388
Provision for loan and asset portfolio losses 6,847 1,920
Depreciation and amortization 4,276 2,972
Total expenses 120,156 61,234
Income before income taxes 22,907 13,606
Income tax expense 8,858 5,045
NET INCOME $ 14,049 $ 8,561
Earnings per share:
Basic $ 0.36 $ 0.25
Diluted 0.35 0.25
Weighted average number of common shares
outstanding
Basic 39,027 33,732
Diluted 40,446 34,812
</TABLE>
See notes to consolidated financial statements.
AMRESCO, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three Months Ended March 31, 1998
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Reductions Accumulated
$0.05 Par Value Capital in For Other Total
Number of Excess of Employee Treasury Comprehensive Retained Shareholders'
Shares Amount Par Stock Stock Income Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1998 36,543,210 $1,827 $257,941 $(2,713) $(160) $ 8,359 $143,246 $408,500
Common stock
offering 5,175,000 259 146,941 147,200
Issuance of common
stock for purchase
of subsidiaries 411,710 20 11,180 11,200
Issuance of common
stock for earnout 335,761 17 8,690 8,707
Exercise of stock
options (including
tax benefit) 175,892 10 3,304 3,314
Grant of
restricted stock 165,556 8 4,990 (4,998)
Amortization of
unearned stock
compensation 834 834
Unrealized loss on
securities
available for
sale, net (2,864) (2,864)
Foreign currency
translation adjustments 104 104
Net income 14,049 14,049
March 31, 1998 42,807,129 $2,141 $433,046 $(6,877) $(160) $ 5,599 $157,295 $591,044
</TABLE>
See notes to consolidated financial statements.
AMRESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 14,049 $ 8,561
Adjustments to reconcile net income to net cash used
in operating activities:
Gain on sale of loans and investments (24,766) (18,111)
Depreciation and amortization 4,276 2,972
Accretion of interest income (6,811) (8,806)
Provision for loan and investment losses 6,847 1,920
Deferred tax benefit (4,995) (2,741)
Other 920 404
Increase (decrease) in cash for changes in (exclusive
of assets and liabilities acquired in business combinations):
Accounts receivable (14,991) 78
Loans held for sale, net (740,795) (206,304)
Retained interests in securitizations 25,819 (3,393)
Other assets (18,488) (1,993)
Accounts payable and accrued compensation and benefits (9,132) 819
Warehouse loans payable 576,806 156,847
Income taxes payable (109) 5,232
Other liabilities (7,332) (7,876)
Net cash used in operating activities (198,702) (72,391)
INVESTING ACTIVITIES:
Sale of temporary investments, net 34,190
Origination of loans and purchase of asset portfolios (209,117) (98,620)
Collections on loans and asset portfolios 119,577 25,445
Purchase of asset-backed securities - available for sale (90,486) (31,957)
Proceeds from sale of and collections on asset-backed
securities - available for sale 12,698
Cash received from purchase of subsidiaries 930
Investment in and advances to joint venture (6,947) (1,711)
Purchase of premises and equipment (2,700) (675)
Net cash used in investing activities (176,975) (72,398)
FINANCING ACTIVITIES:
Net proceeds from notes payable and other debt 444,096 199,993
Repayment of notes payable and other debt (531,066) (238,051)
Proceeds from issuance of senior subordinated notes 320,828 186,631
Proceeds from common stock offering 147,799
Stock options exercised and tax benefit from employee
stock compensation 3,314 747
Net cash provided by financing activities 384,971 149,320
Net increase in cash and cash equivalents 9,294 4,531
Cash and cash equivalents, beginning of period 25,866 29,046
Cash and cash equivalents, end of period $ 35,160 $ 33,577
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 18,552 $ 16,442
Income taxes paid 12,793 1,919
Exchange of loans held for sale for retained interest
in securitizations 30,770 13,932
Common stock issued for the purchase of subsidiaries
and earnouts 19,907 30,963
Common stock issued for unearned stock compensation 4,998 3,043
</TABLE>
See notes to consolidated financial statements
AMRESCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(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
month period ended March 31, 1998 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, 1997.
Certain reclassifications of prior period amounts have been made
to conform to the current period presentation.
2. Notes Payable and Other Debt
Revolving Loan Agreement - During 1998, 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
revolving commitment of $480.0 million and a term commitment of
$100.0 million, subject to a combined borrowing limit of $550.0
million. As of March 31, 1998, $279.5 million was outstanding
under the Revolving Loan Agreement.
Warehouse Debt - On January 8, 1998, a wholly-owned
subsidiary of the Company entered into an amendment of a Whole
Loan Financing Facility which replaced an existing warehouse
agreement, with Credit Suisse First Boston Mortgage Capital LLC
for an amount not to exceed $700.0 million (the "Facility") to
finance the acquisition and warehousing of mortgage loans.
Indebtedness under the Facility is secured by the loans
originated with funds advanced under the Facility. As of March
31, 1998, $420.2 million was outstanding under the Facility.
On February 26, 1998, a wholly-owned subsidiary of the
Company entered into an Interim Warehouse and Security Agreement
with Prudential Securities Credit Corporation ("Prudential") for
an amount not to exceed $250.0 million (the "Security
Agreement"). The Security Agreement provides a maximum loan
balance of $100.0 million for the origination of certain
commercial loans and a maximum loan balance of $150.0 million for
the origination of certain franchise and construction loans.
Indebtedness under the Security Agreement is secured by the loans
purchased with funds advanced under the Security Agreement. At
March 31, 1998, $110.8 million was outstanding under the Security
Agreement. On March 26, 1998, a wholly-owned subsidiary of the
Company entered into an Interim Warehouse and Security Agreement
with Prudential for an amount not to exceed $350.0 million (the
"Residential Security Agreement") for the purchase of certain
mortgage loans. Indebtedness under the Residential Security
Agreement is secured by the loans purchased with funds advanced
under the Residential Security Agreement. At March 31, 1998,
$198.1 million was outstanding under the Residential Security
Agreement. The maximum aggregate loan amount to the Company and
its subsidiaries from Prudential from these agreements and other
outstanding agreements cannot exceed $1.0 billion.
Subordinated Debt - On February 24, 1998 and March 10, 1998,
the Company issued $290.0 million and $40.2 million,
respectively, aggregate principal amount of senior subordinated
notes. The notes bear interest at 9.875% per annum and mature on
March 15, 2005. The net proceeds from the offerings aggregated
approximately $320.7 million. 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.
3. Shareholders' Equity
On February 24, 1998, the Company issued options to purchase
approximately 331,000 shares of common stock and approximately
166,000 restricted common shares to certain key employees and
directors.
On February 23, 1998, the Company completed a registered
public offering of 5.2 million shares of common stock including
the underwriters' over-allotment option. The net proceeds from
such offering, after underwriters discount and offering expenses,
aggregated approximately $147.2 million. The price to the public
was $30.00 per share and the proceeds to the Company were $28.56
per share, after underwriting discounts.
4. Comprehensive Income
Effective January 1, 1998, the Company adopted statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." This Statement requires that all items recognized under
accounting standards as components of comprehensive earnings be
reported in an annual financial statement that is displayed with
the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other
comprehensive earnings by their nature in an annual financial
statement. For example, other comprehensive earnings includes
foreign currency translation adjustments and unrealized gains and
losses on marketable securities classified as available-for-sale.
Annual financial statements for prior periods will be
reclassified, as required. The Company's total comprehensive
earnings were as follows (in thousands):
Three Months Ended March
31,
1998 1997
NET INCOME $14,049 $8,561
Other comprehensive loss, net of tax:
Foreign currency translation adjsutments $ 104 $ (146)
Unrealized gains on securities:
Unrealized holding losses during period (113) (751)
Less: Reclassification adjustment for
gains included in net income (2,751)
Other comprehensive loss, net of tax (2,760) (897)
COMPREHENSIVE INCOME $11,289 $7,664
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
The Company is a leading diversified financial services
company with four principal lines of business: asset management,
commercial mortgage banking, residential mortgage banking and
commercial finance. 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. In addition, in its asset management
business, the Company provides special servicing for
nonperforming and underperforming loans in commercial mortgage-
backed bond trusts and similar securitized commercial asset-
backed loan portfolios. The commercial mortgage banking business
involves the full range of real estate capital markets functions,
including the origination, warehousing, underwriting, placement,
securitization and servicing of commercial real estate mortgages
and commercial real estate brokerage. The residential mortgage
banking business involves originating, acquiring, warehousing,
securitizing and servicing nonconforming loans. In its
commercial finance business, the Company focuses on (i) loans to
franchisees of nationally recognized restaurant, hospitality and
service organizations, (ii) loans to small business owners, (iii)
structured finance and (iv) single family residential
construction lending.
Revenues from the Company's asset management activities
primarily consist of earnings on asset portfolios, fees charged
for the management of asset portfolios and for the successful
resolution of the assets within such asset portfolios and gains
on sale of investments. The Company's revenues from its
commercial mortgage banking activities are primarily earned from
fees generated by the (i) origination and underwriting of
commercial real estate mortgage loans, (ii) placement of such
loans with permanent investors and (iii) servicing of loans,
interest earned on commercial loans held for sale and gains on
the sale and securitization of commercial mortgage loans held for
sale earned either through a joint venture, as was the case in
1997, or through the Company's own expected securitization
activity. Revenues from the Company's residential mortgage
banking activities primarily consist of interest earned on
originated and purchased residential mortgage loans, accrued
earnings on retained interests in securitizations and gains on
the securitization and sale of residential mortgage loans and
other related securities. Revenues from the Company's commercial
finance business are primarily earned from interest and fees on
structured finance activities, loans to franchisees of nationally
recognized restaurant, hospitality and service organizations,
loans to single family residential contractors, accrued earnings
on retained interests in securitizations and gains on the
securitization and sale of franchise loans and other related
securities. Corporate and other revenues primarily consist of
interest earned on investments, other miscellaneous income and
intercompany eliminations. Corporate and other expenses
primarily include corporate personnel and overhead and certain
incentive compensation, unallocated interest expense and
amortization of intangibles.
Results of Operations
The following discussion and analysis presents the
significant changes in results of operations of the Company for
the three months ended March 31, 1998 and 1997 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.
Three Months Ended
(in thousands, except per share data) March 31,
1998 1997
Revenues:
Asset management $31,016 $20,747
Commercial mortgage banking 41,420 16,672
Residential mortgage banking 55,208 36,431
Commercial finance 15,424 1,953
Corporate, other and
intercompany eliminations (5) (963)
Total revenues 143,063 74,840
Operating expenses:
Asset management 17,795 11,021
Commercial mortgage banking 33,188 12,246
Residential mortgage banking 44,733 24,630
Commercial finance 11,791 2,071
Corporate, other and intercompany
eliminations 12,649 11,266
Total operating expenses 120,156 61,234
Operating profit:
Asset management 13,221 9,726
Commercial mortgage banking 8,232 4,426
Residential mortgage banking 10,475 11,801
Commercial finance 3,633 (118)
Corporate, other and intercompany
eliminations (12,654) (12,229)
Total operating profit 22,907 13,606
Income tax expense 8,858 5,045
Net income $ 14,049 $ 8,561
Earnings per share (1):
Basic $ 0.36 $ 0.25
Diluted 0.35 0.25
Weighted average shares outstanding:
Basic 39,027 33,732
Diluted 40,446 34,812
(1) Prior period restated for the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share."
Three Months Ended March 31, 1998 Compared to Three Months Ended
March 31, 1997
The Company reported a 91% increase in revenues from $74.8
million to $143.1 million, a 68% increase in operating profit
from $13.6 million to $22.9 million and a 64% increase in net
income from $8.6 million to $14.0 million compared to the prior
year period. The increases were due primarily to additional
contributions by commercial mortgage banking, commercial finance
and asset management operations. Diluted weighted average common
shares outstanding increased 16% due primarily to the early 1998
public offering of the Company's common stock. Diluted earnings
per share increased 40% from $0.25 to $0.35.
Asset Management. Revenues for the three months ended March
31, 1998 primarily consisted of $21.5 million in interest income,
$6.6 million in gain on sale of investments and $2.7 million in
asset management and resolution fees. The $10.3 million increase
in revenues from $20.7 million for the first three months of 1997
to $31.0 million for the three months ended March 31, 1998 was
primarily comprised of a $7.2 million increase in interest income
and a $6.4 million increase in gain on sale of investments
offset, in part, by a $3.1 million decrease in management and
resolution fees. Gain on sale of loans and investments increased
due primarily to sales of commercial mortgage backed securities.
Interest income increased due primarily to a significant increase
in aggregate investments for the Company's own account since
early 1997. 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 quarter ended March 31, 1998
primarily consisted of $7.6 million in interest expense, $5.9
million in other general and administrative expenses and $3.7
million in personnel cost. The $6.8 million increase in expenses
from $11.0 million for the prior year period to $17.8 million for
the quarter ended March 31, 1998 was due primarily to a $4.4
million increase in interest expense related to the financing of
increased levels of investments from early 1997 and a $2.4
million increase in other general and administrative expenses
primarily related to increased real estate.
Commercial Mortgage Banking. Revenues for the three months
ended March 31, 1998 primarily consisted of $19.7 million in
origination, underwriting and servicing revenues, $16.2 million
in interest income and $4.8 million in income from equity
affiliate. The $24.7 million increase in revenues from $16.7
million for the prior year period to $41.4 million for the three
months ended March 31, 1998 primarily relates to an increase of
$12.4 million in interest income due primarily to increased
balances of commercial loans held for sale and interest on
servicing related deposits both of which have increased
significantly since early 1997, $8.0 million in mortgage banking
and servicing revenues due primarily to transaction volume of
$2.0 billion during the first three months of 1998 compared to
$1.1 billion for the first three months of 1997 and income from
equity affiliate of $3.7 million. Income from equity affiliate
was from AMRESCO Capital's 50% share in a joint venture.
Operating expenses for the quarter ended March 31, 1998
primarily consisted of $17.4 million in personnel expense, $9.9
million in interest expense and $5.4 million in other general and
administrative expense. The $21.0 million increase in expenses
from $12.2 million for the prior year period to $33.2 million for
the quarter ended March 31, 1998 was due primarily to an increase
of $8.9 million in interest expense related to financing an
increased balance of commercial loans held for sale, an $8.6
million increase in personnel expenses primarily related to
commissions on increased originations and increased number of
personnel and an increase of $3.2 million in other general and
administrative expense due to expanded operations.
Residential Mortgage Banking. Revenues for the three months
ended March 31, 1998 primarily consisted of $38.0 million in
interest income and $15.9 million of gains on securitization and
sale of residential mortgage loans. The $18.8 million increase
in revenues from $36.4 million for the prior year period to $55.2
million for the three months ended March 31, 1998 primarily
related to increased levels of loan originations, acquisitions
and securitizations. The increase in revenues was primarily
comprised of a $21.1 million increase in interest income related
to loans held for sale, which have increased significantly since
early 1997, and retained interests in securitizations (including
related hedging and mark-to-market activities).
Operating expenses for the quarter ended March 31, 1998
primarily consisted of $23.4 million in interest expense, $11.0
million in personnel expense, $5.0 million in other general and
administrative expense and a $4.8 million provision for loan
losses. Operating expenses increased by $20.1 million from $24.6
million for the prior year period to $44.7 million for the
quarter ended March 31, 1998. This increase primarily consisted
of $12.7 million in interest expense, $3.4 million in provision
for loan losses, $2.6 million in personnel expense and $1.3
million in other general and administrative expenses. Interest
expense primarily related to borrowings under warehouse loans
payable which funded the origination, acquisition and warehousing
of mortgage loans held for sale. Personnel and other general and
administrative costs increased significantly from the prior year
period due primarily to the increased operations of the
wholesale/retail business.
Commercial Finance. Revenues for the three months ended
March 31, 1998 primarily consisted of $12.9 million of interest
income and $1.6 million of gain on securitization and sale of
loans and investments. The $13.4 million increase in revenues
from $2.0 million for the prior year period to $15.4 million for
the three months ended March 31, 1998 relates primarily to the
acquisition of the operations of Commercial Lending Corporation
("ACLC") in March 1997 and increased lending activity. Interest
income increased $10.9 million due primarily to interest earned
on loans and securities retained in securitizations, both of
which have increased significantly since early 1997. The $1.6
million gain primarily relates to gain on the transfer to the
securitization trustee of approximately $25.0 million of
franchise loans securitized in December 1997 by ACLC.
Operating expenses for the quarter ended March 31, 1998
primarily consisted of $5.8 million in interest expense, $2.8
million in personnel cost, a $1.6 million provision for loan
losses and $1.7 million in other general and administrative
expenses. The $9.7 million increase in expenses from $2.1
million for the prior year to $11.8 million for the quarter ended
March 31, 1998 was due primarily to an increase of $5.2 million
in interest expense related to the financing for increased levels
of loans held for sale and investments from 1997, $2.1 million in
personnel expense related to expanded operations due primarily to
the acquisition of ACLC, $1.3 million in other general and
administrative expenses primarily related to expanded operations
and $1.1 million of additional provision for loan losses.
Corporate, Other and Intercompany Eliminations. Operating
losses for the three months ended March 31, 1998 increased $0.4
million due primarily to increases in interest costs, overhead
related to expanded operations and amortization of intangibles
related to acquisitions. The rapid growth of the commercial
mortgage banking, residential mortgage banking and commercial
finance operations have necessitated the hiring of additional
personnel and the related development of corporate
infrastructure. The Company anticipates that the costs
associated with the corporate function will continue to decrease
as a percentage of revenues over time as the corporate support
systems and infrastructure are able to support a greater base of
revenue generating operations.
Liquidity and Capital Resources
Cash and equivalents totaled $35.2 million at March 31,
1998. Cash flows used in operating activities plus principal
collections on loans, asset portfolios and asset-backed
securities investments totaled a use of $66.4 million for the
first three months of 1998 compared to a use of $46.9 million for
the same period in 1997. The variance from the prior period was
due primarily to providing financing for the increased balance of
loans held for sale not covered by the warehouse line offset, in
part, by increased principal collections on loans, asset
portfolios and asset-backed securities. The following table is a
summary of selected cash flow activity and debt ratios during the
first three months of 1998 and 1997 (dollars in thousands):
For the Three Months
Ended March 31,
1998 1997
Net cash used in operating activities $(198,702) $ (72,391)
Net cash used in investing activities (176,975) (72,398)
Net cash provided by financing activities 384,971 149,320
Other financial measures:
Cash flow from operations and collections on
loans, asset portfolios and asset-backed
securities. (66,427) (46,946)
Cash provided by new capital and borrowings,
net (excluding warehouse loans payable) 381,657 148,573
Cash used for purchase of asset portfolios
and asset-backed securities and originations
of loans (299,603) (130,577)
EBITDA (1) 77,026 32,737
Interest coverage ratio (2) 1.5x 2.0x
The following table is a summary of selected debt ratios as of
March 31, 1998 and December 31, 1997:
1998 1997
Ratio of total debt to equity 5.0:1 5.2:1
Ratio of core debt to equity (3) 1.9:1 2.1:1
(1) EBITDA is calculated as operating income before interest,
income taxes, depreciation and amortization. The Company has
included information concerning EBITDA because EBITDA is one
measure of an issuer's historical ability to service its
indebtedness. EBITDA should not be considered as an alternative
to, or more meaningful than, net income as an indicator of the
Company's operating performance or to cash flows as a measure of
liquidity.
(2) Interest coverage ratio means the ratio of earnings before
interest, taxes, depreciation and amortization to cash interest
expense.
(3) Excludes indebtedness under warehouse lines of credit.
The following table shows the components of the Company's
capital structure, including certain short-term debt, as of March
31, 1998 and December 31, 1997 (dollars in millions):
1998 1997
% of % of
Dollars Total Dollars Total
Shareholders' equity $ 591.0 17% $ 408.5 16%
Senior notes 57.5 2 57.5 2
Senior subordinated notes 580.2 16 250.0 10
Mortgage warehouse loans 1,845.5 52 1,268.6 51
Notes payable 457.4 13 531.6 21
Total $3,531.6 100% $2,516.2 100%
Total assets increased $1.0 billion to $3.6 billion at March
31, 1998 from $2.6 billion at December 31, 1997. This increase
was due primarily to an increase in loans held for sale, asset-
backed securities, loans and investments in real estate
portfolios.
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 - including an anticipated $30.0 million investment in
AMRESCO Capital Trust, a real estate investment trust, which is
expected to close in May 1998. The funds for such growth are
anticipated to be provided by cash flows and borrowings under the
Company's Revolving Loan Agreement or other debt facilities. As
a result, interest expense for the remainder of 1998 is expected
to be higher than interest expense for the corresponding period
in 1997.
The Company believes its funds on hand of $35.2 million at
March 31, 1998, 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, into 1999.
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: May 4, 1998 By: /s/Barry L. Edwards
Barry L. Edwards
Executive Vice President
and Chief Financial Officer
AMRESCO, INC.
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
AMRESCO, INC.
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
Three Months Ended
March 31,
1998 1997
Basic:
Net income $14,049,000 $8,561,000
Weighted average common shares outstanding 39,127,179 33,909,405
Contingently issuable shares 218,895 43,662
Restricted shares (318,834) (221,290)
Total 39,027,240 33,731,777
Earnings per share $0.36 $0.25
Diluted:
Net income $14,049,000 $8,561,000
Weighted average common shares outstanding 39,127,179 33,909,405
Contingently issuable shares 218,895 43,662
Net effect of dilutive stock options based on
the Treasury stock method using the average
average market price 1,099,489 859,301
Total 40,445,563 34,812,368
Earnings per share $0.35 $0.25
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<PERIOD-END> MAR-31-1998
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